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 March 31, 2003
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The number of shares of the registrant's common stock, no par value, outstanding
as of May 1, 2003 was 37,029,695.
ITEM 1. Financial Statements
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended March 31, 2003 and 2002
(in thousands, except loss per share)
(unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
---------------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------------
Revenues:
Systems-related........................................ $10,777 $4,341 $24,619 $14,636
Materials-related...................................... 16,897 18,737 26,301 27,579
---------------------------------------------------------
Total revenues..................................... 27,674 23,078 50,920 42,215
Cost of revenues:
Systems-related........................................ 7,186 6,853 16,172 12,264
Materials-related...................................... 17,737 25,355 29,771 36,536
---------------------------------------------------------
Total cost of revenues............................. 24,923 32,208 45,943 48,800
---------------------------------------------------------
Gross profit (loss).............................. 2,751 (9,130) 4,977 (6,585)
Operating expenses:
Selling, general and administrative ................... 7,392 9,483 13,171 16,481
Research and development............................... 5,428 11,625 9,034 23,572
Gain from debt extinguishment.......................... - - (6,614) -
Impairment and restructuring........................... - 35,939 - 35,939
---------------------------------------------------------
Total operating expenses .......................... 12,820 57,047 15,591 75,992
---------------------------------------------------------
Operating loss................................... (10,069) (66,177) (10,614) (82,577)
Other expenses:
Interest expense, net................................... 1,741 1,682 3,522 2,610
Other expense, net...................................... - - - 13,262
Equity in net loss of unconsolidated affiliate.......... 731 851 1,302 1,228
---------------------------------------------------------
Total other expenses................................ 2,472 2,533 4,824 17,100
---------------------------------------------------------
Net loss......................................... ($12,541) ($68,710) ($15,438) ($99,677)
=========================================================
Per Share Data:
Weighted average basic and diluted shares outstanding
used in per share calculations............................ 36,936 36,597 36,857 36,399
Net loss per basic and diluted share...................... ($0.34) ($1.88) ($0.42) ($2.74)
=========================================================
The accompanying notes are an integral part of these consolidated
financial statements.
2
EMCORE CORPORATION
CONSOLIDATED BALANCE SHEETS
As of March 31, 2003 and September 30, 2002
(in thousands)
As of As of
March 31, September 30,
ASSETS 2003 2002
--------------- --------------
(unaudited)
Current assets:
Cash and cash equivalents..................................... $37,845 $42,716
Marketable securities......................................... 5,876 41,465
Accounts receivable, net ..................................... 20,831 23,817
Accounts receivable - related party........................... 481 518
Inventories................................................... 29,907 31,027
Other current assets.......................................... 2,237 1,188
------------------------------------
Total current assets..................................... 97,177 140,731
Property, plant and equipment, net.............................. 102,185 101,302
Goodwill........................................................ 30,366 20,384
Intangible assets, net.......................................... 5,997 3,042
Investments in unconsolidated affiliate......................... 9,140 8,482
Other assets, net............................................... 11,114 12,002
------------------------------------
Total assets............................................. $255,979 $285,943
====================================
LIABILITIES and SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $10,191 $10,346
Accrued expenses.............................................. 13,809 12,875
Advanced billings............................................. 3,081 5,604
Capitalized lease obligation - current........................ 79 81
------------------------------------
Total current liabilities................................ 27,160 28,906
Convertible subordinated notes.................................. 161,750 175,000
Capitalized lease obligation, net of current portion............ 59 87
------------------------------------
Total liabilities........................................ 188,969 203,993
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.0001 par, 5,882 shares authorized,
no shares outstanding....................................... - -
Common stock, no par value, 100,000 shares authorized,
37,017 shares issued and 36,997 outstanding at March 31,
2003; 36,772 shares issued and 36,752 outstanding at
September 30, 2002......................................... 334,567 334,051
Accumulated deficit.......................................... (266,351) (250,913)
Accumulated other comprehensive loss......................... (240) (222)
Shareholders' notes receivable............................... (34) (34)
Treasury stock, at cost; 20 shares........................... (932) (932)
------------------------------------
Total shareholders' equity............................... 67,010 81,950
------------------------------------
Total liabilities and shareholders' equity............... $255,979 $285,943
====================================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended March 31, 2003 and 2002
(in thousands)
(unaudited)
Six Months Ended March 31,
------------------------------
2003 2002
------------------------------
Cash flows from operating activities:
Net loss.............................................. $(15,438) $(99,677)
------------------------------
Adjustments to reconcile net loss to net cash
used for operating activities:
Gain from debt extinguishment....................... (6,614) -
Depreciation and amortization....................... 9,863 9,915
Provision for doubtful accounts..................... 350 1,469
Equity in net loss of unconsolidated affiliate...... 1,302 1,228
Compensatory stock issuances........................ 345 379
Impairment of equity investment..................... - 13,262
Loss from impairment, restructuring charges
and other charges................................. - 50,443
Reduction of note receivable........................ 101 -
Decrease (increase) in assets:
Accounts receivable........................ 2,636 2,522
Accounts receivable - related party....... 37 1,676
Inventories................................ 7,649 2,114
Other current assets....................... (970) 1,453
Other assets............................... (79) (565)
Increase (decrease) in liabilities:
Accounts payable........................... (155) (6,044)
Accrued expenses........................... (1,167) (2,823)
Advanced billings.......................... (2,523) 635
Other...................................... 20 (41)
------------------------------
Total adjustments..................... 10,795 75,623
------------------------------
Net cash used for operating activities............. (4,643) (24,054)
------------------------------
Cash flows from investing activities:
Purchase of property, plant, and equipment............. (859) (5,681)
Investments in unconsolidated affiliate................ (1,960) (1,960)
Proceeds from collection of related
party notes receivable................................ - 5,000
Cash paid for acquisition, net of cash acquired........ (26,450) (25,084)
Proceeds from sales of marketable securities, net...... 35,551 28,230
------------------------------
Net cash provided by investing activities.......... 6,282 505
------------------------------
Cash flows from financing activities:
Repurchase of convertible subordinated notes........... (6,636) -
Payments on capital lease obligations.................. (45) (40)
Proceeds from exercise of stock options
and employee stock purchase plan..................... 171 1,194
Proceeds from exercise of stock purchase warrants...... - 4,194
------------------------------
Net cash provided by (used for) financing
activities........................................ (6,510) 5,348
------------------------------
Net decrease in cash and cash equivalents.............. (4,871) (18,201)
Cash and cash equivalents, beginning of period......... 42,716 71,239
------------------------------
Cash and cash equivalents, end of period............... $37,845 $53,038
==============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest.......... $4,450 $4,576
==============================
The accompanying notes are an integral part of these consolidated
financial statements.
4
EMCORE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended September 30, 2001 and 2002 and the six months
ended March 31, 2003 (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, 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 3,248 3,248
Stock purchase warrant
exercise................................... 1,111 5,509 5,509
Compensatory stock issuances.................. 34 1,505 1,505
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...................................... (129,761) (129,761)
Impairment of equity investment............... 8,421 8,421
Unrealized loss on marketable securities...... (308) (308)
Translation adjustment........................ (21) (21)
----------
Comprehensive loss....................... (121,669)
Stock option exercise......................... 159 1,023 1,023
Stock purchase warrant exercise............... 823 4,194 4,194
Compensatory stock issuances.................. 125 714 714
Issuance of common stock - Employee Stock
Purchase Plan 48 561 561
-----------------------------------------------------------------------------------
Balance at September 30, 2002...... 36,752 334,051 (250,913) (222) (34) (932) 81,950
Net loss...................................... (15,438) (15,438)
Unrealized loss on marketable securities...... (38) (38)
Translation adjustment........................ 20 20
----------
Comprehensive loss....................... (15,456)
Compensatory stock issuances.................. 156 345 345
Issuance of common stock - Employee Stock
Purchase Plan 89 171 171
-----------------------------------------------------------------------------------
Balance at March 31, 2003.......... 36,997 $334,567 ($266,351) ($240) ($34) ($932) $67,010
======== ========== ============ ============== ============== ========= ==========
The accompanying notes are an integral part of these consolidated
financial statements.
5
EMCORE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of EMCORE Corporation and its subsidiaries (EMCORE). These statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim information, and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments considered necessary for a fair presentation have
been included. Operating results for interim periods are not necessarily
indicative of results that may be expected for the full year.
Preparation of EMCORE's financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts in the financial
statements and accompanying notes. Actual results could differ from those
estimates. For further information, refer to the consolidated financial
statements and footnotes included in EMCORE's Annual Report on Form 10-K for the
fiscal year ended September 30, 2002.
Certain prior period information has been reclassified to conform with current
year presentation.
NOTE 2. Segment Data and Related Information
EMCORE has two reportable operating segments: the systems-related business and
the materials-related business.
The systems-related business is our TurboDisc(R) product line, which designs,
develops and manufactures metal organic chemical vapor deposition (MOCVD)
systems and manufacturing processes. Revenues for the systems-related business
are derived primarily from sales of TurboDisc MOCVD systems, as well as spare
parts, services, and other related products.
The materials-related business is comprised of our Photovoltaics, Fiber Optics,
and Electronic Materials and Devices product lines. Photovoltaics revenues are
derived primarily from the sales of satellite communications products including
solar cells, covered interconnect solar cells (CICs) and solar panels. EMCORE's
Fiber Optics product line designs, develops, and manufactures high speed optical
transmitter modules, receiver modules and transponders utilizing EMCORE's
leading-edge vertical cavity surface emitting lasers (VCSELs) and PIN (the "P",
"I", "N" represent P-type, intrinsic and N-type semiconductor materials,
respectively) photodiode array components for the data communications and
telecommunications markets. EMCORE's recently purchased Agere System Inc.'s
cable television transmission systems, telecom access and satellite
communications components business (Ortel) for $26.2 million in cash. Ortel,
which is a part of EMCORE's fiber optic group, designs and manufactures high
quality optoelectronic solutions that enable voice, video and data networks.
Ortel's product offerings include 1310 nm and 1550 nm analog lasers, dense
wavelength division multiplexing (DWDM) lasers, transmitter engines,
photodiodes, fiber-to-the-home/curb/business components, wideband lasers and
receivers, and optical links for long-haul antenna remoting. Revenues from the
Electronic Materials and Devices product line include wireless products, such as
RF materials including heterojunction bipolar transistors (HBTs) and
enhancement-mode pseudomorphic high electron mobility transistors (pHEMTS), and
also MR sensors and process development technology.
6
EMCORE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The segments reported are the segments of EMCORE for which separate financial
information is available and are evaluated regularly by executive management in
deciding how to allocate resources and in assessing performance. Unaudited
information about reported segments is as follows:
- ------------------------------------------- ---------- ------------ ----------- ------------ ------------ -----------
(in thousands) Systems- Materials Systems Materials
-related -related TOTAL -related -related TOTAL
STATEMENT OF OPERATIONS Quarter 2 Quarter 2 Quarter 2 Quarter 2 Quarter 2 Quarter 2
FY 2003 FY 2003 FY 2003 FY 2002 FY 2002 FY 2002
Three months ended March 31, 2003 & 2002
- ------------------------------------------- ---------- ------------ ----------- ------------ ------------ -----------
Revenues................................... $10,777 $16,897 $27,674 $4,341 $18,737 $23,078
Cost of revenues........................... 7,186 17,737 24,923 6,853 25,355 32,208
---------- ------------ ----------- ------------ ------------ -----------
Gross profit (loss)............... 3,591 (840) 2,751 (2,512) (6,618) (9,130)
Gross margin...................... 33.3% (5.0%) 9.9% (57.9%) (35.3%) (39.6%)
Operating expenses:
Selling, general and administrative... 2,519 4,873 7,392 6,102 3,381 9,483
Research and development.............. 1,359 4,069 5,428 3,950 7,675 11,625
Impairment and restructuring.......... - - - 4,672 31,267 35,939
---------- ------------ ----------- ------------ ------------ -----------
Total operating expenses......... 3,878 8,942 12,820 14,724 42,323 57,047
---------- ------------ ----------- ------------ ------------ -----------
Operating loss................... ($287) ($9,782) ($10,069) ($17,236) ($48,941) ($66,177)
Other expenses:
Interest expense, net................. - - 1,741 - - 1,682
Equity in net loss of unconsolidated
affiliate.......................... - - 731 - - 851
---------- ------------ ----------- ------------ ------------ -----------
Total other expenses............... - - 2,472 - - 2,533
---------- ------------ ----------- ------------ ------------ -----------
Net loss........................... ($287) ($9,782) ($12,541) ($17,236) ($48,941) ($68,710)
- ------------------------------------------- ---------- ------------ ----------- ------------ ------------ -----------
(in thousands) Systems Materials Systems Materials
-related -related TOTAL -related -related TOTAL
STATEMENT OF OPERATIONS FY 2003 FY 2003 FY 2003 FY 2002 FY 2002 FY 2002
Six months ended March 31, 2003 & 2002
- ------------------------------------------- ---------- ------------ ----------- ------------ ------------ -----------
Revenues................................... $24,619 $26,301 $50,920 $14,636 $27,579 $42,215
Cost of revenues........................... 16,172 29,771 45,943 12,264 36,536 48,800
---------- ------------ ----------- ------------ ------------ -----------
Gross profit (loss)............... 8,447 (3,470) 4,977 2,372 (8,957) (6,585)
Gross margin...................... 34.3% (13.2%) 9.8% 16.2% (32.5%) (15.6%)
Operating expenses:
Selling, general and administrative... 4,878 8,293 13,171 10,852 5,629 16,481
Research and development.............. 2,691 6,343 9,034 7,830 15,742 23,572
Gain from debt extinguishment......... (6,614) - (6,614) - - -
Impairment and restructuring.......... - - - 4,672 31,267 35,939
---------- ------------ ----------- ------------ ------------ -----------
Total operating expenses......... 955 14,636 15,591 23,354 52,638 75,992
---------- ------------ ----------- ------------ ------------ -----------
Operating income (loss).......... $7,492 ($18,106) ($10,614) ($20,982) ($61,595) ($82,577)
Other expenses:
Interest expense, net................. - - 3,522 - - 2,610
Other expense, net.................... - - - - - 13,262
Equity in net loss of
unconsolidated affiliate........... - - 1,302 - - 1,228
---------- ------------ ----------- ------------ ------------ -----------
Total other expenses............... - - 4,824 - - 17,100
---------- ------------ ----------- ------------ ------------ -----------
Net income (loss) $7,492 ($18,106) ($15,438) ($20,982) ($61,595) ($99,677)
- ------------------------------------------- ---------- ------------ ----------- ------------ ------------ -----------
During the second quarter of fiscal 2002, EMCORE recorded pre-tax charges to
income totaling $50.4 million, which included fixed asset impairment charges of
$34.8 million, excess inventory reserve of $11.9 million, loss provision for
accounts receivable of $2.6 million and severance charges of $1.1 million.
7
EMCORE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The reportable operating segments are each managed separately because they
manufacture and distribute distinct products and services. The table below
outlines EMCORE's four different product lines:
For the three months ended March 31, For the six months ended March 31,
2003 2002 2003 2002
- -------------------------------------- ----------------------------------------------------------------------------------
Product Lines Revenue % Revenue % Revenue % Revenue %
- ------------- ------- - ------- - ------- - ------- -
Systems-related:
TurboDisc.......................... $10,777 39% $4,341 19% $24,619 48% $14,636 35%
Material-related:
Photovoltaics...................... 5,211 19% 10,958 47% 10,286 20% 12,787 30%
Fiber Optics........................ 9,685 35% 2,427 11% 11,971 24% 3,754 9%
Electronic Materials & Devices. 2,001 7% 5,352 23% 4,044 8% 11,038 26%
----------- -------- ---------- --------- ----------- ------- ------------ -------
TOTAL $27,674 100% $23,078 100% $50,920 100% $42,215 100%
======= ==== ======= ==== ======= ==== ======= ====
In January 2003, EMCORE acquired Ortel, which contributed approximately $7.1
million of fiber optic revenues to the second quarter of fiscal 2003.
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
therefore, EMCORE does not anticipate that fluctuations in any currency will
have a material effect on its financial condition or results of operations.
The following chart contains a breakdown of EMCORE's consolidated revenues by
geographic region:
For the three months ended March 31, For the six months ended March 31,
2003 2002 2003 2002
- --------------------- ------------- -------- ----------- -------- ----------- -------- ------------ -------
Region: Revenue % Revenue % Revenue % Revenue %
------- - ------- - ------- - ------- -
North America..... $15,911 58% $18,889 82% $26,505 52% $31,877 76%
Asia.............. 8,653 31% 2,063 9% 15,832 31% 4,794 11%
Europe.......... 3,110 11% 2,126 9% 8,583 17% 5,544 13%
- --------------------- ------------- -------- ----------- -------- ----------- -------- ------------ -------
TOTAL $27,674 100% $23,078 100% $50,920 100% $42,215 100%
======= ==== ======= ==== ======= ==== ======= ====
NOTE 3. Acquisitions
In December 2002, EMCORE acquired certain assets of privately-held Alvesta
Corporation of Sunnyvale, California. Alvesta Corporation is an industry leader
in the research and development of parallel optic transceivers for fiber optic
communication networks. Alvesta pioneered four channel parallel optic
transceivers for the Optical Internetworking Forum, 10G Fibre Channel, 10
Gigabit Ethernet and Infiniband applications. Alvesta's product revenues from
sales of its four-channel products were approximately $5 million in 2001. The
total cash purchase price, including acquisition costs, was approximately
$250,000. The transaction included the acquisition of intellectual property and
inventory. In addition, EMCORE hired six employees of Alvesta's key design team.
8
EMCORE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
On January 21, 2003, EMCORE acquired Ortel for $26.2 million in cash. Ortel
contributed approximately $7.1 million of fiber optic revenues to the second
quarter of fiscal 2003. The following unaudited condensed consolidated pro forma
financial statement has been prepared to give effect to EMCORE's acquisition of
certain assets and liabilities of Ortel.
EMCORE retained an independent consultant to perform a valuation of the acquired
assets. The pro forma adjustments are based upon available information and
assumptions that EMCORE believes are reasonable. A preliminary allocation of the
purchase price for the above transactions has been made to major categories of
assets and liabilities in the accompanying pro forma statements based on
currently available information. The actual allocation of purchase price and the
resulting effect on income from operations are not expected to differ materially
from the pro forma amounts included herein. The unaudited condensed consolidated
pro forma financial statement do not purport to represent what the consolidated
results of operations or financial position of EMCORE would actually have been
if the acquisition had occurred on the dates referred to below, nor do they
purport to project the results of operations or financial position of EMCORE for
any future period.
The unaudited condensed consolidated pro forma statement of operations data was
prepared by combining EMCORE's statement of operations for the year ended
September 30, 2002 with Ortel's statement of Net Sales, Cost of Sales and Direct
Operating Expenses for the year ended September 30, 2002, giving effect to the
acquisition as though it occurred on October 1, 2001.
The unaudited condensed consolidated pro forma statement of operations does not
give effect to any restructuring costs or any potential cost savings or other
operating efficiencies that could result from the acquisition, or any
non-recurring charges or credits resulting from the transaction such as
in-process research and development charges.
The unaudited condensed consolidated pro forma financial statement should be
read in conjunction with the historical financial statements of (i) EMCORE
included in its Annual Report on Form 10-K for the year ended September 30, 2002
(filed December 30, 2002), and (ii) Ortel included in EMCORE's Form 8-K/A (filed
April 7, 2003).
Condensed Consolidated Pro Forma Statement of Operations Data
For the year ended September 30, 2002
EMCORE Ortel Adjustments Footnotes Pro Forma
------ ----- ----------- --------- ---------
Sales..................................... $ 87,772 $ 55,800 $ 143,572
Net loss.................................. $(129,761) $(223,906) $ 191,471 1 $(162,196)
================ =============== ================ ==============
Net loss per basic and diluted share...... $ (3.55) $ (4.44)
================ ==============
For the three months ended March 31, 2003
EMCORE Ortel Adjustments Pro Forma
------ ----- ----------- ---------
Sales..................................... $ 27,674 $ 8,598 $ 7,117 2 $ 43,389
Net loss.................................. $ (12,541) $ (3,581) $ 1,568 2 $ (14,554)
================ =============== ================ ==============
Net loss per basic and diluted share...... $ (0.34) $ (0.39)
================ ==============
For the three months ended March 31, 2002
EMCORE Ortel Adjustments Pro Forma
------ ----- ----------- ---------
Sales..................................... $ 23,078 $ 13,288 $ - $ 36,366
Net loss.................................. $ (68,710) $ (8,006) $ - $ (76,716)
================ =============== ================ ==============
Net loss per basic and diluted share...... $ (1.88) $ (2.10)
================ ==============
For the six months ended March 31, 2003
EMCORE Ortel Adjustments Pro Forma
------ ----- ----------- ---------
Sales..................................... $ 50,920 $ 17,188 $ (7,117) 2 $ 60,991
Net loss.................................. $ (15,438) $ (6,040) $ 1,568 2 $ (19,910)
================ =============== ================ ==============
Net loss per basic and diluted share...... $ (0.42) $ (0.54)
================ ==============
For the six months ended March 31, 2002
EMCORE Ortel Adjustments Pro Forma
------ ----- ----------- ---------
Sales..................................... $ 42,215 $ 31,046 $ - $ 73,261
Net loss.................................. $ (99,677) $ (16,892) $ - $(116,569)
================ =============== ================ ==============
Net loss per basic and diluted share...... $ (2.74) $ (3.20)
================ ==============
(1) An adjustment was made to eliminate the various impairment and restructuring
charges recorded by Ortel during the periods related to the acquired assets. The
acquired assets are valued at fair market value. Therefore, there would be no
impairment and restructuring charges in the condensed consolidated pro forma
financial statements, as the acquired assets would be recorded in purchase
accounting at their fair market value upon acquisition.
(2) An adjustment was made to eliminate the sales and net losses recorded twice
in the table above during the period from January 21, 2002, the date EMCORE
purchased Ortel, through March 31, 2003 ("Consolidation Period"). During that
period, Ortel's financial information was consolidated into EMCORE; however, to
accurately depict the financial position of both entities for the three and six
months ended March 31, 2003, both sales and net loss were shown on a 'stand
alone' basis, and properly adjusted for by backing out the amounts during the
Consolidation Period to determine the pro forma information.
The effects of the acquisition have been presented using the purchase method of
accounting. The total estimated purchase price of the transaction has been
allocated to assets and liabilities based on management's preliminary estimate
of their fair values. The preliminary allocation of the purchase price will be
subject to further adjustments, which are not anticipated to be material, as
EMCORE finalizes its allocation of purchase price in accordance with accounting
principles generally accepted in the United States.
9
EMCORE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following represents the preliminary allocation of the purchase price over
the estimated fair values of the acquired assets and assumed liabilities of
Ortel at January 21, 2003.
Cash........................................... $25,000
Acquisition costs.............................. 1,200
-----------
Total purchase price........................... $26,200
===========
Allocation of purchase price based on fair values:
Assets acquired:
Inventories................................ 6,473
Property, plant and equipment.............. 8,570
Identifiable intangible assets............. 3,274
Goodwill................................... 9,983
Less: warranty reserve......................... (2,100)
-----------
Net assets acquired................................ $26,200
===========
NOTE 4. Joint Venture
In January 1999, General Electric Lighting and EMCORE formed GELcore, a joint
venture to develop and market HB LED lighting products. General Electric
Lighting and EMCORE have agreed that this joint venture will be the exclusive
vehicle for each party's participation in solid state lighting. Under the terms
of the joint venture agreement, EMCORE has a 49% non-controlling interest in the
GELcore venture. EMCORE accounts for this related party investment of an
unconsolidated affiliate using the equity method of accounting.
NOTE 5. Balance Sheet Data
o Accounts receivable, net
The components of accounts receivable consisted of the following:
(in thousands) At At
March 31, 2003 September 30, 2002
----------------- ------------------
Accounts receivable..................... $20,465 $24,029
Accounts receivable - unbilled.......... 1,982 3,135
----------------- ---------------
22,447 27,164
Allowance for doubtful accounts......... (1,616) (3,347)
---------------- ---------------
Total.................... $20,831 $23,817
================ ===============
10
EMCORE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
o Inventories
The components of inventories consisted of the following:
(in thousands)
At At
March 31, 2003 September 30, 2002
------------------- ----------------------
Raw materials.................. $16,611 $19,926
Work-in-process................. 10,019 8,706
Finished goods.................. 3,277 2,395
------------------- ----------------------
Total $29,907 $31,027
=================== ======================
o Property, Plant and Equipment
The components of property, plant and equipment consisted of the following:
(in thousands) At At
March 31, September 30,
2003 2002
-------------- ----------------
Land....................... $2,502 $2,502
Building and improvements 61,085 60,777
Equipment................ 77,315 69,223
Furniture and fixtures... 5,835 4,843
Leasehold improvements... 1,737 1,729
Construction in progress. 1,068 1,094
Property and equipment
under capital lease... 429 429
-------------- --------------
149,971 140,597
Less: accumulated depreciation and
amortization... (47,786) (39,295)
-------------- --------------
Total..... $102,185 $101,302
============== ==============
o Goodwill
All goodwill relates to EMCORE's materials-related business. In March 2002,
EMCORE acquired certain assets, including equipment and intellectual
property, of the Applied Solar Division of Tecstar, Inc. and its
subsidiary, Tecstar Power Systems, Inc. (this acquired business is referred
to herein as "Tecstar") and allocated approximately $20.4 million to
goodwill. In January 2003, EMCORpurchased Ortel for $26.2 million in cash,
and allocated approximately $10.0 million to goodwill.
11
EMCORE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
o Intangible Assets, net
The components of intangible assets consisted of the following:
At March 31, 2003 At September 30, 2002
----------------- ---------------------
(in thousands) Gross Accumulated Net Gross Accumulated Net
Assets Amortization Assets Assets Amortization Assets
--------- ---------------- --------- --------- ----------------- -----------
Patents............................ $2,441 ($1,240) $1,201 $2,674 ($1,326) $1,348
Acquired intellectual property:
Ortel..................... 3,274 (162) 3,112 - - -
Tecstar.................. 1,900 (396) 1,504 1,900 (206) 1,694
Alvesta.................. 195 (15) 180 - - -
--------- ---------------- --------- --------- ----------------- -----------
Total... $7,810 ($1,813) $5,997 $4,574 $(1,532) $3,042
========= ================ ========= ========= ================= ===========
Future amortization expense as of March 31, 2003 is as follows:
(in thousands)
Period ending: Amortization
------------
March 31, 2004 $ 1,524
March 31, 2005 1,452
March 31, 2006 1,330
March 31, 2007 1,097
March 31, 2008 437
------------
Total amortization $ 5,840
============
o Accrued Expenses
The components of accrued expenses consisted of the following:
(in thousands) At At
March 31, September 30,
2003 2002
---------------- --------------
Compensation....................... $3,913 $4,392
Interest........................... 3,055 3,281
Warranty........................... 3,423 2,134
Other.............................. 3,418 3,068
------------- -----------
Total............... $13,809 $12,875
============= ===========
NOTE 6. Commitments and Contingencies
EMCORE leases certain facilities and equipment under non-cancelable operating
leases. Facility and equipment rent expense under such leases amounted to
approximately $0.5 million and $0.3 million for the three months ended March 31,
2003 and 2002, respectively. Future minimum rental payments under EMCORE's
non-cancelable operating leases with an initial or remaining term of one year or
more as of March 31, 2003 are as follows:
(in thousands)
Period ending: Operating
------------
March 31, 2004 $2,104
March 31, 2005 1,708
March 31, 2006 1,476
March 31, 2007 1,167
March 31, 2008 1,008
------------
Total minimum lease payments $7,463
============
12
EMCORE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
In fiscal 2000, GELcore entered into a Revolving Loan Agreement (the "GELcore
Credit Facility") with General Electric Canada, Inc., an affiliate of GE, which
is the owner of a 51% controlling share of GELcore. The GELcore Credit Facility
provides for borrowings of up to Canadian $7.5 million (US $5.1 million at March
31, 2003) at a rate of interest based on prevailing Canadian interest rates.
Amounts outstanding under the GELcore Credit Facility are payable on demand, and
the GELcore Credit Facility expires in August 2003. EMCORE has guaranteed 49%
(i.e. its proportionate share) of GELcore's obligations under the GELcore Credit
Facility. As of March 31, 2003, US $2.7 million was outstanding under the
GELcore Credit Facility.
NOTE 7. Stock Options
In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based
Compensation -- Transition and Disclosure, an amendment of FASB Statement No.
123. SFAS 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. EMCORE implemented SFAS 148 in the quarter
ended March 31, 2003.
The following table illustrates the effect on net loss and net loss per share if
EMCORE had applied the fair value recognition provisions of SFAS No. 123 to
stock based compensation:
For the three months For the six months
ended March 31, ended March 31,
--------------------- ---------------------
2003 2002 2003 2002
---- ---- ---- ----
Net loss..................................... ($12,541) ($68,710) ($15,438) ($99,677)
Deduct: Total stock based employee compensation
expense determined under fair value based methods
for all awards, net of related tax effects..... (706) (1,744) (1,389) (3,487)
------------- ------------- ------------ ------------
Pro forma net loss............................. ($13,247) ($70,454) ($16,827) ($103,164)
============= ============= ============ ============
The pro forma disclosures shown above were calculated for all options using
Black-Scholes option pricing model with the following assumptions:
For the three months For the six months
ended March 31, ended March 31,
--------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
Expected dividend yield 0% 0% 0% 0%
Expected stock price volatility 112.96% 112.62% 112.96% 112.62%
Risk-free interest rate 2.78% 4.93% 2.78% 4.93%
Weighted average expected life (in years) 5 5 5 5
13
EMCORE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 8. Recent Financial Accounting Pronouncements
FIN 45
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Financial Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. FIN 45 clarifies that a guarantor is required to
recognize, at the inception of the guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
initial measurement provisions of FIN 45 are applicable on a prospective basis
to guarantees issued or modified after December 15, 2002. In the normal course
of business, EMCORE does not issue guarantees; accordingly, FIN 45 has no effect
on the financial statements.
In April 2003, FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. The changes in SFAS No. 149
improve financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. In particular, SFAS No. 149 (1)
clarifies under what circumstances a contract with an initial net investment
meets the characteristic of a derivative discussed in paragraph 6(b) of SFAS No.
133, (2) clarifies when a derivative contains a financing component, (3) amends
the definition of an underlying to conform it to language used in FIN 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, and (4) amends certain other
existing pronouncements. Those changes will result in more consistent reporting
of contracts as either derivatives or hybrid instruments. SFAS No. 149 is to be
applied prospectively to contracts entered into or modified after June 30, 2003,
with certain exceptions, and for hedging relationships designated after June 30,
2003. Management believes that adopting this statement will not have a material
impact on the financial position, results of operations, or cash flows of
EMCORE.
14
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q includes forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. These forward-looking statements are based largely on our current
expectations and projections about future events and financial trends affecting
the financial condition of our business. 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:
o 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;
o statements regarding anticipated results from EMCORE's acquisition of
Ortel, and difficulties in integrating past or future acquisitions into
EMCORE's operations;
o statements regarding the expected level and timing of benefits to EMCORE
from its restructuring and realignment efforts, including:
o expected cost reductions and their impact on EMCORE's financial
performance, and
o expected improvement to EMCORE's product and technology development
programs,
o statements regarding EMCORE's ability to obtain or maintain ISO
qualifications;
o 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 any period in fiscal 2003 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:
o difficulties in integrating Ortel's operations into EMCORE's operations and
the uncertainty as to the results to be achieved by EMCORE in connection
with this acquisition;
o 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;
o 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
o other risks and uncertainties described in EMCORE's filings with the
Securities and Exchange Commission (including under the heading "Risk
Factors" in our most recent Annual Report on Form 10-K), such as:
o cancellations, rescheduling or delays in product shipments;
o manufacturing capacity constraints;
o lengthy sales and qualification cycles; difficulties in the production
process;
o changes in semiconductor industry growth; and
o increased competition; delays in developing and commercializing new
products.
We assume no obligation to update the matters discussed in this Quarterly
Report.
15
EMCORE Corporation designs, develops and manufactures compound
semiconductor wafers and devices and is a leading developer and manufacturer of
the MOCVD systems and manufacturing processes used to fabricate compound
semiconductor wafers, devices and modules. Compound semiconductors are composed
of two or more elements and usually consist of a metal, such as gallium,
aluminum or indium, and another element 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 is the only fully integrated commercial supplier of compound
semiconductor equipment and products. We offer a comprehensive portfolio of
products and systems for the broadband, wireless communications, photovoltaic
and solid state lighting markets. We have developed extensive fiber optic module
design, solar panel design, materials science expertise, process technology and
MOCVD production system manufacturing expertise 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 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.
Growth in our industry had been driven by the widespread deployment of
fiber optic networks, introduction of new wireless networks and services,
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. We believe our expertise
in materials science and process technology provides us with a competitive
advantage to manufacture compound semiconductor wafers, devices and modules in
high volumes.
Systems-Related
EMCORE is a leading provider of compound semiconductor technology processes and
MOCVD production systems. We believe that our proprietary TurboDisc(R)
deposition technology makes possible one of the most cost-effective production
processes for the commercial volume manufacture of high-performance compound
semiconductor wafers and devices, which are integral to solid state lighting and
global communications applications. Although overall demand for MOVCD systems
has declined since fiscal 2001, we believe our overall market share has recently
been increasing as a result of aggressive market penetration of new and
higher-end products. Continuing EMCORE's standing as the world leader in GaN
production platforms, EMCORE introduced the E300 GaNzilla(TM), the most powerful
tool available for the production of high brightness blue and green LEDs. It
offers the highest throughput in the industry for the growth of GaN materials.
This product release has been highly successful with 14 systems shipped through
March 31, 2003 and with installations in 3 continents. In addition, EMCORE
recently introduced its Enterprise(R) 300LDM MOCVD production tool designed to
achieve high quality materials and high yields for consumer electronic
applications. This new tool produces devices for several applications including
DVD and CD-ROMs. Engineered specifically for the high volume production of long
wavelength infrared and visible lasers, VCSELs and InP-based electronic
materials, EMCORE's 300LDM provides customers with run-to-run process control
and is designed to accomplish excellent uniformity of thickness, doping and
composition of epitaxial layers. In addition, EMORE's New Jersey facility
successfully completed a QS 9000 surveillance audit in the second quarter of
Fiscal 2003.
Materials-Related
EMCORE offers a broad array of compound semiconductor wafers and devices,
including photovoltaic products, fiber optic devices and components and
electronic materials and devices.
Photovoltaics. EMCORE's compound semiconductor solar cells are used
primarily in satellite applications and have achieved industry-leading
efficiencies. Solar cells provide the electrical power for a satellite and
their efficiency dictates the amount of power and bears upon the weight,
launch costs and
16
potential revenues of the satellite. In March 2002, EMCORE acquired certain
assets, including equipment and intellectual property, of the Applied Solar
Division of Tecstar, Inc. and its subsidiary, Tecstar Power Systems, Inc.
(this acquired business is referred to herein as "Tecstar"). With the
Tecstar acquisition, EMCORE has fully integrated the production of solar
panels using EMCORE's solar cells. The Tecstar acquisition has augmented
EMCORE's capability to penetrate the satellite communications sector and
enables EMCORE to provide satellite manufacturers with proven integrated
satellite power solutions that considerably improve satellite economics.
Satellite manufacturers and solar array integrators can now rely on EMCORE
as a single supply source that meets all of their satellite power needs.
EMCORE is currently completing the process of qualifying its advanced solar
cells with Tecstar's proven solar panel processes for LEO and GEO orbits.
The combination of Tecstar's demonstrated success with well-known space
programs and EMCORE's industry-leading solar cell technology should enable
EMCORE to dramatically improve satellite economics. With well-established
partnerships with major satellite manufacturers and a proven qualification
process, EMCORE believes it will play an important role in the evolution of
telecommunications and data communications around the world.
Fiber Optic Devices and Components. The proliferation of the Internet and
the growth in volume of data being sent over local and wide area networks
has placed a strain on the networking infrastructure. The demand for
increased bandwidth has resulted in a need for both faster and more
expansive networks. EMCORE's 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, Fibre Channel, VSR OC-192, the emerging VSR
OC-768 and related markets. EMCORE's 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. EMCORE plans to capitalize on its oxide VCSEL
manufacturing platform and expertise, by providing the industry with 1
Gbps, 2.5 Gbps, 10 Gbps (OC-192), and 40 Gbps (OC-768) solutions through
single-channel serial, multi-channel parallel or wavelength-divisional
multiplexing approaches. Leading electronic systems manufacturers are
integrating VCSELs into a broad array of end-market applications including
Internet access, digital cross-connect telecommunications switches,
Infiniband optical bus, and fiber optic switching and routing, such as
Gigabit Ethernet and SAN. EMCORE's fiber optic devices and components are
designed to help solve the data bottle necking problems for distances under
300 meters in central office and point-of-presence environments and provide
a cost effective alternative to more costly comparable serial
interconnects.
In January 2003, EMCORE acquired the West Coast optoelectronics division of
Agere Systems, Inc. (Ortel) for $26.2 million in cash. The transaction
included assets, products, technology and intellectual property related to
Agere's cable TV optical components, telecom access and satellite
communications operations, which had revenues of approximately $56 million
in fiscal 2002. Ortel designs and manufactures high quality optoelectronic
solutions that enable voice, video and data networks. Ortel's product
offering includes 1310 nm and 1550 nm analog lasers, dense wavelength
division multiplexing (DWDM) lasers, transmitter engines, photodiodes,
fiber-to-the-home/curb/business components, wideband lasers and receivers,
and optical links for long-haul antenna remoting.
Electronic Materials and Devices. RF materials, including heterojunction
bipolar transistors (HBTs) and enhancement-mode pseudomorphic high electron
mobility transistors (pHEMTS), are compound semiconductor materials used in
wireless communications. Compound semiconductor RF materials have a broader
bandwidth and superior performance at higher frequencies than silicon-based
materials. EMCORE currently produces 4-inch and 6-inch InGaP HBT materials
including E-mode devices that are used for power amplifiers for next
generation wireless infrastructure such as GSM, TDMA and CDMA multiband
wireless handsets. InGaP HBT materials provide higher linearity, higher
power added efficiency as well as greater reliability than first generation
AlGaAs HBT technologies. EMCORE also manufactures MR sensors that are
compound semiconductor devices that possess sensing capabilities. MR
sensors improve vehicle performance through more accurate control of engine
and crank shaft timing, which allows for improved spark plug efficiency and
reduced emissions. In January 1997, EMCORE initiated shipments of compound
semiconductor MR sensors using technology licensed to EMCORE from General
Motors. This license allows EMCORE to manufacture and sell products using
this technology.
17
HB-LED Joint Venture
In January 1999, General Electric Lighting and EMCORE formed GELcore (GELcore),
a joint venture to develop and market HB-LED lighting products. HB-LEDs are
solid state compound semiconductor devices that emit light and are used in
miniature packages for everyday applications such as indicator lights on
automobiles, traffic lights, computers and other electronic equipment. 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.
Segment Data and Related Information
EMCORE has two reportable operating segments: the systems-related business and
the materials-related business.
The systems-related business is our TurboDisc(R) product line, which designs,
develops and manufactures metal organic chemical vapor deposition (MOCVD)
systems and manufacturing processes. Revenues for the systems-related business
are derived primarily from sales of TurboDisc MOCVD systems, as well as spare
parts, services, and other related products.
The materials-related business is comprised of our Photovoltaics, Fiber Optics,
and Electronic Materials and Devices product lines. Photovoltaics revenues are
derived primarily from the sales of satellite communications products including
solar cells, covered interconnect solar cells (CICs) and solar panels. EMCORE's
Fiber Optics designs, develops, and manufactures high speed optical transmitter
modules, receiver modules and transponders utilizing EMCORE's leading-edge
vertical cavity surface emitting lasers (VCSELs) and PIN (the "P", "I", "N"
represent P-type, intrinsic and N-type semiconductor materials, respectively)
photodiode array components for the data communications and telecommunications
markets. EMCORE's recently acquired Ortel division, which is a part of the fiber
optic group, designs and manufactures high quality optoelectronic solutions that
enable voice, video and data networks. Ortel's product offerings include 1310 nm
and 1550 nm analog lasers, dense wavelength division multiplexing (DWDM) lasers,
transmitter engines, photodiodes, fiber-to-the-home/curb/business components,
wideband lasers and receivers, and optical links for long-haul antenna remoting.
Revenues from the Electronic Materials and Devices product line include wireless
products, such as RF materials including HBTs and pHEMTS, and also MR sensors
and process development technology.
The segments reported are the segments of EMCORE for which separate financial
information is available and are evaluated regularly by executive management in
deciding how to allocate resources and in assessing performance. Unaudited
information about reported segments is as follows:
- ------------------------------------------- ---------- ------------ ----------- ------------ ------------ -----------
(in thousands) Systems Materials Systems Materials
-related -related TOTAL -related -related TOTAL
STATEMENT OF OPERATIONS Quarter 2 Quarter 2 Quarter 2 Quarter 2 Quarter 2 Quarter 2
FY 2003 FY 2003 FY 2003 FY 2002 FY 2002 FY 2002
Three months ended March 31, 2003 & 2002
- ------------------------------------------- ---------- ------------ ----------- ------------ ------------ -----------
Revenues................................... $10,777 $16,897 $27,674 $4,341 $18,737 $23,078
Cost of revenues........................... 7,186 17,737 24,923 6,853 25,355 32,208
---------- ------------ ----------- ------------ ------------ -----------
Gross profit (loss)............... 3,591 (840) 2,751 (2,512) (6,618) (9,130)
Gross margin...................... 33.3% (5.0%) 9.9% (57.9%) (35.3%) (39.6%)
Operating expenses:
Selling, general and administrative... 2,519 4,873 7,392 6,102 3,381 9,483
Research and development.............. 1,359 4,069 5,428 3,950 7,675 11,625
Impairment and restructuring.......... - - - 4,672 31,267 35,939
---------- ------------ ----------- ------------ ------------ -----------
Total operating expenses......... 3,878 8,942 12,820 14,724 42,323 57,047
---------- ------------ ----------- ------------ ------------ -----------
Operating loss................... ($287) ($9,782) ($10,069) ($17,236) ($48,941) ($66,177)
Other expenses:
Interest expense, net................. - - 1,741 - - 1,682
Equity in net loss of unconsolidated
affiliate.......................... - - 731 - - 851
---------- ------------ ----------- ------------ ------------ -----------
Total other expenses............... - - 2,472 - - 2,533
---------- ------------ ----------- ------------ ------------ -----------
Net loss........................... ($287) ($9,782) ($12,541) ($17,236) ($48,941) ($68,710)
XXX
- ------------------------------------------- ---------- ------------ ----------- ------------ ------------ -----------
18
- ------------------------------------------- ---------- ------------ ----------- ------------ ------------ -----------
(in thousands) Systems Materials Systems Materials
-related -related TOTAL -related -related TOTAL
STATEMENT OF OPERATIONS FY 2003 FY 2003 FY 2003 FY 2002 FY 2002 FY 2002
Six months ended March 31, 2003 & 2002
- ------------------------------------------- ---------- ------------ ----------- ------------ ------------ -----------
Revenues................................... $24,619 $26,301 $50,920 $14,636 $27,579 $42,215
Cost of revenues........................... 16,172 29,771 45,943 12,264 36,536 48,800
---------- ------------ ----------- ------------ ------------ -----------
Gross profit (loss)............... 8,447 (3,470) 4,977 2,372 (8,957) (6,585)
Gross margin...................... 34.3% (13.2%) 9.8% 16.2% (32.5%) (15.6%)
Operating expenses:
Selling, general and administrative... 4,878 8,293 13,171 10,852 5,629 16,481
Research and development.............. 2,691 6,343 9,034 7,830 15,742 23,572
Gain from debt extinguishment......... (6,614) - (6,614) - - -
Impairment and restructuring.......... - - - 4,672 31,267 35,939
---------- ------------ ----------- ------------ ------------ -----------
Total operating expenses......... 955 14,636 15,591 23,354 52,638 75,992
---------- ------------ ----------- ------------ ------------ -----------
Operating income (loss)........... $7,492 ($18,106) ($10,614) ($20,982) ($61,595) ($82,577)
Other expenses:
Interest expense, net................. - - 3,522 - - 2,610
Other expense, net.................... - - - - - 13,262
Equity in net loss of
unconsolidated affiliate........... - - 1,302 - - 1,228
---------- ------------ ----------- ------------ ------------ -----------
Total other expenses............... - - 4,824 - - 17,100
---------- ------------ ----------- ------------ ------------ -----------
Net income (loss) $7,492 ($18,106) ($15,438) ($20,982) ($61,595) ($99,677)
- ------------------------------------------- ---------- ------------ ----------- ------------ ------------ -----------
During the second quarter of fiscal 2002, EMCORE recorded pre-tax
charges to income totaling $50.4 million, which included fixed asset
impairment charges of $34.8 million, excess inventory reserve of $11.9
million, loss provision for accounts receivable of $2.6 million and
severance charges of $1.1 million.
The reportable operating segments are each managed separately because
they manufacture and distribute distinct products and services. The
table below outlines EMCORE's four different product lines:
For the six months ended For the six months ended
March 31, March 31,
2003 2002 2003 2002
- -------------------------------------- ----------------------------------------------------------------------------------
Product Lines Revenue % Revenue % Revenue % Revenue %
- ------------- ------- - ------- - ------- - ------- -
Systems-related:
TurboDisc........................... $10,777 39% $4,341 19% $24,619 48% $14,636 35%
Material-related:
Photovoltaics....................... 5,211 19% 10,958 47% 10,286 20% 12,787 30%
Fiber Optics........................ 9,685 35% 2,427 11% 11,971 24% 3,754 9%
Electronic Materials & Devices...... 2,001 7% 5,352 23% 4,044 8% 11,038 26%
----------- -------- ---------- -------- ----------- ------- ------------ -------
TOTAL $27,674 100% $23,078 100% $50,920 100% $42,215 100%
=========== ======== ========== ======== =========== ======= ============ =======
Customers
Since its inception, EMCORE has worked closely with its customers to design
and develop process technology and material science expertise for use in
production systems for its customers' end-use applications. EMCORE has leveraged
its process and materials science knowledge base to manufacture a broad range of
compound semiconductor wafers and devices such as VCSELs, photodetectors, RF and
electronic materials, solar cells, HB-LEDs and MR sensors. EMCORE's customer
base includes many of the largest semiconductor, telecommunications, consumer
goods and computer manufacturing companies in the world. Some of our customers
include Agere Systems, Inc., Agilent Technologies Ltd., Anadigics Inc.,
Boeing-Spectrolab, Corning, Inc., General Motors Corp., Hewlett Packard Co.,
Honeywell International, Inc., Infineon Technologies AG, Loral Space &
Communications Ltd., LumiLeds Lighting (a joint venture between Philips Lighting
and Agilent Technologies), Motorola, Inc., Nortel Networks Corp., Siemens AG's
Osram GmbH subsidiary, TriQuint Semiconductor, Inc., Tyco, Inc., many of the
largest electronics manufacturers in Japan and a number of Taiwanese, Chinese
and Korean companies. EMCORE also sells to a number of other customers whose
names cannot be identified because of confidentiality obligations.
19
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 therefore, EMCORE does not anticipate that fluctuations in any
currency will have a material effect on its financial condition or results of
operations.
The following chart contains a breakdown of EMCORE's consolidated revenues by
geographic region:
For the three months ended March 31, For the six months ended March 31,
2003 2002 2003 2002
- ---------------------------------------------------------------- ------------------------------------------
Region: Revenue % Revenue % Revenue % Revenue %
------- - ------- - ------- - ------- -
North America. $15,911 58% $18,889 82% $26,505 52% $31,877 76%
Asia.............. 8,653 31% 2,063 9% 15,832 31% 4,794 11%
Europe.......... 3,110 11% 2,126 9% 8,583 17% 5,544 13%
- ---------------------------------------------------------------- ------------------------------------------
TOTAL $27,674 100% $23,078 100% $50,920 100% $42,215 100%
======= ==== ======= ==== ======= ==== ======= ====
Backlog
As of March 31, 2003, EMCORE had a backlog believed to be firm of
approximately $52.1 million, consisting of approximately $29.3 million of
system-related orders and $22.8 million of materials-related orders. This
compares to a backlog of $45.5 million as reported at September 30, 2002. The
book-to-bill ratio for MOCVD systems was 1.46 for the three months ended March
31, 2003. The increase in backlog was attributable to increased demand for MOCVD
systems and the $4.4 million of backlog acquired from Ortel. Historically,
significant portions of our materials-related revenues are not reported in
backlog since our customers have reduced lead times. Many of our
materials-related sales usually occur within the same month when the purchase
order is received. The backlog does not include orders for product that have not
met qualification specifications, nor does it include anticipated service or
component orders, estimated at $8 million annually, since these orders have very
short lead times. We believe the entire backlog could be filled during the
following twelve months. However, especially given the current market
environment, customers may delay shipment of certain orders. Backlog also could
be adversely affected if customers unexpectedly cancel purchase orders accepted
by us.
Application of Critical Accounting Policies
The preparation of financial statements requires management to make
estimates and assumptions that affect 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 - EMCORE reviews long-lived assets for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired,
the impairment recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying
amount or fair value less cost to sell.
20
o Goodwill - In accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, EMCORE reviews goodwill for impairment at the
reporting unit level on an annual basis, or whenever an event occurs
or circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying amount. If the
carrying amount of goodwill for a particular reporting unit exceeds
the implied fair value of that goodwill, an impairment loss not to
exceed the carrying amount of goodwill is recognized in an amount
equal to that excess. After the goodwill impairment loss is
recognized, the adjusted carrying amount of goodwill is its new
accounting basis.
o Revenue Recognition - Revenues from systems-related sales are
recognized upon shipment where product has met customer's
specifications and when the title, ownership and risk of loss have
passed to the customer. EMCORE's billing terms on system sales
generally include a holdback of 10-20 percent on the total purchase
price subject to completion of the installation and final acceptance
process at the customer site. EMCORE defers this portion of revenue
related to installation and final acceptance until such installation
and final acceptance has been completed.
Revenues from materials-related sales are recognized when the product
meets the customer's specifications and when title, ownership and risk
of loss have passed to the customer. For new applications of EMCORE's
products where performance cannot be assessed prior to meeting
specifications at the customer's site, no revenue is recognized until
such specifications are met.
EMCORE records revenues from solar panel contracts using the
percentage-of-completion method where the elapsed time from award of a
contract to completion of performance exceeds 6 months. Revenue is
recognized in proportion to actual costs incurred compared to total
anticipated costs expected to be incurred for each contract. If
estimates of costs to complete long-term contracts indicate a loss, a
provision is made for the total loss anticipated. EMCORE has numerous
contracts that are in various stages of completion. Such contracts
require estimates to determine the appropriate cost and revenue
recognition. EMCORE uses all available information in determining
dependable estimates of the extent of progress towards completion,
contract revenues and contract costs. Estimates are revised as
additional information becomes available.
EMCORE's research contracts require the development or evaluation of
new materials applications and generally have a duration of 6 to 48
months. Contracts with a duration of six months or less are accounted
for on the completed contract method. Contracts of greater than 6
months contain interim milestones, reporting and invoicing
requirements and are billed according to the contract. For
"Cost-Plus-Fixed-Fee" research contracts with the Government, EMCORE
recognizes revenue to the extent of costs incurred plus the estimated
gross profit as stipulated in such contracts, based upon contract
performance. For other long-term contracts, EMCORE recognizes the
revenues and associated costs on these contracts as each major
milestone in the contract is met. A contract is considered complete
when all significant costs have been incurred, and the research
reporting requirements to the customer have been met. Contract costs
include all direct material and labor costs and those indirect costs
related to contract performance, such as indirect labor, supplies,
tools, repairs and depreciation costs, as well as coverage of certain
general and administrative costs. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
EMCORE also provides service for its products. Revenue from time and
materials based service arrangements is recognized as the service is
performed. Revenue from service contracts is recognized ratably over
the term of such service contracts. Service revenue is insignificant
for all periods presented.
In rare occurrences, at the customer's written request, EMCORE enters
into bill and hold transactions whereby title transfers to the
customer, but the product does not ship until a specified later date.
EMCORE recognizes revenues associated with the sale of product from
bill and hold arrangements when the product is complete, ready to
ship, and all bill and hold criteria have been met.
21
The impact of and any associated risks relating to these policies on our
business operations is discussed above and 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 Pronouncement
FIN 45
In Novemver 2002, the Financial Acounting Standards Board ("FASB") issued
Financial Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. FIN 45 clarifies that a guarantor is required to
recognize, at the inception of the guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
initial measurement provisions of FIN 45 are applicable on a prospective basis
to guarantees issued or modified after December 31, 2002. FIN 45 also requires
enhanced and additional disclosures of guarantees in financial statements ending
after December 15, 2002. In the normal course of business, EMCORE does not issue
guarantees; accordingly, FIN 45 has no effect on the financial statements.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. The changes in SFAS No. 149
improve financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. In particular, SFAS No. 149 (1)
clarifies under what circumstances a contract with an initial net investment
meets the characteristic of a derivative discussed in paragraph 6(b) of SFAS No.
133, (2) clarifies when a derivative contains a financing component, (3) amends
the definition of an underlying to conform it to language used in FIN 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, and (4) amends certain other
existing pronouncements. Those changes will result in more consistent reporting
of contracts as either derivatives or hybrid instruments. SFAS No. 149 is to be
applied prospectively to contracts entered into or modified after June 30, 2003,
with certain exceptions, and for hedging relationships designated after June 30,
2003. Management believes that adopting this statement will not have a material
impact on the financial position, results of operations, or cash flows of
EMCORE.
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 six months ended March 31, 2003 and 2002:
Statements of Operations Data:
For the three months For the six months ended
ended March 31, March 31,
----------------------------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues.................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................ 90.1% 139.6% 90.2% 115.6%
----------------------------------------------------
Gross profit (loss)........... 9.9% (39.6)% 9.8% (15.6)%
Operating expenses:
Selling, general and administrative.... 26.7% 41.1% 25.9% 39.0%
Research and development............... 19.6% 50.3% 17.7% 55.8%
Gain on debt extinguishment............ - - (13.0)% -
Impairment and restructuring........... - 155.7% - 85.2%
----------------------------------------------------
Total operating expenses.......... 46.3% 247.1% 30.6% 180.0%
----------------------------------------------------
Operating loss............... (36.4)% (286.7)% (20.8)% (195.6)%
Other expenses:
Interest expense, net................. 6.3% 7.3% 6.9% 6.2%
Other expense, net.................... - - - 31.4%
Equity in net loss of unconsolidated affiliate 2.6% 3.7% 2.6% 2.9%
----------------------------------------------------
Total other expenses............. 8.9% 11.0% 9.5% 40.5%
Net loss.................... (45.3)% (297.7)% (30.3)% (236.1)%
====================================================
22
Comparison of the three and six-month periods ended March 31, 2003 and 2002
Revenues. EMCORE's revenues increased 20% or $4.6 million from $23.1
million for the three months ended March 31, 2002 to $27.7 million for the three
months ended March 31, 2003. In January 2003, EMCORE acquired Ortel, which
contributed approximately $7.1 million of materials-related revenues to the
second quarter of fiscal 2003. This represents the highest revenue quarter that
EMCORE has experienced since the quarter ended September 30, 2001. International
sales accounted for 42% and 18% of revenues for the three months ended March 31,
2003 and 2002, respectively. For the six months ended March 31, 2003 and 2002,
revenues increased 21% or $8.7 million from $42.2 to $50.9 million. Excluding
the results of Ortel, revenues would have increased approximately $1.6 million
from the prior period. International sales accounted for 48% and 24% of revenues
for the six months ended March 31, 2003 and 2002, respectively. Due to the
significant increase in quarter-over-quarter backlog and the Ortel acquisition,
fiscal 2003 third quarter revenue is expected to increase approximately 20% over
second quarter results to $32-$34 million.
For the three-month periods ended March 31, 2003 and 2002, systems-related
revenues increased 151% or $6.5 million from $4.3 million reported in the prior
period to $10.8 million. Systems-related sales represented 39% and 19% of
EMCORE's total consolidated revenues, respectively, for the quarters ended March
31, 2003 and 2002. The capital equipment market continues to be dominated by
demand for gallium nitride LEDs. System shipments during the quarter were 80%
LED related and 20% consumer electronics related. The number of MOCVD production
systems shipped during the quarter increased 150% from 2 systems in fiscal 2002
to 5 systems in fiscal 2003. For the six months ended March 31, 2003 and 2002,
systems-related revenues increased 68% or $10.0 million from $14.6 million
reported in the prior period to $24.6 million. Systems-related sales represented
48% and 35% of EMCORE's total consolidated revenues, respectively, for the
six-month periods ended March 31, 2003 and 2002. The number of MOCVD production
systems shipped during the six-month periods increased 140% from 5 systems in
2002 to 12 systems in 2003. Second quarter component and service revenue in
fiscal 2003 of $2.1 million increased as expected when compared to $1.4 million
earned in the prior period. Based on EMCORE's backlog of system orders,
management expects annual systems-related revenues to increase approximately 50%
in fiscal 2003 when compared to fiscal 2002.
For the three-month periods ended March 31, 2003 and 2002,
materials-related revenues decreased 10% or $1.8 million from $18.7 million
reported in the prior period to $16.9 million. On a product line basis, sales of
photovoltaic products decreased $5.7 million or 52%, fiber optic devices and
components increased $7.2 million or 299% and electronic materials and devices
decreased $3.3 million or 63% from the prior period. Excluding the results of
Ortel, materials-related revenues decreased 48% or $8.9 million from the prior
period. Materials-related sales represented 61% and 81% of EMCORE's total
consolidated revenues, respectively, for the quarters ended March 31, 2003 and
2002. For the six months ended March 31, 2003 and 2002, materials-related
revenues decreased 5% or $1.3 million from $27.6 million reported in the prior
period to $26.3 million. On a product line basis, sales of photovoltaic products
decreased $2.5 million or 20%, fiber optic devices and components increased $8.2
million or 219% and electronic materials and devices decreased $7.0 million or
63% from the prior period. Excluding the results of Ortel, materials-related
revenues decreased 30% or $8.4 million from the prior period. Materials-related
sales represented 52% and 65% of EMCORE's total consolidated revenues,
respectively, for the six-month periods ended March 31, 2003 and 2002.
Sales of photovoltaic products, which include solar cells, CICs and solar
panels, represented 19% and 47% of EMCORE's total consolidated revenues for the
three months ended March 31, 2003 and 2002, respectively. For the six months
ended March 31, 2003 and 2002, sales of photovoltaic products represented 20%
and 30%, respectively, of EMCORE's total consolidated revenue. The decrease in
revenue is attributable to the continued to weakness in satellite infrastructure
spending, which has created delays in program deployment. Accordingly, we expect
annual photovoltaic revenues will remain flat, or at best, modestly increase in
fiscal 2003 compared to fiscal 2002.
Sales of fiber optic products, which include VCSELs, VCSEL-based array
transceivers and transponders, photodetectors, and Ortel's product lines
represented 35% and 11% of EMCORE's total consolidated revenues for the three
months ended March 31, 2003 and 2002, respectively. For the six-month periods
ended March 31, 2003 and 2002, sales of fiber optic products represented 24% and
9%, respectively, of EMCORE's total consolidated revenue. EMCORE continues to
work with customers to optimize our designs in packaged solutions. We expect
these products to generate more revenue in fiscal 2003 than in fiscal 2002, due
to the Ortel acquisition and as EMCORE finalizes the development and
commercialization of new fiber optic products.
23
Sales of electronic materials and device products, which include RF
materials and MR sensors, represented 7% and 23% of EMCORE's total consolidated
revenues for the three months ended March 31, 2003 and 2002, respectively. For
the six-month periods ended March 31, 2003 and 2002, sales of electronic
materials and device products represented 8% and 26%, respectively, of EMCORE's
total consolidated revenue. RF materials are compound semiconductor materials
that enable circuits and devices to operate at radio frequencies and are
primarily used in cellular phones and base stations. In fiscal 2002, Motorola
was the largest customer for the materials-related segment and revenues from
Motorola represented approximately 13% of EMCORE's total fiscal 2002 revenues.
EMCORE broadened its relationship with Motorola by selling them two EMCORE MOCVD
systems, which may be used for both research and development and as an internal
source of production for electronic materials. In light of the fact that
Motorola has developed the capacity to supply a portion of their needs
internally and due to the delayed introduction of InGaP HBTs into GSM handsets,
RF materials related revenues have decreased significantly since fiscal 2002.
This market is highly competitive, raw materials are extremely expensive and
average selling prices have been declining over the past two years. As a result
of continued weakness in market conditions for wireless infrastructure spending,
we expect RF materials related revenue to decline in fiscal 2003 from fiscal
2002 and become less significant or strategic to overall EMCORE revenues.
Quarterly revenues from our mature MR sensors product line decreased $0.3
million from the prior year as a result of the phase out of certain automotive
models at General Motors. Our contract with General Motors expires in fiscal
2004.
Gross Profit. EMCORE's gross profit was $2.8 million for the three months
ended March 31, 2003 compared to a gross loss of $9.1 million for the three
months ended March 31, 2002, representing a 130% increase totaling $11.9
million. For the three-month periods ended March 31, 2003 and 2002, gross
margins increased from -40% to 10%. For the six-month periods ended March 31,
2003 and 2002, gross profit increased 176% or $11.6 million from -$6.6 million
to $5.0 million. For the six-month periods ended March 31, 2003 and 2002, gross
margins increased from -16% to 10%. The increase in gross profit occurred in
both the systems-related and materials-related segments. An $11.9 million charge
was recorded in the second quarter of fiscal 2002 to reserve for excess
inventory that EMCORE believed it was carrying as a result of the market
conditions. EMCORE continues 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. Since EMCORE is operating at approximately 20%
capacity, we anticipate that gross profits and margins will continue to be
affected in the near term by any unabsorbed fixed costs.
For the three months ended March 31, 2003 and 2002, EMCORE's gross profit
on systems-related revenues increased 243% or $6.1 million from -$2.5 million to
$3.6 million. Gross margins for systems-related revenues increased to 33% from
- -58%, for the three-month periods ended March 31, 2003 and 2002, respectively.
For the six-month periods ended March 31, 2003 and 2002, gross profit on
systems-related revenues increased 250% or $6.0 million from $2.4 million to
$8.4 million. Gross margins for systems-related revenues increased to 34% from
16%, for the six-month periods ended March 31, 2003 and 2002, respectively. This
gross margin increase was a result of a $4.2 million inventory charge in fiscal
2002 and differences in pricing and product mix of MOCVD systems sales. The
average selling price for MOCVD systems sold during the second quarter of fiscal
2003 was approximately $1.6 million as compared to $1.1 million in the second
quarter of fiscal 2002.
For the three months ended March 31, 2003 and 2002, EMCORE's gross profit
on materials-related revenues increased 87% or $5.8 million from -$6.6 million
to -$0.8 million. Gross margins for materials-related revenues increased to
- -5.0% from -35%, for the three-month periods ended March 31, 2003 and 2002,
respectively. For the six months ended March 31, 2003 and 2002, gross profit on
materials-related revenues increased 61% or $5.5 million from -$9.0 million to
- -$3.5 million. Gross margins for materials-related revenues increased to -13%
from -33%, for the six-month periods ended March 31, 2003 and 2002,
respectively. The most significant factor contributing to these negative gross
margins is unabsorbed overhead costs associated with lower revenues. The
significant increase in gross margins is a direct result of a one-time $7.8
million inventory charge in fiscal 2002. Regarding unabsorbed expenses, 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. By December 2001, EMCORE's manufacturing facilities for its
materials-related businesses were all completed and placed into service with the
anticipation of expanding market prospects. Lower than forecasted
materials-related revenues caused these fixed expenses to be allocated across
reduced production volumes, adversely affecting gross profit and margins.
24
Selling, General and Administrative. EMCORE's selling, general and
administrative (SG&A) expenses decreased 22%, or $2.1 million, from $9.5 million
for the three months ended March 31, 2002 to $7.4 million for the three months
ended March 31, 2003. The Ortel acquisition added approximately $1.6 million to
SG&A expenses in the second quarter of fiscal 2003. For the six-month periods
ended March 31, 2003 and 2002, SG&A expenses decreased 20% or $3.3 million from
$16.5 million to $13.2 million. The decrease was primarily related to fiscal
2002 restructuring programs, which involved headcount reduction and a cutback on
marketing expenditures. As a percentage of revenue, SG&A expenses decreased from
39% for the six months ended March 31, 2002 to 27% in fiscal 2003. Assuming no
further non-recurring charges and acquisitions, management expects annual SG&A
expenses in fiscal year 2003 to continue to decrease in absolute dollars from
fiscal 2002 as a result of implemented cost control and restructuring programs.
Research and Development. EMCORE's research and development (R&D) expenses
decreased 53%, or $6.2 million, from $11.6 million for the three months ended
March 31, 2002 to $5.4 million for the three months ended March 31, 2003. The
Ortel acquisition added approximately $1.1 million to R&D expenses in the second
quarter of fiscal 2003. For the six-month periods ended March 31, 2003 and 2002,
R&D expenses decreased 62% or $14.6 million from $23.6 million to $9.0 million.
This decrease was due primarily to the deferral or elimination of certain
non-critical research and development projects as well as less R&D costs being
incurred on our fiber-optic product line as new components have been released
for commercial use. As a percentage of revenue, R&D expenses decreased from 56%
for the six months ended March 31, 2002 to 20% in 2003. Assuming no
non-recurring charges and acquisitions, management expects annual R&D expenses
in fiscal year 2003 to continue to decrease in absolute dollars from fiscal 2002
as a result of implemented cost control and restructuring programs.
Gain From Debt Extinguishment. In December 2002, EMCORE purchased, in
multiple transactions, $13.3 million principal amount of the notes at prevailing
market prices, for an aggregate of approximately $6.3 million. As a result of
the transaction, EMCORE recorded a gain from operations of approximately $6.6
million after netting unamortized debt issuance costs of approximately $0.3
million.
Impairment and Restructuring Charges. During the second quarter of fiscal
2002, EMCORE recorded pre-tax charges to income totaling $50.4 million, which
included impairment charges of $34.8 million and restructuring charges of $1.1
million, an $11.9 million inventory writedown and a $2.6 million writedown of
accounts receivable. All monetary obligations relating to these charges have
been paid as of March 31, 2003.
Impairment charges: 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 that were disposed of. The remainder of the
impairment charge related principally to EMCORE's Electronic Materials and
Devices and Fiber Optics groups. During fiscal 2000 and 2001, EMCORE
completed new facilities for these businesses in anticipation of expanding
market prospects. Fiscal 2002 business forecasts 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 groups 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. Of the impairment charges recorded in the second quarter of fiscal
2002, $4.0 million related to EMCORE's systems-related business segment and
$30.8 million related to the materials-related business segment.
Restructuring charges: EMCORE's fiscal 2002 restructuring program consisted
of the realignment of all engineering, manufacturing and sales/marketing
operations, as well as workforce reductions. Included in the provision for
impairment and restructuring charges were severance and fringe benefit
charges of $1.1 million related to employee termination costs for 120
employees. Of the severance charges recorded in the second quarter of
fiscal 2002, $0.6 million related to EMCORE's systems-related business
segment and $0.5 million related to the materials-related business segment.
Interest Expense, net. For the three-month periods ended March 31, 2003 and
2002, net interest expense remained constant at $1.7 million. For the six-month
periods ended March 31, 2003 and 2002, net interest expense increased $0.9
million from $2.6 million reported in the prior period, to $3.5 million due to
less investments in marketable securities.
25
Other Expense. In August 2001, EMCORE received common stock in Uniroyal
Technology Corporation (UTCI). During 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 for the UTCI common
stock, which was recorded as other expense.
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 six months ended March 31, 2003, EMCORE incurred a net loss of
$0.7 million and $1.3 million, respectively, related to the GELcore joint
venture. For the three and six months ended March 31, 2002, EMCORE incurred a
net loss of $0.9 million and $1.2 million, respectively, related to the GELcore
joint venture.
Income Taxes. As a result of its losses, EMCORE did not incur any income
tax expense in both the three and six-month periods ended March 31, 2003 and
2002.
Liquidity and Capital Resources
Working Capital
EMCORE has funded operations to date through product sales, sales of
equity, subordinated debt and borrowings under revolving credit facilities.
Significant financial transactions include the following:
o In May 2001, EMCORE issued $175.0 million of 5% convertible
subordinated notes;
o In March 2000, EMCORE raised approximately $127.5 million from an
additional equity offering;
o In June 1999, EMCORE raised approximately $52.0 million from a
secondary public offering.
At March 31, 2003, EMCORE had working capital of approximately $70.0
million. Working capital at September 30, 2002 was $111.8 million. Cash, cash
equivalents and marketable securities at March 31, 2003 totaled $43.7 million,
which reflects net cash usage of $40.5 million for fiscal 2003. The following
four items accounted for virtually all of the cash usage:
o $26.5 million Acquisitions: ORTEL Corporation and Alvesta Corporation
o $ 6.3 million Repurchase of convertible subordinated notes
o $ 4.5 million Semi-annual interest payment on convertible subordinated
notes
o $ 2.0 million Investment into GELcore joint venture
Net Cash Used For Operations
For the six-month period ended March 31, 2003, net cash used for operations
totaled $4.6 million, an improvement of $19.5 million from the six-month period
ended March 31, 2002, when net cash used for operating activities totaled $24.1
million. Included in EMCORE's fiscal 2003 net loss of $15.4 million were
non-cash items of $6.6 million related to the gain from partial debt
extinguishment and $9.9 million in depreciation and amortization expenses.
Changes in balance sheet accounts for the six months ended March 31, 2003 and
2002 totaled $5.4 million and -$1.1 million, respectively. Improvements in
receivable collections and inventory turnover more than offset payments made on
liabilities during fiscal 2003. During fiscal 2002, EMCORE proceeded with a
restructuring program, consisting of the realignment of all engineering,
manufacturing and sales/marketing operations, as well as workforce reductions.
This restructuring should enable us to achieve our goal of having positive cash
flow from operations by the end of fiscal 2003, assuming revenues in fiscal 2003
are consistent with revenues in fiscal 2002.
26
Net Cash Provided by Investment Activities
For the six months ended March 31, 2003, net cash provided by investment
activities totaled $6.3 million. For the six months ended March 31, 2002, net
cash provided by investment activities totaled $0.5 million.
o Capital expenditures - Fiscal 2003 capital expenditures were $0.9 million
compared with $5.7 million in fiscal 2002. As part of our ongoing effort to
conserve cash, EMCORE's capital expenditures in fiscal 2003 consisted
almost solely of sustaining capital purchases. EMCORE estimates total
capital expenditures in fiscal 2003 to be approximately $2.5 million.
o Acquisitions - In December 2002, EMCORE acquired certain assets of
privately held Alvesta Corporation of Sunnyvale, California. The total cash
purchase price, including acquisition costs, was approximately $250,000. In
January 2003, EMCORE purchased Ortel for $26.2 million in cash.
o Investments - For both the six-month periods ending March 31, 2003 and
2002, investments in EMCORE's GELcore joint venture totaled approximately
$2.0 million each. EMCORE expects to invest an additional $1.5 million into
the GELcore joint venture by September 30, 2003.
o Repayment of loan - In November 2001, EMCORE received payment from UTCI of
$5.0 million for a related party loan made in August 2001.
o Marketable securities - For the six-month period ending March 31, 2003,
EMCORE's net investment in marketable securities decreased by $35.6 million
in order to fund acquisitions and operations.
Net Cash Provided By (Used For) Financing Activities
Net cash used for financing activities in the six-month period ended March
31, 2003 amounted to approximately $6.5 million of which $6.6 million related to
the partial repurchase of our convertible subordinated notes. Net cash provided
by financing activities in the six-month period ended March 31, 2002 amounted to
approximately $5.3 million of which $4.2 million related to proceeds received
from the exercise of common stock warrants which were due.
Financing Transactions
In May 2001, EMCORE issued $175.0 million aggregate principal amount of its
5% convertible subordinated notes due in May 2006. Net proceeds received by
EMCORE, after costs of issuance, were approximately $168.8 million. Interest is
payable in arrears semiannually on May 15 and November 15 of each year, which
began on November 15, 2001. The notes are convertible into EMCORE common stock
at a conversion price of $48.76 per share, subject to certain adjustments, at
the option of the holder. The notes may be redeemed at EMCORE's option, on or
after May 20, 2004 at specific redemption prices. There are no financial
covenants related to these notes. For the three-month periods ended December 31,
2002 and 2001, interest expense relating to the notes approximated $4.4 million
and $4.6 million, respectively.
In May 2002, the Board of Directors authorized EMCORE from time to time to
repurchase a portion of the notes in one or more open market transactions, in
accordance with certain guidelines. In December 2002, EMCORE purchased, in
multiple transactions, $13.3 million principal amount of the notes at prevailing
market prices, for an aggregate purchase price of approximately $6.3 million. As
a result of the transaction, EMCORE recorded a gain from operations of
approximately $6.6 million after netting unamortized debt issuance costs of
approximately $0.3 million. Annual interest expense in future periods also has
been decreased by approximately $650,000. EMCORE may continue to repurchase
notes through various means, including but not limited to one or more open
market or privately negotiated transactions in future periods. The timing and
amount of repurchase, if any, whether de minimis or material, will depend on
many factors, including but not limited to, the availability of capital, the
prevailing market price of the convertible notes and overall market conditions.
27
In fiscal 2000, GELcore entered into a Revolving Loan Agreement (the
"GELcore Credit Facility") with General Electric Canada, Inc., an affiliate of
GE, which is the owner of a 51% controlling share of GELcore. The GELcore Credit
Facility provides for borrowings of up to Canadian $7.5 million (US $5.1 million
at March 31, 2003) at a rate of interest based on prevailing Canadian interest
rates. Amounts outstanding under the GELcore Credit Facility are payable on
demand, and the GELcore Credit Facility expires in August 2003. EMCORE has
guaranteed 49% (i.e. its proportionate share) of GELcore's obligations under the
GELcore Credit Facility. As of March 31, 2003, US $2.7 million was outstanding
under the GELcore Credit Facility.
As of March 31, 2003, EMCORE had a remaining 2.0 million shares of common
stock available on a filed shelf registration statement previously declared
effective by the SEC.
Conclusion
EMCORE believes that its current liquidity should be sufficient to meet its
cash needs for working capital through the next twelve months. 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 may be severely limited.
Such a limitation could have a material adverse effect on EMCORE's business,
financial condition, results of operations and cash flow.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Although EMCORE occasionally enters into transactions denominated in
foreign currencies, the total amount of such transactions is not material.
Accordingly, fluctuations in foreign currency value should not have a material
adverse effect on our future financial condition or results of operations.
ITEM 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures - The term "disclosure
controls and procedures" is defined in Rules 13a-14(c) and 15d-14(c) of the
Exchange Act. These rules refer to the controls and other procedures of a
company that are designed to ensure that information required to be disclosed by
a company in the reports that it files under the Exchange Act is recorded,
processed, summarized and reported within required time periods. Our Chief
Executive Officer and our Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures as of a date within 90
days before the filing of this quarterly report (the "Evaluation Date"), and
they have concluded that, as of the Evaluation Date, such controls and
procedures were effective at ensuring that required information will be
disclosed on a timely basis in our reports filed under the Exchange Act.
(b) Changes in internal controls - We maintain a system of internal accounting
controls that are designed to provide reasonable assurance that our books and
records accurately reflect our transactions and that our established policies
and procedures are followed. Subsequent to the Evaluation Date, there were no
significant changes to our internal controls or in other factors that could
significantly affect our internal controls.
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
The following matters were submitted to a vote of shareholders at
EMCORE's 2003 Annual Meeting of Shareholders held February 27, 2003:
a) Election of Director.
Number of Shares:
For Withheld
Thomas G. Werthan 32,911,274 1,053,209
b) Ratify selection of Deloitte & Touche LLP as independent auditors of
the Company for fiscal year ended September 30, 2003.
Number of Shares:
For Against Abstain
26,645,357 7,315,075 4,051
28
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
99.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.*
99.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.*
* These documents are being furnished in accordance with SEC
Release Nos. 33-8212 and 34-47551.
(b) Reports on Form 8-K
o Form 8-K dated February 4, 2003; announcing the Ortel
acquisition.
o Form 8-K dated March 11, 2003; announcing that the Board of
Directors of EMCORE appointed John M. Gillen as a Director.
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: May 15, 2003 By: /s/ Reuben F. Richards, Jr.
---------------------------------------------
Reuben F. Richards, Jr.
President and Chief Executive Officer
Date: May 15, 2003 By: /s/ Thomas G. Werthan
---------------------------------------------
Thomas G. Werthan
Vice President and Chief Financial Officer
29
I, Reuben F. Richards, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of EMCORE Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Reuben F. Richards, Jr.
Reuben F. Richards, Jr.
President and CEO
30
I, Thomas G. Werthan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of EMCORE Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Thomas G. Werthan
------------------------
Thomas G. Werthan
Chief Financial Officer
31
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
99.1 Certification of the Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.*
99.2 Certification of the Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.*
* These documents are being furnished in accordance
with SEC Release Nos. 33-8212 and 34-47551.
32
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 March 31, 2003, as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Reuben F.
Richards, Jr., President and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. Section 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.
---------------------------
Reuben F. Richards, Jr.
May 15, 2003
A signed original of this written statement required by Section 906 has been
provided to EMCORE Corporation and will be retained by EMCORE Corporation and
furnished to the Securities and Exchange Commission or its staff upon request.
33
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 March 31, 2003, 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. Section
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
---------------------
Thomas G. Werthan
May 15, 2003
A signed original of this written statement required by Section 906 has been
provided to EMCORE Corporation and will be retained by EMCORE Corporation and
furnished to the Securities and Exchange Commission or its staff upon request.
34
