(Address
of principal executive offices, including zip code)
(732)
271-9090
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act: Common Stock,
No Par Value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. ¨
Yes
x
No
Indicate
by check mark if the registrant is not required to file reports pursuant
to
Section 13 or 15(d) of the Act. ¨
Yes
x
No
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. x
Yes
¨
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 an accelerated filer (as defined
in Rule
12b-2 of the Act). x
Yes
¨
No
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule
12b-2 of the Act). ¨
Yes
x
No
The
aggregate market value of common stock held by non-affiliates of the registrant
as of March 31, 2005 (the last business day of the registrant's most recently
completed second fiscal quarter) was approximately $123,924,639, based
on the
closing sale price of $3.37 per share of common stock as reported on the
NASDAQ
National Market.
Portions
of the Definitive Proxy Statement to be delivered to shareholders in connection
with the Annual Meeting of Shareholders to be held February 13, 2006 are
incorporated by reference in Part III.
This
Annual Report on Form 10-K includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Exchange Act of 1934. These forward-looking statements are based
largely on our current expectations and projections about future events
and
financial trends affecting the financial condition of our business. These
forward- looking statements 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. Management cautions that these forward-looking statements
are
subject to business, economic, and other risks and uncertainties, both
known and
unknown, that may cause actual results to be materially different from
those
discussed in these forward-looking statements. Factors that could contribute
to
these differences include, but are not limited to, those discussed under
“Risk
Factors”, “Forward-Looking Statements”, and elsewhere in this Report. The
cautionary statements made in this Report should be read as being applicable
to
all forward-looking statements wherever they appear in this Report. This
discussion should be read in conjunction with the consolidated financial
statements, including the related footnotes.
These
forward-looking statements include, without limitation, any and all statements
or implications regarding:
·
The
ability of EMCORE Corporation (EMCORE) to remain competitive
and a leader
in its industry and the future growth of the company, the industry,
and
the economy in general;
·
Difficulties
in integrating recent or future acquisitions into our
operations;
·
The
expected level and timing of benefits to EMCORE from on-going
cost
reduction efforts, including (i) expected cost reductions and
their impact
on our financial performance, (ii) our continued leadership in
technology
and manufacturing in its markets, and (iii) our belief that the
cost
reduction efforts will not impact product development or manufacturing
execution;
·
Expected
improvements in our product and technology development
programs;
·
Whether
our products will (i) be successfully introduced or marketed,
(ii) be
qualified and purchased by our customers, or (iii) perform to
any
particular specifications or performance or reliability standards;
and/or
·
Guidance
provided by EMCORE regarding our expected financial performance
in current
or future periods, including, without limitation, with respect
to
anticipated revenues, income, or cash flows for any period in
fiscal 2006
and subsequent periods.
These
forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from those projected, including without
limitation, the following:
·
EMCORE’s
cost reduction efforts may not be successful in achieving their
expected
benefits, or may negatively impact our
operations;
·
The
failure of our products (i) to perform as expected without material
defects, (ii) to be manufactured at acceptable volumes, yields,
and cost,
(iii) to be qualified and accepted by our customers, and (iv)
to
successfully compete with products offered by our competitors;
and/or
·
Other
risks and uncertainties described in EMCORE’s filings with the Securities
and Exchange Commission (SEC) (including under the heading “Risk Factors”
in this Annual Report on Form 10-K) such as: cancellations, rescheduling,
or delays in product shipments; manufacturing capacity constraints;
lengthy sales and qualification cycles; difficulties in the production
process; changes in semiconductor industry growth; increased
competition;
delays in developing and commercializing new products; and other
factors.
Neither
management nor any other person assumes responsibility for the accuracy
and
completeness of the forward-looking statements. Forward-looking statements
are
made only as of the date of this Report and subsequent facts or circumstances
may contradict, obviate, undermine, or otherwise fail to support or substantiate
such statements. We assume no obligation to update the matters discussed
in this
Annual Report on Form 10-K to conform such statements to actual results
or to
changes in our expectations, except as required by applicable law or
regulation.
For
specific information about our company, our products or the markets we serve,
please visit our website at http://www.emcore.com. The information on EMCORE’s
website is not incorporated by reference into and is not made a part of this
report. All of our SEC filings available on our website are accessible free
of
charge.
Company
Overview
EMCORE
Corporation (EMCORE), a New Jersey corporation established in 1984, offers
a
broad portfolio of compound semiconductor-based components and subsystems
for
the broadband, fiber optic, satellite, solar and wireless communications
markets. EMCORE has three operating segments: Fiber Optics, Photovoltaics,
and
Electronic Materials and Devices. Our integrated
solutions philosophy embodies state-of-the-art technology, material science
expertise, and a shared vision of our customer's goals and objectives to
be
leaders in the transport of video, voice and data over copper, hybrid fiber/coax
(HFC), fiber, satellite, and wireless networks.
EMCORE’s
solutions include: optical components and subsystems for fiber-to-the-premise,
cable television, and high speed data and telecommunications networks; solar
cells, solar panels, and fiber optic ground station links for global satellite
communications; and RF transistor materials for high bandwidth wireless
communications systems, such as WiMAX and Wi-Fi Internet access and 3G mobile
handsets and PDA devices.
Through
its joint venture participation in GELcore, LLC, EMCORE plays a vital role
in
developing and commercializing next-generation High-Brightness LED technology
for use in the general and specialty illumination markets.
Industry
Overview
Advances
in information technologies have created a growing need for efficient and
high-performance electronic and optoelectronic systems that operate at very
high
frequencies, emit and detect light, provide higher transmission rates with
increased storage capacities, and can be produced cost-effectively in commercial
volumes. To meet these needs, we develop and manufacture components
and subsystems that incorporate our internally produced compound semiconductor
materials. Our products have several advantages
over traditional silicon devices including higher operating speeds, lower
power
consumption, reduced noise and distortion, higher temperature performance,
light
emitting properties, higher detection efficiency, and higher light emission
efficiency. In
fiscal
2005, we offered innovative products, categorized into three segments, “Fiber
Optics,”“Photovoltaics,” and “Electronic Materials and Devices.” Collectively,
these products and the products offered by our joint venture, GELcore, serve
the
communications, cable television, defense and homeland security, satellite
and
terrestrial power, wireless, and lighting and illlumination markets.
EMCORE’s
Operating Segments
Fiber
Optics
EMCORE's
Fiber Optics segment provides optical components, subsystems and systems
that
enable the transmission of video, voice and data over high-capacity fiber
optic
cables. Our products enable information that is encoded on light signals
to be
transmitted, routed (switched), and received in communication systems. EMCORE’s
Fiber Optics segment serves the cable television (CATV), fiber-to-the-premise
(FTTP), telecommunications, data and satellite communications, storage area
network and, increasingly, the defense and homeland security markets.
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.
Cable
Television (CATV) and Fiber-to-the-premise (FTTP) Networks
-
The
communications industry in which we participate in 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. digitalized video, voice and
data content, bundled as a service provided by a single communication provider.
As
a
market leader in radio frequency (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 US 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.
As
part
of our strategy, we are committed to identifying strategic opportunities
that
either compliment or broaden our markets. In May 2005, EMCORE acquired the
analog CATV and RF over fiber specialty businesses from JDS Uniphase Corporation
(JDSU). This acquisition is expected to 1) solidify our leadership position
in
the CATV marketplace; 2) offer an optimal path to higher volume with improved
overall product margins; and 3) expand our product line offering while
broadening our customer base in the CATV market segment.
Telecommunications
Networks -
Our
state-of-the-art optical components and modules enable high-speed (up to
an
aggregate 40 gigabits per second or Gb/s) optical interconnections that drive
architectures in next-generation carrier class switching and routing networks.
Our parallel optical modules facilitate high channel count optical interconnects
in multi-shelf central office equipment. These systems sit in the network
core
and in key metro nodes of voice telephony and Internet infrastructures, and
are
highly expandable with pay-as-you-grow capacity scaling. EMCORE is a leader
in
providing optical modules to the telecom equipment market area with its most
comprehensive parallel optical transceiver product family, including 12-lane
SNAP-12TM,
OptoCubeTM,
4-lane
QuadLinkTM
and
SmartLinkTM
transceivers. In addition, EMCORE provides the telecom industry with distributed
feedback (DFB) lasers, p-type, intrinsic, and n-type semiconductor material
(PIN) and avalanche photodetector (APD) components, in various packages,
for
OC-48 and OC-192 applications.
Data
Communications Networks
-
EMCORE’s leading-edge optical components and modules for data applications
include 10G Ethernet LX4, 10G Ethernet EX4, 10G Ethernet CX4, and
SmartLinkTM
transceivers. These modules support 10G Ethernet, optical Infiniband, and
parallel optical interconnects for enterprise Ethernet, metro Ethernet and
high
performance computing (HPC), also called "super computing" applications.
These
high-speed modules enable switch-to-switch, router-to-router, and
server-to-server backbone connections at aggregate speeds of 10G and above.
Pluggable LX4 modules in X2 or XENPAK form factors provide a
"pay-as-you-populate" cost structure during installation. The LX4 module
can
transmit data over both multi-mode and single-mode optical fiber, enabling
transmission of optical 10G Ethernet signals over 300 meters of legacy
multi-mode fiber or 10km of single-mode fiber. The EX4 extends optical span
lengths to over 1km of multi-mode and 40km of single-mode fiber. CX4 modules
similarly allow the cost-effective transmission of Ethernet signals over
legacy
copper cable. EMCORE’s parallel optical modules also are used in switched bus
architectures that are needed for next-generation blade servers, clustered
and
grid interconnected servers, super computers and network-attached
storage.
Satellite
Communications Networks - EMCORE
manufactures satellite communications fiber optics products, including
transmitters, receivers, subsystem, and systems, that transport wideband
microwave signals between satellite hub equipment and antenna
dishes.
Storage
Area Networks -
Our
optical components also are used in the high-end data storage market, and
include high-speed, 850 nm vertical cavity surface emitting lasers (VCSELs)
and
PIN photodiode components, and 10G transmit and receive optical subassemblies
(TOSAs/ROSAs). In the future, EMCORE anticipates selling our integrated
pluggable X2 or XENPAK form factor modules into the emerging 10G FibreChannel
segment. These products provide optical interfaces for switches and storage
systems used in large enterprise mission-critical applications, such as
inventory control or financial systems.
Defense
and Homeland Security
-
Leveraging its expertise in high frequency RF module design, EMCORE offers
a
suite of ruggedized products intended for the government and defense markets.
EMCORE’s specialty fiber products include fiber optic gyro components used in
precision guidance munitions; RF fiber optic link components for towed decoy
systems and phased array radar antennas; RF over fiber links for device remoting
and optical networks; and emerging applications such as RF photonic systems.
Photovoltaics
EMCORE
serves the global satellite communications market by providing advanced solar
cell products and solar panels. Compound semiconductor solar cells are used
to
power satellites because they are more resistant to radiation levels in space
and convert substantially more power from light, consequently weighing less
per
unit of power than silicon-based solar cells. These characteristics increase
satellite useful life, increase payload capacity, and reduce launch costs.
EMCORE’s Photovoltaics segment designs and manufactures multi-junction compound
semiconductor 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 27.5%. EMCORE is also the
only
manufacturer to supply true monolithic bypass diodes, for shadow protection,
utilizing several EMCORE patented methods. A satellite’s broadcast success and
corresponding revenue depend on its power efficiency and its capacity to
transmit data.
EMCORE
also provides covered interconnect cells (CICs) and solar panel lay-down
services, giving us the capacity 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. Through well-established partnerships with major
satellite manufacturers and a proven manufacturing process, we play a vital
role
in the evolution of satellite communications around the world.
EMCORE
is
adapting its high efficiency solar cell product for terrestrial applications.
Intended for use with solar concentrator systems, these cells have already
been
measured at 35% efficiency and further improvements are anticipated. We believe
that these systems will be competitive with silicon technologies because
they
are more efficient than silicon and, therefore, benefit more from concentration
than silicon. With energy prices at all time highs, the demand for alternative
energy sources continues to gain momentum. The terrestrial solar cell market
is
currently estimated at $7 billion, growing at a 28% CAGR, and is expected
to
reach $30 billion by 2010, according to CSLA
Asia-Pacific Markets.
EMCORE
is working with several concentrator systems manufacturers to develop system
elements for this product line.
In
April
2005, EMCORE announced plans to consolidate solar panel operations into a
state-of-the-art facility located in Albuquerque, New Mexico. The establishment
of a modern solar panel manufacturing facility, adjacent to the Albuquerque
solar cell fabrication operations, should enable superior consistency, as
well
as reduced manufacturing costs. The
synergy of these operations located on one site is expected to provide the
highest quality, highest reliability, and most cost-effective solar components
to surpass current technologies and offerings. EMCORE will ensure that the
space
qualification of this facility is commensurate with the heritage of its existing
solar panel operation located in City of Industry, California. Production
operations at the California solar panel facility will be discontinued during
fiscal 2006 and completely closed by March 2007. By
consolidating operations into a single location, EMCORE Photovoltaics expects
to
realize annual cost savings in fiscal 2007 and beyond, which will enable
us to
better compete in the terrestrial and space power markets.
Electronic
Materials and Devices
EMCORE’s
RF materials are compound semiconductor materials used in wireless
communications. These materials have a broader bandwidth and superior
performance at higher frequencies compared to silicon-based materials. EMCORE’s
Electronic Materials and Devices (EMD) segment currently produces both GaAs
and
GaN based transistor wafers. For GaAs materials, EMD produces 4-inch and
6-inch
wafers for three different applications: InGaP hetero-junction bipolar
transistors (HBTs), pseudomorphic high electron mobility transistor wafers
(pHEMTs), and enhancement-mode pHEMT transistor wafers (E-modes). These
materials are used for power amplifiers and switches in GSM, CDMA multiband
wireless handsets, WiMAX, Wi-Fi, broadband, cellular handsets, and in wireless
LAN applications. InGaP HBT materials provide higher linearity, higher
power-added efficiency, as well as greater reliability than first generation
AlGaAs HBT technologies. For GaN materials, EMD produces 2-inch, 3-inch,
and
4-inch AlGaN/GaN HEMT materials. These materials are designed to meet future
wireless base station infrastructure requirements for higher power and
frequency, along with temperature operation at industry leading efficiencies.
Recently, EMCORE has also combined into a single RF structure, InGaP HBT
and
pHEMT materials (combinational materials). We believe that our ability to
produce high volumes of RF materials at a low cost will encourage their adoption
in new applications and products.
EMCORE
continues to work closely with its customers to develop next-generation
technology to help them achieve their product roadmap objectives. In fiscal
2005, EMCORE started production of integrated HBT and pHEMT materials. The
combination of these two devices in a single epi structure consolidates the
processing requirement for EMCORE’s customers. Additionally, the close
integration of these devices enables our customers to increase the efficiency
and performance of the devices by incorporating improved power control, better
linearity and smaller size. Anadigics, Inc., a leading supplier of wireless
and
broadband solutions, announced that it had selected EMCORE to be their primary
supplier for all their RF materials. EMCORE also works closely with and supplies
advanced materials to several other industry leaders.
EMCORE
supports GaN development projects through participation in government DARPA
programs centered on wide bandgap communication and radar systems. EMCORE
has
secured several long-term contracts to provide critical GaN HEMT epitaxial
materials to industry leading device, component, and system manufactures.
EMCORE
anticipates converting these DARPA sponsored programs into long-term commercial
business at the conclusion of the existing contracts.
Joint
Venture - GELcore
In
January 1999, General Electric Lighting and EMCORE formed GELcore, a joint
venture to address the solid-state lighting market with high brightness light
emitting diode-based (HB-LED) lighting systems. HB-LEDs
are solid-state compound semiconductor devices that emit light. They are
used in
miniature packages in everyday applications, including commercial displays,
transportation, general and specialty illumination, computers, and other
consumer electronics. HB-LEDs offer substantial advantages over small
incandescent bulbs, including longer life, lower maintenance costs and energy
consumption, and smaller space requirements. Groups of HB-LEDs can make up
single or full-color electronic displays. Presently, HB-LED chips are used
for
backlighting applications, including wireless handsets, cellular handsets,
computer monitors, and automotive dashboard lighting. In addition, they are
used
in consumer products, office equipment, full color displays, neon and
fluorescent replacements, message advertising, informational signs, landscape
lighting, and traffic signals. While growing its business in commercial
applications, GELcore is focused on the general illumination market as its
ultimate goal.
General
Electric Lighting and EMCORE have agreed that this joint venture will be
the
exclusive vehicle for each party’s participation in solid-state lighting. EMCORE
has a 49% non-controlling interest in the GELcore venture. GELcore combines
EMCORE's materials science and device design expertise with General Electric
Lighting's brand name recognition, phosphor technology, and extensive marketing
and distribution capabilities. EMCORE participates in the development and
commercialization of next-generation LED technology for use in the general
and
specialty illumination markets. GELcore's products include traffic lights,
channel letters, and other signage and display products that incorporate
HB-LEDs. In the near term, GELcore expects to deploy its HB-LED products
in the
commercial and industrial markets, including medical, aerospace, commercial
refrigeration, transportation, appliance, and general and specialty illumination
applications. GELcore’s operating results are accounted for using the equity
method of accounting and its financial reporting is on a calendar year basis.
Since its inception, GELcore has had a compound annual revenue growth rate
of
23%, with calendar 2004 revenue totaling $68.0 million. EMCORE expects that
GELcore’s calendar 2005 revenue will approximate $80.0 million.
HB-LEDs
have the potential to significantly reduce overall U.S. lighting energy
consumption. Energy savings to date from HB-LEDs have been estimated to exceed
the power produced from one large electric power plant -- more than 8 billion
kilowatt-hours. If solid-state lighting achieves anticipated price and
performance targets, over the next two decades U.S. lighting energy consumption
could be reduced by over 30 percent. HB-LED traffic signals use only 10 percent
of the electricity consumed by the incandescent lamps they replace. Moreover,
LED signals last several times longer, allowing for additional savings through
reduced maintenance costs. HB-LEDs also have made inroads into mobile
applications, such as brake and signal lights on trucks, buses, and automobiles.
In 2002, an estimated 41 million gallons of gasoline and 142 million gallons
of
diesel fuel were saved because of HB-LED use on these vehicles. If our nation's
entire fleet of automobiles, trucks, and buses were converted to HB-LED
lighting, an estimated 1.4 billion gallons of gasoline and 1.1 billion gallons
of diesel fuel could be saved. (The information in this paragraph is based
on
published reports prepared by Navigant Consulting for the US Department of
Energy.)
EMCORE’s
Products
The
following charts depict some of our products:
The
following illustration shows how EMCORE’s products are deployed throughout the
world’s communication infrastructure, and how they interconnect with each other.
The lower left side shows CATV and FTTP networks, the lower right side shows
telecommunications and data networks and the upper portion shows satellite
communications and wireless networks.
The
following chart summarizes (i) our products, (ii) the markets to which those
products are directed, (iii) representative applications in which our products
are used, and (iv) certain benefits and characteristics of compound
semiconductor devices:
EMCORE
Products
Market
Representative
Applications
Benefits/Characteristics
Analog
& digital lasers (DFB, FP)
Photodetectors
and subassembly components
Broadcast
analog & digital fiber-optic transmitters
QAM
transmitters
CATV
Cable
Television (CATV)
Hybrid
Fiber Coax (HFC) networks
Digital
overlay on HFC
Increased
capacity to offer more cable services
Increase
data transmission speeds
Increased
bandwidth
Lower
power consumption
Low
noise video receive
Increased
transmission distance
Analog
& digital lasers (DFB, FP)
Photodetectors
and subassembly components
PIN
and APD photodiodes and subassemblies
Passive
optical network (PON) transceivers
Analog
& digital video receivers
Multi-Dwelling
Unit (MDU) video receivers
FTTP
Passive
optical network (PON) in
Fiber-to-the-Premise
(FTTP) networks
High
performance for both digital and analog characteristics
Integrated
infrastructure to support competitive costs
Support
for multiple standards
High-speed
lasers (VCSEL, DFB, FP) and subassembly components
High-speed
photodetector (PIN, APD) and subassembly components
Improved
cable management over copper interconnects
Increased
transmission distance
Lowest
cost optical interconnections for massively parallel
multi-processors
Solar
cells and panels
Fiber-optic
transmitters and receivers
Satellite
Communications
Power
modules for satellites
Satellite-to-ground
communications
Antenna
to ground station communications
High
radiation tolerance
High
light-to-power conversion efficiency for reduced size and launch
costs
Increased
bandwidth
RF
and electronic materials
RF
and electronic devices
Optical
transmitters for remoting
Wireless
Communications
Wireless
handsets
Wireless
Broadband
Direct
broadcast systems
Remoting
High
Power Wireless Infrastructure
Increased
network capacity
Lower
power consumption
Reduced
network congestion
Extended
battery life
Improved
signal-to-noise performance
Fiber-optic
gyroscope components
High
Frequency Fiber-Optic Links
ED
Fiber Amplifiers
Terahertz
Spectroscopy Systems
Defense
and
Homeland
Security
Precision
guided munitions
Towed-Decoy
Modules
Secure
communications
Chemical,
Biological,
Explosive
sensors
High-frequency
and dynamic range
Compact
form-factor
Extreme
temperature, shock and vibration tolerance
HB-LED
lighting systems
Solid-State
Lighting
Flat
panel displays
Solid-state
lighting
Outdoor
signage and displays
Traffic
signals
Lower
power consumption
Lower
temperature operation
Longer
life
As
summarized in the table below, EMCORE has positioned itself as a component
and
subsystem manufacturer that services a significant portion of the digital
and
analog communications market:
EMCORE’s
Strategy
Management’s
objective is to maximize shareholder value by capitalizing upon EMCORE’s
leading-edge compound semiconductor materials and device expertise to provide
cost-effective materials, components and subsystems for the broadband, fiber
optic, satellite, solar and wireless communications markets. Specifically,
the
key elements of EMCORE’s strategy include:
I.
Leverage Leading-Edge Compound Semiconductor Expertise Across Multiple Product
Applications
Purchasing
components from multiple vendors can result in too many layers of margin
costs,
such that the final integrated subsystem is neither cost competitive nor
effective in deploying new product technologies or responding to customer
demands. We believe a vertically integrated structure in which key technologies
are produced internally is the most beneficial way to maximize gross margins
and
meet customer objectives. By having the know-how and intellectual property
to
internally produce and supply compound semiconductor products, EMCORE can
stay
ahead of the competition in both performance and cost
effectiveness.
II.
Target Potential High Growth Market Opportunities
EMCORE
targets potential high growth market opportunities, where performance
characteristics and high volume production efficiencies can give compound
semiconductors a competitive advantage over other devices. Historically,
while
technologically superior, compound semiconductors have not been widely deployed
because they are more expensive to manufacture than silicon-based semiconductors
and other existing solutions. EMCORE believes that as compound semiconductor
production costs are reduced, new customers will be compelled to use these
products because of their enhanced performance characteristics. EMCORE is
focusing its product development efforts in the high growth areas of fiber
optic
communications (FTTP infrastructure), data and telecommunications (high data
rate technologies), energy generation (terrestrial concentrator solar cells
and
modules), defense and homeland security (RF transport for defense applications),
integrated GaAs epitaxial technology (3G handsets, PDAs, WiMAX / Wi-Fi
networking), and energy conservation (LED-based technologies through GELcore).
III.
Pursue Strategic Acquisitions and Partnership with Industry Leading
Companies
EMCORE
is
committed to the ongoing evaluation of strategic opportunities that can expand
our addressable markets and strengthen our competitive position. Where
appropriate, EMCORE will acquire additional products, technologies, or
businesses that are complimentary to, or broaden the markets we operate in.
Over
the past several years, several acquisitions have expanded not only our
materials expertise, but also our components and subsystems technologies.
EMCORE
also seeks to develop long-term relationships with leading companies in each
of
the industries that we serve. We develop these relationships through long-term,
high-volume supply agreements, joint ventures, investments, and other
arrangements. EMCORE continues to work closely with its customers to develop
next-generation technology to help them achieve their product roadmap
objectives. Recently, EMCORE announced product design wins with Cisco Systems,
Inc. (10G LX4 and CX4 XENPAK), JDS Uniphase Corporation and Finisar (10G
TOSAs
& ROSAs), Tellabs, Inc. (FTTP Integrated PON transceiver), Alcatel (FTTP
video receiver), and Scientific-Atlanta, Inc. and Aurora Networks (CATV HFC
transmitters). These product launches were successful due to the solid
collaboration we have with these leading companies.
IV.
Invest in Research and Development to Maintain Technology Leadership and
Lower
Production Costs
Through
substantial investment in research and development (R&D), EMCORE seeks to
expand its leadership position in compound semiconductor-based communications
products and subsystems. EMCORE works with its customers to enhance the
performance of our processes, materials science, and fiber optic module design
expertise, including the development of new low-cost, high-volume wafers,
components, and subsystems for our customers. To remain a leader in our markets,
EMCORE not only addresses our customers’ current needs, but we respond to their
evolving requirements to remain designed into their product lifecycles. In
addition, EMCORE’s development efforts are constantly focused on lowering the
production costs of its products. In
2005,
EMCORE’s product development projects included an X2 form factor for LX4, an
extended reach version of the LX4 (the EX4), a high density 1310 nm transmitters
for CATV, a triplexer for FTTP applications, and a 32 channel QAM transmitter
for CATV. EMCORE expects significant revenue from each of these products
in
fiscal 2006. In addition, during fiscal 2005, our photovoltaic division
developed a small concentrator unit using our high-efficiency gallium arsenide
solar cells for terrestrial applications. We intend to expend additional
resources during fiscal 2006 to further develop this technology and establish
cost effective manufacturing and distribution capabilities.
V.
Target Positive Cash Flows and Income From Operations
Management
is committed to achieving operating profitability by reducing EMCORE’s cost
structure and lowering the breakeven points of every product line, with the
goal
of achieving positive operating income during the second half of fiscal 2006.
Over the past several years, management has implemented a number of initiatives
to help achieve this goal. EMCORE has (i) outsourced high volume product
manufacturing to contract manufacturers; (ii) consolidated various corporate
functions; (iii) reduced outside contractors and temporary workers; (iv)
implemented programs to improve manufacturing process yields; (v) focused
R&D efforts on projects that are expected to generate returns within one
year without, we believe, jeopardizing future revenue opportunities; and
(vi)
initiated workforce reductions. In fiscal 2006, further cost reductions will
be
realized from facility consolidations and transfer of additional products
to
contract manufacturers.
Acquisitions
In
addition to using our internal capacity to develop and manufacture products
for
our target markets, EMCORE continues to expand its portfolio of communications
products and technologies through acquisitions:
-
In May
2005, EMCORE acquired the analog CATV and RF over fiber specialty businesses
from JDSU. Product
lines acquired through this acquisition include: HFC 1550-nm broadcast
transmitters, in both legacy and linearized optical modulated designs, to
link
between cable network headends and hubs, 1310-nm transmitters linking cable
network hubs and nodes, 1550-nm DWDM QAM transmitters, associated analog
receivers, amplifiers for extending fiber network reach for FTTP applications,
and RF and microwave over fiber specialty products for defense and satellite
communications. With
this
acquisition, EMCORE consolidated certain key intellectual properties in the
areas of analog CATV transmission and predistortion, and now offers the most
complete and best-of-breed fiber optic product portfolios for the CATV and
FTTP
marketplaces. Our CATV products support various network architectures and
address our customers’ needs of transmitting and receiving signals in short to
long haul, forward to return path, and headend to hub to node configurations.
Our FTTP products include PON transceivers for Optical Network Terminals
(ONTs),
directly and externally modulated optical transmitters for optical line
terminals (OLTs), and high-power (35 dbm) erbium-doped fiber amplifiers (EDFAs)
for in-line signal amplification. As a result of this acquisition, we believe
we
have one of the broadest optical communications product portfolios in the
industry.
-
In
November 2005, EMCORE announced that it acquired
privately held Phasebridge, Inc. of Pasadena, California through an asset
acquisition. The acquisition included its products, technical and engineering
staff, certain assets and intellectual properties and technologies.
Phasebridge’s operations will be integrated into the Ortel division of EMCORE,
which is located nearby in Alhambra, 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.
Please
refer to 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
acquisitions.
Divestiture
In
April
2005, EMCORE divested product technology focused on gallium nitride (GaN)-based
power electronic devices for the
power
device industry. The new company, Velox Semiconductor Corporation (Velox),
raised $6.0 million from various venture capital partnerships. Five EMCORE
employees transferred to Velox as full-time personnel and EMCORE contributed
intellectual property and equipment receiving a 19.2% stake in Velox. As
of
September 30, 2005, the recorded value of EMCORE’s investment in Velox was
approximately $1.3 million.
Investments
In
addition to the GELcore joint venture and Velox investment mentioned above,
in
February 2002, EMCORE purchased $1.0 million of preferred stock of Archcom
Technology, Inc. (Archcom), a venture-funded, start-up optical networking
components company that designs, manufactures, and markets a series of high
performance lasers and photodiodes for the datacom and telecom industries.
During fiscal 2004, Archcom raised additional capital, but EMCORE did not
participate. As a result, we reduced the carrying value of our investment
in
Archcom by 50%, or $0.5 million and recorded this expense as an investment
loss
in the statement of operations.
In
October 2004, EMCORE invested $1.0 million in K2 Optronics, Inc., a
California-based company specializing in the design and manufacture of external
cavity lasers, to strengthen our partnership in designing next-generation,
high-performance, long-wavelength components on an exclusive basis for the
CATV
and FTTP markets. As part of the acquisition of the JDSU businesses, EMCORE
also
paid $0.5 million to purchase JDSU's equity interest in K2 Optronics,
Inc.
Restructuring
Programs
Management
is committed to achieving operating profitability by reducing EMCORE’s cost
structure and lowering the breakeven points of every product line, with the
goal
of achieving positive operating income during the second half of fiscal
2006.
Since
fiscal 2002, EMCORE has significantly streamlined its manufacturing operations
by focusing on core competencies to identify cost efficiencies. Where
appropriate, EMCORE transferred the manufacturing of certain product lines
to
contract manufacturers. In fiscal 2005, we continued restructuring efforts
that
included centralizing corporate and administrative functions, divesting product
technology, and consolidating multiple facilities. 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 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
charges.
Revenues
by Product Line
The
following table sets forth the revenues and percentage of total revenues
attributable to each of EMCORE's operating segments for each of the past
three
fiscal years.
EMCORE
derives a portion of its revenue from funding of research contracts or
subcontracts by various agencies of the U.S. government (government). These
contracts typically cover work performed from several months up to several
years. These contracts may be modified or terminated at the convenience of
the
government; in addition, these programs may be subject to government budgetary
fluctuations. In fiscal 2005, 2004, and 2003, government research contract
funding represented 9%, 5%, and 9% of total EMCORE revenue, respectively.
EMCORE
is
presently engaged in a solar cell development and production program for
a major
US aerospace corporation based on our commercial BTJ photovoltaics technology.
The initial phases of this long-term cost reimbursable contract are focused
on
technology development and manufacturing optimization. Establishment of a
volume
production capacity for this product is being performed by EMCORE at reduced
margins in order to minimize program ramp-up costs for our customer. Over
the
next 2 to 3 years, the program scope could exceed $40 million in
development and production revenues.
Please
refer to 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
government contracts.
Customers
and Geographic Region
EMCORE
is
devoted to working directly with its customers from initial product design,
product qualification and manufacturing to product delivery. We design and
develop (i) process technology, (ii) material science expertise, (iii) optical
sub-assemblies, and/or (iv) integrated module level products for use in our
customers' end-use applications. EMCORE's customer base includes many of
the
largest semiconductor, telecommunications, data communications, and computer
manufacturing companies in the world. In fiscal 2005, Cisco Systems, Inc.
(Cisco) accounted for 19% of our total revenue. In fiscal 2004, Motorola,
Inc.
(Motorola) and Cisco accounted for 13% and 8% of our total revenue,
respectively. In fiscal 2003, Motorola accounted for 14% of total
revenue.
The
following table sets forth EMCORE's consolidated revenues by geographic region.
Revenue was assigned to geographic regions based on the customers’ or contract
manufacturers’ shipment locations.
Geographic
Revenues
For
the fiscal years ended September 30,
FY
2005
FY
2004
FY
2003
(in
thousands)
Revenue
%
of Revenue
Revenue
%
of Revenue
Revenue
%
of Revenue
United
States
$
107,956
84.6
%
$
66,485
71.4
%
$
44,136
73.2
%
Asia
and South America
13,728
10.8
15,912
17.1
9,018
15.0
Europe
5,919
4.6
10,672
11.5
7,130
11.8
Total
revenues
$
127,603
100.0
%
$
93,069
100.0
%
$
60,284
100.0
%
Marketing
and Sales
EMCORE
actively markets its products through its dedicated sales force, external sales
agents, marketing staff, applications engineers, select advertising, and
participation at trade shows. We communicate directly with our customers’
engineering, manufacturing and purchasing personnel in determining product
design, qualifications, performance and cost. EMCORE's strategy is to use its
dedicated sales force for marketing and selling to key accounts. EMCORE’s
external sales agents include UR Group in Europe, BUPT and MilliTech in China,
and Altima, M-RF and RF-Device in Japan. We also have an established
distribution and value added reseller channel to sell our satellite
communication products worldwide. EMCORE plans to expand its external sales
agent program for increased coverage in international markets and some domestic
segments.
EMCORE's
sales cycle for component and subsystem products is usually three months to
in
excess of a year. During this time, we work closely with our customers to
qualify our products in their product lines. As a result, EMCORE develops
strategic and long lasting customer relationships with products and services
that we believe are uniquely tailored to our customers'
requirements.
Backlog
As
of
September 30, 2005, EMCORE had a backlog of approximately $40.2 million as
compared to a backlog of $28.8 million as reported at September 30, 2004. We
believe that substantially all of our backlog can be shipped during the next
12
months, with the exception of approximately $0.6 million on a certain long-term
contract. Given our current market environment, customers may 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 EMCORE’s
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.
Manufacturing
EMCORE's
operations include wafer fabrication, design and device production, solar panel
engineering and assembly, and fiber optic module design and manufacture. Many
of
EMCORE's manufacturing operations are computer monitored or controlled to
enhance reliability and yield. EMCORE employs a strategy of minimizing ongoing
capital investments, while maximizing the variable nature of its cost structure.
EMCORE maintains a commercially advantageous contract supply agreement with
Veeco for MOCVD systems, components, and spare parts. Where EMCORE can gain
significant cost advantages while maintaining strict quality and intellectual
property control, EMCORE outsources to overseas contract manufacturers the
production of certain components and subassemblies. Our contract manufacturing
supply chain is an integral part of enabling this strategy. EMCORE develops
assembly and testing procedures, and then transfers these procedures overseas.
Our contract manufacturers must maintain comprehensive quality and delivery
systems, and we continuously monitor them for compliance. As of September 30,2005, EMCORE had 364 employees involved in manufacturing.
EMCORE
has a combined clean room area totaling approximately 88,000 square feet. Unlike
silicon semiconductor technology, which could involve up to a 100-step
manufacturing process, our electronic materials and devices products are
manufactured in a four-part process: epitaxial deposition, fabrication, testing,
and packaging. The epitaxial deposition process represents the growth of thin
layers of GaAs, GaN, or other materials on a polished wafer, depending on the
nature of the device being produced. Following epitaxy, chips are fabricated
in
a clean room environment. The final steps involve testing and packaging prior
to
shipment to the customer, or further integration into a module or subsystem
within EMCORE's manufacturing infrastructure. EMCORE also maintains the
capability to transfer and monitor our ongoing processes to contract
manufacturers.
Our
various manufacturing processes involve extensive quality assurance systems
and
performance testing. All of EMCORE's facilities have acquired and maintain
certification status for their quality management systems. The New Jersey
facility, which is used for EMCORE's electronic materials and devices products,
is registered to both ISO 9001 and QS 9000-1998. Both the New Mexico and
California facilities, which are used for EMCORE's photovoltaics and fiber
optics products, are registered to ISO 9001.
EMCORE
has continued to invest in performance enhancing components for our MOCVD
production equipment. These investments will enable us to meet ever-stricter
performance requirements, combined with typical industry price erosion. Please
refer to Properties under Item 2 for a listing of manufacturing
locations and the primary products manufactured at each location as of September30, 2005. Please refer to Risk Factors for a discussion of risks attendant
to
EMCORE’s use of foreign contract manufacturers.
Sources
of Raw Materials
EMCORE
depends on a limited number of suppliers for certain raw materials, components
and equipment used in our products. EMCORE continually reviews its vendor
relationships to mitigate risks and improve 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,
EMCORE maintains ongoing communications with our vendors to work to prevent
any
interruptions in supply, and have implemented a supply-chain management program
to maintain quality and improve 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 for a discussion of risks attendant to EMCORE’s reliance
upon sole or limited sources of materials.
Research
and Development
Our
R&D efforts have been sharply focused to maintain our technology 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. The semiconductor industry is characterized
by rapid changes in process technologies with increasing levels of functional
integration. To maintain and improve its competitive position, EMCORE invests
significant resources in R&D. 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.
EMCORE
has dedicated 24 MOCVD systems and five device fabrication facilities for both
research and production, which are capable of processing virtually all compound
semiconductor materials and devices. Five of those MOCVD systems and two device
fabrication areas are dedicated fully to R&D efforts and are used by a staff
of over 125 scientists, engineers, technicians, and staff, of whom 45 have
a
Ph.D. degree. The R&D staff utilizes x-ray, optical, and electrical
characterization equipment, as well as device and module fabrication and
testing, that generates data rapidly, which allows for shortened development
cycles and rapid customer response.
During
fiscal 2005, 2004, and 2003, EMCORE invested $17.4 million, $23.6 million,
and
$17.0 million in R&D activities. As a percentage of revenues, R&D
represented 14%, 25%, and 28% for the fiscal years 2005, 2004, and 2003,
respectively. 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. 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, EMCORE 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. One
such R&D project was the XENPAK 10G LX4 module project that began in August
2003. Within twelve months, the LX4 module was designed and developed by EMCORE,
qualified by the customer, and was transferred to manufacturing for full
production. Revenues from LX4 module sales represented a significant area of
growth in our total fiscal 2004 and 2005 revenues. We continue to expect
significant revenues in fiscal 2006 and beyond. We believe that several other
recently completed R&D projects have the potential to greatly improve our
competitive position and drive revenue growth in the next few years. Listed
below are a couple of examples:
-
In
the FTTP market, EMCORE has developed an integrated PON transceiver
utilizing Ortel’s industry leading video technology. EMCORE’s PON
transceiver has been customer qualified and is now in
production.
-
In
the photovoltaics market, EMCORE has developed a high efficiency
solar
cell product for terrestrial applications. Intended for use in
concentrated sunlight, these cells have been measured at greater
than 35%
efficiency at 500 suns.
Fiscal
2005 new product launches include:
-
April
2005: EMCORE announced its PCI height compliant, small form factor
10GBASE-CX4 (CX4) module, which extends its portfolio of electrical
domain
products for the 10G Ethernet market.
-
March
2005: EMCORE announced a dramatic breakthrough in 1550nm video
transmission technology. This new generation of video transmitters
significantly reduces size, power consumption, and video transmission
costs, while enhancing the signal quality of analog, digital and
IP video
delivered over conventional CATV HFC and FTTP networks.
-
March
2005: EMCORE announced the availability of new generation 32-channel
1550nm wavelength QAM-256 transmitters for broadband CATV dense wavelength
division multiplexing (DWDM) networks. Quadrature Amplitude Modulation
(QAM) is a combined phase and amplitude modulation scheme to increase
the
transmission bandwidth over CATV networks. This technology is long
sought
after to harvest the bandwidth in the CATV allocated frequency band
and
will allow CATV multiple service operators (MSOs) to provide premium
triple-play services: HDTV, data, and Voice over IP
(VoIP).
-
March
2005: EMCORE announced that it has released a 10G Transmitter
Optical Subassembly (TOSA) and Receiver Optical Sub-assembly (ROSA)
for
short wavelength 10G Ethernet, 10G Fibre Channel, and backplane
interconnect applications. EMCORE's TOSA/ROSA products are available
in LC
or SC receptacle packages for makers of optoelectronic modules
operating
in the 850nm window, assembled in XFP, XENPAK, X2, XPAK and proprietary
form factors.
-
February
2005: EMCORE announced that it has released a 10G Receiver Optical
Subassembly (ROSA) for long wavelength 10G Ethernet, OC-192 SONET
and 10G
Fibre Channel applications. EMCORE's ROSA is an innovative and
integrated
LC or SC receptacle receiver for makers of optoelectronic modules
operating in the 1310nm and 1550nm windows, assembled in XFP,
XENPAK, X2,
XPAK and proprietary form factors.
-
February
2005: EMCORE announced that it has released a family of component
devices for Passive Optical Network, Ethernet in the First
Mile, and FTTP
applications. These advanced Distributed Feedback Laser (DFB)
and
Avalanche Photodiode (APD) devices will be integrated into
products
deployed in Ethernet Passive Optical Networks (EPON), Gigabit
Passive
Optical Networks (GPON), Gigabit Ethernet Passive Optical Networks
(GEPON)
and Broadband Passive Optical Networks (BPON). These advanced
components
add to EMCORE's strong market position as a leading semiconductor
laser
and photodiode supplier.
-
February
2005: EMCORE announced that it has released a small form factor
version of its successful 10GBASE-LX4 (LX4) module, used
in 10G Ethernet
(10GbE) applications. The new reduced size X2 module is roughly
half the
size of the XENPAK unit and supports topside mounting on
the host PCB.
This module continues to fully support the 10GbE, IEEE 802.3ae-2002
standard. The small form factor LX4 module in an X2 form
factor offers all
of the functionality of EMCORE's XENPAK units. LX4 modules
offer a single
interface that can transmit over both multimode fiber and
single-mode
fiber. It is the only solution approved by the IEEE that
can enable 10GbE
connectivity over 300m over multimode fiber, as well as 10km
of
single-mode fiber. By the end of 2006 it is estimated the
number of X2
ports shipping will begin to surpass XENPAK. EMCORE has identified
this
rapid expansion of the small form factor 10GbE X2 segment
as a significant
market opportunity for its new
product.
-
February
2005: EMCORE announced that it has released a new, innovative
10G
Ethernet compatible XENPAK module, part number EEX-8100-XEN
(EX4), which
enables extended distance transmission over both multimode
and single-mode
fibers. The EX4 is a proprietary EMCORE product that plugs
into standard
XENPAK slots and can transmit up to 1 km on legacy multimode
fiber, and up
1.5 km on some higher-grade legacy multimode fibers. The
module can also
transmit up to 40 km over installed single-mode fiber.
This extended
multimode fiber reach addresses the needs of many end-users
who find
themselves with "stranded fibers" which are longer than
300 m. These
legacy multimode fibers were installed for transmission
of older
technologies, such as FDDI, Fast Ethernet and Gigabit Ethernet.
Current
10G Ethernet modules do not support these stranded links.
According to a
commissioned report by Alan Flatman, presented to the IEEE
in March 2004,
there are greater than seven million multimode links longer
than 300 m
installed worldwide in campus and building backbones. EMCORE
has
identified these embedded stranded fibers as a significant
market
opportunity for the EX4, by enabling these links to upgrade
to 10G
Ethernet.
EMCORE
also actively competes for R&D funds. In view of the high cost of
development, EMCORE solicits research contracts that provide opportunities
to
enhance its core technology base and promote the commercialization of targeted
EMCORE products. 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.
Intellectual
Property and Licensing
EMCORE
protects its proprietary technology by applying for patents where appropriate
and in other cases by preserving the technology and 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, 2005, EMCORE held 63 U.S. patents and 8 foreign
patents. Also, over 100 patent applications have been filed in the U.S. and
internationally. Our U.S. patents will expire between 2009 and 2022. These
patents and patent applications claim various aspects of current or planned
commercial versions of EMCORE's materials, components, and
subsystems.
We
also
have entered into license agreements with the licensing agencies of other
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 US and other foreign countries. We do
not
believe the financial obligations under any of these agreements has a material
adverse effect on our business, financial condition or results of
operations.
EMCORE
relies on trade secrets to protect its intellectual property when it believes
that publishing patents would make it easier for others to reverse engineer
EMCORE's proprietary processes. A "trade secret" is information that has value
to the extent it is not generally known, not readily ascertainable by others
through legitimate means, and protected in a way that maintains its secrecy.
Reliance on trade secrets is only an effective business practice insofar as
trade secrets remain undisclosed and a proprietary product or process is not
reverse engineered or independently developed. 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, our joint venture partner,
customers, and suppliers. We also rely upon other intellectual property rights
such as trademarks and copyright 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. To date, we have not engaged in any litigation regarding the
intellectual property rights of our products and processes.
In
connection with our sale of the TurboDisc capital equipment business in November
2003, EMCORE retained a license to all MOCVD system-related technology. EMCORE
intends to use this license to further optimize the performance of its own
reactors and develop improvements to its hardware that will increase yields
on
existing products and enable the fabrication of advanced, wide bandgap
materials.
Environmental
Regulations
EMCORE
is
subject to federal, state, and local laws and regulations concerning the use,
storage, handling, generation, treatment, emission, release, discharge, and
disposal of certain materials used in its R&D and production operations, as
well as laws and regulations concerning environmental remediation and employee
health and safety. The production of wafers and devices involves the use of
certain hazardous raw materials, including, but not limited to, ammonia,
phosphine, and arsine. If 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 government or third parties, and
injunctions requiring us to suspend or curtail operations which could have
a
material adverse effect on our business.
EMCORE
has in-house professionals to address compliance with applicable environmental
and health and safety laws and regulations. We believe that EMCORE is currently
in compliance with all applicable environmental laws, including the Resource
Conservation and Recovery Act, except such violations as could not reasonably
be
expected to have a material effect on our financial condition or results of
operations.
Competition
The
semiconductor industry is extremely competitive and is characterized by rapid
technological change, frequent introduction of new products, short product
life
cycles and significant price erosion. EMCORE faces actual and potential
competition from numerous domestic and international compound semiconductor
companies. Many of these companies have greater engineering, manufacturing,
marketing, and financial resources than we have. A partial list of these
competitors include:
CATV.
Competitors in the CATV market include Fujitsu, Mitsubishi and Optium
Corporation.
Telecommunications.
For
telecommunications and FTTP components, the market competitors include Fujitsu,
JDSU, Mitsubishi, MRV Communications, and Summitomo. For 10G transceivers
and
parallel optical modules, our competitors include Agilent Technologies, Inc.
(Agilent), Eudyna Devices, Inc., Finisar Corporation (Finisar), Opnext, Inc.
(Opnext), and Picolight, Inc. (Picolight).
Data
and Storage. The
market competitors include Agilent, Finisar (particularly its Advanced Optical
Component division, which was acquired from Honeywell Corporation), Opnext,
and
Picolight. There are also numerous smaller vendors located throughout the
world.
Satellite
Communications. For
photovoltaics products, EMCORE primarily competes with Mitsubishi Electric,
RWE
SCHOTT Solar GmbH, Sharp Electronics Corporation, and Spectrolab, Inc., a
subsidiary of The Boeing Company. For satellite communication products, our
primary competitors are Foxcom and MITEQ, Inc.
Wireless
Communications. The
primary competitors in the electronic materials and wireless communications
markets include APA Enterprises, Inc., CREE Inc., Hitachi Cable, IQE plc.,
Kopin
Corporation, Sumika, Visual Photonics Epitaxy Co., Ltd., as well as integrated
circuit manufacturers with in-house transistor growth capabilities.
Defense
and Homeland Security.
The
competitors in RF transport for defense and homeland security products include
Aegis Technologies, Linear Photonics, LLC , Gemfire Corporation, JDSU, and
Optium Corporation.
Solid
State Lighting. The
principal competitors for HB-LED applications and EMCORE's joint venture
with
General Electric Lighting include CREE, LumiLeds Lighting, a division of
Philips
Lighting, Nichia Corporation, Siemens AG's Osram GmbH subsidiary, and Toyoda
Gosei Co., Ltd. In addition, Arima Computer Corporation, Epistar Corporation,
and other Asia-based companies in recent years have begun production of
LEDs.
In
addition to the companies listed above, EMCORE competes with many research
institutions and universities for research contract funding. EMCORE also
sells
its products to current competitors and companies with the capability of
becoming competitors. As the markets for EMCORE's products grow, new competitors
are likely to emerge and current competitors may increase their market share.
In
the EU, political and legal requirements encourage the purchase of EU-produced
goods, which may put EMCORE at a competitive disadvantage against its European
competitors.
There
are
substantial barriers to entry by new competitors across EMCORE's 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 products; the lengthy sales and qualification cycles; and the
difficulties in hiring and retaining skilled employees with the required
scientific and technical backgrounds. EMCORE believes that the primary
competitive factors within EMCORE's 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 factors. 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.
Employees
At
September 30, 2005, EMCORE had 650 employees, including 364 employees in
manufacturing operations, 99 employees in R&D, 148 employees in sales,
general and administration (SG&A), and 39 temporary employees. This
represented an increase of 62 employees or 11% from September 30, 2004. 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. None of EMCORE's employees are covered
by
a collective bargaining agreement, nor have we ever experienced any
labor-related work stoppage. We believe our employee relations generally
to be
good.
Risk
Factors
YOU
SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW. IF ANY OF THE FOLLOWING
RISKS ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF
OPERATIONS COULD BE MATERIALLY AND ADVERSELY AFFECTED. WE CAUTION THE READER
THAT THESE RISK FACTORS MAY NOT BE EXHAUSTIVE. WE OPERATE IN A CONTINUALLY
CHANGING BUSINESS ENVIRONMENT AND NEW RISK FACTORS EMERGE FROM TIME TO TIME.
WE
CANNOT PREDICT SUCH NEW RISK FACTORS, AND WE CANNOT ASSESS THE EFFECT, IF
ANY,
OF SUCH NEW RISK FACTORS ON OUR BUSINESSES OR THE EXTENT TO WHICH ANY FACTOR,
OR
COMBINATION OF FACTORS, MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE
PROJECTED IN ANY FORWARD-LOOKING STATEMENTS CONTAINED IN THIS REPORT.
ACCORDINGLY, FORWARD-LOOKING STATEMENTS SHOULD NOT BE RELIED UPON AS A
PREDICTION OF ACTUAL RESULTS. IN ADDITION, OUR MANAGEMENT'S ESTIMATES OF
FUTURE
OPERATING RESULTS ARE BASED ON THE CURRENT COMPLEMENT OF BUSINESSES, WHICH
IS
CONSTANTLY SUBJECT TO CHANGE AS MANAGEMENT UPDATES AND IMPLEMENTS ITS BUSINESS
STRATEGY.
We
May Continue To Incur Net Losses.
We
started operations in 1984 and as of September 30, 2005, we had an accumulated
deficit of $316.0 million. We incurred net losses of $13.1 million in fiscal
2005, $13.4 million in fiscal 2004, and $38.5 million in fiscal 2003. While
we
have reduced our cost structure substantially, and are focused on profitability,
we may continue to lose money. Many of our expenses, particularly those relating
to capital equipment, debt service, and manufacturing overhead are fixed.
Accordingly, lower revenue causes our fixed production costs to be allocated
across reduced production volumes, which adversely affects our gross margin
and
profitability. While our business strategy is to achieve operational
profitability during the second half of fiscal 2006, if we are unable to
achieve
target revenues or to contain our cost structures, we will continue to incur
operating losses.
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.
Reduced
Customer Lead Times Means We Are Less Able To Forecast Revenues And, As A
Result, We May Be Unable To Accurately Predict Growth And Manage Our Cost
Structure.
Several
of our customers have reduced the lead times they give us when ordering product
from us. While this trend has enabled us to reduce inventory, it also restricts
our ability to forecast revenues. If our sales and profit margins do not
increase to support the higher levels of operating expenses, and if our new
product offerings are not successful, our business, financial condition,
results
of operations and cash flows could be materially and adversely
affected.
Our
Success Depends On Our Ability To Introduce New Products On A Timely
Basis.
We
compete in markets characterized by rapid technological change, evolving
industry standards and continuous improvements in products. Due to constant
changes in these markets, our future success depends on our ability to improve
our manufacturing processes, systems and products. To remain competitive
we must
continually introduce new and improved products. Our business, financial
condition, results of operations and cash flows may be materially and adversely
affected if:
·
we
are unable to improve our existing products on a timely
basis;
·
our
new products are not introduced on a timely basis or do not achieve
sufficient market penetration; or
·
our
new products experience reliability or quality
problems.
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, additional
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.
The
Time And Costs Of Developing New Products May Exceed Our Budget And Our Products
May Not Be Commercially Successful.
We
continue to introduce a number of new products, and expect to be introducing
additional new products in the future. The commercialization of our new products
involves substantial expenditures in R&D, production, and marketing. We may
be unable to successfully design or manufacture these new products and may
have
difficulty penetrating new markets. In 2006, we intend to expend significant
resources to continue to develop and commercialize a terrestrial solar
concentrator based on our high efficiency gallium arsenide solar cell. There
can
be no assurance that we will successfully complete development or that any
resultant system will be as cost effective as existing silicon-based solutions.
In addition, development and commercialization may take longer than we
anticipate and be more costly than we have budgeted.
Because
it is generally not possible to predict the amount of time required and the
costs involved in achieving certain research, development, and engineering
objectives, actual development costs may exceed budgeted amounts and estimated
product development schedules may be extended. Our business, financial
condition, results of operations, and cash flows could suffer if we incur
budget
overruns or delays in our R&D efforts.
We
Have Substantial Long-Term Debt Which We May Be Unable To Repay If We Cannot
Generate Sufficient Funds To Do So.
In
May
2001, we sold $175.0 million of 5% Convertible Subordinated Notes due May15,2006 (2006 Notes) in a private placement for resale to qualified institutional
buyers. In December 2002, EMCORE purchased $13.2 million principal amount
of the
notes at prevailing market prices for an aggregate of approximately $6.3
million. In February 2004, EMCORE exchanged approximately $146.0 million,
or
90.2%, of these remaining 2006 Notes for approximately $80.3 million aggregate
principal amount of new 5% Convertible Senior Subordinated Notes due May15,2011 (2011 Notes) and approximately 7.7 million shares of EMCORE common stock.
The new notes are convertible into EMCORE common stock at a conversion price
of
$8.06 per share, subject to adjustment under customary anti-dilutive provisions.
They also are redeemable should EMCORE's common stock price reach $12.09
per
share.
In
November 2005, EMCORE exchanged $14,425,000 aggregate principal amount of
EMCORE’s 2006 Notes for $16,580,460 aggregate principal amount of newly issued
Convertible Senior Subordinated Notes due May 15, 2011 (New 2011 Notes) pursuant
to an Exchange Agreement (Agreement) with Alexandra Global Master Fund Ltd.
(Alexandra). The terms of the New 2011 Notes are identical in all
material respects to EMCORE’s 2011 Notes. The New 2011 Notes are
ranked pari passu with the existing 2011 Notes. The New 2011 Notes will be
convertible at any time prior to maturity, unless previously redeemed or
repurchased by EMCORE, into the shares of EMCORE common stock, no par value,
at
the conversion rate of 124.0695 shares of common stock per $1,000 principal
amount. The
effective conversion rate is $8.06 per share of common stock, subject to
adjustment under customary anti-dilutive provisions. They also are redeemable
should EMCORE's common stock price reach $12.09 per share. The 2006 Notes
exchanged by Alexandra represented approximately 91.4% of the $15,775,000
total
amount of existing 2006 Notes outstanding at the time of the transaction.
EMCORE intends to redeem for cash the remaining $1,350,000 of 2006 Notes
on or
before the May 15, 2006 maturity date.
In
addition, we may incur additional debt in the future. This significant amount
of
debt could, among other things:
·
make
it difficult for us to make payments on the notes and any other
debt we
may have;
·
make
it difficult for us to obtain any necessary future financing for
working
capital, capital expenditures, debt service requirements or other
purposes;
·
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;
·
limit
our flexibility in planning for, or reacting to, changes in our
business;
and
·
make
us more vulnerable in the event of a further or continued downturn
in our
business.
If
our
cash flow is inadequate to meet our obligations or we are unable to generate
sufficient cash flow or otherwise obtain funds necessary to make required
payments on the notes or our other obligations, we would be in default under
the
terms thereof. Default under one or both of the note indentures would permit
the
holders of the notes to accelerate the maturity of the notes and could cause
defaults under future indebtedness we may incur. Any such default would have
a
material adverse effect on our business, prospects, financial condition,
results
of operations and cash flows. In addition, we cannot assure you that we would
be
able to repay amounts due in respect of the notes if payment of either or
both
of the notes were to be accelerated following the occurrence of an event
of
default as defined in the respective note indentures.
We
May Engage In Acquisitions That May Effect Our Operating Results, Dilute
Our
Shareholders, and/or Cause Us To Incur Debt.
We
may
pursue acquisitions to acquire new technologies, products or service offerings.
Future acquisitions by us may involve the following:
·
use
of significant amounts of cash;
·
potentially
dilutive issuances of equity securities on potentially unfavorable
items;
and
·
incurrence
of debt on potentially unfavorable terms, as well as amortization
expense
related to other intangible assets.
In
addition, acquisitions involve numerous risks, including:
·
inability
to achieve anticipated synergies;
·
difficulties
in the integration of the operations, technologies, products and
personnel
of the acquired company;
·
diversion
of management’s attention from other business
concerns;
·
risks
of entering markets in which we have no or limited prior experience;
and
·
potential
loss of key employees of the acquired company or of
EMCORE.
From
time
to time, we have engaged in discussions with acquisition candidates regarding
potential acquisitions of product lines, technologies and businesses. If
acquisitions occur, we cannot be certain that our business, operating results
and financial condition will not be materially and adversely
affected.
In
the
past several years we have completed several major acquisitions, which have
reoriented EMCORE's strategy and broadened our product lines within our target
markets. However, if customer demand in these markets does not meet current
expectations, our revenues could be significantly reduced, and we could suffer
a
material adverse effect on our financial condition, results of operations
and
cash flows.
Our
Acquisitions Place A Strain On Our Resources.
We
are in
a dynamic business and certain of our larger acquisitions over the past several
years have presented many challenges. These acquisitions have placed, and
will
continue to place, a significant strain on our management, financial, sales,
and
other employees, as well as on our internal systems and controls. If we are
unable to effectively manage multiple facilities and a joint venture in
geographically distant locations, our business, financial condition, results
of
operations and cash flows could be materially and adversely
affected.
Cisco
Systems, Inc. (Cisco) is an important customer, accounting for 19% of our
revenue in fiscal 2005. The majority of our revenues from Cisco come from
the
sale of our LX4 module.
We
sell
most of our LX4 modules to Cisco. Until recently, EMCORE was the sole supplier
of LX4 modules to Cisco, and we currently continue to supply Cisco with the
majority of its needs. In fiscal 2005, sales to Cisco accounted for 19% of
our
total revenue. The majority of this revenue came from sales of our LX4 module.
We do not have an exclusive commercial arrangement with Cisco and Cisco has
made
it clear that continued sales are dependent on our continuing to be the leader
in price, quality and delivery. We understand that Cisco has recently qualified
another vendor for LX4 modules and is working with several other vendors
(including EMCORE) to qualify the next generation LX4 module, the X2. There
can
be no assurance that EMCORE will continue to be the dominant supplier of
LX4
modules to Cisco or that EMCORE will be selected to supply X2 modules to
Cisco.
Absent strong demand for EMCORE’s LX4 modules from other customers, if Cisco
decreases its purchase orders, for any reason, our business and operating
results (including, among other things, our revenue and gross margin) will
be
harmed, at least in the short-term.
The
Markets In Which We Compete Are Highly Competitive. An Increase In Competition
Would Limit Our Ability To Maintain Or Increase Our Market
Share.
We
face
substantial competition from a number of companies, many of which have greater
financial, marketing, manufacturing and technical resources. Larger-sized
competitors could spend more on R&D, which could give those competitors an
advantage in meeting customer demand. We expect that existing and new
competitors will improve the design of their existing products and will
introduce new products with enhanced performance characteristics. The
introduction of new products or more efficient production of existing products
by our competitors could result in price reductions and increases in expenses,
and reduce market acceptance of our products, which could diminish our market
share and gross margins.
We
Face Intense and Predatory Competition in Certain Markets.
The
compound semiconductor industry has been undergoing a period of significant
consolidation, and we believe that some of our competitors have engaged in
below-cost sales and other predatory conduct in order to preserve revenues
and/or drive their competitors out of business. As part of our strategy to
achieve profitable growth, we may be unable to win future business from
customers who elect to buy from such predatory companies. As a result, our
revenues may decline as we focus on profitable business opportunities (by
not
choosing to bid on orders with negative gross margins), and our business,
financial condition, results of operations, and cash flows may be materially
and
adversely impacted.
We
May Not Respond Effectively to Increased Competition Caused by Industry
Volatility and Consolidation.
Our
business could be seriously harmed if we do not compete effectively. We face
competitive challenges, especially from Asia, that are likely to arise from
a
number of factors, including industry volatility resulting from rapid product
development cycles; increasing price competition due to maturation of
technologies; industry consolidation resulting in competitors with greater
financial, marketing, and technical resources; the emergence of new competitors
in Asia with lower cost structures and competitive offerings; and greater
competition for fewer customers as a result of consolidation in our sales
channels.
Fluctuations
In Our Quarterly Operating Results May Negatively Impact Our Stock
Price.
Our
revenues and operating results may vary significantly from quarter to quarter
due to a number of factors particular to EMCORE and the compound semiconductor
industry. Not all of these factors are in our control. They can
include:
·
the
volume and timing of orders and payments for our
products;
·
the
timing of our announcements and introduction of new products and
of
similar announcements by our
competitors;
·
downturns
in the market for our customers’
products;
·
regional
economic conditions, particularly in locations (such as the United
States
and Asia) where we derive a significant portion of our
revenues;
·
price
volatility in the compound semiconductor industry;
and
·
changes
in product mix.
These
factors may cause our operating results for future periods to be below the
expectations of analysts and investors. This may cause a decline in the price
of
our common stock.
General
Electric Lighting, Our Joint Venture Partner, Who Has Majority Ownership
and
Control Of GELcore, May Make Decisions That We Do Not Agree With And That
Adversely Affect Our Net Income.
We
have a
49% minority interest in our GELcore joint venture with General Electric
Lighting. A board of managers governs GELcore with representatives from both
General Electric Lighting and EMCORE. Many fundamental decisions must be
approved by both parties, which means we will be unable to direct the operation
and direction of GELcore without the agreement of General Electric Lighting.
If
we are unable to agree on important issues with General Electric Lighting,
GELcore's business may be delayed or interrupted, which may, in turn, materially
and adversely affect our business, financial condition, results of operations
and cash flows.
We
have
devoted and may be required to continue to devote significant funds and
technologies to GELcore to develop and enhance its products. In addition,
GELcore requires that some of our employees devote much of their time to
its
projects. This places a strain on our management, scientific, financial,
and
sales employees. If GELcore is unsuccessful in developing and marketing their
products, our business, financial condition, results of operations and cash
flows may be materially and adversely affected.
General
Electric Lighting and EMCORE have agreed that this joint venture will be
the
sole vehicle for each party's participation in the solid state lighting market.
General Electric Lighting and EMCORE have also agreed to several limitations
during the life of the venture and thereafter relating how each of us can
make
use of the joint venture's technology. One consequence of these limitations
is
that in certain circumstances, such as a material default by us or certain
sales
of our interest in the joint venture, we would not be permitted to use the
joint
venture's technology to compete in the solid state lighting market.
Since
a Significant Percentage of Our Revenues Are From Foreign Sales, Various
International Commercial Risks May Disproportionately Affect Our
Revenues.
Sales
to
customers located outside the U.S. accounted for approximately 15% of our
revenues in fiscal 2005, 29% of our revenues in fiscal 2004, and 27% of our
revenues in fiscal 2003. Sales to customers in Asia represent the majority
of
our international sales. We believe that international sales will continue
to
account for a significant percentage of our revenues. Because of this, the
following international commercial risks may disproportionately affect our
revenues:
·
political
and economic instability may inhibit export of our devices and
limit
potential customers’ access to U.S. dollars in a country or region in
which our customers are located;
·
we
may experience difficulties in the timeliness of collection of
foreign
accounts receivable and be forced to write off receivables from
foreign
customers;
·
tariffs
and other barriers may make our devices less cost
competitive;
·
the
laws of certain foreign countries may not adequately protect our
trade
secrets and intellectual property or may be burdensome to comply
with;
·
potentially
adverse tax consequences to our customers may make our devices
not cost
competitive; and
·
currency
fluctuations may impact foreign investment in U.S. companies, including
EMCORE, or affect overseas demand for our
products.
We
Will Lose Sales If We Are Unable To Obtain Government Authorization To Export
Our Products.
Exports
of our products to certain international destinations (such as the People's
Republic of China, Argentina, Brazil, India, Russia, Malaysia, and Taiwan)
may
require pre-shipment authorization from U.S. export control authorities,
including the U.S. Departments of Commerce and State. Authorization may be
conditioned on end-use restrictions. Failure to receive these authorizations
may
materially and adversely affect our revenues and in turn our business, financial
condition, results of operations and cash flows from international
sales.
Our
communications satellite business is particularly sensitive to export control
issues. All of our commercially-available solar cell products are
export-controlled. At present, jurisdiction over export of these items is
being
reviewed by the U.S. Department of State and the U.S. Department of Commerce.
During this review period, we are required to apply to the U.S. Department
of
State for export licenses for our solar cell products. Given the current
global
political climate, obtaining export licenses can be difficult and
time-consuming. Failure to obtain export licenses for these shipments could
significantly reduce our revenue, and could have a material adverse effect
on
our financial condition, results of operations and cash flows.
Our
Operating Results Could Be Harmed If We Lose Access To Sole Or Limited Sources
Of Materials Or Services.
We
currently obtain some components and services for our products from limited
or
single sources. We generally do not carry significant inventories of any
raw
materials. Because we often do not account for a significant part of our
vendors’ business, we may not have access to sufficient capacity from these
vendors in periods of high demand. In addition, we risk having important
suppliers terminate product lines, change business focus, or even go out
of
business. Because some of these suppliers are located overseas, we may be
faced
with higher costs of purchasing these materials if the dollar weakens against
other currencies. If we were to change any of our limited or sole source
vendors, we would be required to re-qualify each new vendor. Re-qualification
could prevent or delay product shipments that could negatively affect our
results of operations. In addition, our reliance on these vendors may negatively
affect our production if the components vary in quality or quantity. If we
are
unable to obtain timely deliveries of sufficient components of acceptable
quality or if the prices of components for which we do not have alternative
sources increase, our business, financial condition, results of operations
and
cash flows could be materially and adversely affected.
Our
Products Are Difficult To Manufacture And Our Production Could Be Disrupted
If
We Are Unable To Avoid Manufacturing Difficulties.
We
manufacture many of our wafers and devices in our own production facilities.
Difficulties in the production process can cause a substantial percentage
of
wafers and devices to be rejected. Lower-than-expected production yields
may
delay shipments or result in unexpected levels of warranty claims, either
of
which can materially and adversely affect our operating results. We have
experienced difficulties in achieving planned yields in the past, particularly
in pre-production and upon initial commencement of full production volumes,
which have adversely affected our gross margins. Because the majority of
our
manufacturing costs are relatively fixed, our production yields are critical
to
our financial results. Because we manufacture many of our products internally,
any interruption in manufacturing resulting from fire, natural disaster,
equipment failures, or otherwise could materially and adversely affect our
business, financial condition, results of operations and cash
flows.
We
Face Lengthy Sales And Qualifications Cycles For Our Products And, In Many
Cases, Must Invest A Substantial Amount Of Time And Funds Before We Receive
Orders.
Nearly
all of our products are tested by current and potential customers to determine
whether they meet customer or industry specifications. During a given
qualification period, we invest significant resources and allocate substantial
production capacity to the manufacture of these new products, prior to any
commitment to purchase by customers and without generating significant revenues
from the qualification process. 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, results
of
operations and cash flows could be materially and adversely
affected.
Our
historical and future budgets for operating expenses, capital expenditures,
operating leases, and service contracts are based upon our assumptions as
to the
anticipated market acceptance of our products. Because of the lengthy lead
time
required for product development and the changes in technology that typically
occur during such period, it is difficult to accurately estimate customer
demand
for a given product. If our products do not achieve expected customer demand,
our business, financial condition, results of operations and cash flows could
be
materially and adversely affected.
If
Our Contract Manufacturers Fail To Deliver Quality Products At Reasonable
Prices
And On A Timely Basis, Our Results Of Operations And Financial Condition
Could
Be Materially 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. 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. 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 control over quality and delivery schedules.
We also may experience supply interruptions, import/export controls, cost
escalations and competitive disadvantages if our contract manufacturers fail
to
develop, implement or maintain manufacturing methods appropriate for our
products and customers.
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 is 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 the 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 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 our contract manufacturer’s manufacturing lines and,
as a consequence, our operating results and customer relationships could
be
harmed.
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.
We
Have Continuing Concerns Regarding The Manufacture, Profitability Quality,
And
Distribution Of Our Products.
EMCORE’s
success depends upon our ability to timely deliver high quality products
to our
customers at acceptable cost. As a technology company, we constantly encounter
quality, volume, price and cost concerns. These factors have caused considerable
strain on our execution capabilities and our customer relations. Currently,
we
are (a) having difficulty responding to customer delivery expectations for
some
of our products, (b) unable to fulfill customer demand for some of our products,
(c) experiencing yield and quality problems, and (d) expending additional
funds
and other resources to respond to these execution challenges. We are currently
losing additional revenue opportunities due to these concerns. We are also,
in
the short-term, diverting resources from R&D and other functions to assist
with resolving these matters. If we do not improve our performance in all
of
these areas, our operating results will be harmed, the commercial viability
of
new products may be challenged and our customers may choose to reduce their
orders of our products and purchase additional products from our competitors.
Our business, financial condition, results of operations, and cash flows
may be
materially and adversely affected by these factors.
We
Could Incur Significant Costs To Correct Defective Products.
Our
products are rigorously tested for quality both internally and by our customers.
Nevertheless, our products do, and may continue to, fail to meet customer
expectations from time-to-time. Also, not all defects are immediately
detectible. Failures could result from faulty design or problems in
manufacturing. In either case, we could incur significant costs to repair
and/or
replace defective products under warranty, particularly when such failures
occur
in installed systems. We have experienced such failures in the past and remain
exposed to such failures. In some cases, product redesigns and/or rework
may be
required to correct a defect, and such occurrences could adversely impact
future
business with effected customers. Our business, financial condition, results
of
operations and cash flows may be materially and adversely affected by any
unexpected warranty costs.
Industry
Demand For Skilled Employees (Particularly Scientific And Technical Personnel
With Compound Semiconductor Experience) Exceeds The Number Of Skilled Personnel
Available.
Our
future success depends, in part, on our ability to attract and retain certain
key personnel, including scientific, operational and management personnel.
The
competition for attracting and retaining these employees (especially scientists
and technical 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 financial
condition, results of operations and cash flows may be materially and adversely
affected.
Protecting
Our Trade Secrets And Obtaining Patent Protection Is Critical To Our Ability
To
Effectively Compete For Business.
Our
success and competitive position depend on protecting our trade secrets and
other intellectual property. Our strategy is to rely both on trade secrets
and
patents to protect our manufacturing and sales processes and products. Reliance
on trade secrets is only an effective business practice insofar as trade
secrets
remain undisclosed and a proprietary product or process is not reverse
engineered or independently developed. We take certain measures to protect
our
trade secrets, including executing non-disclosure agreements with our employees,
our joint venture partner, customers, and suppliers. If parties breach these
agreements or the measures we take are not properly implemented, we may not
have
an adequate remedy. Disclosure of our trade secrets or reverse engineering
of
our proprietary products, processes, or devices could materially and adversely
affect our business, financial condition, results of operations and cash
flows.
There
is
also no assurance that any patents will afford us commercially significant
protection of our technologies or that we will have adequate resources to
enforce our patents. We are actively pursuing patents on some of our recent
inventions. In addition, the laws of certain other countries may not protect
our
intellectual property to the same extent as U.S. laws.
Our
Failure To Obtain Or Maintain The Right To Use Certain Intellectual Property
May
Adversely Affect Our Financial Results.
The
compound semiconductor, optoelectronics and 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 our
intellectual property, there can be no assurance that:
·
infringement
claims (or claims for indemnification resulting from infringement
claims)
will not be asserted against us or that such claims will not be
successful;
·
future
assertions will not result in an injunction against the sale of
infringing
products or otherwise significantly impair our business and results
of
operations;
·
any
patent owned by us will not be invalidated, circumvented or challenged;
or
·
we
will not be required to obtains licenses, the expense of which
may
adversely affect our results of operations and
profitability.
In
addition, effective copyright and trade secret protection may be unavailable
or
limited in certain foreign countries. Litigation, which could result in
substantial cost to us and diversion of our resources, may be necessary to
defend our rights or defend us against claimed infringement of the rights
of
others.
Our
Management's Stock Ownership Gives Them The Power To Control Business Affairs
And Prevent A Takeover That Could Be Beneficial To Unaffiliated
Shareholders.
Certain
members of our management, specifically Thomas J. Russell, Chairman of our
Board, Reuben F. Richards, Jr., President, Chief Executive Officer and a
director, and Robert Louis-Dreyfus, a director, are former members of Jesup
& Lamont Merchant Partners, L.L.C. They collectively beneficially own
approximately 20% of our common stock. Accordingly, such persons will continue
to hold sufficient voting power to control our business and affairs for the
foreseeable future. This concentration of ownership may also have the effect
of
delaying, deferring or preventing a change in control of our company, which
could have a material adverse effect on our stock price.
Unsuccessful
Control Of The Hazardous Raw Materials Used In Our Manufacturing Process
Could
Result In Costly Remediation Fees, Penalties Or Damages Under Environmental
And
Safety Regulations.
Some
of
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 occur, we could
experience interruptions in our operations and incur substantial remediation
and
other costs. Failure to comply with environmental and health and safety laws
and
regulations may materially and adversely affect our business, financial
condition, results of operations and cash flows.
Compliance
Obligations Will Cause Us To Incur Increased Costs.
Changes
in the laws and regulations affecting public companies over the past several
years, including certain provisions of the Sarbanes-Oxley Act of 2002, have
resulted in additional internal and external expenses required to respond
to
these new requirements. In particular, we have incurred and will continue
to
incur general and administrative expense as we have implemented Section 404
of
the Sarbanes-Oxley Act, which requires management to report on, and our
independent auditors to attest to, our internal controls. Compliance with
these
new rules requires management to devote substantial time and attention to
accounting and other compliance matters, which can be disruptive to product
development, marketing and other business activities. Furthermore, these
new
requirements may 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.
We
May Have Difficulty Obtaining Director And Officer Liability Insurance In
Acceptable Amounts For Acceptable Rates Which Could Impair Our Ability To
Recruit and Retain Qualified Officers and Directors.
Like
most
other public companies, we carry insurance protecting our officers and directors
against claims relating to the conduct of our business. Historically, this
insurance covered, among other things, the costs incurred by companies and
their
management to defend against and resolve claims relating to management conduct
and results of operations, such as securities class action claims. These
claims
typically are extremely expensive to defend against and resolve. Hence, as
is
customary, we purchase and maintain insurance to cover some of these costs.
We
pay significant premiums to acquire and maintain this insurance, which is
provided by third-party insurers, and we agree to underwrite a portion of
such
exposures under the terms of the insurance coverage. Over the last several
years, the premiums we have paid for this insurance have increased
substantially. One consequence of the current economic environment and decline
in stock prices has been a substantial increase in the number of securities
class actions and similar claims brought against public corporations and
their
management. Consequently, insurers providing director and officer liability
insurance have in recent periods sharply increased the premiums they charge
for
this insurance, raised retentions (that is, the amount of liability that
a
company is required to pay to defend and resolve a claim before any applicable
insurance is provided), and limited the amount of insurance they will provide.
Moreover, insurers typically provide only one-year policies.
Each
year
we negotiate with insurers to renew our director and officer insurance.
Particularly in the current economic environment, we cannot be certain that
we
will be able to obtain sufficient director and officer liability insurance
coverage in the future at acceptable rates and with acceptable deductibles
and
other limitations. Failure to obtain such insurance could materially harm
our
financial condition in the event that we are required to defend against and
resolve any future securities class actions or other claims made against
us or
our management arising from the conduct of our operations. Further, the
inability to obtain such insurance in adequate amounts may impair our future
ability to retain and recruit qualified officers and directors.
Our
Business Or Our Stock Price Could Be Adversely Affected By Issuance Of Preferred
Stock.
Our
board
of directors is authorized to issue up to 5,882,352 shares of preferred stock
with such dividend rates, liquidation preferences, voting rights, redemption
and
conversion terms and privileges as our board of directors, in its sole
discretion, may determine. The issuance of shares of preferred stock may
result
in a decrease in the value or market price of our common stock, or our board
of
directors could use the preferred stock to delay or discourage hostile bids
for
control of us in which shareholders may receive premiums for their common
stock
or to make the possible sale of 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.
Certain
Provisions Of New Jersey Law And Our Charter May Make A Takeover Of EMCORE
Difficult Even If Such Takeover Could Be Beneficial To Some Of Our
Shareholders.
New
Jersey law and our certificate of incorporation, as amended, contain certain
provisions that could delay or prevent a takeover attempt that our shareholders
may consider in their best interests. Our board of directors is divided into
three classes. Directors are elected to serve staggered three-year terms
and are
not subject to removal except for cause by the vote of the holders of at
least
80% of our capital stock. In addition, approval by the holders of 80% of
our
voting stock is required for certain business combinations unless these
transactions meet certain fair price criteria and procedural requirements
or are
approved by two-thirds of our continuing directors. We may in the future
adopt
other measures that may have the effect of delaying or discouraging an
unsolicited takeover, even if the takeover were at a premium price or favored
by
a majority of unaffiliated shareholders. Certain of these measures may be
adopted without any further vote or action by our shareholders and this could
depress the price of our common stock.
The
Price Of Our Common Stock May Fluctuate Widely In The Future.
EMCORE’s
stock price has experienced large swings over the last year, and may continue
to
fluctuate widely in the future. In fiscal 2005, our stock price was as high
as
$6.12 per share and as low as $1.46 per share. Volatility in the price of
our
common stock may be caused by other factors outside of our control, and may
be
unrelated or disproportionate to our operating results.
Factors
such as quarterly fluctuations in financial results, the estimates and
projections of industry analysts, and financial performance and other activities
of other publicly traded companies in the semiconductor industry could cause
the
price of our common stock to fluctuate substantially. Similarly, the NASDAQ
National Market has experienced and may continue to experience significant
price
and volume fluctuations, which could adversely affect the market price of
our
common stock without regard to our operating performance.
The
following chart contains certain information regarding each of EMCORE's
principal facilities as of September 30, 2005. Except for the storage facility
located in Somerset, NJ, each of these facilities contains office, marketing,
sales, and R&D space.
Location
Function
Approximate
Sq.
Feet
Terms
(in fiscal year)
Somerset,
New Jersey
Corporate
Headquarters
Manufacturing
of RF materials
Storage
facility
18,716
19,500
47,000
Lease
expires in 2007 (1)
Lease
expires in 2007 (2)
Lease
expires in 2006 (1)
(3)
Albuquerque,
New Mexico
Manufacturing
of photovoltaic and fiber optic products
145,000
Owned
by EMCORE (4)
City
of Industry, California
Manufacturing
of photovoltaic panels
71,699
Lease
expires in 2007
Alhambra,
California
Manufacturing
of CATV, FTTP, and satcom products
75,000
Lease
expires in 2011 (1)
Santa
Clara, California
Fiber
optics sales and R&D facility
4,000
Lease
expires in 2006
Ewing,
New Jersey
CATV
sales and R&D facility
8,880
Site
license expires in Nov.
2005
(5)
Downers
Grove, Illinois
Manufacturing
of LX4 modules; R&D facility
11,700
Month
to month
Notes
(1) Leases
have the option to be renewed by EMCORE, subject to inflation
adjustments.
(2) EMCORE
has the right of first offer to purchase the building in which the lease
property is located.
(3) EMCORE
subleases this space to a third party.
(4) EMCORE
subleases approximately 20,000 square feet of this facility to third
parties.
(5) Limited
transitional site license under Asset Purchase Agreement with JDS
Uniphase.
We
are
involved in lawsuits and proceedings which arise in the ordinary course
of
business. There are no matters pending that we expect to be material in
relation
to our business, consolidated financial condition, results of operations,
or
cash flows.
Market
for Registrant’s Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity
Securities.
EMCORE's
common stock is traded on the NASDAQ National Market and is quoted under
the
symbol "EMKR". The following table sets forth the quarterly high and low
sale prices for EMCORE's common stock during the two most recent fiscal
years.
The
reported closing sale price of EMCORE's common stock on November 30, 2005
was
$6.14 per share. As of November 30, 2005, EMCORE had approximately 6,800
shareholders of record. EMCORE has never declared or paid dividends on its
common stock since the company's formation. EMCORE currently does not intend
to
pay dividends on its common stock in the foreseeable future, so that it may
reinvest any earnings in its business. The payment of dividends, if any,
in the
future is at the discretion of the Board of Directors.
Equity
Compensation Plan Information
The
following table sets forth the number of securities outstanding under each
of
EMCORE's stock option plans, the weighted average exercise price of such
options, and the number of options available for grant under such plans,
as of
September 30, 2005.
The
following selected consolidated financial data of EMCORE's five most recent
fiscal years ended September 30, 2005 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 Supplemental Data under Item 8. The Statement of
Operations data set forth below with respect to fiscal years 2005, 2004,
and
2003, and the Balance Sheet data as of September 30, 2005 and 2004, are derived
from EMCORE's audited financial statements included elsewhere in this document.
The Statement of Operations data for fiscal years 2002 and 2001, and the
Balance
Sheet data as of September 30, 2003, 2002, and 2001, are derived from audited
financial statements not included herein. Significant transactions that affect
the comparability of EMCORE’s operating results and financial condition
include:
In
November 2003, EMCORE sold its TurboDisc capital equipment business to a
subsidiary of Veeco Instruments, Inc. (Veeco). EMCORE’s financial statements
have been reclassified to reflect the TurboDisc business as a discontinued
operation for all prior periods presented.
Fiscal
2001:
Interest
income and interest expense reflect the May 2001 issuance of $175.0 million
aggregate principal amount of 5% convertible subordinated notes due in May
2006
(2006 Notes).
Other
income included a net gain of $5.9 million related to the settlement of
litigation and a net gain of $10.0 million in connection with the sale of
the
Uniroyal Optoelectronics LLC (UOE) joint venture.
Equity
in
net loss of unconsolidated affiliates included an approximate $7.4 million
charge associated with the UOE joint venture along with an approximate $4.9
million charge associated with the GELcore joint venture.
Effective
October 1, 2000, EMCORE changed its revenue recognition policy to defer the
portion of revenue related to the installation of TurboDisc MOCVD systems
until
final acceptance. The net effect of this change was $3.6 million.
Fiscal
2002:
In
March
2002, EMCORE acquired certain assets of Tecstar for a total cash purchase
price
of approximately $25.1 million.
EMCORE
recorded pre-tax charges to income totaling $40.7 million, which included:
a) a
severance SG&A charge of $0.8 million related to employee termination costs;
b) a non-cash SG&A charge of $30.8 million related to impairment of certain
fixed assets; c) an inventory write-down expense of $7.7 million charged
to cost
of revenue; and d) an additional reserve for doubtful accounts of $1.4 million
which was charged to SG&A expense.
Financial
Accounting Standards Board approved an accounting standard that no longer
requires goodwill to be amortized.
Other
expense included a charge of $14.4 million associated with the write-off
of two
investments.
Fiscal
2003:
In
January 2003, EMCORE purchased Ortel for $26.2 million in cash.
In
December 2002, EMCORE purchased $13.2 million principal amount of the 2006
Notes
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.
Fiscal
2004:
In
November 2003, EMCORE sold its TurboDisc capital equipment business to Veeco
in
a transaction that is valued at up to $80.0 million. 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
2006 Notes for approximately $80.3 million aggregate principal amount of
new 5%
Convertible Senior Subordinated Notes due May 15, 2011 and approximately
7.7
million shares of EMCORE common stock. 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 an
investment.
Fiscal
2005:
SG&A
expense included approximately $0.9 million in severance-related charges
and
$2.3 million of City of Industry related charges.
EMCORE
received a $12.5 million net earn-out payment from Veeco in connection with
the
sale of the TurboDisc business.
Selected
Financial Data
Balance
Sheet Data
As
of September 30,
(in
thousands)
2005
2004
2003
2002
2001
Cash,
cash equivalents and marketable securities
$
40,175
$
51,572
$
28,439
$
84,181
$
147,661
Working
capital
39,098
58,541
77,464
111,825
201,215
Total
assets
206,287
213,243
232,439
285,943
403,553
Long-term
liabilities
94,709
96,078
161,791
175,087
175,046
Shareholders’
equity
$
75,563
$
85,809
$
44,772
$
81,950
$
197,127
Statement
of Operations Data
For
the fiscal years ended September 30,
(in
thousands)
FY
2005
FY
2004
FY
2003
FY
2002
FY
2001
Revenue
$
127,603
$
93,069
$
60,284
$
51,236
$
53,473
Cost
of revenue
106,746
85,780
61,959
62,385
41,784
Gross
profit (loss)
20,857
7,289
(1,675
)
(11,149
)
11,689
Operating
expenses:
Selling,
general and administrative
25,136
21,927
21,637
47,295
15,714
Research
and development
17,429
23,555
17,002
30,580
42,204
Goodwill
amortization
-
-
-
-
1,147
Total
operating expenses
42,565
45,482
38,639
77,875
59,065
Operating
loss
(21,708
)
(38,193
)
(40,314
)
(89,024
)
(47,376
)
Other
(income) expenses:
Interest
income
(1,081
)
(783
)
(1,009
)
(2,865
)
(5,222
)
Interest
expense
4,844
6,156
8,288
8,936
3,240
Gain
from debt extinguishment
-
(12,312
)
(6,614
)
-
-
Other
expense (income)
-
500
-
14,388
(15,920
)
Equity
in net loss (income) of unconsolidated affiliates
112
(789
)
1,228
2,706
12,326
Total
other expenses (income)
3,875
(7,228
)
1,893
23,165
(5,576
)
Loss
from continuing operations
(25,583
)
(30,965
)
(42,207
)
(112,189
)
(41,800
)
Discontinued
operations:
(Loss)
income from discontinued operations
-
(2,045
)
3,682
(17,572
)
33,158
Gain
on disposal of discontinued operations
12,476
19,584
-
-
-
Income
(loss) from discontinued operations
12,476
17,539
3,682
(17,572
)
33,158
Net
loss before cumulative effect of
a
change in accounting principle
(13,107
)
(13,426
)
(38,525
)
(129,761
)
(8,642
)
Cumulative
effect of a change in accounting principle
-
-
-
-
(3,646
)
Net
loss
$
(13,107
)
$
(13,426
)
$
(38,525
)
$
(129,761
)
$
(12,288
)
Per
share data:
Basic
and diluted per share data:
Loss
from continuing operations
$
(0.54
)
$
(0.72
)
$
(1.14
)
$
(3.07
)
$
(1.21
)
Income
(loss) from discontinued operations
0.26
0.41
0.10
(0.48
)
0.96
Cumulative
effect of a change in accounting principle
-
-
-
-
(0.11
)
Net
loss
$
(0.28
)
$
(0.31
)
$
(1.04
)
$
(3.55
)
$
(0.36
)
Weighted
average number of shares outstanding used in basic and diluted
per share
calculations
Management’s
Discussion and Analysis of Financial Condition and Results of
Operation.
This
Annual Report on Form 10-K includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Exchange Act of 1934. These forward-looking statements are based
largely on our current expectations and projections as they relate to our
future
results, prospects, developments, and business strategies. These forward-looking
statements may be identified by the use of terms and phrases such as "expects",
"anticipates", "intends", "plans", “believes", "estimate", “predict”, “target”,
“may”, “could”, “will”, and variations of these terms and phrases including
references to assumptions. These forward-looking statements are subject to
known
and unknown risks, business, economic, and other risks and uncertainties,
that
may cause actual results to be materially different from those discussed
in
these forward-looking statements. The cautionary statements made in this
report
should be read as being applicable to all forward-looking statements wherever
they appear in this report. This discussion should be read in conjunction
with
the consolidated financial statements, including the related footnotes. If
one
or more of these risks or uncertainties materialize, or if underlying
assumptions prove incorrect, our actual results may vary materially from
those
expected or projected.
Company
Overview
EMCORE
Corporation (EMCORE), a New Jersey corporation established in 1984, offers
a
broad portfolio of compound semiconductor-based components and subsystems
for
the broadband, fiber optic, satellite, solar and wireless communications
markets. EMCORE has three operating segments: Fiber Optics, Photovoltaics,
and
Electronic Materials and Devices. Our integrated
solutions philosophy embodies state-of-the-art technology, material science
expertise, and a shared vision of our customer's goals and objectives to
be
leaders in the transport of video, voice and data over copper, hybrid fiber/coax
(HFC), fiber, satellite, and wireless networks.
EMCORE’s
solutions include: optical components and subsystems for fiber-to-the-premise,
cable television, and high speed data and telecommunications networks;
solar
cells, solar panels, and fiber optic ground station links for global satellite
communications; and RF transistor materials for high bandwidth wireless
communications systems, such as WiMAX and Wi-Fi Internet access and 3G
mobile
handsets and PDA devices.
Through
its joint venture participation in GELcore, LLC, EMCORE plays a vital role
in
developing and commercializing next-generation High-Brightness LED technology
for use in the general and specialty illumination markets.
Management
Summary
We
are an
industry-leading company in the development and manufacture of optoelectronic
and high-frequency products. By
leveraging our broad compound semiconductor expertise to provide cost-effective
components, subsystems, and systems, we are focused on six key
markets:
·
High-speed
Fiber Optics for Telephony and Internet Core and Metro
Networks
·
High-speed
Fiber Optics for Large Enterprise Data Communications, Super
Computing,
and Storage Area Networks
·
Next-generation
Cable TV and Fiber-to-the-Premise “Triple Play”
Networks
·
Satellite
Communications, in Space and on the
Ground
·
Advanced
Transistors and Amplifiers Used in High-Bandwidth
Wireless Communications Systems, such as WiMAX and
Wi-Fi Internet access and 3G mobile handsets and PDA
devices
·
Solid
State Lighting for Specialty and Commercial
Illumination
In
fiscal
2005, demand for the Company's products was driven principally by increased
communications bandwidth requirements and by expanded competition between
telecommunications carriers, cable TV MSOs, and wireless network providers
for
the delivery of video, voice and data. We continued our leadership of the
10G Ethernet space, acquired JDSU’s CATV business and privately-held Phasebridge
to expand our leading positions in CATV and Specialty fiber products, launched
our next-generation FTTP triplexer product, won several major satellite
programs, and increased our 3G wireless and base station materials sales
by over
50%.
In
fiscal
2005, we significantly exceeded our revenue objectives, expanding the
business
by more than 37% over the prior year. We also continued our efforts to
streamline operations and focus on bottom-line profitability. As a result,
we
attained our goal of dramatically improving gross margins, and achieved
positive cash flows from operations in the September 30 fiscal quarter.
We
expect these growth trends to continue in fiscal 2006, as accelerating
demand
for our products has increased year-end sales backlog by 40% to over
$40
million.
Our
primary objectives for the coming year are to achieve positive operating
income
during the second half of fiscal 2006 and positive net income by the
end of
fiscal 2006; to expand our satellite photovoltaics technolgies into the
terrestrial solar power markets; to continue our successful growth in
digital
fiber optics products and technologies; and to expand our defense and
government
markets activities across all operating segments.
We
are
operationally focused on driving profitable revenue growth based on our
existing
product lines, developing or acquiring next-generation technologies and
high-margin products for our strategic markets, and continuing our business
optimization efforts to manage costs and enhance productivity. While
achieving
20-30% annual top-line growth, we intend to remove over $10 million in
COGS
through material cost reductions, overseas contract manufacturing labor,
and
product design improvements.
Business
Segments, Geographic Revenues, Customers and Backlog
The
following table sets forth the revenues and percentage of total revenues
attributable to each of EMCORE's operating segments for each of the past
three
fiscal years.
Product
Revenues
For
the fiscal years ended September 30,
FY
2005
FY
2004
FY
2003
(in
thousands)
Revenue
%
of Revenue
Revenue
%
of Revenue
Revenue
%
of Revenue
Fiber
Optics
$
81,960
64.2
%
$
56,169
60.4
%
$
32,658
54.2
%
Photovoltaics
33,407
26.2
25,716
27.6
18,196
30.2
Electronic
Materials and Devices
12,236
9.6
11,184
12.0
9,430
15.6
Total
revenues
$
127,603
100.0
%
$
93,069
100.0
%
$
60,284
100.0
%
The
following table sets forth EMCORE's consolidated revenues by geographic region.
Revenue was assigned to geographic regions based on the customers’ or contract
manufacturers’ shipment locations.
Geographic
Revenues
For
the fiscal years ended September 30,
FY
2005
FY
2004
FY
2003
(in
thousands)
Revenue
%
of Revenue
Revenue
%
of Revenue
Revenue
%
of Revenue
United
States
$
107,956
84.6
%
$
66,485
71.4
%
$
44,136
73.2
%
Asia
and South America
13,728
10.8
15,912
17.1
9,018
15.0
Europe
5,919
4.6
10,672
11.5
7,130
11.8
Total
revenues
$
127,603
100.0
%
$
93,069
100.0
%
$
60,284
100.0
%
EMCORE
is
devoted to working directly with its customers from initial product design,
product qualification and manufacturing to product delivery. We design and
develop (i) process technology, (ii) material science expertise, (iii) optical
sub-assemblies, and/or (iv) integrated module level products for use in our
customers' end-use applications. EMCORE's customer base includes many of
the
largest semiconductor, telecommunications, data communications, and computer
manufacturing companies in the world. In fiscal 2005, Cisco Systems, Inc.
(Cisco) accounted for 19% of our total revenue. In fiscal 2004, Motorola,
Inc.
(Motorola) and Cisco accounted for 13% and 8% of our total revenue,
respectively. In fiscal 2003, Motorola accounted for 14% of total
revenue.
As
of
September 30, 2005, EMCORE had a backlog of approximately $40.2 million as
compared to a backlog of $28.8 million as reported at September 30, 2004.
We
believe that substantially all of our backlog can be shipped during the next
12
months, with the exception of approximately $0.6 million on a certain long-term
contract. Given our current market environment, customers may 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 EMCORE’s
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 set forth operating loss attributable to each
EMCORE operating segment.
Operating
Loss by Segment
For
the fiscal years ended September 30,
(in
thousands)
FY
2005
FY
2004
FY
2003
Operating
loss by segment:
Fiber
Optics
$
(13,681
)
$
(24,889
)
$
(19,790
)
Photovoltaics
(4,234
)
(8,571
)
(14,488
)
Electronic
Materials and Devices
(3,793
)
(4,733
)
(6,036
)
Total
operating loss
(21,708
)
(38,193
)
(40,314
)
Other
(income) expenses:
Interest
expense, net
3,763
5,373
7,279
Gain
from debt extinguishment
-
(12,312
)
(6,614
)
Investment
loss
-
500
-
Equity
in net loss (income) of GELcore
112
(789
)
1,228
Total
other expenses (income)
3,875
(7,228
)
1,893
Loss
from continuing operations
$
(25,583
)
$
(30,965
)
$
(42,207
)
Long-lived
assets (consisting of property, plant and equipment, goodwill and intangible
assets) for each operating segment are as follows:
Long-Lived Assets
As of September 30,
(in thousands)
2005
2004
Fiber
Optics
$
56,261
$
59,802
Photovoltaics
37,861
38,577
Electronic
Materials and Devices
2,825
5,736
Total
$
96,947
$
104,115
Critical
Accounting Policies
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 revenues and expenses
during the reported period. Management bases estimates on historical experience
and on various assumptions about the future that are believed to be reasonable
based on available information. 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, warranty
accruals, goodwill, intangibles, other long-lived assets, and revenue
recognition.
Accounts
Receivable.
EMCORE
regularly evaluates its accounts receivable and accordingly maintains allowances
for doubtful accounts for estimated losses resulting from the inability of
our
customers to meet their financial obligation 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 a SG&A expense. If the financial condition of our customers were
to deteriorate, additional allowances may be required.
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, (iii) or 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 write-downs
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
written down 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 written
off, since such raw material components usually are only a portion of the
resultant finished products 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 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 write-downs.
Valuation
of Goodwill and 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.
Intangible assets consist primarily of intellectual property acquired and
purchased intangible assets. Purchased intangible assets include existing
and
core technology, trademarks and trade names, and customer contracts. Intangible
assets are amortized using the straight-lined method over estimated useful
lives
ranging from 1 to 5 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. EMCORE last evaluated its goodwill and intangible
assets
during the quarter ended March 31, 2005. 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. During fiscal 2005, 2004,
and
2003, EMCORE tested for impairment of goodwill on an annual basis and did
not
record any impairment charges on any goodwill or intangible assets. As part
of
our quarterly review of financial results, we did not identify any impairment
indicators that the carrying value of our goodwill may not be recoverable.
In
accordance with
Statement of Financial Accounting Standard (SFAS) No. 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 weighted average revenue. Based on that analysis, we
determined that the carrying amount of the reporting units did not exceed
their
fair value.
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. During fiscal 2005, 2004, and 2003, we recorded no impairment charges
on
any of EMCORE’s long-lived assets.
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 Financial
Accounting Standards Board (FASB) Interpretation No. 45, Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others,
EMCORE
makes estimates 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.
Revenue
Recognition.
Revenue
is generally 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. In rare occurrences, at a customer’s
request, EMCORE enters into bill and hold transactions whereby title and
risk of
loss transfers to the customer, but carriage to the customer does not occur
until a specified later date. EMCORE recognizes revenue associated with the
sale
of product from bill and hold arrangements when the product is complete,
ready
for delivery, and all bill and hold criteria have been met. There were no
bill
and hold arrangements as of September 30, 2005, 2004, or 2003.
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 delivery, 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 a product discontinuance, does not
give
distributors a right of return.
Solar
Panel Contracts
- EMCORE
records revenues 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 revenues, and contract costs. Estimates
are revised as additional information becomes available. At September 30,2005
and 2004, EMCORE's accrued program losses totaled approximately $23,000 and
$120,000, respectively.
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 government to practice the inventions for government purposes.
The R&D contract funding may be based on a cost-plus, cost reimbursement,
cost-share, 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.
For
cost-share contracts, the actual costs of performance are divided between
the
U.S. government and EMCORE based on the R&D contract terms. 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. Revenues from government R&D contracts amounted to approximately
$11.8 million. $4.6 million and $5.2 million for the years ended September30,2005, 2004, and 2003 respectively.
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 generally accepted accounting principles (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
and
other required GAAP disclosures.
Results
of Operations
The
following table sets forth the consolidated statements of operations data
of
EMCORE expressed as a percentage of total revenues for the fiscal years ended
September 30, 2005, 2004, and 2003.
EMCORE’s
consolidated
revenue increased $34.5 million or 37% to $127.6 million in fiscal 2005 from
$93.1 million in fiscal 2004. All three of EMCORE’s operating segments: Fiber
Optics, Photovoltaics and Electronic Materials and Devices, posted revenue
increases year over year. On a product line basis, fiber optics revenues
increased $25.8 million or 46%, photovoltaic revenues increased $7.7 million
or
30%, and revenues from electronic materials and devices increased
$1.0
million or 9% from the prior year. International sales accounted for 15%
of
revenues in fiscal 2005 and 29% in fiscal 2004.
Revenue from government contracts increased $7.2
million
to $11.8 million in fiscal 2005 from $4.6 million in fiscal 2004. With increased
focus on energy conservation, national security, and fiber optic communications,
we expect revenues from government contracts to increase significantly in
fiscal
2006. A comparison of revenue earned at each of EMCORE’s operating 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.
EMCORE's
Fiber Optics segment provides optical components, subsystems and systems
that
enable the transmission of video, voice and data over high-capacity fiber
optic
cables. Our products enable information that is encoded on light signals
to be
transmitted, routed (switched) and received in communication systems. EMCORE’s
Fiber Optics segment serves the cable television (CATV), fiber-to-the-premise
(FTTP), telecommunications, data and satellite communications, storage area
network and, increasingly, the defense and homeland security markets.
Annual
revenues increased $25.8 million or 46% to $82.0 million in fiscal 2005 from
$56.2 million in fiscal 2004. On a quarterly basis, fiscal 2005 revenues
were
$17.7 million, $19.0 million, $21.1 million, and $24.2 million compared to
fiscal 2004 quarterly revenues of $15.5 million, $14.2 million, $11.9 million,
and $14.6 million. Increased sales volume of 10G Ethernet transceiver modules
and CATV and FTTX components were the reason for the significant increase
in
annual revenues. The communications industry in which we participate in
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.
digitalized video, voice and data content, bundled as a service provided
by a
single communication provider. As a market leader in radio frequency (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 US 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.
As
part
of our strategy, we are committed to identifying strategic opportunities
that
either compliment or broaden our markets. In May 2005, EMCORE acquired the
analog CATV and RF over fiber specialty businesses from JDS Uniphase Corporation
(JDSU). This acquisition is expected to 1) solidify our leadership position
in
the CATV marketplace; 2) offer an optimal path to higher volume with improved
overall product margins; and 3) expand our product line offering while
broadening our customer base in the CATV market segment. The CATV product
line
purchased from JDSU contributed approximately $4.0 million in additional
revenues during fiscal 2005.
During
fiscal 2005, EMCORE also experienced increased demand for its existing parallel
optical products: SNAP-12TM
and
SmartLinkTM transceivers.
Fiber optics revenue represented 64% and 60% of EMCORE's total revenues in
fiscal 2005 and 2004, respectively. Significant customers for the fiber optics
product line include: Agilent Technologies, Inc., Alcatel, Aurora Networks,
BUPT-GUOAN Broadband, C-Cor Electronics, Cisco, Finisar, Hewlett-Packard
Corporation, Intel Corporation, JDSU, Motorola, Network Appliance,
Scientific-Atlanta, Inc., Sycamore Networks, Inc., and Tellabs. As a result
of
successful customer product qualifications and the recent increase in order
backlog, annual fiber optics revenues are expected to increase by approximately
20% in fiscal 2006.
Photovoltaics
EMCORE
serves the global satellite communications market by providing advanced solar
cell products and solar panels. Compound semiconductor solar cells are used
to
power satellites because they are more resistant to radiation levels in space
and convert substantially more power from light, consequently weighing less
per
unit of power than silicon-based solar cells. These characteristics increase
satellite useful life, increase payload capacity, and reduce launch costs.
EMCORE’s Photovoltaics segment designs and manufactures multi-junction compound
semiconductor 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 27.5%. EMCORE is also the
only
manufacturer to supply true monolithic bypass diodes, for shadow protection,
utilizing several EMCORE patented methods. A satellite’s broadcast success and
corresponding revenue depend on its power efficiency and its capacity to
transmit data. EMCORE also provides covered interconnect cells (CICs) and
solar
panel lay-down services, giving us the capacity 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. Through well-established
partnerships with major satellite manufacturers and a proven manufacturing
process, we play a vital role in the evolution of satellite communications
around the world.
Annual
revenues increased $7.7 million or 30% to $33.4 million in fiscal 2005 from
$25.7 million in fiscal 2004. On a quarterly basis, fiscal 2005 revenues
were
$7.5 million, $7.8 million, $8.8 million, and $9.3 million compared to fiscal
2004 quarterly revenues of $4.5 million, $6.1 million, $6.8 million, and
$8.3
million. The increase in revenue was attributable to both increases in solar
cell orders and government research contracts. Government
contract revenues for photovoltaics products were $9.4 million and $2.8 million
in fiscal years 2005 and 2004, respectively.
The
space
power generation market continues to depend on government programs as a result
of significant sales price erosion for commercial solar products.
Commercial
satellite awards decreased from 19 in calendar year 2003 to 13 in calendar
year
2004. Commercial satellite awards have increased to 17 through the first
9
months of calendar 2005, representing a modest recovery. There have been
indications that the commercial satellite market is improving to some degree
as
future awards are anticipated for high definition TV, satellite radio and
advanced mobile services. Military procurement remains steady, and we are
focusing on gaining market share in that area.
EMCORE
is
presently engaged in a solar cell development and production program for
a major
US aerospace corporation based on our commercial BTJ photovoltaics technology.
The initial phases of this long-term cost reimbursable contract are focused
on
technology development and manufacturing optimization. Establishment of a
volume
production capacity for this product is being performed by EMCORE at reduced
margins in order to minimize program ramp-up costs for our customer. Over
the
next 2 to 3 years, the program scope could exceed $40.0 million in
development and production revenues.
EMCORE
is
adapting its high efficiency solar cell product for terrestrial applications.
Intended for use with solar concentrator systems, these cells have already
been
measured at 35% efficiency and further improvements are anticipated. We believe
that these systems will be competitive with silicon technologies because
they
are more efficient than silicon and, therefore, benefit more from concentration
than silicon. With energy prices at all time highs, the demand for alternative
energy sources continues to gain momentum. The terrestrial solar cell market
is
currently estimated at $7 billion, growing at a 28% CAGR, and is expected
to
reach $30 billion by 2010, according to CSLA
Asia-Pacific Markets.
EMCORE
is working with several concentrator systems manufacturers to develop system
elements for this product line.
Photovoltaics
revenue represented 26% and 28% of EMCORE's total revenues for fiscal 2005
and
2004, respectively. Significantcustomers
for the photovoltaics product line include Boeing, General Dynamics, ISRO,
Lockheed Martin, Loral Space Systems. In fiscal 2006, we expect to see increased
applications for our solar cells in terrestrial products, as well as in the
commercial satellite industry that continues to develop a communications
backbone for video, voice and data networks. As a result, annual
photovoltaics revenues are expected to increase by approximately 30% in fiscal
2006.
Electronic
Materials & Devices
EMCORE’s
RF materials are compound semiconductor wafers used in wireless communications.
These materials have a broader bandwidth and superior performance at higher
frequencies compared to silicon-based materials. EMCORE’s Electronic Materials
and Devices (EMD) segment currently produces both GaAs and GaN based transistor
wafers. For GaAs materials, EMD produces 4-inch and 6-inch wafers for three
different applications: InGaP hetero-junction bipolar transistors (HBTs),
pseudomorphic high electron mobility transistor wafers (pHEMTs), and
enhancement-mode pHEMT transistor wafers (E-modes). For GaN materials, EMD
produces 2-inch, 3-inch, and 4-inch AlGaN/GaN HEMT materials. Recently, EMCORE
has also combined into a single RF structure, InGaP HBT and pHEMT materials
(combinational materials).
Revenues
from EMCORE’s EMD segment increased $1.0 million or 9% to $12.2 million in
fiscal 2005 from $11.2 million in fiscal 2004. On a quarterly basis, fiscal
2005
revenues were $1.8 million, $3.6 million, $3.3 million, and $3.5 million
compared to fiscal 2004 quarterly revenues of $3.1 million, $2.9 million,
$2.6
million, and $2.6 million. Government contract revenues for EMCORE’s EMD
products were $2.4 million and $1.8 million in fiscal years 2005 and 2004,
respectively. In the first half of fiscal 2005, development of advanced GaN
RF
material was funded primarily through government contract programs administered
by The Defense Advanced Research Projects Agency (DARPA) and the United States
Air Force. EMCORE expects continued funding from contracts during fiscal
2006,
with some of this funding transitioning to commercial business. Overall,
the
market that this segment competes in is highly competitive, raw materials
are
extremely expensive, and average selling prices have been declining over
the
past several years. Management anticipates the broader acceptance of GaAs
Combinational Materials, and introduction of new GaN RF materials to drive
revenue growth in fiscal 2006. Both of these materials are expected to be
well
utilized by major RF product manufacturers in both infrastructure and wireless
devices. EMD’s revenue represented 10% and 12% of EMCORE's total revenues for
fiscal 2005 and 2004, respectively. Significantcustomers
for the EMD product line include Anadigics, Inc., Freescale Semiconductor,
Inc.
(Freescale), RFMD and Triquint. As a result of successful customer product
qualifications and the recent increase in order backlog, annual EMD revenues
are
expected to increase by approximately 20% in fiscal 2006.
Gross
Profit
Gross
profit increased $13.6 million to $20.9 million in fiscal 2005 from $7.3
million
in fiscal 2004. Compared to the prior year, gross margins increased to 16%
from
8%. On a segment basis, margins for fiber optics increased from 12% in fiscal
2004 to 18% in fiscal 2005 due to increased revenues and improvement on material
costs. Margins for the photovoltaics segment improved from (8%) in fiscal
2004
to 14% in fiscal 2005 due to increased revenues, completion of profitable
solar
panel contracts and significant improvement on manufacturing metrics and
yields.
Margins for the EMD segment decreased from 25% in fiscal 2004 to 12% in fiscal
2005 due to declining selling prices and higher raw material and facility
costs.
Factors
that contributed to the increase in gross profit
include the introduction of new products where we were first to market which
allowed for favorable pricing, lower unabsorbed overhead variances due to
higher
revenue levels and favorable product mix shifts. These factors were slightly
offset by declining average
selling
prices, which is a gross profit pressure that is expected to remain for the
foreseeable future. Actions designed to improve our gross margins (through
product mix improvements, cost reductions associated with product transfers
and
product rationalization, and yield and quality improvements, among other
things)
continue to be a principal focus for us.
Many
of
our expenses, particularly those relating to capital equipment, debt service,
and manufacturing overhead are fixed. Improvement to gross margins is highly
dependent upon the amount of revenue EMCORE earns. As revenues increase,
our
margins should increase as well since a significant portion of our facility
costs is fixed, so higher throughput should result in lower costs per unit
produced. Management does expect gains in gross margins to be somewhat offset
by
lower sales prices due to competitive pricing pressures.
Operating
Expenses
Selling,
General and Administrative. SG&A
expenses increased $3.2 million or 15% to $25.1 million in fiscal 2005 from
$21.9 million in fiscal 2004.
This
increase is a direct result of acquisition-related charges, costs incurred
as we
fully implemented the requirements of the Sarbanes-Oxley Act of 2002, in
particular, Section 404 thereof, the continued investment in personnel strategic
to our business, severance charges, and expenses associated with the Company’s
April 2005 announcement to consolidate its City of Industry, California location
to New Mexico. As a percentage of revenue, SG&A decreased from 24% to 20%.
Fiscal
2005 SG&A expense included approximately $0.9 million in severance-related
charges and approximately $2.3 million in expenses related to the City of
Industry facility. The severance-related charges were provided to 54 employees
that were involuntary affected by a reduction in workforce. In fiscal 2004,
EMCORE incurred $1.2 million in severance-related charges related to employee
termination costs for 110 employees. We intend to continue to aggressively
address our SG&A expenses and reduce these expenses as, and when,
opportunities arise.
In
April
2005, EMCORE announced plans to consolidate solar panel operations into a
state-of-the-art facility located in Albuquerque, New Mexico. The establishment
of a modern solar panel manufacturing facility, adjacent to the Albuquerque
solar cell fabrication operations, should enable superior consistency, as
well
as reduced manufacturing costs. In
connection with this plan, EMCORE’s Photovoltaics operating segment recorded
charges consisting of fixed asset disposals totaling $0.4 million and other
exit
costs totaling approximately $1.9 million for total City of Industry related
costs of $2.3 million. Asset disposals relate to equipment that has been
abandoned for disposal. Other exit charges relate to consolidation of excess
facilities and other costs associated with exiting business activities. All
of
the City of Industry related charges, except for the asset impairments will
result in cash outflows.
In
August
2005, EMCORE announced the receipt of a photovoltaic contract valued in excess
of $8.0 million. This contract also
contains options for several additional sets of solar panels with deliveries
through early 2007. As a result of this contract award and the requirement
of an
accelerated delivery schedule, EMCORE resumed production operations at its
City
of Industry, California facility to support this new effort. As a result,
until
the facility closes, EMCORE no longer classifies these expenses as restructuring
charges, but includes them in selling, general and administrative expenses
and
refers to them as City of Industry related charges. Total City of Industry
related charges during fiscal 2005 amounted to $2.3 million. Production
operations at the California facility
will be
discontinued during fiscal 2006 and completely closed by March 2007.
By
consolidating operations into a single location, EMCORE Photovoltaics expects
to
realize annual cost savings in fiscal 2007 and beyond, which will enable
us to
better compete in the terrestrial and space power markets. New estimates
of the
projected shutdown costs and timeline remain to be determined at this time,
as
they depend in part upon whether any of the contractual options described
above
are exercised by the customer. However, the projected total cost associated
with
the closure of EMCORE's California solar panel facility is expected to decrease
due to a reduction in contract termination costs.
Research
and Development.
The semiconductor industry is characterized by rapid changes in process
technologies with increasing levels of functional integration. Our R&D
efforts have been sharply focused to maintain our technology 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.
R&D
expenses decreased $6.1 million or 26% to $17.4 million in fiscal 2005 from
$23.5 million in fiscal 2004.As
a
percentage of revenue, R&D decreased from 25% to 14%. The primary reason for
the annual decrease in R&D expense was the divestiture of product
technology. In April 2005, EMCORE divested a R&D project that was focused on
gallium nitride (GaN)-based power electronic devices for the
power
device industry. The new company, Velox Semiconductor Corporation (Velox),
raised $6.0 million from various venture capital partnerships. Five EMCORE
employees transferred to Velox as full-time personnel and EMCORE contributed
intellectual property and equipment, receiving a 19.2% stake in Velox. As
of
September 30, 2005, the recorded value of EMCORE’s investment in Velox was
approximately $1.3 million.
The
reduction in annual R&D expense is also due to several new products that
were launched during fiscal 2005. 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. Listed below are a couple of
examples:
-
In the
FTTP market, EMCORE has developed an integrated PON transceiver utilizing
Ortel’s industry leading video technology. EMCORE’s PON transceiver has been
customer qualified and is now in production.
-
In
the
photovoltaics market, EMCORE has developed a high efficiency solar cell product
for terrestrial applications. Intended for use in concentrated sunlight,
these
cells have been measured at greater than 35% efficiency at 500
suns.
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. 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,
EMCORE
reduced overall R&D costs as a percentage of revenue without, we believe,
jeopardizing future revenue opportunities. In fiscal 2006, management expects
R&D to continue to decline as a percentage of revenue as products previously
under development are released to production. Our technology and product
leadership is an important competitive advantage. Driven by current and
anticipate 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.
Other
Income & Expenses
Interest
Expense, net. Interest
expense, net decreased $1.6 million, or 30%, to $3.8 million in fiscal 2005
from
$5.4 million in fiscal 2004. This decrease is primarily due to the retirement
of
approximately $65.7 million of EMCORE’s subordinated debt through a debt
exchange accomplished in February 2004.
Gain
From Debt Extinguishment. In
February 2004, EMCORE exchanged approximately $146.0 million, or 90.2%, of
the
remaining 2006 Notes for approximately $80.3 million aggregate principal
amount
of new 5% Convertible Senior Subordinated Notes due May 15, 2011 and
approximately 7.7 million shares of EMCORE common stock. As a result of this
transaction, EMCORE recorded a net gain from early debt extinguishment of
approximately $12.3 million.
Investment
Loss. In
February 2002, EMCORE purchased $1.0 million of 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 2004,
EMCORE chose not to participate in an equity offering at Archcom, which diluted
EMCORE’s ownership in half to $0.5 million.
Equity
in Net Loss (Income) of GELcore. EMCORE's
portion of equity in GELcore decreased $0.9 million to a net loss of
approximately $0.1 million in fiscal 2005 from net income of approximately
$0.8
million in fiscal 2004. In fiscal 2005, on a quarterly basis, EMCORE's share
of
GELcore's operating results was $0.4 million, $(0.3) million, $(0.8) million
and
$0.6 million. In fiscal 2004, on a quarterly basis, EMCORE's share of GELcore's
operating results was $0.3 million, $(0.1) million, $0.4 million and $0.2
million. The annual decrease was due to costs associated with the transfer
of
operations from GELcore’s Lechine, Quebec manufacturing facility to Mexico,
which was completed in July 2005. GELcore incurred approximately $1.6 million
of
costs related to this transfer, of which EMCORE’s share was approximately $0.8
million.
Income
Taxes.
As a
result of its losses, the Company did not incur any income tax expense in
either
fiscal 2005 or 2004. Realization of the deferred tax assets is dependent
upon
future earnings, if any, the timing and amount of which are uncertain.
Accordingly, the net deferred tax assets have been fully offset by a valuation
allowance. As of September 30, 2005, the Company had Federal and State tax
net
operating loss carryforwards of approximately $278.0 million and $176.0 million,
respectively, that expire in the years 2006 through 2025. The Company is
incorporated in the State of New Jersey, which presently has a moratorium
on the
use of tax net operating loss carryforwards due to state government budget
deficits.
Discontinued
Operations. EMCORE
sold its TurboDisc capital equipment business in an asset sale in November
2003
to a subsidiary of Veeco Instruments Inc. (Veeco) in a transaction that is
valued at up to $80.0 million. The selling price was $60.0 million in cash
at
closing, with an additional aggregate maximum payout of $20.0 million over
the
next two years. 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. EMCORE’s maximum second year earn-out payment from
Veeco is $6.8 million. Based upon currently available information, EMCORE
cannot
predict whether it will receive a second year earn-out payment from Veeco
because calendar year 2005 revenues from the TurboDisc capital equipment
business may not exceed the minimum revenue earn-out threshold. During
fiscal 2004, EMCORE recognized a net loss from discontinued operations of
$2.0
million and a gain on the disposal of the TurboDisc capital equipment business
of $19.6 million. EMCORE does not have any material contingent liabilities
resulting from this sale of this business.
EMCORE’s
consolidated revenue increased $32.8 million or 54% to $93.1 million in fiscal
2004 from $60.3 million in fiscal 2003. All
three
of EMCORE’s operating segments: Fiber Optics, Photovoltaics and Electronic
Materials and Devices, posted revenue increases year over year. On
a
product line basis, fiber optics revenues increased $23.5 million or 72%,
photovoltaic revenues increased $7.5 million or 41%, and revenues from
electronic materials and devices increased $1.8 million or 19% from the prior
year. International sales accounted for 29% of revenues in fiscal 2004 and
27%
in fiscal 2003. Revenue from government contracts decreased $0.6 million
to $4.6
million in fiscal 2004 from $5.2 million in fiscal 2003.
Fiber
Optics
In
fiscal
2004, EMCORE acquired two fiber optics businesses that complement the
transceiver module product line. In October 2003, EMCORE acquired Molex Inc.'s
10G Ethernet transceiver business (Molex), and in June 2004, EMCORE purchased
Corona Optical Systems, Inc. (Corona), a parallel optics company. In January
2003,
EMCORE
acquired Agere’s System’s, Inc.’s CATV transmission systems, telecom access, and
satellite communication components business, formerly Ortel Corporation (Ortel).
Annual
revenues increased $23.5 million or 72% to $56.2 million in fiscal 2004 from
$32.7 million in fiscal 2003. On a quarterly basis, fiscal 2004 revenues
were
$15.5 million, $14.2 million, $11.9 million, and $14.6 million compared to
fiscal 2003 quarterly revenues of $2.3 million, $9.7 million, $11.2 million,
and
$9.5 million. In
fiscal
2003, Ortel was part of EMCORE for approximately three quarters. The first
quarter of fiscal 2004 experienced an unexpected increase in Ortel sales
volumes
due to one-time buys from our customers. But the third and fourth quarter
were
lower due to reduced customer demand. The decrease in revenues in the third
quarter of fiscal 2004 was a direct result of a LX4 product launch delay.
Supply
chain issues caused the delay; specifically, a vendor supplied contaminated
material that was not identified until testing of the finished modules. To
maintain the integrity of our business and product line, management decided
not
to ship the finished modules because of the risk of warranty returns. The
LX4
product was successfully launched in July 2004. Fiber optics revenue represented
60% and 54% of EMCORE's total revenues in fiscal 2004 and 2003,
respectively.
Photovoltaics
Annual
revenues increased $7.5 million or 41% to $25.7 million in fiscal 2004 from
$18.2 million in fiscal 2003. On a quarterly basis, fiscal 2004 revenues
were
$4.5 million, $6.1 million, $6.8 million, and $8.3 million compared to fiscal
2003 quarterly revenues of $5.1 million, $5.2 million, $3.0 million, and
$4.9
million. Government contract revenues for photovoltaics products were $2.8
million and $2.7 million in fiscal years 2004 and 2003, respectively. The
increase in revenue is attributable to the receipt of two significant solar
contracts that were delayed from the prior year. Photovoltaics revenue
represented 28% and 30% of EMCORE's total revenues for fiscal 2004 and 2003,
respectively.
Electronic
Materials & Devices
Revenues
from the EMD segment increased $1.8 million or 19% to $11.2 million in fiscal
2004 from $9.4 million in fiscal 2003. On a quarterly basis, fiscal 2004
revenues were $3.1 million, $2.9 million, $2.6 million, and $2.6 million
compared to fiscal 2003 quarterly revenues of $2.0 million, $2.0 million,
$2.7
million, and $2.7 million. Government contract revenues for EMD products
were
$1.8 million and $2.5 million in fiscal years 2004 and 2003, respectively.
The
increase in revenues was due in part to EMCORE broadening its relationship
with
ANADIGICS, Inc. by entering into a preferred supplier agreement in the second
quarter of fiscal 2004. EMD’s revenue represented 12% and 16% of EMCORE's total
revenues for fiscal 2004 and 2003, respectively.
Gross
Profit (Loss)
Gross
profit increased $9.0 million to $7.3 million in fiscal 2004 from ($1.7)
million
in fiscal 2003. Compared to the prior year, gross margins increased from
(2.8%)
to 7.8% of revenue. On a product line basis, margins for fiber optics increased
from 10.4% in fiscal 2003 to 11.8% in fiscal 2004, margins for photovoltaics
improved from (31.5%) in fiscal 2003 to (8.2%) in fiscal 2004 and margins
for
the electronic materials and devices product line increased slightly as well.
Gross margins were negatively impacted by the underutilization of fixed costs
and overhead resulting from expansions previously deployed through fiscal
2001.
Operating
Expenses
Selling,
General and Administrative. SG&A
expenses increased $0.3 million or 1% to $21.9 million in fiscal 2004 from
$21.6
million in fiscal 2003. As a percentage of revenue, SG&A significantly
decreased from 36% in fiscal 2003 to 24% in fiscal 2004. In fiscal 2004,
EMCORE
incurred $1.2 million in severance-related charges related to employee
termination costs for 110 employees. In the fourth quarter of fiscal 2004,
EMCORE reversed a portion of the professional fees accrual in the amount
of $0.5
million, which represented an over-accrued amount based upon information
gained
directly from the service providers.
Research
and Development. R&D
expenses increased $6.6 million or 39% to $23.6 million in fiscal 2004 from
$17.0 million in fiscal 2003. The increase was primarily due to an increase
in
R&D spending in the fiber optics product line. During fiscal 2004, this
group incurred significant R&D on the development of the LX4 module,
including a $1.3 million one-time charge incurred as a result of contaminated
materials supplied to us by a vendor. Also, Ortel's R&D focus continued the
development of PONs and FTTP systems that are intended to provide even greater
bandwidth, better performance and increased reliability to homes and businesses.
As a percentage of revenue, R&D decreased from 28% in fiscal 2003 to 25% in
2004.
Gain
From Debt Extinguishment. In
February 2004, EMCORE exchanged approximately $146.0 million, or 90.2%, of
2006
Notes for approximately $80.3 million aggregate principal amount of new 5%
Convertible Senior Subordinated Notes due May 15, 2011 and approximately
7.7
million shares of EMCORE common stock. As a result of this transaction, EMCORE
recorded a net gain from early debt extinguishment of approximately $12.3
million.
Interest
Expense, net.
Interest expense, net decreased $1.9 million, or 26%, to $5.4 million in
fiscal
2004 from $7.3 million in fiscal 2003. This decrease is due to the retirement
of
approximately $65.7 million of EMCORE’s subordinated debt through the debt
exchange accomplished in February 2004.
Investment
Loss. In
February 2002, EMCORE purchased $1.0 million of 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 2004,
EMCORE chose not to participate in a equity offering at Archcom which diluted
EMCORE ownership in half to $0.5 million.
Equity
in Net Income (Loss) of GELcore. EMCORE's
portion of equity in GELcore increased $2.0 million, or 164%, to net income
of
$0.8 million in fiscal 2004 from a net loss of $1.2 million in fiscal 2003.
In
fiscal 2004, on a quarterly basis, EMCORE's share of GELcore's operating
results
was $0.3 million, $(0.1) million, $0.4 million and $0.2 million. In fiscal
2003,
on a quarterly basis, EMCORE's share of GELcore's operating results was $(0.5)
million, $(0.7) million, $(0.1) million and $0.1 million. This quarterly
improvement is associated with increased unit volumes, changes in LED product
mix and less manufacturing inefficiencies associated with newer product
introductions.
Income
Taxes. As
a
result of its losses, EMCORE did not incur any income tax expense in either
fiscal 2004 or 2003.
Quarterly
Results of Operations
The
following tables present EMCORE’s unaudited results of operations expressed in
dollars and as a percentage of revenue for the eight most recently ended
quarters. EMCORE believes that all necessary adjustments, consisting only
of
normal recurring adjustments, have been included in the amounts below to
present
fairly the selected quarterly information when read in conjunction with
the
consolidated financial statements and notes included elsewhere in this
document.
EMCORE’s results from operations may vary substantially from quarter to quarter.
Accordingly, the operating results for a quarter are not necessarily indicative
of results for any subsequent quarter or for the full year. EMCORE has
experienced and expects to continue to experience significant fluctuations
in
quarterly results. See Selected Financial Data under Item
6 for a listing of certain significant transactions that affect the
comparability of EMCORE’s operating results and financial
condition.
As
of
September 30, 2005 EMCORE had working capital of approximately $39.1 million
compared to $58.5 as of September 30, 2004. Cash, cash equivalents, and
marketable securities at September 30, 2005 totaled $40.2 million, which
reflects a net decrease of $11.4 million for fiscal 2005.
Cash
Flow
Net
Cash Used For Operations
Net
cash
used for operations decreased $17.0 million or 53% to $15.3 million in fiscal
2005 from $32.3 million in fiscal 2004. Following is a summary of the major
items accounting for the increase in cash used in operations:
For the fiscal years ended September 30,
(in thousands)
FY
2005
FY
2004
Favorable
(Unfavorable)
Loss
from continuing operations
$
(25,583
)
$
(30,965
)
$
5,382
Adjustments
(non cash items):
Depreciation
14,464
15,219
(755
)
Gain
from debt extinguishment
-
(12,312
)
12,312
Other
non-cash items
1,579
304
1,275
Cash
used in operations, excluding working capital
changes
and cash used for discontinued operations
(9,540
)
(27,754
)
18,214
Other
adjustments:
Changes
in working capital
(5,747
)
(366
)
(5,381
)
Cash
used for discontinued operations
-
(4,218
)
4,218
Cash
used in operations
$
(15,287
)
$
(32,338
)
$
17,051
Fiscal
2005 changes in working capital include an increase of accounts receivables
of
$1.6 million, an increase in prepaid and other current assets of $1.1 million,
an increase of other assets totaling $1.0 million and a decrease in accounts
payable and accrued expenses of $1.6 million Fiscal 2004 changes in working
capital include an increase of accounts receivables of $6.2 million, an increase
in prepaid and other current assets of $0.6 million, an increase of other
assets
totaling $0.5 million and an increase in accounts payable, accrued expenses
and
other liabilities of $7.5 million.
Despite
a
significant increase in annual revenues, days sales outstanding decreased
from
69 days at September 30, 2004 to 62 days at September 30, 2005, due to improved
collections. Inventory turnover increased slightly from 6.0 turns at September30, 2004 to 6.4 turns at September 30, 2005.
The
$4.2
million of discontinued operations in fiscal 2004 represents costs incurred
on
the TurboDisc capital equipment business sold to Veeco in November 2003.
EMCORE
owned this product line for approximately 35 days in fiscal 2004. As a result,
expenses exceeded revenues and a loss was incurred for the period during
which
EMCORE still owned the TurboDisc business.
Net
Cash Provided by Investing Activities
Net
cash
provided by investing activities decreased by $8.3 million to $14.0 million
in
fiscal 2005 from $22.3 million in fiscal 2004. Changes in cash flow consisted
of:
Divestiture
- In November 2003, EMCORE
sold its TurboDisc capital equipment business in an asset sale to Veeco in
a
transaction that is valued at up to $80.0 million. The selling price was
$60.0
million in cash at closing, with an additional aggregate maximum payout of
$20.0
million over the next two years. 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. EMCORE’s maximum second year earn-out
payment from Veeco is $6.8 million. Based upon currently available information,
EMCORE cannot predict whether it will receive a second year earn-out payment
from Veeco because calendar year 2005 revenues from the TurboDisc capital
equipment business may not exceed the minimum revenue earn-out threshold.
Capital
expenditures -
Capital
expenditures increased to $5.4 million in fiscal 2005 from $4.2 million in
fiscal 2004. This increase was due in part to our purchase of an uninterruptible
power supply system, a power supply that includes a battery to maintain power
in
the event of a power outage. This unit was installed at our Albuquerque
manufacturing facility. As part of our ongoing effort to manage cash, management
carefully scrutinizes all significant capital
purchases. Management has approved an increase in capital expenditures for
fiscal 2006 in order to support the expected increase in annual revenues.
GELcore
Investment - An investment in GELcore of approximately $1.5 million was made
during fiscal 2005 to support the transfer of operations from Canada to Mexico.
No investments were made to GELcore during fiscal 2004.
Other
Investments - In October 2004, EMCORE invested $1.0 million in K2 Optronics,
Inc., a California-based company specializing in the design and manufacture
of
external cavity lasers, to strengthen its partnership in designing
next-generation long wavelength components for the CATV and FTTP markets.
Also,
as part of the acquisition of JDSU’s analog CATV and RF over fiber specialty
businesses, EMCORE also paid $0.5 million to purchase JDSU's equity interest
in
K2 Optronics, Inc.
Acquisitions
- In October 2003, EMCORE acquired Molex's 10G Ethernet transceiver business
for
an initial $1.0 million in cash, $1.5 million in cash earn out based upon
initial LX4 unit shipments, and future cash earn out payments calculated
as a
percentage of revenue, ranging from 3.7% to 0.25%, on LX4 product sold through
December 2007. In June 2004, EMCORE purchased Corona for $1.2 million in
a
cash-for-stock merger. As mentioned above, in May 2005, EMCORE acquired the
CATV
and RF over fiber specialty businesses from JDSU for $1.5 million in cash
plus a
deferred payment, payable in quarterly installments, associated with EMCORE’s
quarterly usage of the acquired JDSU inventory valued between $2.5 million
and
$3.5 million.
Marketable
securities - In fiscal 2005, EMCORE’s net investment in marketable securities
decreased by $11.5 million. In fiscal 2004, EMCORE’s net investment in
marketable securities increased by $32.2 million (as compared to fiscal 2003)
in
order to take advantage of higher interest-bearing instruments.
Net
Cash Provided By Financing Activities
Net
cash
provided by financing activities increased $0.4 million to $1.4 million in
fiscal 2005 from $1.0 million in fiscal 2004. In fiscal 2004, EMCORE incurred
approximately $2.5 million in debt issuance costs associated with the
convertible debt exchange. In fiscal 2005, proceeds from the exercise of
stock
options decreased $1.7 million from the prior year.
Financing
Transactions
In
May
2001, EMCORE sold $175.0 million of 5% Convertible Subordinated Notes due
May15, 2006 (2006 Notes) in a private placement for resale to qualified
institutional buyers. In December 2002, EMCORE purchased $13.2 million principal
amount of the notes at prevailing
market prices for an aggregate of approximately $6.3 million. In February
2004,
EMCORE exchanged approximately $146.0 million, or 90.2%, of these remaining
2006
Notes for approximately $80.3 million aggregate principal amount of new 5%
Convertible Senior Subordinated Notes due May 15, 2011 (2011 Notes) and
approximately 7.7 million shares of EMCORE common stock. The new notes are
convertible into EMCORE common stock at a conversion price of $8.06 per share,
subject to adjustment under customary anti-dilutive provisions. They also
are
redeemable should EMCORE's common stock price reach $12.09 per share. As
a
result of this transaction, EMCORE recorded a gain from early debt
extinguishment of approximately $12.3 million, decreased annual interest
expense
by approximately $3.3 million, and reduced debt by approximately $65.7
million.
In
November 2005, EMCORE exchanged $14,425,000 aggregate principal amount of
EMCORE’s 2006 Notes for $16,580,460 aggregate principal amount of newly issued
Convertible Senior Subordinated Notes due May 15, 2011 (New 2011 Notes) pursuant
to an Exchange Agreement (Agreement) with Alexandra Global Master Fund Ltd.
(Alexandra). The terms of the New 2011 Notes are identical in all
material respects to EMCORE’s 2011 Notes. The New 2011 Notes are
ranked pari passu with the existing 2011 Notes. The New 2011 Notes will be
convertible at any time prior to maturity, unless previously redeemed or
repurchased by EMCORE, into the shares of EMCORE common stock, no par value,
at
the conversion rate of 124.0695 shares of common stock per $1,000 principal
amount. The
effective conversion rate is $8.06 per share of common stock, subject to
adjustment under customary anti-dilutive provisions. They also are redeemable
should EMCORE's common stock price reach $12.09 per share.
The 2006 Notes exchanged by Alexandra have been reclassified to long-term
debt
in the accompanying balance sheets. As a result of this transaction, EMCORE
will
recognize a non-cash loss in the first quarter of fiscal 2006 related to
the
early extinguishment of debt. Furthermore, the 2006 Notes exchanged by
Alexandra represented approximately 91.4% of the $15,775,000 total amount
of
existing 2006 Notes outstanding at the time of the transaction.
EMCORE intends to redeem for cash the remaining $1,350,000 of 2006
Notes on or
before the May 15, 2006 maturity date.
EMCORE
may continue to repurchase 2006 Notes and/or 2011 Notes through various means,
including, but not limited to, one or more open market or privately negotiated
transactions in future periods. The timing and amount of repurchase, if any,
whether de
minimisor
material, will depend on many factors, including, but not limited to, the
availability of capital, the prevailing market price of the notes, and overall
market conditions.
If
our
cash flow is inadequate to meet our obligations or we are unable to generate
sufficient cash flow or otherwise obtain funds necessary to make required
payments on
the
notes or our other obligations, we would be in default under the terms thereof.
Default under any of the note indentures would permit the holders of the
notes
to accelerate the maturity of the notes and could cause defaults under future
indebtedness we may incur. Any such default would have a material adverse
effect
on our business, prospects, financial condition, results of operations and
cash
flows. In addition, we cannot assure you that we would be able to repay amounts
due in respect of the notes if payment of any of the notes were to be
accelerated following the occurrence of an event of default as defined in
the
respective note indentures.
In
September 2005, EMCORE entered into a non-recourse receivables purchase
agreement (AR Agreement) with Silicon Valley Bank (SVBank). Under the
terms of the AR Agreement, EMCORE from time to time may sell, without recourse,
certain accounts receivables to SVBank up to a maximum aggregate
outstanding amount of $20.0 million. The AR Agreement expires on December31, 2006, unless the term is extended by mutual agreement by all parties.
During
the quarter ended September 30, 2005, EMCORE sold approximately $2.2 million
of
account receivables to SVBank.
Contractual
Obligations
EMCORE’s
contractual obligations over the next five years are summarized in the table
below:
Our
long-term debt is convertible debt, and therefore may be converted to EMCORE
common stock before maturity under certain circumstances. The above-listed
JDSU
inventory purchase obligation is an estimate. As of September 30, 2005, EMCORE
does not have any significant purchase obligations or other long-term
liabilities beyond those listed in the table above. EMCORE’s off-balance
sheet arrangements consist of operating leases, employment contracts and
purchase obligations as described above. In addition, EMCORE guarantees 49%
of
any amounts borrowed under GELcore’s revolving credit line. As of September 30,2005, GELcore’s outstanding borrowings were $2.9 million. The maximum borrowing
currently permitted under the credit line is $6.2 million.
Conclusion
We
believe that our current liquidity should be sufficient to meet our cash
needs
for working capital through the next 12 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.
Additional funding may not be available when needed, or on terms acceptable
to
EMCORE. If EMCORE is required to raise additional financing and if adequate
funds are not available or not available on acceptable terms, 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.
Quantitative
and Qualitative Disclosures About Market
Risk.
We
are
exposed to financial market risks, including changes in currency exchange
rates,
interest rates, and non-marketable equity security prices. We do not use
derivative financial instruments for speculative purposes.
Currency
Exchange Rates.
Although EMCORE occasionally enters into transactions denominated in foreign
currencies, the total amount of such transactions is not material. Accordingly,
fluctuations in foreign currency values would not have a material adverse
effect
on our future financial condition or results of operations. However, some
of our
foreign suppliers may adjust their prices (in $US) from time to time to reflect
currency exchange fluctuations, and such price changes could impact our future
financial condition or results of operations.
Interest
Rates.
We
maintain an investment portfolio in a variety of high-grade (AAA), short-term
debt and money market instruments, which carry a minimal degree of interest
rate
risk. Due in part to these factors, our future investment income may be slightly
less than expected because of changes in interest rates, or we may suffer
insignificant losses in principal if forced to sell securities that have
experienced a decline in market value because of changes in interest
rates.
Non-Marketable
Equity Securities. Our
strategic investments in non-marketable equity securities would be affected
by
an adverse movement of equity market prices, although the impact cannot be
directly quantified. Such a movement and the related underlying economic
conditions would negatively affect the prospects of the companies in which
we
invest, their ability to raise additional capital, and the likelihood of
our
being able to realize our investments through liquidity events, such as initial
public offerings, mergers, and private sales. These types of investments
involve
a great deal of risk, and there can be no assurance that any specific company
will grow or will become successful. Consequently, we could lose all or part
of
our investment.
EMCORE
Corporation (EMCORE), a New Jersey corporation established in 1984, offers
a
broad portfolio of compound semiconductor-based components and subsystems
for
the broadband, fiber optic, satellite, solar and wireless communications
markets. EMCORE has three operating segments: Fiber Optics, Photovoltaics,
and
Electronic Materials and Devices. Our integrated
solutions philosophy embodies state-of-the-art technology, material science
expertise, and a shared vision of our customer's goals and objectives
to be
leaders in the transport of video, voice and data over copper, hybrid
fiber/coax
(HFC), fiber, satellite, and wireless networks.
EMCORE’s
solutions include: optical components and subsystems for fiber-to-the-premise,
cable television, and high speed data and telecommunications networks;
solar
cells, solar panels, and fiber optic ground station links for global
satellite
communications; and RF transistor materials for high bandwidth wireless
communications systems, such as WiMAX and Wi-Fi Internet access and 3G
mobile
handsets and PDA devices.
Through
its joint venture participation in GELcore, LLC, EMCORE plays a vital
role in
developing and commercializing next-generation High-Brightness LED technology
for use in the general and specialty illumination
markets.
NOTE
2. Summary of Significant Accounting Policies.
Principles
of Consolidation. The consolidated financial statements include the accounts
of EMCORE and all its wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation. Certain
amounts
in prior period financial statements have been reclassified to conform to
the
current year presentation.
Use
of
Estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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
revenues and expenses during the reported period. Management bases estimates
on
historical experience and on various assumptions about the future that are
believed to be reasonable based on available information. 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.
Cash
and Cash Equivalents. Cash and cash equivalents consist of highly liquid
short-term investments purchased with an original maturity of three months
or
less.
Marketable
Securities. Unrealized gains and losses for these securities are excluded
from earnings and reported as a separate component of shareholders' equity.
Realized gains and losses on sales of investments, as determined on a specific
identification basis, are included in the consolidated statement of operations.
Fair values are determined by reference to market prices for securities as
quoted based on publicly traded exchanges. The fair value of the debt securities
approximate cost. Declines in values that are deemed to be other than temporary
are recorded as a component of other (income) expense on the consolidated
statement of operations. EMCORE recorded approximately $0.1 million of net
realized gains on sales of available-for-sale debt securities during fiscal
2003. There were no net realized gains on sales of available-for-sale debt
securities during fiscal 2005 or 2004.
Concentration
of Credit Risk. Financial instruments, which may subject EMCORE to a
concentration of credit risk, consist primarily of cash and cash equivalents,
marketable securities and accounts receivable. EMCORE's cash and cash
equivalents consist primarily of
money
market funds. EMCORE has established guidelines relative to credit ratings,
diversification and maturities that seek to maintain safety and liquidity.
EMCORE has maintained cash balances with certain large creditworthy financial
institutions in excess of the $100,000 insured limit of the Federal Deposit
Insurance Corporation. On certain occasions, EMCORE performs credit evaluations
of its customers' financial condition and generally requires no collateral
from
its customers. These
evaluations require significant judgment and are based on a variety of factors
including, but not limited to, current economic trends, historical payment,
bad
debt write-off experience, and financial review of the customer.
Fair
Value of Financial Instruments. The carrying amounts of cash and cash
equivalents, marketable securities, account receivable, accounts payable,
and
accrued expenses approximate fair value because of the short maturity of
these
instruments. The carrying amount of long-term receivables approximates fair
value, as the effective rates for these instruments are comparable to market
rates at year-end. The carrying amount of investments approximates fair market
value. Fair value for investments in privately held companies is estimated
based
upon one or more of the following: assessment of historical and forecasted
financial condition; operating results and cash flows, valuation estimates
based
on recent rounds of financing, and/or quoted market prices of comparable
public
companies. As of September 30, 2005 and 2004, the fair market value of the
convertible subordinated notes, based on the quoted market prices, approximated
$92.8 million and $88.0 million, respectively.
Accounts
Receivable. EMCORE regularly evaluates its accounts receivable and
accordingly maintains allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to meet their financial obligation
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 a SG&A expense. If
the financial condition of our customers were to deteriorate, additional
allowances may be required.
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, (iii) or 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 write-downs 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 written down 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 written off, since such raw material components
usually are only a portion of the resultant finished products 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 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
write-downs.
Property,
Plant, and Equipment. Property, plant, and equipment are recorded at cost
and depreciated on a straight-line basis over the assets’ estimated useful
lives, which range from three to forty years. Leasehold improvements are
amortized over the lesser of the asset life or the life of the related lease.
Expenditures for repairs and maintenance are charged to expense as incurred.
The
costs for major renewals and improvements are capitalized and depreciated
over
their estimated useful lives. The cost and related accumulated depreciation
of
the assets are removed from the accounts upon disposition and any resulting
gain
or loss is reflected in the consolidated statement of operations.
Valuation
of Goodwill and 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. Intangible assets consist
primarily of intellectual property acquired and purchased intangible assets.
Purchased intangible assets include existing and core technology, trademarks
and
trade names, and customer contracts. Intangible assets are amortized using
the
straight-lined method over estimated useful lives ranging from 1 to 5 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. EMCORE last evaluated its goodwill and intangible
assets during the quarter ended March 31, 2005. 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. During fiscal 2005, 2004,
and
2003, EMCORE tested for impairment of goodwill on an annual basis and did
not
record any impairment charges on any goodwill or intangible assets. As part
of
our quarterly review of financial results, we did not identify any impairment
indicators that the carrying value of our goodwill may not be recoverable.
In
accordance with Statement of Financial Accounting Standard (SFAS) No. 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 weighted average revenue. Based on that analysis, we
determined that the carrying amount of the reporting units did not exceed
their
fair value.
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. During fiscal 2005, 2004, and 2003, we recorded
no
impairment charges on any of EMCORE’s long-lived assets.
Investments.
EMCORE accounts for its investment in the GELcore joint venture, a 49% owned
company over which it has the ability to exercise significant influence,
using
the equity method of accounting. Due to the limited availability of timely
data,
EMCORE occasionally records adjustments to this equity basis investment in
the
subsequent quarter. EMCORE accounts for similar investments which do not
permit
us to exert significant influence over the entity in which we are investing
by using the cost method of accounting. The recorded amounts generally represent
our cost of the investment less any adjustments we make when we determine
that
an investment’s carrying value is other-than-temporarily impaired. EMCORE
periodically reviews these investments for impairment. In the event the carrying
value of an investment exceeds its fair value and the decline in fair value
is
determined to be other-than-temporary, EMCORE writes down the value of the
investment to its fair value.
Post-employment
Benefits. Post-employment benefits accrued for workforce reductions related
to restructuring activities are accounted for under SFAS No. 112,
Employer’s
Accounting for Post-employment Benefits.
A
liability for post-employment benefits is recorded when payment is probable,
the
amount is reasonably estimable, and the obligation relates to rights that
have
vested or accumulated.
Revenue
Recognition. Revenue is generally 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. In rare occurrences, at a customer’s
request, EMCORE enters into bill and hold transactions whereby title and
risk of
loss transfers to the customer, but carriage to the customer does not occur
until a specified later date. EMCORE recognizes revenue associated with the
sale
of product from bill and hold arrangements when the product is complete,
ready
for delivery, and all bill and hold criteria have been met. There were no
bill
and hold arrangements as of September 30, 2005, 2004 or 2003.
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 delivery, 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 a product discontinuance, does not
give
distributors a right of return.
Solar
Panel Contracts- EMCORE records revenues 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 revenues,
and
contract costs. Estimates are revised as additional information becomes
available. At September 30, 2005 and 2004, EMCORE's accrued program losses
totaled approximately $23,000 and $120,000, respectively.
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 government to practice
the
inventions for government purposes. The R&D contract funding may be based on
a cost-plus, cost reimbursement, cost-share, 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. For cost-share contracts, the actual
costs of performance are divided between the U.S. government and EMCORE based
on
the R&D contract terms. 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. Revenues from government
R&D contracts amounted to approximately $11.8 million. $4.6 million and $5.2
million for the years ended September 30, 2005, 2004, and 2003 respectively.
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 Financial Accounting Standards Board (FASB) Interpretation
No.
45, Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others,
EMCORE
makes estimates 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.
Research
and Development. Research and development costs are charged to expense as
incurred.
Income
Taxes. Deferred tax assets and liabilities are recognized for the expected
tax consequences of temporary differences between the tax bases of assets
and
liabilities and their reported amounts. Management provides valuation allowances
against the deferred tax asset for amounts which are considered "more likely
than not" to be realized.
Comprehensive
Income. SFAS No. 130, Reporting
Comprehensive Income,
establishes standards for reporting and display of comprehensive income and
its
components in financial statements. It requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in the financial statement that is displayed with the
same
prominence as other financial statements. Comprehensive income consists of
net
earnings, the net unrealized gains or losses on available for sale marketable
securities and foreign currency translation adjustments and is presented
in the
consolidated statements of shareholders' equity.
Earnings
Per Share. Basic earnings per share is calculated by dividing net earnings
applicable to common stock by the weighted average number of common stock
shares
outstanding for the period. Diluted earnings per share reflect the potential
dilution that could occur if EMCORE’s outstanding stock options were exercised.
The effect of outstanding common stock purchase options and warrants, the
convertible preferred stock and the convertible subordinated notes have been
excluded from the diluted earnings per share calculation since the effect
of
such securities is anti-dilutive.
Recent
Accounting
Pronouncements.
FASB
Interpretation No. 47
In
March
2005, the FASB issued FASB Interpretation No. 47, Accounting
for Conditional Asset Retirement Obligations, an Interpretation of FASB
Statement No. 143.
FIN 47
clarifies the timing of liability recognition for legal obligations associated
with the retirement of tangible long-lived assets when the timing and/or
method
of settlement of the obligations are conditional on a future event and where
an
entity would have sufficient information to reasonably estimate the fair
value
of an asset retirement obligation. FIN 47 is effective for conditional
asset retirement obligations occurring during fiscal years ending after
December 15, 2005. EMCORE
does not believe the adoption of this pronouncement on October 1, 2006 will
have
a material impact on its financial statements.
FAS
No. 151
In
November 2004, the FASB issued Statement of Financial Accounting Standards
No.
151, Inventory
Costs, an amendment of ARB No. 43, Chapter 4.
FAS 151
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). FAS 151 requires that those
items be recognized as current-period charges regardless of whether they
meet
the criterion of "so abnormal". In addition, it requires that allocation
of
fixed production overheads to the costs of conversion be based on the normal
capacity of the production facilities. FAS 151 is effective for inventory
costs
incurred during fiscal years beginning after June 15, 2005. The Company believes
that FAS 151 will not have a significant impact on its financial position
or
results of operations
SFAS
No. 154
In
June
2005, FASB issued SFAS No. 154, Accounting
Changes and Error Corrections, a replacement of APB Opinion No. 20,
Accounting Changes,
and FASB
Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements.
The
Statement applies to all voluntary changes in accounting principle, and changes
the requirements for accounting for and reporting of a change in
accounting
principle. SFAS 154 requires retrospective application to prior periods’
financial statements of a voluntary change in accounting principle unless
it is
impracticable. SFAS 154 requires that a change in method of depreciation,
amortization, or depletion for long-lived, non-financial assets be accounted
for
as a change in accounting estimate that is affected by a change in accounting
principle. Opinion 20 previously required that such a change be reported
as a
change in accounting principle. SFAS 154 is effective for accounting changes
and
corrections of errors made in fiscal years beginning after December 15,2005. EMCORE does not believe the adoption of this pronouncement on October1,2006 will have a material impact on its financial statements.
EITF
No. 05-6
In
June
2005, the Emerging Issues Task Force (EITF) issued No. 05-6, Determining
the Amortization Period for Leasehold Improvements.
The
pronouncement requires that leasehold improvements acquired in a business
combination or purchased subsequent to the inception of the lease be amortized
over the lesser of the useful life of the asset or the lease term that includes
reasonably assured lease renewals as determined on the date of the acquisition
of the leasehold improvement. This pronouncement should be applied prospectively
and EMCORE adopted it during the first quarter of fiscal 2006. EMCORE does
not
believe this pronouncement will have an impact on its financial statements.
SFAS
No. 123(R)
Effective
October 1, 2005, the first day of fiscal 2006, EMCORE adopted SFAS
No. 123(R), Share-Based
Payment (Revised 2004)
on a
modified prospective basis. As a result, EMCORE will include stock-based
compensation costs in its results of operations for the quarter ended December31, 2005, as more fully described in Note 3 to EMCORE’s consolidated
financial statements.
The
above
listing is not intended to be a comprehensive list of all of our significant
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by generally accepted accounting principles
(GAAP). There also are areas in which management's judgment in selecting
any
available alternative would not produce a materially different result.
NOTE
3. Stock Options and Warrants.
Stock
Options.
In
accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting
for Stock Issued to Employees, as amended,
no
compensation expense is recorded for stock options or other stock-based awards
that are granted to employees with an exercise price equal to or above the
common stock price on the grant date. EMCORE accounts for stock-based
compensation in accordance with APB 25, and provides the pro forma disclosures
required by SFAS No. 123, Accounting
for Stock-Based Compensation,
as
amended by SFAS No. 148, Accounting
for Stock-Based Compensation Transition and Disclosure.
EMCORE
computes fair value for this purpose using the Black-Scholes option valuation
model. The Black-Scholes model was developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. EMCORE’s
options have characteristics significantly different from traded options,
and
the input assumptions used in the model can materially affect the fair value
estimate. The assumptions used in this model to estimate fair value and
resulting values are as follows:
Stock
Option Plans
For
the fiscal years ended September 30,
FY
2005
FY
2004
FY
2003
Expected
dividend yield
0
%
0
%
0
%
Expected
stock price volatility
105
%
109
%
112
%
Risk-free
interest rate
3.8
%
3.4
%
2.8
%
Weighted
average expected life (in years)
5
5
5
The
following table illustrates the effect on the net loss and net loss per share
if
EMCORE had applied the fair value recognition provisions of SFAS No. 123
to
stock based compensation:
Loss
per share
For
the fiscal years ended September 30,
(in
thousands)
FY
2005
FY
2004
FY
2003
Net
loss
$
(13,107
)
$
(13,426
)
$
(38,525
)
Deduct:
Total stock based employee compensation expense determined under
fair
value based methods for all awards, net of related tax
effects
(2,927
)
(3,476
)
(3,339
)
Pro
forma net loss
$
(16,034
)
$
(16,902
)
$
(41,864
)
Reported
net loss per basic and diluted share
$
(0.28
)
$
(0.31
)
$
(1.04
)
Pro
forma net loss per basic and diluted share
$
(0.34
)
$
(0.39
)
$
(1.13
)
EMCORE
has stock option plans to provide incentives to eligible employees, officers
and
directors in the form of stock options. Most of the options vest and become
exercisable over three to five years and have ten year terms. EMCORE maintains
two incentive stock option plans: the 2000 Stock Option Plan (2000 Plan),
and
the 1995 Incentive and Non Statutory Stock Option Plan (1995 Plan and, together
with the 2000 Plan, the Option Plans). The 1995 Plan authorizes the grant
of
options to purchase up to 2,744,118 shares of EMCORE's common stock. As of
September 30, 2005, no options were available for issuance under the 1995
Plan.
The 2000 Plan authorizes the grant of options to purchase up to 6,850,000
shares
of EMCORE's common stock. As of September 30, 2005, 449,972 options were
available for issuance under the 2000 Plan. Certain options under the Option
Plans are intended to qualify as incentive stock options pursuant to Section
422A of the Internal Revenue Code.
During
fiscal 2005, 1,793,900 options were granted pursuant to the 2000 Plan at
exercise prices ranging from $1.98 to $5.84 per share. As of September 30,2005,
2004, and 2003, options with respect to 2,845,544, 2,489,807, and 3,088,389,
were exercisable, respectively. The following table summarizes the activity
under the Option Plans:
On
September 30, 2002, EMCORE offered to all employees holding options with
an
exercise price of at least $4.00 per share, excluding executive officers,
the
opportunity to exchange those options for new options to be issued on May1,2003. On October 30, 2002, EMCORE accepted all options tendered for exchange
and
canceled them all. On May 1, 2003, EMCORE issued 2,972,149 options in exchange
for the tendered options. These options had an exercise price of $1.82, which
was the closing price for EMCORE common stock on May 1, 2003. With the exception
of the new exercise price, the new options had the same terms as the tendered
options.
Warrants.
Set
forth
below is a summary of EMCORE's outstanding warrants at September 30,2005:
(1) Issued
in
connection with EMCORE’s December 1997 acquisition of MicroOptical Devices,
Inc.
(2) Issued
in
connection with EMCORE’s IP agreement with Sandia Laboratories.
NOTE
4. GELcore Joint Venture.
In
January 1999, General Electric Lighting and EMCORE formed GELcore, a joint
venture to address the solid-state lighting market with high brightness
light
emitting diode-based (HB-LED) lighting systems. General Electric Lighting
and
EMCORE have agreed that this joint venture will be the exclusive vehicle
for
each party's participation in solid-state lighting. EMCORE has a 49%
non-controlling interest in the GELcore venture, and accounts for this
investment using the equity method of accounting. Additional investments
in
GELcore totaled approximately $1.5 million in fiscal 2005. For the years
ended
September 30, 2005, 2004, and 2003, EMCORE recognized (loss) income of
$(0.1)
million, $0.8 million, and $(1.2) million, respectively, related to this
joint
venture, which was recorded as a component of other income and expenses.
As of
September 30, 2005 and 2004, EMCORE's net investment in this joint venture
amounted to approximately $11.4 million and $10.0 million,
respectively.
NOTE
5. Acquisitions.
Fiscal
2004 - In October 2003, EMCORE acquired Molex Inc.'s 10G Ethernet transceiver
business (Molex) for an initial $1.0 million in cash, $1.5 million in cash
earn
out based upon initial LX4 unit volumes, and future cash earnout payments
calculated as a percentage of revenue, ranging from 3.7% to 0.25%, on LX4
product sold through December 2007. In June 2004, EMCORE purchased Corona
Optical Systems, Inc. (Corona), a parallel optics company, for $1.2 million
in a
cash-for-stock merger. These acquired businesses are a part of EMCORE's
fiber
optic operating segment.
Fiscal
2005 -
In May
2005, EMCORE acquired the analog cable TV (CATV) and radio frequency (RF)
over
fiber specialty businesses from JDS Uniphase Corporation (JDSU) for $1.5
million
in cash plus a deferred payment, payable in quarterly installments, associated
with EMCORE’s quarterly usage of the acquired JDSU inventory valued between $2.5
million and $3.5 million. EMCORE will
also
pay JDSU a royalty on licensed intellectual property. The acquired business
is a
part of EMCORE's fiber optic operating segment. The preliminary allocation
of
the purchase price was based, in part, upon a valuation and estimates,
and
assumptions are subject to change. The preliminary purchase
price was allocated as follows:
JDSU
CATV Acquisition - Preliminary Allocation
(in
thousands)
Inventory
$
3,450
Fixed
assets
500
Cost
investment in K2 Optronics
500
Intangible
assets
1,900
Accrued
expenses
(4,850
)
Total
purchase price
$
1,500
These
transactions were accounted for as purchases in accordance with SFAS
No. 141, Business
Combinations;
therefore, the tangible assets acquired were recorded at fair value on
acquisition date. These
acquisitions were not significant on a pro-forma basis, and therefore,
pro-forma
financial statements are not provided. The operating results of the assets
acquired are included in the accompanying consolidated statement of operations
from the date of acquisition.
NOTE
6. Divestiture.
In
April
2005, EMCORE divested product technology focused on gallium nitride (GaN)-based
power electronic devices for the
power
device industry. The new company, Velox Semiconductor Corporation (Velox),
raised $6.0 million from various venture capital partnerships. Five EMCORE
employees transferred to Velox as full-time personnel and EMCORE contributed
intellectual property and equipment receiving a 19.2% stake in Velox. As
of
September 30, 2005, the recorded value of EMCORE’s investment in Velox was
approximately $1.3 million.
NOTE
7. Investments.
In
addition to the GELcore joint venture and Velox investment mentioned above,
in
February 2002, EMCORE purchased $1.0 million of preferred stock of Archcom
Technology, Inc. (Archcom), a venture-funded, start-up optical networking
components company that designs, manufactures, and markets a series of
high
performance lasers and photodiodes for the datacom and telecom industries.
During fiscal 2004, Archcom raised additional capital, but EMCORE did not
participate. As a result, we reduced the carrying value of our investment
in
Archcom by 50%, or $0.5 million and recorded this expense as an investment
loss
in the statement of operations.
In
October 2004, EMCORE invested $1.0 million in K2 Optronics, Inc., a
California-based company specializing in the design and manufacture of
external
cavity lasers, to strengthen our partnership in designing next-generation,
high-performance, long-wavelength components on an exclusive basis for
the CATV
and FTTP markets. As part of the acquisition of JDSU's businesses, EMCORE
also
paid $0.5 million to purchase JDSU's equity interest in K2 Optronics,
Inc.
NOTE
8. Discontinued Operations.
In
November 2003, EMCORE sold its TurboDisc capital equipment business in
an asset
sale in November 2003 to a subsidiary of Veeco Instruments Inc. (Veeco)
in a
transaction that is valued at up to $80.0 million. The selling price was
$60.0
million in cash at closing, with an additional aggregate maximum payout
of $20.0
million over the next two years. 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.
EMCORE’s maximum second year earn-out payment from Veeco is $6.8
million. Based
upon currently available information, EMCORE cannot predict whether it
will
receive a second year earn-out payment from Veeco because calendar year
2005
revenues from the TurboDisc capital equipment business may not exceed the
minimum revenue earn-out threshold.
NOTE
9. Severance Expense.
Severance
- SG&A expense included approximately $0.9 million and $1.2 million in
severance-related charges in fiscal 2005 and 2004, respectively. In fiscal
2005,
$0.3 million of severance-related benefits was associated with the reduction
of
51 employees related to the closure of the City of Industry, California
(COI)
facility. Excluding the COI facility closure, EMCORE further reduced its
workforce by 39 employees, of whom 29 employees were engaged in manufacturing,
4
employees in SG&A, and 6 employees in R&D. In fiscal 2004,
severance-related benefits were provided to 110 employees that were involuntary
affected by a reduction in workforce. Severance expense by operating segment
is
summarized below:
Severance
Expense
For
the fiscal years ended September 30,
(in
thousands)
FY
2005
FY
2004
Operating
Segment:
Fiber
Optics
$
610
$
831
Photovoltaics
230
85
Electronic
Materials & Devices
60
240
Total
Severance
$
900
$
1,156
The
following table sets forth changes in the severance accrual account, the
balance
of which is expected to be paid by December 31, 2005.
The
following table summarizes the changes in the allowance for doubtful accounts
for the years ended September 30, 2005, 2004 and 2003:
Allowance
for Doubtful Accounts
As
of September 30,
(in
thousands)
2005
2004
2003
Balance
at beginning of year
$
666
$
1,041
$
1,185
Account
adjustments
(302
)
(215
)
443
Write-offs
(deductions)
(36
)
(160
)
(587
)
Balance
at end of year
$
328
$
666
$
1,041
In
September 2005, EMCORE entered into a non-recourse receivables purchase
agreement (AR Agreement) with Silicon Valley Bank (SVBank). Under the
terms of the AR Agreement, EMCORE from time to time may sell, without recourse,
certain accounts receivables to SVBank up to a maximum aggregate
outstanding amount of $20.0 million. The AR Agreement expires on December31, 2006, unless the term is extended by mutual agreement by all parties.
During
the quarter ended September 30, 2005, EMCORE sold approximately $2.2 million
of
account receivables to SVBank.
Receivables
from related parties consisted of the following:
Receivables,
Related Parties
As
of September 30,
(in
thousands)
2005
2004
Current
assets:
GELcore
joint venture
$
185
$
215
Velox
249
-
Employee
loans
3,000
-
Employee
loans - interest portion
763
-
Subtotal
4,197
215
Long-term
assets:
Employee
loans
169
3,169
Employee
loans - interest portion
-
585
Subtotal
169
3,754
Total
$
4,366
$
3,969
Employee
Loans
From
time
to time, prior to July 2002, EMCORE has loaned money to certain of its
executive
officers and directors. Pursuant to due authorization from EMCORE's Board
of
Directors, EMCORE loaned $3.0 million to the Chief Executive Officer in
February
2001. The promissory note matures on February 22, 2006 and bears interest
(compounded annually) at a rate of (a) 5.18% per annum through May 23,2002 and
(b) 4.99% from May 24, 2002 through maturity. All interest is payable at
maturity. The note is partially secured by a pledge of shares of EMCORE's
common
stock. Accrued interest at September 30, 2005 totaled approximately $0.8
million.
In
addition, pursuant to due authorization of the Company's Board of Directors,
EMCORE loaned $82,000 to the Chief Financial Officer (CFO) of EMCORE in
December
1995. The loan does not bear interest and provides for offset of the loan
via
bonuses payable to the CFO over a period of up to 25 years. The remaining
balance relates to $87,260 of loans from the Company to an officer (who
is not a
Named Executive Officer) that were made during 1997 through 2000, and are
payable on demand.
During
the first quarter of fiscal 2005, pursuant to due authorization of the
Company’s
Compensation Committee, EMCORE wrote-off $34,000 of notes receivable that
were
issued in 1994 to certain EMCORE employees.
NOTE
11. Inventory, net.
Inventory
is stated at the lower of cost or market, with cost being determined using
the
standard cost method that includes material, labor and manufacturing overhead
costs. The components of inventory consisted of the following:
Inventory,
net
As
of September 30,
(in
thousands)
2005
2004
Raw
materials
$
15,482
$
9,000
Work-in-process
5,101
4,140
Finished
goods
5,911
5,754
Subtotal
26,494
18,894
Less:
reserves
(8,146
)
(4,055
)
Total
$
18,348
$
14,839
EMCORE
recorded write-downs of inventory of $3.7 million and $4.0 million for the
years
ended September 30, 2005 and 2004, respectively.
NOTE
12. Property, Plant, and Equipment, net.
Property,
plant, and equipment, net, consisted of the following:
Property,
Plant, and Equipment, net
As
of September 30,
(in
thousands)
2005
2004
Land
$
1,502
$
1,502
Building
and improvements
37,944
37,938
Equipment
71,854
72,094
Furniture
and fixtures
5,002
5,002
Leasehold
improvements
2,935
2,893
Construction
in progress
3,390
1,406
Property
and equipment under capital lease
466
466
Subtotal
123,093
121,301
Less:
accumulated depreciation and amortization
(66,136
)
(55,947
)
Total
$
56,957
$
65,354
At
September 30, 2005, minimum future lease payments due under the capital leases
are as follows:
Depreciation
expense on owned property and equipment amounted to approximately $14.5 million,
$13.2 million, and $16.8 million in fiscal 2005, 2004, and 2003, respectively.
Accumulated amortization on assets accounted under capital leases amounted
to
approximately $0.4 million as of September 30, 2005 and 2004. In fiscal
2005, EMCORE wrote off $0.4 million of equipment that has been abandoned
for
disposal.
NOTE
13. Goodwill and Intangible Assets, net.
The
following table sets forth changes in the carrying value of goodwill by
reportable segment:
In
May
2001, EMCORE issued $175.0 million aggregate principal amount of its 5%
convertible subordinated notes due in May 2006 (2006 Notes). Interest is
payable
in arrears semiannually on May 15 and November 15 of each year. The notes
are
convertible into EMCORE common stock at a conversion price of $48.76 per
share,
subject to certain adjustments, at the option of the holder. In
December 2002, EMCORE purchased $13.2 million principal amount of the 2006
Notes
at prevailing market prices for an aggregate of approximately $6.3 million,
resulting in a gain of approximately $6.6 million after netting unamortized
debt
issuance costs of approximately $0.3 million.
On
February 24, 2004, EMCORE exchanged approximately $146.0 million, or 90.2%,
of
its remaining 2006 Notes for approximately $80.3 million aggregate principal
amount of new 5% Convertible Senior Subordinated Notes due May 15, 2011
(2011
Notes) and approximately 7.7 million shares of EMCORE common stock. Interest
on
the 2011 Notes is payable in arrears semiannually on May 15 and November
15 of
each year. The notes are convertible into EMCORE common stock at a conversion
price of $8.06 per share, subject to adjustment under customary anti-dilutive
provisions. They also are redeemable should EMCORE's common stock price
reach
$12.09 per share.
As
a result of this transaction, EMCORE reduced debt by approximately $65.7
million, recorded a gain from early debt extinguishment of approximately
$12.3
million.
For
the
years ended September 30, 2005, 2004, and 2003, interest expense relating
to the
notes approximated $4.8 million, $6.1 million, and $8.3 million,
respectively.
Subsequent
Event
Fiscal
2006:
In
November 2005, EMCORE exchanged $14,425,000 aggregate principal amount
of
EMCORE’s 2006 Notes for $16,580,460 aggregate principal amount of newly issued
Convertible Senior Subordinated Notes due May 15, 2011 (New 2011 Notes)
pursuant
to an Exchange Agreement (Agreement) with Alexandra Global Master Fund
Ltd.
(Alexandra). The terms of the New 2011 Notes are identical in all
material respects to EMCORE’s 2011 Notes. The New 2011 Notes are
ranked pari passu with the existing 2011 Notes. The New 2011 Notes will be
convertible at any time prior to maturity, unless previously redeemed or
repurchased by EMCORE, into the shares of EMCORE common stock, no par value,
at
the conversion rate of 124.0695 shares of common stock per $1,000 principal
amount. The
effective conversion rate is $8.06 per share of common stock, subject to
adjustment under customary anti-dilutive provisions. They also are redeemable
should EMCORE's common
stock price reach $12.09 per share. The 2006 Notes exchanged by Alexandra
have been reclassified to long-term debt in the accompanying balance sheets.
As
a result of this transaction, EMCORE will recognize a non-cash loss in
the first
quarter of fiscal 2006 related to the early extinguishment of debt.
Furthermore, the 2006 Notes exchanged by Alexandra represented approximately
91.4% of the $15,775,000 total amount of existing 2006 Notes outstanding
at the time of the transaction. EMCORE intends to redeem for cash the
remaining $1,350,000 of 2006 Notes on or before the May 15, 2006 maturity
date.
NOTE
16. Commitments and Contingencies.
EMCORE
leases certain land, facilities, and equipment under non-cancelable operating
leases. All of the leases provide for rental adjustments for increases
in base
rent (up to specific limits), property taxes, and general property maintenance
that would be recorded as rent expense. EMCORE also has subleased a portion
of
one of its leased facilities to a third party. Net facility and equipment
rent
expense under such leases amounted to approximately $1.9 million, $2.3
million,
and $2.1 million for the years ended September 30, 2005, 2004, and 2003,
respectively. Future minimum rental payments under EMCORE's non-cancelable
operating leases with an initial or remaining term of one year or more
as of
September 30, 2005 are as follows:
EMCORE
is
involved in lawsuits and proceedings that arise in the ordinary course
of
business. There are no matters pending that we expect to be material in
relation
to our business, consolidated financial condition, results of operations,
or
cash flows.
NOTE
17. Income Taxes.
A
reconciliation of the income tax provision at the federal statutory rate
to the
income tax provision at the effective tax rate is as follows:
Significant
components of the Company’s deferred tax assets are as follows:
For
the fiscal years ended September 30,
(in
thousands)
FY
2005
FY
2004
Deferred
tax assets (liabilities):
Federal
net operating loss carryforwards
$
94,634
$
88,799
Research
credit carryforwards (state and federal)
2,024
4,124
Inventory
reserves
2,751
1,360
Accounts
receivable reserves
112
233
Accrued
warranty reserve
431
852
State
net operating loss carryforwards
15,860
15,277
Investment
writedown
4,766
4,766
Other
1,586
1,993
Fixed
assets and intangibles
2,256
(3,920
)
Total
deferred tax assets (liabilities)
124,420
113,484
Valuation
Allowance
(124,420
)
(113,484
)
Net
deferred tax asset
$
-
$
-
Realization
of the deferred tax assets is dependent upon future earnings, if any, the
timing
and amount of which are uncertain. Accordingly, the net deferred tax assets
have
been fully offset by a valuation allowance.
As
of
September 30, 2005, the Company had net operating loss carryforwards for
federal
income tax purposes of approximately $278.0 million, which expire beginning
in
the year 2007 through 2025. The Company also has state net operating loss
carryforwards of approximately $176.0 million, which expire beginning in
the
year 2006. The Company also has federal and state research and development
tax
credits of approximately $0.7 million and $2.7 million. The research credits
will begin to expire in the year 2006 through 2025.
Utilization
of the Company’s net operating loss and tax credit carryforwards may be subject
to a substantial annual limitation due to the ownership change limitations
set
forth in Internal Revenue Code Section 382 and similar state provisions.
Such an annual limitation could result in the expiration of the net operating
loss and tax credit carryforwards before utilization.
The
Company is incorporated in the State of New Jersey, which presently limits
the
use of net operating loss carryforwards due to state government budget
deficits.
NOTE
18. Shareholders’ Equity.
Preferred
Stock:EMCORE’s
certificate of incorporation authorizes the Board of Directors to issue
up to
5,882,352 shares of preferred stock of EMCORE upon such terms and conditions
having such rights, privileges and preferences as the Board of Directors
may
determine.
Future
Issuances:
As
of September 30, 2005, EMCORE has reserved a total of 17,024,659 shares of
its common stock for future issuances as follows:
Number
of Shares
For
exercise of outstanding warrants to purchase common stock
31,535
For
exercise of outstanding common stock options
6,166,226
For
conversion of subordinated notes
10,283,307
For
future common stock option awards
449,972
For
future issuances to employees under the Employee Stock Purchase
Plan
93,619
Total
reserved
17,024,659
NOTE
19. Segment Data and Related Information.
Effective
January 1, 2005, EMCORE reorganized its reporting structure into three
segments:
Fiber Optics, Photovoltaics, and Electronic Materials and Devices. EMCORE's
Fiber Optics revenues are derived primarily from sales of optical components
and
subsystems for CATV, fiber to the premise, enterprise routers and switches,
telecom grooming switches, core routers, high performance servers,
supercomputers and satellite communications data links. EMCORE's Photovoltaics
revenues are derived primarily from the sales of solar power conversion
products, including solar cells, covered interconnect solar cells, and
solar
panels. EMCORE's Electronic Materials and Devices revenues are derived
primarily
from sales of wireless components, such as RF materials including
Hetero-junction Bipolar Transistors and enhancement-mode pseudomorphic
high
electron mobility transistors, GaN materials for wireless base stations,
and
process development technology.
The
following table sets forth the revenues and percentage of total revenues
attributable to each of EMCORE's operating segments for each of the past
three
fiscal years.
Product
Revenues
For
the fiscal years ended September 30,
FY
2005
FY
2004
FY
2003
(in
thousands)
Revenue
%
of Revenue
Revenue
%
of Revenue
Revenue
%
of Revenue
Fiber
Optics
$
81,960
64.2
%
$
56,169
60.4
%
$
32,658
54.2
%
Photovoltaics
33,407
26.2
25,716
27.6
18,196
30.2
Electronic
Materials and Devices
12,236
9.6
11,184
12.0
9,430
15.6
Total
revenues
$
127,603
100.0
%
$
93,069
100.0
%
$
60,284
100.0
%
The
following table sets forth EMCORE's consolidated revenues by geographic
region.
Revenue was assigned to geographic regions based on the customers’ or contract
manufacturers’ shipment locations.
Geographic
Revenues
For
the fiscal years ended September 30,
FY
2005
FY
2004
FY
2003
(in
thousands)
Revenue
%
of Revenue
Revenue
%
of Revenue
Revenue
%
of Revenue
United
States
$
107,956
84.6
%
$
66,485
71.4
%
$
44,136
73.2
%
Asia
and South America
13,728
10.8
15,912
17.1
9,018
15.0
Europe
5,919
4.6
10,672
11.5
7,130
11.8
Total
revenues
$
127,603
100.0
%
$
93,069
100.0
%
$
60,284
100.0
%
In
fiscal
2005, Cisco Systems, Inc. (Cisco) accounted for 19% of our total revenue.
In
fiscal 2004, Motorola, Inc. (Motorola) and Cisco accounted for 13% and
8% of our
total revenue, respectively. In fiscal 2003, Motorola accounted for 14%
of total
revenue.
The
following table set forth operating loss attributable to each EMCORE operating
segment.
Operating
Loss by Segment
For
the fiscal years ended September 30,
(in
thousands)
FY
2005
FY
2004
FY
2003
Operating
loss by segment:
Fiber
Optics
$
(13,681
)
$
(24,889
)
$
(19,790
)
Photovoltaics
(4,234
)
(8,571
)
(14,488
)
Electronic
Materials and Devices
(3,793
)
(4,733
)
(6,036
)
Total
operating loss
(21,708
)
(38,193
)
(40,314
)
Other
(income) expenses:
Interest
expense, net
3,763
5,373
7,279
Gain
from debt extinguishment
-
(12,312
)
(6,614
)
Investment
loss
-
500
-
Equity
in net loss (income) of GELcore
112
(789
)
1,228
Total
other expenses (income)
3,875
(7,228
)
1,893
Loss
from continuing operations
$
(25,583
)
$
(30,965
)
$
(42,207
)
Long-lived
assets (consisting of property, plant and equipment, goodwill and intangible
assets) for each operating segment are as follows:
Long-Lived
Assets
As
of September 30,
(in
thousands)
2005
2004
Fiber
Optics
$
56,261
$
59,802
Photovoltaics
37,861
38,577
Electronic
Materials and Devices
2,825
5,736
Total
$
96,947
$
104,115
NOTE
20. Employee Benefits.
EMCORE
has a savings plan (Savings Plan) that qualifies as a deferred salary
arrangement under Section 401(k) of the Internal Revenue Code. Under the
Savings
Plan, participating employees may defer a portion of their pretax earnings,
up
to the Internal Revenue Service annual contribution limit. All employer
contributions are made in EMCORE's common stock. For the years ended September30, 2005, 2004, and 2003, EMCORE contributed approximately $734,000, $739,000,
and $701,000, respectively, in common stock to the Savings Plan.
EMCORE
adopted an Employee Stock Purchase Plan (ESPP) in fiscal 2000, which was
amended
in fiscal 2004. The amendment changed the ESPP plan from a 12-month duration
plan to a 6-month duration plan, with new participation periods beginning
in
January and July of each year. The ESPP provides employees of EMCORE with
an
opportunity to purchase common stock through payroll deductions. The option
price is set at 85% of the market price for EMCORE's common stock on either
the
first or last day of the participation period, whichever is lower. Contributions
are limited to 10% of an employee's compensation. The Board of Directors
has
reserved 1,000,000 shares of common stock for issuance under the ESPP.
The
remaining amount of shares reserved for the ESPP are as follows:
Number
of Shares
Original
amount of shares reserved for the ESPP
1,000,000
Number
of shares issued in December 2000 for CY2000
(16,534
)
Number
of shares issued in December 2001 for CY2001
(48,279
)
Number
of shares issued in December 2002 for CY2002
(89,180
)
Number
of shares issued in December 2003 for CY2003
(244,166
)
Number
of shares issued in June 2004 for first half of CY2004
(166,507
)
Number
of shares issued in December 2004 for second half of
CY2004
(167,546
)
Number
of shares issued in June 2005 for first half of CY2005
We
have
audited the accompanying consolidated balance sheets of EMCORE Corporation
(the
"Company") as of September 30, 2005 and 2004, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each
of the
three years in the period ended September 30, 2005. These financial statements
are the responsibility of the Company's management. Our responsibility
is to
express an opinion on these financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, such consolidated financial statements present fairly, in all
material
respects, the financial position of EMCORE Corporation as of September30, 2005
and 2004, and the results of its operations and its cash flows for each
of the
three years in the period ended September 30, 2005, in conformity with
accounting principles generally accepted in the United States of America.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal
control over financial reporting as of September 30, 2005, based on the
criteria
established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
and our
report dated December 14, 2005 expressed an unqualified opinion on management’s
assessment of the effectiveness of the Company’s internal control over financial
reporting and an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
(a)Evaluation
of Disclosure Controls and Procedures
The
term
“disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934, as amended (Exchange Act). This
term
refers to the controls and procedures of a company that are designed to
ensure
that information required to be disclosed by a company in the reports that
it
files under the Exchange Act is recorded, processed, summarized, and reported
within required time periods. Our Chief Executive Officer and our Chief
Financial Officer have evaluated the effectiveness of our disclosure controls
and procedures as of the end of the period covered by this annual report.
They
have concluded that, as of that date, our disclosure controls and procedures
were effective at ensuring that required information will be disclosed
on a
timely basis in our reports filed under the Exchange Act.
(b)Changes
in Internal Control over Financial Reporting
No
change
in our internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter
ended
September 30, 2005 that has materially affected, or is reasonably likely
to
materially affect, our internal control over financial
reporting.
(c)Report
of Management on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for the company. Internal control over
financial reporting is a process to provide reasonable assurance regarding
the
reliability of our financial reporting for external purposes in accordance
with
accounting principles generally accepted in the United States of America.
Internal control over financial reporting includes maintaining records
that in
reasonable detail accurately and fairly reflect our transactions; providing
reasonable assurance that transactions are recorded as necessary for preparation
of our financial statements; providing reasonable assurance that receipts
and
expenditures of company assets are made in accordance with management
authorization; and providing reasonable assurance that unauthorized acquisition,
use or disposition of company assets that could have a material effect
on our
financial statements would be prevented or detected on a timely basis.
Because
of its inherent limitations, internal control over financial reporting
is not
intended to provide absolute assurance that a misstatement of our financial
statements would be prevented or detected.
Management
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, management concluded that
the
company’s internal control over financial reporting was effective as of
September 30, 2005. Deloitte & Touche LLP has audited this assessment of our
internal control over financial reporting; their report is included
below.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and
Shareholders
of EMCORE Corporation
Somerset,
New Jersey
We
have
audited management’s assessment, included in Item 9A Controls and Procedures -
Report of Management on Internal Control Over Financial Reporting, that
EMCORE
Corporation (the “Company”) maintained effective internal control over financial
reporting as of September 30, 2005 based on criteria established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
The Company’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness
of
internal control over financial reporting. Our responsibility is to
express an opinion on management’s assessment and an opinion on the
effectiveness of the Company’s internal control over financial reporting based
on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management’s assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary
in the
circumstances. We believe that our audit provides a reasonable basis for
our opinions.
A
company’s internal control over financial reporting is a process designed by, or
under the supervision of, the company’s principal executive and principal
financial officers, or persons performing similar functions, and effected
by the
company’s board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and
the
preparation of financial statements for external purposes in accordance
with
generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (1)
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly
reflect the transactions and dispositions of the assets of the company;
(2)
provide reasonable assurance that transactions are recorded as necessary
to
permit preparation of financial statements in accordance with generally
accepted
accounting principles, and that receipts and expenditures of the company
are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention
or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override
of
controls, material misstatements due to error or fraud may not be prevented
or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future
periods
are subject to the risk that the controls may become inadequate because
of
changes in conditions, or that the degree of compliance with the policies
or
procedures may deteriorate.
In
our
opinion, management’s assessment that the Company maintained effective internal
control over financial reporting as of September 30, 2005, is fairly stated,
in
all material respects, based on the criteria established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission.
Also in our opinion, the Company maintained, in all material respects,
effective
internal control over financial reporting as of September 30, 2005, based
on the
criteria established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements
as of and
for the year ended September 30, 2005 of the Company and our report dated
December 14, 2005 expressed an unqualified opinion on those financial
statements.
Directors
and Executive Officers of the
Registrant.
Information
regarding our executive officers and directors required by this Item is
incorporated by reference to EMCORE’s Definitive Proxy Statement in connection
with the 2005 Annual Meeting of Stockholders (the "Proxy Statement"), which
will
be filed with the Securities and Exchange Commission within 120 days after
the
fiscal year ended September 30, 2005. Information required by Item 405 of
Regulation S-K is incorporated by reference to the section entitled "Section
16(a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement.
We
have
adopted a code of ethics entitled the “EMCORE Corporation Code of Business
Conduct and Ethics,” which is applicable to all employees, officers, and
directors of EMCORE. The full text of our Code of Business Conduct and Ethics
is
included with the Corporate Governance information available on our website
(www.emcore.com).
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
Information
regarding security ownership of certain beneficial owners and management is
incorporated by reference to the section entitled “Security Ownership of Certain
Beneficial Owners and Management” in the Proxy Statement.
Information
regarding EMCORE’s equity compensation plans is incorporated by reference to the
section entitled “Equity Compensation Plans” in the Proxy
Statement.
Information
required by this Item is incorporated by reference to the sections entitled
“Certain Relationships and Related Transactions” and “Compensation Committee
Interlocks and Insider Participation” in the Proxy Statement.
The
applicable Financial Statement Schedules required under this Item 15(a)(2)
are
presented in the Company's consolidated financial statements and notes thereto
under Item 8 of this Annual Report on Form 10-K.
(a)(3) Exhibits
Exhibit
No.
Description
2.1
Asset
Purchase Agreement, dated as of November 3, 2003, by and among
Veeco St.
Paul Inc., Veeco Instruments Inc., and Registrant (incorporated
by
reference to Exhibit 2.1 to Registrant's Current Report on Form
8-K filed
November 18, 2003).
2.2
Purchase
Agreement, dated as of May 27, 2005, between JDS Uniphase Corporation
and
Registrant (incorporated by reference to Exhibit 2.1 to Registrant’s
Current Report on Form 8-K filed June 3, 2005).
Amended
By-Laws, as amended through December 21, 2000 (incorporated by
reference
to Exhibit 3.2 to Registrant's Annual Report on Form 10-K for
the fiscal
year ended September 30, 2000).
Note,
dated as of May 7, 2001, in the amount of $175,000,000 (incorporated
by
reference to Exhibit 4.2 to Registrant's Quarterly Report on
Form 10-Q for
the fiscal quarter ended March 31, 2001).
Note
dated as of February 24, 2004, in the amount of $80,276,000 (incorporated
by reference to Exhibit 4.4 to Registrant's Annual Report on
Form 10-K for
the fiscal year ended September 30, 2004).
Indenture,
dated as of November 16, 2005, between Registrant and Deutsche
Bank Trust
Company Americas, as Trustee.*
10.1
Specimen
certificate for shares of common stock (incorporated by reference
to
Exhibit 4.1 to Amendment No. 3 to the Registration Statement
on Form S-1
(File No. 333-18565) filed with the Commission on February 24,1997).
10.2
Transaction
Agreement dated January 20, 1999 between General Electric Company
and
Registrant (incorporated by reference to Exhibit 10.1 to Registrant’s
Amended Quarterly Report on Form 10-Q/A filed on May 17, 1999).
Confidential treatment has been requested by EMCORE for portions
of this
document. Such portions are indicated by “[*]”.
10.3†
1995
Incentive and Non-Statutory Stock Option Plan (incorporated by
reference
to Exhibit 10.1 to the Amendment No. 1 to the Registration Statement
on
Form S-1 filed on February 6, 1997).
Amended
and Restated Note, dated as of May 23, 2002 between Registrant
and Reuben
F. Richards, Jr. (incorporated by reference to Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended
June 30, 2002).
Terms
of Executive Severance Policy (incorporated by reference to Exhibit
10.1
to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended
December 31, 2004).
Exchange
Agreement, dated as of November 10, 2005, by and between Alexandra
Global
Master Fund Ltd. and Registrant.*
14.1
Code
of Ethics for Financial Professionals (incorporated by reference
to
Exhibit 14.1 to Registrant’s Annual Report on Form 10-K for the fiscal
year ended September 30, 2003).
Pursuant
to the requirements of Section 13 or 15(d) of the Securities and Exchange
Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
Each
person whose signature appears below constitutes and appoints and hereby
authorizes Reuben F. Richards, Jr. and Thomas G. Werthan, severally, such
person’s true and lawful attorneys-in-fact, with full power of substitution or
resubstitution, for such person and in his name, place and stead, in any
and all
capacities, to sign on such person’s behalf, individually and in each capacity
stated below, any and all amendments, including post-effective amendments
to
this Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Commission granting unto said
attorneys-in-fact, full power and authority to do and perform each and every
act
and thing requisite or necessary to be done in and about the premises, as
fully
to all intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact, or their substitute
or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant in the
capacities indicated, on December 14, 2005.
Executive
Vice President, Chief Financial Officer, and Director
Thomas
G. Werthan
(Principal
Accounting and Financial Officer)
/s/
Richard A. Stall
Executive
Vice President, Chief Technology Officer, and Director
Richard
A. Stall
/s/
Robert Louis-Dreyfus
Director
Robert
Louis-Dreyfus
/s/
Charles T. Scott
Director
Charles
T. Scott
/s/
Robert Bogomolny
Director
Robert
Bogomolny
/s/
John Gillen
Director
John
Gillen
EXHIBIT
INDEX
Exhibit
No.
Description
2.1
Asset
Purchase Agreement, dated as of November 3, 2003, by and among
Veeco St.
Paul Inc., Veeco Instruments Inc., and Registrant (incorporated
by
reference to Exhibit 2.1 to Registrant's Current Report on Form
8-K filed
November 18, 2003).
2.2
Purchase
Agreement, dated as of May 27, 2005, between JDS Uniphase Corporation
and
Registrant (incorporated by reference to Exhibit 2.1 to Registrant’s
Current Report on Form 8-K filed June 3, 2005).
Amended
By-Laws, as amended through December 21, 2000 (incorporated by
reference
to Exhibit 3.2 to Registrant's Annual Report on Form 10-K for
the fiscal
year ended September 30, 2000).
Note,
dated as of May 7, 2001, in the amount of $175,000,000 (incorporated
by
reference to Exhibit 4.2 to Registrant's Quarterly Report on
Form 10-Q for
the fiscal quarter ended March 31, 2001).
Note
dated as of February 24, 2004, in the amount of $80,276,000 (incorporated
by reference to Exhibit 4.4 to Registrant's Annual Report on
Form 10-K for
the fiscal year ended September 30, 2004).
Indenture,
dated as of November 16, 2005, between Registrant and Deutsche
Bank Trust
Company Americas, as Trustee.*
10.1
Specimen
certificate for shares of common stock (incorporated by reference
to
Exhibit 4.1 to Amendment No. 3 to the Registration Statement
on Form S-1
(File No. 333-18565) filed with the Commission on February 24,1997).
10.2
Transaction
Agreement dated January 20, 1999 between General Electric Company
and
Registrant (incorporated by reference to Exhibit 10.1 to Registrant’s
Amended Quarterly Report on Form 10-Q/A filed on May 17, 1999).
Confidential treatment has been requested by EMCORE for portions
of this
document. Such portions are indicated by “[*]”.
10.3†
1995
Incentive and Non-Statutory Stock Option Plan (incorporated by
reference
to Exhibit 10.1 to the Amendment No. 1 to the Registration Statement
on
Form S-1 filed on February 6, 1997).
Amended
and Restated Note, dated as of May 23, 2002 between Registrant
and Reuben
F. Richards, Jr. (incorporated by reference to Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended
June 30, 2002).
Terms
of Executive Severance Policy (incorporated by reference to Exhibit
10.1
to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended
December 31, 2004).
Exchange
Agreement, dated as of November 10, 2005, by and between Alexandra
Global
Master Fund Ltd. and Registrant.*
14.1
Code
of Ethics for Financial Professionals (incorporated by reference
to
Exhibit 14.1 to Registrant’s Annual Report on Form 10-K for the fiscal
year ended September 30, 2003).
