10-K 1 0001.txt ANNUAL REPORT ON FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2000 [ ] 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 22-2746503 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 145 Belmont Drive, Somerset, NJ 08873 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (732) 271-9090 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par Value 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 1, 2000 was approximately $651,884,111 (based on the closing sale price of $35.3125 per share). The number of shares outstanding of the registrant's no par value common stock as of December 1, 2000 was 34,012,909. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement for the 2001 Annual Meeting of Shareholders (to be filed with the Securities and Exchange Commission on or before January 28, 2001) are incorporated by reference in Part III of this Form 10-K. EMCORE Corporation FORM 10-K For the fiscal year ended September 30, 2000 INDEX page Part I Item 1. Business Item 2. Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Financial Statements and Supplementary Data Consolidated Balance Sheets as of September 30, 1999 and 2000 Consolidated Statements of Operations for the years ended September 30, 1998, 1999 and 2000 Consolidated Statements of Shareholders' Equity for the years ended September 30, 1998, 1999 and 2000 Consolidated Statements of Cash Flows for the years ended September 30, 1998, 1999 and 2000 Notes to Financial Statements Independent Auditors' Report Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures Part III Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K SIGNATURES PART I Item 1. Business Company Overview EMCORE Corporation, a New Jersey Corporation, 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. Established in 1986, EMCORE offers a comprehensive portfolio of compound semiconductor products for the rapidly expanding broadband and wireless communications and solid state lighting markets. EMCORE's product philosophy embodies state of the art technology, material science expertise and a shared vision of our customers' goals and objectives to be leaders and pioneers in the rapidly growing world of compound semiconductors. EMCORE's product line features: optical components for high-speed data and telecommunications; solar cells for global satellite communications; electronic materials for high bandwidth communications systems, such as Internet access and wireless telephones; MOCVD tools for the growth of GaAs, AIGaAs, InP, InGaP, InGaAIP, InGaAsP, GaN, InGaN, AIGaN, and SiC epitaxial materials used in numerous applications, including data and telecommunications modules, cellular telephones, solar cells and high brightness LEDs. Our customers include Agilent Technologies Ltd., AMP, Inc., Anadigics Inc., Corning, Inc., General Motors Corp., Hewlett Packard Co., Honeywell Int'l Inc., Boeing-Spectrolab, JDS Uniphase Corp., Loral Space & Communications Ltd., Lucent Technologies, Inc., Motorola, Inc., Nortel Networks Corp., Siemens AG's Osram GmbH subsidiary, TriQuint Semiconductor, Inc. and more than a dozen of the largest electronics manufacturers in Japan. For further information about EMCORE, visit http://www.emcore.com. 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, computational and display capabilities and can be produced cost-effectively in commercial volumes. In the past, electronic systems manufacturers have relied on advances in silicon semiconductor technology to meet many of these demands. However, the newest generation of high-performance electronic and optoelectronic applications require certain functions that are generally not achievable using silicon-based components. Compound semiconductors have emerged as an enabling technology to meet the complex requirements of today's advanced information systems. Many compound semiconductor materials have unique physical properties that allow electrons to move at least four times faster than through silicon-based devices. Advantages of compound semiconductor devices over silicon devices include: o higher operating speeds; o lower power consumption; o reduced noise and distortion; and o light emitting and detecting optoelectronic properties. Compound semiconductor devices can be used to perform individual functions as discrete devices, such as VCSELs, RF materials, solar cells, HB LEDs and MR sensors. Compound semiconductor devices can also be combined into integrated circuits, such as transmitters, receivers and alphanumeric 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: o widespread deployment of fiber optic networks and the increasing use of optical systems within these networks; o launch of new wireless services and wireless high-speed data systems; o rapid build-out of satellite communications systems; o increasing use of infrared emitters and optical detectors in computer systems; o emergence of advanced consumer electronics applications, such as DVDs and flat panel displays; o increasing use of high-performance electronic devices in automobiles; and o 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.
Market Representative Applications Products Benefits/Characteristics Data communications High-speed fiber optic networks VCSEL components Increased network capacity and optical links (including and arrays Increased data transmission Gigabit Ethernet, HB LEDs speeds asynchronous transfer mode Lasers Increased bandwidth or ATM, and FibreChannel RF materials networks) Wireless Cellular telephones HB LEDs Improved display visibility Communication Pagers RF materials Improved signal to noise PCS handsets performance Direct broadcast systems Lower power consumption Increased network capacity Reduced network congestion Extended battery life Telecommunications High capacity fiber optic trunk VCSEL components Increased data transmission lines and arrays speeds Lasers Increased bandwidth RF materials Satellite Power modules for satellites Solar cells Radiation tolerance Communications Satellite to ground RF materials Conversion of more light communication to power than silicon Reduced launch costs 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 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 transmission speeds Peripherals Chip-to-chip and board-to-board and arrays Increased bandwidth optical links Transceivers Consumer electronics DVDs HB LEDs Improved display visibility CD-Roms VCSEL components High-speed data transmission Telephones and arrays Low power requirements Radios Integrated circuits Calculators Lasers
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 achieved by the layering of different compound semiconductor materials in the same device. This layered structure creates an optimal configuration to permit the emission or detection of light and the detection of magnetic fields. 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 different methods to deposit compound materials: (i) molecular beam epitaxy; (ii) vapor phase epitaxy; (iii) liquid phase epitaxy; and (iv) 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 vapor phase epitaxy or liquid phase epitaxy technologies often have high electronic and optical properties. However, due to the nature of the underlying processes, none of these methods can be easily scaled up to high volume production, which is necessary for the commercial viability of compound semiconductor devices. All of these four methods used to manufacture compound semiconductor devices pose technical, training and safety challenges that are not present in the manufacture of silicon devices. The production systems typically require expensive reactant materials, use of certain toxic chemicals and tight control over numerous manufacturing parameters. The key differences between MOCVD and the three other methods are 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 that 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 increase, 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 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 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 materials and process development; o design and development of devices; o MOCVD production systems; and o 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 they can manufacture their own devices in-house using a TurboDisc production system configured to their specific needs. Strategy EMCORE's objective is to capitalize on its position in MOCVD process technology and production systems to become the leading supplier of compound semiconductor wafers, devices and production systems. The key elements of EMCORE's strategy include: Apply Core Technology Across Multiple Applications. EMCORE continually leverages its proprietary core technology to develop compound semiconductor products for multiple applications in a variety of markets. These activities include developing new products for targeted applications as well as expanding existing products into new applications. For example, EMCORE's array transceiver program is being expanded to meet customer demands for a new transponder product. 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 Market Opportunities. EMCORE's strategy is to target high growth market 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 products because of their higher performance characteristics. For example, EMCORE has reduced the average cost of compound semiconductor solar cells to the point where customers are replacing silicon-based solar cells because of the compound semiconductor solar cells' higher overall efficiency, better end-of-life performance 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 that include long-term, high-volume supply agreements, joint ventures, an acquisition and other arrangements. For example, EMCORE entered into 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. EMCORE has also signed a Joint Development Manufacturing and Marketing Agreement with JDS Uniphase for the joint development, manufacture and marketing of a family of array transceivers for cost effective, high bandwidth optical networking products. 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; and 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 products. Products Production Systems EMCORE is a leading supplier of MOCVD compound semiconductor production systems, with more than 300 systems shipped as of September 30, 2000. EMCORE believes that its TurboDisc production systems offer significant ownership advantages over competing systems and that the high throughput capabilities of its TurboDisc production systems make possible superior reproducibility of thickness, composition, electronic properties and layer accuracy required for electronic and optoelectronic devices. Each system can be customized for the customer's throughput, wafer size and process chemistry requirements. EMCORE's production systems also achieve a high degree of reliability with an average time available for production, based on customer data, of approximately 95%. EMCORE believes its TurboDisc production 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 and incorporation in the customer's product. EMCORE's next generation of TurboDisc products are being designed to provide a number of innovations including: o new reactor design to improve efficiency; o cassette-to-cassette wafer handling to increase automation; o digital control system to reduce noise; o real-time process control and data acquisition on WindowsNT platform; o modular component design to ease outsourcing and upgrading; and o improved temperature control. Wafers and Devices Since its inception, EMCORE has worked closely with its customers to design and develop process technology and material science expertise 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 VCSELs, RF materials, solar cells, HB LEDs and MR sensors. 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:
PRODUCTS AND STRATEGIC RELATIONSHIPS Product Line Company Nature of Relationship Application Vertical cavity JDS Uniphase Joint Development Manufacturing Array transceivers surface-emitting lasers and Marketing Agreement Array transponders (VCSELs) Agilent Long-term supply agreement Gigarray(R)VCSEL arrays for use in parallel optical transceivers Radio frequency (RF) Motorola Long-term supply agreement Digital wireless, fiber optic materials Anadigics and cellular applications Solar cells Space Systems/ Long-term supply agreement Solar panels in Loral communications satellite powered Lockheed Martin Strategic partner systems Missiles and Space High-brightness General Electric GELcore joint venture for the Traffic lights light-emitting diodes Lighting development, marketing and Miniature lamps (HB LEDs) distribution of white light Automotive lighting and colored HB LED Flat panel displays products Uniroyal Uniroyal Optoelectronics joint Other lighting applications Technology venture for the Corporation manufacture of HB LED wafers and package-ready devices Magneto resistive (MR) General Motors Long-term supply agreement Cam and crank shaft sensors sensors Corporation
VCSELs Vertical cavity surface-emitting lasers ("VCSELs") are semiconductor lasers that emit light in a cylindrical beam. VCSELs offer significant advantages over traditional laser diodes used in fiber optic communications, including: o greater control over beam size and wavelength; o reduced manufacturing complexity and packaging costs; o lower power consumption; and o higher frequency performance. 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. In December 1997, EMCORE acquired MicroOptical Devices, Inc. ("MODE"), a development stage company primarily dedicated to the research and development of enabling VCSEL technologies. In February 1998, EMCORE announced Gigalase(R), its first commercial high speed VCSEL laser operating at 1.25 Gbps. In December 1998, EMCORE announced its second VCSEL product, Gigarray(R), a VCSEL array. In March 2000, EMCORE debuted the industry's first commercial 2.5 Gbps 850nm oxide VCSEL, the Gigalase(R) with OxideGuide(TM), and in August 2000 announced the availability of its first 850 nm 1x4 and 1x12 Oxide VCSEL arrays and its high speed gallium arsenide (GaAs) photodetector arrays. The 1x4 array is capable of up to 10 Gbps transmission speeds, while the 1x12 has a transmission speed of 30Gbps. EMCORE's photodetector arrays operate up to speeds of 3.125Gbps and provide the efficiency required for high speed data transmission. In January 2000, EMCORE entered into a three-year supply agreement with Agilent, a leading supplier of fiber optic transceivers and integrated circuits for infrastructure products for the Internet. Under this agreement, EMCORE will manufacture Gigarray(R) VCSEL arrays for use in parallel optical transceivers. The initial purchase order under the agreement is contingent upon EMCORE's development of a component that meets Agilent's specifications. EMCORE began shipping commercial product in December 2000. In June 2000, EMCORE signed a Joint Development Manufacturing and Marketing Agreement with JDS Uniphase for the joint development, manufacture and marketing of a family of array transceivers for the Very Short Reach OC-192 and related markets. Recent industry forecasts indicate that the market opportunity for high-speed optical transceivers, including 2.5 gigabit per channel arrays and 10 gigabit serial devices will exceed $3.4 billion by the year 2004. EMCORE has completed alpha testing and began shipping prototype array transceivers in December 2000. RF Materials Radio frequency ("RF") materials are compound semiconductor materials that transmit and receive communications. Compound semiconductor RF materials have a broader bandwidth and superior performance at higher frequencies than silicon-based materials. EMCORE currently produces 4-inch and 6-inch InGaP HBT and pHEMT materials that are used by its wireless customers for power amplifiers for GSM, TDMA, and CDMA multiband wireless handsets. InGaP HBT materials provide higher linearity, higher power added efficiency as well as greater reliability than first generation AlGaAs HBT technologies, and have become the technology of choice for next generation HBT-based power amplifiers for wireless handsets. In addition, recent developments and transfers to production of enhancement mode pHEMT technologies have demonstrated their continued competitiveness for handset applications. EMCORE is also exploring opportunities to market RF materials to its fiber optic customers for use in high speed digital components for OC-48 and OC-192 fiber optic communication and to its power satellite customers for satellite communication applications. EMCORE believes that its ability to produce high volumes of RF materials at a low cost will facilitate their adoption in new applications and products. In May 2000, EMCORE signed an agreement with Motorola to meet their requirements for epitaxial tools, wireless electronic materials and technology. This relationship includes supplying Motorola with epitaxial process technology and multiple MOCVD production tools, as well as purchase orders for electronic device epitaxial wafers. Motorola also announced that EMCORE was awarded their Standard Supplier Designation, making EMCORE the only qualified supplier of MOCVD tools for Motorola's compound semiconductor factories. In October 2000 EMCORE received a $10.7 million order from Anadigics to supply 6-inch GaAs HBT and pHEMT wafers for their fiber optic and wireless communications devices. Anadigics will be using EMCORE's materials for power amplifiers for GSM, TDMA and CDMA multi-band wireless handsets and for high-speed digital components for OC-192 data communication applications. Solar Cells Compound semiconductor solar cells are used to power satellites because they are more resistant to radiation levels in space and convert substantially more light to power, therefore weigh less per unit of power than silicon-based solar cells. These characteristics increase satellite life, increase payload capacity and reduce launch costs. In fiscal 2000, EMCORE announced the manufacture and shipment of the world's highest efficiency dual-junction solar cell for satellite applications. EMCORE also announced the production of high-efficiency triple junction solar cells with a minimum average efficiency of 26%. EMCORE began shipping the triple junction solar cells in December 2000. EMCORE is currently involved in several solar cell projects: o EMCORE's solar cells were selected for use on two Space Technology Research Vehicles (STRV 1c&1d). These microsatellites are scheduled to be launched in November, 2001 by Arianspace. EMCORE's solar cells have been selected for two European communication satellite programs scheduled for launch in 2002. Additionally, EMCORE's solar cells are being used for two Japanese scientific programs sponsored by the National Space Development Agency of Japan (NASDA); o EMCORE is also working with TRW, Boeing and Lockheed to identify programs suitable for our high efficiency solar cells; o In April 2000, EMCORE signed a Memorandum of Understanding with Angewandte Solarenergie-ASE GmbH to provide solar cell material for use in the manufacture of their solar cells. Under this agreement, EMCORE will provide Epi processing and other services; o In November 1999, EMCORE entered into a Technical Assistance Agreement with Loral and Mitsubishi Electric Corporation; 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 supplies compound semiconductor high efficiency gallium arsenide solar cells for Loral's satellites. To date, EMCORE has received purchase orders from Space Systems/Loral that total $32.3 million and services this agreement at our new facility in Albuquerque, New Mexico; o In November 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; and o 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. 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 HB LEDs have a long useful life, consume approximately 10% of the power consumed by incandescent or halogen lighting and improve display visibility. In February 1998, EMCORE and Uniroyal Technology Corporation formed Uniroyal Optoelectronics, a joint venture to manufacture, sell and distribute HB LED wafers and package-ready devices. In May 1999, EMCORE and General Electric Lighting formed GELcore, a joint venture to develop and market HB LED lighting products. General Electric Lighting and EMCORE have agreed that this joint venture will be the exclusive vehicle for each party's participation in solid state lighting. GELcore combines 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. In September 2000, GELcore acquired Ecolux, Inc. adding LED-signaling products to its growing line of LED products. MR Sensors Magneto resistive ("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 to anyone using this technology. As of September 30, 2000, EMCORE has delivered over 10.7 million devices to General Motors Powertrain for crank and cam speed and position sensing applications for 5 different engine builds under 20 different vehicle platforms. Customers EMCORE's rapidly expanding customer base includes many of the largest semiconductor, telecommunications, consumer goods and computer manufacturing companies in the world. A number of EMCORE's customers are listed below. In addition, EMCORE has sold its products to more than a dozen of the largest electronics manufacturers in Japan. Agilent Technologies IBM Philips AG AMP Incorporated JDS Uniphase Rockwell International Anadigics L.M. Ericsson AB Siemens AG - Osram Boeing-Spectrolab Loral Space and Communications Texas Instruments Corning Lucent Technologies Thomson CSF General Motors Motorola TriQuint Semiconductor Hewlett Packard Nortel Networks Honeywell Northrop Grumman
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 help 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. Marketing and Sales EMCORE markets and sells its wafers, devices and systems through its direct sales force in North America, Europe, 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 Co., Ltd. EMCORE's agreements with Hakuto expire in March 2008. Hakuto has exclusive distribution rights for certain EMCORE 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. In August 1999, EMCORE entered into a two-year distribution agreement with DI Systems to market and service EMCORE's products in South Korea. EMCORE has sales offices in California and Taiwan, ROC in order to efficiently service EMCORE's rapidly expanding customer base in these areas. EMCORE's sales and marketing, senior management and technical staff work closely with existing and potential customers to provide compound semiconductor products that meet their customers' needs. EMCORE seeks to match a 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 period 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 elements necessary to meet the customer's specifications and qualifies the materials which may also require the delivery of samples. EMCORE believes that the marketing, management and engineering support involved in this process is beneficial in developing competitive differentiation and long-term relationships with its customers. 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 customer's request. EMCORE also sells replacement parts from inventory to meet 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 has 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 29 TurboDisc systems for both research and production that are capable of processing virtually all compound semiconductor materials. The research and development staff utilizes x-ray, optical and electrical characterization equipment which provide instant data allowing for shortened development cycles and rapid customer response. EMCORE 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 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 for production systems, wafers and devices depend significantly on its ability to maintain trade secrets and other intellectual property protections. Our strategy is to rely on both trade secrets and 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. EMCORE also has an aggressive program to actively patent all areas of its technology. To date, EMCORE has been issued twelve (12) U.S. patents and others are either pending (20 patent applications filed) or under in-house review (40 disclosures and draft patent applications). These U.S. patents will expire between 2005 and 2013. None of these U.S. patents claim any material aspects of current or planned commercial versions of EMCORE's systems, wafers or devices. EMCORE only relies on trade secrets to protect its intellectual property when 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: o non-exclusive rights to develop, manufacture and sell products containing Sandia VCSEL technologies under five U.S. patents that expire between 2007 and 2015; and o non-exclusive rights to employ a proprietary oxidation fabrication method in the manufacture of VCSEL products under a sixth U.S. patent that expires in 2014. 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, 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 its 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 judgment 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 its customers who did not hold licenses directly from Rockwell. Management has reviewed and assessed its likely royalty obligations and believes that it has the appropriate amounts reserved at both September 30, 1999 and 2000. If EMCORE is required to pay Rockwell amounts in excess of its reserves, its business, financial condition and results of operations could be materially and adversely affected. 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 compliance with all such laws and regulations. Backlog As of September 30, 2000, EMCORE had an order backlog of $125.0 million, scheduled to be shipped through September 30, 2001. This represented an increase of $81.9 million or 190% since September 30, 1999. This increase primarily relates to increased production systems bookings, orders for solar cells from Loral and epitaxial wafers from Motorola. EMCORE only includes in backlog 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 41,000 square feet. EMCORE's joint venture with Uniroyal Technology Corporation manufactures HB LED wafers and package-ready devices at its Tampa, Florida manufacturing facility. In May 1998, EMCORE received ISO 9001 and QS 9002 quality certifications for its Somerset, New Jersey facility. In November 1999, EMCORE received ISO 9001 quality certification for its newly completed solar cell facility in Albuquerque, New Mexico. In September 2000, EMCORE received ISO 9001 quality certification for its new Array Transceiver Division in Albuquerque, New Mexico. In December 2000, EMCORE received ISO 9001 quality certification for its VCSEL facility in Albuquerque, New Mexico. 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. EMCORE maintains inventories it believes are sufficient to meet its near term needs. EMCORE implemented a vendor program through which it inspects quality and reviews suppliers and prices in order to standardize purchasing efficiencies and design requirements to maintain as low a cost of sales as possible. However, operating results could be materially and adversely affected by a stoppage or delay of supply, receipt of defective 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 and Nippon-Sanso K.K. Ltd. The primary competitors for EMCORE's wafer foundry include Epitaxial Products Inc., Hitachi-Cable, 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 Osterreich, Electrotechnik and Asahi Kasei Electronic Co., Ltd.. The principal competitors for HB LEDs and EMCORE's joint ventures with Uniroyal Technology Corporation and 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 direct 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, 2000, EMCORE had 625 employees, including 328 employees in manufacturing operations, 185 employees in research and development and 112 employees in sales and general administration. This represents an increase of 257 employees or 70% from September 30, 1999. None of EMCORE's employees are covered by a collective bargaining agreement. EMCORE considers its relationship with its employees to be good. Risk Factors Our Rapid Growth Places A Strain on Our Resources. We are experiencing rapid growth, having added a significant number of new employees within the last year. We have also expanded our manufacturing facilities in Albuquerque, New Mexico and in Somerset, New Jersey. This growth has placed and will continue to place a significant strain on our management, financial, sales and other employees and on our internal systems and controls. If we are unable to effectively manage multiple facilities and multiple joint ventures in geographically distant locations, our business, financial condition and results of operations will be materially and adversely affected. We are also in the process of installing new manufacturing software for all of our facilities and are evaluating replacing our accounting and purchasing systems. Most of the new manufacturing software is customized to our particular business and manufacturing processes. It will take time and require evaluation to eliminate any of the malfunctions in the software and to train personnel to use the new software. In this transition we may experience delays in production, cost overruns and disruptions in our operations. We Expect To Continue to Incur Operating Losses. We started operations in 1984 and as of September 30, 2000 had an accumulated deficit of $108.9 million. We incurred net losses of $36.4 million in fiscal 1998, $22.7 million in fiscal 1999 and $25.5 million in fiscal 2000. We expect to continue to incur losses. To support our growth, we have increased our expense levels and our investments in inventory and capital equipment. As a result, we will need to significantly increase revenues and profit margins to become and stay profitable. If our sales and profit margins do not increase to support the higher levels of operating expenses and if our new product offerings are not successful, our business, financial condition and results of operations will be materially and adversely affected. Since The Technology In The Compound Semiconductor Industry Rapidly Changes, We Must Continually Improve Existing Products, Design And Sell New Products And Manage The Costs Of Research And DevelopmentIn Order To Effectively Compete. We compete in markets characterized by rapid technological change, evolving industry standards and continuous improvements in products. Due to constant changes in these markets, our future success depends on our ability to improve our manufacturing processes, tools and products. For example, our TurboDisc production systems must remain competitive on the basis of cost of ownership and process performance. To remain competitive we must continually introduce manufacturing tools with higher capacity and better production yields. We have recently introduced a number of new products, and, in connection with recent joint ventures and internal development, we will be introducing additional new products in the near future. The commercialization of new products involves substantial expenditures in research and development, production and marketing. We may be unable to successfully design or manufacture these new products and may have difficulty penetrating new markets. In addition, many of our new products are being incorporated into our customers' new products for new applications, such as high-speed computer networks. Because it is generally not possible to predict the amount of time required and the costs involved in achieving certain research, development and engineering objectives, actual development costs may exceed budgeted amounts and estimated product development schedules may be extended. Our business, financial condition and results of operations may be materially and adversely affected if: o we are unable to improve our existing products on a timely basis; o our new products are not introduced on a timely basis; o we incur budget overruns or delays in our research and development efforts; or o our new products experience reliability or quality problems. Fluctuations In Our Quarterly Operating Results May Negatively Impact Our Stock Price. Our revenues and operating results may vary significantly from quarter to quarter due to a number of factors particular to EMCORE and the compound semiconductor industry. Not all of these factors are in our control. These factors include: o the volume and timing of orders for our products, particularly TurboDisc systems, which have an average selling price in excess of $1 million; o the timing of our announcements and introduction of new products and of similar announcements by our competitors; o downturns in the market for our customers' products; o regional economic conditions, particularly in Asia where we derive a significant portion of our revenues; and o price volatility in the compound semiconductor industry. These factors may cause our operating results for future periods to be below the expectations of analysts and investors. This may cause a decline in the price of our common stock. Our Joint Venture Partners, Who Have Control Of These Ventures, May Make Decisions That We Do Not Agree With And That Adversely Affect Our Net Income. We do not have a majority interest in our joint ventures with Uniroyal Technology Corporation or General Electric Lighting. These joint ventures are governed by a board of managers with representatives from both the strategic partner and us. Many fundamental decisions must be approved by both parties to the joint venture, which means we will be unable to direct the operation and direction of these joint ventures without the agreement of our joint venture partners. If we are unable to agree on important issues with a joint venture partner, the business of that joint venture may be delayed or interrupted, which may, in turn, materially and adversely affect our business, financial condition and results of operations. We have devoted and will be required to continue to devote significant funds and technologies to our joint ventures to develop and enhance their products. In addition, our joint ventures will require that some of our employees devote much of their time to joint venture projects. This will place a strain on our management, scientific, financial and sales employees. If our joint ventures are unsuccessful in developing and marketing their products, our business, financial condition and results of operations may be materially and adversely affected. General Electric Lighting and EMCORE have agreed that our joint venture will be the sole vehicle for each party's participation in the solid state lighting market. General Electric Lighting and EMCORE have also agreed to several limitations during the life of the venture and thereafter relating to use that each of us can make of the joint venture's technology. One consequence of these limitations is that in certain circumstances, such as a material default by us, we would not be permitted to use the joint venture's technology to compete against General Electric Lighting in the solid state lighting market. Since A Large Percentage of Our Revenues Are from Foreign Sales, Certain Export Risks May\ Disproportionately Affect Our Revenues. Sales to customers located outside the United States accounted for approximately 39.1% of our revenues in fiscal 1998, 52.6% of our revenues in fiscal 1999 and 38.6% of our revenues in fiscal 2000. Sales to customers in Asia represent the majority of our international sales. We believe that international sales will continue to account for a significant percentage of our revenues. Because of this, the following export risks may disproportionately affect our revenues: o political and economic instability may inhibit export of our systems and devices and limit potential customers' access to U.S. dollars; o shipping and installation costs of our systems may increase; o we may experience difficulties in the timeliness of collection of foreign accounts receivable and be forced to write off receivables from foreign customers; o a strong dollar may make our systems less attractive to foreign purchasers who may decide to postpone making such capital expenditures; o tariffs and other barriers may make our systems and devices less cost competitive; o we may have difficulty in staffing and managing our international operations; o the laws of certain foreign countries may not adequately protect our trade secrets and intellectual property; and o potentially adverse tax consequences to our customers may make our systems and devices not cost-competitive. We Will Lose Sales If We Are Unable To Obtain Government Authorization To Export Our Products. Exports of our products to certain destinations, such as the People's Republic of China, Malaysia and Taiwan, may require pre-shipment authorization from U.S. export control authorities, including the U.S. Departments of Commerce and State. Authorization may be conditioned on end-use restrictions. On certain occasions, we have been denied authorization, particularly with respect to the People's Republic of China. Failure to receive these authorizations may materially and adversely affect our revenues and in turn our business, financial condition and results of operations from international sales. Additionally, export jurisdiction relating to exports of satellites and associated components has not been definitively settled. Such exports may in the future require a license from the Department of State. This may cause delays in shipping solar cells abroad. Delays in receiving export licenses for solar cells may materially and adversely affect our revenues and in turn our business, financial condition and results of operations. Our Products Are Difficult To Manufacture And Small Manufacturing Defects Can Adversely Affect Our Production Yields And Our Operating Results. The manufacture of our TurboDisc systems is a highly complex and precise process. We increasingly outsource the fabrication of certain components and sub-assemblies of our systems, often to sole source suppliers or a limited number of suppliers. We have experienced occasional delays in obtaining components and subassemblies because the manufacturing process for these items is very complex and requires long lead times. The revenues derived from sales of our TurboDisc systems will be materially and adversely affected if we are unable to obtain a high quality, reliable and timely supply of these components and subassemblies. In addition, any reduction in the precision of these components will result in sub-standard end products and will cause delays and interruptions in our production cycle. We manufacture all of our wafers and devices in our manufacturing facilities and our joint venture with Uniroyal Technology Corporation plans to manufacture HB LED wafers and package-ready devices at its facility. Minute impurities, difficulties in the production process, defects in the layering of the devices' constituent compounds, wafer breakage or other factors can cause a substantial percentage of wafers and devices to be rejected or numerous devices on each wafer to be non-functional. These factors can result in lower than expected production yields, which would delay product shipments and may materially and adversely affect our operating results. Because the majority of our costs of manufacture are relatively fixed, the number of shippable devices per wafer for a given product is critical to our financial results. Additionally, because we manufacture all of our products at our facilities in Somerset, New Jersey and Albuquerque, New Mexico, and our joint venture with Uniroyal Technology Corporation will manufacture HB LED wafers and package-ready devices at its sole facility in Tampa, Florida, any interruption in manufacturing resulting from fire, natural disaster, equipment failures or otherwise would materially and adversely affect our business, financial condition and results of operations. We Face Lengthy Sales and Qualifications Cycles for Our Products and, In Many Cases, Must Invest A Substantial Amount of Time and Funds Before We Receive Orders. Sales of our TurboDisc systems primarily depend upon the decision of a prospective customer to increase its manufacturing capacity, which typically involves a significant capital commitment by the customer. Customers usually place orders with us on average two to nine months after our initial contact with them. We often experience delays in obtaining system sales orders while customers evaluate and receive internal approvals for the purchase of these systems. These delays may include the time necessary to plan, design or complete a new or expanded compound semiconductor fabrication facility. Due to these factors, we expend substantial funds and sales, marketing and management efforts to sell our compound semiconductor production systems. These expenditures and efforts may not result in sales. In order to expand our materials production capabilities, we have dedicated a number of our TurboDisc systems to the manufacture of wafers and devices. Several of our products are currently being tested to determine whether they meet customer or industry specifications. During this qualification period, we invest significant resources and dedicate substantial production capacity to the manufacture of these new products, prior to any commitment to purchase by the prospective customer and without generating significant revenues from the qualification process. If we are unable to meet these specifications or do not receive sufficient orders to profitably use the dedicated production capacity, our business, financial condition and results of operations would be materially and adversely affected. Industry Demand For Skilled Employees, Particularly Scientific And Technical Personnel With Compound Semiconductor Experience, Exceeds The Number Of Skilled Personnel Available. Our future success depends, in part, on our ability to attract and retain certain key personnel, including scientific, operational and management personnel. We anticipate that we will need to hire additional skilled personnel to continue to expand all areas of our business. The competition for attracting and retaining these employees, especially scientists, is intense. Because of this intense competition for these skilled employees, we may be unable to retain our existing personnel or attract additional qualified employees in the future. If we are unable to retain our skilled employees and attract additional qualified employees to keep up with our expansion, our business, financial condition and results of operations will be materially and adversely affected. Protecting Our Trade Secrets And Obtaining Patent Protection Is Critical To Our Ability To Effectively Compete For Business. Our success and competitive position depend on protecting our trade secrets and other intellectual property. Our strategy is to rely both on trade secrets and patents to protect our manufacturing and sales processes and products, but reliance on trade secrets is only an effective business practice insofar as trade secrets remain undisclosed and a proprietary product or process is not reverse engineered or independently developed. We take certain measures to protect our trade secrets, including executing non-disclosure agreements with our employees, joint venture partners, customers and suppliers. If parties breach these agreements or the measures we take are not properly implemented, we may not have an adequate remedy. Disclosure of our trade secrets or reverse engineering of our proprietary products, processes or devices could materially and adversely affect our business, financial condition and results of operations. Although we currently hold 12 U.S. patents, these patents do not protect any material aspects of the current or planned commercial versions of our systems, wafers or devices. We are actively pursuing patents on some of our recent inventions, but these patents may not be issued. Even if these patents are issued, they may be challenged, invalidated or circumvented. In addition, the laws of certain other countries may not protect our intellectual property to the same extent as U.S. laws. We May Require Licenses To Continue To Manufacture And Sell Certain Of Our Compound Semiconductor Wafers And Devices, The Expense Of Which May Adversely Affect Our Results Of Operations. The compound semiconductor, optoelectronics, and fiberoptic communications industries are characterized by frequent litigation regarding patent and other intellectual property rights. From time to time we have received and may receive in the future, notice of claims of infringement of other parties' proprietary rights and licensing offers to commercialize third party patent rights. Although we are not currently involved in any litigations relating to our intellectual property, we cannot assure that: o infringement claims (or claims for indemnification resulting from infringement claims) will not be asserted against us, o future assertions will not result in an injunction against the sale of infringing products or otherwise significantly impair our business and results of operations; or o we will not be required to obtain licenses, the expense of which may adversely affect our results of operations and profitability. In October 1999, we were contacted by Rockwell International Corporation regarding whether EMCORE required additional licenses from Rockwell to continue to manufacture and sell MOCVD wafers and devices to customers who do not hold licenses from Rockwell International Corporation. Since that time we have been in discussions with Rockwell regarding the necessity and cost of obtaining such a license. Although the patent to which Rockwell referred expired in January 2000, we may be required to pay additional royalties for certain of our past sales of wafers and devices to customers. If we are required to pay significant royalties in connection with these sales, our business, financial condition and results of operations may be materially and adversely affected. Interruptions In Our Business And A Significant Loss Of Sales To Asia May Result If Our Primary Asian Distributor Fails To Effectivel Market And Service Our Products. We rely on a single marketing, distribution and service provider, Hakuto Co. Ltd. to market and service many of our products in Japan, China and Singapore. Hakuto is one of our shareholders and Hakuto's president is a member of our Board of Directors. We have distributorship agreements with Hakuto which expire in March 2008 and give Hakuto exclusive distribution rights for certain of our products in Japan. Hakuto's failure to effectively market and service our products or termination of our relationship with Hakuto could result in significant delays or interruption in our marketing and service programs in Asia. This could materially and adversely affect our business, financial condition and results of operations. Our Management's Stock Ownership Gives Them The Power To Control Business Affairs And Prevent A Takeover That Could Be Beneficial To Unaffiliated Shareholders. Certain members of our management, specifically Thomas J. Russell, Chairman of our Board, Reuben F. Richards, President, Chief Executive Officer and a director, and Robert Louis-Dreyfus, a director, are former members of Jesup & Lamont Merchant Partners, L.L.C. They collectively beneficially own more than 20% of our common stock. Accordingly, such persons will continue to hold sufficient voting power to control our business and affairs for the foreseeable future. This concentration of ownership may also have the effect of delaying, deferring or preventing a change in control of our company, which could have a material adverse effect on our stock price. Unsuccessful Control Of The Hazardous Raw Materials Used In Our Manufacturing Process Could Result In Costly Remediation Fees, Penalties Or Damages Under Environmental And Safety Regulations. The production of wafers and devices involves the use of certain hazardous raw materials, including, but not limited to, ammonia, phosphine and arsine. If our control systems are unsuccessful in preventing a release of these materials into the environment or other adverse environmental conditions occur, we could experience interruptions in our operations and incur substantial remediation and other costs. Failure to comply with environmental and health and safety laws and regulations may materially and adversely affect our business, financial condition and results of operations. Our Business Or Our Stock Price Could Be Adversely Affected By Issuance Of Preferred Stock. Our board of directors is authorized to issue up to 5,882,352 shares of preferred stock with such dividend rates, liquidation preferences, voting rights, redemption and conversion terms and privileges as our board of directors, in its sole discretion, may determine. The issuance of shares of preferred stock may result in a decrease in the value or market price of our common stock, or our board of directors could use the preferred stock to delay or discourage hostile bids for control of us in which shareholders may receive premiums for their common stock or to make the possible sale of the company or the removal of our management more difficult. The issuance of shares of preferred stock could adversely affect the voting and other rights of the holders of common stock. Certain Provisions Of New Jersey Law And Our Charter May Make A Takeover Of Our Company Difficult Even If Such Takeover Could Be Beneficial To Some Of Our Shareholders. New Jersey law and our certificate of incorporation, as amended, contain certain provisions that could delay or prevent a takeover attempt that our shareholders may consider in their best interests. Our board of directors is divided into three classes. Directors are elected to serve staggered three-year terms and are not subject to removal except for cause by the vote of the holders of at least 80% of our capital stock. In addition, approval by the holders of 80% of our voting stock is required for certain business combinations unless these transactions meet certain fair price criteria and procedural requirements or are approved by two-thirds of our continuing directors. We may in the future adopt other measures that may have the effect of delaying or discouraging an unsolicited takeover, even if the takeover were at a premium price or favored by a majority of unaffiliated shareholders. Certain of these measures may be adopted without any further vote or action by our shareholders. The Price Of Our Common Stock Has Fluctuated Widely In The Last Year And May Fluctuate Widely In The Future. Our common stock is traded on the NASDAQ National Market, which has experienced and may continue to experience significant price and volume fluctuations that could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as quarterly fluctuations in financial results, earnings below analysts' estimates, and financial performance and other activities of other publicly traded companies in the semiconductor industry could cause the price of our common stock to fluctuate substantially. In addition, in recent periods, our common stock, the stock market in general, and the market for shares of small capitalization and semiconductor industry-related stocks in particular, have experienced extreme price fluctuations which have often been unrelated to the operating performance of affected companies. Any similar fluctuations in the future could adversely affect the market price of our common stock. Our stock price has fluctuated widely in the last year and may fluctuate widely in the future. Since September 30, 1999, our stock price has been as high as $86.50 per share and as low as $6.03 per share. Volatility in the price of our common stock may be caused by other factors outside of our control and may be unrelated or disproportionate to our operating results. Forward-Looking Statements Statements contained in this Annual Report on Form 10-K which are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. A forward-looking statement may contain words such as "plans," "hopes," "believes," "estimates," "will continue to be," "will be," "continue to," "expect to," "anticipate that," "to be" or "can impact." Management cautions that forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from those projected in such forward-looking statements. Further, our future business, financial condition and results of operations could differ materially from those anticipated by such forward- looking statements and are subject to risks and uncertainties including the risks set forth above. Moreover, neither any other person nor we assumes responsibility for the accuracy and completeness of the forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this Annual Report on Form 10-K to conform such statements to actual results or to changes in our expectations. Item 2. Properties In July 2000, EMCORE announced that it completed its second phase of expansion at its Somerset, NJ manufacturing facility and had moved its corporate offices to a new facility located nearby. The expansion of the Somerset, NJ manufacturing facility significantly increases production capacity for EMCORE's existing photonics, RF materials, devices and MOCVD production tool lines; and enables EMCORE to develop new product lines and meet the requirements of a rapidly expanding customer base. Earlier in the year, EMCORE completed the first phase expansion of its RF materials division which doubled production capacity to meet market demand for its InGaP HBT and pHEMT products used in fiber optic and wireless communication devices. The second phase of the expansion added another 7,000 square feet of space which increases the electronic material production capability by nearly 400%. The expansion accommodates the addition of up to ten new Enterprise Electronic Materials MOCVD production tools, engineered and manufactured by EMCORE, for the high volume production of pHEMTs and HBTs. This will bring the total number of materials-related production tools in operation at Somerset, NJ to eighteen, whereby 733,000 four-inch wafers or 305,000 six-inch wafers can be produced annually. The facility expansion also more than doubles EMCORE's characterization capabilities to ensure the unrestricted flow of high quality epitaxial materials. The second-phase expansion also increases the manufacturing capacity of EMCORE's electronic device division and MOCVD tool division. The electronic device division of EMCORE has been expanded to augment EMCORE's capability to produce photo-detectors for high-speed array transceivers. EMCORE is in the process of purchasing this manufacturing building and an additional 140,000 square foot building in the area to keep production in pace with the high demand for its products. With the additional space, EMCORE's capital equipment division, which manufactures market leading MOCVD tools, will have the capacity to triple the amount of production tools manufactured per year. In July 2000, EMCORE also announced plans to significantly expand its Sandia Technology Park site, located in Albuquerque, New Mexico, into a campus environment that will house EMCORE's solar cell, optical components and networking products. Scheduled for completion by January 2001, this expanded facility will triple the cleanroom manufacturing capacity of the plant to meet increased product demand, EMCORE's expanding customer base and new product lines. EMCORE has already purchased an additional two acres west of the site and completed the build out of the remaining unoccupied portion of the existing EMCORE facility adding an additional 36,000 square feet to the existing 50,000-square-foot facility. Construction of a new 36,000 square foot, 2-story building has started and is expected to be completed by January 2001. This will allow for one integrated manufacturing site for EMCORE's component module and photovoltaic operations. The existing 50,000 square foot facility in Albuquerque, New Mexico was completed in October 1998, where 50% of the plant is occupied by EMCORE's PhotoVoltaic division for the manufacture of advanced dual and triple junction solar cells for satellite applications. EMCORE's MicroOptical Device (MODE) division provides the building blocks for high-speed telecom and data communications, including the Internet infrastructure, by designing and manufacturing reliable and efficient high-speed laser components, subassemblies, and modules. The expansion of these operations at a newly constructed, state of the art facility will be paramount to the future development of industry leading technologies for the communications industry. 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 Santa Clara, California and Hsinchu, Taiwan. In addition to EMCORE's facilities, Uniroyal Optoelectronics, a joint venture between EMCORE and Uniroyal Technology Corporation, leases a 77,000 square foot office and manufacturing facility in Tampa, Florida; 44,000 square feet is currently in use and the remaining unoccupied portion of 33,000 square feet is expected to be completed by July 2001.
Location Function Sq. Feet Terms Somerset, Headquarters 40,000 Lease Expires in 2005 (1) New Jersey Manufacturing building for RF materials, MR 80,000 Lease Expires in 2005 (1) sensors and MOCVD production systems Albuquerque, Manufacturing building for solar cells and 86,000 Owned by EMCORE New Mexico VCSELs Manufacturing buildings for VCSELs and array 37,000 Leases Expire in 2001 transceivers (MODE) and 2002 (1) (1) All leases have the option to be renewed by EMCORE, subject to cost of living adjustments.
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 EMCORE's common stock is traded on the NASDAQ National Market and is quoted under the symbol "EMKR." The following table sets forth the quarterly high and low sale prices for EMCORE's common stock during the three most recent fiscal years. Stock prices have been adjusted to reflect a two-for-one (2:1) common stock split that was effective on September 18, 2000. Fiscal Year Ended September 30, 1998 High Low First Quarter....................................... $11.6880 $ 7.7500 Second Quarter...................................... $ 9.8130 $ 5.5000 Third Quarter ...................................... $ 8.3750 $ 4.5000 Fourth Quarter ..................................... $ 6.7500 $ 3.0000 Fiscal Year Ended September 30, 1999 First Quarter...................................... $ 9.1880 $ 3.6250 Second Quarter...................................... $14.3750 $ 6.9380 Third Quarter ...................................... $11.5000 $ 6.4380 Fourth Quarter ..................................... $12.5000 $ 5.6250 Fiscal Year Ended September 30, 2000 First Quarter....................................... $19.6250 $ 6.0310 Second Quarter...................................... $86.5000 $15.3130 Third Quarter ...................................... $61.0000 $20.0000 Fourth Quarter ..................................... $62.5000 $28.5630 Fiscal Year Ended September 30, 2001 First Quarter (through December 1, 2000)............ $37.8125 $33.5000 The reported closing sale price of EMCORE's common stock on December 1, 2000 was $35.3125 per share. As of December 1, 2000, EMCORE had approximately 2,697 shareholders of record. EMCORE has never declared or paid dividends on its common stock since its formation. EMCORE currently does not intend to pay dividends on its common stock in the foreseeable future so that it may reinvest its earnings in its business. The payment of dividends, if any, in the future will be at the discretion of the Board of Directors. Recent Sales of Unregistered Securities In 1999, EMCORE's Chairman personally guaranteed EMCORE's bank facility and extended a line of credit to EMCORE. In recognition of these services, the Board of Directors granted a warrant for 600,000 shares (adjusted for the 2:1 stock split in September 2000) of common stock to the Chairman. The warrant was immediately exercisable at $6.4700 per share and issued in March 2000. EMCORE believes the issuance of the warrant was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. Item 6. Selected Financial Data The following selected consolidated financial data for the five most recent fiscal years ended September 30, 2000 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 document. The Statement of Operations data set forth below with respect to fiscal years 1998, 1999 and 2000 and the Balance Sheet data as of September 30, 1999 and 2000 are derived from EMCORE's audited financial statements included elsewhere in this document. The Statement of Income data for fiscal years 1996 and 1997 and the Balance Sheet data as of September 30, 1996, 1997 and 1998 are derived from audited financial statements not included herein. All share amounts have been restated to reflect EMCORE's two-for-one (2:1) common stock split that was effective on September 18, 2000. 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. In connection with this transaction, EMCORE recorded a non-recurring, non-cash charge of $19.5 million for acquired in-process research and development, which affects the comparability of EMCORE's operating results and financial condition.
(in thousands, except per share amounts) For the Fiscal Years Ended September 30, 1996 1997 1998 1999 2000 Statements of Operations data Revenue................................... $27,779 $47,752 $43,760 $58,341 $104,506 Cost of revenues.......................... 18,607 30,094 24,676 33,158 61,301 ----------------------------------------------------------- Gross profit............................ 9,172 17,658 19,084 25,183 43,205 Operating expenses: Selling, general and administrative..... 6,524 9,346 14,082 14,433 21,993 Goodwill amortization................... - - 3,638 4,393 4,392 Research and development: Recurring............................. 5,401 9,001 16,495 20,713 32,689 One-time acquired in-process.......... - - 19,516 - - ----------------------------------------------------------- Total operating expenses............ 11,925 18,347 53,731 39,539 59,074 Operating loss............................ (2,753) (689) (34,647) (14,356) (15,869) Stated interest expense (income), net... 297 520 973 866 (4,492) Imputed warrant interest expense........ 126 3,988 601 1,136 843 Equity in net loss of unconsolidated affiliates............................ - - 198 4,997 13,265 ----------------------------------------------------------- Total other expenses................ 423 4,508 1,772 6,999 9,616 ----------------------------------------------------------- Loss before income taxes and extra- ordinary item........................... (3,176) (5,197) (36,419) (21,355) (25,485) Provision for income taxes............ - 137 - - - ----------------------------------------------------------- Loss before extraordinary item............ (3,176) (5,334) (36,419) (21,355) (25,485) Extraordinary item.................... - 285 - 1,334 - ----------------------------------------------------------- Net loss.................................. $(3,176) $(5,619) $(36,419) $(22,689) $(25,485) ----------------------------------------------------------- Per share data Weighted average shares used in calculating per share data.............. 5,988 9,338 17,550 21,180 31,156 ----------------------------------------------------------- Loss per basic and diluted shares before extraordinary item............... $(0.53) $(0.57) $(2.08) $(1.03) $(0.82) ----------------------------------------------------------- Net loss per basic and diluted shares..... $(0.53) $(0.60) $(2.08) $(1.09) $(0.82) -----------------------------------------------------------
As of September 30, 1996 1997 1998 1999 2000 Balance Sheet data Cash, cash equivalents and marketable securities................................. $ 1,367 $ 3,653 $ 4,456 $ 7,165 $101,745 Working capital (deficiency)................. 1,151 12,156 (2,017) 20,690 111,587 Total assets................................. 20,434 39,463 73,220 99,611 243,902 Long-term liabilities........................ 8,947 7,577 26,514 9,038 1,295 Redeemable convertible preferred stock....... - - - 14,193 - Shareholders' equity......................... 522 21,831 19,580 61,623 199,322
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview EMCORE, an ISO 9001 certified manufacturer, 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 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. EMCORE recognizes revenue upon shipment. Systems-related revenues include sales of EMCORE's TurboDisc production systems as well as components and services. The book-to-ship time period on systems is approximately six to nine months, and the average selling price is in excess of $1.0 million. For systems, EMCORE incurs certain installation and warranty costs subsequent to shipment which are estimated and accrued at the time the sale is recognized. Materials-related revenues include wafers, devices and process development technology. The materials sales cycle is generally shorter than systems-related sales and average selling prices vary significantly based on the products and services provided. In order to facilitate the development and manufacture of new products in targeted growth areas, EMCORE has established a number of strategic relationships through joint ventures, long-term supply agreements and an acquisition. The most significant strategic relationships are summarized below: o In June 2000, EMCORE and JDS Uniphase executed a Joint Development Manufacturing and Marketing Agreement (the "Agreement"). Under the Agreement, EMCORE and JDS Uniphase will jointly develop, manufacture and market a family of fiber optic array transceivers based on EMCORE's laser technology that facilitate light to logic (electronic signal in/modulated light signal out) for fiber optic communications products used in switches, routers and computer backplanes for OC-192, OC-768 and other proprietary network designs. EMCORE will manufacture VCSEL arrays and design gigabit speed control circuits, photodetectors, optical links and other components. JDS Uniphase will handle all marketing, worldwide sales, application support, customer service and distribution functions and will assist EMCORE with technical support for the optical packaging and testing for the products. The initial product to be developed and commercialized under the Agreement with JDS Uniphase will be an array transceiver with twelve channels each operating at 1.25 Gigabits/second, yielding a compact, high speed data link. These products are designed to make possible short distance links between dense wavelength division multiplexing systems (DWDM), high-speed routers and SONET (long-haul telecommunications) equipment. Recent industry forecasts indicate that the market opportunity for high-speed optical transceivers, including 2.5 gigabit per channel arrays and 10 gigabit serial devices will exceed $3.4 billion by the year 2004. EMCORE has completed alpha testing and began shipping prototype array transceivers in December 2000; o In May 2000, EMCORE signed an agreement with Motorola to meet their requirements for epitaxial tools, wireless electronic materials and technology. This relationship includes supplying Motorola with epitaxial process technology and multiple MOCVD production tools, as well as purchase orders for electronic device epitaxial wafers. Motorola also announced that EMCORE was awarded their Standard Supplier Designation, making EMCORE the only qualified supplier of MOCVD tools for Motorola's compound semiconductor factories; o In January 2000, EMCORE entered into a three-year supply agreement with Agilent, a leading supplier of fiber optic transceivers and integrated circuits for infrastructure products for the Internet. Under this agreement, EMCORE will manufacture Gigarray(R) VCSEL arrays for use in parallel optical transceivers. The initial purchase order under the agreement is contingent upon EMCORE's development of a component that meets Agilent's specifications. EMCORE began shipping commercial product in December 2000; 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 $17.5 million in GELcore and has seconded various employees to the joint venture to assist in the development of products. In September 2000, GELcore acquired Ecolux, Inc. adding LED-signaling products to GELcore's growing line of LED products; 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 supplies compound semiconductor high-efficiency gallium arsenide solar cells for Loral's satellites. To date, EMCORE has received purchase orders from Space Systems/Loral that total $19.5 million and services this agreement at EMCORE's new facility in Albuquerque, New Mexico; o In March 1997, EMCORE 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 over $17.6 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 recorded goodwill of approximately $13.2 million, which is being charged against operations over a three-year period, impacting financial results through December 2000. MODE's operations are located in Albuquerque, New Mexico. Because EMCORE does not have a controlling economic and voting interest in the General Electric Lighting and Uniroyal Technology 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 years 1998, 1999 and 2000, international sales constituted 39.1%, 52.6% and 38.6%, respectively, of revenues. EMCORE anticipates that international sales will continue to account for a significant portion of revenues. Historically, EMCORE has received substantially all payments for products and services in U.S. dollars and therefore EMCORE does not currently anticipate that fluctuations in any currency will have a material effect on its financial condition or results of operations. The following chart contains a breakdown of EMCORE's worldwide revenues by geographic region.
For the fiscal years ended September 30, 1998 1999 2000 (in thousands) Revenue % of revenue Revenue % of revenue Revenue % of revenue ------- ------------ ------- ------------ ------- ------------ Region: North America $26,648 61% $27,698 48% $64,174 62% Asia 15,527 35% 28,211 48% 34,656 33% Europe 1,585 4% 2,432 4% 5,676 5% ------------------------------------------------------------------------------------------------------ TOTAL $43,760 100% $58,341 100% $104,506 100% ======= ==== ======= ==== ======== ====
As of September 30, 2000, EMCORE had an order backlog of $125.0 million scheduled to be shipped through September 30, 2001. This represents an increase of $81.9 million or 190.0% since September 30, 1999. Year-end backlog also compares favorably to the sequential backlogs reported at June 30, 2000, March 31, 2000 and December 31, 1999 of $105.0 million, $84.0 million and $46.6 million, respectively. 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. This business unit assists our customers with device design, process development and optimal configuration of TurboDisc production systems. Revenues for the systems-related business unit consist of sales of EMCORE's TurboDisc production systems as well as spare parts and services related to these 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, packaged devices, modules 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 EMCORE 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. EMCORE does not allocate assets or operating expenses to the individual operating segments. There are no intercompany sales transactions between the two operating segments. Results of Operations The following table sets forth the condensed consolidated Statement of Operations data of EMCORE expressed as a percentage of total revenues for the fiscal years ended September 30, 1998, 1999 and 2000: Statement of Operations Data: Fiscal Years Ended September 30, 1998 1999 2000 Revenues.................................... 100.0% 100.0% 100.0% Cost of revenues............................ 56.4% 56.8% 58.7% ---------------------------------- Gross profit.............................. 43.6% 43.2% 41.3% Operating expenses: Selling, general and administrative....... 32.2% 24.7% 21.0% Goodwill amortization..................... 8.3% 7.5% 4.2% Research and development: Recurring............................... 37.7% 35.5% 31.3% One-time acquired in-process............ 44.6% - - ---------------------------------- Total operating expenses.............. 122.8% 67.7% 56.5% ---------------------------------- Operating loss........................... (79.2%) (24.5%) (15.2%) Stated interest expense (income), net.... 2.2% 1.5% (4.3%) Imputed warrant interest expense......... 1.4% 1.9% 0.8% Equity in net loss of unconsolidated affiliates............................. 0.4% 8.6% 12.7% ---------------------------------- Total other expenses................. 4.0% 12.0% 9.2% ---------------------------------- Loss before extraordinary item.............. (83.2%) (36.6%) (24.4%) Extraordinary item.......................... - 2.3% - ---------------------------------- Net loss.................................... (83.2%) (38.9%) (24.4%) ================================== Comparison of Fiscal Years Ended September 30, 1999 and 2000 Revenues. EMCORE's revenues increased 79.1% or $46.2 million from $58.3 million for the fiscal year ended September 30, 1999 to $104.5 million for the fiscal year ended September 30, 2000. This increase in revenues was attributable to both systems- and materials-related product lines. Systems-related revenues increased 47.9% or $21.3 million from $44.5 million to $65.8 million. The number of MOCVD production systems shipped increased 51.6% from 31 in fiscal year 1999 to 47 in fiscal year 2000. Management expects system shipments to increase over 85% in fiscal year 2001 to approximately 75 MOCVD systems. Materials-related revenues increased 179.3% or $24.9 million from $13.9 million to $38.7 million. This revenue growth was primarily related to sales of solar cells and sales of pHEMT and HBT epitaxial wafers to wireless communication companies, which increased 1,760.6% and 802.0%, respectively, from the prior year. As a percentage of revenues, systems- and materials-related revenues accounted for 76.2% and 23.8%, respectively, for the fiscal year ended September 30, 1999 and improved to 63.0% and 37.0%, respectively, for the fiscal year ended September 30, 2000. EMCORE expects the product mix between systems and materials to continue to approach 50% as other new products are introduced and production of commercial volumes of these materials commences. International sales accounted for 52.6% of revenues for the fiscal year ended September 30, 1999 and 38.6% of revenues for the fiscal year ended September 30, 2000. The increase in domestic sales is a direct result of significant materials-related design wins at several large U.S. semiconductor and telecommunication companies. Gross Profit. EMCORE's gross profit increased 71.6% or $18.0 million from $25.2 million for the fiscal year ended September 30, 1999 to $43.2 million for the fiscal year ended September 30, 2000. Gross profit earned on systems-related revenues increased 56.0% or $10.0 million from $18.0 million to $28.0 million. This increase is due primarily to the rise in production system sales, discussed above, as well as, improved manufacturing efficiencies. Component and service related revenues continue to increase as EMCORE's production system installed base approaches 300 MOCVD systems. Gross profit earned on materials-related revenues increased 110.2% or $8.0 million from $7.2 million to $15.2 million. Management expects gross profits on materials-related sales to increase significantly due to recent yield improvements on manufacturing processes and based upon expected increased production output due to EMCORE's strong order backlog of material-related products. Selling, General and Administrative. Selling, general and administrative expenses increased by 52.4% or $7.6 million from $14.4 million for the fiscal year ended September 30, 1999 to $22.0 million for the fiscal year ended September 30, 2000. A significant portion of the increase was due to headcount increases in marketing and sales personnel to support domestic and foreign markets and other administrative headcount additions to sustain internal support. As a percentage of revenue, selling, general and administrative expenses decreased from 24.7% for the fiscal year ended September 30, 1999 to 21.0% for the fiscal year ended September 30, 2000. Goodwill Amortization. Goodwill of $13.2 million was recorded in connection with our acquisition of MODE in December 1997. EMCORE recognized $4.4 million of goodwill amortization for the fiscal years ended September 30, 1999 and 2000, each reflecting a full year of amortization. As of September 30, 2000, EMCORE had approximately $0.7 million of net goodwill remaining, which will be fully amortized by December 2000. Research and Development. Recurring research and development expenses increased 57.8% or $12.0 million from $20.7 million in the fiscal year ended September 30, 1999 to $32.7 million in the fiscal year ended September 30, 2000. As a percentage of revenue, recurring research and development expenses decreased from 35.5% for the fiscal year ended September 30, 1999 to 31.3% for the fiscal year ended September 30, 2000. During the quarter ended September 30, 2000, EMCORE incurred $7.0 million of additional research and development expenses in connection with EMCORE's array transceiver program, manufacturing process development and transponder development, which are being designed under an agreement with JDS Uniphase. In addition, EMCORE accelerated certain fiber optic and wireless programs to meet customer driven market windows. To maintain growth and to continue to pursue market leadership in materials science technology, management expects to continue to invest a significant amount of its resources in research and development. In fiscal year 2001, management expects research and development expenses to increase approximately 25%, but continue to decrease as a percentage of revenues. Interest Income/Expense. For the fiscal year ended September 30, 2000, net interest changed $5.4 million from net interest expense of $0.9 million to net interest income of $4.5 million. In March 2000, EMCORE completed the issuance of an additional 2.0 million common stock shares (adjusted for 2:1 stock split) through a public offering, which resulted in proceeds of $127.5 million, net of issuance costs. A portion of the proceeds was used to repay all outstanding bank loans, thereby reducing interest expense and generating interest income on the retained proceeds. Higher interest rates in fiscal year 2000 also contributed to increased interest income. Imputed warrant interest expense, non-cash. In 1999, EMCORE's Chairman personally guaranteed EMCORE's bank facility and extended a line of credit to EMCORE. In recognition of these services during 2000, the Board of Directors granted a warrant for 600,000 shares (adjusted for the 2:1 stock split in September 2000) of common stock to the Chairman. The warrant was immediately exercisable at $6.47 per share. As the warrant related to past services, the fair value was charged as an expense in the Statement of Operations. EMCORE assigned a fair value of $689,000 to the warrants, which was based upon EMCORE's application of the Black-Scholes option-pricing model. The consequent expense was charged to "imputed warrant interest expense, non-cash." Equity in unconsolidated affiliates. Because EMCORE does not have a controlling economic and voting interest in its joint ventures, EMCORE accounts for these joint ventures under the equity method of accounting. For the fiscal year ended September 30, 1999, EMCORE incurred a net loss of $2.2 million related to the Uniroyal joint venture and a $2.5 million net loss related to the GELcore joint venture. For the fiscal year ended September 30, 2000, EMCORE incurred a net loss of $7.8 million related to the Uniroyal joint venture and a $5.4 million net loss related to the GELcore joint venture. Income Taxes. As a result of its losses, EMCORE did not incur any income tax expense in both fiscal years 1999 and 2000. As of September 30, 2000, the Company has net operating loss carryforwards for tax purposes of approximately $44.0 million that expire in the years 2003 through 2020. The Company believes that the consummation of certain equity transactions and a significant change in the ownership during fiscal years 1995, 1998 and 1999 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 Sections 382 and 383. Comparison of Fiscal Years Ended September 30, 1998 and 1999 Revenues. EMCORE's revenues increased 33.3% from $43.8 million for the fiscal year ended September 30, 1998 to $58.3 million for the fiscal year ended September 30, 1999. The revenue increase was attributable to increased revenues in the systems-related product lines. Revenues from systems-related sales and materials-related sales were $26.3 million and $17.4 million, respectively, for the fiscal year ended September 30, 1998 and $44.5 million and $13.9 million, respectively, for the fiscal year ended September 30, 1999. As a percentage of revenues, systems- and materials-related revenues accounted for 60.2% and 39.8%, respectively, for the fiscal year ended September 30, 1998 and 76.2% and 23.8%, respectively, for the fiscal year ended September 30, 1999. International sales accounted for 39.1% of revenues for the fiscal year ended September 30, 1998 and 52.5% of revenues for the fiscal year ended September 30, 1999. Gross Profit. EMCORE's gross profit increased 32.0% from $19.1 million for the fiscal year ended September 30, 1998 to $25.2 million for the fiscal year ended September 30, 1999. As a percentage of revenue, gross profit decreased slightly from 43.6% of revenue for the fiscal year ended September 30, 1998 to 43.2% of revenue for the fiscal year ended September 30, 1999. During the first half of fiscal year 1999, EMCORE sold three compound semiconductor production systems for approximately $5.3 million to a joint venture in which it has a 49% minority interest. EMCORE deferred $1.3 million of gross profit on such sales. Such deferred gross profit is being 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 2.5% from $14.1 million for the fiscal year ended September 30, 1998 to $14.4 million for the fiscal year ended September 30, 1999. As a percentage of revenue, selling, general and administrative expenses decreased from 32.2% for the fiscal year ended September 30, 1998 to 24.7% for the fiscal year ended September 30, 1999. Goodwill Amortization. Goodwill of $13.2 million was recorded in connection with our acquisition of MODE on December 5, 1997. EMCORE recognized approximately $4.4 million of goodwill amortization for the fiscal year ended September 30, 1999, reflecting a full year of amortization. As of September 30, 1999, EMCORE had approximately $5.1 million of net goodwill remaining, which will be fully amortized by December 2000. Research and Development. Recurring research and development expenses increased 25.6% from $16.5 million in the fiscal year ended September 30, 1998 to $20.7 million in the fiscal year ended September 30, 1999. As a percentage of revenue, recurring research and development expenses decreased from 37.7% for the fiscal year ended September 30, 1998 to 35.5% for the fiscal year ended September 30, 1999. The increase in research and development spending was primarily attributable to EMCORE's acquisition of MODE, the startup of our new Albuquerque, New Mexico facility and increased staffing and equipment costs necessary to enhance current products and develop new product offerings. Products introduced or under development include HB LEDs, high efficiency solar cells, new generation TurboDisc production systems, VCSELs, RF materials and other optoelectronic devices. In fiscal year 1998, EMCORE recognized a $19.5 million one-time charge for acquired in-process research and development relating to the purchase of MODE. Other Expenses. During fiscal year 1996, EMCORE issued 5,151,766 detachable warrants along with subordinated notes to certain of its existing shareholders. EMCORE subsequently assigned a value to these detachable warrants issued using the Black-Scholes option-pricing model. EMCORE recorded the subordinated notes at a carrying value that is subject to periodic accretions, using the interest method. In June 1998, EMCORE issued 569,368 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 is charged to "Imputed warrant interest expense, non-cash" and equaled approximately $601,000 and $950,000 for the fiscal years ended September 30, 1998 and 1999, respectively. 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. This Debenture was converted to common stock in March 2000. In connection with this funding of EMCORE's initial capital contribution, General Electric received 564,020 warrants to purchase common stock at $11.44 per share. These warrants, which were to expire in 2006, were exercised in March 2000. EMCORE had assigned a value to these warrants using the Black-Scholes option-pricing model. The warrant value of $2.6 million was included in other assets and was being amortized over seven years. The consequent expense of the warrant amortization was charged to "Imputed warrant interest expense, non-cash" and equaled approximately $186,000 for the fiscal year ended September 30, 1999. For the fiscal year ended September 30, 1999, stated interest expense, net decreased by $107,000 to $866,000. On June 15, 1999, EMCORE completed the issuance of an additional 6.0 million common stock shares through a public offering, which resulted in proceeds of $52.0 million, net of issuance costs. A significant portion of those proceeds was used to repay all outstanding bank loans and subordinated notes. Because EMCORE does not have a controlling economic and voting interest in the Uniroyal Technology, Union Miniere and General Electric Lighting joint ventures, EMCORE accounts for these joint ventures under the equity method of accounting. For the fiscal year ended September 30, 1998, EMCORE incurred a net loss of $198,000 related to the Uniroyal joint venture. For the fiscal year ended September 30, 1999, EMCORE incurred a net loss of $2.2 million related to the Uniroyal joint venture, a $2.5 million net loss related to the GELcore joint venture and a $297,000 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 fiscal years 1998 and 1999. As of September 30, 1999, EMCORE has net operating loss carryforwards for tax purposes of approximately $24.0 million, which expire in the years 2003 through 2019. EMCORE believes that the consummation of certain equity transactions and a significant change in the ownership during fiscal years 1995, 1998 and 1999 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 Sections 382 and 383 of the Internal Revenue Code. Extraordinary Item. On June 15, 1999, EMCORE repaid its outstanding bank loans using a portion of the proceeds from the public offering. EMCORE also used a portion of the net proceeds to repurchase its outstanding 6.0% subordinated notes due 2001. The early extinguishment of debt resulted in an extraordinary charge of $1.3 million or $0.07 per share in fiscal year 1999 that consisted of $867,000 related to the discount on prepayment of the subordinated notes and $467,000 related to the write-off of related deferred financing costs. Quarterly Results of Operations The following tables present EMCORE's unaudited results of operations expressed in dollars and as a percentage of revenues for the eight most recently ended fiscal quarters. EMCORE believes that all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts below to present fairly the selected quarterly information when read in conjunction with the consolidated financial statements and notes included elsewhere in this document. EMCORE's results from operations may vary substantially from quarter to quarter. Accordingly, the operating results for a quarter are not necessarily indicative of results for any subsequent quarter or for the full year.
(in thousands) Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, Jun. 30, Sept. 30, 1998 1999 1999 1999 1999 2000 2000 2000 Revenues......................... $10,125 $16,072 $17,667 $14,477 $16,501 $23,925 $30,023 $34,057 Cost of revenues................. 6,016 9,203 9,853 8,086 9,778 13,989 17,537 19,997 ------------------------------------------------------------------------------------ Gross profit................... 4,109 6,869 7,814 6,391 6,723 9,936 12,486 14,060 Operating expenses: Selling, general & administrative... 3,144 3,225 3,650 4,414 4,724 5,271 5,919 6,079 Goodwill amortization.......... 1,099 1,098 1,098 1,098 1,098 1,098 1,098 1,098 Research & development......... 5,924 4,348 4,959 5,482 4,708 4,662 5,984 17,335 ------------------------------------------------------------------------------------ Total operating expenses......... 10,167 8,671 9,707 10,994 10,530 11,031 13,001 24,512 ------------------------------------------------------------------------------------ Operating loss................. (6,058) (1,802) (1,893) (4,603) (3,807) (1,095) (515) (10,452) Stated interest expense/ (income), net.................. 230 463 290 (117) (78) (615) (1,951) (1,848) Imputed warrant interest expense, non-cash.............. 316 317 410 93 163 680 - - Equity in net loss of unconsolidated affiliates...... 276 1,395 1,311 2,015 2,766 3,047 2,896 4,556 ------------------------------------------------------------------------------------ Total other expenses............. 822 2,175 2,011 1,991 2,851 3,112 945 2,708 ------------------------------------------------------------------------------------ Loss before income taxes....... (6,880) (3,977) (3,904) (6,594) (6,658) (4,207) (1,460) (13,160) Provision for income taxes....... - - - - - - - - ------------------------------------------------------------------------------------ Loss before extraordinary item......................... (6,880) (3,977) (3,904) (6,594) (6,658) (4,207) (1,460) (13,160) Extraordinary loss............... - - 1,334 - - - - - ------------------------------------------------------------------------------------ Net loss....................... $(6,880) $(3,977) $(5,238) $(6,594) $(6,658) $(4,207) $(1,460) $(13,160) ====================================================================================
Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, Jun. 30, Sept. 30, 1998 1999 1999 1999 1999 2000 2000 2000 Revenues......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues................. 59.4 57.3 55.8 55.9 59.3 58.5 58.4 58.7 ------------------------------------------------------------------------------------- Gross profit................... 40.6 42.7 44.2 44.1 40.7 41.5 41.6 41.3 Operating expenses: Selling, general & administrative............... 31.0 20.1 20.7 30.5 28.6 22.0 19.7 17.8 Goodwill amortization.......... 10.9 6.8 6.2 7.6 6.7 4.6 3.7 3.2 Research & development......... 58.5 27.0 28.1 37.9 28.5 19.5 19.9 50.9 ------------------------------------------------------------------------------------- Total operating expenses......... 100.4 53.9 55.0 76.0 63.8 46.1 43.3 72.0 ------------------------------------------------------------------------------------- Operating loss................. (59.8) (11.2) (10.8) (31.9) (23.1) (4.6) (1.7) (30.7) Stated interest expense/ (income), net.................. 2.3 2.9 1.6 (0.8) (0.5) (2.6) (6.5) (5.4) Imputed warrant interest expense, non-cash.............. 3.1 2.0 2.3 0.6 1.0 2.8 - - Equity in net loss of unconsolidated affiliates...... 2.7 8.6 7.4 13.9 16.8 12.7 9.6 13.4 ------------------------------------------------------------------------------------- Total other expenses............. 8.1 13.5 11.3 13.7 17.3 13.0 3.1 8.0 ------------------------------------------------------------------------------------- Loss before income taxes....... (67.9) (24.7) (22.1) (45.6) (40.3) (17.6) (4.9) (38.6) Provision for income taxes....... - - - - - - - - ------------------------------------------------------------------------------------- Loss before extraordinary item......................... (67.9) (24.7) (22.1) (45.6) (40.3) (17.6) (4.9) (38.6) Extraordinary loss............... - - 7.6 - - - - - ------------------------------------------------------------------------------------- Net loss....................... (67.9)% (24.7)% (29.7)% (45.6)% (40.3)% (17.6)% (4.9)% (38.6)% =====================================================================================
EMCORE has experienced and expects to continue to experience significant fluctuations in quarterly results. Factors which have had an influence on and may continue to influence EMCORE's operating results in a particular quarter include, but are not limited to, the timing of receipt of orders, cancellation, rescheduling or delay in product shipment or supply deliveries, product mix, competitive pricing pressures, EMCORE's ability to design, manufacture and ship products on a cost effective and timely basis, including the ability of EMCORE to achieve and maintain acceptable production yields for wafers and devices, regional economic conditions and the announcement and introduction of new products by EMCORE and by its competitors. The timing of sales of EMCORE's TurboDisc production systems may cause substantial fluctuations in quarterly operating results due to the substantially higher per unit price of these products relative to EMCORE's other products. If the compound semiconductor industry experiences downturns or slowdowns, EMCORE's business, financial condition and results of operations may be materially and adversely affected. Liquidity And Capital Resources EMCORE has funded operations to date through sales of equity, bank borrowings, subordinated debt and revenues from product sales. In June 1999, EMCORE completed a secondary public offering and raised approximately $52.0 million, net of issuance costs. In March 2000, EMCORE completed an additional public offering and raised approximately $127.5 million, net of issuance costs. As of September 30, 2000, EMCORE had working capital of approximately $111.6 million, including $101.7 million in cash, cash equivalents and marketable securities. Operating activities generated $7.6 million in fiscal year 2000, an increase of $22.8 million when compared to prior year's net cash used by operations of $15.2 million. For the quarter ended September 30, 2000, EMCORE experienced its second consecutive quarter of significant positive cash flow from operating activities. The increase in cash for the year ended was primarily due to increases in customer deposits, EMCORE's equity in net loss of unconsolidated affiliates and non-cash depreciation and amortization expense. These amounts were partially offset by EMCORE's net loss and increases in both inventory and accounts receivable. Net cash used for investment activities amounted to $104.6 million, which represents an increase of 234.7 or $73.3 million from the prior year. In fiscal year 2000, EMCORE's capital expenditures totaled $33.8 million which was used primarily for capacity expansion at both New Jersey and New Mexico's manufacturing facilities. EMCORE quadrupled its production capacity for GaInP HBTs and pHEMTs to meet wireless and fiber optic market demands. EMCORE's net investment in marketable securities totaled $50.9 million. During fiscal year 2000, EMCORE invested $20.0 million in its joint ventures, $8.4 million into GELcore and $11.6 million into UOE. Net cash provided by financing activities for the fiscal year ended September 30, 2000 amounted to approximately $140.7 million, primarily from the sale of 2.0 million common stock shares to the public which resulted in proceeds of $127.5 million, net of issuance costs. In March 1997, EMCORE entered into a $10.0 million loan agreement with its bank (the "Loan Agreement") that had an interest rate equal to the prime rate plus 50 basis points. In December 1999, EMCORE's 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. EMCORE was in compliance with all covenants and no amounts were outstanding under this facility at September 30, 2000. EMCORE's planned capital expenditures are expected to total approximately $50.0 million during fiscal year 2001. EMCORE is currently engaged in construction activities relating to a new 36,000 square foot, 2-story building at the Sandia Technology Park site, in Albuquerque, New Mexico and completion of the third and final stages of expansion at the Somerset, NJ, manufacturing facilities. The 2001 expansion in Somerset, NJ involves an expected $12.0 million purchase of two buildings to be used for manufacturing of RF materials, devices and MOCVD production tools. Capital spending in fiscal year 2001 also includes upgrading manufacturing facilities, continued investment in analytical and diagnostic research and development equipment, upgrading and purchasing computer equipment and the manufacture of TurboDisc MOCVD production systems for production of materials-related products. EMCORE believes that its current liquidity, together with available credit, should be sufficient to meet its cash needs for working capital through fiscal year 2001. However, if the available credit facilities, cash generated from operations and cash on hand are not sufficient to satisfy EMCORE's liquidity requirements, EMCORE will seek to obtain additional equity or debt financing. Additional funding may not be available when needed or on terms acceptable to EMCORE. If EMCORE is required to raise additional financing and if adequate funds are not available or not available on acceptable terms, the ability to continue to fund expansion, develop and enhance products and services, or otherwise respond to competitive pressures will be severely limited. Such a limitation could have a material adverse effect on EMCORE's business, financial condition or operations. In 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 its 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 judgment 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 its customers who did not hold licenses directly from Rockwell. Management has reviewed and assessed its likely royalty obligations and believes that it has the appropriate amounts reserved at September 30, 2000. If EMCORE is required to pay Rockwell amounts in excess of its reserves, its business, financial condition and results of operations could be materially and adversely affected. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("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, as amended, is effective for fiscal years beginning after June 15, 2000. EMCORE will be required to adopt this standard, as amended, in its fiscal year ending September 30, 2001. Management believes that adopting this statement will not have a material impact on the financial position, results of operations or cash flows of EMCORE. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101. ("SAB 101") "Revenue Recognition in Financial Statements," which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. The Company will adopt SAB 101 by the fourth quarter of fiscal year 2001 and is currently determining the impact such adoption will have on its consolidated financial statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk During fiscal year 2000, EMCORE invested some of the proceeds from its March 2000 public offering into high-grade corporate debt, commercial paper, government securities and other investments at fixed interest rates that vary by security. No other material changes in market risk were identified. During fiscal year 2000, EMCORE repaid all outstanding bank term loans. EMCORE has no debt outstanding as of September 30, 2000. Item 8. Financial Statements and Supplementary Data EMCORE CORPORATION CONSOLIDATED BALANCE SHEETS As of September 30, 1999 and 2000 (in thousands, except share data) ASSETS 1999 2000 Current assets: Cash and cash equivalents............................... $ 7,165 $50,849 Marketable securities................................... - 50,896 Accounts receivable, net of allowance for doubtful accounts of $563 and $1,065 at September 30, 1999 and 2000, respectively................................ 11,423 18,240 Accounts receivable - related parties................... 2,480 2,334 Inventories, net........................................ 13,990 30,724 Prepaid expenses and other current assets............... 389 1,829 --------------------- Total current assets.................................. 35,447 154,872 Property, plant and equipment, net........................ 46,282 69,701 Goodwill, net............................................. 5,126 734 Investments in unconsolidated affiliates.................. 9,496 17,015 Other assets, net......................................... 3,260 1,580 --------------------- Total assets........................................... $99,611 $243,902 ===================== LIABILITIES and SHAREHOLDERS' EQUITY Current liabilities: Accounts payable........................................ $ 5,359 $ 16,512 Accrued expenses........................................ 4,173 6,083 Advanced billings....................................... 4,350 20,278 Capitalized lease obligation - current.................. 713 72 Other current liabilities............................... 162 340 --------------------- Total current liabilities............................. 14,757 43,285 Convertible subordinated debenture........................ 7,800 - Capitalized lease obligation, net of current portion...... 141 75 Other liabilities......................................... 1,097 1,220 --------------------- Total liabilities..................................... 23,795 44,580 --------------------- Commitments and contingencies Mandatorily redeemable convertible preferred stock, 1,030,000 shares issued and outstanding at September 30, 1999...................................... 14,193 - Shareholders' equity: Preferred stock, $0.0001 par, 5,882,353 shares authorized.............................................. - - Common stock, no par value, 100,000,000 shares authorized, 26,707,614 shares issued and outstanding at September 30, 1999; 33,974,698 shares issued and 33,968,426 outstanding at September 30, 2000...................................... 152,426 314,780 Accumulated deficit....................................... (83,256) (108,864) Notes receivable.......................................... (7,547) (6,355) Treasury stock............................................ - (239) --------------------- Total shareholders' equity.............................. 61,623 199,322 --------------------- Total shareholders' equity and mandatorily redeemable preferred stock............................ 75,816 199,322 --------------------- Total liabilities, shareholders' equity and mandatorily redeemable preferred stock................ $ 99,611 $243,902 ===================== The accompanying notes are an integral part of these consolidated financial statements. EMCORE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended September 30, 1998, 1999 and 2000 (in thousands, except per share data) 1998 1999 2000 Revenues: Systems-related............................... $ 26,324 $44,477 $65,788 Materials-related............................. 17,436 13,864 38,718 ----------------------------- Total revenues.............................. 43,760 58,341 104,506 Cost of revenues: Systems-related............................... 15,942 26,522 37,775 Materials-related............................. 8,734 6,636 23,526 ----------------------------- Total cost of revenues...................... 24,676 33,158 61,301 ----------------------------- Gross profit.............................. 19,084 25,183 43,205 Operating expenses: Selling, general and administrative........... 14,082 14,433 21,993 Goodwill amortization......................... 3,638 4,393 4,392 Research and development - recurring.......... 16,495 20,713 32,689 Research and development - one time acquired in-process, non-cash............... 19,516 - - ----------------------------- Total operating expenses.................... 53,731 39,539 59,074 ----------------------------- Operating loss............................ (34,647) (14,356) (15,869) Other (income) expense: Interest income............................... (448) (751) (4,834) Interest expense.............................. 1,421 1,617 342 Imputed warrant interest expense, non-cash.... 601 1,136 843 Equity in net loss of unconsolidated affiliates.................................. 198 4,997 13,265 ----------------------------- Total other expenses........................ 1,772 6,999 9,616 Loss before extraordinary item.................. (36,419) (21,355) (25,485) Extraordinary item - loss on early extinguishment of debt...................... - 1,334 - ----------------------------- Net loss........................................ $(36,419) $(22,689) $(25,485) ============================- Per share data: Weighted average basic and diluted shares outstanding used in per share data calculations.................................. 17,550 21,180 31,156 ----------------------------- Loss per basic and diluted share before extraordinary item............................ $ (2.08) $ (1.03) $ (0.82) ============================= Net loss per basic and diluted share............ $ (2.08) $ (1.09) $ (0.82) ============================= The accompanying notes are an integral part of these consolidated financial statements.
EMCORE CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY As of September 30, 1998, 1999 and 2000 (in thousands) Common Stock Shareholders' Total ----------------- Accumulated Notes Treasury Shareholders' Shares Amount Deficit Receivable Stock Equity ------------------ ----------- ------------- -------- ------------- Balance at September 30, 1997............... 12,001 $ 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 note receivable....... 3,656 7,458 (7,458) - Issuance of common stock and common stock purchase options and warrants in connec- tion with the acquisition of MODE.............. 2,924 32,329 32,329 Stock option exercise............................ 72 83 83 Stock purchase warrant exercise.................. 11 23 23 Issuance of common stock on exercise of warrants in exchange for subordinated notes.... 35 72 72 Compensatory stock issuance...................... 53 351 351 Net loss......................................... (36,419) (36,419) ------------------------------------------------------------------------------- Balance at September 30, 1998............... 18,752 $87,443 $(60,196) $(7,667) - $19,580 Preferred stock dividends........................ (319) (319) Accretion of redeemable preferred stock to redemption value............................... (52) (52) Issuance of common stock purchase warrants....... 2,596 2,596 Issuance of common stock from public offering, net of issuance cost of $5,000................. 6,000 52,000 52,000 Stock option exercise............................ 220 376 376 Stock purchase warrant exercise.................. 643 2,450 2,450 Conversion of mandatorily redeemable convertible preferred stock into common stock.......................................... 1,040 7,125 7,125 Redemptions of shareholders' notes receivable.... 120 120 Compensatory stock issuance..................... 53 436 436 Net loss......................................... (22,689) (22,689) ------------------------------------------------------------------------------- Balance at September 30, 1999............... 26,708 $152,426 $(83,256) $(7,547) - $61,623 Preferred stockdividends......................... (83) (83) Accretion of redeemable preferred stock to redemption value............................... (40) (40) Issuance of common stock purchase warrants....... 689 689 Issuance of non-qualified stock options to equity investee................................ 835 835 Issuance of common stock from public offering, net of issuance cost of $8,500....... 2,000 127,500 127,500 Stock option exercise............................ 506 2,197 2,197 Stock purchase warrant exercise.................. 1,996 10,874 10,874 Conversion of mandatorily redeemable con- vertible preferred stock into common stock..... 2,060 14,193 14,193 Purchase of treasury stock....................... (6) (239) (239) Redemptions of shareholders' notes receivable.... 1,192 1,192 Compensatory stock issuance...................... 23 566 566 Conversion of convertible subordinated notes into common stock.............................. 682 5,500 5,500 Net loss......................................... (25,485) (25,485) ------------------------------------------------------------------------------- Balance at September 30, 2000............... 33,969 $314,780 $(108,864) $(6,355) $(239) $199,322 =============================================================================== The accompanying notes are an integral part of these consolidated financial statements.
EMCORE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended September 30, 1998, 1999 and 2000 (in thousands) 1998 1999 2000 Cash flows from operating activities: Net loss................................. $(36,419) $(22,689) $(25,485) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Acquired in-process research and development, non-cash.................. 19,516 - - Depreciation and amortization.......... 8,767 11,575 14,955 Provision for doubtful accounts........ 1,118 390 780 Provision for inventory valuation...... 120 40 313 Deferred gain on sale to unconsol- idated affiliate....................... - 1,259 301 Non-cash charges on warrant issuances.. 601 1,136 843 Extraordinary loss on early extinguishment of debt................. - 1,335 - Equity in net loss of unconsolidated affiliates............................. 198 4,997 13,265 Compensatory stock issuance............ 351 436 566 Change in assets and liabilities: Accounts receivable - trade............ 2 (4,375) (7,597) Accounts receivable - related parties................................ 2,000 (1,980) 146 Inventories............................ (5,243) (1,585) (17,047) Prepaid expenses and other current assets................................. (64) (140) (1,440) Other assets........................... (624) (69) (983) Accounts payable....................... 7,950 (6,664) 11,153 Accrued expenses....................... (970) (24) 1,910 Advanced billings...................... 1,182 1,170 15,928 Unearned service revenue............... (72) (53) - ---------------------------------- Total adjustments........................ 34,832 7,448 33,093 ---------------------------------- Net cash and cash equivalents (used for) provided by operating activities.. (1,587) (15,241) 7,608 Cash flows from investing activities: Purchase of property, plant, and equipment.............................. (22,132) (17,110) (33,755) Acquisition, cash acquired............. 193 - - Investments in marketable securi- ties, net.............................. - - (50,896) Investments in unconsolidated affiliates............................. (490) (14,203) (19,949) (Funding) payments of restricted cash................................... 250 62 - ---------------------------------- Net cash and cash equivalents used for investing activities............... (22,179) (31,251) (104,600) Cash flows from financing activities: Proceeds from public stock offering, net of issuance cost of $8,500......... - - 127,500 Proceeds from preferred stock offering, net of issuance cost of $500................................... - 21,200 - Proceeds from public stock offer- ing, net of issuance cost of $5,000................................. - 52,000 - Proceeds under convertible subordi- nated debenture........................ - 7,800 - Proceeds (payments) under bank loans.................................. 17,950 (17,950) - Proceeds (payments) under notes payable - related party................ 7,000 (7,000) - Payments on demand note facility and subordinated debt.................. - (8,563) - Proceeds from exercise of stock purchase warrants...................... 23 2,164 10,874 Proceeds from exercise of stock options................................ 83 376 2,197 Payments on capital lease obliga- tions.................................. (487) (573) (715) Purchase of treasury stock............. - - (239) Dividends paid on preferred stock...... - (253) (133) Proceeds from shareholders' notes receivable............................. - - 1,192 ---------------------------------- Net cash and cash equivalents provided by financing activities....... 24,569 49,201 140,676 ---------------------------------- Net increase in cash and cash equivalents............................ 803 2,709 43,684 Cash and cash equivalents, beginning of year................................ 3,653 4,456 7,165 ---------------------------------- Cash and cash equivalents, end of year................................... $ 4,456 $ 7,165 $ 50,849 Supplemental disclosures of cash flow information: Cash paid for interest................. $ 1,347 $ 1,739 $ 351 Non-cash Investing and Financing Activities: Common stock issued on the exercise of warrants in exchange for subordi- nated notes............................ 72 - 7,800 Issuance of common stock on the exercise of warrants in exchange for notes receivable....................... 7,458 - - Issuance of common stock, common stock purchase options and warrants in connection with the acquisition of MicroOptical Devices, Inc........... 32,329 - - Conversion of mandatorily redeem- able convertible preferred stock to common stock........................... - 7,280 14,420 Reference is made to Note 8 - Debt Facilities - for disclosure relating to certain non-cash warrant issuance. Reference is made to Note 11 - Stockholders' Equity - for disclosure relating to certain non-cash equity transactions. The accompanying notes are an integral part of these consolidated financial statements. EMCORE Corporation Notes to Consolidated Financial Statements As of September 30, 1999 and 2000 and for the years ended September 30, 1998, 1999 and 2000 NOTE 1. Description of Business EMCORE Corporation (the "Company"), a New Jersey Corporation, 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. The Company offers its customers a complete, vertically integrated solution for the design, development and production of compound semiconductor wafers and devices. NOTE 2. Summary of Significant Accounting Policies Principles of Consolidation. The consolidated financial statements include the accounts of the Company and it's wholly owned subsidiary. The equity method of accounting is used for unconsolidated affiliates where the Company exercises significant influence, generally when ownership is at least 20% and not more than 50%. All intercompany accounts and transactions are eliminated upon consolidation. Prior period balances have been reclassified to conform to the current period financial statement presentation. 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. Marketable Securities. The Company accounts for its investment in marketable securities as available for sale securities in accordance with the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Unrealized gains and losses for these securities are excluded from earnings and reported net of tax as a separate component of shareholders' equity. Realized gains and losses on sales of investments, as determined on a specific identification basis, are included in the consolidated statements of operations. Fair values are determined by reference to market prices for securities as quoted based on publicly traded exchanges. At September 30, 2000, the Company's available for sale marketable securities were comprised of debt securities. The fair value of these debt securities at September 30, 2000 approximated cost. At September 30, 2000, the Company's available for sale debt securities were comprised of $25.4 million of U.S. government debt securities, $13.3 million of corporate debt securities, $11.2 million of municipal bonds and $1.0 million of other debt securities. The contractual maturities for all available for sale debt securities will occur during fiscal 2001. The Company did not record any realized gains or losses on sales of available-for-sale debt securities during fiscal 2000. Inventories. Inventories are stated at the lower of cost or market with cost being determined using the first-in, first-out (FIFO) method. Reserves are established for slow moving or obsolete inventory based upon historical and anticipated usage. Property, Plant and Equipment. Property, plant 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 forty 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 long-lived assets are 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. Other Assets. Included in other assets are various deferred costs and warrant valuation costs. The deferred costs are primarily related to obtaining product patents that enhance and maintain the Company's intellectual property position. These patent costs are being amortized on a straight-line basis over five years or the remaining life of the patent, whichever is less. Total patent amortization expense amounted to approximately $79,000, $143,000 and $219,000 for the years ended September 30, 1998, 1999 and 2000, respectively. In May 1999, EMCORE issued 564,020 common stock purchase warrants to General Electric for financing EMCORE's initial capital contribution in the GELcore joint venture through the issuance of a $7.8 million convertible subordinated debenture. The warrants were assigned a value of $2.6 million using the Black-Scholes option pricing model and were included in other assets as a deferred financing cost. The asset was being amortized over the life of the subordinated debenture. In March 2000, General Electric converted the subordinated debenture into 681,968 shares of common stock. In conjunction with recording the conversion, the unamortized warrant value of approximately $2.3 million was charged against common stock as an equity issuance cost. Amortization expense related to these warrants, recorded as imputed warrant interest expense, amounted to $186,000 and $154,000 for the years ended September 30, 1999 and 2000, respectively. Goodwill. Goodwill is amortized using the straight-line method over three years. The Company, as applicable, evaluates whether there has been a permanent impairment in the value of goodwill. Any impairment would be recognized when the sum of expected undiscounted cash flows derived from the acquired business is less than its carrying value. Income Taxes. The Company recognizes deferred taxes by the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for differences between the financial statement and tax bases of assets and liabilities at enacted statutory tax rates in effect for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. In addition, valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. The primary sources of temporary differences are depreciation and amortization of intangible assets. Revenue and Cost Recognition - Systems- and Materials-related 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 that are estimated and accrued at the time the sale is recognized. Materials 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 a duration 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 $438,000, $1.4 million and $2.5 million for the years ended September 30, 1998, 1999 and 2000, respectively. Research and Development. Research and development costs are charged to expense as incurred. Fair Value of Financial Instruments. The Company estimates the fair value of its financial instruments based upon discounted cash flow analyses using the Company's incremental borrowing rate on similar instruments as the discount rate. As of September 30, 1999 and 2000, the carrying values of the Company's cash, cash equivalents, marketable securities, accounts receivables and accounts payable as reflected on the Company's accompanying balance sheet approximates fair value. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. The Company's most significant estimates relate to accounts receivable and inventory valuation reserves, warranty and installation accruals and the valuation of long-lived assets. Concentration of Credit Risk. Financial instruments, which may subject the Company to a concentration of credit risk, consist primarily of cash equivalents, marketable securities and accounts receivable. Marketable securities consist primarily of high-grade corporate debt, commercial paper, government securities and other investments at interest rates that vary by security. The Company's cash equivalents consist primarily of money market funds. The Company has maintained cash balances with certain financial institutions in excess of the $100,000 insured limit of the Federal Deposit Insurance Corporation. The Company performs ongoing credit evaluations of its customers' financial condition and generally requires no collateral from its customers. To reduce credit risk and to fund manufacturing costs, the Company requires periodic prepayments or irrevocable letters of credit on most production system orders. The Company maintains reserves for potential credit losses based upon the credit risk of specified customers, historical trends and other information. The Company's credit losses generally have not exceeded its expectations. Although such losses have been within management's expectations to date, there can be no assurance that such reserves will continue to be adequate. Recent Financial Accounting Pronouncements In June 1998, the FASB issued SFAS No.133, Accounting for Derivatives 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, as amended, is effective for fiscal years beginning after June 15, 2000. The Company is required to adopt this standard, as amended, effective January 1, 2001. 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. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101. ("SAB 101") "Revenue Recognition in Financial Statements," which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. The Company will adopt SAB 101 by the fourth quarter of fiscal year 2001 and is currently determining the impact such adoption will have on its consolidated financial statements. NOTE 3. 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 was 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 is anti-dilutive. The following table reconciles the number of shares utilized in the earnings per share calculations.
For the fiscal years ended September 30, (in thousands, except per share data) 1998 1999 2000 Loss before extraordinary item.............................. ($36,419) ($21,355) ($25,485) Extraordinary item, loss on early retirement of debt...................................................... - 1,334 - -------------------------------------- Net loss.................................................... ($36,419) ($22,689) ($25,485) Preferred stock dividends................................. - 319 83 Periodic accretion of preferred stock to redemption value..................................................... - 52 40 -------------------------------------- Net loss attributable to common shareholders................ ($36,419) ($23,060) ($25,607) ====================================== Weighted average of outstanding common shares - basic....... 17,550 21,180 31,156 Effect of dilutive securities: Stock option and warrants............................... - - - Preferred stocks........................................ - - - Convertible subordinated debenture...................... - - - -------------------------------------- Weighted average of outstanding common shares - diluted..... 17,550 21,180 31,156 ====================================== Loss per basic and diluted share before extraordinary item.. ($2.08) ($1.03) ($0.82) ====================================== Net loss per basic and diluted share........................ ($2.08) ($1.09) ($0.82) ======================================
NOTE 4. 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. In fiscal year 2000, the Company invested an additional $9.7 million in this venture and recognized a loss of $5.4 which has been recorded as a component of other income and expense. As of September 30, 2000, the Company's net investment in this joint venture amounted to $9.6 million. In March 1997, the Company and a subsidiary of Uniroyal Technology Corporation formed Uniroyal Optoelectronics LLC, a joint venture, to manufacture, sell and distribute HB LED wafers and package-ready devices. Under the terms of the joint venture agreement, the Company has a 49% non-controlling interest in this joint venture and accounts for its investment under the equity method of accounting. In fiscal year 2000, the Company invested an additional $11.6 million in this venture and recognized a loss of $7.8 million which has been recorded as a component of other income and expense. As of September 30, 2000, the Company's net investment in this joint venture amounted to $7.5 million. NOTE 5. Inventories The components of inventories consisted of the following: (in thousands) As of September 30, 1999 2000 Raw materials $ 9,146 $19,594 Work-in-process 3,620 8,831 Finished goods 1,224 2,299 ---------------------- Total $13,990 $30,724 ====================== NOTE 6. Property, Plant and Equipment Major classes of property and equipment are summarized below: (in thousands) As of September 30, 1999 2000 Land $ 1,029 $ 1,502 Building 9,179 16,427 Equipment 41,225 56,216 Furniture and fixtures 4,880 7,373 Leasehold improvements 10,764 17,472 Property and equipment under capital lease 2,164 2,171 ----------------------- 69,241 101,161 Less: accumulated depreciation and amortization (22,959) (31,460) ----------------------- Total $46,282 $69,701 ======================= At September 30, 2000, minimum future lease payments due under the capital leases are as follows: (in thousands) Period ending: September 30, 2001 $95 September 30, 2002 43 September 30, 2003 17 September 30, 2004 7 September 30, 2005 1 --------- Total minimum lease payments 163 Less: amount representing interest (imputed interest rate of 14.4%) (16) --------- Net minimum lease payments 147 Less: current portion 72 --------- Long-term portion $75 ========= Depreciation on owned property and equipment amounted to approximately $4.7 million, $6.6 million and $8.0 million for the years ended September 30, 1998, 1999 and 2000, respectively. Accumulated amortization on assets accounted under capital leases amounted to approximately $834,000 and $1.3 million as of September 30, 1999 and 2000, respectively. Included in equipment are twenty-seven systems and twenty-nine systems with a combined net book value of approximately $15.6 million and $21.0 million at September 30, 1999 and 2000, 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: (in thousands) As of September 30, 1999 2000 Salary and other compensation costs.... $1,631 $2,614 Installation and warranty costs........ 929 1,277 Other.................................. 1,613 2,192 --------------------- Total $4,173 $6,083 ===================== NOTE 8. Debt Facilities Convertible Subordinated Debenture In May 1999, in connection with the GELcore venture, General Electric funded the Company's initial capital contribution of $7.8 million in GELcore. The funding was in the form of a subordinated debenture (the "Debenture") with an interest rate of 4.75%. The Debenture was to mature in 2006 and was convertible into common stock of the Company at the conversion price of $11.44 or 681,968 shares. In addition, General Electric also received 564,020 warrants to purchase common stock at $11.44 per share. These warrants are exercisable at any time and expire in 2006. These warrants were valued using Black Scholes model, resulting in a valuation of $2.6 million, which was included in other assets as a deferred financing cost. The asset was being amortized over the life of the Debenture. In March 2000, General Electric converted the subordinated debenture into 681,968 shares of common stock. In conjunction with recording the conversion, the unamortized warrant value of approximately $2.3 million was charged against common stock as an equity issuance cost. Bank Loans In March 1997, EMCORE entered into a $10.0 million loan agreement with its bank (the "Loan Agreement") that had an interest rate equal to the prime rate plus 50 basis points. In December 1999, EMCORE's Loan Agreement was extended through January 31, 2001. The Loan Agreement's financial covenants were modified under this amendment, and management believes that EMCORE will be able to comply with such requirements. EMCORE was in compliance with all covenants and no amounts were outstanding under this facility at September 30, 2000. Extraordinary Items: On June 15, 1999, the Company repaid its outstanding bank loans using a portion of the proceeds from its June 1999 public offering. The Company also used a portion of the net proceeds to repurchase its outstanding 6.0% subordinated notes due 2001. The early extinguishment of debt resulted in an extraordinary charge of $1.3 million or $0.06 per share in fiscal year 1999 that consisted of the following: (in thousands) Extraordinary items: Discount on prepayment of 6% subordinated notes due 2001.......... $ 867 Write-off of related deferred financing costs..................... 467 ------ Net extraordinary loss............................................ $1,334 ====== NOTE 9. Commitments and Contingencies The Company leases its main manufacturing facility of 80,000 square feet under an operation lease expiring in 2005. The Company leases certain equipment under non-cancelable operating leases. Facility and equipment rent expense under such leases amounted to approximately $637,000, $761,000 and $921,000 for the years ended September 30, 1998, 1999 and 2000, 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, 2000 are as follows: (in thousands) Period ending: Operating ------------ September 30, 2001 $570 September 30, 2002 280 September 30, 2003 276 September 30, 2004 92 September 30, 2005 - ------------ Total minimum lease payments $1,218 ------------ 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 its 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 judgment 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 its customers who did not hold licenses directly from Rockwell. Management has reviewed and assessed its likely royalty obligations and believes that it has the appropriate amounts reserved at both September 30, 1999 and 2000. If EMCORE is required to pay Rockwell amounts in excess of its reserves, its business, financial condition and results of operations could be materially and adversely affected. 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. NOTE 10. Income Taxes The Company accounts for its income taxes under the provisions of Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The principal differences between the U.S. statutory and effective income tax rates were as follows: For the years ended September 30, 1998 1999 2000 US statutory income tax benefit 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 19.8% 35.0% 33.9% Non-deductible amortization 3.4% 4.8% 6.0% Other (1.5)% 0.1% - ------------------------------- Effective tax rate - - - =============================== As a result of its losses, the Company did not incur any income tax expense during the years ended September 30, 1998, 1999 and 2000. The components of the Company's net deferred taxes were as follows: (in thousands) For the years ended September 30, Deferred tax assets: 1999 2000 Federal net operating loss carryforwards $11,800 $13,557 Research credit carryforwards (state and federal) 1,554 2,937 Inventory reserves 133 179 Accounts receivable reserves 191 362 Fixed assets 2,325 - Interest 386 287 Accrued installation reserve 146 177 Accrued warranty reserve 157 256 State net operating loss carryforwards 1,336 2,268 Other 569 158 Valuation reserve - federal (15,430) (13,455) Valuation reserve - state (2,936) (4,263) ----------------------- Total deferred tax assets 231 2,463 Deferred tax liabilities: Fixed assets and intangibles (231) (2,463) ----------------------- Net deferred taxes $ - $ - ----------------------- 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, 2000, the Company has net operating loss carryforwards for tax purposes of approximately $44.0 million that expire in the years 2003 through 2020. The Company believes that the consummation of certain equity transactions and a significant change in the ownership during fiscal years 1995, 1998 and 1999 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 Sections 382 and 383. NOTE 11. Stockholders' Equity Preferred Stock: The Company's certificate of incorporation authorizes the Board of Directors to issue up to 5,882,352 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. Public Offerings: On June 15, 1999, the Company completed the issuance of an additional 6.0 million common stock shares through a public offering, which resulted in proceeds of $52.0 million, net of issuance costs of $5.0 million. On January 19, 2000, the Company filed a shelf registration statement (the "Shelf Registration Statement") with the Securities and Exchange Commission to offer from time to time up to 4.0 million shares of common stock. The Shelf Registration Statement became effective on February 4, 2000. On March 1, 2000, the Company completed the issuance of 2.0 million common stock shares under the Shelf Registration Statement that resulted in proceeds of $127.5 million, net of issuance costs of $8.5 million. A portion of the proceeds was used to repay all outstanding bank indebtedness. The majority of the funds will be used to expand manufacturing capacity for new data communications and wireless products, to fund additional investments in the Company's joint ventures and for other general corporate purposes. Private Placement Offering: 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 was being accreted by periodic charges to accumulated deficit. The Series I Preferred Stock carried a dividend of 2% per annum that was charged to accumulated deficit. In June 1999, 520,000 shares of the Series I Preferred Stock were converted into common stock. During the six-month period ended March 31, 2000, the remaining 1,030,000 shares of the Series I Preferred Stock were converted into common stock. Common Stock: In February 1999, an amendment to the Certificate of Incorporation increased the number of no par value common stock shares that the Company is authorized to issue to 50,000,000 million shares. The Certificate of Incorporation was amended, effective December 22, 2000, to effect a two-for-one (2:1) split of the common stock. As a result, as of the effective date of the amendment, the Certificate of Incorporation authorizes the Company to issue up to 100,000,000 shares of common stock, with no par value. The amendment did not change the number of authorized shares or other provisions relating to the preferred stock. All references in these financial statements to common stock and per share data have been adjusted to reflect the common stock split that was effective on September 18, 2000. Future Issuances: At September 30, 2000, the Company has reserved a total of 6,712,968 shares of its common stock for future issuances as follows:
Number of shares For exercise of outstanding warrants to purchase common stock 2,407,430 For exercise of outstanding common stock options 3,770,676 For future common stock option awards 34,862 For future issuances to employees under the Employee Stock Purchase Plan 500,000 --------- Total reserved 6,712,968 ---------
NOTE 12. Stock Options and Warrants All share amounts have been restated to reflect EMCORE's two-for-one (2:1) common stock split that was effective on September 18, 2000. Stock Option Plan. As of September 30, 2000, the Company's Amended and Restated Incentive and Non-Statutory Stock Option Plan (the " Option Plan") has authorized the grant of options for up to 4,194,118 shares of the Company's common stock. As of September 30, 2000, 34,862 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 2000, options with respect to 1,858,602 were granted pursuant to the Company's option plan at exercise prices ranging from $7.00 to $60.00 per share. Stock options generally vest over three to five years and are exercisable over a ten-year period. As of September 30, 1998, 1999 and 2000, options with respect to 481,863, 554,439 and 1,581,805 were exercisable, respectively. The following table summarizes the activity under the Option Plan:
Weighted Average Shares Exercise Price Outstanding as of September 30, 1997 950,944 $3.24 Assumed in MODE acquisition 401,956 0.25 Granted 1,230,612 6.67 Exercised (71,618) 1.17 Cancelled (86,442) 5.11 --------- ---- Outstanding as of September 30, 1998 2,425,452 $4.48 Granted 661,590 6.87 Exercised (220,144) 1.71 Cancelled (254,872) 4.67 ---------- ----- Outstanding as of September 30, 1999 2,612,026 $5.30 Granted 1,858,602 22.04 Exercised (506,256) 4.36 Cancelled (193,696) 8.01 --------- ----- Outstanding as of September 30, 2000 3,770,676 $13.54 ========== =======
At September 30, 2000, stock options outstanding were as follows:
Weighted Average Options Remaining Exercisable Weighted Average Exercise Prices Outstanding Contractual Life (Years) Options Exercise Price < $1.00 142,554 7.18 142,554 $0.23 $1 < to <= $5 340,788 5.55 274,426 2.10 $5 < to <= $10 1,549,058 7.68 675,012 6.43 $10 < to <= $20 165,500 8.35 36,800 11.00 $20 < to <= $30 1,381,676 9.52 453,013 22.02 > $30 191,100 9.74 - 42.31
In connection with the Company's acquisition of MODE in December 1997, we assumed 402,000 common stock purchase options with exercise prices ranging from $0.21 to $0.30. 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, 2000, there are 142,554 options outstanding at a weighted average exercise price of $0.23. The following table summarizes the activity of options assumed in the MODE acquisition:
Weighted Average Shares Exercise Price Outstanding as of September 30, 1997 -- - Assumed in MODE acquisition 401,956 $0.25 Exercised (31,780) 0.26 Cancelled (15,528) 0.28 --------- ----- Outstanding as of September 30, 1998 354,648 $0.25 Exercised (105,598) 0.27 Cancelled (56,058) 0.28 --------- ----- Outstanding as of September 30, 1999 192,992 $0.23 Exercised (49,772) 0.25 Cancelled (666) 0.29 ------ ----- Outstanding as of September 30, 2000 142,554 $0.23 ======= ======
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:
(in thousands) For the fiscal years ended September 30, 1998 1999 2000 Loss before extraordinary item As reported $36,419 $21,354 $25,485 Pro forma $37,038 $22,648 $29,843 Loss per basic and diluted share before extraordinary item As reported $(2.08) $(1.03) $(0.82) Pro forma $(2.11) $(1.09) $(0.96) Net loss As reported $36,419 $22,689 $25,485 Pro forma $37,038 $23,983 $29,843 Net loss per basic and diluted share As reported $(2.08) $(1.09) $(0.82) Pro forma $(2.11) $(1.15) $(0.96)
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: no dividend yield; expected volatility of 60% for fiscal year 1998, 76% for fiscal year 1999 and 100% for fiscal year 2000; a risk-free interest rate of 5.6%, 5.8% and 5.9% for fiscal years 1998, 1999 and 2000, respectively; and expected lives of 5 years. The weighted average fair value of options granted during the years ended September 30, 1998, 1999 and 2000 were $7.50, $9.05 and $17.90 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, 2000: Underlying Exercise Expiration Security Price Warrants Date Common Stock (1) $2.04 44,250 May 1, 2001 Common Stock (2) $2.16 14,796 August 21, 2006 Common Stock (3) $5.10 1,892,890 September 1, 2001 Common Stock (4) $5.69 455,494 May 1, 2001 --------- 2,407,430 ========= (1) issued in connection with EMCORE's May 1996 Subordinated note issuance. (2) issued in connection with EMCORE's December 1997 acquisition of MicroOptical Devices, Inc. (3) issued in connection with EMCORE's September 1996 subordinated debt issuance and October 1996 debt guarantee. (4) issued in connection with EMCORE's June 1998 bank loan agreement. NOTE 13. Related Parties 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 High Brightness (HB) LED wafers and package-ready devices (see Note 4). During the fiscal year ended September 30, 1999, EMCORE sold three compound semiconductor production systems to the venture totaling $5.3 million in revenues. During the fiscal year ended September 30, 2000, EMCORE sold two compound semiconductor production systems to the venture totaling $2.7 million in revenues. As of September 30, 2000, EMCORE had a remaining deferred gross profit of approximately $1.6 million on such sales to the extent of its ownership interest. Such deferred gross profits will be recognized ratably over the assigned life of the production systems purchased by the joint venture. During the years ended September 30, 1999 and 2000, sales made to the joint venture approximated $5.9 million and $3.9 million, respectively. As of September 30, 1999 and 2000, the Company had an outstanding related party receivable of $1.8 and $0.6 million, respectively. In May 1999, EMCORE and General Electric Lighting formed GELcore, a joint venture to develop and market HB LED lighting products. As of September 30, 1999 and 2000, the Company had an outstanding related party receivable of $0.7 million and $1.8 million, respectively. 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 years ended September 30, 1999 and 2000, sales made through Hakuto approximated $10.2 million and $12.4 million, respectively. In 1999, the Company's Chairman personally guaranteed the Company's bank facility and extended a line of credit to the Company. In recognition of these services during 2000, the Company's Board of Directors granted a warrant for 600,000 shares of common stock to the Chairman. The warrant was immediately exercisable at $6.47 per share. The warrant was issued in 2000, and as it related to past services, the fair value was charged as an expense in the Statement of Operations. The Company assigned a fair value of $689,000 to the warrants, which was based upon the Company's application of the Black-Scholes option-pricing model. The consequent expense was charged to "Imputed warrant interest expense, non-cash." NOTE 14. Segment Data and Related Information 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 consists 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 below 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 accounting policies of the operating segments are the same as those described in the summary of accounting policies (see Note 2). 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. Information about reported segment gross profit is as follows: (in thousands) 1998 1999 2000 Revenues: Systems-related........................ $26,324 $44,477 $65,788 Materials-related...................... 17,436 13,864 38,718 ------------------------------- Total revenues....................... 43,760 58,341 104,506 Cost of sales: Systems-related......................... 15,942 26,522 37,775 Materials-related....................... 8,734 6,636 23,526 ------------------------------- Total cost of sales................... 24,676 33,158 61,301 ------------------------------- Gross profit: Systems-related......................... 10,382 17,955 28,013 Materials-related....................... 8,702 7,228 15,192 ------------------------------- Total gross profit.................... $19,084 $25,183 $43,205 ------------------------------- Gross margin: Systems-related......................... 39.4% 40.4% 42.6% Materials-related....................... 49.9% 52.1% 39.2% ------------------------------- Total gross margin.................... 43.6% 43.2% 41.3% ------------------------------- EMCORE has generated a significant portion of its sales to customers outside the United States. In fiscal 1998, 1999 and 2000, international sales constituted 39.1%, 52.6% and 38.6%, respectively, of revenues. EMCORE anticipates that international sales will continue to account for a significant portion of revenues. Historically, EMCORE has received substantially all payments for products and services in U.S. dollars and therefore EMCORE does not anticipate that fluctuations in any currency will have a material effect on its financial condition or results of operations. The following chart contains a breakdown of EMCORE's worldwide revenues by geographic region.
For the fiscal years ended September 30, 1998 1999 2000 (in thousands) Revenue % of revenue Revenue % of revenue Revenue % of revenue Region: North America $26,648 61% $27,698 48% $64,174 62% Asia 15,527 35% 28,211 48% 34,656 33% Europe 1,585 4% 2,432 4% 5,676 5% --------------------- ------------- --------------- ----------- --------------- ----------- ---------------- TOTAL $43,760 100% $58,341 100% $104,506 100% ======= ==== ======= ==== ======== ====
All long-lived assets are located in the North America region. Significant sales in the Asia region are predominately made in Japan and Taiwan. Sales to customers that accounted for at least 10% of total EMCORE revenues are outlined below. In fiscal year 1999, no individual customer had sales equal to or in excess of 10% of total fiscal year 1999 revenues. For the fiscal years ended September 30, 1998 1999 2000 Customer A 17.3% - - --------------------------------------------------------------------- Customer B 12.8% - - --------------------------------------------------------------------- Customer C - - 14.0% --------------------------------------------------------------------- Customer D - - 12.5% --------------------------------------------------------------------- NOTE 15. Employee Benefits 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 years ended September 30, 1998, 1999 and 2000, the Company contributed approximately $252,000, $376,000 and $527,000, respectively to the Savings Plan. The Company adopted an Employee Stock Purchase Plan (the "Purchase Plan") on February 16, 2000. The Purchase Plan provides employees of the Company with an opportunity to purchase common stock through payroll deductions. The purchase price is set at 85% of the lower of the fair market value of common stock at the beginning of the participation period, the first Trading Day on or after January 1st, or at the end of the participation period, the last Trading Day on or before December 31st of such year. The beginning of the first participation period began on April 1, 2000. Contributions are limited to 10% of an employee's compensation. The participation periods have a 12-month duration, with new participation periods beginning in January of each year. The Board of Directors has reserved 1,000,000 shares of common stock for issuance under the Purchase Plan. As of September 30, 2000, no shares of common stock had yet been purchased under the Purchase Plan. NOTE 16. Quarterly Financial Data (Unaudited)
(in thousands except per share data) Revenues Operating Net Net Loss Loss Loss Per Share Fiscal Year 1998: December 31, 1997....... $12,357 $(19,717)* $(19,883)* $(1.41)* March 31, 1998.......... 13,808 (615) (778) (0.04) June 30, 1998........... 9,074 (7,955) (8,260) (0.44) September 30, 1998...... 8,521 (6,359) (7,498) (0.40) Fiscal Year 1999: December 31, 1998....... $10,125 $(6,058) $(6,880) $(0.37) March 31, 1999.......... 16,072 (1,802) (3,977) (0.22) June 30, 1999........... 17,667 (1,893) (5,238) (0.26) September 30, 1999...... 14,477 (4,603) (6,594) (0.25) Fiscal Year 2000: December 31, 1999....... $16,501 $(3,807) $(6,658) $(0.25) March 31, 2000.......... 23,925 (1,095) (4,207) (0.14) June 30, 2000........... 30,023 (515) (1,460) (0.04) September 30, 2000...... 34,057 (10,452) (13,160) (0.39) * includes $19.5 million one-time acquired in-process, non-cash research and development.
All share amounts have been restated to reflect EMCORE's two-for-one (2:1) common stock split that was effective on September 18, 2000. INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of EMCORE Corporation Somerset, New Jersey We have audited the accompanying consolidated balance sheets of EMCORE Corporation (the "Company") as of September 30, 1999 and 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended September 30, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14(a)(2). 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 audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 consolidated financial statements present fairly, in all material respects, the financial position of EMCORE Corporation as of September 30, 1999 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2000 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financials statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Parsippany, New Jersey November 15, 2000 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 continues 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. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant The information required by this item is incorporated herein by reference to EMCORE's 2000 Proxy Statement, which will be filed on or before January 28, 2001. Item 11. Executive Compensation The information required by this item is incorporated herein by reference to EMCORE's 2000 Proxy Statement, which will be filed on or before January 28, 2001. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this item is incorporated herein by reference to EMCORE's 2000 Proxy Statement, which will be filed on or before January 28, 2001. Item 13. Certain Relationships and Related Transactions The information required by this term is incorporated herein by reference to EMCORE's 2000 Proxy Statement, which will be filed on or before January 28, 2001. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 14(a)(1) Financial Statements Page Reference Included in Part II, Item 8 of this report: Consolidated Balance Sheets as of September 30, 1999 and 2000 Consolidated Statements of Operations for the years ended September 30, 1998, 1999 and 2000 Consolidated Statements of Shareholders' Equity for the years ended September 30, 1998, 1999 and 2000 Consolidated Statements of Cash Flows for the years ended September 30, 1998, 1999 and 2000 Notes to Financial Statements Independent Auditors' Report 14(a)(2) Financial Statement Schedule Located immediately following the signature page of this report: Schedule I - UNIROYAL OPTOELECTRONICS, LLC - Financial Statements as of October 1, 2000 and September 26, 1999, for the Fiscal Years Ended October 1, 2000 and September 26, 1999, for the Period February 20, 1998 (date of incorporation) to September 27, 1998 and for the Period February 20, 1998 (date of incorporation) to October 1, 2000 and Independent Auditors' Report Schedule II - Valuation and qualifying accounts and reserves Other schedules have been omitted since they are either not required or not applicable. 14(a)(3) Exhibits Exhibit No. Description 3.1 Restated Certificate of Incorporation, dated December 21, 2000.* 3.2 Amended By-Laws, as amended December 6, 2000.* 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 (incorporated by reference to Exhibit 4.2 to EMCORE's filing on Form 10-K, dated December 29, 1998). 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 Distribution Agreement dated as of March 31, 1998 between EMCORE and Hakuto (incorporated by reference to Exhibit 10.4 to EMCORE's filing on Form 10-K/A, dated May 17, 1999). Confidential Statement has been requested by EMCORE 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). 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 EMCORE 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 EMCORE 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 EMCORE with respect to portions of this document. Such portions are indicated by "[*] ". 10.14 Acquisition Agreement, dated as of December 5, 1997, between EMCORE and MicroOptical Devices, Inc. (incorporated by reference to Exhibit 2 to EMCORE's filing on Form 8-K, dated December 22, 1997). 10.15 Purchase Agreement, dated November 30, 1998, by and between EMCORE, Hakuto UMI and UTC (incorporated by reference to Exhibit 10.15 to EMCORE's filing on Form 10-K, dated December 29, 1998). 10.16 Registration Rights Agreement, dated November 30, 1998 by and between EMCORE, Hakuto, UMI and UTC (incorporated by reference to Exhibit 10.16 to EMCORE's filing on Form 10-K, dated December 29, 1998). 10.17 Long Term Purchase Agreement dated November 24, 1998 by and between EMCORE and Space Systems/Loral, Inc. (incorporated by reference to Exhibit 10.17 to EMCORE's filing on Form 10-K/A, dated May 17, 1999). Confidential treatment has been requested by EMCORE for portions of this document. Such portions are indicated by "[*]". 10.18 Note Purchase Agreement dated as of May 26, 1999 by and between EMCORE and GE Capital Equity Investments, Inc. (incorporated by reference to Exhibit 10.18 to Amendment No. 2 to the 1998 S-3 filed on June 9, 1999). 10.19 Registration Rights Agreement dated as of May 26, 1999 by and between EMCORE and GE Capital Equity Investments, Inc. (incorporated by reference to Exhibit 10.19 to Amendment No. 2 to the 1998 S-3 filed on June 9, 1999). 10.20 $22.875 Warrant issued to General Electric Company (incorporated by reference to Exhibit 10.20 to Amendment No. 2 to the 1998 S-3 filed on June 9, 1999). 10.21 Transaction Agreement dated January 20, 1999 between General Electric Company and EMCORE (incorporated by reference to Exhibit 10.1 to EMCORE's filing on Form 10-Q/A, dated May 17, 1999). Confidential treatment has been requested by EMCORE for portions of this document. Such portions are indicated by "[*]". 10.22 Third Amendment to Revolving Loan and Security Agreement, dated as of December 1, 1999 between EMCORE and First Union National Bank (incorporated by reference to Exhibit 10.22 to EMCORE's filing on Form 10-K, dated December 29, 1999). 10.23 Joint Development, Manufacturing and Marketing Agreement for High Speed Array Transceivers dated June 16, 2000 between JDS Uniphase Corporation and EMCORE Corporation. Confidential treatment has been requested by EMCORE for portions of this document. Such portions are indicated by "{redact}".* 21 Subsidiaries of the registrant.* 23.1 Consent of Deloitte & Touche LLP.* 23.2 Consent of Deloitte & Touche LLP.* 27 Financial Data Schedule.* --------------- * Filed herewith SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Township of Somerset, State of New Jersey, on December 28, 2000. EMCORE CORPORATION BY /S/ REUBEN F. RICHARDS, JR. -------------------------------------------- Name: Reuben F. Richards, Jr. TITLE: President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of EMCORE Corporation in the capacities indicated, on December 28, 2000. 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 Reuben F. Richards, Jr. Officer) /s/ THOMAS G. WERTHAN Vice President, Chief Financial ---------------------------------- Officer 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 Schedule I UNIROYAL OPTOELECTRONICS, LLC (A Development Stage Company) Financial Statements as of October 1, 2000 and September 26, 1999, for the Fiscal Years Ended October 1, 2000 and September 26, 1999, for the Period February 20, 1998 (date of incorporation) to September 27, 1998 and for the Period February 20, 1998 (date of incorporation) to October 1, 2000 and Independent Auditors' Report. INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Uniroyal Optoelectronics, LLC: We have audited the accompanying balance sheets of Uniroyal Optoelectronics, LLC (a development stage company, (the "Company") as of October 1, 2000 and September 26, 1999, the related statements of operations and of cash flows for the years ended October 1, 2000 and September 26, 1999, for the period February 28, 1998 (date of incorporation) to September 27, 1998, and for the period February 20, 1998 (date of incorporation) to October 1, 2000, and the related statements of changes in members' equity for the years ended October 1, 2000 and September 26, 1999, and for the period February 20, 1998 (date of incorporation) to September 27, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, such financial statements present fairly, in all material respects, the financial position of the Company as of October 1, 2000 and September 26, 1999, and the results of its operations and its cash flows for the years ended October 1, 2000 and September 26, 1999, for the period February 20, 1998 (date of incorporation) to September 27, 1998, and for the period February 20, 1998 (date of incorporation) to October 1, 2000, in conformity with accounting principles generally accepted in the United States of America. The Company is in the development stage at October 1, 2000. As discussed in Note 1 to the financial statements, successful completion of the Company's development program and, ultimately, the attainment of profitable operations is dependent upon future events, including maintaining adequate financing to fulfill its development activities and achieving a level of sales adequate to support the Company's cost structure. Deloitte and Touche LLP Certified Public Accountants Tampa, Florida December 5, 2000 UNIROYAL OPTOELECTRONICS, LLC (A Development Stage Company) BALANCE SHEETS (In thousands) October 1, September 26, 2000 1999 ASSETS Current assets: Cash and cash equivalents $ 470 $ 456 Trade accounts receivable 91 12 Inventories (Note 3) 2,028 448 Prepaid expenses and other current assets 304 90 Due from affiliate (Note 8) 1,233 - --------- --------- Total current assets 4,126 1,006 Property, plant and equipment - net (Note 4) 30,748 21,434 Deposits 29 34 --------- --------- TOTAL ASSETS $ 34,903 $ 22,474 ========= ========= LIABILITIES AND MEMBERS' EQUITY Current liabilities: Current obligations under capital leases (Note 5) $ 3,807 $ 3,345 Trade accounts payable 2,479 1,026 Accrued expenses: Compensation and benefits 241 244 Due to affiliate (Note 8) - 1,345 Other 135 52 --------- --------- Total current liabilities 6,662 6,012 Long-term obligations under capital leases (Note 5) 13,322 14,839 --------- --------- Total liabilities 19,984 20,851 --------- --------- Commitments and contingencies (Note 7) Members' equity (Note 6): Capital contributions 35,956 6,500 Deficit accumulated during the development stage (21,037) (4,877) --------- --------- Total members' equity 14,919 1,623 --------- --------- TOTAL LIABILITIES AND MEMBERS' EQUITY $ 34,903 $ 22,474 ========= ========= See notes to financial statements.
UNIROYAL OPTOELECTRONICS, LLC (A Development Stage Company) STATEMENTS OF OPERATIONS (In thousands) For the Period February 20, 1998 Fiscal Year Ended (date of incorporation) to October 1, September 26, September 27, October 1, 2000 1999 1998 2000 Net sales $ 1,805 $ 485 $ - $ 2,290 Costs and expenses: Costs of goods sold 1,744 435 - 2,179 Selling and administrative 12,667 4,345 397 17,409 Depreciation 2,305 210 1 2,516 --------- ---------- -------- --------- Loss before interest (14,911) (4,505) (398) (19,814) Interest (expense) income - net (1,249) 33 (7) (1,223) --------- ---------- -------- --------- Net loss $ (16,160) $ (4,472) $ (405) $ (21,037) ========= ========== ======== ========= See notes to financial statements.
UNIROYAL OPTOELECTRONICS, LLC (A Development Stage Company) STATEMENTS OF CHANGES IN MEMBERS' EQUITY (In thousands) Uniroyal Optoelectronics, Emcore Members' Inc. Corporation Equity Balance at February 20, 1998 $ - $ - $ - Capital contributions 510 490 1,000 Net loss (207) (198) (405) ---------- --------- ---------- Balance at September 27, 1998 303 292 595 Capital contributions - 5,500 5,500 Net loss (2,281) (2,191) (4,472) ---------- --------- ---------- Balance at September 26, 1999 (1,978) 3,601 1,623 Capital contributions 17,828 11,628 29,456 Net loss (8,242) (7,918) (16,160) ---------- --------- ---------- Balance at October 1, 2000 $ 7,608 $ 7,311 $ 14,919 ========== ========= ========== See notes to financial statements.
UNIROYAL OPTOELECTRONICS, LLC (A Development Stage Company) STATEMENTS OF CASH FLOWS (In thousands) For the Period February 20, 1998 Fiscal Year Ended (date of incorporation) to October 1, September 26, September 27, October 1, 2000 1999 1998 2000 OPERATING ACTIVITIES: Net loss $ (16,160) $ (4,472) $ (405) $ (21,037) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 2,305 210 1 2,516 Loss on disposal of fixed assets 118 - - 118 Changes in assets and liabilities: Increase in trade accounts receivable (79) (12) - (91) Increase in inventories (1,580) (448) - (2,028) (Increase) decrease in prepaid expenses and deposits (98) 1,705 (1,829) (222) Increase in trade accounts payable 1,453 853 173 2,479 Increase in accrued expenses 80 284 12 376 (Decrease) increase in due to affiliates (2,578) (553) 1,898 (1,233) ---------- --------- --------- ----------- Net cash used in operating activities (16,539) (2,433) (150) (19,122) ---------- --------- --------- ---------- INVESTING ACTIVITIES: Purchases of property, plant and equipment (9,358) (1,105) (293) (10,756) Proceeds from sale of fixed assets 110 - - 110 ---------- --------- --------- ---------- Net cash used in investing activities (9,248) (1,105) (293) (10,646) ---------- --------- --------- ---------- FINANCING ACTIVITIES: Capital contributions 29,456 5,500 1,000 35,956 Repayments of capital leases (3,655) (2,063) - (5,718) ---------- --------- --------- ---------- Net cash provided by financing activities 25,801 3,437 1,000 30,238 ---------- --------- --------- ---------- Net increase (decrease) in cash and cash equivalents 14 (101) 557 470 Cash and cash equivalents at beginning of period 456 557 - - ---------- --------- --------- ---------- Cash and cash equivalents at end of period $ 470 $ 456 $ 557 $ 470 ========== ========= ========= ==========
Supplemental Disclosures: Interest payments (net of capitalized interest) were approximately $1,344,000 for the year ended October 1, 2000. There were no payments of interest expense (net of capitalized interest) for the year ended September 26, 1999 or for the period February 20, 1998 (date of incorporation) to September 27, 1998. Purchases of property, plant and equipment and financing activities for the fiscal years ended October 1, 2000 and September 26, 1999 do not include $2,600,000 and $18,450,000, respectively, related to property acquired under capitalized leases. There were no purchases of property, plant and equipment under capitalized leases during the period February 20, 1998 (date of incorporation) to September 27, 1998. See notes to financial statements. UNIROYAL OPTOELECTRONICS, LLC (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS For the Fiscal Years Ended October 1, 2000 and September 26, 1999, for the Period February 20, 1998 (date of incorporation) to September 27, 1998 and for the Period February 20, 1998 (date of incorporation) to October 1, 2000 1. THE COMPANY Uniroyal Optoelectronics, LLC (the "Company") is in the development stage. The Company will ultimately engage in the production of wafers for high brightness light emitting diodes (LEDs) and package-ready dies for use in the lighting, signage and transportation industries. The Company anticipates commercial production at its newly constructed Tampa, Florida facility during the first half of Fiscal 2001. On February 20, 1998, the Company was organized as a State of Delaware limited liability corporation. The Company operates under a joint venture agreement between Optoelectronics, Inc. (wholly-owned subsidiary of Uniroyal Technology Corporation ("UTC")) (51% owner), and Emcore Corporation ("Emcore") (49% owner). The Company is subject to the risks and difficulties experienced by any new business such as obtaining adequate capital or financing, limited operating history, competition and lack of distribution channels. The Company's operations to date have been conducted primarily for the purpose of financial planning, raising capital, acquiring property, plant, equipment and other operating assets, recruiting and training personnel, developing markets and starting up production. The Company's success is dependent upon its ability to maintain adequate financing to fulfill its development activities and to achieve a level of sales adequate to support the Company's cost structure. Financial support from one or both owners will continue as necessary to meet the financial obligations of the Company. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fiscal Year End The Company's fiscal year ends on the Sunday following the last Friday in September. The dates on which the fiscal year ended for the fiscal years since inception were October 1, 2000 ("Fiscal 2000"), September 26, 1999 ("Fiscal 1999") and September 27, 1998 ("Fiscal 1998"). Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include all highly liquid investments purchased with an original maturity of three months or less. Financial Instruments The carrying value of all current assets and liabilities approximates the fair value because of their short-term nature. The fair values of the Company's capital lease obligations approximate their carrying value due to interest rates which are comparable to current market rates. Trade Accounts Receivable The Company grants credit to its customers generally in the form of short-term trade accounts receivable. The creditworthiness of customers is evaluated prior to the sale of inventory. There are no significant concentrations of credit risk to the Company. Inventories Inventories are stated at the lower of cost or market. Cost is determined using standard costs (which approximate actual costs) for raw materials and supplies. Property, Plant and Equipment Property, plant and equipment are stated at cost. The cost of property, plant and equipment held under capital leases is equal to the lower of the net present value of the minimum lease payments or the fair value of the leased assets at the inception of the lease. Depreciation is computed under the straight-line method based on the cost and estimated useful lives of the related assets including assets held under capital leases. Interest costs applicable to the construction of the Tampa, Florida facility have been capitalized to the cost of the related assets. Interest capitalized during Fiscal 2000 and Fiscal 1999 approximated $287,000 and $791,000, respectively. Start-up Costs The Company follows the American Institute of Certified Public Accountant Statement of Position 98-5, Reporting Costs of Start-Up Activities. This statement requires that the cost of start-up activities and organizational costs be expensed as incurred. Income Taxes The limited liability corporation is considered a partnership for Federal and State income tax purposes. Accordingly, the equity owners account for their pro rata share of the Company's income, deductions and credits in their separate tax returns. As a result, income tax expenses, assets and liabilities are not recognized in the financial statements of the Company. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends upon the intended use of the derivative and resulting designation. In July 1999, FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No. 133, which postponed the effective date of SFAS No. 133 for one year. SFAS No. 133 will now be effective for the Company beginning in Fiscal 2001. In June 2000, FASB issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment to SFAS No. 133. The Company currently does not anticipate there will be a material impact on the results of operations or financial position upon adoption of SFAS No. 133 as amended by SFAS No. 138. 3. INVENTORIES Inventories consist of raw materials and supplies at October 1, 2000 and September 26, 1999 at a value of $2,028,000 and $448,000, respectively. There was no inventory at September 27, 1998. 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following (in thousands):
Estimated Useful October 1, September 26, Lives 2000 1999 Buildings and leasehold improvements 3-20 years $ 5,854 $ 5,544 Machinery, equipment and office furnishings 3-15 years 24,515 5,503 Construction in progress 2,842 10,598 ----------- ----------- 33,211 21,645 Accumulated depreciation (2,463) (211) ----------- ----------- Total $ 30,748 $ 21,434 =========== ===========
1. OBLIGATIONS UNDER CAPITAL LEASES During both Fiscal 2000 and Fiscal 1999, the Company entered into non-cancelable capital lease agreements for certain leasehold improvements, machinery and equipment. Future minimum capital lease obligations during subsequent fiscal years ending in September are as follows (in thousands): Fiscal Year 2001 $ 5,141 2002 5,428 2003 5,428 2004 4,125 2005 220 ----------- Total minimum lease payments 20,342 Less imputed interest at 8.5% - 9.6% (3,213) ----------- Present value of minimum capital lease payments 17,129 Current portion 3,807 ----------- Long-term obligations under capital leases $ 13,322 =========== Interest incurred (including capitalized interest) totaled approximately $1,580,000, $791,000 and $11,000 for Fiscal 2000, Fiscal 1999 and Fiscal 1998, respectively. UTC has guaranteed all of the above capital lease obligations. The Company's property held under capitalized leases included in property, plant and equipment (Note 4) consisted of the following (in thousands): October 1, September 26, 2000 1999 Leasehold improvements $ 5,429 $ 5,426 Machinery, equipment and office furnishings 18,249 5,066 Construction in progress - 9,755 ------- ------- 23,678 20,247 Less accumulated amortization (2,117) (181) ------- ------- Total $21,561 $20,066 ======= ======= 1. MEMBERS' EQUITY The members of the Company include Uniroyal Optoelectronics, Inc. and Emcore Corporation. Initial capital contributions to the Company included $510,000 from Uniroyal Optoelectronics, Inc. and $490,000 from Emcore and were made in July 1998. In Fiscal 1999, Emcore made additional capital contributions to the Company of $5,500,000. During Fiscal 2000, Uniroyal Optoelectronics, Inc. contributed $17,828,000 in cash while Emcore contributed an additional $11,628,000 in cash. As of year end, accumulated capital contributions totaled $18,338,000, or 51%, for Uniroyal Optoelectronics, Inc. and $17,618,000, or 49%, for Emcore. Earnings and losses are allocated to the members in amounts equivalent to their ownership percentages. 2. COMMITMENTS AND CONTINGENCIES Leases The Company leases equipment and warehouse and office space under various lease agreements, certain of which are subject to escalations based upon increases in specified operating expenses or increases in the Consumer Price Index. The approximate future minimum rentals under non-cancelable operating leases during subsequent fiscal years ending in September are as follows (in thousands): Fiscal Year 2001 $ 382 2002 391 2003 401 2004 395 2005 393 Subsequent years 1,174 ----- Total $3,136 ===== Rent expense was approximately $399,000, $370,000 and $56,000 for Fiscal 2000, Fiscal 1999 and Fiscal 1998, respectively. 1. RELATED PARTY TRANSACTIONS UTC The Company is party to an administrative agreement with UTC, in which UTC will provide management, legal, accounting, tax, information systems, treasury, human resource, risk management, environmental and all other support services that may be necessary for the operations of the Company. The management fee to the Company is calculated as the greater of $25,000 per month or 3.5% of monthly net sales. Fees under this agreement approximated $300,000, $300,000 and $50,000 for Fiscal 2000, Fiscal 1999 and Fiscal 1998, respectively. The Company's employees participate in health and welfare benefit plans administered by UTC. Costs for these plans are charged to the Company based upon various methods including actual cost per employee, headcount allocations and ratios of compensation expense. Expenses included in the statements of operations were approximately $284,000, $51,000 and $5,000 for Fiscal 2000, Fiscal 1999 and Fiscal 1998, respectively. UTC administers all of the insurance programs for the Company. Costs of these programs are allocated to the Company based on various factors including percentage of assets, employee base and sales and historical loss experience. Included in the statements of operations for Fiscal 2000 and Fiscal 1999 were approximately $96,000 and $31,000, respectively, of such costs. No insurance charges were allocated to the Company in Fiscal 1998. UTC provides a savings plan under Section 401(k) of the Internal Revenue Code. The savings plan allows all eligible employees to defer up to 15% of their income on a pre-tax basis through contributions to the savings plan. For every dollar an employee contributes, UTC may contribute an amount equal to 25% of each participant's before-tax obligation up to 6% of the participant's compensation. Such employee compensation may be made in cash or in UTC common stock. The expenses allocated to the Company by UTC pertaining to this savings plan were approximately $635,000, $11,000 and $1,000 for Fiscal 2000, Fiscal 1999 and Fiscal 1998, respectively. Included in due from affiliate as of October 1, 2000 is a capital contribution of approximately $1,849,000 made in cash by UTC on October 3, 2000. Amount is partially offset by charges from UTC relating to benefit plans, property insurance programs and UTC administration fees. Included in due to affiliate as of September 26, 1999, are amounts due UTC for items paid on behalf of the Company of approximately $963,000, amounts due UTC for the UTC administrative agreement of approximately $300,000, and charges from UTC relating to the benefit plans, property insurance programs and savings plans totaling approximately $82,000. Emcore Under a supply agreement dated July 31, 1998, Emcore will provide product for the Company as required until the Company's facility in Tampa, Florida is ready for commercial production. During Fiscal 2000, approximately $1,600,000 of the Company's net sales were for products supplied by Emcore at a cost of approximately $1,600,000. During Fiscal 1999, approximately $479,000 of the Company's net sales were for products supplied by Emcore at an approximate cost of $428,000. There were no sales in Fiscal 1998. During Fiscal 2000, the Company purchased approximately $1,444,000 of inventory from Emcore for use in testing and completing the Company's manufacturing processes. Corresponding purchases totaled approximately $125,000 for Fiscal 1999. Also during Fiscal 2000, the Company spent approximately $4,612,000 for MOCVD epitaxy reactors and approximately $289,000 for machine parts and supplies purchased from Emcore. There were no such expenditures during Fiscal 1999 or Fiscal 1998. During Fiscal 2000, Emcore provided technical and administrative services to the Company at a cost of approximately $207,000. Similar services provided in Fiscal 1999 totaled approximately $311,000. There were no such services provided by Emcore in Fiscal 1998. At October 1, 2000, approximately $110,000 of net payables to Emcore is included in accounts payable in connection with Emcore inventory provided to the Company. This corresponding amount at September 26, 1999 was approximately $110,000. Schedule II EMCORE CORPORATION Valuation and Qualifying Accounts and Reserves For the years ended September 30, 1998, 1999 and 2000
Additions Balance at Charged to Balance at Beginning of Costs and Write-offs End of Period Expenses (Deductions) Period Allowance for Doubtful Accounts ---------------------------------------------------- For the year ended September 30, 1998 $697,000 $1,118,000 $(1,204,000) $611,000 For the year ended September 30, 1999 611,000 390,000 (438,000) 563,000 For the year ended September 30, 2000 563,000 780,000 (278,000) 1,065,000