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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
or
£ TRANSITION
REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from ___ to
___
EMCORE
Corporation
(Exact
name of
registrant as specified in its charter)
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New
Jersey
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22-2746503
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(State
or other jurisdiction of
incorporation or organization)
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(I.R.S.
Employer Identification
No.)
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10420
Research Road,
SE, Albuquerque,
New
Mexico
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87123
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(Address
of principal executive
offices)
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(Zip
Code)
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Registrant’s
telephone number, including
area code: (505)
332-5000
Securities
registered pursuant to
Section 12(b) of the Act:
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Title
of each class:
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Common
Stock,
No Par Value
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Name
of each exchange on which
registered:
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NASDAQ
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Securities
registered pursuant to
Section 12(g) of the Act:
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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
TABLE
OF CONTENTS
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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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59
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60
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61
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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
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.
|
|
|
·
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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.
|
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·
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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.
|
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·
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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.
|
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·
|
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.
|
|
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·
|
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.
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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.
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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 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:
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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.
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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.
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 
