10-K: Annual report pursuant to Section 13 and 15(d)
Published on December 31, 2007
UNITED
STATES
SECURITIES
ANDEXCHANGE
COMMISSION
Washington,
D.C. 20549
FORM
10-K
(MarkOne)
T ANNUAL
REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the fiscal year ended September
30, 2007
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
|
22-2746503
|
|
(State
or other jurisdiction of
incorporation or organization)
|
(I.R.S.
Employer Identification
No.)
|
|
10420
Research Road,
SE, Albuquerque,
New
Mexico
|
87123
|
|
(Address
of principal executive
offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including
area code: (505)
332-5000
Securities
registered pursuant to
Section 12(b) of the Act:
|
Title
of each class:
|
Common
Stock,
No Par Value
|
|
Name
of each exchange on which
registered:
|
NASDAQ
|
Securities
registered pursuant to
Section 12(g) of the Act:
|
None
|
Indicate
by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
£Yes TNo
Indicate
by check mark if the registrant
is not required to file reports pursuant to Section 13 or 15(d) of the Act.
£Yes
TNo
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.
TYes £No
Indicate
by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of the registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part
III
of this Form 10-K or any amendment to this Form 10-K. £
Indicate
by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
£Large
accelerated
filer
|
T Accelerated
filer
|
£Non-accelerated
filer
|
Indicate
by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the
Act).
|
£Yes TNo
|
The
aggregate market value of common
stock held by non-affiliates of the registrant as of March 30, 2007(the
last business day of the
registrant's most recently completed second fiscal quarter) was approximately
$203.8 million,
based on the closing sale price of
$5.00 per share of common stock as reported on the NASDAQ Global
Market.
The
number of shares outstanding of the
registrant’s no par value common stock as of December 26, 2007was
52,253,883.
DOCUMENTS
INCORPORATED BY
REFERENCE
In
accordance with General Instruction
G(3) of Form 10-K, certain information required by Part III hereof will either
be incorporated into this Form 10-K by reference to the Registrant's Definitive
Proxy Statement for the Registrant's 2008 Annual Meeting of Stockholders filed
within 120 days of September 30, 2007or
will be included in an amendment to
this Form 10-K filed within 120 days of September 30, 2007.
FORM
10-K
For
The Fiscal Year Ended September 30, 2007
TABLE
OF CONTENTS
PAGE
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Part
I
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Item
1.
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3
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Item
1A.
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16
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Item
1B.
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30
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Item
2.
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31
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Item
3.
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31
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Item
4.
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33
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Part
II
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Item
5.
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33
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Item
6.
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35
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Item
7.
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38
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Item
7A.
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58
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Item
8.
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59
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for
the fiscal years ended September 30, 2007, 2006, and 2005
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59
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as
of September 30, 2007 and 2006
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60
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for
the fiscal years ended September 30, 2007, 2006, and 2005
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61
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for
the fiscal years ended September 30, 2007, 2006, and 2005
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62
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64
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93
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Item
9.
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94
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Item
9A.
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94
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Item
9B.
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98
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Part
III
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Item
10.
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98
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Item
11.
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98
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Item
12.
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98
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Item
13.
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98
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Item
14.
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98
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Part
IV
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Item
15.
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99
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102
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PART
I
Business
|
Company
Overview
EMCORE
Corporation (the “Company”, “we”
or “EMCORE”) is a leading provider of compound semiconductor-based
components and subsystems for the broadband, fiber optic, satellite and
terrestrial solar power markets. We were established in 1984 as a New
Jersey corporation. We have two reporting segments: Fiber Optics and
Photovoltaics. EMCORE's Fiber Optics segment offers optical
components, subsystems and systems that enable the transmission of video, voice
and data over high-capacity fiber optic cables for high-speed data and
telecommunications, cable television (“CATV”) and fiber-to-the-premises (“FTTP”)
networks. EMCORE's Photovoltaics segment provides solar products for
satellite and terrestrial applications. For satellite applications, EMCORE
offers high-efficiency compound semiconductor-based gallium arsenide (“GaAs”)
solar cells, covered interconnect cells (“CICs”) and fully integrated solar
panels. For terrestrial applications, EMCORE offers Concentrating
Photovoltaic Systems (“CPV”) for utility scale solar applications as well as
offering its high-efficiency GaAs solar cells and CPV components for use in
solar power concentrator systems. For specific information about our
company, our products or the markets we serve, please visit our website at
http://www.emcore.com.
EMCORE
is
subject to the information requirements of the Securities Exchange Act of 1934.
We file periodic reports, current reports, proxy statements and other
information with the Securities and Exchange Commission (“SEC”). The
SEC maintains a website (http://www.sec.gov) that contains all of our
information that has been filed electronically. Our annual reports are available
on our website, free of charge, as soon as reasonably practicable after such
material is electronically filed with, or furnished to, the SEC. The
information on EMCORE’s website is not incorporated by reference into and is not
made a part of this Annual Report on Form 10-K or a part of any other report
or
filing with the SEC.
Industry
Overview
Compound
semiconductor-based products provide the foundation of components, subsystems
and systems used in a broad range of technology markets, including broadband,
datacom, telecom and satellite communication equipment and networks, advanced
computing technologies and satellite and terrestrial solar power generation
systems. Compound semiconductor materials are capable of providing
electrical or electro-optical functions, such as emitting optical communications
signals, detecting optical communications signals, and converting sunlight
into
electricity.
Our
Markets
Collectively,
our products serve the telecommunications, cable television, defense and
homeland security, and satellite and terrestrial solar power
markets. The following illustration shows how our products are
deployed throughout the world’s communication infrastructure and power
generation markets.
Fiber
Optics
Our
fiber
optics products enable information that is encoded on light signals to be
transmitted, routed (switched) and received in communication systems and
networks. Our Fiber
Optics segment primarily targets the following markets:
|
·
|
Cable
Television (CATV) Networks- We are a
market leader in
providing radio frequency (RF) over fiber products for the CATV
industry. Our products are used in hybrid fiber coaxial (HFC)
networks that enable cable service operators to offer multiple advanced
services to meet the expanding demand for high-speed Internet, on-demand
and interactive video and other advanced services, such as high-definition
television (HDTV)
and voice over IP
(VoIP). Our CATV products include forward and return-path
analog and digital lasers, photodetectors and subassembly components,
broadcast analog and digital fiber-optic transmitters and quadrature
amplitude modulation (QAM) transmitters and receivers. Our
products provide our customers with increased capacity to offer more
cable
services; increased data transmission distance, speed and bandwidth;
lower
noise video receive; and lower power
consumption.
|
|
·
|
Fiber-To-The-Premises
(FTTP) Networks-
Telecommunications companies are increasingly extending their optical
infrastructure to their customers’ location in order to deliver higher
bandwidth services. We have developed and maintained customer qualified
FTTP components and subsystem products to support plans by telephone
companies to offer voice, video and data services through the deployment
of new fiber-based access networks. Our FTTP products include
passive optical network (PON) transceivers, analog fiber optic
transmitters for video overlay and high-power erbium-doped fiber
amplifiers (EDFA), analog and digital lasers, photodetectors and
subassembly components, analog video receivers and multi-dwelling
unit
(MDU)
video receivers. Our
products provide our customers with higher performance for analog
and
digital characteristics; integrated infrastructure to support competitive
costs; and additional support for multiple
standards.
|
|
·
|
Data
Communications Networks- We provide
leading-edge optical
components and transceiver modules for data applications that enable
switch-to-switch, router-to-router and server-to-server backbone
connections at aggregate speeds of 10 gigabits per second (G) and
above. Our products support 10G Ethernet, optical Infiniband
and parallel optical interconnects for enterprise Ethernet, metro
Ethernet
and high performance computing (HPC)
applications. Our data
communications products include components and transceivers for LX4,
SR,
LR, LRM and CX4 10G Ethernet applications and optical Infiniband,
high-speed lasers, photodetectors and subassembly components, parallel
optical modules and optical media converters. Our products
provide our customers with increased network capacity; increased
data
transmission distance and speeds; increased bandwidth; lower power
consumption; improved cable management over copper interconnects;
and
lower cost optical interconnections for massively parallel
multi-processors.
|
|
·
|
Telecommunications
Networks- Our
leading-edge optical components and modules enable high-speed (up
to an
aggregate 40G) optical interconnections that drive advanced architectures
in next-generation carrier class switching and routing networks.
Our
products are used in equipment in the network core and key metro
optical
nodes of voice telephony and Internet infrastructures. Our
products include a comprehensive parallel optical transceiver family,
distributed feedback lasers (“DFB”) and avalanche photo detections
(“APD”)
components in various packages
for OC-48 and OC-192 applications. Recently, we developed and
launched a XFP DWDM (dense wavelength division multiplexing) transceiver
and a 300-pin small-form-factor tunable transponder product for the
telecommunications market.
|
|
·
|
Satellite
Communications (Satcom) Networks- We are a
leading provider of
optical components and systems for use in equipment that provides
high-performance optical data links for the terrestrial portion of
satellite communications networks. Our products include transmitters,
receivers, subsystems and systems that transport wideband radio frequency
and microwave signals between satellite hub equipment and antenna
dishes. Our products provide our customers with increased
bandwidth and lower power
consumption.
|
|
·
|
Storage
Area
Networks- Our high
performance optical components are also used in high-end data storage
solutions to improve the performance of the storage
infrastructure. Products include high-speed 850nm vertical
cavity surface emitting lasers (VCSELs), DFBs, photodiode components
for
2G, 8G and 10G Fibre Channel. Our products also include 10G
(single data rate Infiniband SDR IB) and 20G (double data rate Infiniband
DDRIB)
transmit and receive optical
media converters.
|
|
·
|
Video
Transport-
Our video transport
product line offers solutions for broadcasting, transportation, IP
television (IPTV), mobile video and security & surveillance
applications over private and public networks. EMCORE’s video, audio, data
and RF transmission systems serve both analog and digital requirements,
providing cost-effective, flexible solutions geared for network
reconstruction and
expansion.
|
|
·
|
Defense
and
Homeland Security-
Leveraging our expertise in RF module design and high-speed parallel
optics, we provide a suite of ruggedized products that meet the
reliability and durability requirements of the U.S. Government and
defense
markets. Our specialty defense products include fiber optic
gyro components used in precision guided munitions, ruggedized parallel
optic transmitters and receivers, high-frequency RF fiber optic link
components for towed decoy systems, optical delay lines for radar
systems,
EDFAs, terahertz spectroscopy systems and other products. Our
products provide our customers with high frequency and dynamic range;
compact form-factor; and extreme temperature, shock and vibration
tolerance.
|
|
·
|
Consumer
Products- We extend
our optical technology into the consumer market by integrating our
VCSELs
into optical computer mice and ultra short data links. We are
in production with customers on several products and currently qualifying
our products with additional customers. An optical computer
mouse with laser illumination is superior to LED-based illumination
in
that it reveals surface structures that a LED light source cannot
uncover.
VCSELs enable computer mice to track with greater accuracy, on more
surfaces and with greater responsiveness than existing LED-based
solutions.
|
The
following charts depict some of our
fiber optics products:
As
summarized in the table below, we
have positioned ourselves as a vertically integrated fiber optics component
and
subsystem manufacturer that services a significant portion of the digital and
analog communications market:
Datacom
and
Telecom
|
Broadband
|
|||||||
Serial
1-4G
|
Serial
10G
|
Parallel
|
CATV
|
FTTP
|
||||
850nm
|
1310-1550nm
|
850nm
|
1310-1550nm
|
Copper
|
850nm
|
1310-1550nm
|
1310,1490,1550nm
|
|
MODULES
|
SR
X2
SR
SFP+
|
LX4
Xenpak LX4
X2
LR
X2
LR
SFP+
ZR
XFP DWDM
Tunable
SFF
300-pin
Tspdr
LRM
SFP+
|
CX4
Xenpak
CX4
X2
CX4
XFP
|
SNAP12
SmartLink
Mini95
QSFP
|
Ex-Mod/Dir-Mod
/Lin-Mod
1550,
QAM
and
1310
Transmitters
Receiver
Subsystem
Tx
Engine
Rx
Video
Card
|
B-PON
TxRx
B-PON
MDU
TxRx
G-PON
TxRx
GPON
MDU
TxRx
|
||
OSAS
|
TO
- Cans
LC/SC
TOSA
LC/SC
ROSA
|
TO
- Cans
LC/SC
TOSA
LC/SC
ROSA
|
LC/SC
TOSA
LC/SC
ROSA
|
DML
Butterfly
Mini
Dil Rx
LC/SC
ROSA
LRM
TOSA
Linear
ROSA
|
AOSA
|
DFB
Butterfly
Analog
PD
OSA
|
DFB
Laser
TO
APD-TIA
TO
|
|
CHIPS
|
VCSELs
PDs
|
FP, DFBs
PINs, APDs
|
VCSELs
PDs
|
FP, DFBs
PINs, APDs
|
VCSEL
Array
PIN
Array
|
Analog
DFB
Analog
PD
|
DFB
Laser
APDs
|
Photovoltaics
We
believe our high-efficiency compound semiconductor-based multi-junction solar
cell products provide our customers with compelling cost and performance
advantages over traditional silicon-based solutions. These include
higher solar cell efficiency allowing for greater conversion of light into
electricity, an increased ability to benefit from use in solar concentrator
systems, ability to withstand high heat and radiation environments and reduced
overall footprint. Our
Photovoltaics segment primarily targets the
following
markets:
|
·
|
Satellite
Solar
Power Generation- We
are a leader in providing solar power generation solutions to the
global
communications satellite industry and U.S. Government space
programs. A satellite’s operational success and
corresponding revenue depend on its available power and its capacity
to
transmit data. We provide
advanced compound semiconductor-based solar cell and solar panel
products,
which are more resistant to radiation levels in space and generate
substantially more power from sunlight than silicon-based
solutions. Space power systems using our multi-junction solar
cells weigh less per unit of power than traditional silicon-based
solar
cells. These performance characteristics increase satellite useful
life,
increase satellites’ transmission capacity and reduce launch
costs. Our
products provide our customers with higher light to power conversion
efficiency for reduced size and launch costs; higher radiation tolerance;
and longer lifetime in harsh space environments. We
design and manufacture multi-junction compound semiconductor-based
solar cells for both commercial and military satellite applications.
We
currently manufacture and sell one of the most efficient and reliable,
radiation resistant advanced triple-junction solar cells in the world,
with an average "beginning of life" efficiency of 28.5%. In May
2007, EMCORE announced that it has attained solar conversion efficiency
of
31% for an entirely new class of advanced multi-junction solar cells
optimized for space applications. EMCORE is also the only
manufacturer to supply true monolithic bypass diodes for shadow
protection, utilizing several EMCORE patented methods. EMCORE also
provides covered interconnect cells (CICs) and solar panel lay-down
services, giving us the capability to manufacture complete solar
panels.
We can provide satellite manufacturers with proven integrated satellite
power solutions that considerably improve satellite economics. Satellite
manufacturers and solar array integrators rely on EMCORE to meet
their
satellite power needs with our proven flight heritage. The pictures
below
represent a solar cell and solar panel used for satellite space power
applications.
|
|
|
·
|
Terrestrial
Solar Power Generation- Solar
power generation
systems use photovoltaic cells to convert sunlight to electricity
and have
been used in space programs and, to a lesser extent, in terrestrial
applications for several decades. The market for terrestrial
solar power generation solutions has grown significantly as solar
power
generation technologies improve in efficiency, as global prices for
non-renewable energy sources (i.e., fossil fuels) continue to rise,
and as
concern has increased regarding the effect of carbon emissions on
global
warming. Terrestrial solar power generation has emerged as one of
the most
rapidly expanding renewable energy sources due to certain advantages
solar
power holds over other energy sources, including reduced environmental
impact, elimination of fuel price risk, installation flexibility,
scalability, distributed power generation (i.e., electric power is
generated at the point of use rather than transmitted from a central
station to the user), and reliability. The rapid increase in demand
for
solar power has created a growing need for highly efficient, reliable
and
cost-effective concentrating solar power systems.
|
EMCORE
has adapted its high-efficiency
compound semiconductor-based multi-junction solar
cell products for
terrestrial applications, which are intended for use with CPV
systems in utility-scale
installations. In August 2007, EMCORE announced that it has obtained
39% peak conversion efficiency under 1000x illumination on its terrestrial
concentrating solar cell products currently in volume
production. This compares favorably to typical efficiency of 15-21%
on silicon-based solar cells and approximately 35% for competing multi-junction
cells. We believe that solar concentrator systems assembled using our compound
semiconductor-based solar cells will be competitive with silicon-based solar
power generation systems because they are more efficient and, when combined
with
the advantages of concentration, we believe will result in a lower cost of
power
generated. Our multi-junction solar cell technology is not subject to
silicon shortages, which have led to increasing prices in the raw materials
required for silicon-based solar cells. While the terrestrial power
generation market is still developing, we are currently shipping production
orders to several solar concentrator companies, and providing samples to several
others, including major system manufacturers in the United States,
Europe and Asia. EMCORE
currently serves the
terrestrial solar market with two levels of concentrated photovoltaic
(CPV)
products: components (including solar
cells and solar cell receivers) and CPV
power systems, as shown in the pictures
below:
Terrestrial
solar cell (mm)
|
Terrestrial
solar cell receiver
|
CPV
power
system
|
|
|
|
EMCORE’s
Strategy
With
several strategic acquisitions and
divestures in the past few years, EMCORE has developed a strong business focus
and comprehensive product portfolio in two main sectors: Fiber Optics and
Photovoltaics. Our principal objective is to maximize shareholder
value by leveraging our expertise in advanced compound semiconductor
technologies to be a leading provider of high-performance, cost-effective
product solutions in each of the markets that we serve. Key elements
of our strategy include:
Enhance
Our
Technology and Expand Our Product Leadership While Lowering Production
Costs.
Through
substantial investment in
research and development and product engineering, we seek to expand our
leadership position in compound semiconductor-based fiber optics and
photovoltaics solutions. We work with our customers to enhance the
performance of our processes, materials science and design expertise to develop
new low-cost components, modules, subsystems and systems. In each product line,
EMCORE offers its customers advanced cost-competitive solutions, which allows
them to be the leaders of technology and product solutions.
Continue
to Target
Large Growth Market Opportunities.
We
target market opportunities that we
believe have large potential growth and where the favorable performance
characteristics of our products and high volume production efficiencies may
give
us a competitive advantage over our competitors. We believe that as production
costs continue to be reduced, existing and new customers will be compelled
to
increase their use of our products because of attractive performance
characteristics and superior value.
Penetrate
the
Terrestrial Solar Power Market.
We
are adapting our high-efficiency
solar cell technology, developed for satellite space power, for terrestrial
applications. We believe that solar concentrator systems assembled using our
compound semiconductor-based solar cells will be competitive with silicon-based
solar power generation systems because our products are more efficient than
silicon and, when combined with the advantages of concentration, they will
result in a lower cost of power generated.
Expand
Our Customer
Relationships and the Breadth of Our Customer Base.
EMCORE
is
devoted to working directly with its customers from initial product design,
product qualification and manufacturing to product delivery. EMCORE's customer
base includes many of the largest telecommunication and data communication
equipment manufacturers, computer manufacturing companies, and aerospace
companies in the world. We intend
to further strengthen our existing customer relationships and expand our
customer base in each of our reporting segments. We work closely with many
of
our customers to anticipate their current and future needs through a
collaborative process to develop next-generation technologies to help them
achieve their product development objectives and seek to develop long-term
relationships with leading companies in each of the markets that we
serve.
Pursue
Strategic
Acquisitions, Investments, and Partnerships.
We
are committed to the ongoing
evaluation of strategic opportunities that can expand our addressable markets
and strengthen our competitive position. Where appropriate, we will acquire
additional products, technologies, or businesses that are complementary to,
or
broaden the markets in which we operate. We plan to pursue strategic
acquisitions, investments, and partnerships to increase revenue and allow for
higher overhead absorption that will improve our gross
margins.
Recent
acquisitions include:
|
·
|
On
December
17, 2007, EMCORE entered
into an Asset
Purchase Agreement with Intel Corporation (“Seller”). Under the
terms of the Agreement, EMCORE will purchase certain of the assets
of
Seller and its subsidiaries relating to the telecom portion of Seller’s
Optical Platform Division for a purchase price of $85 million, as
adjusted
based on an inventory true-up, plus specifically assumed
liabilities. The purchase price will be paid $75 million in
cash and $10 million in cash or common stock of EMCORE, at our
option. The Agreement contains termination rights for both
EMCORE and Seller including a provision allowing either party to
terminate
the Agreement if the transaction has not been consummated by June 18, 2008.
|
|
·
|
In
April 2007, EMCORE
acquired privately-held Opticomm Corporation, of San
Diego,
California.
|
|
·
|
In
January 2006, EMCORE
acquired privately-held K2 Optronics, Inc., of Sunnyvale,
California.
|
|
·
|
In
December 2005, EMCORE acquired privately-held Force, Inc., of
Christiansburg, Virginia.
|
|
·
|
In
November 2005, EMCORE acquired privately-held Phasebridge, Inc.,
of
Pasadena, California.
|
All
of
these acquired businesses have been integrated into EMCORE's Fiber Optics
operating segment.
Recent
investments and strategic
partnerships include:
|
·
|
In
November 2006, EMCORE invested
$13.5 million in WorldWater & Solar Technologies Corporation
(WorldWater, OTC BB:WWAT.OB)
a leader in solar electric
engineering, water management solutions and solar energy installations
and
products. This investment represents EMCORE’s first tranche of
its intended $18.0 million investment, in return for convertible
preferred
stock and warrants of WorldWater. At September 30,
2007, EMCORE held
an approximately 21%
equity ownership in
WorldWater.
|
|
·
|
Also
in November 2006, EMCORE and
WorldWater announced the formation of a strategic alliance and supply
agreement under which EMCORE will be the exclusive supplier of
high-efficiency multi-junction solar cells, assemblies and concentrator
subsystems to WorldWater with expected revenue up to $100.0 million
by
November 2009.
|
Please
refer to Risk Factors under Item
1A, Management’s Discussion and Analysis of Financial Condition and Results of
Operations under Item 7 and Financial Statements and Supplemental Data under
Item 8 for further discussion of these transactions.
Restructuring
Programs and Divestitures
EMCORE
is committed to achieving
profitability by
increasing revenue through the introduction of new products, reducing our cost
structure and lowering the breakeven points of our product
lines. We have
significantly streamlined our manufacturing operations by focusing on core
competencies to identify cost efficiencies. Where appropriate, we transferred
the manufacturing of certain product lines to low-cost contract manufacturers
when we can lower costs and maintain quality and
reliability.
EMCORE’s
restructuring programs are designed to further reduce the number of
manufacturing facilities, in addition to the divesture or exit from selected
businesses and product lines that were not strategic and/or were not capable
of
achieving desired revenue or profitability goals.
Recent
divestitures and facility consolidations include:
·
|
In
August 2007, we announced the
consolidation of our North American fiber optics engineering and
design
centers into our main operating sites. EMCORE's engineering facilities
in
Virginia,
Illinois,
and Northern California have
been consolidated into larger manufacturing sites in Albuquerque,
New
Mexico and Alhambra,
California.
The consolidation of these
engineering sites should allow EMCORE to leverage resources within
engineering, new product introduction, and customer
service.
|
·
|
In
October 2006, we announced the
relocation of our corporate headquarters from Somerset,
New
Jerseyto Albuquerque,
New
Mexico.
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In
October 2006, we consolidated our solar panel operations into our
state-of-the-art manufacturing facility located in Albuquerque, New
Mexico. The establishment of a modern solar panel manufacturing facility,
adjacent to our solar cell fabrication operations, facilitates consistency
as well as reduces manufacturing costs.
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In
August 2006, EMCORE sold its 49% membership interest in GELcore,
LLC to
General Electric Corporation, which owned the remaining 51% membership
interest prior to the transaction, for $100.0 million in cash.
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In
August 2006, EMCORE completed the sale of the assets of its Electronic
Materials & Device division, including inventory, fixed assets, and
intellectual property to IQE plc, a public limited company organized
under
the laws of the United Kingdom, for $16.0 million.
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Our
results of operations and financial
condition have and will continue to be significantly affected by severance,
restructuring charges, impairment of long-lived assets and idle facility
expenses incurred during facility closing activities. Please refer to
Risk Factors under Item 1A, Management’s Discussion and Analysis of Financial
Condition and Results of Operations under Item 7 and Financial Statements and
Supplemental Data under Item 8 for further discussion of these
items.
Government
Research Contract
Funding
We
derive a portion of our revenue from
funding of research contracts or subcontracts by various agencies of the U.S.
Government. These contracts typically cover work performed over extended periods
of time, from several months up to several years. These contracts may be
modified or terminated at the convenience of the U.S. Government and may be
subject to government budgetary fluctuations. In fiscal 2007, 2006, and 2005,
government research contract funding represented 13%, 8% and 8% of our total
consolidated revenue, respectively.
EMCORE
had been engaged in a multi-year
cost reimbursable solar cell development and production contract for a major
U.S.aerospace
corporation. It was previously
reported that the contract would exceed $40.0 million in development and
production revenue over the next several years. Although we
recognized significant revenue for this program during fiscal 2007, our customer
notified us in August 2007 that their program had been terminated for
convenience by the U.S. Government. We adjusted our order backlog
accordingly and this will have no effect on our fiscal 2008 revenue
guidance. In fiscal 2008, we expect to recognize additional revenue
from this program related to contract termination costs. We also
expect revenue in fiscal 2008 from a new U.S. Government contract that has
similar technical contract requirements.
Please
refer to Risk Factors under Item
1A, Management’s Discussion and Analysis of Financial Condition and Results of
Operations under Item 7 and Financial Statements and Supplemental Data under
Item 8 for further discussion of U.S. Government contracts.
Sales
and Marketing
We
sell our products worldwide through
our dedicated sales force, external sales representatives and distributors
and
application engineers. Our sales force communicates with our customers’
engineering, manufacturing and purchasing personnel to determine product design,
qualifications, performance and cost. Our strategy is to use our dedicated
sales
force to sell to key accounts and to expand our use of external sales
representatives for increased coverage in international markets and some
domestic segments.
Throughout
our sales cycle, we work
closely with our customers to qualify our products into their product lines.
As
a result, we develop strategic and long-lasting customer relationships with
products and services that are tailored to our customers’
requirements.
We
focus our marketing communication
efforts on increasing brand awareness, communicating our technologies’
advantages and generating leads for our sales force. We use a variety
of marketing methods, including our website, participation at trade shows and
selective advertising to achieve these goals.
Externally,
our marketing group works
with customers to define requirements, characterize market trends, define new
product development activities, identify cost reduction initiatives and manage
new product introductions. Internally, our marketing group
communicates and manages customer requirements with the goal of ensuring that
our product development activities are aligned with our customers’
needs. These product development activities allow our marketing group
to manage new product introductions and new product and market
trends.
Please
refer to Risk Factors under Item
1A, Management’s Discussion and Analysis of Financial Condition and Results of
Operations under Item 7 and Financial Statements and Supplemental Data under
Item 8 for further discussion of sales and marketing, including information
regarding our customers and geographic areas in which we do
business.
Manufacturing
As
of September 30, 2007,
we had thirteen dedicated MOCVD (metal
organic chemical vapor deposition) systems for both research and production,
which are capable of processing virtually all compound semiconductor-based
materials and devices. Our operations include wafer fabrication,
device design and production, fiber optic module, subsystem and system design
and manufacture, and solar panel engineering and assembly. Many of
our manufacturing operations are computer monitored or controlled to enhance
production output and statistical control. We employ a strategy of minimizing
ongoing capital investments, while maximizing the variable nature of our cost
structure. We maintain supply agreements with many key suppliers throughout
our
supply chain management function. Where we can gain cost advantages while
maintaining quality and intellectual property control, we outsource the
production of certain subsystems, components and subassemblies to contract
manufacturers located overseas. Our contract manufacturers must maintain
comprehensive quality and delivery systems, and we continuously monitor them
for
compliance.
Our
various manufacturing processes
involve extensive quality assurance systems and performance testing. Our
facilities have acquired and maintain certification status for their quality
management systems. Our manufacturing facilities located in Albuquerque,
New
Mexico and Alhambra,
California
are
registered to ISO 9001
standards.
In
May 2007, EMCORE announced the
opening of a new manufacturing facility in Langfang,
China.
Our new company, Langfang EMCORE
Optoelectronics Co. Ltd., is located approximately 30 miles southeast of
Beijingand
currently occupies a space of 22,000
square feet with a Class-10,000 clean room for optoelectronic device
packaging. Another 60,000 square feet is available for future
expansion. We have begun the transfer of our most cost sensitive
optoelectronic devices to this facility. This facility, along with a
strategic alignment with our existing contract manufacturing partners, should
enable us to improve our cost structure and gross margins. We also expect to
develop and provide improved service to our global customers by having a local
presence in Asia.
Please
refer to Risk Factors under Item
1A and Management’s Discussion and Analysis of Financial Condition and Results
of Operations under Item 7 for further discussion of manufacturing
activities.
Sources
of Raw
Materials
We
depend on a limited number of
suppliers for certain raw materials, components and equipment used in our
products. We continually review our vendor relationships to mitigate risks
and
lower costs, especially where we depend on one or two vendors for critical
components or raw materials. While maintaining inventories that we believe
are
sufficient to meet our near-term needs, we generally do not carry significant
inventories of raw materials. Accordingly, we maintain ongoing communications
with our vendors in order to prevent any interruptions in supply, and have
implemented a supply-chain management program to maintain quality and lower
purchase prices through standardized purchasing efficiencies and design
requirements. To date, we generally have been able to obtain sufficient
quantities of quality supplies in a timely manner.
Please
refer to Risk Factors under Item
1A for further discussion of our reliance upon sole or limited sources of raw
materials.
Research
and
Development
Our
research and development (R&D)
efforts have been focused on maintaining our technological leadership position
by working to improve the quality and attributes of our product lines. We also
invest significant resources to develop new products and production technology
to expand into new market opportunities by leveraging our existing technology
base and infrastructure. Our industry is characterized by rapid changes in
process technologies with increasing levels of functional integration. Our
efforts are focused on designing new proprietary processes and products, on
improving the performance of our existing materials, components and subsystems,
and on reducing costs in the product manufacturing process.
As
of September 30, 2007,
we had 3 MOCVD systems dedicated to
R&D efforts. The R&D staff utilizes x-ray, optical and
electrical characterization equipment, as well as device and module fabrication
and testing equipment, which generates data rapidly, allowing for shortened
development cycles and rapid customer response.
During
fiscal 2007, 2006 and 2005, we
invested $30.0 million, $19.7 million, and $16.5 million, respectively in
R&D activities. As a percentage of revenue, R&D represented
18%, 14%, and 14% for fiscal 2007, 2006 and 2005, respectively. As
part of the ongoing effort to cut costs, many of our projects are used to
develop lower cost versions of our existing products. We also actively compete
for R&D funds from U.S. Government agencies and other entities. In view of
the high cost of development, we solicit research contracts that provide
opportunities to enhance our core technology base and promote the
commercialization of targeted products. Generally, internal R&D funding is
used for the development of products that will be released within 12 months
and
external funding is used for longer-range R&D efforts.
EMCORE’s
Photovoltaics division
announced the following new product developments and
launches:
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In
August 2007, our production
terrestrial concentrator cell achieved a new level of performance,
attaining 39% peak conversion efficiency under 1000x concentrated
illumination conditions. This advancement is an evolution of EMCORE's
proven concentrator triple junction (CTJ) production technology,
with
which several million CTJ solar cells have been produced and shipped
to
solar power system manufacturers worldwide. We expect that EMCORE's
continuing investment in technology innovation will enable the
introduction of concentrator solar cell products with conversion
efficiencies over 40%.
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In
May 2007, we announced a solar
conversion efficiency of 31% for an entirely new class of advanced
multi-junction solar cells optimized for space applications. The
new solar
cell, referred to as the Inverted Metamorphic (IMM) design, is composed
of
a novel combination of compound semiconductors that enables a superior
response to the solar spectrum compared to conventional multi-junction
solar cells. Due to its innovative design, the IMM cell is approximately
one fifteenth the thickness of the conventional multi-junction solar
cell.
We expect that the IMM cell, developed in conjunction with the Vehicle
Systems Directorate of U.S. Air Force Research Laboratory, will enable
a
new class of extremely lightweight, high-efficiency, and flexible
solar
arrays that we believe will power the next generation of spacecrafts
and
satellites and will form a platform for future generations of terrestrial
concentrator products.
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In
March 2007, EMCORE’s Fiber Optics
division announced the following new product development and
launches:
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10GBASE-LRM
(long reach multimode) SFP+ Optical Transceiver Module. The LRM SFP+
product expands EMCORE's 10G product portfolio into additional market
niches and platforms, which is a part of EMCORE's strategy to provide
a
complete suite of modules for legacy multimode customer applications.
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Full
Band Tunable Long Reach Small Form Factor Transponder and 1550nm
DWDM Long
Reach XFP Optical Transceiver Module for 10G Applications. These
products
mark the continued expansion of EMCORE's market leading portfolio
of
parallel VCSEL and LX4 optical modules for the 300m multimode market
into
the long reach 10G application space.
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Double
Data Rate (DDR) 12 Channel 60G Modules. The MTX/RX9552 is a 12 channel
60G
DDR product that doubles the speed of the existing single data rate
(SDR)
SNAP12. The DDR modules are currently sampling to customers at data
rates
of 5G per channel featuring low power consumption and an improved
digital
management interface. The Mini, MTX/RX9542, is the second new product
offering that provides DDR bandwidth at half the size. Originally
designed
for broad temperature range military applications, the Mini's small
form
factor allows commercial end users to dramatically increase card
density
and bandwidth.
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1.244G
Burst-Mode, ITU G.984 compliant APD/TIA for the rapidly expanding
Gigabit
Passive Optical Network (GPON) OLT market. EMCORE has created APD/TIA
packaged components for the rapidly expanding North American GPON
OLT
Fiber-To-The-Home (FTTH) market.
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1310
10G Fabry-Perot LC Transmit Optical Sub Assembly (TOSA) designed
to meet
the emerging market of 10G SFP+ and XFP 10G-LRM modules. This new
product
offering expands EMCORE's product base in 10G over multimode fiber
applications by providing key components for LRM modules. LRM is
an
emerging technology that provides 10G transmission speeds over 220m
multi-mode optical fiber links as defined by the IEEE 802.3aq 10G-LRM
standard.
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Please
refer to Risk Factors under Item
1A, Management’s Discussion and Analysis of Financial Condition and Results of
Operations under Item 7 and Financial Statements and Supplemental Data under
Item 8 for further discussion of our R&D efforts.
Intellectual
Property and
Licensing
We
protect our proprietary technology by
applying for patents where appropriate and in other cases by preserving the
technology, related know-how and information as trade secrets. The success
and
competitive position of our product lines depend significantly on our ability
to
obtain intellectual property protection for our R&D efforts. We also
acquire, through license grants or assignments, rights to patents on inventions
originally developed by others. As of September 30, 2007,
we held approximately 99 U.S.patents
and 8 foreign patents and have
over 100 additional patent applications pending. Our U.S.patents
will expire on varying dates
between 2009 and 2024. These patents and patent applications claim
various aspects of current or planned commercial versions of our materials,
components, subsystems and systems.
We
also have entered into license
agreements with the licensing agencies of universities and other organizations,
under which we have obtained exclusive or non-exclusive rights to practice
inventions claimed in various patents and applications issued or pending in
the
U.S.and
other foreign countries. We do not
believe the financial obligations under any of these agreements materially
adversely affect our business, financial condition or results of
operations.
We
rely on trade secrets to protect our
intellectual property when we believe that publishing patents would make it
easier for others to reverse engineer our proprietary processes. A “trade
secret” is information that has value to the extent it is not generally known,
not readily ascertainable by others through legitimate means, and protected
in a
way that maintains its secrecy. Reliance on trade secrets is only an effective
business practice insofar as trade secrets remain undisclosed and a proprietary
product or process is not reverse engineered or independently developed. To
protect our trade secrets, we take certain measures to ensure their secrecy,
such as partitioning the non-essential flow of information between our different
groups and executing non-disclosure agreements with our employees, customers
and
suppliers. We also rely upon other intellectual property rights such as
trademarks and copyrights where appropriate.
As
is
typical in our industry, from time to time, we have sent letters to, and
received letters from, third parties regarding the assertion of patent or other
intellectual property rights in connection with certain of our products and
processes. On September 11, 2006, we filed a lawsuit against Optium Corporation
(Optium) for patent infringement. In the suit, EMCORE and JDS Uniphase
Corporation (JDSU) allege that Optium is infringing on U.S. patents 6,282,003
and 6,490,071 with its Prisma II 1550nm transmitters. On March 14, 2007, EMCORE
and JDSU filed a second patent suit against Optium on JDSU's patent 6,519,374
(“the ‘374 patent”). On March 15, 2007, Optium filed a declaratory
judgment action against EMCORE and JDSU. Optium seeks in this litigation a
declaration that certain products of Optium do not infringe the '374 patent
and
that the patent is invalid. The '374 patent is assigned to JDSU and licensed
to
EMCORE.
On
December 20, 2007, the Company was served with a complaint in another
declaratory relief action which Optium had filed in the Federal District Court
for the Western District of Pennsylvania. This action seeks to have
U.S. patents 6,282,003 and 6,490,071 declared invalid or unenforceable because
of certain conduct alleged to have occurred in connection with the grant of
these patents. These allegations are substantially the same as those
brought by Optium by motion in the Company’s own case against Optium, which
motion had been denied by the Court. The Company believes the
allegations contained in this complaint are without merit and intends to contest
them.
In
connection with our sale of the capital equipment business in November 2003,
we
retained a license to all MOCVD system-related technology. We intend to use
this
license to further optimize the performance of our own reactors and develop
improvements to our hardware that will increase yields on existing products
and
enable the fabrication of advanced wide-band gap materials.
Please
refer to Risk Factors under Item
1A, Legal Proceedings under Item 3, Management’s Discussion and Analysis of
Financial Condition and Results of Operations under Item 7 and Financial
Statements and Supplemental Data under Item 8 for further discussion of
intellectual property.
Environmental
Regulations
We
are subject to federal, state, and
local laws and regulations concerning the use, storage, handling, generation,
treatment, emission, release, discharge, and disposal of certain materials
used
in our R&D and production operations, as well as laws and regulations
concerning environmental remediation, homeland security, and employee health
and
safety. The production of wafers and devices involves the use of certain
hazardous raw materials, including, but not limited to, ammonia, phosphine,
and
arsine. If our control systems are unsuccessful in preventing release
of these or other hazardous materials or we fail to comply with such
environmental provisions, our actions, whether intentional or inadvertent,
could
result in fines and other liabilities to the U.S. Government or third parties,
and injunctions requiring us to suspend or curtail operations which could have
a
material adverse effect on our business.
We
have in-house professionals to
address compliance with applicable environmental, homeland security, and health
and safety laws and regulations. We believe that we are currently in compliance
with all applicable environmental laws, including the Resource Conservation
and
Recovery Act.
Please
refer to Risk Factors under Item
1A for further discussion of our compliance efforts associated with
environmental regulations.
Competition
The
markets for our products in each of
our reporting segments are extremely competitive and are characterized by rapid
technological change, frequent introduction of new products, short product
life
cycles and significant price erosion. We face actual and potential competition
from numerous domestic and international companies. Many of these companies
have
greater engineering, manufacturing, marketing and financial resources than
we
have. Partial lists of these competitors within the markets we participate
in
include:
Fiber
Optics
CATV
Networks. Our
competitors include Hitachi Yagi and Optium at the subsystem level and Applied
Optoelectronics, Inc. and Eudyna Device, Inc. at the component product
level.
FTTP
and
Telecommunications Networks. Our competitors include
Cyoptics, JDSU,
Mitsubishi, MRV Communications, and
Sumitomo for telecommunications and FTTP components. For 10G
transceivers and parallel optical modules, our principal competitors include
Avago, Finisar Corporation, JDSU,
Opnext, Inc. and numerous smaller
vendors.
Data
Communications,
Storage Area Networks and Consumer Products. Our competitors
include Avago, Finisar, Hitachi Cable and Opnext and numerous smaller
vendors.
Satellite
Communications Networks. Our primary
competitors are Foxcom and MITEQ, Inc.
Video
Transport
Products. Our primary
competitors are Evertz and Telecast.
Defense
and Homeland
Security. The competitors
in RF transport for defense and homeland security products include Aegis
Technologies, Gemfire Corporation, Linear Photonics, LLC, JDSUand
Optium.
Photovoltaics
Satellite
Power
Generation. In
the market for satellite power photovoltaics products, we primarily compete
with
Azure Solar GmbH, Sharp and Spectrolab, Inc., a subsidiary of
Boeing.
Terrestrial
Power
Generation. In
the market for terrestrial power photovoltaics products, we primarily compete
with Azure Solar GmbH and Spectrolab, Inc. in the solar cell market and Amonix,
Concentrix, Energy Innovations, Solar Systems Pty, and SolFocus in the solar
power systems market.
In
addition to the companies listed
above, we compete with many research institutions and universities for research
contract funding. We also sell our products to current competitors and companies
with the capability of becoming competitors. As the markets for our products
grow, new competitors are likely to emerge and current competitors may increase
their market share. In the European Union (“EU”), political and legal
requirements encourage the purchase of EU-produced goods, which may put us
at a
competitive disadvantage against our European competitors.
There
are substantial barriers to entry
by new competitors across our product lines. These barriers include the large
number of existing patents, the time and costs to be incurred to develop
products, the technical difficulty in manufacturing semiconductor-based
products, the lengthy sales and qualification cycles and the difficulties in
hiring and retaining skilled employees with the required scientific and
technical backgrounds. We believe that the primary competitive factors within
our current markets are yield, throughput, performance, breadth of product
line,
product heritage, customer satisfaction and customer commitment to competing
technologies. Competitors may develop enhancements to or future generations
of
competitive products that offer superior price and performance characteristics.
We believe that in order to remain competitive, we must invest significant
financial resources in developing new product features and enhancements and
in
maintaining customer satisfaction worldwide.
Order
Backlog
As
of September 30, 2007,
we had an order backlog based on
future billings of approximately $149 million as compared to a backlog of
approximately $48 million from the prior year. The September 30, 2007 order
backlog is comprised of $127
million for our Photovoltaics segment and $22 million for our Fiber Optics
segment. Within our Photovoltaics segment, $57 million relates to our
satellite solar power business and $70 million relates to our terrestrial solar
power business. The significant increase
in order
backlog is attributable to the receipt of long-term photovoltaics-related sales
contracts, of which approximately $45 million is scheduled for shipment after
calendar year 2008.
EMCORE
had been engaged in a multi-year
cost reimbursable solar cell development and production contract for a major
U.S.aerospace
corporation. It was previously
reported that the contract would exceed $40.0 million in development and
production revenue over the next several years. Although we
recognized significant revenue for this program during fiscal 2007, our customer
notified us in August 2007 that their program had been terminated for
convenience by the U.S. Government. We adjusted our order backlog
accordingly and this will have no effect on our fiscal 2008 revenue
guidance. In fiscal 2008, we expect to recognize additional revenue
from this program related to contract termination costs. We also
expect revenue in fiscal 2008 from a new U.S. Government contract that has
similar technical contract requirements.
Customers
may ask us to delay shipment
of certain orders and our backlog could also be adversely affected if customers
unexpectedly cancel purchase orders accepted by us. A majority of our
fiber optics products typically ship within the same quarter as when the
purchase order is received; therefore, our backlog at any particular date is
not
necessarily indicative of actual revenue or the level of orders for any
succeeding period.
Employees
As
of September 30, 2007,
we had 738 employees of whom 46 had a
Ph.D. degree. Our year-end headcount included 441 employees in
manufacturing operations, 118 employees in R&D, 173 employees in sales,
general and administration (SG&A), and 6 temporary employees. This
represented a net decrease of 12 employees or 2% from September 30, 2006.
None
of our employees are covered by a
collective bargaining agreement. We have never experienced any
labor-related work stoppage and believe our employee relations are
good.
Competition
is intense in the recruiting
of personnel in the semiconductor industry. Our ability to attract
and retain qualified personnel is essential to our continued success. We are
focused on retaining key contributors, developing our staff and cultivating
their level of commitment.
Risk
Factors
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Our
disclosure and analysis in this
2007 Annual Report on Form 10-K contain some forward-looking statements, within
the meaning of Section 27A of the Securities Act and Section 21E of Exchange
Act, that set forth anticipated results based on management’s plans and
assumptions. From time to time, we also provide forward-looking statements
in
other materials we release to the public as well as oral forward-looking
statements. These statements are based largely on our current expectations
and
projections about future events and financial trends affecting the financial
condition of our business. They relate to future events or our future
financial performance and involve known and unknown risks, uncertainties and
other factors that may cause the actual results, levels of activity, performance
or achievements of our business or our industry to be materially different
from
those expressed or implied by any forward-looking statements. Such statements
include, in particular, projections about our future results, statements about
our plans, strategies, business prospects, changes and trends in our business
and the markets in which we operate. These forward-looking statements
may be identified by the use of terms and phrases such as “expects”,
“anticipates”, “intends”, “plans”, “believes”, “estimates”, “targets”, “can”,
“may”, “could”, “will”, and variations of these terms and similar
phrases.
We
cannot guarantee that any forward-looking statement will be realized, although
we believe we have been prudent in our plans and assumptions. Achievement of
future results is subject to risks, uncertainties and potentially inaccurate
assumptions. Should known or unknown risks or uncertainties materialize, or
should underlying assumptions prove inaccurate, actual results could differ
materially from past results and those anticipated, estimated or projected.
You
should bear this in mind as you consider forward-looking
statements.
We
undertake no obligation to publicly update forward-looking statements, whether
as a result of new information, future events or otherwise. You are advised,
however, to consult any further disclosures we make on related subjects in
our
Form 10-Qs and Current Reports on Form 8-K filed with the SEC. Also note that
we
provide the following cautionary discussion of risks, uncertainties and possibly
inaccurate assumptions relevant to our businesses. These are factors that,
individually or in the aggregate, we think could cause our actual results to
differ materially from historical and expected results. We note these factors
for investors as permitted by the Private Securities Litigation Reform Act
of
1995. You should understand that it is not possible to predict or identify
all
such factors. Consequently, you should not consider the following to be a
complete discussion of all potential risks or uncertainties.
We
have a history of incurring significant net losses and our future profitability
is not assured.
We
commenced operations in 1984 and as of September 30, 2007, we had an accumulated
deficit of $343.6 million. We incurred a net loss of $58.7 million in fiscal
2007, net income of $54.9 million in fiscal 2006 and a net loss of $13.5 million
in fiscal 2005. Fiscal 2006 results include the sale of our GELcore
joint venture that resulted in a net gain, before tax, of $88.0
million. Our operating results for future periods are subject to
numerous uncertainties and we cannot assure you that we will not continue to
experience net losses for the foreseeable future. Although our
revenue has grown in recent years, we may be unable to sustain such growth
rates
in light of potential changes in market or economic conditions. In
addition, if we are not able to increase revenue and reduce our costs, we may
not be able to achieve profitability.
Our
future revenue is inherently unpredictable. As a result, our
operating results are likely to fluctuate from period to period, which may
cause
volatility in our stock price and may cause our stock price to
decline.
Our
quarterly and annual operating results have fluctuated substantially in the
past
and are likely to fluctuate significantly in the future due to a variety of
factors, some of which are outside of our control. Factors that could
cause our quarterly or annual operating results to fluctuate
include:
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market
acceptance of our products;
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market
demand for the products and services provided by our customers;
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disruptions
or delays in our manufacturing processes or in our supply of raw
materials
or product components;
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changes
in the timing and size of orders by our customers;
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cancellations
and postponements of previously placed orders;
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reductions
in prices for our products or increases in the costs of our raw materials;
and
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the
introduction of new products and manufacturing processes.
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In
addition, the limited lead times with which several of our customers order
our
products restrict our ability to forecast revenue. We may also
experience a delay in generating or recognizing revenue for a number of
reasons. For example, orders at the beginning of each quarter
typically represent a small percentage of expected revenue for that quarter
and
are generally cancelable at any time. We depend on obtaining orders during
each
quarter for shipment in that quarter to achieve our revenue objectives. Failure
to ship these products by the end of a quarter may adversely affect our results
of operations.
As
a result of the foregoing, we believe
that period-to-period comparisons of our results of operations should not be
relied upon as indications of future performance. In addition, our
results of operations in one or more future quarters may fail to meet the
expectations of securities analysts or investors, which would likely result
in a
decline in the trading price of our common stock.
We
enter into long-term firm fixed-price contracts in our Photovoltaics division,
which could subject us to losses if we have cost overruns.
Many
of
our contracts in our Photovoltaics division are contracted on a firm fixed-price
basis. While firm fixed-price contracts allow us to benefit from cost
savings, they also expose us to the risk of cost overruns. If the initial
estimates we used to determine the contract price and the cost to perform the
work prove to be incorrect, we could incur losses. In addition, some of our
contracts have specific provisions relating to cost, schedule, and performance.
If we fail to meet the terms specified in those contracts, then our cost to
perform the work could increase or our price could be reduced, which would
adversely affect our financial condition. These programs have risk for
reach-forward losses if our estimated costs exceed our estimated
price.
Fixed-price
development work inherently has more uncertainty than production contracts
and,
therefore, more variability in estimates of the cost to complete the work.
Many
of these development programs have very complex designs. As technical or quality
issues arise, we may experience schedule delays and cost impacts, which could
increase our estimated cost to perform the work or reduce our estimated price,
either of which could adversely affect our financial condition. Some fixed-price
development contracts include initial production units in their scope of work.
Successful performance of these contracts depends on our ability to meet
production specifications and delivery rates. If we are unable to
perform and deliver to contract requirements, our contract price could be
reduced through the incorporation of liquidated damages, termination of the
contract for default, or other financially significant exposure. Management
uses
its best judgment to estimate the cost to perform the work and the price we
will
eventually be paid on fixed-price development programs. While we believe the
cost and price estimates incorporated in the financial statements are
appropriate, future events could result in either favorable or unfavorable
adjustments to those estimates.
Our
ability to achieve operational and
material cost reductions and to realize production efficiencies for our
operations is critical to our ability to achieve long-term
profitability.
We
have implemented a number of
operational and material cost reductions and productivity improvement
initiatives, particularly with regards to our Fiber Optics segment. Cost
reduction initiatives often involve facility consolidation and re-design of
our
products, which requires our customers to accept and qualify the new designs,
potentially creating a competitive disadvantage for our
products. These initiatives can be time-consuming and disruptive to
our operations and costly in the short-term. Successfully
implementing these and other cost-reduction initiatives throughout our
operations is critical to our future competitiveness and ability to achieve
long-term profitability. However, there can be no assurance that these
initiatives will be successful.
We
are substantially dependent on a
small number of customers and the loss of any one of these customers could
adversely affect our business, financial condition and results of
operations.
In
fiscal 2007, 2006 and 2005, our top
five customers accounted for 49%, 39%, and 49% of our total annual consolidated
revenue. There can be no assurance that we will continue to achieve
historical levels of sales of our products to our largest
customers. The loss of or a reduction in sales to one or more of our
largest customers could have a material adverse affect on our business,
financial condition and results of operations.
We
may not be successful in obtaining
market acceptance and demand for our terrestrial solar power
systems.
We
have invested and intend to continue
to invest significant resources in the adaptation of our high-efficiency
compound semiconductor-based GaAs solar cell products
for
terrestrial applications,
and in mid 2006, EMCORE established a wholly-owned subsidiary, EMCORE Solar
Power (“ESP”)
to conduct this
business ESP
is in the development stage and the
terrestrial solar power business will require substantial additional funding
for
the hiring of employees, research and development and investment in capital
equipment. Factors such as changes in energy prices or the
development of new and efficient alternative energy technologies could limit
growth in or reduce the market for terrestrial solar power
products. In addition, we may experience difficulties in applying our
satellite-based solar products to terrestrial applications or we may be unable
to compete with new and emerging terrestrial solar power
products. The sale of concentrated photovoltaic (“CPV”)
systems involve the design,
manufacture and installation of large and complex structures intended for
outdoor operation, regarding which the Company has had no previous
experience. In addition, it is expected that much of the market for
our CPV
systems will be outside the
U.S.
and will involve partnering with
non-U.S. entities and evaluation and compliance with non-U.S. laws, regulations,
and government electric supply contracts, which are also new areas for the
Company. There can be no assurance that our bids on solar power
installations will be accepted, that we will win any of these bids or that
our
solar power concentrator systems will be qualified for these
projects. If our terrestrial solar cell products are not cost
competitive or accepted by the market, our business, financial condition and
results of operations may be materially and adversely
affected.
We
are a party to several significant U.S. Government contracts, which are subject
to unique risks.
In
2007,
13% of our revenue was derived from U.S. Government contracts. In addition
to
normal business risks, our contracts with the U.S. Government are subject to
unique risks, some of which are beyond our control.
The
funding of U.S. Government
programs is subject to congressional appropriations. Many of the U.S.
Government programs in which we participate may extend for several years;
however, these programs are normally funded annually. Long-term government
contracts and related orders are subject to cancellation if appropriations
for
subsequent performance periods are not made. The termination of funding for
a
U.S. Government program would result in a loss of anticipated future revenue
attributable to that program, which could have a material adverse effect on
our
operations.
The
U.S. Government may modify,
curtail or terminate our contracts. The U.S. Government may modify,
curtail or terminate its contracts and subcontracts without prior notice at
its
convenience upon payment for work done and commitments made at the time of
termination. Modification, curtailment or termination of our major programs
or
contracts could have a material adverse effect on our results of operations
and
financial condition.
Our
contract costs are subject to
audits by U.S. Government agencies. U.S. Government representatives may
audit the costs we incur on our U.S. Government contracts, including allocated
indirect costs. Such audits could result in adjustments to our contract costs.
Any costs found to be improperly allocated to a specific contract will not
be
reimbursed, and such costs already reimbursed must be refunded. We have recorded
contract revenue based upon costs we expect to realize upon final audit.
However, we do not know the outcome of any future audits and adjustments and
we
may be required to reduce our revenue or profits upon completion and final
negotiation of audits. If any audit uncovers improper or illegal activities,
we
may be subject to civil and criminal penalties and administrative sanctions,
including termination of contracts, forfeiture of profits, suspension of
payments, fines and suspension or prohibition from doing business with the
U.S.
Government.
Our
business is subject to potential
U.S. Government inquiries and investigations. We are sometimes subject to
certain U.S. Government inquiries and investigations of our business practices
due to our participation in government contracts. Any such inquiry or
investigation could potentially result in a material adverse effect on our
results of operations and financial condition.
Our
U.S. Government business is also
subject to specific procurement regulations and other requirements. These
requirements, although customary in U.S. Government contracts, increase our
performance and compliance costs. These costs might increase in the future,
reducing our margins, which could have a negative effect on our financial
condition. Failure to comply with these regulations and requirements could
lead
to suspension or debarment, for cause, from U.S. Government contracting or
subcontracting for a period of time and could have an adverse effect on our
reputation and ability to secure future U.S. Government contracts.
If
we do not keep pace with rapid
technological change, our products may not be competitive.
We
compete in markets that are
characterized by rapid technological change, frequent new product introductions,
changes in customer requirements, evolving industry standards, continuous
improvement in products and the use of our existing products in new
applications. We may not be able to develop the underlying core
technologies necessary to create new products and enhancements at the same
rate
as or faster than our competitors, or to license the technology from third
parties that is necessary for our products.
Product
development delays may result
from numerous factors, including:
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changing
product specifications
and customer requirements;
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unanticipated
engineering
complexities;
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expense
reduction measures we have
implemented and others we may
implement;
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difficulties
in hiring and
retaining necessary technical personnel;
and
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difficulties
in allocating
engineering resources and overcoming resource
limitations.
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We
cannot assure you that we will be
able to identify, develop, manufacture, market or support new or enhanced
products successfully, if at all, or on a timely, cost effective or repeatable
basis. Our future performance will depend on our successful development and
introduction of, as well as market acceptance of, new and enhanced products
that
address market changes as well as current and potential customer requirements
and our ability to respond effectively to product announcements by competitors,
technological changes or emerging industry standards. Because it is generally
not possible to predict the amount of time required and the costs involved
in
achieving certain research, development and engineering objectives, actual
development costs may exceed budgeted amounts and estimated product development
schedules may be extended. If we incur budget overruns or delays in our research
and development efforts, our business, financial condition and results of
operations may be materially adversely affected.
The
competitive and rapidly evolving
nature of our industry has in the past resulted and is likely in the future
to
result in reductions in our product prices and periods of reduced demand for
our
products.
We
face substantial competition in each
of our reporting segments from a number of companies, many of which have greater
financial, marketing, manufacturing and technical resources than us.
Larger-sized competitors often spend more on research and development, which
could give those competitors an advantage in meeting customer demands and
introducing technologically innovative products before we do. We expect that
existing and new competitors will improve the design of their existing products
and will introduce new products with enhanced performance
characteristics.
The
introduction of new products and
more efficient production of existing products by our competitors has resulted
and is likely in the future to result in price reductions and increases in
expenses and reduced demand for our products. In addition, some of
our competitors may be willing to provide their products at lower prices, accept
a lower profit margin or expend more capital in order to obtain or retain
business. Competitive pressures have required us to reduce the prices
of some of our products. These competitive forces could diminish our market
share and gross margins, resulting in a material adverse affect on our business,
financial condition and results of operations.
New
competitors may also enter our
markets, including some of our current and potential customers who may attempt
to integrate their operations by producing their own components and subsystems
or acquiring one of our competitors, thereby reducing demand for our
products. In addition, rapid product development cycles, increasing
price competition due to maturation of technologies, the emergence of new
competitors in Asiawith
lower cost structures and industry
consolidation resulting in competitors with greater financial, marketing and
technical resources could result in lower prices or reduced demand for our
products.
Expected
and actual introductions of new
and enhanced products may cause our customers to defer or cancel orders for
existing products and may cause our products to become obsolete. A slowdown
in
demand for existing products ahead of a new product introduction could result
in
a write-down in the value of inventory on hand related to existing products.
We
have in the past experienced a slowdown in demand for existing products and
delays in new product development and such delays may occur in the future.
To
the extent customers defer or cancel orders for existing products due to a
slowdown in demand or in anticipation of a new product release or if there
is
any delay in development or introduction of our new products or enhancements
of
our products, our business, financial condition and results of operations could
be materially adversely affected.
We
may not be successful in implementing
our growth strategy if we are unable to identify and acquire suitable
acquisition targets. In addition, our acquisitions may not have the
anticipated effect on our financial results.
Finding
and consummating acquisitions is
an important component of our growth strategy. Our continued ability to grow
by
acquisition is dependent upon the availability of suitable acquisition
candidates and may be dependent on our ability to obtain acquisition financing
on acceptable terms. We experience competition in making acquisitions from
larger companies with significantly greater resources. There can be no assurance
that we will be able to procure the necessary funds to effectuate our
acquisition strategy on commercially reasonable terms, or at
all.
Future
acquisitions by us may involve
the following:
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use
of significant amounts of
cash;
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potentially
dilutive issuances of
equity securities on potentially unfavorable terms;
and
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incurrence
of debt on potentially
unfavorable terms.
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In
addition, acquisitions involve
numerous risks, including:
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inability
to achieve anticipated
synergies;
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difficulties
in the integration of
the operations, technologies, products and personnel of the acquired
company;
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diversion
of management’s
attention from other business
concerns;
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risks
of entering markets in which
we have limited or no prior
experience;
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potential
loss of key employees of
the acquired company or of us;
and
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risk
of assuming unforeseen
liabilities or becoming subject to
litigation.
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If
these factors limit our ability to
integrate the operations of our acquisitions successfully or on a timely basis,
our expectations of future results of operations may not be met. In addition,
our growth and operating strategies for businesses we acquire may be different
from the strategies that such business currently is pursuing. If our strategies
are not the proper strategies for a company we acquire, it could materially
adversely affect our business, financial condition and results of operations.
Further, there can be no assurance that we will be able to maintain or enhance
the profitability of any acquired business or consolidate the operations of
any
acquired business to achieve cost savings.
In
addition, there may be liabilities
that we fail, or are unable, to discover in the course of performing due
diligence investigations on each company, business or asset we have already
acquired or may acquire in the future. Such liabilities could include those
arising from employee benefits contribution obligations of a prior owner or
non-compliance with, or liability pursuant to, applicable federal, state or
local environmental requirements by prior owners for which we, as a successor
owner, may be responsible. In addition, there may be additional costs relating
to acquisitions including, but not limited to, possible purchase price
adjustments. We cannot assure you that rights to indemnification by sellers
of
assets to us, even if obtained, will be enforceable, collectible or sufficient
in amount, scope or duration to fully offset the possible liabilities associated
with the business or property acquired. Any such liabilities, individually
or in
the aggregate, could materially adversely affect our business, financial
condition and results of operations.
In
the past several years we have
completed several acquisitions, which have broadened our product lines within
our target markets and increased the level of vertical integration within those
product lines. However, if customer demand in these markets does not meet
current expectations, our revenue could be significantly reduced and we could
suffer a material adverse affect on our business, financial condition and
results of operations.
Our
products are difficult to
manufacture. Our production could be disrupted and our results will
suffer if our production yields are low as a result of manufacturing
difficulties.
We
manufacture many of our wafers and
devices in our own production facilities. Difficulties in the production
process, such as contamination, raw material quality issues, human error or
equipment failure, can cause a substantial percentage of wafers and devices
to
be nonfunctional. Lower-than-expected production yields may delay shipments
or
result in unexpected levels of warranty claims, either of which can materially
adversely affect our results of operations. We have experienced difficulties
in
achieving planned yields in the past, particularly in pre-production and upon
initial commencement of full production volumes, which have adversely affected
our gross margins. Because the majority of our manufacturing costs are fixed,
achieving planned production yields is critical to our results of operations.
Because we manufacture many of our products in a single facility, we have
greater risk of interruption in manufacturing resulting from fire, natural
disaster, equipment failures, or similar events than we would if we had back-up
facilities available for manufacturing these products. We could also
incur significant costs to repair and/or replace products that are defective
and
in some cases costly product redesigns and/or rework may be required to correct
a defect. Additionally, any defect could adversely affect our
reputation and result in the loss of future orders.
We
face lengthy sales and qualifications
cycles for our new products and, in many cases, must invest a substantial amount
of time and funds before we receive orders.
Most
of our products are tested by
current and potential customers to determine whether they meet customer or
industry specifications. The length of the qualification process, which can
span
a year or more, varies substantially by product and customer, and thus can
cause
our results of operations to be unpredictable. During a given qualification
period, we invest significant resources and allocate substantial production
capacity to manufacture these new products prior to any commitment to purchase
by customers. In addition, it is difficult to obtain new customers during the
qualification period as customers are reluctant to expend the resources
necessary to qualify a new supplier if they have one or more existing qualified
sources. If we are unable to meet applicable specifications or do not
receive sufficient orders to profitably use the allocated production capacity,
our business, financial condition and results of operations could be materially
adversely affected.
Our
historical and future budgets for
operating expenses, capital expenditures, operating leases and service contracts
are based upon our assumptions as to the future market acceptance of our
products. Because of the lengthy lead times required for product development
and
the changes in technology that typically occur while a product is being
developed, it is difficult to accurately estimate customer demand for any given
product. If our products do not achieve an adequate level of customer demand,
our business, financial condition and results of operations could be materially
adversely affected.
If
our contract manufacturers fail to
deliver quality products at reasonable prices and on a timely basis, our
business, financial condition and results of operations could be materially
adversely affected.
We
are increasing our use of contract
manufacturers located outside of the U.S.as
a less-expensive alternative to
performing our own manufacturing of certain products. Contract
manufacturers in Asiacurrently
manufacture a substantial
portion of our high-volume parts. If these contract manufacturers do
not fulfill their obligations to us, or if we do not properly manage these
relationships and the transition of production to these contract manufacturers,
our existing customer relationships may suffer. For example, in the past, we
experienced difficulties filling orders in our fiber-to-the-premises business
due to capacity limitations at one of our contract manufacturers. In addition,
by undertaking these activities, we run the risk that the reputation and
competitiveness of our products and services may deteriorate as a result of
the
reduction of our ability to oversee and control quality and delivery
schedules.
The
use of contract manufacturers
located outside of the U.S.also
subjects us to the following
additional risks that could significantly impair our ability to source our
contract manufacturing requirements internationally,
including:
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unexpected
changes in regulatory
requirements;
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legal
uncertainties regarding
liability, tariffs and other trade
barriers;
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inadequate
protection of
intellectual property in some
countries;
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greater
incidence of shipping
delays;
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greater
difficulty in hiring
talent needed to oversee manufacturing operations;
and
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potential
political and economic
instability.
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Prior
to our customers accepting
products manufactured at our contract manufacturers, they must requalify the
product and manufacturing processes. The qualification process can be lengthy
and expensive, with no guarantee that any particular product qualification
process will lead to profitable product sales. The qualification process
determines whether the product manufactured at our contract manufacturer
achieves our customers’ quality, performance and reliability standards. Our
expectations as to the time periods required to qualify a product line and
ship
products in volumes to customers may be erroneous. Delays in qualification
can
impair the expected timing of the transfer of a product line to our contract
manufacturer and may impair the expected amount of sales of the affected
products. We may, in fact, experience delays in obtaining qualification of
products produced by our contract manufacturers and, therefore, our operating
results and customer relationships could be materially adversely
affected.
Our
supply chain and manufacturing
process relies on accurate forecasting to provide us with optimal margins and
profitability. Because of market uncertainties, forecasting is becoming much
more difficult. In addition, as we come to rely more heavily on contract
manufacturers, we may have fewer personnel with expertise to manage these
third-party arrangements.
Protecting
our trade
secrets and obtaining patent protection is critical to our ability to
effectively compete.
Our
success and competitive position
depend on protecting our trade secrets and other intellectual property. Our
strategy is to rely on trade secrets and patents to protect our manufacturing
and sales processes and products. Reliance on trade secrets is only an effective
business practice if trade secrets remain undisclosed and a proprietary product
or process is not reverse engineered or independently developed. We take
measures to protect our trade secrets, including executing non-disclosure
agreements with our employees, customers and suppliers. If parties breach these
agreements or the measures we take are not properly implemented, we may not
have
an adequate remedy. Disclosure of our trade secrets or reverse engineering
of
our proprietary products, processes, or devices could materially adversely
affect our business, financial condition and results of
operations.
There
is also no assurance that any
patents will afford us commercially significant protection of our technologies
or that we will have adequate financial resources to enforce our
patents. Nor can there be any assurance that the significant number
of patent applications that we have filed and are pending, or those we may
file
in the future, will result in patents being issued. In addition, the
laws of certain other countries may not protect our intellectual property to
the
same extent as U.S.laws.
Our
failure to obtain or maintain the
right to use certain intellectual property may materially adversely affect
our
business, financial condition and results of operations.
The
compound semiconductor, optoelectronics and fiber optic communications
industries are characterized by frequent litigation regarding patent and other
intellectual property rights. From time to time we have received, and may
receive in the future, notice of claims of infringement of other parties’
proprietary rights and licensing offers to commercialize third party patent
rights. Although we are not currently involved in any litigation relating to
claims of infringement from other parties’ intellectual property, there can be
no assurance that:
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infringement
claims (or claims for
indemnification resulting from infringement claims) will not be asserted
against us or that such claims will not be
successful;
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future
assertions will not result
in an injunction against the sale of infringing products, which could
significantly impair our business and results of
operations;
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any
patent owned or licensed by us
will not be invalidated, circumvented or challenged;
or
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we
will not be required to obtain
licenses, the expense of which may adversely affect our results of
operations and
profitability.
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In
addition, effective copyright and
trade secret protection may be unavailable or limited in certain foreign
countries. Litigation, which could result in substantial cost and diversion
of
our resources, may be necessary to defend our rights or defend us against
claimed infringement of the rights of others. In certain
circumstances, our intellectual property rights associated with government
contracts may be limited.
Our
substantial level of indebtedness
could materially adversely affect our business, financial condition and results
of operations.
We
have substantial debt service
obligations. At September
30, 2007, our debt was
$85.0 million. We may incur additional debt in the future. This significant
amount of debt could:
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make
it difficult for us to make
payments on our convertible notes and any other debt we may
have;
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make
it difficult for us to obtain
any necessary future financing for working capital, capital expenditures,
debt service requirements or other
purposes;
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make
us more vulnerable to adverse
changes in general economic, industry and competitive conditions,
in
government regulation and in our business by limiting our flexibility
in
planning for, and reacting to changing
conditions;
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place
us at a competitive
disadvantage compared with our competitors that have less
debt;
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require
us to dedicate a
substantial portion of our cash flow from operations to service our
debt,
which would reduce the amount of our cash flow available for other
purposes, including working capital and capital expenditures;
and
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limit
funds available for research
and development.
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If
we are unable to generate sufficient
cash flow or otherwise obtain funds necessary to make required payments on
our
outstanding indebtedness, we would be in default under the terms of our
indebtedness. Default under the indenture governing our convertible subordinated
notes would permit the holders of such notes to accelerate the maturity of
the
notes and could cause defaults under future indebtedness we may incur. Any
such
default could materially adversely affect our business, financial condition
and
results of operations. In addition, we cannot assure you that we would be able
to repay amounts due in respect of the notes if payment of the notes were to
be
accelerated following the occurrence of an event of default as defined in the
indenture.
In
our Fiber Optics business, we
generally do not have long-term contracts with our customers and we typically
sell our products pursuant to purchase orders with short lead
times. As a result, our customers could stop purchasing our products
at any time and we must fulfill orders in a timely manner to keep our
customers.
Generally,
we do not have long-term
contracts with customers that purchase our fiber optic products. As a
result, our agreements with our customers do not provide any assurance of future
sales. Risks associated with the absence of long-term contracts with
our customers include the following:
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our
customers can stop purchasing
our products at any time without
penalty;
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our
customers may purchase
products from our competitors;
and
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our
customers are not required to
make minimum purchases.
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We
generally sell our products pursuant
to individual purchase orders, which often have extremely short lead
times. If we are unable to fulfill these orders in a timely manner,
it is likely that we will lose sales and customers. In addition, we
sell some of our products to the U.S. Government and governmental
entities. These contracts are generally subject to termination for
convenience provisions and may be cancelled at any time.
War,
terrorism, public health issues, and other circumstances could disrupt supply,
delivery, or demand of products, which could negatively affect the Company’s
operations and performance.
War,
terrorism, public health issues, and other business interruptions, whether
in
the U.S. or abroad, have caused and could cause damage or disruption to
international commerce and global economy, and thus may have a strong negative
impact on the global economy, the Company, and the Company’s suppliers and/or
customers. The Company’s major business operations are subject to interruption
by earthquake, other natural disasters, fire, power shortages, terrorist attacks
and other hostile acts, labor disputes, public health issues, and other events
beyond its control.
Although
it is impossible to predict the occurrences or consequences of any such events,
such events could result in a decrease in demand for the Company’s products,
make it difficult or impossible for the Company to deliver products to its
customers or to receive components from its suppliers, and create delays and
inefficiencies in the Company’s supply chain. In addition, should major public
health issues including pandemics arise, the Company could be negatively
affected by more stringent employee travel restrictions, additional limitations
in the availability of freight services, governmental actions limiting the
movement of products between various regions, delays in production ramps of
new
products, and disruptions in the operations of the Company’s manufacturing
vendors and component suppliers. The Company’s operating results and financial
condition have been, and in the future may be, adversely affected by such
events.
We
have significant international sales,
which expose us to additional risks and uncertainties.
Sales
to customers located outside the
U.S.accounted
for approximately 27% of our
consolidated revenue in fiscal 2007, 24% of our revenue in fiscal 2006 and
17%
of our revenue in fiscal 2005. Sales to customers in Asiarepresent
the majority of our
international sales. We believe that international sales will continue to
account for a significant percentage of our revenue and we are seeking
international expansion opportunities. Because of this, the following
international commercial risks may materially adversely affect our
revenue:
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political
and economic instability
or changes in U.S. Government policy with respect to these foreign
countries may inhibit export of our devices and limit potential customers’
access to U.S. dollars in a country or region in which those potential
customers are located;
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we
may experience difficulties in
the timeliness of collection of foreign accounts receivable and be
forced
to write off these
receivables;
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tariffs
and other barriers may
make our devices less cost
competitive;
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the
laws of certain foreign
countries may not adequately protect our trade secrets and intellectual
property or may be burdensome to comply
with;
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potentially
adverse tax
consequences to our customers may damage our cost
competitiveness;
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currency
fluctuations may make our
products less cost competitive, affecting overseas demand for our
products; and
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language
and other cultural
barriers may require us to expend additional resources competing
in
foreign markets or hinder our ability to effectively
compete.
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In
addition, certain foreign laws and
regulations place restrictions on the concentration of certain hazardous
materials, including, but not limited to, lead, mercury and cadmium, in our
products. Failure to comply with such laws and regulations could subject us
to
future liabilities or result in the limitation or suspension of the sale or
production of our products. These regulations include the European Union's
(“EU”) Restrictions on Hazardous Substances, Directive on Waste Electrical and
Electronic Equipment and the directive on End of Life for Vehicles. Failure
to
comply with environmental and health and safety laws and regulations may limit
our ability to export products to the EU and could materially adversely affect
our business, financial condition and results of operations.
We
will lose sales if we are unable to
obtain government authorization to export our products.
Exports
of our products are subject to
export controls imposed by the U.S. Government and administered by the U.S.
Departments of State and Commerce. In certain instances, these regulations
may
require pre-shipment authorization from the administering
department. For products subject to the Export Administration
Regulations (“EAR”)
administered by the Department of
Commerce’s Bureau of Industry and Security, the requirement for a license is
dependent on the type and end use of the product, the final destination and
the
identity of the end user. Virtually all exports of products subject
to the International Traffic in Arms Regulations (“ITAR”) regulations
administered by the Department of State’s Directorate of Defense Trade Controls
require a license. Most of our fiber optics products and our
terrestrial solar power products are subject to EAR;
however, certain fiber optics products
andall of our commercially
available solar cell satellite power products are currently subject
to
ITAR.
Given
the current global political
climate, obtaining export licenses can be difficult and
time-consuming. Failure to obtain export licenses for product
shipments could significantly reduce our revenue and could materially adversely
affect our business, financial condition and results of operations.
Compliance with U.S. Government regulations may also subject us to
additional fees and costs. The absence of comparable restrictions on competitors
in those countries may adversely affect our competitive position.
Our
operating results could be harmed if
we lose access to sole or limited sources of materials, components or
services.
We
currently obtain some materials,
components and services used in our products from limited or single
sources. We generally do not carry significant inventories of any raw
materials. Because we often do not account for a significant part of our
suppliers' businesses, we may not have access to sufficient capacity from these
suppliers in periods of high demand. For example, in the past, we experienced
difficulties filling orders in our fiber-to-the-premises business due to limited
available capacity of one of our contract manufacturers. In addition, since
we
generally do not have guaranteed supply arrangements with our suppliers, we
risk
serious disruption to our operations if an important supplier terminates product
lines, changes business focus, or goes out of business. Because some of these
suppliers are located overseas, we may be faced with higher costs of purchasing
these materials if the U.S. dollar weakens against other currencies. If we
were
to change any of our limited or sole source suppliers, we would be required
to
re-qualify each new supplier. Re-qualification could prevent or delay product
shipments that could materially adversely affect our results of operations.
In
addition, our reliance on these suppliers may materially adversely affect our
production if the components vary in quality or quantity. If we are unable
to
obtain timely deliveries of sufficient components of acceptable quality or
if
the prices of components for which we do not have alternative sources increase,
our business, financial condition and results of operations could be materially
adversely affected.
A
failure to attract and retain
technical and other key personnel could reduce our revenue and our operational
effectiveness.
Our
future success depends, in part, on
our ability to attract and retain certain key personnel, including scientific,
operational, financial, and managerial personnel. The competition for attracting
and retaining these employees (especially scientists, technical and financial
personnel) is intense. Because of this competition for skilled employees, we
may
be unable to retain our existing personnel or attract additional qualified
employees in the future. If we are unable to retain our skilled employees and
attract additional qualified employees to the extent necessary to keep up with
our business demands and changes, our business, financial condition and results
of operations may be materially adversely affected.
The
Company's operating results could be
adversely affected by the departure of senior management or key
personnel.
The
loss of senior management and key
personnel - either as a group or on an individual basis - could have a
materially adverse affect on the Company's business and financial
performance. Due to the recent departure of several senior management
members (including the Chief Operating Officer, Chief Financial Officer, Chief
Technology Officer, General Counsel and the head of one of our operating
divisions), the Company is implementing procedures to make it less
dependent on key individuals so that it is less likely that the loss of any
single individual will impact its business.
Failure
to comply with environmental and
safety regulations, resulting in improper handling of hazardous raw materials
used in our manufacturing processes, could result in costly remediation fees,
penalties or damages.
We
are subject to laws and regulations
and must obtain certain permits and licenses relating to the use of hazardous
materials. Our production activities involve the use of certain hazardous raw
materials, including, but not limited to, ammonia, gallium, phosphine and
arsine. If our control systems are unsuccessful in preventing a release of
these
materials into the environment or other adverse environmental conditions or
human exposures occur, we could experience interruptions in our operations
and
incur substantial remediation and other costs or
liabilities.
Our
stock price could be adversely
affected by the issuance of preferred stock.
Our
Board of Directors is authorized to
issue up to 5,882,352 shares of preferred stock with such dividend rates,
liquidation preferences, voting rights, redemption and conversion terms and
privileges as our Board of Directors, in its sole discretion, may determine.
The
issuance of shares of preferred stock may result in a decrease in the value
or
market price of our common stock. Additionally, our Board of
Directors could use the preferred stock to delay or discourage hostile bids
for
control of us in which shareholders may receive premiums for their common stock
or to make the possible sale of EMCORE or the removal of our management more
difficult. The issuance of shares of preferred stock could adversely affect
the
voting and other rights of the holders of common stock and may depress the
price
of our common stock.
We
do not intend to pay cash dividends
on our common stock in the foreseeable future, and therefore only appreciation
of the price of our common stock will provide a return to our
shareholders.
We
currently anticipate that we will
retain all future earnings, if any, to finance the growth and development of
our
business. We do not intend to pay cash dividends in the foreseeable future.
As a
result, only appreciation of the price of our common stock, which may not occur,
will provide a return to our shareholders.
Changes
in accounting rules could affect the Company’s future operating
results.
Financial
statements are prepared in accordance with U.S. generally accepted accounting
principles (GAAP). These principles are subject to interpretation by various
governing bodies, including the Financial Accounting Standards Board (FASB)
and
the SEC, who create and interpret appropriate accounting standards. A change
in
accounting standards could have a significant effect on the Company’s results of
operations. For example, in December 2004, the FASB issued new
guidance that addressed the accounting for share-based payments, Statement
of
Financial Accounting Standards No. 123(R), “Share-Based Payment (revised 2004)”
(“SFAS 123(R)”), which the Company adopted on October 1, 2005. In
fiscal 2006 and 2007, stock-based compensation expense reduced diluted earnings
per common share by approximately $0.09 and $0.12 per share, respectively.
Although the adoption of SFAS 123(R) is expected to continue to have a
significant impact on the Company’s results of operations, future changes to
various assumptions used to determine the fair value of equity awards issued
or
the amount and type of equity awards granted, create uncertainty as to the
amount of future stock-based compensation expense.
We
are subject to risks associated with the availability and coverage of
insurance.
For
certain risks, the Company does not maintain insurance coverage because of
cost
and/or availability. Because the Company retains some portion of its insurable
risks, and in some cases self-insures completely, unforeseen or catastrophic
losses in excess of insured limits may have a material adverse effect on the
Company’s results of operations and financial position.
We
are increasing operations in China, which exposes us to risks inherent in doing
business in China.
In
May 2007, EMCORE Hong Kong, a wholly
owned subsidiary of EMCORE Corporation, announced the opening of a new
manufacturing facility in Langfang,
China.
Our new company, Langfang EMCORE
Optoelectronics Co. Ltd., is located approximately 30 miles southeast of
Beijingand
currently occupies a space of 22,000
square feet with a Class-10,000 clean room for optoelectronic device
packaging. Another 60,000 square feet is available for future
expansion. We have begun the transfer of our most cost sensitive
optoelectronic devices to this facility. This facility, along with a
strategic alignment with our existing contract-manufacturing partners, should
enable us to improve our cost structure and gross margins across product lines.
We expect to develop and provide improved service to our global customers by
having a local presence in Asia. As
we continue
to consolidate our manufacturing operations, we will incur additional costs
to
transfer product lines to our China facility, including costs of qualification
testing with our customers, which could have a material adverse impact on our
operating results and financial condition.
Our
China-based activities are subject to greater political, legal and economic
risks than those faced by our other operations. In particular, the
political, legal and economic climate in China (both at national and regional
levels) is extremely fluid and unpredictable. Our ability to operate in China
may be adversely affected by changes in Chinese laws and regulations, such
as
those relating to taxation, import and export tariffs, environmental
regulations, land use rights, intellectual property and other matters, which
laws and regulations remain highly underdeveloped and subject to change, with
little or no prior notice, for political or other reasons. Moreover, the
enforceability of applicable existing Chinese laws and regulations is
uncertain. In addition, we may not obtain the requisite legal permits
to continue to operate in China and costs or operational limitations may be
imposed in connection with obtaining and complying with such permits. Our
business could be materially harmed by any changes in the political, legal
or
economic climate in China or the inability to enforce applicable Chinese laws
and regulations.
As
a
result of a government order to ration power for industrial use, operations
in
our China facility may be subject to possible interruptions or shutdowns,
adversely affecting our ability to complete manufacturing commitments on a
timely basis. If we are required to make significant investments in generating
capacity to sustain uninterrupted operations at our facility, we may not realize
the reductions in costs anticipated from our expansion in China. In addition,
future outbreaks of avian influenza, or other communicable diseases, could
result in quarantines or closures of our facility, thereby disrupting our
operations and expansion in China.
We
intend
to export the majority of the products manufactured at our facilities in China.
Accordingly, upon application to and approval by the relevant governmental
authorities, we will not be subject to certain Chinese taxes and are exempt
from
customs duty assessment on imported components or materials when the finished
products are exported from China. We are, however, required to pay income taxes
in China, subject to certain tax relief. As the Chinese trade regulations are
in
a state of flux, we may become subject to other forms of taxation and duty
assessments in China or may be required to pay for export license fees in the
future. In the event that we become subject to any increased taxes or new forms
of taxation imposed by authorities in China, our results of operations could
be
materially and adversely affected.
Our
business and operations would be adversely impacted in the event of a failure
of
our information technology infrastructure.
We
rely
upon the capacity, reliability and security of our information technology
hardware and software infrastructure and our ability to expand and update this
infrastructure in response to our changing needs. We are constantly updating
our
information technology infrastructure. Any failure to manage, expand and update
our information technology infrastructure or any failure in the operation of
this infrastructure could harm our business.
Despite
our implementation of security measures, our systems are vulnerable to damages
from computer viruses, natural disasters, unauthorized access and other similar
disruptions. Any system failure, accident or security breach could result in
disruptions to our operations. To the extent that any disruptions or security
breach results in a loss or damage to our data, or inappropriate disclosure
of
confidential information, it could harm our business. In addition, we may be
required to incur significant costs to protect against damage caused by these
disruptions or security breaches in the future.
If
we fail to remediate weaknesses in our current system of internal controls
to an
effective level, we may not be able to accurately report our financial results
or prevent fraud. As a result, our business could be harmed and current and
potential investors could lose confidence in our financial reporting, which
could have a negative effect on the trading price of our debt and equity
securities.
The
Company is subject to the ongoing internal control provisions of Section 404
of
the Sarbanes-Oxley Act of 2002. These provisions provide for the identification
of material weaknesses in internal control over financial reporting, which
is a
process to provide reasonable assurance regarding the reliability of financial
reporting for external purposes in accordance with U.S. GAAP. If we
cannot provide reliable financial reports or prevent fraud, our brand, operating
results and the market value of our debt and equity securities could be harmed.
We have in the past discovered, and may in the future discover, areas of our
internal controls that need improvement.
We
have
devoted significant resources to remediate and improve our internal controls.
We
have also been monitoring the effectiveness of these remediated measures. We
cannot be certain that these measures will ensure adequate controls over our
financial processes and reporting in the future. We intend to continue
implementing and monitoring changes to our processes to improve internal
controls over financial reporting. Any failure to implement required new or
improved controls, or difficulties encountered in their implementation, could
harm our operating results or cause us to fail to meet our reporting
obligations.
Inadequate
internal controls could also cause investors to lose confidence in our reported
financial information, which could have a negative effect on the trading price
of our debt and equity securities. Further, the impact of these events could
also make it more difficult for us to attract and retain qualified persons
to
serve on our Board of Directors or as executive officers, which could harm
our
business. The additions of our manufacturing facility in China and acquisitions
increase the burden on our systems and infrastructure, and impose additional
risk to the ongoing effectiveness of our internal controls, disclosure controls,
and procedures. Consequently, we expect to expend significant
resources and effort in this regard, but are not certain that our efforts will
be successful.
Our
cost
reduction programs may be insufficient to achieve long-term
profitability.
We
are
undertaking cost reduction measures intended to reduce our expense structure
at
both the cost of goods sold and the operating expense levels. We believe these
measures are a necessary response to, among other things, declining average
sales prices across our product lines. These measures may be unsuccessful in
creating profit margins sufficient to sustain our current operating structure
and business.
Shifts
in industry-wide demands and
inventories could result in significant inventory
write-downs.
The
life cycles of some of our products
depend heavily upon the life cycles of the end products into which our products
are designed. Products with short life cycles require us to manage production
and inventory levels closely. We evaluate our ending inventories on a quarterly
basis for excess quantities, impairment of value and obsolescence. This
evaluation includes analysis of sales levels by product and projections of
future demand based upon input received from our customers, sales team and
management estimates. If inventories on hand are in excess of demand, or if
they
are greater than 12-months old, appropriate reserves are provided. In addition,
we write off inventories that are considered obsolete based upon changes in
customer demand, manufacturing process changes that result in existing inventory
obsolescence or new product introductions, which eliminate demand for existing
products. Remaining inventory balances are adjusted to approximate the lower
of
our manufacturing cost or market value.
If
future demand or market conditions
are less favorable than our estimates, inventory write-downs may be required.
We
cannot assure investors that obsolete or excess inventories, which may result
from unanticipated changes in the estimated total demand for our products and/or
the estimated life cycles of the end products into which our products are
designed, will not affect us beyond the inventory charges that we have already
taken.
Our
management's stock ownership gives
them the power to control business affairs and prevent a takeover that could
be
beneficial to unaffiliated shareholders.
Certain
members of our management and
the Board of Directors, specifically Thomas J. Russell, Chairman of our Board,
Reuben F. Richards, Jr., President, Chief Executive Officer and a director,
and
Robert Louis-Dreyfus, a former director, are former members of Jesup &
Lamont Merchant Partners, L.L.C. They collectively beneficially own
approximately 18% of our common stock. Accordingly, such persons will continue
to hold sufficient voting power to control our business and affairs for the
foreseeable future. This concentration of ownership may also have the effect
of
delaying, deferring or preventing a change in control of our company, which
could have a material adverse effect on our stock price.
Certain
provisions of New Jerseylaw
and our charter may make a takeover
of EMCORE difficult even if such takeover could be beneficial to some of our
shareholders.
New
Jerseylaw and our certificate
of
incorporation, as amended, contain certain provisions that could delay or
prevent a takeover attempt that our shareholders may consider in their best
interests. Our Board of Directors is divided into three classes. Directors
are
elected to serve staggered three-year terms and are not subject to removal
except for cause by the vote of the holders of at least 80% of our capital
stock. In addition, approval by the holders of 80% of our voting stock is
required for certain business combinations unless these transactions meet
certain fair price criteria and procedural requirements or are approved by
two-thirds of our continuing directors. We may in the future adopt other
measures that may have the effect of delaying or discouraging an unsolicited
takeover, even if the takeover were at a premium price or favored by a majority
of unaffiliated shareholders. Certain of these measures may be adopted without
any further vote or action by our shareholders and this could depress the price
of our common stock.
The
discovery that we had incorrectly priced stock options and had not accounted
for
them correctly has had, and may continue to have, a material adverse effect
on
our financial results.
We
cannot
predict the outcome of our non-public SEC investigation, and we may face
additional actions, shareholder lawsuits, governmental investigations and
actions on other legal proceedings related to our historical stock option
practices and the remedial actions we have taken. All of these events have
required us, and will continue to require us, to expend significant management
time and incur significant accounting, legal, consulting and other expenses.
This could require significant additional attention and resources from the
operation of our business and adversely affect our financial condition and
results of operations.
We
have been named as a party to shareholder derivative lawsuits relating to our
historical stock option practices, and we may be named in additional
securities-related lawsuits in the future. Additional lawsuits could become
time
consuming and expensive and could result in the payment of significant judgments
and settlements, which could have a material adverse effect on our financial
condition, results of operations and cash flows.
In
connection with our historical stock option practices, three derivative actions
were filed against certain of our current and former directors and officers
purporting to assert claims on the Company’s behalf. Although we have reached a
settlement in principle with the plaintiffs in these lawsuits (see Item 3,
Legal
Proceedings), there may be additional derivative or class action lawsuits filed
in the future. Additional lawsuits could become time consuming and expensive,
and if they result in unfavorable outcomes, there could be a material adverse
effect on our business, financial condition, results of operations and cash
flows. We may be required to pay substantial damages or settlement costs in
excess of our insurance coverage related to these matters, which would have
a
further material adverse effect on our financial condition or results of
operations.
In
addition, subject to certain limitations, we are obligated to indemnify our
current and former directors, officers and employees in connection with the
investigation of our historical stock option granting practices and the related
shareholder litigation and government investigation. We currently hold insurance
policies for the benefit of our directors and officers, although our insurance
coverage may not be sufficient in some or all of these matters. Furthermore,
the
insurers may seek to deny or limit coverage in some or all of these matters,
in
which case we may have to self-fund all or a substantial portion of our
indemnification obligations.
We
are subject to the risk of employee lawsuits in connection with our historical
stock option granting practices, the resulting restatements, and the remedial
measures we have taken.
In
addition to the possibilities that there may be additional governmental
investigations or actions and shareholder lawsuits against us, we may be
involved with future litigation by former officers and employees in connection
with their stock options, employment terminations and other matters. These
lawsuits may be time consuming and expensive, and could cause further
distraction from the operation of our business. The adverse resolution of any
specific lawsuit could have a material adverse effect on our business, financial
condition and results of operations.
It
may be difficult or costly to obtain director and officer insurance coverage
as
a result of our historical stock option granting practices.
We
expect
that the issues arising from our misdated stock options may make it more
difficult to obtain director and officer insurance coverage in the
future. If we are able to obtain this coverage, it could be
significantly more expensive than in the past, which would have an adverse
effect on our financial results and cash flow. As a result of this and related
factors, our directors and officers could face increased risks of personal
liability in connection with the performance of their duties. As a result,
we
may have difficultly attracting and retaining qualified directors and officers,
which could adversely affect our business.
We
may not be able to obtain additional
capital in the future, and failure to do so may harm our
business
We
believe that our current liquidity
should be sufficient to meet our cash needs for working capital through
the next twelve months. 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. On December 17, 2007, EMCORE entered into an asset
purchase agreement with Intel Corporation to purchase certain assets of Intel's
Optical Platform Division for a purchase price of $85 million. The
purchase price will be paid $75 million in cash and $10 million in cash or
EMCORE common stock, at EMCORE's option. EMCORE has plans to improve
its liquidity position through
additional equity financing, as
well as potential asset sales. Due to the unpredictable nature of the
capital markets, particularly in the technology
sector, we cannot assure you that we
will be able to raise additional capital if and when it is required, especially
if we experience disappointing operating results. If adequate funds
are not available or not available on acceptable terms, our 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.
Unresolved
Staff
Comments
|
Not
Applicable.
Properties
|
The
following chart contains certain
information regarding each of our principal facilities.
Location
|
Function
|
Approximate
Square
Footage
|
Term
(in fiscal
year)
|
Active
Properties:
|
|
||
Albuquerque,
New
Mexico
|
Corporate
Headquarters
|
Facilities
are owned by
in
|
|
Manufacturing
facility for
photovoltaic products
|
165,000
|
EMCORE;
certain land
is
|
|
Manufacturing
facility for digital
fiber optic products
|
leased. Land
lease
expires
|
||
R&D
facility
|
2050
|
||
|
|
||
Alhambra,
California
|
Manufacturing
facility for CATV, FTTP and Satcom products
|
91,000
|
Lease
expires in 2011 (1)
|
R&D
facility
|
|
||
|
|||
Langfang,
China
|
Manufacturing
facility for fiber optics products
|
22,000
|
Lease
expires in
2012
|
|
|
||
Ivyland,
Pennsylvania
|
Manufacturing
facility for CATV
and Satcom products
|
9,000
|
Lease
expires in 2011(1)
|
R&D
facility
|
|
||
|
|
||
San
Diego, California
|
Manufacturing
facility for
video transport
products
|
8,100
|
Lease
expires in 2008 (2)
|
R&D
facility (April 2007 -
Acquisition of Opticomm Corporation)
|
|
||
|
|
||
Sunnyvale,
California
|
Manufacturing
facility for
ECLlasers
|
Lease
expires in 2008 (1),
(2)
|
|
R&D
facility
|
15,000
|
|
|
Facility
expected to be vacated in
2008
|
|
||
|
|
||
Vacated
Properties:
|
|
|
|
Naperville,
Illinois
|
Manufacturing
facility for LX4
modules
|
Lease
expires in 2013 and
it
|
|
R&D
facility
|
11,000
|
is
in the process of
being
|
|
Facility
was vacated in October 2007
|
terminated
|
||
|
|
||
City
of Industry, California
|
Facility
was vacated in December
2006
|
72,000
|
Lease
terminated
|
|
|
||
Somerset,
New
Jersey
|
Former
Corporate
Headquarters
|
19,000
|
Lease
terminated
|
Facility
vacated in September
2007
|
|
||
|
|
||
Blacksburg,
Virginia
|
Manufacturing
facility for
video transport
products
|
Lease
expires in 2009 and
it
|
|
R&D
facility.
|
6,000
|
is
in the process of
being
|
|
Facility
was vacated in June
2007
|
terminated
|
||
|
|
||
Santa
Clara, California
|
Manufacturing
facility for digital
fiber optics products
|
|
|
R&D
facility
|
4,000
|
Lease
terminated
|
|
Facility
was vacated in September
2007
|
|
Notes:
|
(1)
|
This
lease has the option to be
renewed by EMCORE, subject to inflation
adjustments.
|
|
(2)
|
EMCORE
subleases approximately
one-third of this facility to third
parties.
|
Legal
Proceedings
|
The
Company is subject to various legal proceedings and claims that are discussed
below. The Company is also subject to certain other legal proceedings and claims
that have arisen in the ordinary course of business and which have not been
fully adjudicated. The Company does not believe it has a potential
liability related to current legal proceedings and claims that could
individually or in the aggregate have a material adverse effect on its financial
condition, liquidity or results of operations. However, the results of legal
proceedings cannot be predicted with certainty. Should the Company fail to
prevail in any legal matters or should several legal matters be resolved against
the Company in the same reporting period, the operating results of a particular
reporting period could be materially adversely affected. The Company settled
certain matters during 2007 that did not individually or in the aggregate have
a
material impact on the Company’s results of operations.
SEC
Investigation
The
Company informed the staff of the SEC of the Special Committee’s investigation
of the Company’s historical stock option granting practices on November 6,
2006. After the Company’s initial contact with the SEC, the SEC
opened a non-public investigation concerning the Company’s option granting
practices since the Company’s initial public offering. The Company
has cooperated fully with the SEC’s investigation. Although we cannot
predict the outcome of this matter, we do not expect that such matter will
have
a material adverse effect on our consolidated financial position or results
of
operations.
Shareholder
Derivative Litigation Relating to Historical Stock Option Practices
On
February 1, 2007, Plaintiff Lewis Edelstein filed a purported stockholder
derivative action (the “Federal Court Action”) on behalf of the Company against
certain of its present and former directors and officers (the “Individual
Defendants”), as well as the Company as nominal defendant, in the U.S. District
Court for the District of New Jersey, Edelstein v. Brodie,
et.
al., Case No. 3:07-cv-00596-FLW-JJH (D.N.J.). On May 22,
2007, Plaintiffs Kathryn Gabaldon and Michael Sackrison each filed a purported
stockholder derivative action against the Individual Defendants, and the Company
as nominal defendant, in the Superior Court of New Jersey, Somerset County,
Gabaldon v. Brodie,
et. al., Case No. 3:07-cv-03185-FLW-JJH (D.N.J.) and Sackrison
v. Brodie, et.
al., Case No. 3:07-cv-00596-FLW-JJH (D.N.J.) (collectively, the “State
Court Actions”).
Both
the
Federal Court Action and the State Court Actions alleged, using essentially
identical contentions that the Individual Defendants engaged in improprieties
and violations of law in connection with the Company’s historical issuances of
stock options. Each of the actions seeks the same relief on behalf of
the Company, including, among other things, damages, equitable relief, corporate
governance reforms, an accounting, rescission, restitution and costs and
disbursements of the lawsuit. On July 10, 2007, the State Court
Actions were removed to the U.S. District Court for the District of New
Jersey.
On
September 26, 2007, the plaintiff in the Federal Court Action signed an
agreement in principle with the Individual Defendants and the Company to settle
that litigation in accordance with the Memorandum of Understanding (the “MOU”)
filed as Exhibit 10.10 to the Annual Report on Form 10-K for the year ended
September 30, 2006. That same day, the plaintiffs in the State Court
Actions advised the Federal Court that the settlement embodied in the MOU would
also constitute the settlement of the State Court Actions.
The
MOU
provides that the Company will adhere to certain policies and procedures
relating to the issuance of stock options, stock trading by directors, officers
and employees, the composition of its Board of Directors, and the functioning
of
the Board’s Audit and Compensation Committees. The MOU also provides
for the payment of $700,000 relating to plaintiff’s attorneys’ fees, costs and
expenses, which the Company’s insurance carrier has committed to pay on behalf
of the Company. To be fully implemented, the MOU will be embodied in
a more detailed stipulation of settlement and will be expressly conditioned
on
Court approval following a period for comment by potentially affected
parties.
We
have
recorded $700,000 as a liability for the stipulated settlement as of September
30, 2007 since events that led to the litigation existed as of that
date. Although we anticipate that our insurance carrier will cover
the stipulated settlement, we have not recorded any receivable, or gain
contingency, since the settlement is still contingent upon certain future
events. See Note 21, Subsequent Events, of the Notes to Consolidated
Financial Statements for further details.
Indemnification
Obligations
Subject
to certain limitations, we are obligated to indemnify our current and former
directors, officers and employees in connection with the investigation of our
historical stock option granting practices, related government investigation
and
shareholder litigation. These obligations arise under the terms of our
certificate of incorporation, our bylaws, applicable contracts, and New Jersey
law. The obligation to indemnify generally means that we are required to pay
or
reimburse the individuals’ reasonable legal expenses and possibly damages and
other liabilities incurred in connection with these matters. We are currently
paying or reimbursing legal expenses being incurred in connection with these
matters by a number of our current and former directors, officers and employees.
The maximum potential amount
of
future payments the Company could be required to make under these
indemnification agreements is unlimited; however, the Company has a director
and
officer liability insurance policies that limits its exposure and enables it
to
recover a portion of any future amounts paid.
Intellectual
Property Lawsuits
We
protect our proprietary technology by
applying for patents where appropriate and in other cases by preserving the
technology, related know-how and information as trade secrets. The success
and
competitive position of our product lines is significantly impacted by our
ability to obtain intellectual property protection for our R&D
efforts.
We
have,
from time to time, exchanged correspondence with third parties regarding the
assertion of patent or other intellectual property rights in connection with
certain of our products and processes. Additionally, on September 11, 2006,
we
filed a lawsuit against Optium Corporation (Optium) in the U.S. District Court
for the Western District of Pennsylvania for patent infringement. In the suit,
EMCORE and JDS Uniphase Corporation (JDSU) allege that Optium is infringing
on
U.S. patents 6,282,003 and 6,490,071 with its Prisma II 1550nm transmitters.
On
March 14, 2007, following denial of a motion to add additional claims to its
existing lawsuit, EMCORE and JDSU filed a second patent suit in the same court
against Optium alleging infringement of JDSU's patent 6,519,374 ("the '374
patent"). On March 15, 2007, Optium filed a declaratory judgment
action against EMCORE and JDSU. Optium seeks in this litigation a declaration
that certain products of Optium do not infringe the '374 patent and that the
patent is invalid. The '374 patent is assigned to JDSU and licensed to
EMCORE.
On
December 20, 2007, the Company was served with a complaint in another
declaratory relief action which Optium had filed in the Federal District Court
for the Western District of Pennsylvania. This action seeks to have
U.S. patents 6,282,003 and 6,490,071 declared invalid or unenforceable because
of certain conduct alleged to have occurred in connection with the grant of
these patents. These allegations are substantially the same as those
brought by Optium by motion in the Company’s own case against Optium, which
motion had been denied by the Court. The Company believes the
allegations contained in this complaint are without merit and intends to contest
them.
Submission
of Matters to a Vote of
Security Holders
|
No
matters were submitted to a vote of
security holders during the fourth quarter ended September 30, 2007.
PART
II
Market
for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
|
The
Company’s common stock is traded on the NASDAQ Global Market and is quoted under
the symbol "EMKR". The reported closing sale price of our common stock on
December 26, 2007 was $14.98 per share. As of December 26, 2007, we had
approximately 205 shareholders of record. Many of our shares of
common stock are held by brokers and other institutions on behalf of
shareholders, and we are unable to estimate the number of these
shareholders.
Price
Range of Common Stock
The
price
range per share of common stock presented below represents the highest and
lowest sales prices for the Company’s common stock on the NASDAQ Global Market
during each quarter of the two most recent fiscal years.
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|
Fiscal
2007 price range per share of common stock
|
$4.60
–
$6.47
|
$3.84
– $ 5.89
|
$4.32
– $ 5.78
|
$5.45
– $ 9.91
|
Fiscal
2006 price range per share of common stock
|
$4.97
–
$7.83
|
$6.93
– $10.67
|
$7.65
– $12.65
|
$5.56
– $10.11
|
Dividend
Policy
We
have
never declared or paid dividends on our common stock since the Company's
formation. We currently do not intend to pay dividends on our common stock
in
the foreseeable future, so that we may reinvest any earnings in our business.
The payment of dividends, if any, in the future is at the discretion of the
Board of Directors.
Performance
Graph
The
following stock performance graph does not constitute soliciting material,
and
should not be deemed filed or incorporated by reference into any other Company
filing under the Securities Act of 1933 or the Securities Exchange Act of 1934,
except to the extent the Company specifically incorporates this stock
performance graph by reference therein.
The
following graph and table compares the cumulative total shareholders’ return on
the Company’s common stock for the five-year period from September 30, 2002
through September 30, 2007 with the cumulative total return on the NASDAQ Stock
Market Index, the NASDAQ Electronic Components Stocks Index (SIC Code 3674)
and
the NASDAQ Computer Stocks Index. The comparison assumes $100 was
invested on September 30, 2002 in the Company’s common stock. The
Company did not declare, nor did it pay, any dividends during the comparison
period.
|
2002
|
2003
|
2004
|
2005
|
2006
|
2007
|
EMCORE
Corporation
|
100.00
|
193.42
|
129.61
|
402.63
|
389.47
|
631.58
|
NASDAQ
Composite
|
100.00
|
152.34
|
164.43
|
187.61
|
199.51
|
240.48
|
NASDAQ
Electronic Components
|
100.00
|
193.88
|
156.49
|
186.07
|
175.35
|
210.04
|
NASDAQ
Computer
|
100.00
|
158.14
|
156.01
|
180.45
|
191.05
|
235.29
|
Equity
Compensation Plan Information
The
description of equity compensation plans required by Regulation S-K, Item 201(d)
is incorporated herein by reference to Part III, Item 12 – Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters.
Selected
Financial Data
|
The
following selected consolidated financial data of EMCORE's five most recent
fiscal years ended September 30, 2007 is qualified by reference to, and should
be read in conjunction with, Management’s Discussion and Analysis of Financial
Condition and Results of Operations under Item 7 and Financial Statements and
Supplementary Data under Item 8. The information set forth below is not
necessarily indicative of results for future operations. Significant
transactions that affect the comparability of EMCORE’s operating results and
financial condition include:
Financial
Highlights:
Fiscal
2007:
|
·
|
In
November 2006, EMCORE invested $13.5 million in WorldWater & Solar
Technologies Corporation in return for convertible preferred stock
and
warrants.
|
|
·
|
In
April 2007, EMCORE modified its convertible subordinated notes to
resolve
an alleged default event. The interest rate was increased from 5%
to 5.5%
and the conversion price was decreased from $8.06 to $7.01. EMCORE
also
repurchased $11.4 million of outstanding notes to reduce interest
expense
and share dilution.
|
|
·
|
In
April 2007, EMCORE acquired privately-held Opticomm Corporation for
$4.1
million in cash.
|
|
·
|
Fiscal
2007 operating expenses included:
|
|
§
|
$10.6
million related to our review of historical stock option granting
practices;
|
|
§
|
$9.4
million related to our new terrestrial solar power division;
|
|
§
|
$6.1
million related to non-recurring legal expenses;
and,
|
§
|
$2.8
million related to severance charges associated with facility closures
and
consolidation of operations.
|
Fiscal
2006:
|
·
|
In
November 2005, EMCORE exchanged $14.4 million of convertible subordinated
notes due in May 2006 for $16.6 million of newly issued convertible
senior
subordinated notes due May 15, 2011. As a result of this transaction,
EMCORE recognized approximately $1.1 million in the first quarter
of
fiscal 2006 related to the early extinguishment of debt.
|
|
·
|
EMCORE
received manufacturing equipment valued at $2.0 million less tax
of $0.1
million as a final earn-out payment from Veeco in connection with
the sale
of the TurboDisc division.
|
|
·
|
In
August 2006, EMCORE sold its Electronic Materials
&
Device (EMD)
division to IQE plc (IQE) for $16.0 million. The net gain associated
with
the sale of the EMD business totaled approximately $7.6 million,
net of
tax of $0.5 million. The results of operations of the EMD
division have been reclassified to discontinued operations for all
periods
presented.
|
|
·
|
In
August 2006, EMCORE sold its 49% membership interest in GELcore,
LLC for
$100.0 million to General Electric Corporation, which prior to the
transaction owned the remaining 51% membership interest in GELcore.
EMCORE
recorded a net gain of $88.0 million, before tax, on the sale of
GELcore,
after netting EMCORE’s investment in this joint venture of $10.8 million
and transaction expenses of $1.2 million.
|
|
·
|
EMCORE
recorded approximately $2.2 million of impairment charges on goodwill
and
intellectual property associated with the June 2004 acquisition of
Corona
Optical Systems.
|
|
·
|
Fiscal
2006 operating expense included $1.3 million related to our review
of
historical stock option granting practices and $1.3 million related
to our
new terrestrial solar power division.
|
|
·
|
Other
expense included a charge of $0.5 million associated with the write-down
of the Archcom investment.
|
|
·
|
EMCORE
recognized a provision for income taxes of $1.9 million from continuing
operations for the year ended September 30, 2006.
|
Fiscal
2005:
|
·
|
SG&A
expense included approximately $0.9 million in severance-related
charges
and $2.3 million of charges associated with the consolidation of
EMCORE’s
City of Industry, California location to Albuquerque, New Mexico.
|
|
·
|
EMCORE
received a $12.5 million net earn-out payment from Veeco in connection
with the 2003 sale of the TurboDisc division.
|
Fiscal
2004:
|
·
|
In
November 2003, EMCORE sold its TurboDisc division to a subsidiary
of Veeco
Instruments, Inc. (Veeco). The results of operations of TurboDisc
have
been reclassified to discontinued operations for all periods presented.
The net gain associated with the sale of the TurboDisc business totaled
approximately $19.6 million.
|
|
·
|
In
February 2004, EMCORE exchanged approximately $146.0 million, or
90.2%, of
the convertible subordinated notes due in May 2006 for approximately
$80.3
million of new convertible subordinated notes due May 15, 2011 and
approximately 7.7 million shares of EMCORE common stock. The total
net
gain from debt extinguishment was $12.3 million.
|
|
·
|
SG&A
expense included approximately $1.2 million in severance-related
charges.
|
|
·
|
Other
expense included a charge of $0.5 million associated with the write-down
of the Archcom investment.
|
Fiscal
2003:
|
·
|
In
December 2002, EMCORE purchased $13.2 million of convertible subordinated
notes due in May 2006 at prevailing market prices for approximately
$6.3
million. Total gain from debt extinguishment was $6.6 million after
netting unamortized debt issuance costs of approximately $0.3 million.
|
·
|
In
January 2003, EMCORE purchased Ortel for $26.2 million in
cash.
|
Selected
Financial
Data
Statements
of Operations Data
For
the fiscal years ended September 30
(in
thousands, except per share data)
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
Product
revenue
|
$ | 148,334 | $ | 132,304 | $ | 106,556 | $ | 77,782 | $ | 48,396 | ||||||||||
Service
revenue
|
21,272 | 11,229 | 8,801 | 4,103 | 2,456 | |||||||||||||||
Total
revenue
|
169,606 | 143,533 | 115,367 | 81,885 | 50,852 | |||||||||||||||
Gross
profit (loss)
|
30,368 | 25,952 | 19,302 | 4,473 | (3,231 | ) | ||||||||||||||
Operating
loss
|
(57,456 | ) | (34,150 | ) | (20,371 | ) | (35,604 | ) | (38,256 | ) | ||||||||||
(Loss)
income from continuing operations
|
(58,722 | ) | 45,039 | (24,685 | ) | (28,376 | ) | (40,149 | ) | |||||||||||
Income
(loss) from discontinued operations
|
- | 9,884 | 11,200 | 14,422 | (3,389 | ) | ||||||||||||||
Net
(loss) income
|
$ | (58,722 | ) | $ | 54,923 | $ | (13,485 | ) | $ | (13,954 | ) | $ | (43,538 | ) | ||||||
Per
share data:
|
||||||||||||||||||||
(Loss)
income from continuing operations:
|
||||||||||||||||||||
Per
basic share
|
$ | (1.15 | ) | $ | 0.91 | $ | (0.52 | ) | $ | (0.66 | ) | $ | (1.09 | ) | ||||||
Per
diluted share
|
$ | (1.15 | ) | $ | 0.87 | $ | (0.52 | ) | $ | (0.66 | ) | $ | (1.09 | ) |
Balance
Sheet Data
As
of September 30
(in
thousands)
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
Cash,
cash equivalents and marketable securities
|
$ | 41,226 | $ | 123,967 | $ | 40,175 | $ | 51,572 | $ | 28,439 | ||||||||||
Working
capital
|
63,204 | 129,683 | 56,996 | 58,486 | 77,382 | |||||||||||||||
Total
assets
|
234,736 | 287,547 | 206,287 | 213,243 | 232,439 | |||||||||||||||
Long-term
liabilities
|
84,981 | 84,516 | 94,701 | 96,051 | 161,750 | |||||||||||||||
Shareholders’
equity
|
98,157 | 149,399 | 75,563 | 85,809 | 44,772 |
Management’s
Discussion and
Analysis of Financial Condition and Results of Operations
|
Business
Overview
EMCORE
Corporation (the “Company”, “we”,
or “EMCORE”) is a leading provider of compound semiconductor-based
components and subsystems for the broadband, fiber optic, satellite and
terrestrial solar power markets. We have two reporting segments:
Fiber Optics and Photovoltaics. EMCORE's Fiber Optics segment offers
optical components, subsystems and systems that enable the transmission of
video, voice and data over high-capacity fiber optic cables for high-speed
data
and telecommunications, cable television (“CATV”) and fiber-to-the-premises
(“FTTP”) networks. EMCORE's Photovoltaics segment provides solar
products for satellite and terrestrial applications. For satellite applications,
EMCORE offers high-efficiency compound semiconductor-based gallium arsenide
(“GaAs”) solar cells, covered interconnect cells (“CICs”) and fully integrated
solar panels. For terrestrial applications, EMCORE offers
Concentrating Photovoltaic Systems (“CPV”) for utility scale solar applications
as well as offering its high-efficiency GaAs solar cells for use in solar power
concentrator systems. For specific information about our company, our
products or the markets we serve, please visit our website at
http://www.emcore.com. We were established in 1984 as a New Jersey
corporation.
Management
Summary
Our
principal objective is to maximize
shareholder value by leveraging our expertise in advanced compound
semiconductor-based technologies to be a leading provider of high-performance,
cost-effective product solutions in each of the markets we
serve.
We
target market opportunities that we
believe have large potential growth and where the favorable performance
characteristics of our products and high volume production efficiencies may
give
us a competitive advantage over our competitors. We believe that as
compound semiconductor production costs continue to be reduced, existing and
new
customers will be compelled to increase their use of these products because
of
their attractive performance characteristics and superior
value.
With
several strategic acquisitions and
divestures in the past few years, EMCORE has developed a strong business focus
and comprehensive product portfolios in two main sectors: Fiber Optics and
Photovoltaics.
Fiber
Optics
Our
fiber
optics products enable information that is encoded on light signals to be
transmitted, routed (switched) and received in communication
networks. Our fiber
optics products provide our customers with increased capacity to offer more
services, at increased data transmission distance, speed and bandwidth with
lower noise video receive and lower power consumption. Our Fiber Optics segment
primarily
targets the following markets:
|
·
|
Cable
Television (CATV) Networks- We
are a market leader in
providing radio frequency (RF) over fiber products for the CATV
industry. Our products are used in hybrid fiber coaxial (HFC)
networks that enable cable service operators to offer multiple advanced
services to meet the expanding demand for high-speed Internet, on-demand
and interactive video and other advanced services, such as high-definition
television (HDTV)
and voice over IP
(VoIP).
|
|
·
|
Fiber-To-The-Premises
(FTTP) Networks-Telecommunications
companies are
increasingly extending their optical infrastructure to their customers’
location in order to deliver higher bandwidth services. We have developed
and maintained customer qualified FTTP components and subsystem products
to support plans by telephone companies to offer voice, video and
data
services through the deployment of new fiber-based access
networks..
|
|
·
|
Data
Communications Networks- We provide
leading-edge optical
components and transceiver modules for data applications that enable
switch-to-switch, router-to-router and server-to-server backbone
connections at aggregate speeds of 10 gigabits per second (G) and
above.
|
|
·
|
Telecommunications
Networks-
Our leading-edge
optical components and modules enable high-speed (up to an aggregate
40G)
optical interconnections that drive advanced architectures in
next-generation carrier class switching and routing
networks. Our products are used in equipment in the network
core and key metro optical nodes of voice telephony and Internet
infrastructures.
|
|
·
|
Satellite
Communications (Satcom) Networks- We
are a leading provider of
optical components and systems for use in equipment that provides
high-performance optical data links for the terrestrial portion of
satellite communications
networks.
|
|
·
|
Storage
Area
Networks-
Our high performance
optical components are also used in high-end data storage solutions
to
improve the performance of the storage
infrastructure.
|
|
·
|
Video
Transport-
Our video transport
product line offers solutions for broadcasting, transportation, IP
television (IPTV), mobile video and security & surveillance
applications over private and public networks. EMCORE’s video, audio, data
and RF transmission systems serve both analog and digital requirements,
providing cost-effective, flexible solutions geared for network
reconstruction and
expansion.
|
|
·
|
Defense
and
Homeland Security-
Leveraging
our
expertise in RF module design and high-speed parallel optics, we
provide a
suite of ruggedized products that meet the reliability and durability
requirements of the U.S. Government and defense markets. Our
specialty defense products include fiber optic gyro components used
in
precision guided munitions, ruggedized parallel optic transmitters
and
receivers, high-frequency RF fiber optic link components for towed
decoy
systems, optical delay lines for radar systems, EDFAs, terahertz
spectroscopy systems and other
products.
|
|
·
|
Consumer
Products-
We extend our
optical
technology into the consumer market by integrating our VCSELs into
optical
computer mice and ultra short data links. We are in production
with customers on several products and currently qualifying our products
with additional customers. An optical computer mouse with laser
illumination is superior to LED-based illumination in that it reveals
surface structures that a LED light source cannot uncover. VCSELs
enable
computer mice to track with greater accuracy, on more surfaces and
with
greater responsiveness than existing LED-based
solutions.
|
Photovoltaics
We
believe our high-efficiency compound semiconductor-based multi-junction solar
cell products provide our customers with compelling cost and performance
advantages over traditional silicon-based solutions. These include
higher solar cell efficiency allowing for greater conversion of light into
electricity, an increased ability to benefit from use in solar concentrator
systems, ability to withstand high heat environments and reduced overall
footprint. Our
Photovoltaics segment primary targets the following
markets:
|
·
|
Satellite
Solar
Power Generation. We are a leader
in
providing solar power generation solutions to the global communications
satellite industry and U.S. Government space programs. A
satellite’s operational success and corresponding revenue depend on its
available power and its capacity to transmit data. We manufacture advanced
compound
semiconductor-based solar cell and solar panel products, which are
more
resistant to radiation levels in space and generate substantially
more
power from sunlight than silicon-based solutions. Space power
systems using our multi-junction solar cells weigh less per unit
of power
than traditional silicon-based solar cells. These performance
characteristics increase satellite useful life, increase satellites’
transmission capacity and reduce launch costs. Our products
provide our customers
with higher light to power conversion efficiency for reduced size
and
launch costs; higher radiation tolerance; and longer lifetime in
harsh
space environments. We design and manufacture
multi-junction compound semiconductor-based solar cells for both
commercial and military satellite applications. We currently manufacture
and sell one of the most efficient and reliable, radiation resistant
advanced triple-junction solar cells in the world, with an average
"beginning of life" efficiency of 28.5%. In May 2007, EMCORE
announced that it has attained solar conversion efficiency of 31%
for an
entirely new class of advanced multi-junction solar cells optimized
for
space applications. EMCORE is also the only manufacturer to
supply true monolithic bypass diodes for shadow protection, utilizing
several EMCORE patented methods. EMCORE also provides covered interconnect
cells (CICs) and solar panel lay-down services, giving us the capability
to manufacture complete solar panels. We can provide satellite
manufacturers with proven integrated satellite power solutions that
considerably improve satellite economics. Satellite manufacturers
and
solar array integrators rely on EMCORE to meet their satellite power
needs
with our proven flight heritage.
|
|
·
|
Terrestrial
Solar Power Generation. Solar
power
generation systems use photovoltaic cells to convert sunlight to
electricity and have been used in space programs and, to a lesser
extent,
in terrestrial applications for several decades. The market for
terrestrial solar power generation solutions has grown significantly
as
solar power generation technologies improve in efficiency, as global
prices for non-renewable energy sources (i.e., fossil fuels) continue
to
rise, and as concern has increased regarding the effect of carbon
emissions on global warming. Terrestrial solar power generation has
emerged as one of the most rapidly expanding renewable energy sources
due
to certain advantages solar power holds over other energy sources,
including reduced environmental impact, elimination of fuel price
risk,
installation flexibility, scalability, distributed power generation
(i.e.,
electric power is generated at the point of use rather than transmitted
from a central station to the user), and reliability. The rapid increase
in demand for solar power has created a growing need for highly efficient,
reliable and cost-effective solar power concentrator systems.
|
EMCORE
has adapted its high-efficiency
compound semiconductor-based GaAs solar cell products
for
terrestrial applications, which are intended for use with solar concentrator
systems in utility-scale installations. In August 2007, EMCORE
announced that it has obtained 39% peak conversion efficiency on its terrestrial
concentrating solar cell products currently in volume
production. This compares favorably to typical efficiency of 15-21%
on silicon-based solar cells and 35% for competing multi-junction concentrating
solar cells. We believe that solar concentrator systems assembled using our
compound semiconductor-based solar cells will be competitive with silicon-based
solar power generation systems because they are more efficient and, when
combined with the advantages of concentration, we believe will result in a
lower
cost of power generated. Our multi-junction solar cell technology is
not subject to silicon shortages, which have led to increasing prices in the
raw
materials required for silicon-based solar cells. While the terrestrial power
generation market is still developing, we have already fulfilled production
orders for one solar concentrator company, and provided samples to several
others, including major system manufacturers in Europe and Asia.
We
are committed to the ongoing
evaluation of strategic opportunities that can expand our addressable markets
and strengthen our competitive position. Where appropriate, we will acquire
additional products, technologies, or businesses that are complementary to,
or
broaden the markets in which we operate. We plan to pursue strategic
acquisitions, investments, and partnerships to increase revenue and allow for
higher overhead absorption that will improve our gross
margins.
Recent
investments
and strategic partnerships
include:
|
·
|
In
November 2006, EMCORE invested
$13.5 million in WorldWater & Solar Technologies Corporation
(“WorldWater”, OTC BB: WWAT.OB)
a leader in solar electric
engineering, water management solutions and solar energy installations
and
products. This investment represents EMCORE’s first tranche of
its intended $18.0 million investment, in return for convertible
preferred
stock and warrants of WorldWater. At September 30,
2007, EMCORE held
an approximately 21%
equity ownership in
WorldWater.
|
|
·
|
Also
in November 2006, EMCORE and
WorldWater announced the formation of a strategic alliance and supply
agreement under which EMCORE will be the exclusive supplier of
high-efficiency multi-junction solar cells, assemblies and concentrator
subsystems to WorldWater with expected revenue up to $100.0 million
by
November 2009.
|
Please
refer to Risk Factors under Item
1A and Financial Statements and Supplemental Data under Item 8 for further
discussion of these transactions.
Recent
acquisitions include:
|
·
|
On
December
17, 2007,
EMCORE entered into an Asset Purchase Agreement with Intel Corporation
(“Seller”). Under the terms of the Agreement, EMCORE will
purchase certain of the assets of Seller and its subsidiaries relating
to
the telecom portion of Seller’s Optical Platform Division for a purchase
price of $85million, as adjusted based on an inventory true-up, plus
specifically assumed liabilities. The purchase price will be
paid $75 million in cash and $10 million in cash or common stock
of
EMCORE, at our option. The Agreement contains termination
rights for both EMCORE and Seller including a provision allowing
either
party to terminate the Agreement if the transaction has not been
consummated by June
18, 2008.
|
|
·
|
On
April
13,
2007,
EMCORE acquired privately-held Opticomm Corporation, of San
Diego,
California,
including
its
fiber optic video, audio and data networking business, technologies,
and
intellectual property. EMCORE paid $4.2 million initial
consideration, less $0.1 million cash received at acquisition, for
all of
the shares of Opticomm. EMCORE also agreed to an additional earn-out
payment based on Opticomm's 2007 revenue. EMCORE management anticipates
that this transaction will provide approximately $7.0 million of
revenue
for calendar year 2007, and upon integration will be operationally
profitable. In 2006, Opticomm generated revenue of $6.3 million.
Founded
in 1986, Opticomm is one of the leading specialists in the field
of fiber
optic video, audio and data networking for the commercial, governmental
and industrial sectors. Its flagship product is the Optiva platform,
a
complete line of transmission systems built to address the primary
optical
communication requirements of the following markets: broadcast and
media,
security and surveillance, healthcare, traffic and rail, and government
and military.
|
|
·
|
On
January
12,
2006,
EMCORE purchased K2 Optronics, Inc. (“K2”), a privately-held company
located in Sunnyvale,
CA. EMCORE,
an investor in K2, paid approximately $4.1 million in EMCORE common
stock,
and paid approximately $0.7 million in transaction-related expenses,
to
acquire the remaining part of K2that
EMCORE did not
already own. Prior to the transaction EMCORE owned a 13.6% equity
interest
in K2 as a result of a $1.0 million investment that EMCORE made in
K2 in
October 2004. In addition, K2was
a supplier to
EMCORE of analog external cavity lasers for CATV
applications.
|
|
·
|
On
December 18, 2005, EMCORE acquired the assets of Force, Inc., a
privately-held company located in Christiansburg, Virginia. In connection
with the asset purchase, EMCORE issued 240,000 shares of EMCORE common
stock, no par value, with a market value of $1.6 million at the
measurement date and $0.5 million in cash. The acquisition included
Force’s fiber optic transport and video broadcast products, technical and
engineering staff, certain assets and intellectual properties and
technologies.
|
|
·
|
On
November 8, 2005, EMCORE acquired the assets of Phasebridge, Inc.,
a
privately-held company located in Pasadena, California. Founded in 2000, Phasebridge
is
known as an innovative provider of high performance, high value,
miniaturized multi-chip system-in-package optical modules and subsystem
solutions for a wide variety of markets, including fiber optic gyroscopes
(FOG) for weapons & aerospace guidance, RF over fiber links for device
remoting and optical networks, and emerging technologies such as
optical
RF frequency synthesis and processing and terahertz spectroscopy.
In connection with the asset purchase, based on a closing price of
$5.46,
EMCORE issued 128,205 shares of EMCORE common stock, no par value,
which
was valued in the transaction at approximately $0.7
million. The acquisition included Phasebridge’s products,
technical and engineering staff, certain assets and intellectual
properties and technologies.
|
All
of
these acquired businesses are part of EMCORE's Fiber Optics operating
segment. Please refer
to Risk Factors under Item 1A and Financial Statements and Supplemental Data
under Item 8 for further discussion of these transactions.
EMCORE
is committed to achieving
profitability by
increasing revenue through the introduction of new products, reducing our cost
structure and lowering the breakeven points of our product
lines. We have
significantly streamlined our manufacturing operations by focusing on core
competencies to identify cost efficiencies. Where appropriate, we transferred
the manufacturing of certain product lines to low-cost contract manufacturers
when we can lower costs and maintain quality and
reliability.
In
May
2007, EMCORE announced the opening of a new manufacturing facility in Langfang,
China. Our new company, Langfang EMCORE Optoelectronics Co. Ltd., is located
approximately 30 miles southeast of Beijing and currently occupies a space
of
22,000 square feet with a Class-10,000 clean room for optoelectronic device
packaging. Another 60,000 square feet is available for future
expansion. We have begun the transfer of our most cost sensitive
optoelectronic devices to this facility. This facility, along with a
strategic alignment with our existing contract manufacturing partners, should
enable us to improve our cost structure and gross margins. We also expect to
develop and provide improved service to our global customers using a local
presence in Asia.
EMCORE’s
restructuring programs are designed to further reduce the number of
manufacturing facilities, in addition to the divesture or exit from selected
businesses and product lines that were not strategic and/or were not capable
of
achieving desired revenue or profitability goals.
Recent
divestitures and facility consolidations include:
·
|
In
August 2007, we announced the
consolidation of our North American fiber optics engineering and
design
centers into our main operating sites. EMCORE's engineering facilities
in
Virginia,
Illinois,
and Northern California have
been consolidated into larger manufacturing sites in Albuquerque,
New
Mexicoand Alhambra,
California.
The consolidation of these
engineering sites should allow EMCORE to leverage resources within
engineering, new product introduction, and customer
service.
|
·
|
In
October 2006, we announced the
relocation of our corporate headquarters from Somerset,
New
Jerseyto Albuquerque,
New
Mexico.
|
·
|
In
October 2006, we consolidated our solar panel operations into our
state-of-the-art manufacturing facility located in Albuquerque, New
Mexico. The establishment of a modern solar panel manufacturing facility,
adjacent to our solar cell fabrication operations, facilitates consistency
as well as reduces manufacturing costs.
|
·
|
In
August 2006, EMCORE sold its 49% membership interest in GELcore,
LLC to
General Electric Corporation, which owned the remaining 51% membership
interest prior to the transaction, for $100.0 million in cash.
|
·
|
In
August 2006, EMCORE completed the sale of the assets of its Electronic
Materials & Device (EMD) division, including inventory, fixed assets,
and intellectual property to IQE plc, a public limited company organized
under the laws of the United Kingdom for $16.0 million.
|
Our
results of operations and financial condition have and will continue to be
significantly affected by severance, restructuring charges, impairment of
long-lived assets and idle facility expenses incurred during facility closing
activities. Please refer to Risk Factors under Item 1A and Financial
Statements and Supplemental Data under Item 8 for further discussion of these
items.
Critical
Accounting Policies
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“U.S. GAAP”) requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities and disclosure of contingent assets and liabilities
at
the date of the financial statements and the reported amounts of revenue and
expenses during the reported period. Management develops estimates based on
historical experience and on various assumptions about the future that are
believed to be reasonable based on the best information available. EMCORE’s
reported financial position or results of operations may be materially different
under changed conditions or when using different estimates and assumptions,
particularly with respect to significant accounting policies, which are
discussed below. In the event that estimates or assumptions prove to differ
from
actual results, adjustments are made in subsequent periods to reflect more
current information. EMCORE's most significant estimates relate to accounts
receivable, inventory, goodwill, intangibles, other long-lived assets, warranty
accruals, revenue recognition, and valuation of stock-based
compensation.
Valuation
of Accounts
Receivable. EMCORE regularly evaluates the collectibility of its accounts
receivable and accordingly maintains allowances for doubtful accounts for
estimated losses resulting from the inability of our customers to meet their
financial obligations to us. The allowance is based on the age of receivables
and a specific identification of receivables considered at risk. EMCORE
classifies charges associated with the allowance for doubtful accounts as
SG&A expense. If the financial condition of our customers were to
deteriorate, additional allowances may be required.
Valuation
of
Inventory. Inventory is stated at the lower of cost or market, with cost
being determined using the standard cost method. EMCORE reserves against
inventory once it has been determined that: (i) conditions exist that may not
allow the inventory to be sold for its intended purpose, (ii) the inventory’s
value is determined to be less than cost, or (iii) the inventory is determined
to be obsolete. The charge related to inventory reserves is recorded as a cost
of revenue. The majority of the inventory reserves are related to estimated
allowances for inventory whose carrying value is in excess of net realizable
value and on excess raw material components resulting from finished product
obsolescence. In most cases where EMCORE sells previously reserved inventory,
it
is typically sold as a component part of a finished product. The finished
product is sold at market price at the time resulting in higher average gross
margin on such revenue. EMCORE does not track the selling price of individual
raw material components that have been previously reserved for or written off,
since such raw material components usually are an insignificant portion of
the
resultant finished product and related sales price. EMCORE evaluates inventory
levels at least quarterly against sales forecasts on a significant part-by-part
basis, in addition to determining its overall inventory risk. Reserves are
adjusted to reflect inventory values in excess of forecasted sales, as well
as
overall inventory risk assessed by management. We have incurred, and may in
the
future incur, charges to reserve for and write-down our inventory. While we
believe, based on current information, that the amount recorded for inventory
is
properly reflected on our balance sheet, if market conditions are less favorable
than our forecasts, our future sales mix differs from our forecasted sales
mix,
or actual demand from our customers is lower than our estimates, we may be
required to record additional inventory reserves.
Valuation
of Goodwill and
Other Intangible Assets. Goodwill represents the excess of the purchase
price of an acquired business or assets over the fair value of the identifiable
assets acquired and liabilities assumed. Other intangible assets consist
primarily of intellectual property that has been internally developed or
purchased. Purchased intangible assets include existing and core technology,
trademarks and trade names, and customer base and contracts. Intangible assets
are amortized using the straight-lined method over estimated useful lives
ranging from one to fifteen years.
EMCORE
evaluates its goodwill and intangible assets for impairment on an annual basis,
or whenever events or changes in circumstances indicate that the carrying value
may not be recoverable. Circumstances that could trigger an impairment test
include but are not limited to: a significant adverse change in the business
climate or legal factors; an adverse action or assessment by a regulator;
unanticipated competition; loss of key personnel; the likelihood that a
reporting unit or significant portion of a reporting unit will be sold or
otherwise disposed; results of testing for recoverability of a significant
asset
group within a reporting unit; and recognition of a goodwill impairment loss
in
the financial statements of a subsidiary that is a component of a reporting
unit. The determination as to whether a write-down of goodwill or intangible
assets is necessary involves significant judgment based on the short-term and
long-term projections of the future performance of the reporting unit to which
the goodwill or intangible assets are attributed. As of
December 31, 2006,
2005 and 2004, EMCORE tested for
impairment of its goodwill and intangible assets. In accordance with
Statement of Financial Accounting Standard (“SFAS”) 142, Goodwill
and Other
Intangible Assets, the fair
value of the reporting units was determined by using a valuation technique
based
on each reporting unit’s multiples of revenue. Based on that analysis, we
determined that the carrying amount of the reporting units did not exceed their
fair value.
During
the three months ended
September 30,
2006, as part of our
quarterly review of financial results, we identified impairment indicators
that
the carrying value of our goodwill and intangible assets associated with the
acquisition of Corona Optical Systems may not be recoverable. See Note 9,
Impairment, of the Notes to Consolidated Financial Statements for further
details.
Valuation
of Long-lived
Assets. EMCORE reviews long-lived assets on an annual basis or whenever
events or circumstances indicate that the assets may be impaired. A
long-lived asset is considered impaired when its anticipated undiscounted cash
flow is less than its carrying value. In making this determination, EMCORE
uses
certain assumptions, including, but not limited to: (a) estimates of the fair
market value of these assets; and (b) estimates of future cash flows expected
to
be generated by these assets, which are based on additional assumptions such
as
asset utilization, length of service that assets will be used in our operations,
and estimated salvage values. As of December 31, 2006,
2005 and 2004, EMCORE tested for
impairment and based on that analysis, we did not record any impairment charges
on any of EMCORE’s long-lived assets.
Revenue
Recognition.
Revenue is recognized upon shipment, provided persuasive evidence of a contract
exists, (such as when a purchase order or contract is received from a customer),
the price is fixed, the product meets its specifications, title and ownership
have transferred to the customer, and there is reasonable assurance of
collection of the sales proceeds. In those few instances where a given sale
involves post shipment obligations, formal customer acceptance documents, or
subjective rights of return, revenue is not recognized until all post-shipment
conditions have been satisfied and there is reasonable assurance of collection
of the sales proceeds. The majority of our products have shipping terms that
are
free on board (FOB) or free carrier alongside (FCA) shipping point, which means
that EMCORE fulfills its delivery obligation when the goods are handed over
to
the freight carrier at our shipping dock. This means the buyer bears all costs
and risks of loss or damage to the goods from that point. In certain cases,
EMCORE ships its products cost insurance and freight (CIF). Under this
arrangement, revenue is recognized under FCA shipping point terms, but EMCORE
pays (and bills the customer) for the cost of shipping and insurance to the
customer's designated location. EMCORE accounts for shipping and related
transportation costs by recording the charges that are invoiced to customers
as
revenue, with the corresponding cost recorded as cost of revenue. In
those instances where inventory is maintained at a consigned location, revenue
is recognized only when our customer pulls product for its use and title and
ownership have transferred to the customer. Revenue from time and
material contracts is recognized at the contractual rates as labor hours and
direct expenses are incurred. EMCORE also generates service revenue
from hardware repairs and calibrations that is recognized as revenue upon
completion of the service. Any cost of warranties and remaining
obligations that are inconsequential or perfunctory are accrued when the
corresponding revenue is recognized.
Distributors-
EMCORE uses a number of distributors
around the world. In accordance with Staff Accounting Bulletin No. 104,
Revenue
Recognition, EMCORE
recognizes revenue upon shipment of product to these distributors. Title and
risk of loss pass to the distributors upon shipment, and our distributors are
contractually obligated to pay EMCORE on standard commercial terms, just like
our other direct customers. EMCORE does not sell to its distributors on
consignment and, except in the event of product discontinuance, does not give
distributors a right of return.
Solar
Panel
Contracts - EMCORE records
revenue from certain solar panel contracts using the percentage-of-completion
method. 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 revenue, and contract costs. Estimates are revised as
additional information becomes available.
Government
R&D
Contracts - R&D
contract revenue represents reimbursement by various U.S. Government entities,
or their contractors, to aid in the development of new technology. The
applicable contracts generally provide that EMCORE may elect to retain ownership
of inventions made in performing the work, subject to a non-exclusive license
retained by the U.S. Government to practice the inventions for governmental
purposes. The R&D contract funding may be based on a cost-plus, cost
reimbursement, or a firm fixed price arrangement. The amount of funding under
each R&D contract is determined based on cost estimates that include both
direct and indirect costs. Cost-plus funding is determined based on actual
costs
plus a set margin. As we incur costs under cost reimbursement type contracts,
we
record revenue. Contract costs include material, labor, special tooling and
test
equipment, subcontracting costs, as well as an allocation of indirect costs.
An
R&D contract is considered complete when all significant costs have been
incurred, milestones have been reached, and any reporting obligations to the
customer have been met. Government contract revenue is primarily
recognized as service revenue.
EMCORE
also has certain cost-sharing R&D arrangements. Under such
arrangements in which the actual costs of performance are divided between the
U.S. Government and EMCORE, no revenue is recorded and the Company’s R&D
expense is reduced for the amount of the cost-sharing receipts.
The
U.S.
Government may terminate any of our government contracts at their convenience
as
well as for default based on our failure to meet specified performance
measurements. If any of our government contracts were to be terminated for
convenience, we generally would be entitled to receive payment for work
completed and allowable termination or cancellation costs. If any of our
government contracts were to be terminated for default, generally the U.S.
Government would pay only for the work that has been accepted and can require
us
to pay the difference between the original contract price and the cost to
re-procure the contract items, net of the work accepted from the original
contract. The U.S. Government can also hold us liable for damages resulting
from
the default.
Product
Warranty
Reserves. EMCORE provides its customers with limited rights of return for
non-conforming shipments and warranty claims for certain products. In accordance
with SFAS 5, Accounting for
Contingencies, EMCORE makes estimates of product warranty expense using
historical experience rates as a percentage of revenue and accrues estimated
warranty expense as a cost of revenue. We estimate the costs of our warranty
obligations based on our historical experience of known product failure rates,
use of materials to repair or replace defective products and service delivery
costs incurred in correcting product failures. In addition, from time to time,
specific warranty accruals may be made if unforeseen technical problems arise.
Should our actual experience relative to these factors differ from our
estimates, we may be required to record additional warranty reserves.
Alternatively, if we provide more reserves than we need, we may reverse a
portion of such provisions in future periods.
Stock-Based
Compensation. The Company uses the Black-Scholes
option-pricing model and the straight-line attribution approach to determine
the
fair-value of stock-based awards under SFAS 123(R), Share-Based Payment (revised
2004). The Company elected to use the modified prospective transition
method as permitted by SFAS 123(R) and accordingly prior periods were not
restated to reflect the impact of SFAS 123(R). The modified prospective
transition method requires that stock-based compensation expense be recorded
for
all new and unvested stock options and employee stock purchase plan shares
that
are ultimately expected to vest as the requisite service is rendered beginning
on October 1, 2005, the first day of the Company’s fiscal year 2006. For
purposes of pro forma disclosure, stock-based compensation expense for awards
granted prior to October 1, 2005 is measured on the grant-date fair-value as
determined under the provisions of SFAS 123. The option-pricing model
requires the input of highly subjective assumptions, including the option’s
expected life and the price volatility of the underlying stock. EMCORE’s
expected term represents the period that stock-based awards are expected to
be
outstanding and is determined based on historical experience of similar awards,
giving consideration to the contractual terms of the stock-based awards, vesting
schedules and expectations of future employee behavior as influenced by changes
to the terms of its stock-based awards. The expected stock price volatility
is
based on EMCORE’s historical stock prices. See Note 4, Equity, of the Notes to
Consolidated Financial Statements for further details.
***
The
above listing is not intended to be
a comprehensive list of all of our accounting policies. In many cases, the
accounting treatment of a particular transaction is specifically dictated by
U.S. GAAP. There also are areas in which management's judgment in selecting
any
available alternative would not produce a materially different result. See
our
audited consolidated financial statements and notes thereto included in this
Annual Report on Form 10-K, which contain a discussion of our accounting
policies, recently adopted accounting pronouncements and other required GAAP
disclosures.
Business
Segments, Geographic Revenue,
Significant Customers and Backlog
EMCORE
has two reporting segments: Fiber Optics and Photovoltaics. EMCORE's
Fiber Optics revenue is derived primarily from sales of optical components
and
subsystems for CATV, FTTP, enterprise routers and switches, telecom grooming
switches, core routers, high performance servers, supercomputers, and satellite
communications data links. EMCORE's Photovoltaics revenue is derived
primarily from the sales of solar power conversion products for the space and
terrestrial markets, including solar cells, covered interconnect solar cells,
solar panel concentrator solar cells and Concentrating Photovoltaic Systems
(“CPV”) receiver assemblies. EMCORE evaluates its reportable segments in
accordance with SFAS 131, Disclosures About Segments
of an
Enterprise and Related Information. EMCORE’s Chief Executive Officer is
EMCORE’s Chief Operating Decision Maker pursuant to SFAS 131, and he allocates
resources to segments based on their business prospects, competitive factors,
net revenue, operating results and other non-GAAP financial ratios.
The
following tables set forth the revenue and percentage of total revenue
attributable to each of EMCORE's reporting segments for the fiscal years ended
September 30, 2007, 2006 and 2005.
Segment
Revenue
(in
thousands)
2007
|
2006
|
2005
|
||||||||||||||||||||||
Revenue
|
%
of Revenue
|
Revenue
|
%
of Revenue
|
Revenue
|
%
of Revenue
|
|||||||||||||||||||
Fiber
Optics
|
$ | 110,377 | 65 | % | $ | 104,852 | 73 | % | $ | 81,960 | 71 | % | ||||||||||||
Photovoltaics
|
59,229 | 35 | 38,681 | 27 | 33,407 | 29 | ||||||||||||||||||
Total
revenue
|
$ | 169,606 | 100 | % | $ | 143,533 | 100 | % | $ | 115,367 | 100 | % |
The
following tables set forth EMCORE's consolidated revenue by geographic region
for the fiscal years ended September 30, 2007, 2006 and 2005. Revenue was
assigned to geographic regions based on our customers’ or contract
manufacturers’ billing address.
Geographic
Revenue
(in
thousands)
2007
|
2006
|
2005
|
||||||||||||||||||||||
Revenue
|
%
of Revenue
|
Revenue
|
%
of Revenue
|
Revenue
|
%
of Revenue
|
|||||||||||||||||||
North
America
|
$ | 124,032 | 73 | % | $ | 109,614 | 76 | % | $ | 95,723 | 83 | % | ||||||||||||
Asia
|
34,574 | 20 | 28,537 | 20 | 13,725 | 12 | ||||||||||||||||||
Europe
|
10,821 | 7 | 4,152 | 3 | 5,916 | 5 | ||||||||||||||||||
South
America
|
134 | - | 1,230 | 1 | 3 | - | ||||||||||||||||||
Australia
|
45 | - | - | - | - | - | ||||||||||||||||||
Total
revenue
|
$ | 169,606 | 100 | % | $ | 143,533 | 100 | % | $ | 115,367 | 100 | % |
Customer
A and Customer B accounted for 13% and 11% of our total consolidated revenue
in
fiscal 2007. Customer C accounted for 12% of our total consolidated revenue
in
fiscal 2006. Customer A accounted for 22% of our total consolidated
revenue in fiscal 2005. The revenue from Customers A and C is related to the
fiber optics segment and the revenue from Customer B is related to the
photovoltaics segment.
As
of September 30, 2007,
we had an order backlog based on
future billings of approximately $149 million as compared to a backlog of
approximately $48 million from the prior year. The September 30, 2007 order
backlog is comprised of $127
million for our Photovoltaics segment and $22 million for our Fiber Optics
segment. Within our Photovoltaics segment, $57 million relates to our
satellite solar power business and $70 million relates to our terrestrial solar
power business. The significant increase
in order
backlog is attributable to the receipt of long-term photovoltaics-related sales
contracts, of which approximately $45 million is scheduled for shipment after
calendar year 2008.
EMCORE
had been engaged in a multi-year
cost reimbursable solar cell development and production contract for a major
U.S.aerospace
corporation. It was previously
reported that the contract would exceed $40.0 million in development and
production revenue over the next several years. Although we
recognized significant revenue for this program during fiscal 2007, our customer
notified us in August 2007 that their program had been terminated for
convenience by the U.S. Government. We adjusted our order backlog
accordingly and this will have no effect on our fiscal 2008 revenue
guidance. In fiscal 2008, we expect to recognize additional revenue
from this program related to contract termination costs. We also
expect revenue in fiscal 2008 from a new U.S. Government contract that has
similar technical contract requirements.
A
majority of our fiber optics products
typically ship within the same quarter as when the purchase order is received;
therefore, our backlog at any particular date is not necessarily indicative
of
actual revenue or the level of orders for any succeeding
period.
The
following table sets forth operating losses attributable to each EMCORE
operating segment for the fiscal years ended September 30, 2007, 2006 and
2005.
Statement
of Operations
Data
|
||||||||||||
(in
thousands)
|
2007
|
2006
|
2005
|
|||||||||
Operating
loss by
segment:
|
||||||||||||
Fiber
Optics
|
$ | (25,877 | ) | $ | (18,950 | ) | $ | (13,884 | ) | |||
Photovoltaics
|
(11,202 | ) | (8,365 | ) | (4,348 | ) | ||||||
Corporate
|
(20,377 | ) | (6,835 | ) | (2,139 | ) | ||||||
Operating
loss
|
(57,456 | ) | (34,150 | ) | (20,371 | ) | ||||||
Total
other expenses
(income)
|
1,266 | (81,041 | ) | 4,314 | ||||||||
(Loss)
income from continuing
operations before income taxes
|
(58,722 | ) | 46,891 | (24,685 | ) | |||||||
Provision
for income
taxes
|
- | 1,852 | - | |||||||||
(Loss)
income from continuing
operations
|
$ | (58,722 | ) | $ | 45,039 | $ | (24,685 | ) |
On
October 1, 2005, EMCORE adopted SFAS 123(R) and incurred stock-based
compensation expense in its results of operations, which was distributed as
follows:
Stock-based
Compensation Expense
For
the fiscal year ended
September
30,
2007
(in
thousands)
|
Cost
of
Revenue
|
SG&A
|
R&D
|
Total
|
||||||||||||
Fiber
Optics
|
$
|
1,071
|
$
|
2,369
|
$
|
1,093
|
$
|
4,533
|
||||||||
Photovoltaics
|
364
|
670
|
372
|
1,406
|
||||||||||||
Total
stock-based compensation
expense
|
$
|
1,435
|
$
|
3,039
|
$
|
1,465
|
$
|
5,939
|
Stock-based
Compensation Expense
For
the fiscal year ended
September
30,
2006
(in
thousands)
|
Cost
of
Revenue
|
SG&A
|
R&D
|
Total
|
||||||||||||
Fiber
Optics
|
$
|
893
|
$
|
1,593
|
$
|
1,135
|
$
|
3,621
|
||||||||
Photovoltaics
|
242
|
661
|
203
|
1,106
|
||||||||||||
Total
stock-based compensation
expense from continuing operations
|
1,135
|
2,254
|
1,338
|
4,727
|
||||||||||||
Discontinued
operations
(1)
|
-
|
-
|
-
|
267
|
||||||||||||
Total
stock-based compensation
expense
|
$
|
1,135
|
$
|
2,254
|
$
|
1,338
|
$
|
4,994
|
______________________
(1)
See Note 8 “Discontinued
Operations and Restructuring Charges” in Notes to the Consolidated Financial
Statements.
Long-lived
assets (consisting of property, plant and equipment, goodwill and intangible
assets) for each operating segment as of September 30, 2007 and 2006 are as
follows:
Long-lived
Assets
(in
thousands)
|
2007
|
2006
|
||||||
Fiber
Optics
|
$
|
56,816
|
$
|
57,817
|
||||
Photovoltaics
|
46,706
|
42,087
|
||||||
Corporate
|
-
|
22
|
||||||
Total
long-lived
assets
|
$
|
103,522
|
$
|
99,926
|
In
fiscal 2007, all assets from our
former corporate headquarters in New Jerseywere
written off and/or fully
depreciated.
Results
of
Operations
The
following table sets forth the
consolidated statements of operations data of EMCORE expressed as a percentage
of total revenue for the fiscal years ended September 30, 2007,
2006, and 2005.
STATEMENT
OF
OPERATIONS DATA
2007
|
2006
|
2005
|
||||||||||
Product
revenue
|
87.5
|
% |
92.2
|
% |
92.4
|
% | ||||||
Service
revenue
|
12.5
|
7.8
|
|
7.6
|
||||||||
Total
revenue
|
100.0
|
100.0
|
100.0
|
|||||||||
Cost
of product revenue
|
73.3
|
75.4
|
77.1
|
|||||||||
Cost
of service revenue
|
8.7
|
6.5
|
6.2
|
|||||||||
Total
cost of revenue
|
82.0
|
81.9
|
83.3
|
|||||||||
Gross
profit
|
18.0
|
18.1
|
16.7
|
|||||||||
Operating
expenses:
|
||||||||||||
Selling,
general and administrative
|
34.1
|
26.6
|
20.1
|
|||||||||
Research
and development
|
17.8
|
13.7
|
14.3
|
|||||||||
Impairment
of goodwill and intellectual property
|
-
|
1.6
|
-
|
|||||||||
Total
operating expenses
|
51.9
|
41.9
|
34.4
|
|||||||||
Operating
loss
|
(33.9
|
) |
(23.8
|
) |
(17.7
|
) | ||||||
Other
(income) expense:
|
||||||||||||
Interest
income
|
(2.4
|
) |
(0.9
|
) |
(0.9
|
) | ||||||
Interest
expense
|
2.9
|
3.7
|
4.1
|
|||||||||
Loss
from convertible subordinated notes exchange offer
|
-
|
0.8
|
-
|
|||||||||
Loss
from early redemption of convertible subordinated notes
|
0.3
|
-
|
-
|
|||||||||
Gain
from insurance proceeds
|
(0.2
|
) |
-
|
-
|
||||||||
Impairment
of investment
|
-
|
0.3
|
-
|
|||||||||
Loss
on disposal of property, plant and equipment
|
0.1
|
0.3
|
0.4
|
|||||||||
Net
gain on sale of GELcore investment
|
-
|
(61.3
|
) |
-
|
||||||||
Equity
in net loss of GELcore investment
|
-
|
0.4
|
0.1
|
|||||||||
Equity
in net loss of Velox investment
|
-
|
0.2
|
-
|
|||||||||
Foreign
exchange gain
|
-
|
-
|
-
|
|||||||||
Total
other (income) expenses
|
0.7
|
(56.5
|
) |
3.7
|
||||||||
|
||||||||||||
Income
(loss) from continuing operations before income taxes
|
(34.6
|
) |
32.7
|
(21.4
|
) | |||||||
|
||||||||||||
Provision
for income taxes
|
-
|
1.3
|
-
|
|||||||||
Income
(loss) from continuing operations
|
(34.6
|
) |
31.4
|
(21.4
|
) | |||||||
|
||||||||||||
Discontinued
operations:
|
|
|||||||||||
Income
(loss) from discontinued operations, net of tax
|
-
|
0.3
|
(1.1
|
) | ||||||||
Gain
on disposal of discontinued operations, net of tax
|
-
|
6.6
|
10.8
|
|||||||||
Income
from discontinued operations
|
-
|
6.9
|
9.7
|
|||||||||
|
|
|
||||||||||
Net
income (loss)
|
(34.6
|
)% |
38.3
|
% |
(11.7
|
)% |
Comparison
of Fiscal Years Ended September
30, 2007and
2006
EMCORE
sold its Electronic, Materials and Device (“EMD”) division in August
2006. All financial information in fiscal 2006 that related to this
division has been excluded from operations for comparison of financial
performance.
Consolidated
Revenue
EMCORE’s
consolidated revenue
increased $26.1 million or 18% to $169.6 million from $143.5 million, as
reported in the prior year. International sales increased $11.7 million or
34%,
when compared to the prior year. Government contract revenue, which is primarily
service revenue, increased $10.8 million or 97% to $21.9 million from $11.1
million, as reported in the prior year. A comparison of revenue achieved at
each
of EMCORE’s reporting segments follows:
Fiber
Optics
Over
the
past several years, communications networks have experienced dramatic growth
in
data transmission traffic due to worldwide Internet access, e-mail, and
e-commerce. As Internet content expands to include full motion video on-demand,
HDTV, multi-channel high quality audio, online video conferencing, image
transfer, online multi-player gaming, and other broadband applications, the
delivery of such data will place a greater demand on available bandwidth and
require the support of higher capacity networks. The bulk of this traffic, which
continues to grow at a very high rate, is already routed through the optical
networking infrastructure used by local and long distance carriers, as well
as
Internet service providers. Optical fiber offers substantially greater bandwidth
capacity, is less error prone, and is easier to administer than older copper
wire technologies. As greater bandwidth capability is delivered closer to the
end user, increased demand for higher content, real-time, interactive visual
and
audio content is expected. We believe that EMCORE is well positioned to benefit
from the continued deployment of these higher capacity fiber-optic
networks.
Customers
for the Fiber Optics segment include: Avago Technologies, Inc., Alcatel, Aurora
Networks, BUPT-GUOAN Broadband, C-Cor Electronics, Cisco, Finisar,
Hewlett-Packard Corporation, Intel Corporation, Jabil, JDSU, Motorola, Network
Appliance, Sycamore Networks, Inc., and Tellabs.
Annual
fiber optics revenue increased $5.5 million or 5% to $110.4 million from $104.9
million, as reported in the prior year. On a quarterly basis, fiscal 2007
revenue was $25.3 million, $26.2 million, $27.6 million and $31.3 million.
On a
quarterly basis, fiscal 2006 revenue was $25.0 million, $25.9 million, $26.0
million and $28.0 million. The annual increase in revenue is
primarily due to recent acquisitions and a significant increase in the demand
for our CATV products, satellite communications, telecommunications and FTTP
components. Also, despite higher revenue for this segment, revenue from our
legacy products that serve the digital fiber optics sector were lower than
last
year due to customer inventory management and increased
competition. The communications industry in which we participate
continues to be dynamic. The driving factor is the competitive environment
that
exists between cable operators, telephone companies, and satellite and wireless
service providers. Each are rapidly investing capital to deploy a converging
multi-service network capable of delivering “triple play services”, i.e. video,
voice and data content, bundled as a service provided by a single communication
provider. As a market leader in RF transmission over fiber products for the
CATV
industry, EMCORE enables cable companies to offer multiple forms of
communications to meet the expanding demand for high-speed Internet, on-demand
and interactive video, and other new services (such as HDTV and VoIP).
Television is also undergoing a major transformation, as the U.S. Government
requires television stations to broadcast exclusively in digital format,
abandoning the analog format used for decades. Although the transition date
for
digital transmissions is not expected for several years, the build-out of these
television networks has already begun. To support the telephone companies plan
to offer competing video, voice and data services through the deployment of
new
fiber-based systems, EMCORE has developed and maintains customer qualified
FTTP
components and subsystem products. Our CATV and FTTP products include broadcast
analog and digital fiber optic transmitters, quadrature amplitude modulation
(QAM) transmitters, video receivers, and passive optical network (PON)
transceivers. Government contract revenue in fiscal 2007 and 2006
totaled $1.5 million and $1.9 million, respectively. Fiber optics
revenue represented 65% and 73% of EMCORE's total consolidated revenue for
fiscal 2007 and 2006, respectively.
Photovoltaics
EMCORE
is
a leader in providing solar power generation solutions to the global
communications satellite industry and U.S. Government space
programs. EMCORE manufactures advanced compound semiconductor-based solar cell
products
and solar panels, which are more resistant to radiation levels in space and
convert substantially more power from sunlight than silicon-based solutions.
EMCORE’s Photovoltaics segment designs and manufactures multi-junction
compound semiconductor-based solar cells for both commercial and military
satellite applications.
Customers
for the Photovoltaics segment include Boeing, General Dynamics, Green and Gold
Energy, Indian Space Research Organization (“ISRO”), Lockheed Martin, and Space
Systems/Loral.
Annual
photovoltaics revenue increased $20.5 million or 53% to $59.2 million from
$38.7
million, as reported in the prior year. On a quarterly basis, fiscal 2007
revenue was $13.2 million, $13.4 million, $16.8 million and $15.8 million.
On a
quarterly basis, fiscal 2006 revenue was $10.7 million, $10.3 million, $10.4
million and $7.3 million. In fiscal 2007, our Photovoltaics division
continued to experience increased demand for its space and terrestrial solar
cells, solar panels and U.S. Government-related research
contracts. Revenue for the quarter ended September 30, 2006 was
reduced because EMCORE did not receive export licenses covering three
international satellite programs in time to ship
product. Subsequently, EMCORE received license approvals on all three
of the programs and the delayed orders were shipped to the customers in the
first quarter of fiscal 2007. EMCORE is currently required to obtain approvals
from the Department of State in order to export certain satellite photovoltaic
products. Government contract revenue totaled $20.4 million and $9.2 million
in
fiscal 2007 and 2006, respectively. Photovoltaics revenue represented
35% and 27% of EMCORE's total consolidated revenue for fiscal 2007 and 2006,
respectively.
We
see
additional areas for growth resulting from the joint venture between ISRO and
EADS Astrium for the manufacture of GEO communication satellites. EMCORE is
a
leading supplier of solar cell products to ISRO, and we anticipate increased
activity with that customer. Government and military procurement remains steady,
and we have recently been awarded solar panel government contracts for military
and science missions, and this represents an expansion of our customer
base.
EMCORE
had been engaged in a multi-year
cost reimbursable solar cell development and production contract for a major
U.S.aerospace
corporation. It was previously
reported that the contract would exceed $40.0 million in development and
production revenue over the next several years. Although we
recognized significant revenue for this program during fiscal 2007, our customer
notified us in August 2007 that their program had been terminated for
convenience by the U.S. Government. We adjusted our order backlog
accordingly and this will have no effect on our fiscal 2008 revenue
guidance. In fiscal 2008, we expect to recognize additional revenue
from this program related to contract termination costs. We also
expect revenue in fiscal 2008 from a new U.S. Government contract that has
similar technical contract requirements.
In
August
2007, EMCORE was awarded a follow-on production order from Green and Gold Energy
(GGE) for three million solar cells for use in GGE's SunCubeTM
terrestrial concentrator system. This 105 MW purchase order represents a
follow-on order to an initial 5 MW order placed earlier in 2007. All hardware
ordered under this contract is to be shipped by December 2008.
On
November 28, 2006, EMCORE announced that its Photovoltaics division had been
awarded a multi-year purchase order from a leading manufacturer of high power
geosynchronous communications satellites. EMCORE estimates the expected revenue
from the purchase order at more than $41.0 million over a period of 3 years.
EMCORE will supply state of the art, high efficiency multi-junction solar cells
for approximately ten high power satellites. Production of the solar cells
will
take place at EMCORE's state-of-the-art multi-junction solar cell production
facility located in Albuquerque, New Mexico. The recently awarded
purchase order represents an extension to an existing multi-year purchasing
agreement with a leading U.S. commercial satellite manufacturer. The agreement
calls for continuous solar cell production through 2009 with several hundred
thousand solar cells to be delivered to the end customer.
In
February 2006, EMCORE was awarded a subcontract to participate in the Defense
Research Projects Agency (DARPA) Very High Efficiency Solar Cell (VHSEC) program
to more than double the efficiency of terrestrial solar cells within the next
fifty months. EMCORE was selected by the University of Delaware, the prime
contractor for the DARPA VHSEC program, to develop advanced III-V multi-junction
solar cells in Phase I of the program effort. The VHSEC program will provide
up
to $53.0 million in funding, which will be awarded to program participants
in
various phases over the next several years.
Gross
Profit
Gross
profit increased $4.4 million or 17% to $30.4 million from $26.0 million in
the
prior year. Compared to the prior year, gross margins remained constant at
18%.
On a segment basis, margins for Fiber Optics decreased slightly from 20% to
19%
primarily due to unabsorbed overhead as a result of lower revenue from our
legacy products that serve the digital fiber optics sector. Margins
for the Photovoltaics segment increased from 12% to 17%. This
increase was due to increased revenues and improved product mix, a shift to
generally higher margin products along with higher overhead absorption. In
October 2006, EMCORE consolidated
its solar panel manufacturing into a state-of-the-art facility located in
Albuquerque,
New
Mexico. The establishment of
a
modern solar panel manufacturing facility, adjacent to our solar cell
fabrication operations, facilitates consistency, as well as reduces
manufacturing costs.
Actions
designed to improve our gross margins (through product mix improvements, cost
reductions associated with product transfers and product rationalization,
maximizing production yields on high-performance devices and quality
improvements, among other things) continue to be a principal focus for
us. We focus our
activities on developing new process control and yield management tools that
enable us to accelerate the adoption of new technologies into full-volume
production, while minimizing their associated risks.
On
October 1, 2005, EMCORE adopted SFAS 123(R) and incurred stock-based
compensation expense as more fully described in Note 4, Equity, of the Notes
to
Consolidated Financial Statements. In fiscal 2007 and 2006, gross
profit included $1.4 million and $1.1 million of stock-based compensation
expense related to employee stock options and employee stock purchases under
SFAS 123(R), respectively.
Operating
Expenses
Selling,
General and
Administrative. SG&A expenses increased $19.6 million or
51% to $57.8 million from $38.2 million in the prior year. Consistent with prior
years, SG&A expense includes corporate overhead expenses. As a
percentage of revenue, SG&A increased from 27% to 34%. The increase in
SG&A expense is primarily due to:
· | professional fees incurred of $10.6 million associated with our review of historical stock option granting practices; | |
· | non-recurring legal expenses and restructuring and severance-related charges associated with facility closures and consolidation of operations that totaled $6.1 million and 2.8 million, respectively; and | |
|
·
|
continued
investment in personnel strategic to our business.
|
Research
and Development.
Our R&D efforts have been sharply focused to maintain our
technological leadership position by working to improve the quality and
attributes of our product lines. We also invest significant resources to develop
new products and production technology to expand into new market opportunities
by leveraging our existing technology base and infrastructure. Our efforts
are
focused on designing new proprietary processes and products, on improving the
performance of our existing materials, components, and subsystems, and on
reducing costs in the product manufacturing process. In addition to using our
internal capacity to develop and manufacture products for our target markets,
EMCORE continues to expand its portfolio of products and technologies through
acquisitions.
R&D
expenses increased $10.3 million or 52% to $30.0 million from $19.7 million
in
the prior year. The
increase in R&D is due to $7.9 million of R&D expenses incurred at our
new terrestrial solar power division. As a percentage of revenue,
R&D increased to 18% from 14% reported in prior period. We
believe that recently completed R&D projects have the potential to greatly
improve our competitive position and drive revenue growth in the next few
years.
As
part
of the ongoing effort to cut costs, many of our projects are to develop lower
cost versions of our existing products and of our existing processes, while
improving quality. Also, we have implemented a program to focus research and
product development efforts on projects that we expect to generate returns
within one year. As a result, over the last several years, EMCORE has reduced
overall R&D costs as a percentage of revenue without, we believe,
jeopardizing future revenue opportunities. Our technology and product leadership
is an important competitive advantage. Driven by current and anticipated demand,
we will continue to invest in new technologies and products that offer our
customers increased efficiency, higher performance, improved functionality,
and/or higher levels of integration. In fiscal 2008, we expect
R&D spending as a percentage of revenue to decrease after our
second-generation concentrator photovoltaic (“CPV”) system is transferred from
R&D to production.
Other
Income & Expenses
Loss
from Convertible Subordinated
Notes Exchange Offer. In November 2005, EMCORE exchanged $14.4 million of
convertible subordinated notes due in May 2006 for $16.6 million of newly issued
convertible subordinated notes due May 15, 2011. As a result of this
transaction, EMCORE recognized approximately $1.1 million of expense in the
first quarter of fiscal 2006 related to the early extinguishment of debt. EMCORE
will also incur additional expense of approximately $1.1 million over the life
of the subordinated notes, which will be charged to interest expense. This
charge will increase interest expense by approximately $50,000 per quarter
through May 2011, the maturity date of the convertible subordinated
notes.
Loss
from Early
Redemption of Convertible Subordinated Notes. In April 2007, EMCORE
redeemed $11.4
million of convertible subordinated notes due in May 2011. As a result of this
transaction, EMCORE recognized a loss of approximately $0.6 million in the
third
quarter of fiscal 2007 related to the redemption of debt.
Impairment
of
Investment. In February
2002, EMCORE purchased preferred stock of Archcom Technologies, Inc., a
venture-funded, start-up optical networking components company that designs,
manufactures and markets a series of high performance lasers and photodiodes
for
datacom and telecom industries. In fiscal 2006, EMCORE wrote-off its remaining
investment in Archcom totaling $0.5 million.
Gain
on Insurance
Proceeds. During the three
months ended March 31,
2007, we recognized a gain
of $0.4 million related to insurance proceeds received.
Net
Gain on Sale of GELcore
Investment. In August 2006, EMCORE sold its 49% membership interest in
GELcore, LLC for $100.0 million to General Electric Corporation, which prior
to
the transaction owned the remaining 51% membership interest in
GELcore. EMCORE recorded a net gain of $88.0 million, before tax, on
the sale of GELcore, after netting EMCORE’s investment in this joint venture of
$10.8 million and transaction expenses of $1.2 million.
Provision
for Income
Taxes
As
a
result of its losses, the Company did not incur any income tax expense in fiscal
2007. EMCORE recorded a provision for income taxes totaling $1.9 million in
connection with the gain on the sale of GELcore in fiscal 2006. See
Note 17, Income Taxes, of the Notes to Consolidated Financial Statements for
further discussion of the financial tax impact of the sale of
GELcore.
Discontinued
Operations
On
August
18, 2006, EMCORE completed the
sale of the
assets of its EMD division, including inventory, fixed assets, and intellectual
property to IQE. Under the terms of the purchase agreement, EMCORE
sold the EMD division to IQE for $16.0 million, consisting of $13.0 million
in
cash and $3.0 million in the form of a secured promissory note of IQE,
guaranteed by IQE's affiliates. The note was completely repaid in fiscal 2007,
via four quarterly installments at an annual interest rate of
7.5%. EMCORE recorded a net gain of $7.6 million, after tax,
on the sale of EMD, after netting EMCORE’s investment in EMD of $6.0 million and
transaction expenses of $2.4 million.
In
November 2003, EMCORE sold its TurboDisc division in an asset sale to a
subsidiary of Veeco Instruments Inc. (Veeco). The selling price was $60.0
million in cash at closing, with a potential additional earn-out up to $20.0
million over the next two years, calculated based on the net sales of TurboDisc
products. In March 2005, EMCORE received $13.2 million of earn-out payment
from
Veeco in connection with its first year of net sales of TurboDisc products.
After offsetting this receipt against expenses related to the discontinued
operation, EMCORE recorded a net gain from the disposal of discontinued
operations of $12.5 million. In March 2006, EMCORE received manufacturing
equipment valued at $2.0 million less $0.1 million tax as a final
earn-out payment from Veeco in connection with Veeco’s second year of net sales
of TurboDisc products. The cumulative additional earn-out totaled
$15.2 million or 76% of the maximum available payout of $20.0
million.
Comparison
of Fiscal Years Ended September
30, 2006and
2005
EMCORE
sold its EMD division
in August 2006. All financial information that related to this
division has been excluded from operations for comparison of financial
performance.
Consolidated
Revenue
EMCORE’s
consolidated revenue
increased $28.1 million or 24% to $143.5 million from $115.4 million, as
reported in the prior year. International sales increased $14.3 million or
73%,
when compared to the prior year. Government contract revenue, which is primarily
service revenue, increased $1.7 million or 18% to $11.1 million from
$9.4 million, as reported in the prior year. A comparison of revenue achieved
at
each of EMCORE’s reporting segments follows:
Fiber
Optics
Annual
fiber optics revenue increased $22.9 million or 28% to $104.9 million from
$82.0
million, as reported in the prior year. On a quarterly basis, fiscal 2006
revenue was $25.0 million, $25.9 million, $26.0 million and $28.0 million.
On a
quarterly basis, fiscal 2005 revenue was $17.7 million, $19.0 million, $21.1
million and $24.2 million. The annual increase in revenue is
primarily due to recent acquisitions and a significant increase in the demand
for our 10G products, satellite communications, telecommunications and FTTP
components as well as CATV. Government contract revenue in fiscal
2006 totaled $1.9 million. There was no government contract revenue for fiber
optics products in fiscal 2005. Fiber optics revenue represented 73% and 71%
of
EMCORE's total consolidated revenue for fiscal 2006 and 2005,
respectively.
Photovoltaics
Annual
photovoltaics revenue increased $5.3 million or 16% to $38.7 million from $33.4
million, as reported in the prior year. On a quarterly basis, fiscal 2006
revenue was $10.7 million, $10.3 million, $10.4 million and $7.3 million. On
a
quarterly basis, fiscal 2005 revenue was $7.5 million, $7.8 million, $8.8
million and $9.3 million. Revenue for the quarter ended September 30,
2006 was reduced because EMCORE did not receive export licenses covering three
international satellite programs in time to ship
product. Subsequently, EMCORE received license approvals on all three
of the programs and the delayed orders were shipped to the customers in the
first quarter of fiscal 2007. Government contract revenue totaled $9.2 million
and $9.4 million in fiscal 2006 and 2005, respectively. Photovoltaics
revenue represented 27% and 29% of EMCORE's total consolidated revenue for
fiscal 2006 and 2005, respectively.
Gross
Profit
Gross
profit increased $6.7 million or 35% to $26.0 million from $19.3 million in
the
prior year. Compared to the prior year, gross margins increased from 16.7%
to
18.1%. On a segment basis, margins for Fiber Optics increased from 18% to 21%
primarily from the increase in sales volume and savings from our manufacturing
cost reduction program offset slightly from declining average selling
prices. Margins for the Photovoltaics segment decreased from 14% to
13%. This decrease was due to product mix shift to generally lower
margin products and higher overhead absorption variances as EMCORE consolidated its solar panel
operations
into a state-of-the-art facility located in Albuquerque,
New
Mexico. On
October 1, 2005, EMCORE
adopted SFAS 123(R) and incurred stock-based compensation expense in cost of
revenues of approximately $1.1 million.
Operating
Expenses
Selling,
General and
Administrative. SG&A expenses increased $15.0 million or
65% to $38.2 million from $23.2 million in the prior year. Consistent with prior
years, SG&A expense includes corporate overhead expenses. As a
percentage of revenue, SG&A increased from 20% to 27%. The increase in
SG&A expense is primarily due to:
|
·
|
acquisitions
of Phasebridge Inc., Force Inc., and K2 Optronics, Inc.;
|
|
·
|
a
related-party partial loan forgiveness to our Chief Executive Officer
that
totaled approximately $2.7 million;
|
|
·
|
stock-based
compensation expense totaling $2.3 million in 2006;
|
|
·
|
professional
fees incurred of $1.3 million associated with our review of historical
stock option granting practices;
|
|
·
|
expenses
associated with the move of our solar panel manufacturing facility
to
Albuquerque, New Mexico;
|
|
·
|
Sarbanes-Oxley,
in particular Section 404, compliance expense; and
|
|
·
|
continued
investment in personnel strategic to our business.
|
Research
and Development.
R&D expenses increased $3.2 million or 19% to $19.7
million from $16.5 million in the prior year. The increase in R&D
is due to expenses attributable to the three businesses acquired since November
2005 and additional stock-based compensation expense of $1.3 million related
to
the adoption of SFAS 123(R). As a percentage of revenue, R&D
remained flat at 14% for both fiscal 2006 and 2005.
Impairment. EMCORE
recorded approximately $2.2 million of impairment charges on goodwill and
intellectual property associated with the June 2004 acquisition of Corona
Optical Systems, as more fully described in Note 9, Impairment, of the Notes
to
Consolidated Financial Statements.