UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2001
/ / 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 incorporation or organization) (I.R.S. Employer Identification No.)
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 10K 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 6, 2001 was approximately $329,550,431 (based on the
closing sale price of $16.51 per share).
The number of shares outstanding of the registrant's no par value common stock
as of December 6, 2001 was 36,475,803.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 2002 Annual
Meeting of Shareholders (to be filed with the Securities and Exchange Commission
on or before January 28, 2002) are incorporated by reference in Part III of this
Form 10-K.
EMCORE Corporation
FORM 10K
For the fiscal year ended September 30, 2001
INDEX
Part I page
Item 1. Business.........................................................................3
Item 2. Properties......................................................................27
Item 3. Legal Proceedings...............................................................28
Item 4. Submission of Matters to a Vote of Security Holders.............................28
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...........28
Item 6. Selected Financial Data.........................................................29
Item 7. Management's Discussion and Analysis of Financial Condition and Results of 31
Operations......................................................................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......................40
Item 8. Financial Statements and Supplementary Data.....................................41
Consolidated Statements of Operations for the years ended 41
September 30, 2001, 2000 and 1999..............................................
Consolidated Balance Sheets as of September 30, 2001 and 2000..................42
Consolidated Statements of Shareholders' Equity for the years 43
ended September 30, 2001, 2000 and 1999.........................................
Consolidated Statements of Cash Flows for the years ended September 30, 44
2001, 2000 and 1999.............................................................
Notes to Consolidated Financial Statements......................................46
Independent Auditors' Report....................................................63
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial 65
Disclosures.....................................................................
Part III
Item 10. Directors and Executive Officers of the Registrant..............................65
Item 11. Executive Compensation..........................................................65
Item 12. Security Ownership of Certain Beneficial Owners and Management..................65
Item 13. Certain Relationships and Related Transactions..................................65
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8K.................65
SIGNATURES......................................................................68
2
Forward-Looking Statements
This Annual Report on Form 10-K includes forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. These forward-looking statements are based largely on our current
expectations and projections about future events and financial trends affecting
the financial condition of our business. These forward-looking statements are
subject to a number of risks, uncertainties and assumptions about us, including,
among other things:
o general economic and business conditions, both globally and in
our markets;
o our expectations and estimates concerning our future financial
performance, financing plans and the effect of competition;
o anticipated trends in the compound semiconductor capital
equipment, wafers and devices business;
o existing and future regulations affecting the compound
semiconductor capital equipment, wafers and devices business; and
o other risk factors set forth in the "Risk Factors" section of
this Form 10-K
In addition, the words "believe", "may", "will", "estimate",
"continue", "anticipate", "intend", "expect" and similar expressions, as they
relate to our business, our management or us, are intended to identify
forward-looking statements. Certain factors referenced under "Risk Factors" in
this Annual Report and other public documents incorporated by reference could
cause actual results to differ materially from those in the forward-looking
statements. We assume no obligation to update the matters discussed in this
Annual Report.
PART I
Item 1. Business
Company Overview
EMCORE Corporation, headquartered in Somerset, New Jersey, develops
and manufactures compound semiconductor products to advance global
communications and solid state lighting applications. Established in 1984,
EMCORE offers a diverse portfolio of compound semiconductor products, including:
optical interconnects and devices for data and telecommunications applications
(such as Gigabit Ethernet, Fibre Channel, Infiniband(SM), OC-192, OC-768 and
OC-48), electronic materials for wireless and data and telecommunications, solar
cells for satellite communications and metal organic chemical vapor deposition
(MOCVD) tools for the growth of optoelectronic materials, including high
brightness light emitting diodes (HB LEDs), lasers, RF and electronic materials,
solar cells and magnetoresistive (MR) sensors. 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.
Some of our customers include Agilent Technologies Ltd., AMP, Inc.,
Anadigics Inc., Blaze Networking Products, Boeing-Spectrolab, Corning, Inc.,
General Motors Corp., Hewlett Packard Co., Honeywell Int'l Inc., Infineon
Technologies AG, Loral Space & Communications Ltd., Lucent Technologies, Inc.,
LumiLeds Lighting (a joint venture between Philips Lighting and Agilent
Technologies), 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.
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Industry Overview
Recent advances in information technologies have created a growing
need for efficient, high-performance electronic systems that operate at very
high frequencies, have increased storage capacity and computational and display
capabilities and can be produced cost-effectively in commercial volumes. In the
past, electronic systems manufacturers have relied on advances in silicon
semiconductor technology to meet many of these demands. However, the newest
generation of high-performance electronic and optoelectronic applications
requires 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 through them 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 vertical cavity surface emitting lasers
(VCSELs), photodetectors, RF and electronic 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 generally 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 replacement of electrical backplanes with laser-based optical
backplanes in data and telecommunication systems;
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 the anticipated conversion to HB LEDs from incandescent, halogen
and compact fluorescent lighting.
4
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 and Increased network capacity
and optical links (including photodetector Increased data transmission
VSR OC-768, OC-192, components and speeds
OC-48, Gigabit Ethernet, arrays Increased bandwidth
asynchronous transfer mode HB LEDs Reduced power consumption
or ATM, and FibreChannel Lasers
networks) RF and electronic
materials
Array transceivers
Serial transceivers
Wireless Cellular telephones HB LEDs Improved display visibility
communication Pagers RF and electronic Improved signal to noise
PCS handsets materials performance
Direct broadcast systems RF and electronic Lower power consumption
PDAs devices Increased network capacity
Reduced network congestion
Extended battery life
Telecommunications High capacity fiber optic trunk VCSEL components Increased data transmission
lines and arrays speeds
Very Short Reach links Lasers Increased bandwidth
RF materials
Photodiode
components and
arrays
Array transceivers
VSR transponders
Lighting Flat panel displays HB LEDs Lower power consumption
Solid state lighting Miniature lamps Longer life
Outdoor signage and display
Digital readout signals
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
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 Serial transceivers
Computer buses (Infiniband) Array transceivers
Consumer electronics DVDs HB LEDs Improved display visibility
Radios VCSEL components High-speed data transmission
Telephones and arrays Low power requirements
Calculators Integrated circuits
CD-ROMs Lasers
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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 the 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 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 inhouse 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.
6
EMCORE's compound semiconductor products and services include:
o Development of compound semiconductor materials and processes;
o Design and development of devices;
o Fiber optic components and modules, including transceivers and
transponders;
o VCSEL devices and PIN photodiodes, including bare die, packaged
components and optical subassemblies;
o Electronic and RF materials, including pHEMTs, HBTs and FETs;
and,
o MOCVD production tools for the manufacture of epitaxial
materials, including GaAs, AlGaAs, InP, InGaP, InGaAlP, InGaAsP,
GaN, InGaN, AlGaN, and SiC
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 EMCORE's Core Materials and Manufacturing Expertise Across
Multiple Product 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 has introduced VCSELs and photodetectors for
communications products and through its joint venture with General Electric
Lighting, 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 siliconbased 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.
Strategic Acquisitions and Partnerships with Industry Leading
Companies. EMCORE seeks to identify and develop long-term relationships with
leading companies in each of the industries it serves. EMCORE develops these
relationships in a number of ways that include long-term, high-volume supply
agreements, joint ventures, acquisitions 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
intends to actively seek similar strategic relationships with other key
customers and industry participants in order to further expand its technological
and production base.
Continue Investment in Research and Development 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,
7
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
MOCVD Tools
EMCORE is a leading supplier of MOCVD compound semiconductor
production systems, with more than 400 systems shipped since inception in
October 1984. EMCORE believes that its TurboDisc production systems offer
significant ownership advantages over competing systems and that the high
throughput capabilities of its TurboDisc MOCVD tools 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 tools also achieve a high degree of
reliability with an average uptime, based on customer data, of approximately
90%.
EMCORE believes its TurboDisc MOCVD tools 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, maintenance and spare parts 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
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.
During fiscal year 2001, EMCORE announced several new application
specific TurboDisc reactors:
o The Enterprise 450 TurboDisc reactor with cassette to cassette
wafer handling and advanced temperature control is a high
efficiency reactor designed primarily for electronic materials
applications (configurations are also available for LEDs, solar
cells and optoelectronic applications);
o The Enterprise 300 GaNzilla is designed for the high-volume
commercial manufacture of high brightness blue and green LEDs and
GaN electronic materials;
o The Enterprise 300 LDM is designed for the high-volume commercial
manufacture of laser diodes for telecommunication and
datacommunication applications; and
o The Discovery 180 SpectraGaN is a second generation SpectraBlue
tool with higher throughput and greater efficiency used for the
commercial manufacture of high brightness blue and green LEDs and
GaN based electronics.
8
EMCORE's TurboDisc product line now consists of the following MOCVD
tools:
Tool Applications
Discovery Research and Development (RD) Customer determined
Discovery 180 LDM (Laser Diode Machine) VCSELs, laser diodes, AlGaAs and InGaAs detectors
Discovery 180 SpectraBlue / Discovery 180 SpectraGaN Blue and Green LEDs, blue lasers, GaN electronic devices
Enterprise 300 LDM Laser diodes
Enterprise 300 GaNzilla Blue and green LEDs, blue lasers, GaN electronic devices
Enterprise 400 Gold High-Brightness red, orange and yellow LEDs
Enterprise 400 EM PHEMTs, HBTs, FETs, E-mode devices
Enterprise 400 SC Solar cells
Enterprise 450 EM Electronic materials such as PHEMTs, HBTs, FETs,
E-mode devices,
Enterprise 450 LED High-Brightness red, orange and yellow LEDs
Enterprise 450 SC Solar cells
EMCORE's next generation of TurboDisc products is being designed to
provide a number of innovations including:
o new reactor design to improve source efficiency;
o digital control system to reduce electronic noise;
o modular component design to simplify component and design upgrades;
o improved temperature control with the ability to control the
deposition temperature to within 1 to 2 degrees Celsius; and
o greater up time and lower maintenance intervals.
During the first quarter of fiscal 2002, EMCORE signed an agreement
with LumiLeds Lighting, a joint venture between Agilent Technologies and Philips
Lighting, for the supply of MOCVD tools to be used in the production of high
brightness gallium nitride (GaN) LEDs.
Optical Devices
EMCORE manufactures optical devices employing VCSEL-based technology.
Vertical cavity surface-emitting lasers (VCSELs) are microscopic semiconductor
lasers that emit light from the top surface of the chip. They combine the
ability of batch process and on-wafer tests like LEDs and the superior
electro-optical performance of traditional edge-emitting lasers. In addition,
the cylindrical laser beam profile allows an easy and efficient coupling of the
light into a multi-mode fiber. The manufacturability for both wafer processing
and packaging enables a cost-effective high-bandwidth fiberoptic communication
solution. Therefore, VCSEL-based optical devices 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.
There are two major fabrication processes for VCSELs, either by
ion-implantation or selective oxidation. Compared to implant VCSELs, the oxide
VCSELs provide many superior characteristics, which include lower turn-on
current, higher efficiency, higher speed, better performance linearity and
stability, and better reliability. Currently, the implant VCSELs are still
widely used for applications with transmission speeds up to 1 Gbps. However, the
oxide VCSEL is the technology of choice for applications requiring data rates
higher than 2 Gbps, which is the trend in the datacom industry. EMCORE
established a consistent manufacturing procedure for the oxide VCSEL fabrication
process despite the inherent challenges of this manufacturing technique compared
to the implant process. EMCORE believes that it is the only high-volume
manufacturer for oxide VCSELs.
9
EMCORE's strategy is to capitalize on its oxide VCSEL manufacturing
platform and expertise, by providing the industry with 1 Gbps, 2.5 Gbps, 10 Gbps
(OC-192), and 40 Gbps (OC-768) solutions through single-channel serial,
multi-channel parallel or wavelength-divisional multiplexing approaches.
Leading electronic systems manufacturers are integrating VCSELs into a
broad array of end-market applications including Internet access, digital
cross-connect telecommunications switches, Infiniband optical bus, and fiber
optic switching and routing, such as Gigabit Ethernet, and storage area
networks.
EMCORE's Optical Device division, located in Albuquerque, New Mexico
is primarily dedicated to the research and development of enabling VCSEL
technologies. EMCORE's optical device product line has achieved several
significant milestones since it commenced commercial production of VCSEL-based
products:
o February 1998 - EMCORE announced its first commercial high speed VCSEL
laser operating at 1.25 Gbps;
o December 1998 - EMCORE introduced its second VCSEL product, a VCSEL
array;
o March 2000 - EMCORE debuted the industry's first commercial 2.5Gbps,
850nm oxide VCSEL employing its patented OxideGuide(TM) technology;
o 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 manufactures VCSEL arrays for use in parallel
optical transceivers. EMCORE began shipping commercial product in
December 2000;
o August 2000 - EMCORE announced the availability of its first 850nm 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;
o March 2001 - EMCORE debuted the industry's first 850 nm 10 Gbps VCSEL.
These VCSELs are designed to work in existing optical components and
are optimized for high-speed data transmission over multimode fiber.
Designed for optical interconnect applications under 300 meters,
including Local Area Networks ("LANs") such as Gigabit Ethernet and
Fibre Channel, these VCSEL products are available as bare die or can
be built into optical subassemblies; and
o March 2001 - EMCORE also debuted its first SC and LC Transmitter
Optical Subassemblies ("TOSA") designed for 850nm applications. These
TOSAs provide the market with a device that incorporates speed and
reliability in a low cost package. The package is cost effective and
ideal for integration into existing and new transceiver module
designs. Both products use EMCORE's 2.5 Gbps oxide VCSEL, which meets
the performance requirements of short reach and very short reach
multimode fiber optic applications, including LANs, SANs, backplane,
rack-to-rack and intraswitch. Both TOSA packages perform at the 1Gbps,
1.25Gbps, 2.1Gbps or 2.5Gbps data rates, which are suitable for
Gigabit Ethernet, Fibre Channel and OC-48 applications.
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Photodetectors
Photodetectors are discrete semiconductor devices that detect light in
order to convert an optical signal into an electrical signal. Similar to VCSELs,
photodetectors combine the ability of batch processing and on-wafer testing with
superior electro-optical performance. The large aperture size readily permits
efficient coupling of the light from a multi-mode fiber. Furthermore, EMCORE has
demonstrated devices that are hermetically sealed, thus ensuring devices with
high reliability regardless of the nature of the device packaging.
EMCORE has successfully developed 1x12 1.25Gbps and 1x12 2.7Gbps 850nm
photodetector arrays. These arrays perform light to logic conversions for data
transmissions over multi-mode fiber ribbon cable. EMCORE began shipping these
photodetector arrays July 2000. In addition, EMCORE developed a 10 Gbps
photodetector and 10Gbps 1x4 array, and commenced commercial shipments in
October 2001.
In addition, EMCORE has developed a long-wavelength 1310nm
photodetector product. This product is geared largely toward the high-speed
telecom medium range market/application using single-mode fiber. EMCORE began
shipping 1x12 2.5Gbps long-wavelength photodetector arrays in November 2001.
VCSEL-Based Array Transceivers and Transponders
VCSEL-based array transceivers are penetrating telecommunication
markets as solutions for low-cost, very short reach (VSR) OC-192 (10 Gbps) SONET
optical links. The Optical Internetworking Forum (of which EMCORE is a member)
approved the specifications for VSR OC-192 optical links based on VCSEL arrays
in December 2000. Array transceivers are the preferred solutions of original
equipment manufacturers for high-speed optical backplanes, which are replacing
traditional electrical backplanes as bandwidth requirements have exceeded the
limits practical for copper connections.
EMCORE has successfully developed and made commercially available
high-speed array transceivers and transponders for the data and
telecommunications markets. EMCORE's transceivers and transponders offer OEM
equipment manufacturers several advantages, including:
o Fast transmission speeds up to 32Gbps aggregate throughput.
o Products are designed for high volume manufacturing.
o Utilize EMCORE's leading-edge VCSEL array and PIN photodiode
array components.
o Deliver significant cost-performance and application flexibility
advantages over traditional serial solutions.
Since EMCORE first introduced its new family of fiber optic products
to the market, the Company has made several accomplishments and provided the
marketplace with high speed solutions to alleviate data congestion. Some of
these achievements include:
o August 2001 - EMCORE announced the commercial production of its
new high speed, cost-effective 12 x 1.25Gbps parallel optical
array transmitter/receiver (transceiver) modules to significantly
improve data throughput capability. These modules perform logic
to light and light to logic conversions for data transmissions
over multi-mode fiber ribbon cable.
o October 2001 - EMCORE announced the commercial availability of a
new 300 pin MSA (multi source agreement) compliant transponder
module to provide very short reach interconnections over parallel
fiber links at SONET OC-192 data rates. The VSR transponder is
the first commercially available 300-pin transponder compliant
with the Optical Internetworking Forum's VSR-1 Implementation
Agreement (OIF-VSR4-0.10). This transponder is the initial
product offering from a family of EMCORE transponder products and
will soon be followed by a small form factor version
o November 2001 - EMCORE began shipping its next generation 12 x
2.7Gbps parallel optical array transceiver modules.
11
RF and Electronic 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 including e-mode devices that are used 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.
EMCORE's manufacturing facility in New Jersey has seven Enterprise
MOCVD production tools dedicated to electronic materials growth. In addition,
EMCORE is in the process of qualifying two new Enterprise 450 TurboDisc reactors
equipped with cassette to cassette wafer handling capability, leaving space for
an additional nine Enterprise Electronic Materials Production tools. EMCORE also
equipped its wafer fabrication area with state of the art cassette to cassette
characterization equipment.
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 multi-million dollar order from
Anadigics to supply 6-inch GaAs HBT and pHEMT wafers for their fiber optic and
wireless communications devices. Anadigics is using EMCORE's materials for power
amplifiers for GSM, TDMA and CDMA multiband wireless handsets and for high-speed
digital components for OC-192 data communication applications.
During late 2000 and throughout 2001, EMCORE devoted its development
efforts to making advances in compound semiconductor materials containing
nitrogen, including InGaAsN and InP HBT and GaN FET/pHEMT. EMCORE believes that
these next generation materials and device technologies into which they will be
employed will replace existing technologies. EMCORE has filed patents which it
believes are critical to InGaAsN HBT and GaN FET/pHEMT applications, which
include wireless handsets and base stations, as well as millimeter wave ground
and satellite communication systems. There can be no assurance that these
patents will be issued or, if obtained, that they will afford EMCORE
commercially significant protection of its technologies.
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
September 2000.
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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). Arianspace launched
these micro-satellites in November 2000. EMCORE's solar cells
have also 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 qualify
its high efficiency solar cells for spacecraft with high
electrical power requirements;
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; and
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 $32.6 million and services
this agreement at our facility in Albuquerque, New Mexico.
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 May 1999, EMCORE and General Electric Lighting
formed GELcore LLC ("GELcore"), a joint venture to develop and market HB LED
lighting products. The two parties 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 current product line includes channel letters, flashlights and other
signage and display products incorporating HB LEDs. 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. EMCORE believes that Ecolux is currently receiving the majority of
contracts for which it submits bids for the replacement of traditional traffic
lights with HB LEDs.
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, 2001, EMCORE has delivered approximately 14.8 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.
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Customers
EMCORE's rapidly expanding customer base includes many of the largest
semiconductor, telecommunications, consumer goods and computer manufacturing
companies in the world. Some of our customers include Agilent Technologies Ltd.,
AMP, Inc., Anadigics Inc., Blaze Networking Products, Boeing-Spectrolab,
Corning, Inc., General Motors Corp., Hewlett Packard Co., Honeywell Int'l Inc.,
Infineon Technologies AG, Loral Space & Communications Ltd., Lucent
Technologies, Inc., LumiLeds Lighting (a joint venture between Philips Lighting
and Agilent Technologies), 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.
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' enduse 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, photodetectors, RF and
electronic 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, acquisitions and other certain
relationships. A summary of these relationships is found below:
PRODUCTS AND STRATEGIC RELATIONSHIPS
Product Line Company Nature of Relationship Application
Vertical cavity Agilent Long-term supply agreement Data communication systems
surface-emitting Infineon Customer (routers and switches)
lasers (VCSELs) Molex Customer Telecommunication systems
(cross connect switches,
Photodetectors at Very Short Reach OC-192
850 nm and links)
1310 nm Optical links (including
Gigabit Ethernet, ATM and
FibreChannel networks)
Radio frequency (RF) Motorola Long-term supply agreements Digital wireless and cellular
materials Anadigics applications
Solar cells Space Systems / Loral Long-term supply agreement Solar panels in
communications satellite
Union Miniere, Inc. Long-term germanium sourcing powered systems
agreement
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
Magneto resistive (MR) General Motors Long-term supply agreement Cam and crank shaft sensors
sensors Corporation
Optek
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EMCORE has a comprehensive total quality management program with
special emphasis on total customer satisfaction. EMCORE seeks to encourage
active customer involvement with the design and operation of its production
systems. To accomplish this, EMCORE conducts user group meetings among its
customers in Asia, Europe and North America. At annual meetings, EMCORE's
customers provide valuable feedback on key operations, process oriented
services, problems and recommendations to improve EMCORE products. This direct
customer feedback has enabled EMCORE to constantly update and improve the design
of its systems and processes. Changes that affect the reliability and
capabilities of EMCORE's systems are embodied in new designs to enable current
and future customers to utilize systems which EMCORE believes are high quality
and cost-efficient. As of September 30, 2001, EMCORE employed 47 field service
engineers who install systems and provide on-site support.
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 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. 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. EMCORE will also 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 customers and adheres to a
warranty policy of 1 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. Since fiscal 1998, EMCORE has operated a warehouse depot in Taiwan
to provide improved service to its Asian customers.
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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 34
TurboDisc systems and five device fabrication facilities for both research and
production that are capable of processing virtually all compound semiconductor
materials. Nine of those TurboDisc systems and two device fabrication areas are
dedicated fully to research and development efforts and are used by a staff of
over 100 scientists, engineers and technicians. Forty-one of EMCORE's staff
members have a Ph.D. degree. 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. During
fiscal years 2001, 2000 and 1999, EMCORE invested $53.4 million, $32.7 million
and $20.7 million into research and development.
EMCORE believes that several research and development projects have
the potential to greatly improve its competitive position and to drive its
revenue growth in the next few years. In the field of VCSEL components, EMCORE
has led the industry in the development of 10 Gbps VCSELs and has successfully
tested 10 Gbps operation of prototype parts. These VCSELs can be produced as
singlets or as arrays for much higher bandwidth transceivers. EMCORE is the
first company to offer these devices and commenced shipments of the 10 Gbps
VCSEL to fiber optic customers in December 2000 and received additional purchase
orders for shipments beginning at the end of March 2001. Along with its VCSEL
efforts, EMCORE developed 850 nm and 1310 nm photodetector arrays, which operate
at speeds of up to 10 Gbps and are designed to work with these VCSEL devices.
EMCORE has invested aggressively in the development of array transceiver
products that capitalize on its VCSEL and photodetector components. By
manufacturing these components in-house, EMCORE is able to reduce the overall
cost of the transceiver module. With the first project of a 12 x 1.25 Gbps array
transceiver successfully demonstrated, EMCORE plans to continue with this
roadmap to introduce a family of state-of-the-art products for Very Short Reach
fiber optics modules. In the field of solar cells, development of advanced
device structures and growth techniques are enabling an increase in solar cell
efficiency from EMCORE's current industry leading 26% solar cell to a 28%
product. For electronic materials, EMCORE has continued to develop advanced HBT
and pHEMT structures using next generation materials, such as InGaAsN and InP.
EMCORE expects to introduce its next generation system design across its
TurboDisc product line this year. These new systems are intended to reduce the
overall cost of ownership of the TurboDisc systems by lowering manufacturing
costs for its customers.
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 EMCORE 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 depends significantly on its ability to obtain intellectual
property protection for its research and development efforts. EMCORE's strategy
is to rely on both patents and trade secrets to protect its intellectual
property. To date, EMCORE has been issued 14 U.S. patents and two foreign
patents, and others are either pending (50 patent applications filed) or under
in-house review (19 disclosures and draft patent applications). The U.S. patents
will expire between 2005 and 2018. These patents (granted and filed) claim
material aspects of current or planned commercial versions of EMCORE's systems,
wafers or devices. For example:
o U.S. Patent No. 6,197,121 granted on March 6, 2001 entitled
"Chemical Vapor Deposition Apparatus" covers material aspects of
our current reactor technology, and
o The 12 x 1.25 Gbps array transceiver project for Very Short Reach
fiber optics modules have generated eight patent applications to
date.
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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. 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 partitioning the non-essential flow of information between its
different divisions and executing non-disclosure agreements with its employees,
joint venture partners, customers and suppliers.
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.
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 arsine. 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 in-house professionals to address compliance 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.
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. As of September 30, 2001, EMCORE had 458
employees involved in manufacturing. 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.
Currently, all of EMCORE's divisions have acquired and maintained
certification status for their Quality Management Systems. At the New Jersey
facility, EMCORE's TurboDisc Tools division is registered to ISO 9001 and
EMCORE's Electronic Devices and Electronic Materials divisions are registered to
ISO 9001 + QS 9000. At the New Mexico facility, EMCORE's Photovoltaics, Fiber
Optical Component and Optical Device divisions are registered to ISO 9001.
17
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 insure 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, primarily Aixtron
GmbH and Nippon-Sanso K.K. Ltd. The primary competitors for EMCORE's wafer
foundry include Hitachi-Cable, Kopin Corporation and IQE. EMCORE's principal
competitors for sales of VCSEL-related products include Honeywell, Inc., AXT and
Avalon Photonics for serial optics and Agilent, Infineon, Zarlink Semiconductor
and W.L. Gore for parallel optics. The principal competitors for MR sensors are
Honeywell, Inc., Matshushita Electric Industrial Co. Ltd., Siemens AG
Osterreich, Electrotechnik and Asahi Kasei Electronic Co., Ltd.. In
photovoltaics devices, EMCORE faces competition from Boeing and Tecstar. The
principal competitors for HB LEDs and EMCORE's joint venture with General
Electric Lighting include LumiLeds Lighting, a joint venture between Agilent
Technologies and Philips Lighting, 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, 2001, EMCORE had 867 employees, including 458
employees in manufacturing operations, 219 employees in research and
development, 170 employees in sales and general administration and 20 temporary
employees. This represented an increase of 242 employees or 39% from September
30, 2000. In order to meet the challenges of the current economic climate,
EMCORE announced a workforce reduction in October 2001 that decreased its
overall headcount by 105 employees or approximately 12%. None of EMCORE's
employees are covered by a collective bargaining agreement. EMCORE considers its
relationship with its employees to be good.
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Risk Factors
We May Continue To Incur Operating Losses.
We started operations in 1984 and as of September 30, 2001, we had an
accumulated deficit of $121.2 million. We incurred net losses of $12.3 million
in fiscal 2001, $25.5 million in fiscal 2000 and $22.7 million in fiscal 1999.
In addition, as a result of the downturn in the economy, we expect a decline in
revenues in fiscal year 2002. Many of our expenses, particularly those relating
to capital equipment and manufacturing overhead, are fixed. Accordingly, reduced
revenue causes our fixed production costs to be allocated across reduced
production volumes, which adversely affects our gross margin and profitability.
Therefore, we expect to continue to incur operating losses until revenues
increase. We cannot currently predict whether or when demand will strengthen
across our product lines or how quickly our customers will consume their
inventories of our products. In addition, several of our customers have reduced
the lead times they give us when ordering product from us. While this trend has
enabled us to reduce inventory, it also restricts our ability to forecast
revenues. 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.
We Must Continually Improve Existing Products, Design And Sell New
Products And Manage The Costs Of Research And Development In 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. To remain competitive
we must continually introduce new and improved products as well as production
tools with higher capacity and better production yields.
The life cycles of some of our products depend heavily upon the life
cycles of the end products into which our products are designed. Products with
short life cycles require us to manage production and inventory levels closely.
We cannot assure investors that obsolete or excess inventories, which may result
from unanticipated changes in the estimated total demand for our products and/or
the estimated life cycles of the end products into which our products are
designed, will not affect us beyond the inventory charges that we have already
taken during fiscal year 2001.
We have recently introduced a number of new products, and, in
connection with a joint venture 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.
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 or do not
achieve sufficient market penetration;
o we incur budget overruns or delays in our research and
development efforts; or
o our new products experience reliability or quality problems.
We May Engage In Acquisitions That May Harm Our Operating Results, Dilute Our
Shareholders And Cause Us To Incur Debt Or Assume Contingent Liabilities.
We may pursue acquisitions to acquire new technologies, products or
service offerings. Future acquisitions by us may involve the following:
o use of significant amounts of cash;
o potentially dilutive issuances of equity securities; and
o incurrence of debt or amortization expenses related to goodwill
and other intangible assets.
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In addition, acquisitions involve numerous risks, including:
o difficulties in the integration of the operations, technologies,
products and personnel of the acquired company;
o diversion of management's attention from other business concerns;
o risks of entering markets in which we have no or limited prior
experience; and
o potential loss of key employees of the acquired
company.
From time to time, we have engaged in discussions with acquisition
candidates regarding potential acquisitions of product lines, technologies and
businesses. If such an acquisition does occur, we cannot be certain that our
business, operating results and financial condition will not be materially and
adversely affected.
Our Rapid Growth Places A Strain On Our Resources.
We have experienced 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 a joint venture
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 and accounting software at our New
Jersey facility. 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 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.
Our Industry Is Rapidly Changing
The compound semiconductor industry is changing rapidly due to, among
other things, continuous technological improvements in products and evolving
industry standards. This industry is marked by the continuous introduction of
new products and increased capacity for services similar to those provided by
us. Future technological advances in the compound semiconductor industry may
result in the availability of new products or increase the efficiency of
existing products. If a technology becomes available that is more cost effective
or creates a superior product, we may be unable to access such technology or its
use may involve substantial capital expenditures, which we may be unable to
finance. There can be no assurance that existing, proposed or as yet undeveloped
technologies will not render our technology less profitable or that we will have
available the financial and other resources necessary to compete effectively
against companies possessing such technologies. There can be no assurance that
we will be able to adapt to technological changes or offer competitive products
on a timely or cost effective basis.
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;
o price volatility in the compound semiconductor industry;
o changes in product mix; and
o timing of customer orders.
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.
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Our Joint Venture Partner, Who Has Control Of The Venture, 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 venture with General
Electric Lighting. A board of managers governs this joint venture 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 this joint venture
without the agreement of our joint venture partner. If we are unable to agree on
important issues with the 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 venture to develop and enhance their
products. In addition, our joint venture 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 venture
is 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 how
each of us can make use of the joint venture's technology. One consequence of
these limitations is that in certain circumstances, such as a material default
by us or certain sales of our interest in the joint venture, we would not be
permitted to use the joint venture's technology to compete against General
Electric Lighting in the solid state lighting market.
We Have A Significant Amount Of Investments In Marketable Securities.
EMCORE 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 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. In August 2001, EMCORE sold its minority ownership position in its
joint venture with Uniroyal Technology Corporation (UTCI) in exchange for
approximately 2.0 million shares of UTCI common stock. EMCORE's cost basis in
the UTCI stock is $7.10 per share or approximately $14.0 million. At September
30, 2001, the fair market value of UTCI stock was $3.14 per share. Therefore,
EMCORE had an unrealized loss of $7.8 million recorded as a component of
comprehensive loss. The investment of UTCI common stock is subject to market
risk of equity price changes. While EMCORE cannot predict or manage the future
price for such stock, management continues to evaluate its investment position
on an ongoing basis, which may result in the write down of the investment to an
estimated realizable value and our results of operations could be materially and
adversely affected.
21
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 47.7% of our revenues in fiscal 2001, 38.6% of our revenues in
fiscal 2000 and 52.5% of our revenues in fiscal 1999. 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 Operating Results Could Be Harmed If We Lose Access To Sole Or Limited
Sources Of Materials Or Services.
We currently obtain some components and services for our products from
limited or single sources. We purchase these components and services on a
purchase order basis, do not carry significant inventories of these components
and do not have any long-term supply contracts with these vendors. Because we
often do not account for a significant part of our vendors' business, we may not
have access to sufficient capacity from these vendors in periods of high demand.
If we were to change any of our limited or sole source vendors, we would be
required to re-qualify each new vendor. Re-qualification could prevent or delay
product shipments that could negatively affect our results of operations. In
addition, our reliance on these vendors may negatively affect our production if
the components vary in quality or quantity. If we are unable to obtain timely
deliveries of sufficient components of acceptable quality or if the prices of
components for which we do not have alternative sources increase, our business,
financial condition and results of operations could be materially and adversely
affected.
22
Our Products Are Difficult To Manufacture And Our Production Could Be Disrupted
If We Are Unable To Avoid Manufacturing Difficulties
We manufacture all of our wafers and devices in our manufacturing
facilities. 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. We have
experienced difficulties in achieving planned yields in the past, particularly
in pre-production and upon initial commencement of full production volumes,
which have adversely affected our gross margins. 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. Therefore, it is
critical for us to improve the number of shippable product per wafer and
increase the production volume of wafers in order to maintain and improve our
results of operations. Additionally, because we manufacture all of our products
at our facilities in Somerset, New Jersey and Albuquerque, New Mexico, 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 between two to nine months, or longer, 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.
Our historical and future budgets for operating expenses, capital
expenditures, operating leases and service contracts are based upon our
assumptions as to the anticipated market acceptance of our products. Because of
the lengthy lead time required for our product development and the changes in
technology that typically occur during such period, it is difficult to estimate
customer demand for a product accurately. If our products do not achieve
expected customer demand, our business, financial condition and results of
operation will 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. 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.
23
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. 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, our joint venture partner, 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.
This is no assurance that any patents will afford us commercially
significant protection of our technologies or that we will have adequate
resources to enforce our patents. We are actively pursuing patents on some of
our recent inventions. In addition, the laws of certain other countries may not
protect our intellectual property to the same extent as U.S. laws.
Our Failure To Obtain Or Maintain The Right To Use Certain Intellectual Property
May Adversely Affect Our Financial Results.
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 litigation
relating to our intellectual property, there can be no assurance that:
o infringement claims (or claims for indemnification resulting from
infringement claims) will not be asserted against us or that such
claims will not be successful;
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.
Interruptions In Our Business And A Significant Loss Of Sales To Asia May Result
If Our Primary Asian Distributor Fails To Effectively 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, Jr., 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.
24
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, 2000, our stock price has
been as high as $55.38 per share and as low as $7.67 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.
25
The Markets In Which We Compete Are Highly Competitive. An Increase In
Competition Would Limit Our Ability To Maintain And Increase Our Market Share.
We face substantial competition from a number of companies, many of
which have greater financial, marketing, manufacturing and technical resources.
Larger competitors could spend more on research and development, which could
give those competitors an advantage in meeting customer demand. We expect that
existing and new competitors will improve the design of their existing products
and will introduce new products with enhanced performance characteristics. The
introduction of new products or more efficient production of existing products
by our competitors could diminish our market share and gross margins.
25
Item 2. Properties
In June 2001, EMCORE completed its third phase of expansion at its
Somerset, NJ manufacturing facility. EMCORE purchased its manufacturing building
and leased an additional 47,000 square foot building located nearby. With the
additional space, EMCORE's capital equipment division, which manufactures market
leading MOCVD tools, has the capacity to triple the amount of production tools
manufactured per year. The expansion of the Somerset, NJ manufacturing facility
also significantly increased production capacity for EMCORE's existing
photonics, RF materials and devices; and enables EMCORE to develop new product
lines and meet the requirements of a rapidly expanding customer base. In fiscal
2000, EMCORE completed the first and second phase expansions of its RF materials
division. The expansion added another 7,000 square feet of space, which
increased the electronic material production capability for its InGaP HBT and
pHEMT products by nearly 400%. The expansion accommodates the addition of up to
ten new Enterprise Electronic Materials MOCVD production tools, engineered and
manufactured by EMCORE. This brings the total number of materials-related
production tools in operation at Somerset, NJ to twenty-four, whereby 500,000
four-inch wafers or 210,000 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 increased the manufacturing capacity of EMCORE's
electronic device division. The electronic device division of EMCORE has been
expanded to augment EMCORE's capability to produce both 850nm and 1310nm
photodetectors for high-speed array transceivers.
In January 2001, EMCORE announced the opening of its expanded facility
located at its Sandia Technology Park site in Albuquerque, New Mexico. This
recent expansion triples EMCORE's cleanroom manufacturing capacity. The new
expanded facility adds an additional 36,000 square feet to the existing 50,000
square foot building, which houses EMCORE's solar cell, optical components and
networking products. EMCORE believes the additional cleanroom capacity is
critical in order to serve its growing customer base, and provides an
opportunity for EMCORE to continually develop new product technologies for the
growing global communication markets. The original 50,000 square foot facility
was completed in October 1998. EMCORE's Solar Cell division manufactures
advanced triple junction solar cells for satellite applications. EMCORE's
Optical Device division provides the building blocks for high-speed telecom and
data communications applications, including the Internet infrastructure, by
designing and manufacturing reliable and efficient high-speed laser components
such as VCSELs ) and VCSEL arrays.
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.
Location Function Sq. Feet Terms
Somerset, Headquarters 40,000 Lease Expires in 2005 (1)
New Jersey
Manufacturing building for RF materials, MR 80,000 Owned by EMCORE
sensors, photodetectors and MOCVD
production systems
47,000 Lease Expires in 2006 (1)
Storage facility
Albuquerque, Manufacturing buildings for solar cells and 86,000 Owned by EMCORE
New Mexico VCSELs
Manufacturing building for VCSELs and 37,000 Leases Expire in 2002 (1)
array transceivers
(1) All leases have the option to be renewed by EMCORE, subject to inflation
adjustments.
27
Item 3. Legal Proceedings
In March 2001, EMCORE recorded a net gain of $5.9 million related to
the settlement of litigation. 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, 2000 high low
---- ---
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............................................................................ $55.3750 $28.2500
Second Quarter........................................................................... $52.5000 $20.0000
Third Quarter ........................................................................... $44.1300 $19.6000
Fourth Quarter .......................................................................... $30.6400 $7.6900
Fiscal Year Ended September 30, 2002
First Quarter (through December 6, 2001)................................................. $17.0400 $7.6700
The reported closing sale price of EMCORE's common stock on December
6, 2001 was $16.51 per share. As of December 6, 2001, EMCORE had approximately
6,500 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.
On May 7, 2001, EMCORE sold $175,000,000 aggregate principal amount of
5% convertible subordinated notes due 2006. The notes are initially convertible
into 3,588,793 shares of our common stock at a per share price of $48.7629. The
notes were sold to Credit Suisse First Boston Corporation, Merrill Lynch,
Pierce, Fenner & Smith Incorporated and First Union Securities, Inc. (the
"Initial Purchasers") in a private placement pursuant to Section 4(2) of the
Securities Act of 1933, as amended (the "Act") and, we understand, were
subsequently resold to qualified institutional buyers in reliance on the
exemption from registration provided by Rule 144A under the Act. The notes were
sold to the Initial Purchasers at 97% of face value. EMCORE filed a registration
statement on Form S-3 for the resale of the notes and the common stock into
which the notes are convertible with the SEC on July 20, 2001.
28
Item 6. Selected Financial Data
The following selected consolidated financial data for the five most
recent fiscal years ended September 30, 2001 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 2001, 2000 and 1999
and the Balance Sheet data as of September 30, 2001 and 2000 are derived from
EMCORE's audited financial statements included elsewhere in this document. The
Statement of Operations data for fiscal years 1998 and 1997 and the Balance
Sheet data as of September 30, 1999, 1998 and 1997 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 MicroOptical Devices, Inc. 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.
Effective October 1, 2000, EMCORE changed its revenue recognition
policy to defer the portion of revenue related to installation and final
acceptance until such installation and final acceptance are completed. This
change was made in accordance with the implementation of U.S. Securities and
Exchange Commission Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements ("SAB 101"). Previously, EMCORE had recognized 100 percent
of revenue for products at such time as the product specifications had been met
and the title and risks and rewards of ownership had transferred to the customer
since EMCORE has historically completed such installation services successfully
and since such services have required minimal costs to complete. The effect of
this change is reported as the cumulative effect of a change in accounting
principle in the year ended September 30, 2001. This net effect reflects the
deferral as of October 1, 2000 of $3.6 million of revenue and accrued
installation expense previously recognized. EMCORE recognized the revenue
included in the cumulative effect adjustment during the year ended September 30,
2001.
(in thousands) As of September 30,
--------------------------------------------------------------
2001 2000 1999 1998 1997
Balance Sheet data ----------- ---------- ----------- ----------- ----------
Cash, cash equivalents and marketable
securities................................... $147,661 $101,745 $7,165 $4,518 $3,966
Working capital (deficiency)................. 201,213 111,587 20,690 (2,017) 12,156
Total assets................................. 403,553 243,902 99,611 73,220 39,463
Long-term liabilities........................ 175,046 1,295 9,038 26,514 7,577
Redeemable convertible preferred stock....... - - 14,193 - -
Shareholders' equity......................... 197,127 199,322 61,623 19,580 21,831
29
(in thousands, except per share amounts) For the Fiscal Years Ended September 30,
--------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ---------- ----------- ----------- ----------
Statements of Operations data
Revenue........................................ $184,614 $104,506 $58,341 $43,760 $47,752
Cost of revenues............................... 114,509 61,301 33,158 24,676 30,094
-------------------------------------------------------------
Gross profit............................. 70,105 43,205 25,183 19,084 17,658
Operating expenses:
Selling, general and administrative........ 29,851 21,993 14,433 14,082 9,346
Goodwill amortization...................... 1,147 4,392 4,393 3,638 -
Research and development:
Recurring............................. 53,391 32,689 20,713 16,495 9,001
One-time acquired in-process.......... - - - 19,516 -
-------------------------------------------------------------
Total operating expenses........... 84,389 59,074 39,539 53,731 18,347
Operating loss................................. (14,284) (15,869) (14,356) (34,647) (689)
Stated interest (income) expense net...... (2,048) (4,492) 866 973 520
Imputed warrant interest expense.......... - 843 1,136 601 3,988
Other income.............................. (15,920) - - - -
Equity in net loss of unconsolidated
affiliates.............................. 12,326 13,265 4,997 198 -
-------------------------------------------------------------
Total other (income) expense....... (5,642) 9,616 6,999 1,772 4,508
-------------------------------------------------------------
Loss before income taxes, extraordinary
item and cumulative effect of change in
accounting principle........................ (8,642) (25,485) (21,355) (36,419) (5,197)
Provision for income taxes........... - - - - 137
-------------------------------------------------------------
Loss before extraordinary item and
cumulative effect of change in accounting
principle................................... (8,642) (25,485) (21,355) (36,419) (5,334)
Extraordinary item................... - - (1,334) - (285)
Cumulative effect of change in
accounting principle................. (3,646) - - - -
-------------------------------------------------------------
Net loss....................................... $(12,288) $(25,485) $(22,689) $(36,419) $(5,619)
=============================================================
Per share data
Weighted average shares used in
calculating per share data.................. 34,438 31,156 21,180 17,550 9,338
-------------------------------------------------------------
Loss per basic and diluted share before
extraordinary item and cumulative effect
of change in accounting principle........... $(0.25) $(0.82) $(1.03) $(2.08) $(0.57)
=============================================================
Net loss per basic and diluted share........... $(0.36) $(0.82) $(1.09) $(2.08) $(0.60)
=============================================================
30
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
EMCORE Corporation designs, develops and manufactures compound
semiconductor wafers and devices and is a leading developer and manufacturer of
the tools and manufacturing processes used to fabricate compound semiconductor
wafers and devices. 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, phosphorus or nitrogen. Many compound semiconductors
have unique physical properties that enable electrons to move through them at
least four times faster than through silicon-based devices and are therefore
well suited to serve the growing need for efficient, high performance electronic
systems.
EMCORE offers a comprehensive portfolio of products and systems for
the rapidly expanding broadband, wireless communications and solid state
lighting markets. We have developed extensive materials science expertise and
process technology to address our customers' needs. Customers can take advantage
of our vertically integrated solutions approach by purchasing custom-designed
wafers and devices from us, or by manufacturing their own devices in-house using
one of our metal organic chemical vapor deposition (MOCVD) production systems
configured to their specific needs. Our products and systems enable our
customers to cost effectively introduce new and improved high performance
products to the market faster in high volumes.
The growth in our business is driven by the widespread deployment of
fiber optic networks, introduction of new wireless networks and services, rapid
build-out of satellite communication systems, increasing use of more power
efficient lighting sources, increasing use of electronics in automobiles and
emergence of advanced consumer electronic applications. Also, the growing
demands for higher volumes of a broad range of higher performance devices has
resulted in manufacturers increasingly outsourcing their needs for compound
semiconductor wafers and devices. Our expertise in materials science and process
technology provides us with a competitive advantage to manufacture compound
semiconductor wafers and devices in high volumes. We have increased revenues at
a compound annual growth rate (CAGR) of 62% over the three fiscal years ended
September 30, 2001, from $43.8 million in fiscal 1998 to $184.6 million in
fiscal 2001.
Wafers and Devices
EMCORE offers a broad array of compound semiconductor wafers and
devices, including optical components, such as VCSELs and photodetectors for use
in high-speed data communications and telecommunications networks, radio
frequency materials (RF materials) used in mobile communications products such
as wireless modems and handsets, solar cells that power commercial and military
satellites, high brightness light-emitting diodes (HB LEDs) for several lighting
markets, and magneto resistive sensors (MR sensors) for various automotive
applications.
o Optical Components and Modules. Our family of VCSELs and VCSEL
array transceiver and transponder products, as well as our
photodiode array components, serve the rapidly growing high-speed
data communications network markets, including the Gigabit
Ethernet, FibreChannel, Infiniband, and Very Short Reach OC-192,
the emerging Very Short Reach OC-768 and related markets. Our
strategy is to manufacture high cost optical components and
subassemblies in-house, using our proprietary technologies, to
reduce the overall cost of our transceiver and transponder
modules.
o RF Materials. We currently produce 4-inch and 6-inch InGaP HBT
and pHEMT materials that are used by our wireless customers for
power amplifiers for GSM, TDMA, CDMA and the emerging 3G
multiband wireless handsets.
o Solar Cells. Solar cells are typically the largest single cost
component of a satellite. Our compound semiconductor solar cells,
which are used to power commercial and military satellites, have
achieved industry-leading efficiencies. Solar cell efficiency
dictates the electrical power of the satellite and bears upon the
weight and launch costs of the satellite. We began shipping our
triple junction solar cells in December 2000.
o HB LEDs. Through our joint venture with General Electric
Lighting, we provide advanced HB LED technology used in devices
and in such applications as traffic lights, miniature lamps,
automotive lighting, and flat panel displays.
31
Production Systems
EMCORE is a leading provider of compound semiconductor technology
processes and MOCVD production tools. We believe that our proprietary TurboDisc
deposition technology makes possible one of the most cost-effective production
processes for the commercial volume manufacture of high-performance compound
semiconductor wafers and devices, which are integral to broadband communication
applications.
Customers
Our customers include Agilent Technologies Ltd., Anadigics Inc.,
Boeing-Spectrolab, Corning, Inc., General Motors Corp., Hewlett Packard Co.,
Honeywell International Inc., Infineon Technologies AG, Loral Space &
Communications Ltd., Lucent Technologies, Inc., LumiLeds Lighting, 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.
Recent Developments and Highlights
In October 2001, EMCORE announced the launch of a new 300 pin MSA
(multi source agreement) compliant transponder module to provide very short
reach interconnections over parallel fiber links at SONET OC-192 data rates. The
new module provides a cost effective alternative to more costly, comparable
serial interconnects. EMCORE will also bring to market a "Small Form Factor"
(SFF) version of the 300-pin VSR1 OC-192 Transponder.
During the first quarter of fiscal 2002, EMCORE signed an agreement
with LumiLeds Lighting, a joint venture between Agilent Technologies and Philips
Lighting, for the supply of MOCVD (metal organic chemical vapor deposition)
tools to be used in the production of high brightness gallium nitride (GaN)
LEDs.
In October 2001, EMCORE announced the assumption of direct sales and
marketing responsibility for its 12 X 1.25Gbps fiber optic transmitter and
receiver modules and its VSR OC-192 transponder module from JDS Uniphase. To
enable EMCORE to directly market and sell its own branded products, JDS Uniphase
and EMCORE agreed to amend their Joint Development, Manufacturing and Marketing
Agreement. Under the terms of the amendment, JDS Uniphase will provide
transition marketing and sales services to EMCORE. JDS Uniphase also will
designate EMCORE the primary vendor of VCSEL products for JDS Uniphase's
VCSEL-based optical products and will, subject to certain terms and conditions,
enter into a supply agreement with EMCORE. This amendment will have the effect
of changing the current JDS Uniphase-EMCORE relationship from a distributorship
arrangement to a customer-vendor relationship. Both companies believe that the
change will better achieve their respective economic objectives.
In August 2001, EMCORE sold its minority ownership position in the UOE
joint venture to Uniroyal Technology Corporation (UTCI) in exchange for
approximately 2.0 million shares of UTCI common stock. The Company recorded a
net gain on the disposition of its interest in UOE of approximately $10.0
million in its fourth quarter of fiscal year 2001. The gain was recorded as a
component of other income and expense.
In August 2001, EMCORE announced the commercial production of its new
15 Gbps parallel optical interconnect for high-speed data links, very short
reach OC-192 optical links, and board-to-board and shelf-to-shelf high-speed
interconnects for optical backplanes. This technology from EMCORE exemplifies
the new age of optical interconnects for switches and routers for datacom and
telecom equipment manufacturers.
In July 2001, EMCORE announced the expansion of its optical device
product offerings with its new 850 nm, 10 Gbps gallium arsenide (GaAs)
photodetector to meet the ongoing challenges for speed, reliability and
performance for multimode fiber optic applications. The new photodetector,
introduced at the National Fiber Optic Engineers Conference in Baltimore, MD is
available with EMCORE's recently introduced 10 Gbps oxide VCSEL. This
combination enables the Company to provide a matched solution for transmit and
receive functionality. By working in conjunction with its 10 Gbps VCSEL, the new
device has been designed for high-speed applications over multimode fiber.
EMCORE has developed the photodetector for Very Short Reach (VSR) applications,
32
which include serial links, Local Area Networks (LANs) for Gigabit Ethernet and
FibreChannel, Infiniband(SM) and OC-192.
In May 2001, Blaze Network Products and Cognet MicroSystems, a
division of Intel, selected EMCORE's Coarse Wavelength Division Multiplexing
(CWDM) VCSELs for high-speed data communications. With these VCSELs, Blaze plans
to be the first to market with the smallest pluggable 10 Gbps transceiver in the
industry. Cognet will use the short wavelength VCSELs for extending the reach of
multimode fibers. Results of Operations
Statement of Operations Data:
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, 2001, 2000 and 1999:
Fiscal Years Ended September 30,
--------------------------------------
2001 2000 1999
---------- ---------- ----------
Revenues............................................... 100.0% 100.0% 100.0%
Cost of revenues....................................... 62.0% 58.7% 56.8%
--------------------------------------
Gross profit...................................... 38.0% 41.3% 43.2%
Operating expenses:
Selling, general and administrative............... 16.2% 21.0% 24.7%
Goodwill amortization............................. 0.6% 4.2% 7.5%
Research and development.......................... 28.9% 31.3% 35.5%
--------------------------------------
Total operating expenses.......................... 45.7% 56.5% 67.7%
--------------------------------------
Operating loss.................................... (7.7%) (15.2%) (24.5%)
Stated interest (income), expense net................ (1.1%) (4.3%) 1.5%
Imputed warrant interest expense..................... - 0.8% 1.9%
Other income......................................... (8.6%) - -
Equity in net loss of unconsolidated affiliates...... 6.7% 12.7% 8.6%
--------------------------------------
Total other (income) expense................ (3.0%) 9.2% 12.0%
--------------------------------------
Loss before extraordinary item and cumulative
effect of a change in accounting principle............ (4.7%) (24.4%) (36.6%)
Extraordinary item............................... - (2.3%)
Cumulative effect of a change in
accounting principle............................ (2.0%) - -
--------------------------------------
Net loss.............................................. (6.7%) (24.4%) (38.9%)
======================================
EMCORE has generated a significant portion of its sales to customers
outside the United States. In fiscal 2001, 2000 and 1999, international sales
constituted 47.7%, 38.6% and 52.5%, 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 thus 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,
- ---------------------------------------------------------------------------------------------------------
2001 2000 1999
- ---------------------------------------------------------------------------------------------------------
(in thousands) Revenue % of revenue Revenue % of revenue Revenue % of revenue
------- ------------ ------- ------------ ------- ------------
Region:
North America $96,551 52% $64,174 62% $27,698 48%
Asia 76,848 42% 34,656 33% 28,211 48%
Europe 11,215 6% 5,676 5% 2,432 4%
- --------------------- ------------- ---------------- ----------- --------------- ----------- ------------
TOTAL $184,614 100% $104,506 100% $58,341 100%
======== ===== ======== ==== ======= ====
33
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 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.
Comparison of Fiscal Years Ended September 30, 2001 and 2000
Revenues. EMCORE's revenues increased 76.7% or $80.1 million from
$104.5 million for the fiscal year ended September 30, 2000 to $184.6 million
for the fiscal year ended September 30, 2001. This increase in revenues was
attributable to both systems- and materials-related product lines.
Systems-related revenues increased 99.3% or $65.4 million from $65.8 million to
$131.1 million. The number of MOCVD production systems shipped increased 89.4%
from 47 in fiscal year 2000 to 89 in fiscal year 2001. Materials-related
revenues increased 38.1% or $14.8 million from $38.7 million to $53.5 million.
On an annual basis, sales of solar cells increased 10%, pHEMT and HBT epitaxial
wafers increased 27% and VCSELs increased 302%, respectively, from the prior
year. As a percentage of revenues, systems- and materials-related revenues
accounted for 71.0% and 29.0%, respectively, for the fiscal year ended September
30, 2001 and 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 47.7% of revenues for the fiscal year ended September 30, 2001 and 38.6% of
revenues for the fiscal year ended September 30, 2000. The dollar increase in
domestic sales is a direct result of significant materials-related design wins
at several large U.S. semiconductor and telecommunication companies.
Effective October 1, 2000, EMCORE changed its revenue recognition
policy to defer the portion of revenue related to installation and final
acceptance until such installation and final acceptance are completed. This
change was made in accordance with the implementation of U.S. Securities and
Exchange Commission Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements (SAB 101). Previously, EMCORE had recognized 100 percent of
revenue for products upon shipment as the product specifications had been met
and the title and risks and rewards of ownership had transferred to the customer
since EMCORE has historically completed such installation services successfully
and since such services have required minimal costs to complete. The effect of
this change is reported as the cumulative effect of a change in accounting
principle in the year ended September 30, 2001. This net effect reflects the
deferral as of October 1, 2000 of $3.6 million of revenue and accrued
installation expense previously recognized. EMCORE recognized the revenue
included in the cumulative effect adjustment during the year ended September 30,
2001.
Gross Profit. EMCORE's gross profit increased 62.3% or $26.9 million
from $43.2 million for the fiscal year ended September 30, 2000 to $70.1 million
for the fiscal year ended September 30, 2001. Gross profit earned on
systems-related revenues increased 108.5% or $30.4 million from $28.0 million to
$58.4 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 now exceeds 400 MOCVD systems. Gross profit
earned on materials-related revenues decreased 23.1% or $3.5 million from $15.2
million to $11.7 million. EMCORE has a significant amount of fixed expenses
relating to capital equipment and manufacturing overhead in its new facilities.
EMCORE experienced a reduction in materials-related revenues during the third
and fourth quarters of fiscal year 2001, which caused these fixed expenses to be
34
allocated across reduced production volumes, which adversely affected gross
profit.
Selling, General and Administrative. Selling, general and
administrative expenses increased by 35.7% or $7.9 million from $22.0 million
for the fiscal year ended September 30, 2000 to $29.9 million for the fiscal
year ended September 30, 2001. A significant portion of the increase was due to
increased commission payments as a result of higher sales as well as headcount
increases in marketing and sales personnel to support domestic and foreign
markets and new product lines. As a percentage of revenue, selling, general and
administrative expenses decreased from 21.0% for the fiscal year ended September
30, 2000 to 16.2% for the fiscal year ended September 30, 2001.
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 year ended September 30, 2000,
which reflected a full year of amortization. During the three months ended
December 31, 2000, EMCORE amortized $0.7 million, the remaining portion of this
goodwill. In January 2001, EMCORE purchased Analytical Solutions, Inc. and
Training Solutions, Inc. and allocated approximately $3.1 million to goodwill,
which is being amortized using the straight-line method over a period of five
years, or $155,000 per quarter. As of September 30, 2001, EMCORE had
approximately $2.7 million of net goodwill remaining. In June 2001, SFAS No.
142, "Goodwill and Other Intangible Assets" was approved by the FASB.
Amortization of goodwill, including goodwill recorded in past business
combinations and indefinite lived intangible assets, will cease upon adoption of
this statement. EMCORE is planning to early adopt SFAS No. 142 in the first
quarter of fiscal year 2002.
Research and Development. Research and development expenses increased
63.3% or $20.7 million from $32.7 million in the fiscal year ended September 30,
2000 to $53.4 million in the fiscal year ended September 30, 2001. As a
percentage of revenue, recurring research and development expenses decreased
from 31.3% for the fiscal year ended September 30, 2000 to 28.9% for the fiscal
year ended September 30, 2001. 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 2002, management expects research and development
expenses to decrease approximately 25%, due to the deferral or elimination of
certain non-critical projects.
Interest Income/Expense. For the fiscal year ended September 30, 2001,
net interest changed $2.4 million from net interest income of $4.5 million to
net interest income of $2.0 million. The decrease in interest income is a result
of additional interest expense being incurred from the 5% convertible
subordinated notes due in 2006 coupled with lower interest rates on investments
in marketable securities.
Other income. In March 2001, a net gain of $5.9 million was recorded
related to the settlement of litigation. In August 2001, EMCORE sold its
minority ownership position in the Uniroyal joint venture to Uniroyal Technology
Corporation (UTCI) and received approximately 2.0 million shares of UTCI common
stock as consideration for this transaction. The net gain from the sale
approximated $10.0 million.
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, 2001, EMCORE incurred a net loss of $7.4 million
related to the Uniroyal joint venture and a $4.9 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 2000 and 2001. As of September 30, 2001,
the Company has net operating loss carryforwards for tax purposes of
approximately $62.0 million that expire in the years 2003 through 2021. 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.
35
Comparison of Fiscal Years Ended September 30, 2000 and 1999
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. 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
63.0% and 37.0%, respectively, for the fiscal year ended September 30, 2000.
International sales accounted for 52.5% of revenues for the fiscal year ended
September 30, 1999 and 38.6% of revenues for the fiscal year ended September 30,
2000.
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 continued to increase as EMCORE's
production system installed base exceeded 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.
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 was 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. In addition, EMCORE accelerated
certain fiber optic and wireless programs to meet customer driven market
windows.
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
36
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, 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. 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.
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.
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.
Effective October 1, 2000, EMCORE changed its revenue recognition
policy to defer the portion of revenue related to installation and final
acceptance until such installation and final acceptance are completed. This
change was made in accordance with the implementation of U.S. Securities and
Exchange Commission Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements (SAB 101). Previously, EMCORE had recognized 100 percent of
revenue for products at such time as the product specifications had been met and
the title and risks and rewards of ownership had transferred to the customer
since EMCORE has historically completed such installation services successfully
and since such services have required minimal costs to complete. The effect of
this change is reported as the cumulative effect of a change in accounting
principle in the year ended September 30, 2001. This net effect reflects the
deferral as of October 1, 2000 of $3.6 million of revenue and accrued
installation expense previously recognized. EMCORE recognized the $3.6 million
in revenue included in the cumulative effect adjustment during the year ended
September 30, 2001. The quarters ended December 31, 2000, March 31, 2001 and
June 30, 2001 have been restated to reflect the adoption of SAB 101.
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, cancellations, 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.
37
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands) Dec. 31, Mar. 31, Jun. 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30,
1999 2000 2000 2000 2000 2001 2001 2001
--------------------------------------------------------------------------------------
Revenues........................... $16,501 $23,925 $30,023 $34,057 $39,090 $44,825 $52,652 $48,047
Cost of revenues................... 9,778 13,989 17,537 19,997 23,352 28,049 30,626 32,482
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.................. 6,723 9,936 12,486 14,060 15,738 16,776 22,026 15,565
Operating expenses:
Selling, general &
administrative............. 4,724 5,271 5,919 6,079 6,983 7,552 7,096 8,220
Goodwill amortization......... 1,098 1,098 1,098 1,098 734 103 155 155
Research & development........ 4,708 4,662 5,984 17,335 13,179 11,998 13,889 14,325
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses........... 10,530 11,031 13,001 24,512 20,896 19,653 21,140 22,700
------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss)....... (3,807) (1,095) (515) (10,452) (5,158) (2,877) 886 (7,135)
Stated interest expense/(income),
net............................. (78) (615) (1,951) (1,848) (1,492) (794) (68) 306
Imputed warrant interest expense,
non-cash........................ 163 680 - - - - - -
Other income....................... - - - - - (5,890) - (10,030)
Equity in net loss of
unconsolidated affiliates....... 2,766 3,047 2,896 4,556 4,132 3,668 2,725 1,801
------- ------- ------- ------- ------- ------- ------- -------
Total other expenses/(income)...... 2,851 3,112 945 2,708 2,640 (3,016) 2,657 (7,923)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
cumulative effect of
a change in accounting
principle.................. (6,658) (4,207) (1,460) (13,160) (7,798) 139 (1,771) 788
Cumulative effect of a change in
accounting principle............ --- --- --- --- (3,646) --- --- ---
------- ------- ------- ------- ------- ------- ------- -------
Net incomem (loss)............ $(6,658) $(4,207) $(1,460) $(13,160) $(11,444) $139 $(1,771) $788
======= ======= ======= ======= ======= ======= ======= =======
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands) Dec. 31, Mar. 31, Jun. 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30,
1999 2000 2000 2000 2000 2001 2001 2001
--------------------------------------------------------------------------------------
Revenues........................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues................... 59.3 58.5 58.4 58.7 59.7 62.6 58.2 67.6
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.................. 40.7 41.5 41.6 41.3 40.3 37.4 41.8 32.4
Operating expenses:
Selling, general &
administrative................ 28.6 22.0 19.7 17.8 17.9 16.8 13.5 17.1
Goodwill amortization............ 6.7 4.6 3.7 3.2 1.9 0.2 0.3 0.3
Research & development........... 28.5 19.5 19.9 50.9 33.7 26.8 26.4 29.8
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses........... 63.8 46.1 43.3 72.0 53.5 43.8 40.2 47.2
------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss)....... (23.1) (4.6) (1.7) (30.7) (13.2) (6.4) 1.7 (14.9)
Stated interest expense/(income),
net............................. (0.5) (2.6) (6.5) (5.4) (3.8) (1.8) (0.2) 0.6
Imputed warrant interest expense,
non-cash........................ 1.0 2.8 - - - - - -
Other income....................... - - - - - (13.1) - (20.9)
Equity in net loss of
unconsolidated affiliates....... 16.8 12.7 9.6 13.4 10.6 8.2 5.2 3.7
------- ------- ------- ------- ------- ------- ------- -------
Total other expenses/(income)...... 17.3 13.0 3.1 8.0 6.8 (6.7) 5.0 (16.5)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
cumulative effect of a
change in accounting
principle.................. (40.3) (17.6) (4.9) (38.6) (19.9) 0.3 (3.4) 1.6
Cumulative effect of a change in
accounting principle - - - - (9.3) - - -
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)............. (40.3)% (17.6)% (4.9)% (38.6)% (29.3)% 0.3% (3.4)% 1.6%
======= ======= ======= ======= ======= ======= ======= =======
38
Liquidity and Capital Resources
EMCORE has funded operations to date through sales of equity, bank
borrowings, subordinated debt and revenues from product sales. In May 2001,
EMCORE issued $175.0 million of 5% convertible subordinated notes due in May
2006. In March 2000, EMCORE completed an additional public offering and raised
approximately $127.5 million, net of issuance costs. In June 1999, EMCORE
completed a secondary public offering and raised approximately $52.0 million,
net of issuance costs. As of September 30, 2001, EMCORE had working capital of
approximately $201.2 million, including $147.7 million in cash, cash equivalents
and marketable securities.
Cash used for operating activities approximated $52.5 million during
the year ended September 30, 2001, as a result of increases in accounts
receivable, inventory and other current assets coupled with a decrease in
advanced billings and EMCORE's net loss. The increase in accounts receivable and
inventories was within expectations of the 77% increase in revenues from the
prior year. For the year September 30, 2001, net cash used for investment
activities amounted to approximately $117.0 million. EMCORE's capital
expenditures totaled $89.3 million, which was used primarily for capacity
expansion at both New Jersey and New Mexico's manufacturing facilities.
Completed in January 2001, EMCORE tripled its cleanroom manufacturing capacity
in New Mexico by adding on an additional 36,000 square feet to the existing
50,000 square foot building which houses EMCORE's solar cell, optical components
and networking products. Capital spending in fiscal year 2001 also included the
purchase of and continued upgrades to 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 used internally for production of materials-related
products. EMCORE's planned capital expenditures are expected to total
approximately $24.0 million during fiscal year 2002. EMCORE's net investment in
marketable securities increased by $19.7 million during the year September 30,
2001. Net cash provided by financing activities for the year September 30, 2001
amounted to approximately $190.2 million. In May 2001, EMCORE completed the
private placement of $175.0 million aggregate principal amount of 5% convertible
subordinated notes due 2006. The notes are convertible into EMCORE common stock
at a conversion price of $48.76 per share. The proceeds of the offering are
being used for general corporate purposes, including capital expenditures,
working capital, funding its joint venture and for research and development. In
addition, EMCORE may use a portion of the proceeds of the offering to
strategically acquire or invest in complementary businesses, products or
technology, either directly or through its joint venture.
In March 2001, EMCORE entered into an Amended and Restated Revolving
Loan and Security Agreement with First Union National Bank. This credit facility
provides for revolving loans in an amount up to $20.0 million outstanding at any
one time, depending on EMCORE's borrowing base. These loans bear interest
payable monthly in arrears at a rate equal to the lesser of the prime rate or
LIBOR plus a margin of 1.50%. The credit facility matures on January 31, 2003.
The loans under the credit facility are secured by a security interest in
substantially all of our personal property. There were no borrowings under this
facility and the Company was in compliance with all covenants at September 30,
2001.
EMCORE believes that its current liquidity, together with available
credit, should be sufficient to meet its cash needs for working capital through
fiscal year 2002. 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.
Recent Accounting Pronouncements
In June 2001, Statement of Financial Accounting Standards (SFAS) No.
141, "Business Combinations" was approved by the Financial Accounting Standards
Board (FASB). SFAS No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. Goodwill and
certain intangible assets, arising from these business combinations, will remain
on the balance sheet and will not be amortized. On an annual basis, and when
there is reason to suspect that their values have been diminished or impaired,
these assets must be tested for impairment, and write-downs may be necessary.
39
In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was
approved by the FASB. SFAS No. 142 changes the accounting for goodwill and
indefinite lived intangible assets from an amortization method to an
impairment-only approach. Amortization of goodwill, including goodwill recorded
in past business combinations and indefinite lived intangible assets, will cease
upon adoption of this statement. During fiscal year 2001, EMCORE recognized $1.1
million in goodwill amortization. Identifiable intangible assets will continue
to be amortized over their useful lives and reviewed for impairment in
accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of". EMCORE is required to implement
SFAS No. 142 in fiscal year 2003. EMCORE is planning to early adopt SFAS No. 142
in the first quarter of fiscal year 2002.
In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations and costs associated with the retirement of tangible
long-lived assets. EMCORE is required to implement SFAS No. 143 in fiscal year
2003. EMCORE is currently evaluating the impact that the adoption of SFAS No.
143 will have on its results of operations and financial position.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 replaces SFAS No. 121
and establishes accounting and reporting standards for long-lived assets to be
disposed of by sale. This standard applies to all long-lived assets, including
discontinued operations. SFAS No. 144 requires that those assets be measured at
the lower of carrying amount or fair value less cost to sell. SFAS No. 144 also
broadens the reporting of discontinued operations to include all components of
an entity with operations that can be distinguished from the rest of the entity
that will be eliminated from the ongoing operations of the entity in a disposal
transaction. EMCORE is required to implement SFAS No. 144 in fiscal year 2003.
EMCORE is currently evaluating the impact that the adoption of SFAS No. 144 will
have on its results of operations and financial position, if any.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
In May 2001, EMCORE completed the issuance of $175.0 million aggregate
principal amount of 5.0% convertible subordinated notes due in May 2006. The
notes are convertible into EMCORE common stock at a conversion price of $48.76
per share. Although the fair market value of these fixed rate notes is subject
to interest rate risk, an immediate 10% change in interest rates would not have
a material impact on our future operating results or cash flows.
EMCORE 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 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, 2001, the Company's available for sale marketable
securities were comprised of both debt and equity securities. The fair value of
the debt securities approximated cost. At September 30, 2001, the Company's debt
securities were comprised of $24.2 million of corporate debt securities, $34.5
million of municipal bonds and $11.1 million of asset-backed securities. The
contractual maturities for all available for sale debt securities will occur
during fiscal 2002. In August 2001, EMCORE sold its minority ownership position
in its joint venture with Uniroyal Technology Corporation (UTCI) in exchange for
approximately 2.0 million shares of UTCI common stock. EMCORE's cost basis in
the UTCI stock is $7.10 per share or approximately $14.0 million. At September
30, 2001, the fair market value of UTCI stock was $3.14 per share. Therefore,
EMCORE had an unrealized loss of $7.8 million recorded as a component of
comprehensive loss. The investment of UTCI common stock is subject to market
risk of equity price changes. While EMCORE cannot predict or manage the future
price for such stock, management continues to evaluate its investment position
on an ongoing basis, which may result in the write down of the investment to an
estimated realizable value and our results of operations could be materially and
adversely affected.
Although EMCORE occasionally enters into transactions denominated in
foreign currencies, the total amount of such transactions is not material.
Accordingly, fluctuations in foreign currency values would not have a material
adverse effect on our financial condition or results of operations.
40
Item 8. Financial Statements and Supplementary Data
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended September 30, 2001, 2000 and 1999
(in thousands, except per share data)
2001 2000 1999
----------------- ----------------- -----------------
Revenues:
Systems-related..................................... $131,141 $65,788 $44,477
Materials-related................................... 53,473 38,718 13,864
----------------- ----------------- -----------------
Total revenues............................... 184,614 104,506 58,341
Cost of revenues:
Systems-related..................................... 72,725 37,775 26,522
Materials-related................................... 41,784 23,526 6,636
----------------- ----------------- -----------------
Total cost of revenues....................... 114,509 61,301 33,158
----------------- ----------------- -----------------
Gross profit............................ 70,105 43,205 25,183
Operating expenses:
Selling, general and administrative................. 29,851 21,993 14,433
Goodwill amortization............................... 1,147 4,392 4,393
Research and development............................ 53,391 32,689 20,713
----------------- ----------------- -----------------
Total operating expenses..................... 84,389 59,074 39,539
----------------- ----------------- -----------------
Operating loss.......................... (14,284) (15,869) (14,356)
Other (income) expense:
Interest income..................................... (5,288) (4,834) (751)
Interest expense.................................... 3,240 342 1,617
Imputed warrant interest expense, non-cash.......... - 843 1,136
Other income........................................ (15,920) - -
Equity in net loss of unconsolidated affiliates..... 12,326 13,265 4,997
----------------- ----------------- -----------------
Total other (income) expenses................ (5,642) 9,616 6,999
Loss before extraordinary item and
cumulative effect of a change
in accounting principle.............. (8,642) (25,485) (21,355)
Extraordinary item - loss on early
extinguishment of debt.............................. - - (1,334)
Cumulative effect of a change in accounting
principle........................................... (3,646) - -
----------------- ----------------- -----------------
Net loss.................................. $(12,288) $(25,485) $(22,689)
================= ================= =================
Per share data:
Weighted average basic and diluted shares
outstanding used in per share data calculations....... 34,438 31,156 21,180
----------------- ----------------- -----------------
Loss per basic and diluted share before
extraordinary item and cumulative effect of a change
in accounting principle............................... $(0.25) $(0.82) $(1.03)
================= ================= =================
Net loss per basic and diluted share..................... $(0.36) $(0.82) $(1.09)
================= ================= =================
The accompanying notes are an integral part of these
consolidated financial statements.
41
EMCORE CORPORATION
CONSOLIDATED BALANCE SHEETS
As of September 30, 2001 and 2000
(in thousands, except share data)
ASSETS 2001 2000
Current assets:
Cash and cash equivalents............................................................... $71,239 $50,849
Marketable securities................................................................... 76,422 50,896
Accounts receivable, net of allowance for doubtful accounts of
$1,139 and $1,065 at September 30, 2001 and 2000, respectively....................... 30,918 18,240
Accounts receivable - related parties................................................... 2,161 2,334
Inventories, net........................................................................ 47,382 30,724
Prepaid expenses and other current assets............................................... 4,471 1,829
-----------------------------
Total current assets............................................................... 232,593 154,872
Property, plant and equipment, net........................................................ 143,223 69,701
Goodwill, net............................................................................. 2,687 734
Investments in unconsolidated affiliates.................................................. 9,228 17,015
Other assets, net......................................................................... 15,822 1,580
-----------------------------
Total assets....................................................................... $403,553 $243,902
=============================
LIABILITIES and SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................ $14,075 $16,512
Accrued expenses........................................................................ 13,533 6,083
Advanced billings....................................................................... 3,715 20,278
Capitalized lease obligation - current.................................................. 57 72
Other current liabilities............................................................... - 340
-----------------------------
Total current liabilities.......................................................... 31,380 43,285
Convertible subordinated notes............................................................ 175,000 -
Capitalized lease obligation, net of current portion...................................... 46 75
Other liabilities......................................................................... - 1,220
-----------------------------
Total liabilities.................................................................. 206,426 44,580
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.0001 par, 5,882,352 shares authorized, no shares outstanding....... - -
Common stock, no par value, 100,000,000 shares authorized, 35,617,303 shares issued and
35,597,475 outstanding at September 30, 2001; 33,974,698 shares issued and 33,971,562
outstanding at September 30, 2000..................................................... 327,559 314,780
Accumulated deficit.................................................................... (121,152) (108,864)
Comprehensive income (loss)............................................................ (8,314) 5
Shareholders' notes receivable......................................................... (34) (6,360)
Treasury stock, at cost; 19,828 shares at September 30, 2001; 3,136 shares at
September 30, 2000.................................................................. (932) (239)
-----------------------------
Total shareholders' equity......................................................... 197,127 199,322
-----------------------------
Total liabilities and shareholders' equity......................................... $403,553 $243,902
=============================
The accompanying notes are an integral part of these
consolidated financial statements.
42
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended September 30, 2001, 2000 and 1999
(in thousands) Common Stock
------------------
Comprehensive Shareholders' Total
Accumulated Income Notes Treasury Shareholders'
Shares Amount Deficit (Loss) Receivable Stock Equity
-------- ---------- ------------ -------------- -------------- -------- --------------
Balance at September 30, 1998............ 18,752 $87,443 $(60,196) - $(7,667) - $19,580
Net loss...................................... (22,689) (22,689)
--------------
Comprehensive loss....................... (22,689)
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, 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 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
-------- ---------- ------------ -------------- -------------- -------- --------------
Balance at September 30, 1999............ 26,708 152,426 (83,256) - (7,547) - 61,623
Net loss...................................... (25,485) (25,485)
Unrealized gain on marketable securities...... 5 5
--------------
Comprehensive loss....................... (25,480)
Preferred stock dividends..................... (83) (83)
Accretion of redeemable preferred stock to
redemption value........................... (40) (40)
Issuance of common stock purchase warrants.... 689 689
Issuance of common stock, 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 convertible preferred stock into
common stock............................... 2,060 14,193 14,193
Compensatory stock issuances.................. 23 1,401 1,401
Conversion of subordinated notes into common
stock...................................... 682 5,500 5,500
Treasury stock................................ (3) (239) (239)
Redemptions of shareholders' notes
receivable................................. 1,187 1,187
-------- ---------- ------------ -------------- -------------- -------- --------------
Balance at September 30, 2000............ 33,972 314,780 (108,864) 5 (6,360) (239) 199,322
Net loss...................................... (12,288) (12,288)
Unrealized loss on marketable securities...... (8,085) (8,085)
Translation adjustment........................ (234) (234)
--------------
Comprehensive loss....................... (20,607)
Issuance of common stock in connection with
acquisitions............................... 41 1,840 1,840
Stock option exercise......................... 438 3,247 3,247
Stock purchase warrant exercise............... 1,111 5,508 5,508
Compensatory stock issuances.................. 34 1,507 1,507
Issuance of common stock - Employee Stock
Purchase Plan.............................. 17 677 677
Treasury stock................................ (16) (693) (693)
Redemptions of shareholders' notes receivable. 6,326 6,326
-------- ---------- ------------ -------------- -------------- -------- --------------
Balance at September 30, 2001............ 35,597 $327,559 $(121,152) $(8,314) $(34) $(932) $197,127
======== ========== ============ ============== ============== ======== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
43
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended September 30, 2001, 2000 and 1999
(in thousands)
2001 2000 1999
------------- ------------- -------------
Cash flows from operating activities:
Net loss.................................................. $(12,288) $(25,485) $(22,689)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Cumulative effect of a change in accounting
principle...................................... 3,646 - -
Depreciation and amortization..................... 17,419 14,955 11,575
Provision for doubtful accounts................... 370 780 390
Gain on sale of unconsolidated affiliate.......... (10,000) - -
Deferred gain on sales to unconsolidated
affiliate...................................... (1,560) 301 1,259
Non-cash charges on warrant issuances............. - 843 1,136
Extraordinary loss on early extinguishment of
debt........................................... - - 1,334
Equity in net loss of unconsolidated
affiliates..................................... 12,326 13,265 4,997
Compensatory stock issuance....................... 858 566 436
Change in assets and liabilities:
Accounts receivable - trade....................... (13,952) (7,597) (4,375)
Accounts receivable - related parties............. 174 146 (1,980)
Inventories....................................... (16,966) (16,734) (1,545)
Prepaid expenses and other current assets......... (2,631) (1,440) (140)
Other assets...................................... (14,336) (983) (69)
Accounts payable.................................. (2,475) 11,153 (6,664)
Accrued expenses.................................. 7,087 1,910 (24)
Advanced billings................................. (20,211) 15,928 1,170
Other............................................. (234) - (52)
------------- ------------- -------------
Total adjustments......................................... (43,485) 33,093 7,448
------------- ------------- -------------
Net cash and cash equivalents (used for) provided by
operating activities................................... (52,773) 7,608 (15,241)
Cash flows from investing activities:
Purchase of property, plant, and
equipment......................................... (89,324) (33,755) (17,110)
Cash purchase of business, net of cash
acquired.......................................... (1,707) - -
Investments in marketable securities, net............ (19,654) (50,896) -
Investments in unconsolidated affiliates............. (6,302) (19,949) (14,203)
Payments of restricted cash............................ - - 62
------------- ------------- -------------
Net cash and cash equivalents used for investing
activities............................................ (116,987) (104,600) (31,251)
Cash flows from financing activities:
Proceeds from convertible subordinated notes......... 175,000 - -
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 offering, net of issuance
cost of $5,000.................................... - - 52,000
Proceeds under convertible subordinated
debenture......................................... - - 7,800
Payments under bank loans............................ - - (17,950)
Payments under notes payable - related party......... - - (7,000)
Payments on demand note facility and subordinated
debt.............................................. - - (8,563)
Proceeds from exercise of stock purchase
warrants.......................................... 5,509 10,874 2,164
Proceeds from exercise of stock options.............. 3,248 2,197 376
Payments on capital lease obligations................ (44) (715) (573)
Purchase of treasury stock........................... - (239) -
Dividends paid on preferred stock.................... - (133) (253)
Proceeds from employee stock purchase plan........... 677 - -
Proceeds from shareholders' notes
receivable........................................ 5,760 1,192 -
------------- ------------- -------------
Net cash and cash equivalents provided by financing
activities............................................ 190,150 140,676 49,201
------------- ------------- -------------
Net increase in cash and cash equivalents................. 20,390 43,684 2,709
Cash and cash equivalents, beginning of
year.................................................. 50,849 7,165 4,456
------------- ------------- -------------
Cash and cash equivalents, end of
year.................................................. $71,239 $50,849 $7,165
============= ============= =============
44
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
For the years ended September 30, 2001, 2000 and 1999
(in thousands)
2001 2000 1999
------------- ------------- -------------
Supplemental disclosures of cash flow information:
Cash paid for interest................................ $29 $351 $1,739
Non-cash Investing and Financing Activities:
Treasury stock received for redemption of shareholders'
notes receivable.................................... $693 $239 -
Issuance of non-qualified stock options to equity
investee............................................ $649 $835 -
Proceeds from sale of joint venture in form of
marketable securities............................... ($13,958) - -
Common stock issued on the exercise of warrants in
exchange for subordinated notes..................... - $7,800 -
Conversion of mandatorily redeemable convertible
preferred stock to common stock..................... - $14,420 $7,280
Reference is made to Note 9 - Debt Facilities - for disclosure relating to
certain non-cash warrant issuance. Reference is made to Note 12 - Shareholders'
Equity - for disclosure relating to certain non-cash equity transactions.
The accompanying notes are an integral part of these
consolidated financial statements.
45
EMCORE Corporation
Notes to Consolidated Financial Statements
As of September 30, 2001 and 2000 and
for the years ended September 30, 2001, 2000 and 1999
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, devices and modules. 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 offers a versatile portfolio of compound
semiconductor products for the rapidly expanding broadband and wireless
communications and solid-state lighting markets. The Company's integrated
solutions philosophy embodies state of the art technology, material science
expertise and a shared vision of our customer's goals and objectives to be
leaders and pioneers in the rapidly growing world of compound semiconductors.
EMCORE's solutions include: 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, AlGaAs, InP, InGaP,
InGaAlP, InGaAsP, GaN, InGaN, AlGaN, and SiC epitaxial materials used in
numerous applications, including data and telecommunications modules, cellular
telephones, solar cells and high brightness LEDs.
NOTE 2. Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. 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 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, 2001, the Company's
available for sale marketable securities were comprised of both debt and equity
securities. The fair value of the debt securities approximated cost. At
September 30, 2001, the Company's debt securities were comprised of $24.2
million of corporate debt securities, $34.5 million of municipal bonds and $11.1
million of asset-backed securities. The contractual maturities for all available
for sale debt securities will occur during fiscal 2002. The Company recorded
$113,000 of net realized gains on sales of available-for-sale debt securities
during fiscal 2001. In August 2001, EMCORE sold its minority ownership position
in its joint venture with Uniroyal Technology Corporation (UTCI) in exchange for
approximately 2.0 million shares of UTCI common stock. EMCORE's cost basis in
the UTCI stock is $7.10 per share or approximately $14.0 million. At September
30, 2001, the fair market value of UTCI stock was $3.14 per share. Therefore,
EMCORE had an unrealized loss of $7.8 million recorded as a component of
comprehensive loss. The investment of UTCI common stock is subject to market
risk of equity price changes. While EMCORE cannot predict or manage the future
price for such stock, management continues to evaluate its investment position
on an ongoing basis, which may result in the write down of the investment to an
estimated realizable value and our results of operations could be materially and
adversely affected.
46
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, 2001 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.
Inventories. Inventories are stated at the lower of cost or market with cost
being determined using the first-in, first-out (FIFO) method.
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 Company
loans. The deferred costs are primarily related to $6.2 million of financing
costs associated with the May 2001 issuance of $175.0 million convertible
subordinated notes due in 2006. These financing costs are being amortized on a
straight-line basis over the five-year life of the notes. Total capitalized
financing costs, net of fiscal 2001 amortization of $516,000, was $5.7 million
at September 30, 2001. Deferred costs also include costs related to obtaining
product patents that enhance and maintain the Company's intellectual property
position. These patent costs totaling $1.3 million, net of amortization, 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 $346,000, $219,000 and $143,000 for the years ended September 30,
2001, 2000 and 1999, respectively. Company loans primarily consisted of a $3.0
million loan to the Chief Executive Officer and a $5.0 million loan to Uniroyal
Technology Corporation, Inc.; See NOTE 14 - Related Parties.
Goodwill. Goodwill of $13.2 million was recorded in connection with our
acquisition of MicroOptical Devices, Inc. in December 1997. EMCORE recognized
$4.4 million of goodwill amortization for the fiscal year ended September 30,
2000, which reflected a full year of amortization. During the three months ended
December 31, 2000, EMCORE amortized $0.7 million, the remaining portion of this
goodwill. In January 2001, EMCORE purchased Analytical Solutions, Inc. and
Training Solutions, Inc. and allocated approximately $3.1 million to goodwill
which is being amortized using the straight-line method over a period of five
years, or $155,000 per quarter. As of September 30, 2001, EMCORE had
approximately $2.7 million of net goodwill remaining. In June 2001, SFAS No.
142, "Goodwill and Other Intangible Assets" was approved by the FASB. EMCORE is
planning to early adopt SFAS No. 142 in the first quarter of fiscal year 2002.
Advanced Billings. This represents customer deposits on systems- and
materials-related orders.
Income Taxes. The Company recognizes deferred income 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 basis 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.
47
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 accruals and the valuation of long-lived assets.
Revenue Recognition and Cumulative Effect of Change in Accounting Principle.
Revenues from systems-related sales is recognized when the product meets the
customer's specifications and when the title and the risks and rewards of
ownership have passed to the customer. EMCORE's billing terms on system sales
generally include a hold-back of 20 percent on the total purchase price subject
to completion of the installation and final acceptance process at the customer
site. Effective October 1, 2000, EMCORE changed its revenue recognition policy
to defer the portion of revenue related to installation and final acceptance
until such installation and final acceptance are completed. This change was made
in accordance with the implementation of U.S. Securities and Exchange Commission
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
(SAB 101). Previously, EMCORE had recognized 100 percent of revenue for products
upon shipment as the product specifications had been met and the title and risks
and rewards of ownership had transferred to the customer since EMCORE has
historically completed such installation services successfully and since such
services have required minimal costs to complete. The effect of this change is
reported as the cumulative effect of a change in accounting principle in the
year ended September 30, 2001. This net effect reflects the deferral as of
October 1, 2000 of $3.6 million of revenue and accrued installation expense
previously recognized. EMCORE recognized the revenue included in the cumulative
effect adjustment during the year ended September 30, 2001.
Revenues from materials-related sales are recognized when the product meets the
customer's specifications and when the title and the risks and rewards of
ownership have passed to the customer. For new applications of EMCORE's products
where performance cannot be assessed prior to meeting specifications at the
customer's site, no revenue is recognized until such specifications are met.
EMCORE also provides service for its products. Revenue from time and materials
based service arrangements is recognized as the service is performed. Revenue
from service contracts is recognized ratably over the term of such service
contracts.
Product Warranty Costs. The Company's products generally carry a one-year
warranty. A reserve is established at the time of sale to cover estimated
warranty costs. The Company's estimate of warranty cost is based on its history
of warranty repairs. While most new products are extensions of existing
technology, the estimate could change if new products require a significantly
different level of repair than similar products have required in the past.
Research and Development. Research and development costs are charged to expense
as incurred.
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.
Currency Translation. Assets and liabilities of the Company's Taiwan operations
are translated from Taiwanese new dollar into U.S. dollars at the rate of
exchange in effect at the balance sheet date. Revenues and expenses are
translated at average monthly exchange rates prevailing during the year.
Resulting translation adjustments are reflected in shareholders' equity as a
component of comprehensive income or loss.
48
Recent Financial Accounting Pronouncements.
In June 2001, Statement of Financial Accounting Standards (SFAS) No. 141,
"Business Combinations" was approved by the Financial Accounting Standards Board
(FASB). SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. Goodwill and certain
intangible assets, arising from these business combinations, will remain on the
balance sheet and will not be amortized. On an annual basis, and when there is
reason to suspect that their values have been diminished or impaired, these
assets must be tested for impairment, and write-downs may be necessary.
In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was approved
by the FASB. SFAS No. 142 changes the accounting for goodwill and indefinite
lived intangible assets from an amortization method to an impairment-only
approach. Amortization of goodwill, including goodwill recorded in past business
combinations and indefinite lived intangible assets, will cease upon adoption of
this statement. During fiscal year 2001, EMCORE recognized $1.1 million in
goodwill amortization. Identifiable intangible assets will continue to be
amortized over their useful lives and reviewed for impairment in accordance with
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". EMCORE is required to implement SFAS No.
142 in fiscal year 2003. EMCORE is planning to early adopt SFAS No. 142 in the
first quarter of fiscal year 2002.
In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations and costs associated with the retirement of tangible long-lived
assets. EMCORE is required to implement SFAS No. 143 in fiscal year 2003. EMCORE
is currently evaluating the impact that the adoption of SFAS No. 143 will have
on its results of operations and financial position.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 replaces SFAS No. 121 and
establishes accounting and reporting standards for long-lived assets to be
disposed of by sale. This standard applies to all long-lived assets, including
discontinued operations. SFAS No. 144 requires that those assets be measured at
the lower of carrying amount or fair value less cost to sell. SFAS No. 144 also
broadens the reporting of discontinued operations to include all components of
an entity with operations that can be distinguished from the rest of the entity
that will be eliminated from the ongoing operations of the entity in a disposal
transaction. EMCORE is required to implement SFAS No. 144 in fiscal year 2003.
EMCORE is currently evaluating the impact that the adoption of SFAS No. 144 will
have on its results of operations and financial position, if any.
NOTE 3. Acquisitions
In January 2001, the Company purchased Analytical Solutions, Inc., and Training
Solutions, Inc. both located in Albuquerque, New Mexico. These companies provide
engineering support and analytical services in the form of performance analysis,
failure analysis, cross sectioning and parts qualification to a wide array of
high technology companies. The Company intends that the acquisition of these
companies will accelerate product development and qualification with customers,
particularly in fiberoptics. The total consideration for these two companies was
approximately $4.0 million which was paid in both cash and the Company's common
stock. The acquisition was recorded using the purchase method of accounting. The
Company allocated approximately $3.1 million to goodwill which is being
amortized over a period of five years. The remaining purchase price was
primarily allocated to fixed assets. The Company's results of operations would
not have been materially different had such purchase taken place on the first
day of the Company's fiscal year.
49
NOTE 4. Earnings Per Share
The Company accounts for earnings per share under the provision of Statement of
Financial Accounting Standards No. 128 "Earnings per Share." Basic earnings per
common share 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 convertible preferred stock and
the convertible subordinated notes have been excluded from the diluted 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) 2001 2000 1999
---- ---- ----
Loss before extraordinary item and cumulative effect of a change in
accounting principle.................................................. ($8,642) ($25,485) ($21,355)
Extraordinary item, loss on early retirement of debt........ - - (1,334)
Cumulative effect of a change in accounting principle....... (3,646) - -
--------- --------- ---------
Net loss.............................................................. ($12,288) ($25,485) ($22,689)
Preferred stock dividends.................................... - 83 319
Periodic accretion of preferred stock to redemption value.... - 40 52
--------- --------- ---------
Net loss attributable to common shareholders.......................... ($12,288) ($25,608) ($23,060)
========= ========= =========
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted average of outstanding common shares - basic.............. 34,438 31,156 21,180
Effect of dilutive securities:
Stock option and warrants................................. - - -
Preferred stocks.......................................... - - -
Convertible subordinated notes............................ - - -
Weighted average of outstanding common shares - diluted............ 34,438 31,156 21,180
========= ========= =========
- ------------------------------------------------------------------------------------------------------------------------------------
Loss per basic and diluted share before extraordinary item and
cumulative effect of a change in accounting principle.............. ($0.25) ($0.82) ($1.03)
========= ========= =========
Loss per basic and diluted share - Extraordinary item.............. - - ($0.06)
=========
Loss per basic and diluted share - Cumulative effect of a change in
accounting principle............................................... ($0.11) - -
========= ========= =========
Net loss per basic and diluted share............................... ($0.36) ($0.82) ($1.09)
========= ========= =========
- ------------------------------------------------------------------------------------------------------------------------------------
50
NOTE 5. 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 2001,
the Company invested an additional $4.6 million in this venture and recognized
losses totaling $4.9 million which has been recorded as a component of other
income and expense. As of September 30, 2001, the Company's net investment in
this joint venture amounted to $9.2 million. In November 2001, the Company
invested an additional $2.0 million into this joint venture.
In March 1997, the Company and a subsidiary of Uniroyal Technology Corporation
formed Uniroyal Optoelectronics LLC (UOE), 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 had a 49% non-controlling interest in this
joint venture and accounted for its investment under the equity method of
accounting. During fiscal year 2001, the Company invested an additional $2.4
million in this venture and recognized losses totaling $7.4 million which was
recorded as a component of other income and expense.
In August 2001, EMCORE sold its minority ownership position in the UOE joint
venture to Uniroyal Technology Corporation (UTCI) in exchange for approximately
2.0 million shares of UTCI common stock. The Company recorded a net gain on the
disposition of its interest in UOE of $10.0 million in its fourth quarter of
fiscal year 2001. The gain was recorded as a component of other income and
expense.
The Company's reported net loss for the year ended September 30, 2001 and 2000
would have been reduced by approximately $9.0 million each year if the
disposition had occurred on the first day of each respective period. For the
year ended September 30, 2001, the reduction in net loss is comprised of a
reduction in equity in losses of unconsolidated affiliates of $7.4 million and
the recognition of $1.6 million in deferred gross profit on sales of equipment
to the joint venture. For the year ended September 30, 2000, the reduction in
net loss is comprised of a reduction in equity in losses of unconsolidated
affiliates of $7.8 million and the recognition of $1.2 million in deferred gross
profit on sales of equipment to the joint venture. The pro forma statement of
operations figures above do not include the approximate gain on sale of $10.0
million.
The unaudited pro forma financial information in the paragraph above is based
upon available information and certain assumptions that management believes are
reasonable. The unaudited pro forma consolidated financial data above does not
purport to represent what EMCORE's financial position or results of operations
would have been had the UOE disposition in fact occurred as of the date or at
the beginning of the periods presented, or to project EMCORE's financial
position or results of operations for any future date or period.
In August 2001, EMCORE also made a $5.0 million aggregate principal amount
bridge loan (Bridge Loan) to UTCI; See NOTE 14 - Related Parties.
NOTE 6. Inventories
The components of inventories consisted of the following:
(in thousands) As of September 30,
----------------------------
2001 2000
------------- -------------
Raw materials $32,795 $19,594
Work-in-process 10,161 8,831
Finished goods 4,426 2,299
------------- -------------
Total $47,382 $30,724
============= =============
51
NOTE 7. Property, Plant and Equipment
Major classes of property and equipment are summarized below:
(in thousands) As of September 30,
Estimated ----------------------------
Useful Lives 2001 2000
--------------- -------------- -------------
Land.................................. - $2,502 $1,502
Building and improvements............. 15-40 years 62,911 16,427
Equipment............................. 3-5 years 77,915 58,160
Furniture and fixtures................ 5 years 10,969 7,373
Leasehold improvements................ 5 years 3,937 17,472
Construction in progress.............. - 27,268 -
Property and equipment
under capital lease............... 5 years 285 227
-------------- -------------
185,787 101,161
Less: accumulated depreciation and
amortization................ (42,564) (31,460)
-------------- -------------
Total $143,223 $69,701
============== =============
At September 30, 2001, minimum future lease payments due under the capital
leases are as follows:
(in thousands)
Period ending:
September 30, 2002 $ 65
September 30, 2003 39
September 30, 2004 7
September 30, 2005 1
---------
Total minimum lease payments 112
Less: amount representing interest
9
---------
Net minimum lease payments 103
Less: current portion 57
---------
Long-term portion $46
=========
Depreciation on owned property and equipment amounted to approximately $17.1
million, $8.0 million and $6.6 million for the years ended September 30, 2001,
2000 and 1999, respectively. Accumulated amortization on assets accounted under
capital leases amounted to approximately $0.2 million and $0.1 million as of
September 30, 2001 and 2000, respectively.
Included in equipment are 34 systems and 29 systems with a combined net book
value of approximately $24.8 million and $21.0 million at September 30, 2001 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.
52
NOTE 8. Accrued Expenses
Accrued expenses consisted of the following:
(in thousands) As of September 30,
----------------------------
2001 2000
----------------------------
Salary and other compensation costs.......... $5,520 $2,614
Interest..................................... 3,500 -
Warranty..................................... 1,254 846
Other........................................ 3,259 2,623
----------------------------
Total $13,533 $6,083
============================
NOTE 9. Debt Facilities
Convertible Subordinated Notes
In May 2001, EMCORE completed the private placement of $175 million aggregate
principal amount of 5% convertible subordinated notes due in May 2006. The notes
are convertible into EMCORE common stock at a conversion price of $48.76 per
share at the option of the holder. There are no financial covenants related to
these notes.
Bank Loans
In March 2001, EMCORE entered into an Amended and Restated Revolving Loan and
Security Agreement with a bank. This credit facility provides for revolving
loans in an amount up to $20.0 million outstanding at any one time, depending on
EMCORE's borrowing base. These loans bear interest payable monthly in arrears at
a rate equal to the lesser of the prime rate (6.0% at September 30, 2001) or
LIBOR (2.6% at September 30, 2001) plus a margin of 1.50%. The credit facility
matures on January 31, 2003. The loans under the credit facility are secured by
a security interest in substantially all of our personal property. There were no
borrowings under this facility and the Company was in compliance with all
covenants at September 30, 2001.
Extraordinary Item
In June 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
======
53
NOTE 10. Commitments and Contingencies
The Company leases certain facilities and equipment under non-cancelable
operating leases. Facility and equipment rent expense under such leases amounted
to approximately $806,000, $921,000 and $761,000 for the years ended September
30, 2001, 2000 and 1999, respectively. In January 2001, the Company purchased
its 80,000 sq. ft Somerset, NJ manufacturing building for RF materials, MR
sensors and MOCVD production systems.
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,
2001 are as follows:
(in thousands)
Period ending: Operating
------------
September 30, 2001 $341
September 30, 2002 298
September 30, 2003 110
September 30, 2004 4
------------
Total minimum lease payments $753
------------
In January 2001, the Company switched to a self-insurance medical and dental
health plan for health care coverage of its employees. The Company's maximum
self-insured exposure is $50,000 per claim with certain maximum aggregate policy
limits per claim year. The Company has accrued amounts equal to the actuarially
determined liabilities. The actuarial valuations are based on historical
information along certain assumptions about future events. Changes in
assumptions for such matters as medical costs and changes in actual experience
could cause these estimates to change in the near team.
In April 2001, EMCORE entered into a settlement agreement with Rockwell
Technologies, LLC which released us from any liability relating to our
manufacture and past sales of epitaxial wafers, chips and devices under
Rockwell's US Patent No. 4,368,098. EMCORE had adequate reserves recorded prior
to the settlement agreement.
In March 2001, EMCORE recorded a net gain of $5.9 million related to the
settlement of litigation. 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.
In fiscal year 2000, EMCORE guaranteed 49% of GELcore's unsecured three-year
$7.5 million debt facility obtained from GE Canada, Inc which matures in August
2003.
NOTE 11. 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 basis. 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,
2001 2000 1999
------------- ------------- -------------
US statutory income tax benefit rate (34.0)% (34.0)% (34.0)%
State rate, net of federal benefit (5.9)% (5.9)% (5.9)%
Change in valuation allowance 35.0% 33.9% 35.0%
Non-deductible amortization 4.8% 6.0% 4.8%
Other 0.1% - 0.1%
------------- ------------- -------------
Effective tax rate - - -
============= ============= =============
54
As a result of its losses, the Company did not incur any income tax expense
during the years ended September 30, 2001, 2000 and 1999. The components of the
Company's net deferred taxes were as follows:
(in thousands) For the years ended September 30,
---------------------------------
Deferred tax assets: 2001 2000
------------- --------------
Federal net operating loss carryforwards $21,096 $13,557
Research credit carryforwards (state and federal) 3,293 2,937
Inventory reserves 369 179
Accounts receivable reserves 387 362
Interest - 287
Accrued installation reserve - 177
Accrued warranty reserve 426 256
State net operating loss carryforwards 3,179 2,268
Other 828 158
Valuation reserve - federal (19,243) (13,455)
Valuation reserve - state (5,208) (4,263)
------------- --------------
Total deferred tax assets 5,127 2,463
Deferred tax liabilities:
Fixed assets and intangibles (5,127) (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, 2001, the Company has net operating loss carryforwards for
tax purposes of approximately $62.0 million that expire in the years 2003
through 2021. 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 12. 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 (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.
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 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
55
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, 2001, the Company has reserved a total of
8,419,235 shares of its common stock for future issuances as follows:
Number of shares
For exercise of outstanding warrants to purchase common stock 1,292,546
For exercise of outstanding common stock options 3,402,731
For future common stock option awards 3,240,492
For future issuances to employees under the Employee Stock Purchase Plan 483,466
--------------------
Total reserved 8,419,235
--------------------
NOTE 13. 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 Plans. The Company maintains two incentive stock option plans: the
2000 Stock Option Plan (the "2000 Plan") and the 1995 Incentive and Non
Statutory Stock Option Plan (the "1995 Plan" and, together with the 2000 Plan,
the "Option Plans"). The 1995 Plan authorizes the grant of options to purchase
up to 2,744,118 shares of the Company's common stock, and as of September 30,
2001, no options were available for issuance thereunder. The 2000 Plan
authorizes the grant of options to purchase up to 4,750,000 shares of the
Company's common stock, and as of September 30, 2001, 3,240,492 options were
available for issuance thereunder. Certain options under the Option Plans are
intended to qualify as incentive stock options pursuant to Section 422A of the
Internal Revenue Code.
During fiscal 2001, 270,900 options were granted pursuant to the 2000 Plan at
exercise prices ranging from $20.06 to $53.19 per share.
Stock options generally vest over three to five years and are exercisable over a
ten-year period. As of September 30, 2001, 2000 and 1999, options with respect
to 1,793,047, 1,581,805 and 554,439 were exercisable, respectively.
The following table summarizes the activity under the Option Plans:
Weighted Average
Shares Exercise Price
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
Granted 270,900 36.87
Exercised (462,315) 7.01
Cancelled (176,530) 28.85
--------- -----
Outstanding as of September 30, 2001 3,402,731 $15.49
========= ======
56
At September 30, 2001, stock options outstanding were as follows:
Weighted Average
Options Remaining Exercisable Weighted Average
Exercise Prices Outstanding Contractual Life (Years) Options Exercise Price
- ------------------------------------------------------------------------------------------------------
< $1.00 5,498 6.18 5,498 $ 0.27
$1 < to <= $5 215,047 4.62 184,607 2.12
$5 < to <= $10 1,400,615 6.69 853,078 6.38
$10 < to <= $20 165,780 7.28 67,580 10.91
$20 < to <= $30 1,303,391 8.62 652,104 22.06
> $30 312,400 8.99 30,180 40.79
------- ------
3,402,731 1,793,047
========= =========
In connection with the Company's acquisition of MODE in December 1997, EMCORE
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, 2001, there are 5,498
options outstanding at a weighted average exercise price of $0.27.
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
Exercised (137,056) 0.22
Cancelled - -
--------- ------
Outstanding as of September 30, 2001 5,498 $0.27
========= ======
57
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,
----------------------------------------
2001 2000 1999
------------- ------------- -------------
Loss before extraordinary item and
cumulative effect of a change in
accounting principle
As reported $8,642 $25,485 $21,355
Pro forma $13,000 $29,843 $22,648
Loss per basic and diluted share before
extraordinary item and cumulative effect of a
change in accounting principle
As reported $(0.25) $(0.82) $(1.03)
Pro forma $(0.37) $(0.96) $(1.09)
Net loss
As reported $12,288 $25,485 $22,689
Pro forma $16,646 $29,843 $23,983
Net loss per basic and diluted share
As reported $(0.36) $(0.82) $(1.09)
Pro forma $(0.48) $(0.96) $(1.15)
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 104%, 100% and 76% for fiscal
years 2001, 2000 and 1999, respectively; a risk-free interest rate of 3.9%, 5.9%
and 5.8% for fiscal years 2001, 2000 and 1999, respectively; and expected lives
of 5 years. The weighted average fair value of options granted during the years
ended September 30, 2001, 2000 and 1999 were $27.29, $17.90 and $9.05 per share,
respectively. Stock options granted by the Company prior to its initial public
offering were valued using the minimum value method under SFAS No. 123.
Warrants. Set forth below is a summary of the Company's outstanding warrants at
September 30, 2001:
Underlying
Security Exercise Price Warrants Expiration Date
Common Stock (1) $2.16 14,796 August 21, 2006
Common Stock (2) $5.10 822,256 October 25, 2001
Common Stock (3) $5.69 455,494 June 17, 2003
(1) issued in connection with EMCORE's December 1997 acquisition of MicroOptical
Devices, Inc.
(2) issued in connection with EMCORE's October 1996 debt guarantee; 100%
exercised in October 2001.
(3) issued in connection with EMCORE's June 1998 bank loan agreement.
58
NOTE 14. 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 5 - Joint Ventures. During the fiscal year ended
September 30, 2001, EMCORE sold three compound semiconductor production systems
to the venture totaling $4.2 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. During the years ended September
30, 2001, 2000 and 1999, sales made to the joint venture approximated $4.8
million, $3.9 million and $5.9 million, respectively. As of September 30, 2001
and 2000, the Company had an outstanding related party receivable of $1.6 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, 2001
and 2000, the Company had an outstanding related party receivable of $0.5
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, 2001, 2000 and 1999, sales
made through Hakuto approximated $14.5 million, $16.2 million and $10.2 million,
respectively.
From time to time, the Company has lent money to certain of its executive
officers and directors. Pursuant to due authorization from the Company's Board
of Directors, the Company lent $3.0 million to the Chief Executive Officer. The
promissory note bears interest at a rate of 5.18% per annum, compounded
annually. The note is fully secured by a pledge of shares of the Company's
common stock. Principal and accrued interest is payable in February 2004.
In August 2001, EMCORE made a $5.0 million aggregate principal amount bridge
loan (Bridge Loan) to UTCI, the proceeds of which were to be used by UTCI for
working capital and other corporate purposes. The Bridge Loan had an interest
rate equal to the prime rate and had a maturity date of the earlier of the
second anniversary of the date of the Bridge Loan and the closing of the sale of
the adhesives and sealants business of Uniroyal Engineered Products L.L.C., a
subsidiary of UTCI. The Bridge Loan was guaranteed by UOE and several other
subsidiaries of UTCI, and it was fully secured by a lien on, among other things,
UOE's cash, accounts receivable and a portion of UOE's equipment. The Bridge
Loan was also convertible under certain circumstances into UTCI common stock at
the Company's option. In November 2001, UTCI repaid the loan and accrued
interest in cash.
NOTE 15. 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. . The systems-related
business unit assists customers with device design, process development and
optimal configuration of TurboDisc production systems. Revenues for the
systems-related business unit consists of sales of EMCORE's TurboDisc production
systems as well as spare parts and services. 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, 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 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 - Summary of Significant Accounting Policies. 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.
59
Information about reported segment gross profit is as follows:
(in thousands) 2001 2000 1999
------------------------ ------------------------ ------------------------
Revenues:
Systems-related................... $131,141 $65,788 $44,477
Materials-related................. 53,473 38,718 13,864
------------------------ ------------------------ ------------------------
Total revenues............. 184,614 104,506 58,341
Cost of sales:
Systems-related................... 72,725 37,775 26,522
Materials-related................. 41,784 23,526 6,636
------------------------ ------------------------ ------------------------
Total cost of sales........ 114,509 61,301 33,158
------------------------ ------------------------ ------------------------
Gross profit:
Systems-related................... 58,416 28,013 17,955
Materials-related................. 11,689 15,192 7,228
------------------------ ------------------------ ------------------------
Total gross profit......... $70,105 $43,205 $25,183
------------------------ ------------------------ ------------------------
Gross margin:
Systems-related................... 44.5% 42.6% 40.4%
Materials-related................. 21.9% 39.2% 52.1%
------------------------ ------------------------ ------------------------
Total gross margin......... 38.0% 41.3% 43.2%
------------------------ ------------------------ ------------------------
EMCORE has generated a significant portion of its sales to customers outside the
United States. In fiscal 2001, 2000 and 1999, international sales constituted
47.7%, 38.6% and 52.5%, 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,
- ------------------------------------------------------------------------------------------------------------
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------
(in thousands) Revenue % of revenue Revenue % of revenue Revenue % of revenue
------- ------------ ------- ------------ ------- ------------
Region:
North America $96,551 52% $64,174 62% $27,698 48%
Asia 76,848 42% 34,656 33% 28,211 48%
Europe 11,215 6% 5,676 5% 2,432 4%
- --------------------- ------------- ---------------- ----------- --------------- ----------- ---------------
TOTAL $184,614 100% $104,506 100% $58,341 100%
======== ==== ======== ==== ======= ====
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 years 2001 and 1999, no individual customer had sales equal to
or in excess of 10% of total fiscal year revenues.
For the fiscal years ended September 30,
2001 2000 1999
---- ---- ----
Customer A - 14.0% -
- ------------------- ----------------- ---------------- -----------------
Customer B - 12.5% -
- ------------------- ----------------- ---------------- -----------------
60
NOTE 16. 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. All
employer contributions are made in the Company's common stock. For the years
ended September 30, 2001, 2000 and 1999, the Company contributed approximately
$730,000, $527,000 and $376,000, respectively, in common stock, to the Savings
Plan.
The Company adopted an Employee Stock Purchase Plan (the "Purchase Plan") in
fiscal 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. 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 500,000 shares of common stock for issuance under the
Purchase Plan. In January 2001, 16,534 shares of common stock were purchased
under the fiscal year 2000 Purchase Plan.
61
NOTE 17. Quarterly Financial Data (Unaudited)
Net Net
Income Income
Operating Net Net (Loss) (Loss)
Gross Income Income Income per Diluted per Diluted
Revenues Profit (Loss) (Loss)1 (Loss) Share1 Share
-------- ------ ------ ------- ------ ------ -----
(in thousands except per share
data)
Fiscal Year 1999:
December 31, 1998....... $10,125 $4,109 $(6,057) $(6,879) $(6,879) $(0.37) $(0.37)
March 31, 1999.......... 16,072 6,869 (1,802) (3,977) (3,977) (0.22) (0.22)
June 30, 1999........... 17,667 7,814 (1,893) (3,904) (5,238) (0.20) (0.26)
September 30, 1999...... 14,477 6,391 (4,604) (6,595) (6,595) (0.25) (0.25)
Fiscal Year 2000:
December 31, 1999....... 16,501 6,723 (3,807) (6,658) (6,658) (0.25) (0.25)
March 31, 2000.......... 23,925 9,936 (1,095) (4,207) (4,207) (0.14) (0.14)
June 30, 2000........... 30,023 12,486 (515) (1,460) (1,460) (0.04) (0.04)
September 30, 2000...... 34,057 14,060 (10,452) (13,160) (13,160) (0.39) (0.39)
Fiscal Year 2001:
- -------------------------------
Pre-SAB 101:
(as originally reported)
December 31, 2000....... 40,064 16,528 (4,368) (7,008) (7,008) (0.21) (0.21)
March 31, 2001.......... 47,907 19,581 (72) 2,944 2,944 0.08 0.08
June 30, 2001........... 52,890 21,900 760 (1,897) (1,897) (0.06) (0.06)
Post-SAB 101:
(as restated)
December 31, 2000....... 39,090 15,738 (5,158) (7,798) (11,444) (0.23) (0.34)
March 31, 2001.......... 44,825 16,776 (2,877) 139 139 0.00 0.00
June 30, 2001........... 52,652 22,026 886 (1,771) (1,771) (0.05) (0.05)
September 30, 2001...... 48,047 15,565 (7,135) 788 788 0.02 0.02
(1) - Before extraordinary loss (fiscal 1999) and cumulative effect of a change in accounting principle (fiscal 2001).
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.
Effective October 1, 2000, EMCORE changed its revenue recognition policy to
defer the portion of revenue related to installation and final acceptance until
such installation and final acceptance are completed. This change was made in
accordance with the implementation of U.S. Securities and Exchange Commission
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
(SAB 101). Previously, EMCORE had recognized 100 percent of revenue for products
at such time as the product specifications had been met and the title and risks
and rewards of ownership had transferred to the customer since EMCORE has
historically completed such installation services successfully and since such
services have required minimal costs to complete. The effect of this change is
reported as the cumulative effect of a change in accounting principle in the
year ended September 30, 2001. This net effect reflects the deferral as of
October 1, 2000 of $3.6 million of revenue and accrued installation expense
previously recognized. EMCORE recognized the revenue included in the cumulative
effect adjustment during the year ended September 30, 2001. The quarters ended
December 31, 2000, March 31, 2001 and June 30, 2001 have been restated to
reflect the adoption of SAB 101
62
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, 2001 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, 2001. 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, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended September 30, 2001, 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.
As discussed in Note 2 to the consolidated financial statements, the
Company changed its method of accounting for revenue to conform to the U.S.
Securities and Exchange Commission Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements".
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
November 27, 2001
63
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.
64
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 2001 Proxy Statement, which will be filed on or before January 28,
2002.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference
to EMCORE's 2001 Proxy Statement, which will be filed on or before January 28,
2002.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by reference
to EMCORE's 2001 Proxy Statement, which will be filed on or before January 28,
2002.
Item 13. Certain Relationships and Related Transactions
The information required by this term is incorporated herein by reference
to EMCORE's 2001 Proxy Statement, which will be filed on or before January 28,
2002.
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 Statements of Operations for the years ended
September 30, 2001, 2000 and 1999...................................................41
Consolidated Balance Sheets as of September 30, 2001 and 2000.......................42
Consolidated Statements of Shareholders' Equity for the years ended
September 30, 2001, 2000 and 1999...........................................43
Consolidated Statements of Cash Flows for the years ended
September 30, 2001, 2000 and 1999...................................................45
Notes to Consolidated Financial Statements..........................................46
Independent Auditors' Report........................................................63
14(a)(2) Financial Statement Schedule
Located immediately following the signature page of this report:
Schedule II - Valuation and qualifying accounts and reserves
Other schedules have been omitted since they are either not required or
not applicable.
65
14(a)(3) Exhibits
Exhibit No. Description
3.1 Restated Certificate of Incorporation, dated December 21, 2000
(incorporated by reference to Exhibit 3.1 the registrant's annual
report on Form 10-K for the fiscal year ended September 30,
2000).
3.2 Amended By-Laws, as amended December 6, 2000 (incorporated by
reference to Exhibit 3.2 to the registrant's annual report on
Form 10-K for the fiscal year ended September 30, 2000).
10.1 Specimen certificate for shares of common stock (incorporated by
reference to Exhibit 4.1 to Amendment No. 3 to the Registration
Statement on Form S-1 (File No. 333-18565) filed with the
Commission on February 24, 1997).
10.2 Form of $10.20 (pre-split) Warrant (incorporated by reference to
Exhibit 10.12 to Amendment No. 1 to the Registration Statement on
Form S-1 (File No. 333-18565) filed with the Commission on
February 6, 1997).
10.3 Form of $11.375 (pre-split) Warrant (incorporated by reference to
Exhibit 4.2 to the registrant's annual report on Form 10-K for
the fiscal year ended September 30, 1998).
10.4 Registration Rights Agreement relating to September 1996 warrant
issuance (incorporated by reference to Exhibit 10.6 to Amendment
No. 1 to the Registration Statement on Form S-1 (File No.
333-18565) filed with the Commission on February 6, 1997).
10.5 Registration Rights Agreement relating to December 1996 warrant
issuance (incorporated by reference to Exhibit 10.7 to Amendment
No. 1 to the Registration Statement on Form S-1 (File No.
333-18565) filed with the Commission on February 6, 1997).
10.6 Registration Rights Agreement, dated November 30, 1998 by and
between the Company, Hakuto, UMI and UTC (incorporated by
reference to Exhibit 10.16 to the registrant's annual report on
Form 10-K for the fiscal year ended September 30, 1998).
10.7 Registration Rights Agreement, dated as of May 26, 1999, by and
between EMCORE Corporation and GE Capital Equity Investments,
Inc. (incorporated by reference to Exhibit 10.19 to Amendment No.
2 to the Registration Statement on Form S-3 (File No. 333-71791)
filed with the Commission on June 9, 1999).
10.8 Indenture, dated as of May 7, 2001, between the Company and
Wilmington Trust Company, as Trustee (incorporated by reference
to Exhibit 4.1 to the registrant's quarterly report on Form 10-Q
for the fiscal quarter ended March 31, 2001).
10.9 Note, dated as of May 7, 2001, in the amount of $175,000,000
(incorporated by reference to Exhibit 4.2 to the registrant's
quarterly report on Form 10-Q for the fiscal quarter ended March
31, 2001).
10.10 Amended and Restated Revolving Loan and Security Agreement, dated
as of March 1, 2001, between the Company and First Union National
Bank (incorporated by reference to Exhibit 4.3 to the
registrant's quarterly report on Form 10-Q for the fiscal quarter
ended March 31, 2001).
10.11 Registration Rights Agreement, dated as of May 7, 2001, among the
Company and the Credit Suisse First Boston Corporation, on behalf
of the initial purchasers (incorporated by reference to Exhibit
10.1 to the registrant's quarterly report on Form 10-Q for the
fiscal quarter ended March 31, 2001).
10.12 Transaction Agreement dated January 20, 1999 between General
Electric Company and the Company (incorporated by reference to
Exhibit 10.1 to the Company's filing on Form 10-Q/A, dated May
17, 1999). Confidential treatment has been requested by the
Company for portions of this document. Such portions are
indicated by "[*]".
10.13 Long Term Purchase Agreement dated November 24, 1998 by and
between the Company and Space Systems/Loral, Inc. (incorporated
by reference to Exhibit 10.17 to the Company's filing on Form
10-K/A, dated May 17, 1999). Confidential treatment has been
requested by the Company for portions of this document. Such
portions are indicated by "[*]".
10.14 Purchase Order issued to the Company by General Motors
Corporation on November 17, 1996. (incorporated by reference to
Exhibit 10.15 to Amendment No. 1 to the 1997 S-1). Confidential
treatment has been requested by EMCORE with respect to portions
of this document. Such portions are indicated by "[*] ".
10.15 1995 Incentive and Non-Statutory Stock Option Plan (incorporated
by reference to Exhibit 10.1 to Amendment No. 1 to the 1997 S-1).
10.16 1996 Amendment to Option Plan (incorporated by reference to
Exhibit 10.2 to Amendment No. 1 to the 1997 S-1).
10.17 2000 Stock Option Plan (incorporated by reference to Exhibit 4.2
to Registration Statement on Form S-8 filed on May 11, 2001).
10.18 2000 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 4.3 to Registration Statement on Form S-8 filed on May
18, 2000)
10.19 Note, dated February 22, 2001 between the Company and Reuben F.
Richards, Jr.*
10.20 Membership Interest Purchase Agreement, dated as of August 2,
2001, by and among Uniroyal Technology Corporation, Uniroyal
Compound Semiconductor, Inc., Uniroyal Optoelectronics, LLC and
the Company (incorporated by reference to Exhibit 2.1 to the
Company's quarterly report on Form 10-Q for the fiscal quarter
ended June 30, 2001.
21 Subsidiaries of the Registrant.*
23.1 Consent of Deloitte & Touche LLP.*
- ----------
* Filed herewith
67
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, 2001.
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, 2001.
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
- --------------------------------------------------
Reuben F. Richards, Jr. (Principal Executive Officer)
/s/ THOMAS G. WERTHAN Vice President, Chief Financial Officer
- ------------------------------------------------------- and Director (Principal Accounting and
Thomas G. Werthan 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
68
Schedule II
-----------
EMCORE CORPORATION
Valuation and Qualifying Accounts and Reserves
For the years ended September 30, 2001, 2000 and 1999
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, 2001 $1,065,00 $370,000 $(296,000) $1,139,000
For the year ended September 30, 2000 563,000 780,000 (278,000) 1,065,000
For the year ended September 30, 1999 611,000 390,000 (438,000) 563,000
69
EXHIBIT 10.19
PROMISSORY NOTE
$3,000,000 Somerset, New Jersey
February 22, 2001
FOR VALUE RECEIVED, the undersigned, Reuben F. Richards, Jr. (the
"Borrower"), hereby promises to pay to the order of EMCORE Corporation (the
"Company"), in lawful money of the United States of America in immediately
available funds, at its offices at 145 Belmont Drive, Somerset, New Jersey 08873
(or such other place as Company may direct) the principal sum of THREE MILLION
DOLLARS AND NO CENTS ($3,000,000.00). Principal and accrued interest shall be
payable on February 22, 2004 (the "Maturity Date") at the foregoing address.
1. Interest. Interest shall accrue on the unpaid principal balance of this
Note at a rate of 5.18% per annum, compounded annually. Interest shall be
payable on the Maturity Date.
2. Limited Recourse. The Company's recourse in respect of the Borrower's
obligations under this Note shall be limited to the Collateral (as defined in
the Pledge Agreement, dated as of the date hereof, between the Company and the
Borrower (the "Pledge Agreement")).
3. Security. All obligations of Borrower under this Note are secured by a
pledge of certain shares of EMCORE Corporation common stock ("Common Stock")
pursuant to the Pledge Agreement. By executing this Note, the Borrower hereby
agrees to execute such other instruments as the Company may direct in order to
evidence and perfect Company's security interest in such Common Stock (together
with the Pledge Agreement, the "Pledge Documents").
4. Covenant of the Borrower. Upon receipt of the proceeds of this Note, the
Borrower shall apply all such proceeds towards the purchase of a personal
residence.
5. Voluntary Prepayments. The Borrower may, at his option, prepay at any
time all or any portion of the principal amount of this Note then outstanding,
together with all accrued interest thereon through the date of such prepayment,
without premium or penalty.
6. Acceleration.
(a) If the Borrower voluntarily terminates his employment with the Company
for any reason or if the Company terminates the Borrower's employment without
cause, the Company shall have the right to accelerate all or part of the amounts
outstanding under this Note. If the Borrower is terminated for cause, all
principal and interest outstanding under this Note will automatically become due
and payable sixty (60) calendar days after the termination of the Borrower's
service with the Company.
(b) The Company will have the right to accelerate the principal and
interest due under this Note upon the occurrence of the following events: (i)
there is default under, or a breach of, any covenant, representation or warranty
of the Borrower under this Note or the Pledge Documents, (ii) the Borrower
applies for or consents to the appointment of a receiver, trustee, custodian or
liquidator of any of his property, admits in writing his inability to pay his
debts as they mature, makes a general assignment as a bankrupt or insolvent or
is the subject of an order for relief under Chapter 13 of the United States
Bankruptcy Code or files a voluntary petition in bankruptcy or a petition or
answer seeking an arrangement with creditors or to take advantage of any
bankruptcy, insolvency, readjustment or debt or liquidation law or statute, or
an answer admitting the material allegations of a petition filed against him in
any proceeding under any such law or (iii) an order, judgment or decree is
entered by any court of competent jurisdiction, without the application,
approval or consent of the Borrower, approving a petition appointing a receiver,
trustee, custodian or liquidator of all or a substantial part of the assets of
the Borrower and such order, judgment or decree continues unstayed and in effect
for a period of thirty (30) days; provided that if an event specified in (ii) or
(iii) above shall occur, all principal and interest outstanding under this Note
shall become automatically due and payable.
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7. Notices. All notices and other communications required or permitted to
be given hereunder shall be in writing and shall be deemed to have been duly
given if delivered personally or sent by certified mail, return receipt
requested, first-class postage prepaid to the below listed parties at the
following addresses:
If to the Company, to:
EMCORE Corporation
145 Belmont Drive
Somerset, NJ 08873
Attention: CFO
If to the Borrower, at the address set forth at the end of this Note, or to
such other address as either party shall have last designated by notice to the
other party. All such notices and communications shall be deemed to have been
received on the earlier of the date of receipt and the third business day after
the date of mailing thereof.
8. Amendments. No amendment of this Note shall be effective unless in
writing and signed by the Borrower and the Company.
9. Waiver. The Borrower, for himself and his legal representatives and
successors, hereby expressly waives presentment, demand, notice, protest, and
all other demands or notices in connection with the delivery, acceptance,
endorsement, performance, default, or enforcement of this Note.
10. No Set-Off. This Note is not subject to set-off by the Borrower for any
amounts for any reason.
11. Effect of Delay or Omission. No delay or omission of the Company in
exercising any right or remedy hereunder shall constitute a waiver of any such
right or remedy.
12. Costs of Collection. The Borrower will pay all costs and expenses of
collection, including reasonable attorneys' fees, incurred or paid by the
Company in enforcing this Note or the obligations hereby evidenced, to the
extent permitted by law.
13. Governing Law. This Note shall be construed and enforced in accordance
with the laws of the State of New Jersey, without regard to any conflict of laws
rules.
14. Headings. The section and paragraph headings hereof are for convenience
of reference only and shall not be deemed to construe or affect the meaning of
any of the provisions hereof.
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IN WITNESS WHEREOF, the Borrower has executed this Note as of the date
first above written, and by such execution acknowledges each of the provisions
of this Note.
/s/ Reuben F. Richards, Jr.
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Reuben F. Richards, Jr.
Address:
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Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
MicroOptical Devices, Inc., a Delaware corporation
Analytical Solutions, Inc. a New Mexico corporation
Training Solutions, Inc., a New Mexico corporation
EMCORE IRB Company, Inc., a New Mexico corporation
EMCORE Real Estate Holding Corporation, a Delaware corporation
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement Nos.
333-27507, 333-37306, 333-36445, 333-39547, 333-60816 and 333-45827 of EMCORE
Corporation on Form S-8 and Registration Statement Nos. 333-94911, 333-87753,
333-65526 and 333-42514 of EMCORE Corporation on Form S-3 of our report dated
November 27, 2001 appearing in this Annual Report on Form 10-K of EMCORE
Corporation for the year ended September 30, 2001.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
December 28, 2001