<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one):
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to__________
Commission File Number: 0-22175
EMCORE CORPORATION
(Exact name of Registrant as specified in its charter)
NEW JERSEY
(State or other jurisdiction of incorporation or organization)
22-2746503
(IRS Employer Identification No.)
394 ELIZABETH AVENUE
SOMERSET, NJ 08873
(Address of principal executive offices) (zip code)
(732) 271-9090
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes:[X] No:[ ]
As of February 1, 2000 there were 14,416,511 shares of the
registrant's no par value common stock outstanding.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EMCORE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
---------------------------
1999 1998
---------------------------
<S> <C> <C>
Revenues:
Systems-related ....................................... $ 11,977 $ 7,286
Materials-related ..................................... 4,524 2,839
-------- --------
Total revenues ................................. 16,501 10,125
Cost of revenues:
Systems-related ....................................... 7,518 4,288
Materials-related ..................................... 2,260 1,728
-------- --------
Total cost of revenues ......................... 9,778 6,016
-------- --------
Gross profit .................................... 6,723 4,109
Operating expenses:
Selling, general and administrative ................... 4,724 3,143
Goodwill amortization ................................. 1,098 1,099
Research and development .............................. 4,708 5,924
-------- --------
Total operating expenses ................................. 10,530 10,166
-------- --------
Operating loss .................................. (3,807) (6,057)
Other (income) expense:
Stated interest (income) expense, net .................. (78) 230
Imputed warrant interest expense, non-cash ............. 163 316
Equity in net loss of unconsolidated affiliates ........ 2,766 276
-------- --------
Total other expense ...................................... 2,851 822
-------- --------
Net loss ........................................ ($ 6,658) ($ 6,879)
======== ========
PER SHARE DATA:
Net loss per basic and diluted share (see note 4) ........ ($ 0.49) ($ 0.74)
-------- --------
Weighted average basic and diluted shares outstanding used
in per share data calculations ........................... 13,740 9,390
-------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
2
<PAGE> 3
EMCORE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AT DECEMBER 31, AT SEPTEMBER 30,
---------------------------------------
1999 1999
---------------------------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 2,722 $ 7,165
Accounts receivable, net of allowance for doubtful accounts
of $667 and $563 at December 31, 1999 and
September 30, 1999, respectively.............................. 13,109 11,423
Accounts receivable, related party ..................................... 2,440 2,480
Inventories, net ....................................................... 18,833 13,990
Other current assets ................................................... 527 389
--------- ---------
Total current assets .................................................. 37,631 35,447
Property, plant and equipment, net ....................................... 48,354 46,282
Goodwill, net ............................................................ 4,028 5,126
Investments in unconsolidated affiliates ................................. 6,747 9,496
Other assets, net ........................................................ 3,179 3,260
--------- ---------
Total assets ......................................................... $ 99,939 $ 99,611
========= =========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................................... $ 11,591 $ 5,359
Accrued expenses ......................................................... 5,257 4,173
Advanced billings......................................................... 3,757 4,350
Capital lease obligations - current................................... 546 713
Other current liabilities............................................. 162 162
--------- ---------
Total current liabilities ........................................... 21,313 14,757
Convertible subordinated debenture ....................................... 7,800 7,800
Capital lease obligations, net of current portion ........................ 121 141
Other liabilities ........................................................ 1,097 1,097
--------- ---------
Total liabilities ................................................... 30,331 23,795
--------- ---------
Mandatorily redeemable, convertible preferred stock, 657,143 shares issued
and outstanding at December 31, 1999, (redeemable at maturity for
$9,200), 1,030,000 shares issued and outstanding at September 30, 1999
(redeemable at maturity for $14,420) .................................. 9,100 14,193
SHAREHOLDERS' EQUITY:
Preferred stock, $.0001 par value, 5,882,353 shares authorized ........... -- --
Common stock, no par value, 50,000,000 shared authorized,
13,795,694 shares issued and outstanding at December 31, 1999;
13,353,807 shares issued and outstanding at September
30, 1999 .............................................................. 158,023 152,426
Accumulated deficit ...................................................... (90,017) (83,256)
Notes receivable from warrant issuances and stock sales .................. (7,498) (7,547)
--------- ---------
Total shareholders' equity ............................................... 60,508 61,623
--------- ---------
Total shareholders' equity and mandatorily redeemable,
convertible preferred stock .......................................... 69,608 75,816
--------- ---------
Total liabilities, shareholders' equity and mandatorily
redeemable, convertible preferred stock ........................... $ 99,939 $ 99,611
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
3
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EMCORE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
---------------------------
1999 1998
---------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ..................................................................... ($ 6,658) ($ 6,879)
-------- --------
Adjustments to reconcile net loss to net cash provided by (used for) operating
activities:
Depreciation and amortization ............................................. 3,870 2,746
Provision for doubtful accounts ........................................... 120 60
Provision for inventory valuation ......................................... 360 30
Detachable warrant accretion and debt issuance cost amortization .......... 163 313
Equity in net loss of unconsolidated affiliates ........................... 2,766 276
Deferred gain on sales to an unconsolidated affiliate ..................... -- 711
Compensatory stock issuances .............................................. 93 93
Change in assets and liabilities:
Accounts receivable - trade ...................................... (1,802) 2,825
Accounts receivable - related parties ............................ 40 (2,017)
Inventories ...................................................... (5,235) (68)
Other current assets ............................................. (109) (83)
Other assets ..................................................... (126) 184
Accounts payable ................................................. 6,231 (2,894)
Accrued expenses ................................................. 1,084 (643)
Advanced billings ................................................ (593) 2,123
Other liabilities ................................................ -- (53)
-------- --------
Total adjustments ............................................................ 6,862 3,603
-------- --------
Net cash provided by (used for) operating activities ..................... 204 (3,276)
-------- --------
INVESTING ACTIVITIES:
Purchase of property, plant, and equipment ................................... (4,801) (5,972)
Investment in unconsolidated affiliates ...................................... (17) (5,600)
Payments of restricted cash .................................................. -- 63
--------
Net cash used for investing activities ................................... (4,818) (11,509)
-------- --------
</TABLE>
4
<PAGE> 5
<TABLE>
<CAPTION>
FINANCING ACTIVITIES:
<S> <C> <C>
Proceeds from preferred stock offering, net of $500 issue costs .............. -- 21,200
Payments under notes payable - related party, net ............................ -- (7,000)
Payments under bank loans .................................................... -- (2,000)
Payments on capital lease obligations ........................................ (188) (129)
Proceeds from exercise of stock options ...................................... 233 38
Dividends paid on preferred stock ............................................ (66) --
Proceeds from exercise of stock purchase warrants ............................ 143 --
Proceeds from shareholders' notes receivable ................................. 49 --
------- --------
Net cash provided by financing activities ................................ 171 12,109
------- --------
Net decrease in cash and cash equivalents .................................... (4,443) (2,676)
Cash and cash equivalents, beginning ......................................... 7,165 4,456
------- --------
Cash and cash equivalents, ending ............................................ $ 2,722 $ 1,780
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest ................................ $ 173 $ 334
======= ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
5
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EMCORE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1999
AND THE THREE MONTHS ENDED DECEMBER 31, 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK SHAREHOLDERS' TOTAL
----------------------- ACCUMULATED NOTES SHAREHOLDERS'
SHARES AMOUNT DEFICIT RECEIVABLE EQUITY
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1997 .................... 6,000 $ 45,817 ($23,777) ($ 209) $ 21,831
Issuance of common stock purchase
warrants ......................................... -- 1,310 -- -- 1,310
Issuance of common stock on exercise of
warrants in exchange for notes
receivable .................................... 1,828 7,458 -- (7,458) --
Issuance of common stock and common stock
purchase options and warrants in
connection with the acquisition of MODE ...... 1,462 32,329 -- -- 32,329
Stock option exercise ............................ 36 83 -- -- 83
Stock purchase warrant exercise .................. 6 23 -- -- 23
Issuance of common stock on exercise of warrants
in exchange for subordinated notes ............. 18 72 -- -- 72
Compensatory stock issuance ...................... 26 351 -- -- 351
Net loss ......................................... -- -- (36,419) -- (36,419)
-------- -------- -------- -------- --------
BALANCE AT SEPTEMBER 30, 1998 .................... 9,376 $ 87,443 ($60,196) ($ 7,667) $ 19,580
======== ======== ======== ======== ========
Issuance of common stock from public
offering, net of issuance cost of $5,000 ....... 3,000 52,000 -- -- 52,000
Stock purchase warrant exercise .................. 322 2,450 -- -- 2,450
Issuance of common stock purchase warrants ....... -- 2,596 -- -- 2,596
Redemption of shareholders' notes receivable ..... -- -- -- 120 120
Conversion of mandatorily redeemable
convertible preferred stock into common
stock ......................................... 520 7,125 -- -- 7,125
Compensatory stock issuance ...................... 26 436 -- -- 436
Stock option exercise ............................ 110 376 -- -- 376
Preferred stock dividends ........................ -- -- (319) -- (319)
Periodic accretion of redeemable preferred
stock to mandatory redemption value ........... -- -- (52) -- (52)
Net loss ......................................... -- -- (22,689) -- (22,689)
-------- -------- -------- -------- --------
BALANCE AT SEPTEMBER 30, 1999 .................... 13,354 $152,426 ($83,256) ($ 7,547) $ 61,623
======== ======== ======== ======== ========
Stock purchase warrant exercise .................. 35 143 -- -- 143
Redemption of notes receivable from shareholders . -- -- -- 49 49
Conversion of mandatorily redeemable
convertible preferred stock into common
stock ......................................... 373 5,128 -- -- 5,128
Compensatory stock issuances ..................... 5 93 -- -- 93
Stock option exercise ............................ 29 233 -- -- 233
Preferred stock dividends ........................ -- -- (66) -- (66)
Periodic accretion of redeemable preferred
stock to mandatory redemption value ........... -- -- (37) -- (37)
Net loss ......................................... -- -- (6,658) -- (6,658)
-------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1999 ..................... 13,796 $158,023 ($90,017) ($ 7,498) $ 60,508
======== ======== ======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
6
<PAGE> 7
EMCORE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. INTERIM FINANCIAL INFORMATION AND DESCRIPTION OF BUSINESS
The accompanying unaudited condensed consolidated financial statements of
EMCORE Corporation (the "Company") reflect all adjustments considered necessary
by management to present fairly the Company's consolidated financial position as
of December 31, 1999, and the consolidated results of operations and the
consolidated cash flows for the three-month periods ended December 31, 1999 and
1998. All adjustments reflected in the accompanying unaudited condensed
consolidated financial statements are of a normal recurring nature unless
otherwise noted. Prior period balances have been reclassified to conform with
the current period financial statement presentation. The results of operations
for the three-month period ended December 31, 1999 are not necessarily
indicative of the results for the fiscal year ending September 30, 2000 or any
future interim period.
EMCORE has two reportable operating segments: the systems-related business
unit and the materials-related business unit. The systems-related business unit
designs, develops and manufactures tools and manufacturing processes used to
fabricate compound semiconductor wafer and devices. Revenues for the
systems-related business unit consist of sales of EMCORE's TurboDisc production
systems as well as spare parts and services. Our systems-related business unit
assists our customers with device design, process development and optimal
configuration of TurboDisc production systems. The materials-related business
unit designs, develops and manufactures compound semiconductor materials.
Revenues for the materials-related business unit include sales of semiconductor
wafers, devices and process development technology. EMCORE's
vertically-integrated product offering allows it to provide a complete compound
semiconductor solution to its customers. The segments reported are the segments
of the Company for which separate financial information is available and for
which gross profit amounts are evaluated regularly by executive management in
deciding how to allocate resources and in assessing performance. The Company
does not allocate assets or operating expenses to the individual operating
segments. There are no intercompany sales transactions between the two operating
segments. Available segment information has been presented in the Statement of
Operations.
NOTE 2. JOINT VENTURES
In May 1999, General Electric Lighting and the Company formed GELcore, a
joint venture to develop and market High Brightness Light-Emitting Diode (HB
LED) lighting products. General Electric Lighting and the Company have agreed
that this joint venture will be the exclusive vehicle for each party's
participation in solid state lighting. Under the terms of the joint venture
agreement, the Company has a 49% non-controlling interest in the GELcore venture
and accounts for its investment under the equity method of accounting. For the
three-month period ended December 31, 1999, the Company recognized a loss of
$1.3 million related to this venture which has been recorded as a component of
other income and expense. As of December 31, 1999, the Company's investment in
this venture amounted to $4.0 million.
In December 1997, the Company and a subsidiary of Uniroyal Technology
Corporation formed Uniroyal Optoelectroncis LLC, a joint venture, to
manufacture, sell and distribute HB LED wafers and package-ready devices. For
the three months ended December 31, 1999, the Company recognized a loss of $1.4
million related to this venture, which has been recorded as a component of other
income and expense. As of December 31, 1999, the Company's investment in this
venture amounted to $2.2 million.
7
<PAGE> 8
EMCORE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVENTORIES
The components of inventories, net of reserves, consisted of the following:
AS OF AS OF
(Amounts in thousands) DECEMBER 31, 1999 SEPTEMBER 30, 1999
----------------- ------------------
Raw materials ......... $11,026 $ 9,146
Work-in-process ....... 4,945 3,620
Finished goods ........ 2,862 1,224
------- -------
Total $18,833 $13,990
======= =======
NOTE 4. EARNINGS PER SHARE
The Company accounts for earnings per share under the provision of
Statement of Financial Accounting Standards No. 128 "Earnings per share". Basic
earnings per common share were calculated by dividing net loss by the weighted
average number of common stock shares outstanding during the period. The effect
of outstanding common stock purchase options and warrants, the number of shares
available to be issued upon the conversion of the Company's Series I Preferred
Stock and the number of shares to be issued upon conversion of the convertible
subordinated debenture have been excluded from the earnings per share
calculation since the effect of such securities are anti-dilutive. The following
table reconciles the number of shares utilized in the earnings per share
calculations for the three month-periods ending December 31, 1999 and 1998,
respectively.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED DECEMBER 31,
----------------------
1999 1998
---- ----
<S> <C> <C>
Net loss .................................................. ($ 6,658) ($ 6,879)
Preferred stock dividends ........................ (66) (36)
Periodic accretion of redeemable
preferred stock to mandatory redemption value..... (37) (6)
-------- --------
Net loss attributable to common
shareholders ............................................ ($ 6,761) ($ 6,921)
======== ========
Net loss per basic and diluted share ...................... ($ 0.49) ($0.74)
======== ========
Weighted average of outstanding common shares
- basic ................................................. 13,740 9,390
Effect of dilutive securities:
Stock option and warrants ........................ -- --
Preferred stocks ................................. -- --
Convertible subordinated debenture ............... -- --
-------- --------
Weighted average of outstanding common shares
- diluted ............................................... 13,740 9,390
======== ========
</TABLE>
8
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EMCORE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. PREFERRED STOCK CONVERSION
On November 30, 1998, the Company sold an aggregate of 1,550,000 shares of
Series I Redeemable Convertible Preferred Stock ("the Series I Preferred Stock")
for aggregate consideration of $21.7 million before deducting costs and
expenses, which amounted to approximately $500,000. The Series I Preferred Stock
was recorded net of issuance costs. The excess of the preference amount over the
carrying value is being accreted by periodic charges to accumulated deficit. 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 addition, the Series I Preferred Stock is subject to mandatory
redemption by the Company at $14.00 per share plus accumulated and unpaid
dividends, if any, on November 17, 2003. In June 1999, 520,000 shares of Series
I Redeemable Convertible Preferred Stock were converted to common stock. In
December 1999, 372,857 shares of Series I Redeemable Convertible Preferred Stock
were converted to common stock.
NOTE 6. DEBT FACILITIES
In March 1997, the Company entered into a $10.0 million loan agreement
with First Union National Bank (the "Loan Agreement") that had an interest rate
of prime plus 50 basis points. As of September 30, 1999, there were no amounts
outstanding under this facility. The Loan Agreement contains financial
covenants, which, among other things, require maintenance of certain financial
ratios, liquidity and net worth. In December 1999, the Loan Agreement was
extended through January 31, 2001. The Loan Agreement's financial covenants were
modified under the third amendment, and management believes that the Company
will be able to comply with such requirements throughout fiscal year 2000. The
Company was in compliance with all covenants at December 31, 1999. No amounts
were outstanding under this facility at December 31, 1999.
NOTE 7. RELATED PARTIES
In connection with the Chairman's guarantee of the Company's bank facility
through September 1999 and subsequent extension of that facility until a new
bank line was secured by the Company in December 1999, the Board of Directors
has approved the granting of up to 300,000 warrants to the Chairman in return
for his guarantee and several bridge loans.
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 three months ended December 31,
1999 and 1998, sales made through Hakuto amounted to approximately $2.0 million
and $3.1 million, respectively.
9
<PAGE> 10
EMCORE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. SUBSEQUENT EVENTS
SHELF REGISTRATION
On January 19, 2000, the Company filed a shelf registration statement with
the Securities and Exchange Commission to offer from time to time up to 2
million shares of common stock. This registration statement became effective on
February 4th, 2000.
PREFERRED STOCK CONVERSION
Subsequent to December 31, 1999, the remaining outstanding 657,143
shares of Series I Redeemable Convertible Preferred Stock were converted to
common stock.
DEBT FACILITIES
In January 2000, the Company borrowed a total of $4.0 million under the
Loan Agreement at an annual interest rate equal to the Prime Rate plus fifty
basis points or 9.0%.
10
<PAGE> 11
EMCORE CORPORATION
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT IDENTIFYING IMPORTANT FACTORS THAT COULD CAUSE
EMCORE'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, you are advised that this report contains both
statements of historical facts and forward looking statements.
This report includes forward-looking statements that reflect current
expectations or beliefs of EMCORE concerning future results and events. The
words "expects," "intends," "believes," "anticipates," "likely," "will", and
similar expressions identify forward-looking statements. These forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results and events to differ materially from those anticipated in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, delays in developing and commercializing new products;
cancellations, rescheduling or delays in product shipments; delays in obtaining
export licenses for product shipments; the uncertainty of additional funding;
continued acceptance of our MOCVD technologies; operations and performance of
our joint ventures; our 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; labor actions against EMCORE's customers or vendors;
difficulties in obtaining licenses on commercially reasonable terms necessary to
manufacture and sell certain of our products; economic and stock market
conditions, particularly in the U.S., Europe and Asia, and their impact on sales
of our products and services; and such other risk factors as may have been or
may be included from time to time in EMCORE's reports filed with the Securities
and Exchange Commission.
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 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
provides its customers with a broad range of compound semiconductor products and
services intended to meet their diverse technology requirements.
EMCORE has developed extensive materials science expertise, process
technology and MOCVD production systems to address its customers' needs and
believes that its proprietary TurboDisc(R) 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 the market faster with
high volumes of new and improved high-performance products. EMCORE's compound
semiconductor products and services include:
o development of materials and processes;
o design and development of devices;
o fabrication and assembly of MOCVD production systems; and
o manufacture of wafers and devices in high volumes.
11
<PAGE> 12
EMCORE CORPORATION
OVERVIEW - (CONTINUED):
Customers can take advantage of EMCORE's vertically integrated approach
by purchasing custom-designed wafers and devices from EMCORE or they can
manufacture their own devices in-house using a TurboDisc production system
configured to their specific needs. Our customers include Agilent Technologies
Ltd., AMP, Inc., Hewlett Packard Co., General Motors Corp., Hughes-Spectrolab,
Lucent Technologies, Inc., Motorola, Inc., Siemens AG's Osram GmbH subsidiary
and 12 of the largest electronics manufacturers in Japan.
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
areas. These strategic relationships are summarized below:
o In May 1999, EMCORE and General Electric Lighting formed GELcore, a
joint venture to develop and market HB LED lighting products.
General Electric Lighting and EMCORE have agreed that this joint
venture will be the exclusive vehicle for each party's participation
in solid state lighting. GELcore seeks to combine EMCORE's materials
science expertise, process technology and compound semiconductor
production systems with General Electric Lighting's brand name
recognition and extensive marketing and distribution capabilities.
GELcore's long-term goal is to develop products to replace
traditional lighting. EMCORE has invested $7.8 million in GELcore
and has seconded various employees to the joint venture to assist in
the development of products;
o In May 1999, EMCORE signed a long-term agreement with Sumitomo
Electric Industries, Ltd., located in Hyogo, Japan, to jointly
develop and produce Indium Gallium Phosphide ("InGaP") epitaxial
wafers for use as HBT devices used in digital wireless and cellular
applications. Sumitomo Electric is one of the world's leading
electronics manufacturers. These advanced compound semiconductor HBT
wafers will be produced at EMCORE's E2M wafer foundry in Somerset,
New Jersey, and shipments of commercial product are expected to
begin in February 2000;
o In November 1998, EMCORE signed a long-term supply agreement with
Space Systems/Loral, a wholly owned subsidiary of Loral Space &
Communications. Under this agreement, EMCORE will supply compound
semiconductor high-efficiency gallium arsenide solar cells for
Loral's satellites. EMCORE received purchase orders from Space
Systems/Loral that total $7.2 million and will service this
agreement through our newly completed facility in Albuquerque, New
Mexico. EMCORE started shipping solar cells in December 1999 and a
majority of the solar cell shipments are scheduled for the second
fiscal quarter ended March 31, 2000. This facility presently employs
approximately 68 people, including sales and marketing,
administrative and manufacturing personnel;
o 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 seconded various personnel to
the joint venture to assist in the development of products;
o 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;
12
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EMCORE CORPORATION
OVERVIEW - (CONTINUED):
o In September 1998, EMCORE entered into an agreement with Lockheed
Martin to provide technical management and support for the
commercialization of a new high-efficiency solar cell. It is
anticipated that we will provide high efficiency solar cells to
Lockheed Martin upon completion of the research and development
agreement. EMCORE's new facility in Albuquerque, New Mexico will
provide the support necessary to meet our obligations under this
agreement;
o In September 1998, EMCORE signed a four-year purchase agreement
with AMP Incorporated to provide high speed VCSELs, for use in
transceivers for high-speed networks that link computers. The
contract requires AMP to purchase a minimum of 80% of their VCSEL
needs from EMCORE. EMCORE's MODE facility in Albuquerque, New Mexico
will produce the devices under this contract;
o In December 1997, the Company and a wholly owned subsidiary of
Uniroyal Technology Corporation formed Uniroyal Optoelectronics LLC,
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 $6.0 million in Uniroyal
Optoelectronics and has seconded various employees to the joint
venture to assist in the development of products; and
o In December 1997, EMCORE acquired MicroOptical Devices, Inc.
("MODE") in a stock transaction accounted for under the purchase
method of accounting for a purchase price of $32.8 million. This
acquisition allowed EMCORE to expand its technology base into the
data communications and telecommunications markets. MODE, a
development stage company, constituted a significant and strategic
investment for EMCORE to acquire and gain access to MODE's
in-process research and development of micro-optical technology. As
part of this acquisition, EMCORE incurred a one-time in-process
research and development write-off of $19.5 million. EMCORE also
recorded goodwill of approximately $13.2 million, which is being
charged against operations over a three-year period, and will
therefore impact financial results through December 2000. These
operations are located in Albuquerque, New Mexico and currently
employ approximately 42 people including sales and marketing,
administrative and manufacturing personnel.
Because EMCORE does not have a controlling economic and voting interest
in the General Electric Lighting , Uniroyal Technology, Union Miniere and Optek
joint ventures, EMCORE accounts for these joint ventures under the equity method
of accounting and, as such, our share of profits and losses are included below
the operating income line in our statements of operations.
EMCORE has generated a significant portion of its sales to customers
outside the United States. In fiscal 1997, 1998 and 1999, international sales
constituted 42.0%, 39.1% and 52.5%, respectively, of revenues. For the three
months ended December 31, 1999, international sales constituted 48.1% of
revenues. In fiscal year 1999 and the first quarter of fiscal year 2000, the
majority of EMCORE's international sales were made to customers in Asia.
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
production systems regularly. EMCORE anticipates that international sales will
continue to account for a significant portion of revenues. Historically, EMCORE
has received all payments for products and services in U.S. dollars. EMCORE does
not anticipate that Europe's Euro-currency conversion will have a material
effect on its financial condition or results of operations.
13
<PAGE> 14
EMCORE CORPORATION
OVERVIEW - (CONTINUED):
The following chart contains a breakdown of EMCORE's worldwide revenues
and percentages by geographic region.
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED SEPTEMBER 30,
----------------------------------------
1997 1998 1999 THREE MONTHS ENDED 12/31/99
-----------------------------------------------------------------------------------------------
REVENUE % REVENUE % REVENUE % REVENUE %
--------------- -------- ---------- -------- ------------ --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REGION
North America $27,690 58% $26,648 61% $27,698 48% $ 8,572 52%
Asia 14,584 31% 15,527 35% 28,211 48% 4,575 28%
Europe 5,478 11% 1,585 4% 2,432 4% 3,354 20%
------- ---- ------- ---- ------- ---- ------- ----
TOTAL $47,752 100% $43,760 100% $58,341 100% $16,501 100%
======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
As of December 31, 1999, EMCORE had an order backlog of $46.6 million
scheduled to be shipped through December 31, 2000. This represented an increase
of 8% since September 30, 1999. 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 has two reportable operating segments: the systems-related
business unit and the materials-related business unit. The systems-related
business unit designs, develops and manufactures tools and manufacturing
processes used to fabricate compound semiconductor wafer and devices. Revenues
for the systems-related business unit consist of sales of EMCORE's TurboDisc
production systems as well as spare parts and services. Our systems-related
business unit assists our customers with device design, process development and
optimal configuration of TurboDisc production systems. The materials-related
business unit designs, develops and manufactures compound semiconductor
materials. Revenues for the materials-related business unit include sales of
semiconductor wafers, devices and process development technology. EMCORE's
vertically-integrated product offering allows it to provide a complete compound
semiconductor solution to its customers. The Company does not allocate assets or
operating expenses to the individual operating segments. There are no
intercompany sales transactions between the two operating segments. The
Company's reportable operating segments are business units that offer different
products. The reportable segments are each managed separately because they
manufacture and distribute distinct products and services.
14
<PAGE> 15
EMCORE CORPORATION
RESULTS OF OPERATIONS:
COMPARISON OF THREE-MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1999
REVENUES. EMCORE's revenues increased 63.0% from $10.1 million for the
three-month period ended December 31, 1998 to $16.5 million for the three-month
period ended December 31, 1999. The increase was attributable to increased
revenues in both the systems-related and materials related product lines.
Revenues from systems-related sales and materials-related sales were $7.3
million and $2.8 million, respectively, for the three-month period ended
December 31, 1998 and $12.0 million and $4.5 million, respectively, for the
three-month period ended December 31, 1999. As a percentage of revenues,
systems- and materials-related revenues accounted for 72.0% and 28.0%,
respectively, for the three-month period ended December 31, 1998 and 72.6% and
27.4%, respectively, for the three-month period ended December 31, 1999. EMCORE
expects the product mix between systems and materials to approach 50% as new
products, such as solar cells, VCSELs and HBTs are introduced and production of
commercial volumes of these materials commences. International sales accounted
for 35.1% of revenues for the three-month period ended December 31, 1998 and
48.1% of revenues for the three-month period ended December 31, 1999.
COST OF REVENUES/GROSS PROFIT. Cost of sales includes direct material
and labor costs, allocated manufacturing and service overhead and installation
and warranty costs. EMCORE's gross profit increased 63.6% from $4.1 million for
the three-month period ended December 31, 1998 to $6.7 million for the
three-month period ended December 31, 1999. As a percentage of revenue, gross
profit increased slightly from 40.6% of revenue for the three-month period ended
December 31, 1998 to 40.7% of revenue for the three-month period ended December
31, 1999. During the three-month period ended December 31, 1998, EMCORE sold two
compound semiconductor production systems for approximately $3.0 million to a
joint venture in which it has a 49% minority interest. EMCORE deferred $711,000
of gross profit on such sales. Such deferred gross profit will be recognized
ratably over the assigned life of the production systems purchased by the joint
venture.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by 50.3% from $3.1 million for the three-month period ended
December 31, 1998 to $4.7 million for the three-month period ended December 31,
1999. A significant portion of the increase was largely due to increases in
sales personnel headcount to support domestic and foreign markets and headcount
additions to sustain internal administrative support. As a percentage of
revenue, selling, general and administrative expenses decreased from 31.0% for
the three-month period ended December 31, 1998 to 28.6% for the three-month
period ended December 31, 1999.
GOODWILL AMORTIZATION. Goodwill of $13.2 million was recorded in
connection with our acquisition of MODE on December 5, 1997. EMCORE recognized
approximately $1.1 million of goodwill amortization for the three-month periods
ended December 31, 1998 and 1999. As of December 31, 1999, EMCORE had
approximately $4.0 million of net goodwill remaining, which will be fully
amortized by December 2000.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased
20.5% from $5.9 million in the three-month period ended December 31, 1998 to
$4.7 million in the three-month period ended December 31, 1999. As a percentage
of revenue, research and development expenses decreased from 58.5% for the
three-month period ended December 31, 1998 to 28.5% for the three-month period
ended December 31, 1999. The decrease in research and development spending was
primarily attributable to new products being introduced. To maintain growth and
to continue to pursue market leadership in materials science technology, EMCORE
expects to continue to invest a significant amount of its resources in research
and development.
15
<PAGE> 16
EMCORE CORPORATION
RESULTS OF OPERATIONS: (CONTINUED)
OPERATING LOSS. EMCORE reported a 37.1% decrease in operating loss from
$6.1 million for the three-month period ended December 31, 1998, to an operating
loss of $3.8 million for the three-month period ended December 31, 1999. The
change in operating loss was principally due to increased revenues and gross
profit. During the three-month period ended December 31, 1998, EMCORE deferred
$711,000 of gross profit on two compound semiconductor production systems sold
to a joint venture in which it has a 49% minority interest. In addition,
EMCORE's operating loss in 1998 was impacted by increased research and
development spending, the loss generated from the operations of MODE and the
startup expenses associated with the opening of EMCORE's new Albuquerque, New
Mexico facility.
OTHER EXPENSE. During fiscal year 1996, EMCORE issued 2,575,883
detachable warrants along with subordinated notes to certain of its existing
shareholders. EMCORE subsequently assigned a value to these detachable warrants
issued using the Black-Scholes option-pricing model. EMCORE recorded the
subordinated notes at a carrying value that was subject to periodic accretions,
using the interest method. In June 1998, EMCORE issued 284,684 warrants to its
Chairman and its Chief Executive Officer for providing a guarantee in connection
with an $8.0 million 18-month credit facility with First Union National Bank
entered into in 1998. EMCORE also assigned a value to these warrants using the
Black-Scholes option-pricing model. The consequent expense of the subordinated
note accretion and warrant value amortization was charged to "Imputed warrant
interest, non-cash" and was approximately $316,000 for the three months ended
December 31, 1998. The subordinated notes and the 18-month credit facility were
repaid using a portion of the proceeds from the public offering, which was
completed in June 1999.
In order to fund its initial capital contribution for GELcore, EMCORE
borrowed $7.8 million from General Electric in the form of a convertible
subordinated debenture (the "Debenture"), with an interest rate of 4.75% and a
May 2006 maturity date. In connection with the funding of EMCORE's initial
capital contribution, General Electric received 282,010 warrants to purchase
common stock at $22.875 per share. These warrants are exercisable at any time
and will expire in 2006. EMCORE subsequently assigned a value to these warrants
using the Black-Scholes option-pricing model. The warrant value of $2.6 million
is included in other assets and is being amortized over seven years. The
consequent expense of the warrant amortization is charged to "Imputed warrant
interest, non-cash" and amounted to approximately $163,000 for the three-month
period ended December 31, 1999.
For the three-month period ended December 31, 1999, stated interest
decreased by 133.9% from net interest expense of $230,000 to net interest income
of $78,000. In June 1999, EMCORE completed the issuance of an additional 3.0
million common stock shares through a public offering, which resulted in
proceeds of $52.0 million, net of issuance costs. A significant portion of the
proceeds was used to repay all outstanding bank loans and subordinated notes,
thereby reducing interest expense and generating interest income on the retained
proceeds.
Because EMCORE does not have a controlling economic and voting interest
in the General Electric Lighting, Uniroyal Technology and Union Miniere joint
ventures, EMCORE accounts for these joint ventures under the equity method of
accounting. For the three-month period ended December 31, 1998, EMCORE incurred
a net loss of $276,000 related to the Uniroyal joint venture. For the
three-month period ended December 31, 1999, EMCORE incurred a net loss of $1.3
million related to the GELcore joint venture, a $1.4 million net loss related to
the Uniroyal joint venture and a $27,000 net loss related to the UMCore joint
venture.
INCOME TAXES. As a result of its losses, EMCORE did not incur any income
tax expense in both the three-month periods ended December 31, 1998 and 1999.
16
<PAGE> 17
NET LOSS. EMCORE reported a $200,000 decrease in net loss from $6.9
million for the three-month period ended December 31, 1998, to a net loss of
$6.7 million for the three-month period ended December 31, 1999. The decrease in
net loss was primarily attributable to the increase in gross profit offset by an
increase in the net loss from unconsolidated affiliates.
EMCORE CORPORATION
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $4.4 million from $7.1 million at
September 30, 1999 to $2.7 million at December 31, 1999. For the three-month
period ended December 31, 1999, net cash provided by operations amounted to
$204,000, primarily due to an increase in accounts payable and the non-cash
charges related to equity in net loss from unconsolidated affiliates offset by
an increase in inventory and by EMCORE's net loss. Net cash used for investment
activities amounted to $4.8 million, primarily due to the purchase and
manufacture of new equipment for the facilitation of EMCORE's wafer and device
product lines, and clean room modifications and enhancements. Net cash provided
by financing activities for the three-month period ended December 31, 1999
amounted to approximately $171,000.
In March 1997, EMCORE entered into a $10.0 million loan agreement with
First Union National Bank (the "Loan Agreement") that had an interest rate of
prime plus 50 basis points. As of September 30, 1999, there were no amounts
outstanding under this facility. The Loan Agreement contains financial
covenants, which, among other things, require maintenance of certain financial
ratios, liquidity and net worth. In December 1999, the Loan Agreement was
extended through January 31, 2001. The Loan Agreement's financial covenants were
modified under the third amendment, and management believes that EMCORE will be
able to comply with such requirements throughout fiscal year 2000. The Company
was in compliance with all covenants at December 31, 1999. No amounts were
outstanding under this facility at December 31, 1999. In connection with the
Chairman's guarantee of EMCORE's bank facility through September 1999 and
subsequent extension of that facility until a new bank line was secured by
EMCORE in December 1999, the Board of Directors has approved the granting of up
to 300,000 warrants to the Chairman in return for his guarantee and several
bridge loans. In January 2000, the Company borrowed a total of $4.0 million at
an annual interest rate equal to the Prime Rate plus fifty basis points or 9.0%.
EMCORE believes that its current liquidity, together with available
credit, should be sufficient to meet its cash needs for working capital through
fiscal year 2000. However, if the available credit facilities, cash generated
from operations and cash on hand are not sufficient to satisfy EMCORE's
liquidity requirements, EMCORE will seek to obtain additional equity or debt
financing. Additional funding may not be available when needed or on terms
acceptable to EMCORE. If EMCORE is required to raise additional financing and if
adequate funds are not available or not available on acceptable terms, the
ability to continue to fund expansion, develop and enhance products and
services, or otherwise respond to competitive pressures will be severely
limited. Such a limitation could have a material adverse effect on EMCORE's
business, financial condition or operations.
On January 19, 2000, EMCORE filed a shelf registration statement with
the Securities and Exchange Commission to offer from time to time up to 2.0
million shares of common stock. This registration statement became effective on
February 4, 2000.
In 1992, EMCORE 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 TurboDisc systems. In October 1996 EMCORE
initiated discussions with Rockwell to receive additional licenses to permit
EMCORE to use this technology to manufacture and sell compound semiconductor
wafers and devices. In November 1996, EMCORE suspended these negotiations
because of litigation surrounding the validity of the Rockwell patent. EMCORE
also ceased making royalty payments to Rockwell under the license during the
pendency of the litigation. In January 1999, the case was settled and a
judgement was entered in favor of Rockwell. As a result, EMCORE may be required
to pay royalties to Rockwell for certain of its past sales, of wafers and
devices to customers who did not hold licenses directly from Rockwell.
Management has reviewed and reassessed the royalty agreements and concluded that
it has the appropriate amounts reserved at both December 31, 1999 and September
30, 1999.
17
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
27 - Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended
December 31, 1999.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EMCORE CORPORATION
Date: February 14, 2000 By: /s/ Reuben F. Richards, Jr.
---------------------------------------------
Reuben F. Richards, Jr.
President and Chief Executive Officer
Date: February 14, 2000 By: /s/ Thomas G. Werthan
---------------------------------------------
Thomas G. Werthan
Vice President, Finance and Administration
18
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 2,722
<SECURITIES> 0
<RECEIVABLES> 16,216
<ALLOWANCES> (667)
<INVENTORY> 18,833
<CURRENT-ASSETS> 527
<PP&E> 74,036
<DEPRECIATION> (25,682)
<TOTAL-ASSETS> 99,939
<CURRENT-LIABILITIES> 21,313
<BONDS> 0
9,100
0
<COMMON> 158,023
<OTHER-SE> (97,515)
<TOTAL-LIABILITY-AND-EQUITY> 99,939
<SALES> 16,501
<TOTAL-REVENUES> 16,501
<CGS> 9,778
<TOTAL-COSTS> 9,778
<OTHER-EXPENSES> 13,459
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (78)
<INCOME-PRETAX> (6,658)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,658)
<EPS-BASIC> (0.49)
<EPS-DILUTED> (0.49)
</TABLE>
