UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one):
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to__________
Commission File Number: 0-22175
EMCORE Corporation
(Exact name of Registrant as specified in its charter)
NEW JERSEY
(State or other jurisdiction of incorporation or organization)
22-2746503
(IRS Employer Identification No.)
145 Belmont Drive
Somerset, NJ 08873
(Address of principal executive offices) (zip code)
(732) 271-9090
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes:[X] No:[ ]
The number of shares of the registrant's common stock, no par value,
outstanding as of August 1, 2002 was 36,727,520.
ITEM 1. Financial Statements
EMCORE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and nine months ended June 30, 2002 and 2001
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------- --------------------
2002 2001 2002 2001
Revenues:
Systems-related............................... $ 9,910 $38,711 $24,546 $93,915
Materials-related............................. 10,365 13,941 37,944 42,652
---------------------------------------------------
Total revenues............................ 20,275 52,652 62,490 136,567
Cost of revenues:
Systems-related............................... 6,859 20,932 19,123 53,011
Materials-related............................. 10,889 9,694 47,425 29,016
---------------------------------------------------
Total cost of revenues.................... 17,748 30,626 66,548 82,027
---------------------------------------------------
Gross profit (loss)..................... 2,527 22,026 (4,058) 54,540
Operating expenses:
Selling, general and administrative .......... 6,522 7,096 23,003 21,631
Goodwill amortization......................... - 155 - 992
Research and development...................... 9,398 13,889 32,970 39,066
Impairment and restructuring.................. - - 35,939 -
---------------------------------------------------
Total operating expenses.................. 15,920 21,140 91,912 61,689
---------------------------------------------------
Operating profit (loss)................. (13,393) 886 (95,970) (7,149)
Other expenses:
Interest expense (income), net................. 1,761 (68) 4,371 (2,354)
Other expense (income), net.................... - - 13,262 (5,890)
Equity in net loss of unconsolidated affiliate. 769 2,725 1,997 10,525
----------------------------------------------------
Total other expenses....................... 2,530 2,657 19,630 2,281
----------------------------------------------------
Loss before cumulative effect of a change
in accounting principle................. (15,923) (1,771) (115,600) (9,430)
Cumulative effect of a change in accounting
principle........................................ - - - (3,646)
----------------------------------------------------
Net loss................................ $(15,923) $(1,771) $(115,600) $(13,076)
=====================================================
Per share data: (see note 5)
Loss per basic and diluted shares before
cumulative effect of a change in accounting
principle....................................... $(0.43) $(0.05) $(3.17) $(0.28)
=====================================================
Net loss per basic and diluted shares............. $(0.43) $(0.05) $(3.17) $(0.38)
=====================================================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
EMCORE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
As of June 30, 2002 and September 30, 2001
(in thousands, except share data)
As of As of
June 30, September 30,
ASSETS 2002 2001
------------------- -------------
(unaudited)
Current assets:
Cash and cash equivalents....................................................... $54,290 $71,239
Marketable securities........................................................... 34,807 76,422
Accounts receivable, net of allowance for doubtful accounts of $3,674 and
$1,139 at June 30, 2002 and September 30, 2001, respectively................. 19,974 30,918
Accounts receivable - related party............................................. 478 2,161
Inventories..................................................................... 32,011 47,382
Prepaid expenses and other current assets....................................... 2,214 4,471
--------------------------------
Total current assets....................................................... 143,774 232,593
Property, plant and equipment, net................................................ 104,589 143,223
Goodwill, net..................................................................... 20,384 2,687
Investments in unconsolidated affiliate........................................... 9,191 9,228
Intangible assets, net............................................................ 3,190 -
Other assets, net................................................................. 12,372 15,822
--------------------------------
Total assets............................................................... $293,500 $403,553
================================
LIABILITIES and SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $8,026 $14,075
Accrued expenses................................................................ 10,518 13,533
Advanced billings............................................................... 4,195 3,715
Capitalized lease obligation - current.......................................... 74 57
--------------------------------
Total current liabilities.................................................. 22,813 31,380
Convertible subordinated notes.................................................... 175,000 175,000
Capitalized lease obligation, net of current portion.............................. 102 46
--------------------------------
Total liabilities.......................................................... 197,915 206,426
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, 36,711,335 shares
issued and 36,691,507 outstanding at June 30, 2002; 35,617,303 shares issued
and 35,597,475 outstanding at September 30, 2001............................. 333,909 327,559
Accumulated deficit........................................................... (236,752) (121,152)
Accumulated other comprehensive loss.......................................... (606) (8,314)
Shareholders' notes receivable................................................ (34) (34)
Treasury stock, at cost; 19,828 shares at June 30, 2002 and
September 30, 2001......................................................... (932) (932)
--------------------------------
Total shareholders' equity................................................. 95,585 197,127
--------------------------------
Total liabilities and shareholders' equity................................. $293,500 $403,553
================================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
EMCORE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended June 30, 2002 and 2001
(in thousands) (unaudited)
Nine Months Ended June
30,
------------------------
2002 2001
------------------------
Cash flows from operating activities:
Net loss......................................................... $(115,600) $(13,076)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization................................. 13,633 12,333
Provision for doubtful accounts............................... 1,579 342
Deferred gain on sale to unconsolidated affiliate............. - 351
Equity in net loss of unconsolidated affiliate................ 1,997 10,525
Compensatory stock issuances.................................. 573 671
Impairment of equity investment............................... 13,262 -
Cumulative effect of a change in accounting principle......... - 3,646
Loss from impairment, restructuring charges and other
charges..................................................... 50,443 -
Decrease (increase) in assets:
Accounts receivable - trade.......................... 6,768 (22,089)
Accounts receivable - related parties................ 1,683 (1,579)
Inventories.......................................... 3,315 (22,509)
Other current assets................................. 2,257 (4,049)
Other assets......................................... (586) (10,804)
Increase (decrease) in liabilities:
Accounts payable..................................... (6,049) 7,929
Accrued expenses..................................... (3,971) 6,037
Advanced billings.................................... 480 (6,601)
Other................................................ 145 (209)
------------------------
Total adjustments............................... 85,529 (26,006)
------------------------
Net cash used for operating activities....................... (30,071) (39,082)
Cash flows from investing activities:
Purchase of property, plant, and equipment....................... (6,460) (79,111)
Investments in unconsolidated affiliate.......................... (1,960) (6,302)
Proceeds from collection of notes receivable..................... 5,000 -
Cash paid for acquisition, net of cash acquired.................. (25,084) (1,707)
Proceeds from sales of marketable securities, net................ 35,916 (27,375)
------------------------
Net cash provided by (used for) investing activities......... 7,412 (114,495)
Cash flows from financing activities:
Payments on capital lease obligations............................ (67) (8)
Proceeds from exercise of stock options and employee stock
purchase plan.................................................. 1,583 3,645
Proceeds from shareholders' notes receivable..................... - 5,760
Proceeds from convertible subordinated debenture................. - 175,000
Proceeds from exercise of stock purchase warrants................ 4,194 48
------------------------
Net cash provided by financing activities.................... 5,710 184,445
Net decrease in cash and cash equivalents........... (16,949) 30,868
------------------------
Cash and cash equivalents, beginning of period................... 71,239 50,849
------------------------
Cash and cash equivalents, end of period......................... 54,290 $81,717
========================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest.................... $8,229 $26
========================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended September 30, 2000 and 2001 and the nine months
ended June 30, 2002
(unaudited)
(in thousands)
-------------------
Accumulated
Common Common Other Shareholders' Total
Stock Stock Accumulated Comprehensive Notes Treasury Shareholders'
Shares Amount Deficit Income (Loss) Receivable Stock Equity
----------------------------------------------------------------------------------------
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
Net loss.................................. (115,600) (115,600)
Impairment of equity investment........... 7,667 7,667
Unrealized loss on marketable
securities.............................. (104) (104)
Translation adjustment.................... 145 145
---------------
Comprehensive loss...................... (107,892)
Stock option exercise..................... 159 1,022 1,022
Stock purchase warrant exercise........... 823 4,194 4,194
Compensatory stock issuances.............. 64 573 573
Issuance of common stock -
Employee Stock Purchase Plan............ 48 561 561
----------------------------------------------------------------------------------------
Balance at June 30, 2002............. 36,691 $333,909 $(236,752) $606 $(34) $(932) $95,585
====== ======== ========== ==== ===== ====== =======
The accompanying notes are an integral part of these consolidated
financial statements.
EMCORE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Interim Financial Information and Description of Business
The accompanying unaudited condensed consolidated financial statements of
EMCORE Corporation ("EMCORE" or the "Company") reflect all adjustments
considered necessary by management to present fairly EMCORE's consolidated
financial position as of June 30, 2002, the consolidated results of operations
for the three and nine-month periods ended June 30, 2002 and 2001 and the
consolidated cash flows for the nine-month periods ended June 30, 2002 and 2001.
All adjustments reflected in the accompanying unaudited condensed consolidated
financial statements are of a normal recurring nature unless otherwise noted.
Prior period balances have been reclassified to conform with the current period
financial statement presentation. The results of operations for the nine-month
period ended June 30, 2002 are not necessarily indicative of the results for the
fiscal year ending September 30, 2002 or any future interim period.
EMCORE has two reportable operating segments: the systems-related
business unit and the materials-related business unit. The systems-related
business unit designs, develops and manufactures tools and manufacturing
processes used to fabricate compound semiconductor wafers 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. There are no intercompany sales
transactions between the two operating segments. Available segment information
has been presented in the Statements of Operations.
NOTE 2. Impairment and Restructuring Charges
Subsequent Event
For the nine-month periods ended June 30, 2002 and 2001, revenues
decreased 54% or $74.1 million from $136.6 million in the prior year to $62.5
million. The current economic climate has reduced capital spending dramatically
during the past year, particularly in the data and telecommunication sectors,
where EMCORE has traditionally sold a significant portion of equipment and
material-related products. In July 2002, EMCORE announced a workforce reduction
of approximately 90 employees, all of whom were entitled to termination
benefits. Current headcount is now 553 employees, a reduction of 314, or 36%
since September 2001. EMCORE will pay out approximately $750,000 for employee
termination costs in the fourth quarter ended September 30, 2002. Management
does not believe that the restructuring will have a material impact on revenues.
Second Quarter Events
During the quarter ended March 31, 2002, EMCORE recorded pre-tax charges
to income totaling $50.4 million, which included restructuring and impairment
charges of $35.9 million and other charges of $14.5 million, as described below.
EMCORE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. Impairment and Restructuring Charges (continued)
Restructuring Charges
During the second quarter of fiscal year 2002, EMCORE continued a
restructuring program, consisting of the appointment of a Chief Operating
Officer, re-alignment of all engineering, manufacturing and sales/marketing
operations, as well as workforce reductions. Included in the provision for
restructuring and impairment charges were severance charges of $1.1 million
related to employee termination costs for approximately 120 employees. The
workforce was reduced in both of EMCORE's business segments, all of which were
entitled to termination benefits. Of the severance charges recorded in the
second quarter, $637,000 related to EMCORE's systems business segment and
$463,000 related to the materials business segment. As of June 30, 2002,
substantially all cash outlays for the employee termination costs accrued at
March 31, 2002 have been paid.
Impairment Charges
During the second quarter of fiscal year 2002, EMCORE recorded $34.8
million of non-cash impairment charges related to its fixed assets. Of this
charge, $11.3 million related to certain manufacturing assets to be disposed of.
Management has committed to a plan to dispose of these assets, through either
abandonment or sale. Such decision was made based upon the continued downturn in
the economic environment that affects certain business units, which caused these
manufacturing assets to become idle. EMCORE expects to complete its disposal of
these assets by December 31, 2002. The carrying value of this equipment before
write-down to net realizable value was $11.5 million.
The remainder of the impairment charge related principally to EMCORE's
electronic materials, electronic devices and fiber-optic business units. During
the past two years, EMCORE has completed new facilities for these businesses in
anticipation of expanding market prospects. Business forecasts updated in the
second quarter indicated significantly diminished prospects for these units,
primarily based on the downturn in the telecommunications industry. As a result
of these circumstances, management determined that the long-lived assets of
these operations should be assessed for impairment. Based on the outcome of this
assessment pursuant to SFAS 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed Of", EMCORE recorded a $23.5
million non-cash asset impairment charge to fixed assets in the second quarter
of 2002. The fair values of the assets were determined based upon a calculation
of the present value of the expected future cash flows to be generated by these
facilities.
Of the impairment charges recorded in the second quarter, $4.0 million
related to EMCORE's systems business segment and $30.8 million related to the
materials business segment.
Other Charges
During the second quarter of fiscal year 2002, EMCORE recorded a $11.9
million charge to cost of revenues, of which $3.5 million related to EMCORE's
systems business segment and $8.4 million related to the materials business
segment. Consistent with the downturn in the markets served by EMCORE,
management evaluated its inventory levels in light of actual and forecasted
revenue. The inventory charge related to reserves for excess inventory that
EMCORE believed it was carrying as a result of the market conditions. EMCORE
will continue to monitor its reserves and to the extent that inventories that
have been reserved as excess are ultimately sold, such amounts will be disclosed
in the future.
Included in selling, general, and administrative expense was a $2.6
million charge principally related to a loss provision for accounts receivable
for customers whose current financial condition and payment history indicate
payment is doubtful.
7
EMCORE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. Impairment and Restructuring Charges (continued)
First Quarter Event
The Uniroyal Technology Corporation, Inc. (UTCI) common stock received in
August 2001 is classified by EMCORE as an available-for-sale security with any
unrealized gains and losses being recorded as a component of accumulated other
comprehensive loss in shareholders' equity. In the quarter ended December 31,
2001, management evaluated the relevant facts and circumstances, including the
current fair market value of UTCI common stock, and determined that an
other-than-temporary impairment of the investment existed. Accordingly, EMCORE
took a charge of $13.3 million to establish a new cost basis of $753,000 for the
UTCI common stock, which was recorded as other expense in the consolidated
Statement of Operations. As of June 30, 2002, the UTCI common stock had a fair
market value of $198,000, with $550,000 recorded as an unrealized loss in
shareholders' equity. 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 adversely
affected.
NOTE 3. Acquisition
In March 2002, EMCORE acquired certain assets of the Applied Solar
Division of Tecstar, Inc. and Tecstar Power Systems, Inc ("Tecstar"). This
acquisition vertically integrates all aspects of satellite solar panel
construction within EMCORE and enables the Company to further penetrate the
satellite communications market. The total cash purchase price, including
related acquisitions costs, was approximately $25.1 million. The results of
operations from this acquisition have been included in EMCORE's consolidated
results of operations from the acquisition closing date. The purchase price
allocation was as follows:
Property and equipment $2,242
Other assets 558
Intellectual property 1,900
Goodwill 20,384
------
Total $25,084
=======
NOTE 4. Divestiture
In May 2002, EMCORE sold Analytical Solutions, Inc. and Training
Solutions, Inc. back to the original owner. These companies will continue to
provide engineering support and analytical services to EMCORE. The total
consideration received for these two companies was approximately $3.0 million in
the form of a six-year promissory note with an interest rate of 5.71% per annum.
Total consideration approximated net book value so no material gain or loss was
recorded from this sale. Principal and interest payments owed to EMCORE can be
applied against credits for services provided by the companies.
NOTE 5. Loss Per Share
EMCORE accounts for earnings per share under the provision of SFAS 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, warrants and shares issuable upon conversion of convertible
subordinated debt have been excluded from the diluted weighted average 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.
8
EMCORE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. Loss Per Share (continued)
For the three months For the nine months
(in thousands, except per share data) ended June 30, ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
Loss before cumulative effect of a change in accounting
principle......................................................... $(15,923) $(1,771) $(115,600) $(9,430)
Cumulative effect of a change in accounting principle.... - - - (3,646)
--------- --------------- ---------- -------
Net loss attributable to common shareholders...................... $(15,923) $(1,771) $(115,600) ($13,076)
========= ======== ========== =========
- -------------------------------------------------------------------------------------------------------------------------------
Weighted average of outstanding common shares - basic and diluted. 36,683 34,452 36,496 34,256
====== ====== ====== ======
- -------------------------------------------------------------------------------------------------------------------------------
Loss per basic and diluted share before cumulative effect of
a change in accounting principle.................................. $(0.43) $(0.05) $(3.17) ($0.28)
======= ======= ======= =======
Loss per basic and diluted share - Cumulative effect of a
change in accounting principle.................................... - - - ($0.10)
--------- --------------- ---------- -------
Net loss per basic and diluted share.............................. $(0.43) $(0.05) $(3.17) ($0.38)
======= ======= ======= =======
NOTE 6. Inventories
The components of inventories consisted of the following:
(in thousands)
As of As of
June 30, 2002 September 30, 2001
---------------------- ----------------------
Raw materials $20,278 $32,795
Work-in-process 8,728 10,161
Finished goods 3,005 4,426
---------------------- ----------------------
Total $32,011 $47,382
====================== ======================
NOTE 7. Debt Facilities
In March 2001, EMCORE entered into a $20.0 million Amended and Restated
Revolving Loan and Security Agreement with a bank. There have been no borrowings
under this facility since inception and management had no plans to use this
facility. EMCORE canceled this facility in May 2002.
9
EMCORE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. Joint Venture
In May 1999, General Electric Lighting and EMCORE formed GELcore, a joint
venture to develop and market High Brightness Light-Emitting Diode (HB LED)
lighting products. General Electric Lighting and EMCORE have agreed that this
joint venture will be the exclusive vehicle for each party's participation in
solid state lighting. Under the terms of the joint venture agreement, EMCORE has
a 49% non-controlling interest in the GELcore venture and accounts for its
investment under the equity method of accounting. For the three-month periods
ended June 30, 2002, and 2001, EMCORE recognized a loss of $0.8 million and $1.4
million, respectively. For the nine-month periods ended June 30, 2002 and 2001,
EMCORE recognized a loss of $2.0 million and $3.6 million, respectively, related
to this joint venture which has been recorded as a component of other income and
expense. As of June 30, 2002, EMCORE's net investment in this joint venture
amounted to approximately $9.2 million.
NOTE 9. Related Party
The President of Hakuto Co. Ltd. (Hakuto), the Company's Asian
distributor, is a member of EMCORE's Board of Directors and Hakuto is a minority
shareholder of EMCORE. During the three-month periods ended June 30, 2002 and
2001, sales made through Hakuto amounted to approximately $0.2 million and $0.8
million, respectively. During the nine-month period ended June 30, 2002 and
2001, sales made through Hakuto amounted to approximately $1.2 million and $8.7
million, respectively.
NOTE 10. Recent Accounting Pronouncements
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. 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 adopted SFAS No. 142 on October 1,
2001 and completed its transition test for impairment during the quarter ended
March 31, 2002. No impairment adjustment was deemed necessary by management. Had
SFAS No. 142 been in effect for the three and nine months ended June 30, 2001,
EMCORE's net loss for those periods would have decreased by $155,000 or $0.00
per share and $992,000 or $0.03 per share, respectively.
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. Management
believes that adopting this statement will not have a material impact on the
financial position, results of operations or cash flows of EMCORE.
In 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. Management believes
that adopting this statement will not have a material impact on the financial
position, results of operations or cash flows of EMCORE.
10
EMCORE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. Recent Accounting Pronouncements (continued)
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements 4, 44 and 64, Amendment of FASB Statement 13, and Technical
Corrections". SFAS No. 145 rescinds the provisions of SFAS No. 4 that requires
companies to classify certain gains and losses from debt extinguishments as
extraordinary items, eliminates the provisions of SFAS No. 44 regarding
transition to the Motor Carrier Act of 1980 and amends the provisions of SFAS
No. 13 to require that certain lease modifications be treated as sale leaseback
transactions. The provisions of SFAS No. 145 related to classification of debt
extinguishment are effective for fiscal years beginning after May 15, 2002.
Commencing October 1, 2002, EMCORE will classify debt extinguishment costs
within income from operations and will reclassify previously reported debt
extinguishments as such. The provisions of SFAS No. 145 related to lease
modification are effective for transactions occurring after May 15, 2002.
Management believes that adopting this statement will not have a material impact
on the financial position, results of operations or cash flows of EMCORE.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 nullifies Emerging
Issues Task Force ("EITF") No. 94-3, "Liability Recognition for certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in as Restructuring)". The principal difference between SFAS No.
146 and EITF No. 94-3 relates to its requirements for recognition of a liability
for a cost associated with an exit or disposal activity. SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Under EITF No. 94-3, a liability for
an exit cost was recognized at the date of an entity's commitment to an exit
plan. SFAS No. 146 is effective for exit and disposal activities that are
initiated after December 31, 2002. Management believes that adopting this
statement will not have a material impact on the financial position, results of
operations or cash flows of EMCORE.
11
FORWARD-LOOKING STATEMENTS
The information provided herein may include forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 relating to future events that involve risks and
uncertainties. Words such as "expects," "anticipates," "intends," "plans,"
believes," and "estimates," and variations of these words and similar
expressions, identify these forward-looking statements. These forward-looking
statements include, without limitation, (a) any statements or implications
regarding EMCORE's ability to remain competitive and a leader in its industry,
and the future growth of EMCORE, the industry and the economy in general; (b)
statements regarding the expected level and timing of benefits to EMCORE from
its restructuring and realignment efforts, including (i) expected cost
reductions and their impact on EMCORE's financial performance, (ii) expected
improvement to EMCORE's product and technology development programs, and (iii)
the belief that the restructuring and realignment efforts will position EMCORE
well in the current business environment and prepare it for future growth with
increasingly competitive new product offerings and long-term cost structure; (c)
statements regarding the anticipated cost of the restructuring and realignment
efforts; (d) statements regarding the anticipated charges to be recorded by
EMCORE to reduce the carrying value of excess and obsolete inventory and
doubtful accounts; and (e) any and all guidance provided by EMCORE regarding its
expected financial performance in current or future periods, including, without
limitation, with respect to anticipated revenues for the fourth quarter of
Fiscal 2002 and subsequent periods. These forward-looking statements involve
risks and uncertainties that could cause actual results to differ materially
from those projected, including without limitation, the following: (1) EMCORE's
restructuring and realignment efforts may not be successful in achieving their
expected benefits, may be insufficient to align EMCORE's operations with
customer demand and the changes affecting our industry, or may be more costly
than currently anticipated; (2) due to the current economic slowdown, in
general, and setbacks in our customers' businesses, in particular, our ability
to predict EMCORE's financial performance for future periods is far more
difficult than in the past; and (3) other risks and uncertainties described in
EMCORE's filings with the Securities and Exchange Commission such as
cancellations, rescheduling or delays in product shipments; manufacturing
capacity constraints; lengthy sales and qualification cycles; difficulties in
the production process; changes in semiconductor industry growth, increased
competition, delays in developing and commercializing new products, and other
factors. The forward-looking statements contained in this Form 10-Q are made as
of the date hereof and EMCORE does not assume any obligation to update the
reasons why actual results could differ materially from those projected in the
forward-looking statements.
ITEM 2.
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
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.
12
Growth in our industry had been 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. In addition, until
recently the demands for higher volumes of a broad range of higher performance
devices have resulted in manufacturers increasingly outsourcing their needs for
compound semiconductor wafers and devices. We believe our expertise in materials
science and process technology provides us with a competitive advantage to
manufacture compound semiconductor wafers and devices in high volumes.
Wafers and Devices
EMCORE offers a broad array of compound semiconductor wafers and devices,
including optical devices, such as VCSELs and photodetectors used in high-speed
data communications and telecommunications networks, radio frequency materials
(RF materials) employed in mobile communications products such as wireless
modems and handsets, solar cells and panels used to power commercial and
military satellites, high brightness light-emitting diodes (HB LEDs) used for
several lighting markets, and magneto resistive sensors (MR sensors) used for
various automotive applications.
o Solar Cells and Panels. Solar panels 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 cells provide the
electrical power for a satellite while solar cell efficiency dictates
the amount of electrical power to the satellite and bears upon the
weight, launch costs and potential revenues of the satellite. With the
Tecstar acquisition, EMCORE has fully integrated the production of
solar panels using EMCORE's solar cells.
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 high-speed data communications network and
telecommunications markets, including the Gigabit Ethernet,
FibreChannel, Very Short Reach OC-192, the emerging Very Short Reach
OC-768 and related markets. Our strategy is to manufacture the
otherwise 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 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,
channel lettering and flat panel displays.
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 solid state lighting and
global communications applications.
Customers
Our customers include Agilent Technologies Ltd., Anadigics Inc.,
Boeing-Spectrolab, General Motors Corp., 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.
13
Results of Operations
The following table sets forth the condensed consolidated Statement of
Operations data of EMCORE expressed as a percentage of total revenues for the
three and nine months ended June 30, 2002 and 2001:
Statements of Operations Data:
For the three months For the nine months
ended June 30, ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
Revenues............................................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues..................................... 87.5% 58.2% 106.5% 60.1%
---------- ----------- ----------- ------------
Gross profit (loss)....................... 12.5% 41.8% (6.5)% 39.9%
Operating expenses:
Selling, general and administrative............. 32.2% 13.5% 36.8% 15.8%
Goodwill amortization........................... - 0.3% - 0.7%
Research and development........................ 46.4% 26.4% 52.8% 28.6%
Impairment and restructuring.................... - - 57.5% -
---------- ----------- ----------- ------------
Total operating expenses..................... 78.5% 40.2% 147.1% 45.2%
---------- ----------- ----------- ------------
Operating profit (loss)................... (66.1)% 1.7% (153.6)% (5.2)%
Other expenses:
Interest expense (income), net.................. 8.7% (0.2)% 7.0% (1.7)%
Other expense (income), net..................... - - 21.2% (4.3)%
Equity in net loss of unconsolidated affiliate.. 3.8% 5.2% 3.2% 7.7%
---------- ----------- ----------- ------------
Total other expenses......................... 12.5% 5.0% 31.4% 1.7%
Loss before cumulative effect
of a change in accounting principle....... (78.5)% (3.4)% (185.0)% (6.9)%
---------- ----------- ----------- ------------
Cumulative effect of a change in accounting
principle............................................ - - - (2.7)%
---------- ----------- ----------- ------------
Net loss.................................. (78.5)% (3.4)% (185.0)% (9.6)%
========== =========== =========== ============
EMCORE has generated a significant portion of its sales to customers
outside the United States. 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 consolidated revenues by
geographic region.
For the three months ended June 30, For the nine months ended June 30,
2002 2001 2002 2001
- -----------------------------------------------------------------||-----------------------------------------
Region: Revenue % Revenue % || Revenue % Revenue %
------- - ------- - || ------- - ------- -
||
North America $14,471 71% $30,658 58% || $46,348 74% $74,269 55%
Asia 4,089 20% 16,655 32% || 8,883 14% 53,635 39%
Europe 1,715 9% 5,339 10% || 7,259 12% 8,663 6%
- -----------------------------------------------------------------||-----------------------------------------
TOTAL $20,275 100% $52,652 100% || $62,490 100% $136,567 100%
======= ==== ======= ==== || ======= ==== ======== ====
14
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 wafers 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, solar
panels 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. There are no intercompany sales
transactions between the two operating segments.
Comparison of the three and nine-month periods ended June 30, 2002 and 2001
Revenues. EMCORE's quarterly revenues decreased 62% or $32.4 million from
$52.7 million for the three months ended June 30, 2001 to $20.3 million for the
three months ended June 30, 2002. For the nine- month periods ended June 30,
2002 and 2001, revenues decreased 54% or $74.1 million from $136.6 million in
the prior year to $62.5 million. The decline in revenues was primarily a result
of decreased demand experienced within EMCORE's systems-related product line.
The current economic climate has reduced capital spending dramatically during
the past year, particularly in the data and telecommunication sectors, where
EMCORE has traditionally sold a significant portion of equipment and
material-related products.
For the three months ended June 30, 2002 and 2001, systems-related
revenues decreased 74% or $28.8 million from $38.7 million reported in the prior
year to $9.9 million. The number of MOCVD production systems shipped during the
three-month periods decreased 77% from 26 systems in 2001 to 6 systems in 2002.
For the nine months ended June 30, 2002 and 2001, systems-related revenues
decreased 74% or $69.4 million from $93.9 million reported in the prior year to
$24.5 million. The number of MOCVD production systems shipped during the
nine-month periods decreased 84% from 67 systems in 2001 to 11 systems in 2002.
Average selling prices of MOCVD production tools has also dropped from an
average of $1.3 million in fiscal year 2001 to $1.2 million in fiscal year 2002.
For the three months ended June 30, 2002 and 2001, materials-related
revenues decreased 26% or $3.5 million from $13.9 million reported in the prior
year to $10.4 million. On a product line basis, sales of solar cell products
decreased $1.9 million or 38%, electronic materials and devices increased $0.5
million or 13%, and optical devices and components decreased $2.1 million or
47%, from the prior year. For the nine months ended June 30, 2002 and 2001,
materials-related revenues decreased 11% or $4.7 million from $42.6 million
reported in the prior year to $37.9 million. On a product line basis, sales of
solar cell products increased $1.1 million or 8%, electronic materials and
devices decreased $0.8 million or 5%, and optical devices and components
decreased $5.0 million or 44%, from the prior year.
As a percentage of revenues, systems and materials-related revenues
accounted for 49% and 51%, respectively, for the quarter ended June 30, 2002,
and 74% and 26%, respectively, for the quarter ended June 30, 2001. For the
nine-month periods, systems and materials-related revenues accounted for 39% and
61% in fiscal year 2002, and 69% and 31% in fiscal year 2001. International
sales accounted for 29% of revenues for the quarter ended June 30, 2002 and 42%
of revenues for the quarter ended June 30, 2001. For the nine-month periods,
international sales accounted for 26% of revenues in fiscal year 2002 and 46% of
revenues in fiscal year 2001.
15
Gross Profit. EMCORE's quarterly gross profit decreased 89% or $19.5
million from $22.0 million for the quarter ended June 30, 2001 to $2.5 million
for the quarter ended June 30, 2002. For the nine-month periods ended June 30,
2002 and 2001, gross profit decreased 107% or $58.6 million from $54.5 million
to $(4.1) million. The decline in gross profit was primarily related to
decreased revenues and unabsorbed overhead expenses. During the past two years,
EMCORE completed new facilities for its businesses in anticipation of expanding
market prospects. EMCORE has a significant amount of fixed expenses relating to
capital equipment and manufacturing overhead in its new facilities where
materials-related products are manufactured. Lower than forecasted
materials-related revenues causes these fixed expenses to be allocated across
reduced production volumes, which adversely affected gross profits and margins.
For the three months ended June 30, 2002 and 2001, gross profit earned on
systems-related revenues decreased 83% or $14.7 million from $17.8 million
earned in the prior year to $3.1 million. For the nine months ended June 30,
2002 and 2001, gross profit earned on systems-related revenues decreased 87% or
$35.5 million from $40.9 million earned in the prior year to $5.4 million. For
the nine months ended June 30, 2002 and 2001, gross margins for systems-related
revenues decreased from 44% to 22%. This decrease is due primarily to the
decrease in sales of MOCVD production systems and specific inventory write-down
charges of $4.2 million recorded in the second quarter.
For the three months ended June 30, 2002 and 2001, gross profit earned on
materials-related revenues decreased 112% or $4.7 million from $4.2 million
earned in the prior year to $(0.5) million. For the nine months ended June 30,
2002 and 2001, gross profit earned on materials-related revenues decreased 170%
or $23.1 million from $13.6 million earned in the prior year to $(9.5) million.
For the nine months ended June 30, 2002 and 2001, gross margins for
materials-related revenues decreased from 32% to (25%). This decrease is due
primarily to unabsorbed overhead expenses and specific inventory write-down
charges of $7.7 million recorded in the second quarter.
Selling, General and Administrative. EMCORE's quarterly selling, general
and administrative expenses decreased 8% or $0.6 million from $7.1 million for
the three months ended June 30, 2001 to $6.5 million for the three months ended
June 30, 2002. For the nine-month periods ended June 30, 2002 and 2001, selling,
general and administrative expenses increased 6% or $1.4 million from $21.6
million to $23.0 million. The nine-month increase in selling, general and
administrative expenses was primarily related to a $2.6 million additional
receivable reserve for doubtful accounts recorded in the second quarter. As a
percentage of revenue, selling, general and administrative expenses increased
from 16% for the nine months ended June 30, 2001 to 37% for the nine months
ended June 30, 2002 as a result of lower revenues. Management expects selling,
general and administrative expenses in the fourth quarter to decrease to 28% as
a percentage of revenues as a result of implemented cost control and
restructuring programs.
Goodwill Amortization. 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, would cease upon adoption of this statement. EMCORE adopted SFAS No. 142
on October 1, 2001 and completed its transition test for impairment during the
quarter ended March 31, 2002. No impairment adjustment was deemed necessary by
management. Had SFAS No. 142 been in effect for the three and nine months ended
June 30, 2001, EMCORE's net loss for those periods would have decreased by
$155,000 or $0.00 per share and $992,000 or $0.03 per share, respectively.
Research and Development. EMCORE's quarterly research and development
expenses decreased 32% or $4.5 million from $13.9 million for the three months
ended June 30, 2001 to $9.4 million for the three months ended June 30, 2002.
For the nine-month periods ended June 30, 2002 and 2001, research and
development expenses decreased 16% or $6.1 million from $39.1 million to $33.0
million. As a percentage of revenue, research and development expenses increased
from 29% for the nine months ended June 30, 2001 to 53% for the nine months
ended June 30, 2002 as a result of lower revenues. 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. Management expects research and development expenses in the
fourth quarter to decrease approximately 35% from prior year, due to the
deferral or elimination of certain non-critical projects.
16
Impairment and Restructuring Charges.
During the quarter ended March 31, 2002, EMCORE recorded pre-tax charges
to income totaling $50.4 million, which included restructuring and impairment
charges of $35.9 million and other charges of $14.5 million, as described below.
Restructuring Charges
During the second quarter of fiscal year 2002, EMCORE continued a
restructuring program, consisting of the appointment of a Chief Operating
Officer, re-alignment of all engineering, manufacturing and sales/marketing
operations, as well as workforce reductions. Included in the provision for
restructuring and impairment charges were severance charges of $1.1 million
related to employee termination costs for approximately 120 employees. The
workforce was reduced in both of EMCORE's business segments, all of which were
entitled to termination benefits. Of the severance charges recorded in the
second quarter, $637,000 related to EMCORE's systems business segment and
$463,000 related to the materials business segment. As of June 30, 2002,
substantially all cash outlays for the employee termination costs accrued at
March 31, 2002 have been paid.
Impairment Charges
During the second quarter of fiscal year 2002, EMCORE recorded $34.8
million of non-cash impairment charges related to its fixed assets. Of this
charge, $11.3 million related to certain manufacturing assets to be disposed of.
Management has committed to a plan to dispose of these assets, through either
abandonment or sale. Such decision was made based upon the continued downturn in
the economic environment that affects certain business units, which caused these
manufacturing assets to become idle. EMCORE expects to complete its disposal of
these assets by December 31, 2002. The carrying value of this equipment before
write-down to net realizable value was $11.5 million.
The remainder of the impairment charge related principally to EMCORE's
electronic materials, electronic devices and fiber-optic business units. During
the past two years, EMCORE has completed new facilities for these businesses in
anticipation of expanding market prospects. Business forecasts updated in the
second quarter indicated significantly diminished prospects for these units,
primarily based on the downturn in the telecommunications industry. As a result
of these circumstances, management determined that the long-lived assets of
these operations should be assessed for impairment. Based on the outcome of this
assessment pursuant to SFAS 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed Of", EMCORE recorded a $23.5
million non-cash asset impairment charge to fixed assets in the second quarter
of 2002. The fair values of the assets were determined based upon a calculation
of the present value of the expected future cash flows to be generated by these
facilities.
Of the impairment charges recorded in the second quarter, $4.0 million
related to EMCORE's systems business segment and $30.8 million related to the
materials business segment.
Interest Income/Expense. For the quarter ended June 30, 2002, net
interest changed $1.9 million from net interest income of $0.1 million to net
interest expense of $1.8 million. For the nine months ended June 30, 2002, net
interest changed $6.7 million from net interest income of $2.3 million to net
interest expense of $4.4 million. The decrease in interest income is a result of
interest expense being incurred from the 5% convertible subordinated notes due
in May 2006 offset by lower interest income earned on decreased amounts in cash,
cash equilivents and marketable securities.
Other Expense. In August 2001, EMCORE received common stock in Uniroyal
Technology Corporation (UTCI) which is classified as an available-for-sale
security with any unrealized gains and losses being recorded as a component of
comprehensive income in shareholders' equity. During the quarter ended December
31, 2001, management determined that an other-than-temporary impairment of the
investment existed. Accordingly, EMCORE took a charge of $13.3 million to
establish a new cost basis for the UTCI common stock, which was recorded as
other expense. Other income for the three months ended March 31, 2001 included a
net gain of $5.9 million related to the settlement of litigation.
17
Equity in Unconsolidated Affiliate. Because EMCORE does not have a
controlling economic and voting interest in its joint venture with General
Electric Lighting, EMCORE accounts for it under the equity method of accounting.
For the three and nine months ended June 30, 2002, EMCORE incurred a net loss of
$0.8 million and $2.0 million, respectively, related to the GELcore joint
venture. For the three and nine months ended June 30, 2001, EMCORE incurred a
net loss of $1.4 million and $3.6 million, respectively, related to the GELcore
joint venture. For the three and nine months ended June 30, 2001, EMCORE also
incurred a net loss of $1.3 million and $6.9 million related to the Uniroyal
joint venture.
Income Taxes. As a result of its losses, EMCORE did not incur any income
tax expense in both the three and nine-month periods ended June 30, 2002 and
2001.
Liquidity and Capital Resources
EMCORE has funded operations to date through sales of equity, bank
borrowings, subordinated debt and revenues from product sales. In June 1999,
EMCORE completed a secondary public offering and raised approximately $52.0
million, net of issuance costs. In March 2000, EMCORE completed an additional
public offering and raised approximately $127.5 million, net of issuance costs.
As of June 30, 2002, EMCORE had working capital of approximately $121.0 million,
including $89.1 million in cash, cash equivalents and marketable securities.
Cash used for operating activities approximated $30.1 million during the
nine months ended June 30, 2002 primarily because of EMCORE's net loss of $115.6
million offset by the non-cash charges related to impairment and restructuring
charges on fixed assets and marketable securities of $63.7 million and
depreciation and amortization charges of $13.6 million. For the nine months
ended June 30, 2002, net cash provided by investment activities amounted to
approximately $7.4 million. EMCORE's net investment in marketable securities
decreased by $35.9 million which represents proceeds from sales of marketable
securities of $41.2 million offset by $5.3 million relating to the impairment
charge on UTCI stock. In March 2002, EMCORE completed the Tecstar acquisition at
a total cost of $25.1 million. Capital expenditures for the nine months ended
June 30, 2002 totaled $6.5 million and in November 2001 EMCORE made a $2.0
million capital contribution to GELcore. Net cash provided by financing
activities for the nine months ended June 30, 2002 amounted to approximately
$5.7 million of which $4.2 million related to the exercise of warrants.
In May 2001, EMCORE issued $175.0 million of 5% convertible subordinated
notes due in May 2006. In May 2002, the Board of Directors authorized EMCORE
from time to time to repurchase in one or more open market transactions, in
accordance with certain guidelines established by the Board, a portion of the
notes.
In March 2001, EMCORE entered into a $20.0 million Amended and Restated
Revolving Loan and Security Agreement with a bank. There have been no borrowings
under this facility since inception and management had no plans to use this
facility. EMCORE canceled this facility in May 2002.
EMCORE believes that its current liquidity should be sufficient to meet
its cash needs for working capital through fiscal year 2003. However, if 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.
18
Critical Accounting Policies
The preparation of financial statements requires management to make
estimates and assumptions that effect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Actual results could differ
from those estimates. The significant accounting policies which we believe are
the most critical to the understanding of reported financial results include the
following:
o Accounts Receivable - EMCORE maintains allowances for doubtful
accounts for estimated losses resulting from the inability of our
customers to make required payments. If the financial condition of
our customers were to deteriorate, additional allowances may be
required.
o Inventories - Inventories are stated at the lower of cost or market
with cost being determined using the first-in, first-out (FIFO)
method. EMCORE provides estimated inventory allowances for obsolete
and excess inventory based on assumptions about future demand and
market conditions. If future demand or market conditions are
different than those projected by management, adjustments to
inventory allowances may be required.
o Impairment of 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. EMCORE records impairment losses on long-lived assets
when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by
those assets are less than their carrying amount. Management's
estimates of future cash flows are based upon EMCORE's current
operating forecast, which is believed to be reasonable. However,
different assumptions regarding such cash flows could materially
affect these estimates.
The impact and any associated risks relating to these policies on our
business operations is discussed throughout Management's Discussion and Analysis
of Financial Condition and Results of Operations where such policies affect our
reported and expected financial results.
Recent Accounting Pronouncements
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. 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 adopted SFAS No. 142 on October 1,
2001 and completed its transition test for impairment during the quarter ended
March 31, 2002. No impairment adjustment was deemed necessary by management. Had
SFAS No. 142 been in effect for the three and nine months ended June 30, 2001,
EMCORE's net loss for those periods would have decreased by $155,000 or $0.00
per share and $992,000 or $0.03 per share, respectively.
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. Management
believes that adopting this statement will not have a material impact on the
financial position, results of operations or cash flows of EMCORE.
19
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. Management believes
that adopting this statement will not have a material impact on the financial
position, results of operations or cash flows of EMCORE.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements 4, 44 and 64, Amendment of FASB Statement 13, and Technical
Corrections". SFAS No. 145 rescinds the provisions of SFAS No. 4 that requires
companies to classify certain gains and losses from debt extinguishments as
extraordinary items, eliminates the provisions of SFAS No. 44 regarding
transition to the Motor Carrier Act of 1980 and amends the provisions of SFAS
No. 13 to require that certain lease modifications be treated as sale leaseback
transactions. The provisions of SFAS No. 145 related to classification of debt
extinguishment are effective for fiscal years beginning after May 15, 2002.
Commencing October 1, 2002, EMCORE will classify debt extinguishment costs
within income from operations and will reclassify previously reported debt
extinguishments as such. The provisions of SFAS No. 145 related to lease
modification are effective for transactions occurring after May 15, 2002.
Management believes that adopting this statement will not have a material impact
on the financial position, results of operations or cash flows of EMCORE.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 nullifies Emerging
Issues Task Force ("EITF") No. 94-3, "Liability Recognition for certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in as Restructuring)". The principal difference between SFAS No.
146 and EITF No. 94-3 relates to its requirements for recognition of a liability
for a cost associated with an exit or disposal activity. SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Under EITF No. 94-3, a liability for
an exit cost was recognized at the date of an entity's commitment to an exit
plan. SFAS No. 146 is effective for exit and disposal activities that are
initiated after December 31, 2002. Management believes that adopting this
statement will not have a material impact on the financial position, results of
operations or cash flows of EMCORE.
20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in lawsuits, claims, investigations and
proceedings which arise in the ordinary course of business. There are
no matters pending that we expect to be material in relation to our
business, consolidated financial condition, results of operations or
cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
The following members of Registrant's Board of Directors and
Executive Officers of Registrant have adopted or intend to adopt
"plans" under Rule 10b5-1 of the Securities Exchange Act of 1934, as
amended, for trading in shares of Registrant's common stock:
Reuben F. Richards, Jr.
Dr. Richard A. Stall
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits:
Exhibit No. Exhibit Description
10.1 Amended and Restated Note
10.2 Amended and Restated Pledge Agreement
99(1) Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
99(2) Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended June
30, 2002.
21
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EMCORE CORPORATION
Date: August 14, 2002 By: /s/ Reuben F. Richards, Jr.
---------------------------------------
Reuben F. Richards, Jr.
President and Chief Executive Officer
Date: August 14, 2002 By: /s/ Thomas G. Werthan
---------------------------------------
Thomas G. Werthan
Vice President and Chief Financial Officer
22
Exhibit 10.1
AMENDED AND RESTATED PROMISSORY NOTE
$3,000,000 Somerset, New Jersey
May 23, 2002
RECITALS
WHEREAS, on February 22, 2001 Reuben F. Richards, Jr. (the "Borrower")
executed a Promissory Note (the "Note") payable to the order of EMCORE
Corporation (the "Company") in consideration for a loan in the principal amount
of $3,000,000;
WHEREAS, the Board of Directors has deemed it in the best interests of the
Company to amend certain terms of the Note as approved by the Board on May 21,
2002; and
WHEREAS, the parties intend to amend and restate the Note (herein referred
to as the "Amended and Restated Note") to reflect the changed terms and
conditions.
NOW, THEREFORE, it is hereby agreed as follows:
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, 2006 (the "Maturity Date") at the foregoing address.
1. Interest. Interest shall accrue on the unpaid principal balance of this
Amended and Restated Note at a rate of 5.18% per annum from February 22, 2001 to
May 23, 2002 compounded annually and at a rate of 4.99% per annum thereafter
until the Maturity Date. Interest shall be payable on the Maturity Date.
2. Full Recourse. The loan evidenced by this Amended and Restated Note is a
general obligation of the Borrower.
3. Security. All obligations of Borrower under this Amended and Restated
Note are secured by a pledge of certain shares of EMCORE Corporation common
stock ("Common Stock") pursuant to the Amended and Restated Pledge Agreement. By
executing this Amended and Restated 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 Amended and Restated
Pledge Agreement, the "Pledge Documents").
4. Application of Payment. Each payment hereunder may be made, at the
option of the Borrower, in either lawful tender of the United States or in
shares of Common Stock and shall be applied first to any accrued but unpaid
interest on this Amended and Restated Note and the balance to the unpaid
principal. Prepayment of the principal balance of this Amended and Restated
Note, together with any accrued and unpaid interest, may be made in whole or in
part at any time without penalty. For valuation purposes, the fair market value
per share of Common Stock on any date shall be determined in accordance with the
following provisions:
(a) If the Common Stock is at the time traded on the NASDAQ
National Market, the fair market value shall be the closing
selling price per share of Common Stock on the date in
question, as such prices are reported by the National
Association of Securities Dealers on its NASDAQ system or
any successor system. If there is no reported closing
selling price for the Common Stock on the date in question,
then the closing selling price on the last preceding date
for which such quotation exists shall be determinative of
the fair market value.
(b) If the Common Stock is at the time traded on the American
Stock Exchange or the New York Stock Exchange, then the fair
market value shall be the closing selling price per share of
Common Stock on the date in question on the securities
exchange serving as the primary market for the Common Stock,
as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no reported sale
of Common Stock on such exchange on the date in question,
then the fair market value shall be the closing selling
price on such exchange on the last preceding date for which
such quotation exists.
(c) If the Common Stock is at the time neither listed on any
securities exchange nor traded on the NASDAQ National
Market, the fair market value shall be determined by the
Corporation's Board of Directors after taking into account
such factors as such Board shall deem appropriate.
5. Representation of the Borrower.
(a) The Borrower has applied all proceeds evidenced by this Amended
and Restated Note towards the purchase of a personal residence.
6. Acceleration.
2
(a) If the Borrower voluntarily terminates his employment with the
Company for any reason, the Company shall have the right to accelerate all or
part of the amounts outstanding under this Amended and Restated Note. If the
Borrower is terminated for cause, all principal and interest outstanding under
this Amended and Restated 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 Amended and Restated 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 Amended and Restated Note
or the Amended and Restated 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 Amended and
Restated Note shall become automatically due and payable.
7. Loan Forgiveness. Notwithstanding any other provision of this Amended
and Restated Note the principal balance and accrued but unpaid interest on this
Amended and Restated Note shall be forgiven as follows: (a) If the Company
terminates the Borrower's employment without cause or (b) there is a Change in
Control. For purposes hereof a Change in Control shall be deemed to have
occurred as follows:
(i) an acquisition in one transaction or a series of related
transactions (other than directly from the Company or pursuant to options
granted under a Company stock option plan or other similar awards granted
by the Company) of any voting securities by any person, immediately after
which such person has beneficial ownership of fifty percent (50%) or more
of the combined voting power of the Company's then outstanding voting
securities; provided, however, in determining whether a Change in Control
has occurred, voting securities which are acquired in a Non-Control
Acquisition shall not constitute an acquisition that would cause a Change
in Control;
(ii) the individuals who, immediately prior to the date hereof, are
members of the Board (the "Incumbent Board"), cease for any reason to
constitute at least a majority of the members of the Board; provided,
however, that if the
3
election, or nomination for election, by the Company's common stockholders, of
any new director was approved by a vote of at least a majority of the Incumbent
Board, such new director shall, for purposes of the Plan, be considered as a
member of the Incumbent Board; provided further, however, that no individual
shall be considered a member of the Incumbent Board if such individual initially
assumed office as a result of either an actual or threatened "Election Contest"
(as described in Rule 14a-11 promulgated under the Exchange Act) or other actual
or threatened solicitation of proxies or consents by or on behalf of a Person
other than the Board (a "Proxy Contest") including by reason of any agreement
intended to avoid or settle any Election Contest or Proxy Contest; or
(iii) the consummation of:
(A) a merger, consolidation or reorganization involving the Company
unless:
(1) the stockholders of the Company, immediately before such
merger, consolidation or reorganization, own, directly or indirectly,
immediately following such merger, consolidation or reorganization,
more than fifty percent (50%) of the combined voting power of the
outstanding voting securities of the corporation resulting from such
merger or consolidation or reorganization (the "Surviving
Corporation") in substantially the same proportion as their ownership
of the voting securities immediately before such merger, consolidation
or reorganization,
(2) the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement providing for such
merger, consolidation or reorganization constitute at least a majority
of the members of the board of directors of the Surviving Corporation,
or a corporation beneficially owning, directly or indirectly, a
majority of the voting securities of the Surviving Corporation, and
(3) no person, other than (i) the Company, (ii) any Related
Entity (as defined below), (iii) any employee benefit plan (or any
trust forming a part thereof) that, immediately prior to such merger,
consolidation or reorganization, was maintained by the Company, the
Surviving Corporation, or any Related Entity or (iv) any person who,
together with its Affiliates, immediately prior to such merger,
consolidation or reorganization had beneficial ownership of fifty
percent (50%) or more of the then outstanding voting securities, owns,
together with its Affiliates, beneficial ownership of fifty percent
(50%) or more of the combined voting power of the Surviving
Corporation's then outstanding voting securities
(a transaction described in clauses (1) through (3) above is referred
to herein as a "Non-Control Transaction");
4
(B) a complete liquidation or dissolution of the Company other than
through bankruptcy; or
(C) an agreement for the sale or other disposition of all or
substantially all of the assets or business of the Company to any person
(other than a transfer to a Related Entity or the distribution to the
Company's stockholders of the stock of a Related Entity or any other
assets).
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur
solely because any person (the "Subject Person") acquired beneficial ownership
of fifty percent (50%) or more of the combined voting power of the then
outstanding voting securities as a result of the acquisition of voting
securities by the Company which, by reducing the number of voting securities
then outstanding, increases the proportional number of shares beneficially owned
by the Subject Persons, provided that if a Change in Control would occur (but
for the operation of this sentence) as a result of the acquisition of voting
securities by the Company, and (1) before such share acquisition by the Company
the Subject Person becomes the beneficial owner of any new or additional voting
securities in a related transaction or (2) after such share acquisition by the
Company the Subject Person becomes the beneficial owner of any new or additional
voting securities which in either case increases the percentage of the then
outstanding voting securities beneficially owned by the Subject Person, then a
Change in Control shall be deemed to occur. For purposes hereof, (x) "Affiliate"
shall mean, with respect to any Person, any other Person that, directly or
indirectly, controls, is controlled by, or is under common control with, such
Person; (y) any "Relative" (for this purpose, "Relative" means a spouse, child,
parent, parent of spouse, sibling or grandchild) of an individual shall be
deemed to be an Affiliate of such individual for this purpose; and (z) neither
the Company nor any Person controlled by the Company shall be deemed to be an
Affiliate of any holder of Common Stock. A Non-Control Acquisition shall mean an
acquisition by (i) an employee benefit plan (or a trust forming a part thereof)
maintained by (A) the Company or (B) any corporation or other person of which a
majority of its voting power or its voting equity securities or equity interest
is owned, directly or indirectly, by the Company (a "Related Entity"), (ii) the
Company or any Related Entity, (iii) any of Thomas Russell, The AER Trust 1997,
Robert Louis-Dreyfus, Gallium Enterprises, Inc. and Reuben Richards or (iv) any
Person in connection with a Non-Control Transaction.
8. 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 Amended and Restated 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.
9. Amendments. No amendment of this Amended and Restated Note shall be
effective unless in writing and signed by the Borrower and the Company. Upon
execution of this Amended and Restated Note by the Company and the Borrower, the
Note dated February 22, 2001 shall be cancelled and returned to the Borrower.
6
10. 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 Amended and Restated
Note.
11. No Set-Off. This Amended and Restated Note is not subject to set-off by
the Borrower for any amounts for any reason.
12. 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.
13. 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 Amended and Restated Note or the obligations hereby
evidenced, to the extent permitted by law.
14. Governing Law. This Amended and Restated 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.
15. 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.
6
IN WITNESS WHEREOF, the Borrower has executed this Amended and Restated
Note as of the date first above written, and by such execution acknowledges each
of the provisions of this Amended and Restated Note.
/s Reuben F. Richards, Jr.
Reuben F. Richards, Jr.
Address:
c/o EMCORE CORPORATION
145 Belmont Drive
Somerset, NJ 08873
Exhibit 10.2
EMCORE CORPORATION
------------------
AMENDED AND RESTATED STOCK PLEDGE AGREEMENT
-------------------------------------------
Agreement made as of this 23RD day of May, 2002, by and between EMCORE
Corporation, a New Jersey Corporation (the "Corporation") and Reuben F.
Richards, Jr. (the "Pledgor").
RECITALS
--------
WHEREAS, on February 22, 2001 the Pledgor and the Corporation entered into
a Pledge Agreement (the "Pledge Agreement") to secure a Promissory Note in the
amount of $3,000,0000 (the "Note");
WHEREAS, the Board of Directors has deemed it in the best interests of the
Corporation to approve certain changes to terms of the Note and Pledge Agreement
as approved by the Board on May 21, 2002;
WHEREAS, the parties intend to amend and restate both the Note (herein
referred to as the "Amended and Restated Note") and Pledge Agreement to reflect
the changed terms and conditions; and
WHEREAS, it is the intention of the parties that the indebtedness evidenced
by the Amended and Restated Note continue to be secured only by a pledge of
shares of the Corporation's common stock ("Common Stock").
NOW, THEREFORE, it is hereby agreed as follows:
1. Grant of Security Interest. As security for all present and future
liabilities, obligations, covenants, duties and debts owing by the Pledgor to
the Corporation arising under or pursuant to the Amended and Restated Note, this
Agreement or any related agreement, instrument or document (the "Obligations"),
the Pledgor hereby grants to the Corporation a first priority security interest
in, and assigns, transfers and pledges to the Corporation the following
securities (collectively, the "Collateral"):
(i) the 91,000 shares of Common Stock (the "Pledged Shares")
delivered to the Corporation simultaneously with the execution
and delivery of this Agreement.
(ii) any and all new, additional or different securities or other
property subsequently distributed with respect to the Pledged
Shares which
1
are to be delivered to and deposited with the Corporation
pursuant to the requirements of Paragraph 3(a) of this Agreement;
and
(iii) the proceeds of any sale, exchange or disposition of the
property and securities described in subparagraphs (i) and (ii)
above.
2. Warranties. The Pledgor hereby warrants that the Pledgor is the owner of
the Collateral and has the right to pledge the Collateral and that the
Collateral is free from all liens, adverse claims and other security interests
(other than those created hereby).
3. Duty to Deliver. Any new, additional or different securities or other
property which may now or hereafter become distributable with respect to the
Collateral by reason of (i) any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the Common
Stock as a class without the Corporation's receipt of consideration or (ii) any
merger, consolidation or other reorganization affecting the capital structure of
the Corporation shall, upon receipt by the Pledgor be promptly delivered to and
deposited with the Corporation as part of the Collateral hereunder. Any such
securities shall be accompanied by one or more properly endorsed stock power
assignments.
4. Payment of Taxes and Other Charges. The Pledgor shall pay, prior to the
delinquency date, all taxes, liens, assessments and other charges against the
Collateral, and in the event of the Pledgor's failure to do so, the Corporation
may, at its option, pay any or all of such taxes or other charges without
contesting the legality or validity thereof. The payments so made shall become
part of the indebtedness secured hereunder and until paid, shall bear interest
at the minimum per annum rate, compounded semi-annually, required to avoid
imputation of interest income to the Corporation and compensation income to the
Pledgor under the Federal tax laws.
5. Shareholder Rights. So long as there exists no event of default under
Paragraph 11 of this Agreement, the Pledgor may exercise all shareholder voting
rights and be entitled to receive any and all regular cash dividends paid on the
Collateral and all proxy statements and other shareholder materials pertaining
to the Corporation.
6. Rights and Powers of the Corporation. The Corporation may, without
obligation to do so, exercise at any time and from time to time, one or more of
the following rights and power with respect to any or all of the Collateral:
(i) subject to the applicable limitations of Paragraphs 9 and 10,
accept other property of the Pledgor in exchange for all or part
of the Collateral and release Collateral to the Pledgor to the
extent necessary to effect such exchange, and in such event, the
other
2
property received in the exchange shall become part of the
Collateral hereunder;
(ii) subject to the applicable limitations of Paragraph 5, perform
such acts as are necessary to preserve and protect the Collateral
and the rights, powers and remedies granted with respect to the
Collateral by this Agreement; and
(iii) transfer record ownership of the Collateral to the Corporation
or its nominee and receive, endorse and give receipt for, or
collect by legal proceedings or otherwise, dividends made or paid
with respect to the Collateral; provided and only if, there
exists at the time an outstanding event of default under
Paragraph 11 of this Agreement. Any cash sums which the
Corporation may so receive shall be applied to the payment of the
Amended and Restated Note and any other Obligations secured
hereunder, in such order of application as the Corporation deems
appropriate.
Expenses reasonably incurred in connection with any action by the
Corporation pursuant to this Paragraph 6 shall form part of the
indebtedness secured hereunder as provided in Paragraph 13.
7. Care of Collateral. The Corporation shall exercise reasonable care in
the custody and preservation of the Collateral. However, the Corporation shall
have no obligation to (i) preserve the rights of the Pledgor against adverse
claims or protect the Collateral against the possibility of decline in market
value or (ii) take any action with respect to the Collateral requested by the
Pledgor unless the request is made in writing and the Corporation determines
that the requested action will not unreasonably jeopardize the value of the
Collateral as security for the Amended and Restated Note and the other
Obligations secured hereunder.
Subject to the limitations of Paragraphs 9 and 10, the Corporation may at
any time release and deliver all or part of the Collateral to the Pledgor, and
the receipt thereof by the Pledgor shall constitute a complete and full
acquittance for the Collateral so released and delivered. The Corporation shall
accordingly be discharged from any further liability or responsibility for such
released Collateral, and such released Collateral shall no longer be subject to
the provisions of this Agreement.
8. Transfer of Collateral. In connection with the transfer or assignment of
the Amended and Restated Note (whether by negotiation, discount or otherwise),
the Corporation may, upon ten (10) days prior written notice, transfer all or
any part of the Collateral, and the transferee shall thereupon succeed to the
rights, powers and remedies granted the Corporation hereunder with respect to
the Collateral so transferred. Upon such transfer, the Corporation shall be
fully discharged from all liability and responsibility for the transferred
Collateral.
3
9. Release of Collateral. Provided all Obligations secured hereunder (other
than payments not yet due and payable under the Amended and Restated Note) shall
at the time have been paid in full and there does not at the time otherwise
exist any event of default under Paragraph 11, the Pledged Shares together with
any additional Collateral which may hereafter be pledged and deposited
hereunder, shall be released from pledge and returned to the Pledgor in
accordance with the following provisions:
(i) Upon payment or prepayment of principal under the Amended
and Restated Note together with payment of all accrued
interest to date, one or more of the Pledged Shares held as
Collateral hereunder shall (subject to the applicable
limitations of Paragraphs 9(iii) and 9(v) below) be released
at the time of such payment or prepayment. The number of
shares to be so released shall be equal to the number
obtained by multiplying (i) the total number of Pledged
Shares held under this Agreement at the time of such payment
or prepayment by (ii) a fraction, the numerator of which
shall be the amount of the principal paid or prepaid and the
denominator of which shall be the unpaid principal balance
of the Amended and Restated Note immediately prior to such
payment or prepayment. In no event, however, shall any
fractional shares be released.
(ii) Under no circumstances, however, shall any Pledged Shares or
other Collateral be released if previously applied to the
payment of any indebtedness hereunder. In addition, in no
event shall any Pledged Shares or other Collateral be
released pursuant to the provisions of Paragraphs 9(i) or
9(ii) if, and to the extent that, the fair market value and
the Common Stock and all other Collateral which would
otherwise remain in pledge hereunder after such release were
effected would be less than the unpaid principal and
accumulated interest under the Amended and Restated Note.
(iii) For all valuation purposes under this Agreement, the fair
market value per share of Common Stock on any date shall be
determined in accordance with the following provisions:
(A) If the Common Stock is at the time traded on the NASDAQ
National Market, the fair market value shall be the
closing selling price per share of Common Stock on the
date in question, as such prices are reported by the
National Association of Securities Dealers on its
NASDAQ system or any successor system. If there is no
reported closing selling price for the Common Stock on
the date in question, then the closing selling price on
the last preceding date for which such quotation exists
shall be determinative of the fair market value.
4
(B) If the Common Stock is at the time traded on the
American Stock Exchange or the New York Stock Exchange,
then the fair market value shall be the closing selling
price per share of Common Stock on the date in question
on the securities exchange serving as the primary
market for the Common Stock, as such price is
officially quoted in the composite tape of transactions
on such exchange. If there is no reported sale of
Common Stock on such exchange on the date in question,
then the fair market value shall be the closing selling
price on such exchange on the last preceding date for
which such quotation exists.
(C) If the Common Stock is at the time neither listed on
any securities exchange nor traded on the NASDAQ
National Market, the fair market value shall be
determined by the Corporation's Board of Directors
after taking into account such factors as such Board
shall deem appropriate.
(iv) The Borrower shall at all times comply with Regulation U of
the Federal Reserve Board to the extent applicable.
10. Substitution of Collateral. The Pledgor may, from time to time,
substitute, with the Corporation's prior written consent (which shall not be
unreasonably withheld), any of the Collateral with additional or different
securities delivered to and deposited with the Corporation as part of the
Collateral hereunder; provided, that, such securities are freely tradable
securities listed on a national securities exchange or the NASDAQ National
Market with an aggregate fair market value (as determined pursuant to Paragraph
9) equal to or greater than the Collateral being substituted for hereunder.
11. Events of Default. The occurrence of one or more of the following
events shall constitute an event of default under this Agreement:
(i) the failure of the Pledgor to pay, when due under the
Amended and Restated Note, any installment of principal or
accrued interest; or
(ii) the occurrence of any other acceleration event specified in
the Amended and Restated Note; or
(iii) the failure of the Pledgor to perform any obligation
imposed upon the Pledgor by reason of this Agreement; or
(iv) the breach of any warranty of the Pledgor contained in this
Agreement.
5
Upon the occurrence of any such event of default, the
Corporation shall provide the Pledgor with written notice of such event of
default, and in the event that such event of default remains uncured five (5)
days after delivery of such notice, the Corporation may, at its option, declare
the Amended and Restated Note and all other indebtedness secured hereunder to be
immediately due and payable and may exercise any or all of the rights and
remedies granted to a secured party under the provisions of the New Jersey
Uniform Commercial Code (as now or hereafter in effect), including (without
limitation) the power to dispose of the Collateral by public or private sale or
to accept the Collateral in full payment of the Amended and Restated Note and
all other indebtedness hereunder.
Any proceeds realized from the disposition of the Collateral
pursuant to the foregoing power of sale shall be applied first to the payment of
expenses incurred by the Corporation in connection with the disposition, then to
the payment of the Amended and Restated Note and finally to any other
indebtedness secured hereby. Any surplus proceeds shall be paid over to the
Pledgor. However, in the event such proceeds prove insufficient to satisfy all
obligations of the Pledgor under the Amended and Restated Note, then the Pledgor
shall remain personally liable for the resulting deficiency.
12. Other Remedies. The rights, powers and remedies granted to the
Corporation pursuant to the provisions of this Agreement shall be in addition to
all rights, powers and remedies granted to the Corporation under any statute or
rule of law. Any forebearance, failure or delay by the Corporation in exercising
any right, power or remedy under this Agreement shall not be deemed to be a
waiver of such right, power or remedy. Any single or partial exercise of any
right, power or remedy under this Agreement shall not preclude the further
exercise thereof, and every right, power and remedy of the Corporation under
this Agreement shall continue in full force and effect unless such right, power
or remedy is specifically waived in an instrument executed by the Corporation.
13. Costs and Expenses. All costs and expenses (including reasonable
attorneys fees) incurred by the Corporation in the exercise or enforcement of
any right, power or remedy granted it under this Agreement shall become part of
the indebtedness secured hereunder and shall be payable immediately upon demand
and bear interest at the minimum per annum rate, compounded semi-annually,
required to avoid imputation of interest income to the Corporation and
compensation income to the Pledgor under the Federal tax laws.
14. Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New Jersey without resort to that
State's conflict-of-laws rules.
15. Successors. This Agreement shall be binding on the Corporation and its
successors and assigns and upon the Pledgor and the executors, heirs and
legatees of the Pledgor's estate.
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16. Severability. If any provision of this Agreement is held to be invalid
under applicable law, then such provision shall be ineffective only to the
extent of such invalidity, and neither the remainder of such provision nor any
other provision of this agreement shall be affected thereby.
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IN WITNESS WHEREOF, this Agreement has been duly executed by the Pledgor
and the Corporation as of the date first above written.
EMCORE CORPORATION /s Reuben F. Richards, Jr.
Reuben F. Richards, Jr., as Pledgor
By: /s Thomas G. Werthan
Name: Thomas G. Werthan
Title: CFO
Exhibit 99(1)
STATEMENT REQUIRED BY 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of EMCORE Corporation
(the "Company") for the quarter ended June 30, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Reuben
F. Richards, Jr., Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that:
1) the Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2) the information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
/s/ Reuben F. Richards, Jr.
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Reuben F. Richards, Jr.
August 14, 2002
Exhibit 99(2)
STATEMENT REQUIRED BY 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of EMCORE Corporation
(the "Company") for the quarter ended June 30, 2002, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas
G. Werthan, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
1) the Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Thomas G. Werthan
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Thomas G. Werthan
August 14, 2002