empower with lightTM
annual report and proxy
2008
Strategic Goals for 2009:
Despite these achievements, the economic environment in the second half of
the year has created a very challenging time for our Company and the entire
industry. It’s expected that fiscal 2009 will continue to be a challenging year.
Like many companies, we felt the sudden drop in demand throughout our
business. Liquidity is clearly an important concern. The focus of the manage-
ment team is to improve operations efficiency, reduce costs, and aggressively
liquidate excess inventory.
We continue to pursue the path towards a profitable separation of our two
operating business segments. As an initial step towards that goal, EMCORE
plans to conduct a private placement offering for a minority equity interest in
our solar business. This capital raise is expected to assist the company with
its liquidity requirements through this difficult economic environment as well
as strengthen our competitive positions within each of the two business
sectors. We are confident that the steps we are taking will help turn this
economic crisis into an opportunity for the Company. We firmly believe that
the activities initiated in the past year have uniquely positioned EMCORE for
significant growth when the economic environment improves.
We thank you for your continued support.
Sincerely yours,
Reuben F Richards Jr
Reuben F. Richards, Jr.
Executive Chairman, Chairman of the Board
Hong Hou, Ph.D.
Chief Executive Officer
TO OUR SHAREHOLDERS:
The first half of fiscal 2008 was successful in transitioning EMCORE as we
executed our strategy of growing both our fiber optics and solar photovolta-
ics businesses. As we announced early in our fiscal year, EMCORE’s board
of directors authorized a strategy to grow both operating segments through
organic growth or strategic acquisitions so that they can each be indepen-
dently profitable as stand alone operating businesses.
Within our fiber optics business, we acquired the optics assets from Intel
Corporation for Enterprise and Telecom applications, and successfully
integrated them into EMCORE’s existing infrastructure. The addition of
these businesses made EMCORE one of the top fiber optics component and
subsystem suppliers in the world with one of the most comprehensive and
diversified product portfolios. As a result of this acquisition, combined with
growth of our existing product lines, our revenue in this segment grew 55%
sequentially and the loss from operations narrowed significantly. On the
photovoltaics side of the business, fiscal 2008 marked the first year of
commercial sales of our concentrated photovoltaics (CPV) products.
Through superior product performance and customer support focus, we
successfully developed a broad customer base for CPV components.
EMCORE’s turnkey CPV systems deployed in 2008 represent one of the
largest installations in the world of such technology. As the performance
and benefit of CPV systems continue to be demonstrated, we believe this
technology will generate significant traction in future years. Not only did we
replace solar revenue attributed to the termination of a government
program, but also we managed to grow revenue within this operating
segment sequentially by 15%.
During fiscal 2008, we re-capitalized the Company’s balance sheet through
the conversion of our convertible debt, a private equity placement of $94
million to fund the acquisition and integration of the Intel Fiber Optics
assets, and the partial sale of non-core securities in WorldWater and Solar
Technologies. In the process, we were able to establish a new capability and
capacity for CPV product manufacturing and successfully developed and
launched our CPV systems business. During fiscal 2008, the Company
achieved nearly 40% sequential growth compared to fiscal 2007.
Fiscal 2008 Financial Results and Other Events
The Company exited the fiscal year with $24 million in cash and no debt.
However, the macroeconomic environment deteriorated sharply toward the
latter part of the fiscal year. In addition to a significant goodwill write-off
on our balance sheet related to acquisitions in our fiber optics business,
the loss attributed to the launch of our CPV business was substantial. The
Company has taken aggressive steps to control operational losses and
drive profitability.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2008
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission File Number 0-22175
EMCORE Corporation
(Exact name of registrant as specified in its charter)
New Jersey
(State or other jurisdiction of incorporation or organization)
22-2746503
(I.R.S. Employer Identification No.)
10420 Research Road, SE, Albuquerque, New Mexico
(Address of principal executive offices)
87123
(Zip Code)
Registrant’s telephone number, including area code: (505) 332-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Name of each exchange on which registered:
Common Stock, No Par Value
NASDAQ
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
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
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.
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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See
definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of common stock held by non-affiliates of the registrant as of March 31, 2008 (the last business day of
the registrant's most recently completed second fiscal quarter) was approximately $388.5 million, based on the closing sale price of
$5.76 per share of common stock as reported on The NASDAQ Global Market.
The number of shares outstanding of the registrant’s no par value common stock as of December 29, 2008 was 77,791,229.
DOCUMENTS INCORPORATED BY REFERENCE
In accordance with General Instruction G(3) of Form 10-K, certain information required by Part III hereof will either be
incorporated into this Form 10-K by reference to the Registrant's Definitive Proxy Statement for the Registrant's 2009 Annual
Meeting of Stockholders filed within 120 days of September 30, 2008 or will be included in an amendment to this Form 10-K
filed within 120 days of September 30, 2008.
EMCORE Corporation
FORM 10-K
For The Fiscal Year Ended September 30, 2008
TABLE OF CONTENTS
Part I
Part II
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Consolidated Statements of Operations
for the fiscal years ended September 30, 2008, 2007, and 2006
Consolidated Balance Sheets
as of September 30, 2008 and 2007
Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss)
for the fiscal years ended September 30, 2008, 2007, and 2006
Consolidated Statements of Cash Flows
for the fiscal years ended September 30, 2008, 2007, and 2006
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Item 9.
Item 9A.
Item 9B.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships, Related Transactions and Director Independence
Principal Accounting Fees and Services
Part III
Part IV
Item 15.
Exhibits and Financial Statement Schedules
SIGNATURES
PAGE
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3
ITEM 1.
Business
Company Overview
PART I
EMCORE Corporation (the “Company”, “we”, or “EMCORE”) is a leading provider of compound semiconductor-based
components and subsystems for the broadband, fiber optic, satellite and terrestrial solar power markets. We were established in
1984 as a New Jersey corporation. We have two reporting segments: Fiber Optics and Photovoltaics. EMCORE's Fiber Optics
segment offers optical components, subsystems and systems that enable the transmission of video, voice and data over high-capacity
fiber optic cables for high-speed data and telecommunications, cable television (“CATV”) and fiber-to-the-premises (“FTTP”)
networks. EMCORE's Photovoltaics segment provides solar products for satellite and terrestrial applications. For satellite
applications, EMCORE offers high-efficiency compound semiconductor-based gallium arsenide (“GaAs”) solar cells, covered
interconnect cells (“CICs”) and fully integrated solar panels. For terrestrial applications, EMCORE offers concentrating
photovoltaic (“CPV”) systems for utility scale solar applications as well as offering its high-efficiency GaAs solar cells and CPV
components for use in solar power concentrator systems. For specific information about our Company, our products or the markets
we serve, please visit our website at http://www.emcore.com.
EMCORE is subject to the information requirements of the Securities Exchange Act of 1934. We file periodic reports, current
reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). The SEC maintains a
website (http://www.sec.gov) that contains all of our information that has been filed electronically. Our annual reports are available
on our website, free of charge, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the
SEC. The information on EMCORE’s website is not incorporated by reference into and is not made a part of this Annual Report on
Form 10-K or a part of any other report or filing with the SEC.
Industry Overview
Compound semiconductor-based products provide the foundation of components, subsystems and systems used in a broad range of
technology markets, including broadband, datacom, telecom and satellite communication equipment and networks, advanced
computing technologies and satellite and terrestrial solar power generation systems. Compound semiconductor materials are
capable of providing electrical or electro-optical functions, such as emitting optical communications signals, detecting optical
communications signals, and converting sunlight into electricity.
Our Markets
Collectively, our products serve the telecommunications, datacom, cable television, fiber-to-the-premises, high-performance
computing, defense and homeland security, and satellite and terrestrial solar power markets.
Fiber Optics
Our fiber optics products enable information that is encoded on light signals to be transmitted, routed (switched) and received in
communication systems and networks. Our Fiber Optics segment primarily offers the following product lines:
Telecom Optical Products – We believe we are a leading supplier of 10 gigabit per second (Gb/s) fully C-band and L-band tunable
dense wavelength division multiplexed (DWDM) and coarse wavelength division multiplexed (CWDM) products for the next
generation tele-communications systems. We are one of the few suppliers who offer vertically-integrated products, including
external-cavity laser modules, integrated tunable laser assemblies (ITLAs) and 300-pin transponders. The laser module operates at a
continuous wave mode, and is capable for applications of 10, 40, and 100 Gb/s due to the superior narrow linewidth characteristics.
The ITLA and transponder products are fully Telcordia® qualified and comply with multi-source agreements (MSAs). We also offer
a range of XFP platform OC-192 products for telecom applications. We supply to most major telecom equipment companies
worldwide.
4
Enterprise Datacom Products – We believe we provide leading-edge optical components and transceiver modules for data
applications that enable switch-to-switch, router-to-router and server-to-server backbone connections at aggregate speeds of 10 Gb/s
and above. We offer the broadest range of products with XENPAK form factor which comply with 10 Gb/s Ethernet (10-GE)
IEEE802.3ae standard. Our 10-GE products include short-reach (SR), long-reach (LR), extended-reach (ER), coarse WDM LX4
optical transceivers to connect between the photonic physical layer and the electrical section layer and CX4 transceivers. In
addition to the 10-GE products, EMCORE offers traditional MSA Gigabit Ethernet (GE) 1310-nm small form factor (SFF) and
small form factor pluggable (SFP) optical transceivers. These transceivers also provide integrated duplex data links for bi-
directional communication over single mode optical fiber providing high-speed Gigabit Ethernet data links operating at 1.25Gbps.
Laser/photodetector Component Products - We believe we are a leading provider of optical components including lasers,
photodetectors and various forms of packaged subassemblies. Products include chip, TO, and TOSA forms of high-speed 850nm
vertical cavity VCSELs, distributed feedback Bragg (DFB) lasers, positive-intrinsic-negative (pin) and avalanche photodiode (APD)
components for 2G, 8G and 10G Fibre Channel, Ethernet and 10 GE, FTTP, and Telecom applications. While we provide the
component products to the entire industry, we also enjoy the benefits of vertically-integrated infrastructure through a low-cost and
early availability of new product introduction.
Parallel Optical Transceiver and Cable Products – EMCORE has been the technology and product leader of optical transmitter
and receiver products utilizing arrays of optical emitting or detection devices, e.g., vertical-cavity surface-emitting lasers (VCSELs)
and photodetectors (PDs). These optical transmitter, receiver, and transceiver products are used for back-plane interconnects,
switching/routing between telecom racks and high-performance computing clusters. EMCORE’s products include 12-lane SNAP-12
MSA transmitter and receivers with single, double, and quadruple data rates and 4-lane optical media converters with single and
double data rates. Based on the core competency of 4-lane parallel optical transceivers, we offer optical fiber ribbon cables with
embedded parallel-optical transceivers within the connectors, EMCORE Connects Cables (ECC). These products, with aggregated
bandwidth between 10-40 Gb/s, are ideally suited for high-performance computing clusters. Our products provide our customers
with increased network capacity; increased data transmission distance and speeds; increased bandwidth; lower power consumption;
improved cable management over copper interconnects; and lower cost optical interconnections for massively parallel multi-
processors.
5
Fiber Channel Transceiver Products - EMCORE offers tri-rate SFF and SFP optical transceivers for storage area networks. The
MSA transceiver module is designed for high-speed Fibre Channel data links supporting up to 4.25 Gb/s (4X Fibre Channel rate).
The products provide integrated duplex data links for bi-directional communication over Multimode optical fiber.
Cable Television (CATV) Products - We are a market leader in providing radio frequency (RF) over fiber products for the CATV
industry. Our products are used in hybrid fiber coaxial (HFC) networks that enable cable service operators to offer multiple
advanced services to meet the expanding demand for high-speed Internet, on-demand and interactive video and other advanced
services, such as high-definition television (HDTV) and voice over IP (VoIP). Our CATV products include forward and return-path
analog and digital lasers, photodetectors and subassembly components, broadcast analog and digital fiber-optic transmitters and
quadrature amplitude modulation (QAM) transmitters and receivers. Our products provide our customers with increased capacity to
offer more cable services; increased data transmission distance, speed and bandwidth; lower noise video receive; and lower power
consumption.
Fiber-To-The-Premises (FTTP) Products - Telecommunications companies are increasingly extending their optical infrastructure
to their customers’ location in order to deliver higher bandwidth services. We have developed customer qualified FTTP components
and subsystem products to support plans by telephone companies to offer voice, video and data services through the deployment of
new fiber optics-based access networks. Our FTTP products include passive optical network (PON) transceivers, analog fiber optic
transmitters for video overlay and high-power erbium-doped fiber amplifiers (EDFA), analog and digital lasers, photodetectors and
subassembly components, analog video receivers and multi-dwelling unit (MDU) video receivers. Our products provide our
customers with higher performance for analog and digital characteristics; integrated infrastructure to support competitive costs; and
additional support for multiple standards.
6
Satellite Communications (Satcom) Products - We believe we are a leading provider of optical components and systems for use
in equipment that provides high-performance optical data links for the terrestrial portion of satellite communications networks. Our
products include transmitters, receivers, subsystems and systems that transport wideband radio frequency and microwave signals
between satellite hub equipment and antenna dishes. Our products provide our customers with increased bandwidth and lower
power consumption.
Video Transport - Our video transport product line offers solutions for broadcasting, transportation, IP television (IPTV), mobile
video and security & surveillance applications over private and public networks. EMCORE’s video, audio, data and RF transmission
systems serve both analog and digital requirements, providing cost-effective, flexible solutions geared for network reconstruction
and expansion.
Defense and Homeland Security - Leveraging our expertise in RF module design and high-speed parallel optics, we provide a
suite of ruggedized products that meet the reliability and durability requirements of the U.S. Government and defense markets. Our
specialty defense products include fiber optic gyro components used in precision guided munitions, ruggedized parallel optic
transmitters and receivers, high-frequency RF fiber optic link components for towed decoy systems, optical delay lines for radar
systems, EDFAs, terahertz spectroscopy systems and other products. Our products provide our customers with high frequency and
dynamic range; compact form-factor; and extreme temperature, shock and vibration tolerance.
7
Photovoltaics
We believe our high-efficiency compound semiconductor-based multi-junction solar cell products provide our customers with
compelling cost and performance advantages over traditional silicon-based solutions. These advantages include higher solar cell
efficiency allowing for greater conversion of light into electricity as well as a superior ability to withstand extreme heat and
radiation environments. These advantages enable a reduction in a customer’s solar product footprint by providing more power
output with less solar cells, which is an enhanced benefit when our product is used in concentrating photovoltaic (CPV)
systems. Our Photovoltaics segment primarily targets the following markets:
Satellite Solar Power Generation - We believe we are a leader in providing solar power generation solutions to the global
communications satellite industry and U.S. government space programs. A satellite’s operational success and
corresponding revenue depend on its available power and its capacity to transmit data. We provide advanced compound
semiconductor-based solar cells and solar panel products, which are more resistant to radiation levels in space and generate
substantially more power from sunlight than silicon-based solutions. Space power systems using our multi-junction solar
cells weigh less per unit of power than traditional silicon-based solar cells. Our products provide our customers with higher
conversion efficiency for reduced solar array size and launch costs, higher radiation tolerance, and longer lifetime in harsh
space environments.
We design and manufacture multi-junction compound semiconductor-based solar cells for both commercial and military
satellite applications. We currently manufacture and sell one of the most efficient and reliable, radiation resistant advanced
triple-junction solar cells in the world, with an average "beginning of life" efficiency of 28.5%. EMCORE is in the final
stages of qualifying the next generation high efficiency multi-junction solar cell platform for space applications which will
have an average conversion efficiency of 30%, providing our customers with expanded capability.
Additionally, we are developing an entirely new class of advanced multi-junction solar cell with even higher conversion
efficiency. This new architecture, called inverted metamorphic (IMM), is being developed in conjunction with the National
Renewable Energy Laboratory and the US Air Force Research Laboratory and to date has demonstrated conversion
efficiency exceeding 33% on an R&D scale. We believe EMCORE is also the only manufacturer to supply true monolithic
bypass diodes for shadow protection by utilizing several EMCORE patented methods.
EMCORE also provides covered interconnect cells (CICs) and solar panel lay-down services, giving us the capability to
manufacture fully integrated solar panels for space applications. We can provide satellite manufacturers with proven
integrated satellite power solutions that significantly improve satellite economics. Satellite manufacturers and solar array
integrators rely on EMCORE to meet their satellite power needs with our proven flight heritage. The pictures below
represent a solar cell and solar panel used for satellite space power applications.
8
Terrestrial Solar Power Generation - Solar power generation systems utilize photovoltaic cells to convert sunlight to
electricity and have been used in space programs and, to a lesser extent, in terrestrial applications for several decades. The
market for terrestrial solar power generation solutions has grown significantly as solar power generation technologies
improve in efficiency, as global prices for non-renewable energy sources (i.e., fossil fuels) continue to rise over the long
term, and as concern has increased regarding the effect of carbon emissions on global warming. Terrestrial solar power
generation has emerged as one of the most rapidly expanding renewable energy sources due to certain advantages solar
power has when compared to other energy sources, including reduced environmental impact, elimination of fuel price risk,
installation flexibility, scalability, distributed power generation (i.e., electric power is generated at the point of use rather
than transmitted from a central station to the user), and reliability. The rapid increase in demand for solar power has created
a growing need for highly efficient, reliable and cost-effective concentrating solar power systems.
EMCORE has adapted its high-efficiency compound semiconductor-based multi-junction solar cell products for terrestrial
applications, which are intended for use with concentrator photovoltaic (CPV) systems in utility-scale installations.
EMCORE has attained 39% peak conversion efficiency under 1000x illumination on its terrestrial concentrating solar cell
products in volume production. This compares favorably to average efficiency of 15-21% of silicon-based solar cells and
approximately 35% for competing multi-junction cells. We believe that solar concentrator systems assembled using our
compound semiconductor-based solar cells will be competitive with silicon-based solar power generation systems, in
certain geographic regions, because they are more efficient and, when combined with the advantages of concentration, we
believe will result in a lower cost of power generated. Our multi-junction solar cell technology is not subject to silicon
shortages, which have led to increasing prices in the raw materials required for silicon-based solar cells. EMCORE
currently serves the terrestrial solar market with two levels of concentrated photovoltaic (CPV) products: components
(including solar cells and solar cell receivers) and CPV power systems, as shown in the pictures below:
9
While the terrestrial power generation market is still developing, we are currently shipping production orders of CPV components to
several solar concentrator companies, and providing samples to many others, including major system manufacturers in the United
States, Europe, and Asia. We have finished installations of a total of approximately 1 megawatt (MW) CPV systems in Spain,
China, and US with our own Gen-II design (as shown in the picture above). EMCORE has recently responded to several RFPs from
public utility companies in the US for a total of several hundred MWs using its Gen-III design. The Gen-III product, with enhanced
performance (including a module efficiency of approximately 30%) and much improved cost structure, is scheduled to be in volume
production by the second half of calendar 2009.
In July 2008, we announced our solar cell technology which provides a platform for EMCORE’s next generation photovoltaic
products for space and terrestrial solar power applications. Solar cells built using Inverted Metamorphic (“IMM”) technology
recently achieved world record conversion efficiency of 33% when used in space, and it is anticipated that efficiency levels in the
42%-45% range will be achieved when adapted for use under the 500-1500X concentrated illumination, typical in terrestrial
concentrator photovoltaic (CPV) systems. Once commercialized, the CPV systems that are powered with EMCORE’s IMM-based
solar cells will realize an approximately 10% to 20% reduction in the cost of power generated. EMCORE expects to begin
commercializing this technology for both space and terrestrial applications in 2009. Due to its unique design, the IMM cell is
approximately one fifteenth the thickness of the conventional multi-junction solar cell and will enable a new class of extremely
lightweight, high-efficiency, and flexible solar arrays for space applications. Furthermore, this technology can be readily integrated
into EMCORE’s complete line of CPV receiver products and provide increased energy conversion efficiency in CPV power
systems.
EMCORE’s Strategy
After completing several strategic acquisitions and divestures over the past few years, EMCORE has developed a strong business
focus and comprehensive product portfolio in two main sectors: Fiber Optics and Photovoltaics. Our principal objective is to
maximize shareholder value by leveraging our expertise in advanced compound semiconductor technologies to be a leading
provider of high-performance, cost-effective product solutions in each of the markets that we serve. Key elements of our strategy
include:
Drive Business Growth, Reduce Cost, and Deliver Profitability.
With our enhanced product portfolio, expanded customer base, and established vertically-integrated, low-cost
manufacturing infrastructure in our fiber optics business, we are better positioned than ever to leverage our resources and
infrastructure to grow our revenue through new product introductions and gain market share. Several initiatives for cost
reduction will come to fruition in fiscal 2009, which should improve our gross profit and margins. The Company has also
significantly reduced capital expenditures and has placed a greater emphasis on improving its working capital management.
While we enjoy the moderate growth and greater visibility in our satellite photovoltaics business, we recognize the need of
further investment in our CPV business to develop a more cost competitive design. It is the commitment of management to
deliver overall profitability once the Gen-III product is deployed.
Focus Our R&D Effort on Cost Reduction and Market Share Gain.
EMCORE has invested substantially in research and development and product engineering over the past years. We have
developed a clear path towards business growth and are recognized as a technology leader in both our Fiber Optics and
Photovoltaics segments. In fiscal 2009, we will be focusing our R&D and product engineering efforts on product cost
reduction and market share gain through more complete product solutions for our customers.
Grow Our Terrestrial Solar Power Business by Focused Effort and Strategic Partnership.
For our CPV component business, we will continue to secure and expand our leadership position by providing high-
performance, reliable, and cost-effective products and excellent customer service. For our CPV system business, our
business development focus will be in the U.S. market primarily due to the extension of the investment tax credit (ITC) and
other favorable policies for renewable energy in the U.S. Our Gen-III CPV system solution should provide a competitive
levelized cost of energy for utility scale projects in certain regions. We will continue to develop and expand strategic
partnerships with major international companies to drive our business penetration and expansion into the international
markets. We expect a substantial ramp of our CPV business to occur in the second half of 2009.
Pursue Strategic Acquisitions and Partnership Opportunities.
We are committed to the ongoing evaluation of strategic opportunities that can expand our addressable markets and
strengthen our competitive position. Where appropriate, we will acquire additional products, technologies, or businesses
that are complementary to, or that broaden the markets in which we operate. We plan to pursue strategic acquisitions and
partnerships to increase revenue which will allow for higher overhead absorption and improved gross margins.
10
On August 28, 2008, EMCORE entered into a non-binding Memorandum of Understanding with a subsidiary of an international
conglomerate headquartered in South Korea, outlining the terms pursuant to which the parties would cooperate with respect to
bidding on CPV and other photovoltaic projects in North America, Europe and the Middle East. The Memorandum also described
other possible areas of cooperation, including supply chain management and the possible establishment of a manufacturing joint
venture.
Recent acquisitions include:
· On February 22, 2008, EMCORE acquired telecom-related assets of Intel Corporation’s Optical Platform
Division (“OPD”) that included inventory, fixed assets, intellectual property, and technology comprised of
tunable lasers, tunable transponders, 300-pin transponders, and integrated tunable laser assemblies.
· On April 20, 2008, EMCORE acquired the enterprise and storage-related assets of Intel Corporation’s OPD
business, as well as Intel’s Connects Cables business. The assets acquired include inventory, fixed assets,
intellectual property, and technology relating to optical transceivers for enterprise and storage customers, as
well as optical cable interconnects for high-performance computing clusters.
Please refer to Risk Factors under Item 1A, Management’s Discussion and Analysis of Financial Condition and Results of
Operations under Item 7 and Financial Statements and Supplemental Data under Item 8 for further discussion of these
transactions.
Restructuring Programs
EMCORE is committed to achieving profitability by increasing revenue through the introduction of new products, reducing our cost
structure and lowering the breakeven points of our product lines. We have significantly streamlined our manufacturing operations
by focusing on core competencies to identify cost efficiencies. Where appropriate, we transferred the manufacturing of certain
product lines to low-cost contract manufacturers or our own manufacturing facility in China whenever such transfer can lower costs
while maintaining quality and reliability.
EMCORE’s restructuring programs are designed to further reduce the number of our manufacturing facilities, in addition to the
divesture or exit from selected businesses and product lines that are not strategic or are not capable of achieving desired revenue or
profitability goals. In addition, we will continue to drive operational efficiency and reduce overhead costs.
Our results of operations and financial condition have and will continue to be significantly affected by severance, restructuring
charges, impairment of long-lived assets and idle facility expenses incurred during facility closing activities. Please refer to Risk
Factors under Item 1A, Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 7 and
Financial Statements and Supplemental Data under Item 8 for further discussion of these items.
Government Research Contract Funding
We derive a portion of our revenue from funding by various agencies of the U.S. Government of research contracts and
subcontracts. These contracts typically cover work performed over extended periods of time, from several months up to several
years. These contracts may be modified or terminated at the convenience of the U.S. Government and may be subject to government
budgetary fluctuations.
Please refer to Risk Factors under Item 1A, Management’s Discussion and Analysis of Financial Condition and Results of
Operations under Item 7 and Financial Statements and Supplemental Data under Item 8 for further discussion of U.S. Government
contracts.
Sales and Marketing
We sell our products worldwide through our direct sales force, external sales representatives and distributors and application
engineers. Our sales force communicates with our customers’ engineering, manufacturing and purchasing personnel to determine
product design, qualifications, performance and cost. Our strategy is to use our direct sales force to sell to key accounts and to
expand our use of external sales representatives for increased coverage in international markets and certain domestic segments.
11
Throughout our sales cycle, we work closely with our customers to qualify our products into their product lines. As a result, we
develop strategic and long-lasting customer relationships with products and services that are tailored to our customers’ requirements.
We focus our marketing communication efforts on increasing brand awareness, communicating our technologies’ advantages and
generating leads for our sales force. We use a variety of marketing methods, including our website, participation at trade shows and
selective advertising to achieve these goals.
Externally, our marketing group works with customers to define requirements, characterize market trends, define new product
development activities, identify cost reduction initiatives and manage new product introductions. Internally, our marketing group
communicates and manages customer requirements with the goal of ensuring that our product development activities are aligned
with our customers’ needs. These product development activities allow our marketing group to manage new product introductions
and new product and market trends.
Please refer to Risk Factors under Item 1A, Management’s Discussion and Analysis of Financial Condition and Results of
Operations under Item 7 and Financial Statements and Supplemental Data under Item 8 for further discussion of sales and
marketing, including information regarding our customers and geographic areas in which we do business.
Manufacturing
As of September 30, 2008, we had thirteen dedicated MOCVD (metal organic chemical vapor deposition) systems for both
development and production, which are capable of processing virtually all compound semiconductor-based materials and
devices. Our operations include wafer fabrication, device design and production, fiber optic module, subsystem and system design
and manufacture, and solar panel engineering and assembly. Many of our manufacturing operations are computer monitored or
controlled to enhance production output and statistical control. We employ a strategy of minimizing ongoing capital investments,
while maximizing the variable nature of our cost structure. We maintain supply agreements with many key suppliers throughout our
supply chain management function. Where we can gain cost advantages while maintaining quality and intellectual property control,
we outsource the production of certain subsystems, components and subassemblies to contract manufacturers located overseas. Our
contract manufacturers must maintain comprehensive quality and delivery systems, and we continuously monitor them for
compliance.
Our various manufacturing processes involve extensive quality assurance systems and performance testing. Our facilities have
acquired and maintain certification status for their quality management systems. Our manufacturing facilities located in
Albuquerque, New Mexico; Alhambra, California and LangFang, China are registered to ISO 9001 standards.
Please refer to Risk Factors under Item 1A and Management’s Discussion and Analysis of Financial Condition and Results of
Operations under Item 7 for further discussion of manufacturing activities.
Sources of Raw Materials
We depend on a limited number of suppliers for certain raw materials, components and equipment used in our products. We
continually review our vendor relationships to mitigate risks and lower costs, especially where we depend on one or two vendors for
critical components or raw materials. While maintaining inventories that we believe are sufficient to meet our near-term needs, we
generally do not carry significant inventories of raw materials. Accordingly, we maintain ongoing communications with our vendors
in order to prevent any interruptions in supply, and have implemented a supply-chain management program to maintain quality and
lower purchase prices through standardized purchasing efficiencies and design requirements. To date, we generally have been able
to obtain sufficient quantities of quality supplies in a timely manner.
Please refer to Risk Factors under Item 1A for further discussion of our reliance upon sole or limited sources of raw materials.
Research and Development
Our research and development (R&D) efforts have been focused on maintaining our technological leadership position by working to
improve the quality and attributes of our product lines. We also invest significant resources to develop new products and production
technology to expand into new market opportunities by leveraging our existing technology base and infrastructure. Our industry is
characterized by rapid changes in process technologies with increasing levels of functional integration. Our efforts are focused on
designing new proprietary processes and products, on improving the performance of our existing materials, components and
subsystems, and on reducing costs in the product manufacturing process.
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As of September 30, 2008, we had three MOCVD systems dedicated to R&D efforts. The R&D staff utilizes x-ray, optical and
electrical characterization equipment, as well as device and module fabrication and testing equipment, which generates data rapidly,
allowing for shortened development cycles and rapid customer response.
As part of the ongoing effort to cut costs, many of our projects are used to develop lower cost versions of our existing products. We
also actively compete for R&D funds from U.S. Government agencies and other entities. In view of the high cost of development,
we solicit research contracts that provide opportunities to enhance our core technology base and promote the commercialization of
targeted products. Generally, internal R&D funding is used for the development of products that will be released within twelve
months and external funding is used for long-term R&D efforts.
EMCORE’s Photovoltaics division recently announced the following new product development:
·
In July 2008, we announced our solar cell technology which provides a platform for EMCORE’s next generation
photovoltaic products for space and terrestrial solar power applications. Solar cells built using Inverted Metamorphic
(“IMM”) technology recently achieved world record conversion efficiency of 33% when used in space, and it is anticipated
that efficiency levels in the 42%-45% range will be achieved when adapted for use under the 500-1500X concentrated
illumination, typical in terrestrial concentrator photovoltaic (CPV) systems. Once commercialized, the CPV systems that
are powered with EMCORE’s IMM-based solar cells will realize an approximately 10% to 20% reduction in the cost of
power generated. EMCORE expects to begin commercializing this technology for both space and terrestrial applications in
2009. Due to its unique design, the IMM cell is approximately one fifteenth the thickness of the conventional multi-
junction solar cell and will enable a new class of extremely lightweight, high-efficiency, and flexible solar arrays for space
applications. Furthermore, this technology can be readily integrated into EMCORE’s complete line of CPV receiver
products and provide increased energy conversion efficiency in CPV power systems.
EMCORE’s Fiber Optics division recently announced the following new product development:
·
In June 2008, we announced that our optical fiber EMCORE Connects Cables (ECC) are being used by IBM on the
Department of Energy’s supercomputer nicknamed Roadrunner, the first supercomputer to break the 1,000 trillion
calculations per second mark known as a Petaflop. EMCORE Connects Cables are high-performance InfiniBand®
interconnects that operate at high-speed 20G data rates with an extremely low bit error rate of 10-15.
Please refer to Risk Factors under Item 1A, Management’s Discussion and Analysis of Financial Condition and Results of
Operations under Item 7 and Financial Statements and Supplemental Data under Item 8 for further discussion of our R&D efforts.
Intellectual Property and Licensing
We protect our proprietary technology by applying for patents, where appropriate, and in other cases by preserving the technology,
related know-how and information as trade secrets. The success and competitive position of our product lines depends 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, 2008, we held approximately 148 U.S. patents
and 12 foreign patents and have over 100 additional patent applications pending. Our U.S. patents will expire on varying dates
between 2009 and 2027. These patents and patent applications claim various aspects of current or planned commercial versions of
our materials, components, subsystems and systems.
We also have entered into license agreements with the licensing agencies of universities and other organizations, under which we
have obtained exclusive or non-exclusive rights to practice inventions claimed in various patents and applications issued or pending
in the U.S. and other foreign countries. We do not believe the financial obligations under any of these agreements materially
adversely affect our business, financial condition or results of operations.
We rely on trade secrets to protect our intellectual property when we believe that publishing patents would make it easier for others
to reverse engineer our proprietary processes. A “trade secret” is information that has value to the extent it is not generally known,
not readily ascertainable by others through legitimate means, and protected in a way that maintains its secrecy. Reliance on trade
secrets is only an effective business practice insofar as trade secrets remain undisclosed and a proprietary product or process is not
reverse engineered or independently developed. To protect our trade secrets, we take certain measures to ensure their secrecy, such
as partitioning the non-essential flow of information between our different groups and executing non-disclosure agreements with our
employees, customers and suppliers. We also rely upon other intellectual property rights such as trademarks and copyrights where
appropriate.
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Please refer to Risk Factors under Item 1A, Legal Proceedings under Item 3, Management’s Discussion and Analysis of Financial
Condition and Results of Operations under Item 7 and Financial Statements and Supplemental Data under Item 8 for further
discussion of intellectual property.
Environmental Regulations
We are subject to U.S. Federal, state, and local laws and regulations concerning the use, storage, handling, generation, treatment,
emission, release, discharge, and disposal of certain materials used in our R&D and production operations, as well as laws and
regulations concerning environmental remediation, homeland security, and employee health and safety. The production of wafers
and devices involves the use of certain hazardous raw materials, including, but not limited to, ammonia, phosphine, and arsine. If
our control systems are unsuccessful in preventing release of these or other hazardous materials or we fail to comply with such
environmental provisions, our actions, whether intentional or inadvertent, could result in fines and other liabilities to the U.S.
Government or third parties, and injunctions requiring us to suspend or curtail operations which could have a material adverse effect
on our business.
We have in-house professionals to address compliance with applicable environmental, homeland security, and health and safety laws
and regulations. We believe that we are currently in compliance with all applicable environmental laws, including the Resource
Conservation and Recovery Act.
Please refer to Risk Factors under Item 1A for further discussion of our compliance efforts associated with environmental
regulations.
Competition
The markets for our products in each of our reporting segments are extremely competitive and are characterized by rapid
technological change, frequent introduction of new products, short product life cycles and significant price erosion. We face actual
and potential competition from numerous domestic and international companies. Many of these companies have greater engineering,
manufacturing, marketing and financial resources than we have. Partial lists of these competitors within the markets we participate
in include:
Fiber Optics
CATV Networks. Our competitors include Finisar and Hitachi Yagi at the subsystem level and Applied Optoelectronics,
Inc. and Eudyna Device, Inc. at the component product level.
FTTP and Telecommunications Networks. Our competitors include Cyoptics, MRV Communications, and Sumitomo for
telecommunications and FTTP components. For 10G transceivers and parallel optical modules, our principal competitors
include Avago, Finisar Corporation, JDSU, Opnext, Inc. and numerous smaller vendors.
Data Communications, Storage Area Networks and Consumer Products. Our competitors include Avago, Finisar, Hitachi
Cable and Opnext and numerous smaller vendors.
Satellite Communications Networks. Our primary competitors are Foxcom and MITEQ, Inc.
Video Transport Products. Our primary competitors are Evertz and Telecast.
Defense and Homeland Security. The competitors in RF transport for defense and homeland security products include
Aegis Technologies, Finisar Corporation, Gemfire Corporation, Linear Photonics, LLC, and JDSU.
Photovoltaics
Satellite Solar Power Generation. In the market for satellite solar power products, we primarily compete with Azure Solar
GmbH, SHARP Corporation and Spectrolab, Inc., a subsidiary of Boeing.
Terrestrial Solar Power Generation. In the market for terrestrial solar power products, we primarily compete with Azure
Solar GmbH and Spectrolab, Inc. in the solar cell market and Amonix, Concentrix, GreenVolts, Menova, Renovalia, and
SolFocus in the solar power systems market.
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In addition to the companies listed above, we compete with many research institutions and universities for research contract
funding. We also sell our products to current competitors and companies with the capability of becoming competitors. As the
markets for our products grow, new competitors are likely to emerge and current competitors may increase their market share. In the
European Union (“EU”), political and legal requirements encourage the purchase of EU-produced goods, which may put us at a
competitive disadvantage against our European competitors.
There are substantial barriers to entry by new competitors across our product lines. These barriers include the large number of
existing patents, the time and costs to be incurred to develop products, the technical difficulty in manufacturing semiconductor-
based products, the lengthy sales and qualification cycles and the difficulties in hiring and retaining skilled employees with the
required scientific and technical backgrounds. We believe that the primary competitive factors within our current markets are yield,
throughput, performance, reliability, breadth of product line, product heritage, customer satisfaction and customer commitment to
competing technologies. Competitors may develop enhancements to or future generations of competitive products that offer superior
price and performance characteristics. We believe that in order to remain competitive, we must invest significant financial resources
in developing new product features and enhancements and in maintaining customer satisfaction worldwide.
Order Backlog
As of September 30, 2008, we had an order backlog of approximately $117.2 million compared to $149 million in the prior
year. Our order backlog is defined as purchase orders or supply agreements accepted by the Company with expected product
delivery and / or services to be performed in the future. The September 30, 2008 order backlog is comprised of $96.1 million
related to our Photovoltaics segment of which $60.9 million is expected to be delivered subsequent to fiscal 2009 and $21.1 million
related to our Fiber Optics segment expected to be delivered in fiscal 2009.
On December 17, 2007, EMCORE announced that it had received a purchase order to supply 5.7 Megawatts of CPV, along with a
letter of intent for follow-on projects of 14.3 MW, from DI Semicon, a South Korean semiconductor packaging company, and that it
had also executed an agreement with the same company relating to the formation of a joint venture in South ever Korea to
manufacture CPV systems in South Korea. No amounts from this order were included in EMCORE’s backlog, and, due to DI
Semicon’s inability to obtain necessary financing, EMCORE no longer expects any product orders from, or other arrangements
with, DI Semicon to result in the foreseeable future.
From time to time, our customers may request that we delay shipment of certain orders and our backlog could also be adversely
affected if customers unexpectedly cancel purchase orders that we’ve previously accepted. A majority of our fiber optics products
typically ship within the same quarter as when the purchase order is received; therefore, our backlog at any particular date is not
necessarily indicative of actual revenue or the level of orders for any succeeding period.
Employees
As of September 30, 2008, we had 1,006 employees, including 191 employees in China. Of our total employees 51 had a Ph.D.
degree. Our year-end headcount included 609 employees in manufacturing operations, 170 employees in R&D, 193 employees in
sales, general and administration (SG&A), and 34 temporary employees. This represented a net increase of 221 employees or
28% when compared to September 30, 2007. Excluding headcount in China, the Company' headcount increased 86 employees
from September 30, 2007 primarily due to the acquisition of Intel Corporation's Optical Platform Division.
None of our employees are covered by a collective bargaining agreement. We have never experienced any labor-related work
stoppage and believe that our employee relations are good.
Competition is intense in the recruiting of personnel in the semiconductor industry. Our ability to attract and retain qualified
personnel is essential to our continued success. We are focused on retaining key contributors, developing our staff and cultivating
their level of commitment.
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ITEM 1A.
Risk Factors
Our disclosure and analysis in this 2008 Annual Report on Form 10-K contain some forward-looking statements, within the
meaning of Section 27A of the Securities Act and Section 21E of Exchange Act, that set forth anticipated results based on
management’s plans and assumptions. From time to time, we also provide forward-looking statements in other materials we release
to the public. These statements are based largely on our current expectations and projections about future events and financial
trends affecting the financial condition of our business. They relate to future events or our future financial performance and involve
known and unknown risks, uncertainties and other factors that may cause the actual results, levels of activity, performance or
achievements of our business or our industry to be materially different from those expressed or implied by any forward-looking
statements. Such statements include, in particular, projections about our future results, statements about our plans, strategies,
business prospects, changes and trends in our business and the markets in which we operate. These forward-looking statements
may be identified by the use of terms and phrases such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”,
“targets”, “can”, “may”, “could”, “will”, and variations of these terms and similar phrases.
We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans
and assumptions. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. Should
known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ
materially from past results and those anticipated, estimated or projected. You should keep this in mind as you consider forward-
looking statements.
We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or
otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Form 10-Qs and Current
Reports on Form 8-K filed with the SEC. Also note that we provide the following cautionary discussion of risks, uncertainties and
possibly inaccurate assumptions relevant to our businesses. These are factors that, individually or in the aggregate, we think could
cause our actual results to differ materially from historical and expected results. We note these factors for investors as permitted by
the Private Securities Litigation Reform Act of 1995. You should understand that it is not possible to predict or identify all such
factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties.
We have a history of incurring significant net losses and our future profitability is not assured.
We commenced operations in 1984 and as of September 30, 2008, we had an accumulated deficit of $424.8 million. We incurred a
net loss of $80.9 million in fiscal 2008, net loss of $58.7 million in fiscal 2007, and net income of $54.9 million in fiscal
2006. Fiscal 2006 results include the sale of our GELcore joint venture that resulted in a net gain, before tax, of $88.0 million. Our
operating results for future periods are subject to numerous uncertainties and we cannot assure you that we will not continue to
experience net losses for the foreseeable future. Although our revenue has grown in recent years, we may be unable to sustain such
growth rates in light of potential changes in market or economic conditions. If we are not able to increase revenue and reduce our
costs, we may not be able to achieve profitability.
We may be unable to obtain additional financing, increase our revenue and lower our costs of operations, which could adversely
affect our ability to continue as a going concern.
Our ability to continue as a going concern is dependent upon our ability to obtain financing and achieve levels of revenue and cost
reductions that are adequate to support our capital and operating requirements. No assurance can be given that we will be able to
obtain additional financing on terms that are satisfactory to us or increase our revenue and reduce our operating costs to levels that
will sufficiently support our capital and operating requirements. We may be unable to obtain adequate financing, increase our
revenue and/or lower our costs. Our recurring losses raise substantial doubt about our ability to continue as a going concern. Our
auditors have included in their report an explanatory paragraph regarding the recurring losses that raise substantial doubt about our
ability to continue as a going concern.
We may not be able to increase or sustain our recent revenue growth rate, and we may not be able to manage our future revenue
growth effectively.
Over the last five years, the Company’s compound annual revenue growth rate exceeded 32%. We may not be able to increase or
sustain this revenue growth rate. In February 2008, the Company acquired assets of the telecom portion of Intel Corporation’s
Optical Platform Division (“OPD”). In April 2008, the Company acquired the enterprise and storage assets of Intel Corporation’s
OPD business, as well as Intel’s Connects Cables business. These acquisitions totaled approximately $41.6 million or
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approximately 17% of total consolidated revenue in fiscal 2008. We may not experience similar growth of our total consolidated
revenue or even similar revenue growth within our Fiber Optics segment in future periods. Accordingly, investors should not rely on
the results of any prior quarterly or annual period as an indication of our future operating performance.
Our future revenue is inherently unpredictable. As a result, our operating results are likely to fluctuate from period to period,
and we may fail to meet the expectations of our analysts and/or investors, which may cause volatility in our stock price and may
cause our stock price to decline.
Our quarterly and annual operating results have fluctuated substantially in the past and are likely to fluctuate significantly in the
future due to a variety of factors, some of which are outside of our control. Factors that could cause our quarterly or annual
operating results to fluctuate include:
•
•
•
•
•
•
•
market acceptance of our products;
market demand for the products and services provided by our customers;
disruptions or delays in our manufacturing processes or in our supply of raw materials or product components;
changes in the timing and size of orders by our customers;
cancellations and postponements of previously placed orders;
reductions in prices for our products or increases in the costs of our raw materials; and
the introduction of new products and manufacturing processes.
In addition, the limited lead times with which several of our customers order our products restrict our ability to forecast
revenue. We may also experience a delay in generating or recognizing revenue for a number of reasons. For example, orders at the
beginning of each quarter typically represent a small percentage of expected revenue for that quarter and are generally cancelable at
any time. We depend on obtaining orders during each quarter for shipment in that quarter to achieve our revenue objectives. Failure
to ship these products by the end of a quarter may adversely affect our results of operations.
Our credit facility agreement with Bank of America, N.A., contains customary covenants and defaults, including among others,
limitations on dividends, incurrence of indebtedness and liens and mergers and acquisitions and may restrict our operating
flexibility.
As a result of the foregoing, we believe that period-to-period comparisons of our results of operations should not be relied upon as
indications of future performance. In addition, our results of operations in one or more future quarters may fail to meet the
expectations of analysts or investors, which would likely result in a decline in the trading price of our common stock.
Our ability to achieve operational and material cost reductions and to realize production efficiencies for our operations is critical
to our ability to achieve long-term profitability.
We have implemented a number of operational and material cost reductions and productivity improvement initiatives, which are
intended to reduce our expense structure at both the cost of goods sold and the operating expense levels. Cost reduction initiatives
often involve facility consolidation and re-design of our products, which requires our customers to accept and qualify the new
designs, potentially creating a competitive disadvantage for our products. These initiatives can be time-consuming and disruptive to
our operations and costly in the short-term. Successfully implementing these and other cost-reduction initiatives throughout our
operations is critical to our future competitiveness and ability to achieve long-term profitability. However, there can be no assurance
that these initiatives will be successful in creating profit margins sufficient to sustain our current operating structure and business.
Financial markets worldwide are currently in the midst of an unprecedented crisis which may have a materially adverse impact
on the Company, our customers and our suppliers.
Financial markets are in an unprecedented financial crisis worldwide, affecting both debt and equity markets, which has
substantially limited the amount of financing available to all companies, including companies with substantially greater resources,
better credit ratings and more successful operating histories than us. It is impossible to predict how long this crisis will last or how
it will be resolved. It may, however, have a materially adverse affect on the Company for a number of reasons, such as:
The Company’s historic lack of profitability has caused it to consume cash, through acquisitions, operations and
as a result of the research and development and capital expenditures necessary to expand the market which the
Company serves (particularly the terrestrial solar market), as discussed in more detail below. The Company may be
unable to acquire the cash necessary to finance these activities from either the debt or the equity markets and as a
result the Company may be unable to continue operations.
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The Company’s fiber optics products are sold principally to large publicly held companies which are also
dependent on public debt and equity markets. Our customers may be unable to obtain the financing necessary to
continue their own operations.
The market for the products of the Company’s fiber optics customers, into which the Company’s fiber optics
products are incorporated, is dependent on capital spending from telecommunications and data communications
companies, which may also be adversely affected by the lack of financing.
The market for the Company’s satellite solar cells may also be adversely affected by the worldwide financial
crisis, because the market for commercial satellites depends on capital spending by telecommunications companies
and the market for military satellites depends on resources allocated for military intelligence spending, which may
be restricted. The market for the Company’s terrestrial solar products is dependent on the availability of project
financing for photovoltaic projects, which may no longer be available, and is also largely dependent on government
support of various types, such as investment tax credits, which may no longer be available as governments allocate
scarce resources to deal with the financial crisis.
A reduction in the Company’s sales will adversely affect the Company’s ability to draw on its existing line of
credit with Bank of America because that line of credit is largely dependent on the level of the Company’s
accounts receivable.
In addition, the worldwide financial crisis may adversely affect certain assets held by the Company. Historically, the Company has
invested in securities with an auction reset feature (“auction rate securities”). Beginning in February 2008, the auction rate
securities market experienced a significant increase in the number of failed auctions, resulting from a lack of liquidity, which occurs
when sell orders exceed buy orders, and does not necessarily signify a default by the issuer. In February 2008, the auction market
failed for the Company’s auction rate securities, which meant the Company was unable to sell its investments in auction rate
securities. At September 30, 2008, the Company had approximately $3.1 million in auction rate securities. For failed auctions, we
continue to earn interest on these investments at the maximum contractual rate as the issuer is obligated under contractual terms to
pay penalty rates should auctions fail. The underlying assets for $1.7 million of this total are currently AAA rated, the highest rating
by a rating agency. The remaining $1.4 million of investments are securities whose underlying assets are primarily student loans
which are substantially backed by the U.S. Government. In October 2008, the Company received agreements from its investment
brokers announcing settlement of the auction rate securities at 100% par value, of which $1.7 million was settled in November 2008
and $1.4 million is expected to be settled by June 2010. The Company classified $1.7 million as a current asset and the remaining
$1.4 million as a long-term asset based on the expected settlement dates. Due to the fact the Company will receive full value for all
securities; we have not recorded any impairment on these investments as of September 30, 2008. If we are unable to liquidate and
settle these auction rate securities on favorable terms and conditions, such liquidity limitations could have a material adverse effect
on the Company's business, financial condition, results of operations, and cash flow.
The market price for our common stock has experienced significant price and volume volatility and is likely to continue to
experience significant volatility in the future. This volatility may impair our ability to finance strategic transactions with our
stock and otherwise harm our business.
The closing price of our common stock fluctuated from a high of $15.30 per share to a low of $4.46 per share during the year ended
September 30, 2008. As of December 29, 2008 our stock price was $0.90. Our stock price is likely to experience significant
volatility in the future as a result of numerous factors outside our control. Significant declines in our stock price may interfere with
our ability to raise additional funds through equity financing or to finance strategic transactions with our stock. We have historically
used equity incentive compensation as part of our overall compensation arrangements. The effectiveness of equity incentive
compensation in retaining key employees may be adversely impacted by volatility in our stock price. In addition, there may be
increased risk of securities litigation following periods of fluctuations in our stock price. These and other consequences of volatility
in our stock price could have the effect of diverting management’s attention and could materially harm our business, and could be
exacerbated by the current worldwide financial crisis.
We have significant liquidity and capital requirements and may require additional capital in the future. If we are unable to
obtain the additional capital necessary to meet our requirements, our business may be adversely affected.
Historically, the Company has consumed cash from operations. We had negative cash flow from operations of approximately $41.9
million during fiscal 2008. We have managed our liquidity situation through a series of cost reduction initiatives, capital markets
transactions and the sale of assets. We currently have approximately $79.2 million in working capital as of September 30,
2008. The global credit market crisis has had a dramatic effect on the markets we serve and has created a substantially more
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difficult business environment for us. We do not believe it is likely that these adverse economic conditions, and their effect on the
technology industry, will improve significantly in the near term, notwithstanding the unprecedented intervention by the U.S. and
other governments in the global banking and financial systems.
If our cash on hand is not sufficient to fund the cash used by our operating activities and meet our other liquidity requirements, we
will seek to obtain additional equity or debt financing or dispose of assets to provide additional working capital in the future.
Due to the unpredictable nature of the capital markets, particularly in the technology sector, we cannot assure you that we will be
able to raise additional capital if and when it is required, especially if we experience disappointing operating results. If adequate
funds are not available or not available on acceptable terms, our ability to continue to fund expansion, develop and enhance products
and services, or otherwise respond to competitive pressures may be severely limited. Such a limitation could have a material
adverse effect on our business, financial condition, results of operations and cash flow.
The market for our terrestrial solar power products for utility-scale applications may take time to develop, is rapidly changing
and extremely price-sensitive, involves issues with which the Company has little experience, and is currently dependent on the
policy decisions of governments both inside and outside the United States.
We have invested and intend to continue to invest significant resources in the adaptation of our high-efficiency compound
semiconductor-based GaAs solar cell products for terrestrial applications, including the sale of both concentrator photovoltaics
(“CPV”) components and systems. We generated our first revenue from the sale of CPV systems in 2008, which involved the
design, manufacture and installation of large and complex structures intended for outdoor operation, with which the Company has
had no previous experience.
Factors such as changes in energy prices or the development of new and efficient alternative energy technologies could also limit
growth in, or reduce the market for, our terrestrial solar power products. In addition, we experienced difficulties in applying our
satellite-based solar products to terrestrial applications. We may experience further difficulties in the future in competing with new
and emerging terrestrial solar power products, which we have determined to be extremely price sensitive and rapidly changing as
well as obtaining financing for utility-scale projects utilizing our technology, particularly in view of the current worldwide financial
crisis.
We have determined that the terrestrial solar power business will require substantial additional funding for the hiring of employees,
In addition, historically much of
research and development and investment in capital equipment in order to successfully compete.
the market for CPV systems has been outside the U.S. This has involved partnering with non-U.S. entities, which (because
terrestrial solar power generation is a relatively new industry) may have little experience in the field and which may be new
companies. Participation in non-U.S. markets will involve evaluation and compliance with non-U.S. laws, regulations, and
government electric supply contracts which the Company has limited experience in. The rates available under non-U.S. government
electric supply contracts are subject to policy decisions of these governments, which can change in unpredictable ways. Because
of a reduction in rates offered under non-U.S. electric supply contracts, we believe that most of our future business in the near term
will involve projects located within the United States, which has a substantially less developed program for encouraging the use of
solar power and where the economic competitiveness of our products will be even more significant. There can be no assurance that
our bids on solar power installations will be accepted, that we will win any of these bids, that our CPV systems will be qualified for
these projects, or that governments will continue to offer electric supply contracts and other incentives that will make our products
economically viable. If our terrestrial solar power cell products are not cost competitive or accepted by the market, our business,
financial condition and results of operations may be materially and adversely affected.
Successful deployment of our solar power systems may require us to assume roles with respect to solar power projects with which
we have limited or no experience (such as acting as general contractor) and which may expose us to certain financial risks (such as
cost overruns and performance guaranties) which we ay not have the expertise to properly evaluate or manage. In addition, Since
we cannot test our CPV components and solar power systems for the duration of our standard 20-year warranty period, we may be
subject to unexpected warranty expense; if we are subject to warranty and product liability claims, such claims could adversely
affect our business, financial condition, results of operations, and cash flow.
The competitive environment in which our CPV solar power systems business operates may requires us to arrange financing for
our customer’s projects and/or undertake post-sale customer obligations. If we are unable to arrange adequate financing or if
our post-sale customer obligations are more costly than expected, our revenue and financial results could be materially and
adversely affected.
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We may arrange third-party financing for our end customer’s solar projects. Additionally, we may be required as a condition of
financing or at the request of our end customer to undertake certain post-sale obligations such as:
• System output performance guaranties;
• System maintenance;
• Liquidated damage payments or customer termination rights if the system is not commissioned within
specified timeframes;
• Guaranties of certain minimum residual value of the system at specified future dates; and
• System termination clauses whereby we could be required to buy-back a customer’s system at fair value on
specified future dates.
Such financing arrangements and post-sale obligations involve complex accounting analyses and judgments regarding the timing of
revenue and expense recognition and in certain situations these factors may require us to defer revenue recognition until projects are
completed, which could adversely affect revenue in a particular period.
Due to the recent tightening of credit markets and concerns regarding the availability of credit, our customers may be delayed in
obtaining, or may not be able to obtain, necessary financing for their purchases of solar power systems. If we are unable to arrange
adequate financing or if our post-sale customer obligations are more costly than expected, our revenue and financial results could be
materially and adversely affected.
Our Photovoltaics segment recognizes certain contract revenue on a “percentage-of-completion” basis and upon the
achievement of contractual milestones and any delay or cancellation of a project could adversely affect our business.
Our Photovoltaics segment recognizes certain revenue on a “percentage-of-completion” basis and, as a result, revenue from this
segment is driven by the performance of our contractual obligations. The percentage-of-completion method of accounting for
revenue recognition is inherently subjective because it relies on management estimates of total project cost as a basis for recognizing
revenue and profit. Accordingly, revenue and profit we have recognized under the percentage-of-completion method are potentially
subject to adjustments in subsequent periods based on refinements in estimated costs of project completion that could materially
impact our future revenue and profit.
As with any project-related business, there is the potential for delays within any particular customer project. Variation of project
timelines and estimates may impact our ability to recognize revenue in a particular period. Moreover, incurring penalties involving
the return of the contract price to the customer for failure to timely install one project could negatively impact our ability to continue
to recognize revenue on a “percentage-of-completion” basis generally for other projects. In addition, certain customer contracts may
include payment milestones due at specified points during a project. Because our Photovoltaics segment usually must invest
substantial time and incur significant expense in advance of achieving milestones and the receipt of payment, failure to achieve such
milestones could adversely affect our business, financial condition, results of operations, and cash flows.
As supply of polysilicon increases, the corresponding increase in the global supply of silicon-based solar cells and panels may
cause substantial downward pressure on the prices of our terrestrial solar power products, resulting in lower revenues.
As additional polysilicon becomes available, we expect solar panel production globally to increase. Decreases in polysilicon pricing
and increases in silicon-based solar panel production could each result in substantial downward pressure on the price of solar cells
and panels, including our terrestrial solar power products. Such price reductions could have a negative impact on our revenue, and
our business, financial condition results of operations and cash flows may be materially and adversely affected.
We are substantially dependent on a small number of customers and the loss of any one of these customers could adversely
affect our business, financial condition and results of operations.
In fiscal 2008, 2007 and 2006, our top five customers accounted for 46%, 49%, and 39%, respectively of our total annual
consolidated revenue. There can be no assurance that we will continue to achieve historical levels of sales of our products to our
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largest customers. Even though our customer base is expected to increase and our revenue streams to diversify, a substantial portion
of our net revenues could continue to depend on sales to a limited number of customers. Our agreements with these customers may
be cancelled if we fail to meet certain product specifications or materially breach the agreement, and our customers may seek to
renegotiate the terms of current agreements or renewals. The loss of or a reduction in sales to one or more of our larger customers
could have a material adverse affect on our business, financial condition and results of operations.
Long-term, firm commitment supply agreements could result in insufficient or excess inventory or place us at a competitive
disadvantage.
We manufacture our products utilizing materials, components, and services provided by third parties. We seek to obtain a lower cost
of inventory by negotiating multi-year, binding contractual commitments directly with our suppliers. Under such agreements, we
may be required to purchase a specified quantity of products or use a certain amount of services, which is often over a period of
twelve months or more. We also may be required to make substantial prepayments or issue secured letters of credit to these suppliers
against future deliveries. These contractual commitments, or any other “take or pay” agreement we enter into, allows the supplier to
invoice us for the full purchase price of product or services that we are under contract for, whether or not we actually order the
required volume or services. If for any reason we fail to order the required volume or services, the resulting monetary damages
could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
We do not obtain contracts or commitments from customers for all of our products manufactured with materials purchased under
such firm commitment contracts. Instead, we rely on our long-term internal forecasts to determine the timing of our production
schedules and the volume and mix of products to be manufactured. The level and timing of orders placed by customers may vary for
many reasons. As a result, at any particular time, we may have insufficient or excess inventory, which could render us unable to
fulfill customer orders or increase our cost of production. This would place us at a competitive disadvantage to our competitors, and
could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
Long-term contractual commitments also expose us to specific counter-party risk, which can be magnified when dealing with
suppliers without a long, stable production and financial history. For example, if one or more of our contractual counterparties is
unable or unwilling to provide us with the contracted amount of product, we could be required to attempt to obtain product in the
open market, which could be unavailable at that time, or only available at prices in excess of our contracted prices. In addition, in
the event any such supplier experiences financial difficulties, it may be difficult or impossible, or may require substantial time and
expense, for us to recover any or all of our prepayments. Any of the foregoing could have a material adverse effect on our business,
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, components or services.
We currently obtain some materials, components and services used in our products from limited or single sources. We generally do
not carry significant inventories of any raw materials. Because we often do not account for a significant part of our suppliers’
businesses, we may not have access to sufficient capacity from these suppliers in periods of high demand. In addition, since we
generally do not have guaranteed supply arrangements with our suppliers, we risk serious disruption to our operations if an
important supplier terminates product lines, changes business focus, or goes out of business. Because some of these suppliers are
located overseas, we may be faced with higher costs of purchasing these materials if the U.S. dollar weakens against other
currencies. If we were to change any of our limited or sole source suppliers, we would be required to re-qualify each new supplier.
Re-qualification could prevent or delay product shipments that could materially adversely affect our results of operations. In
addition, our reliance on these suppliers may materially adversely affect our production if the components vary in quality or
quantity. If we are unable to obtain timely deliveries of sufficient components of acceptable quality or if the prices of components
for which we do not have alternative sources increase, our business, financial condition and results of operations could be materially
adversely affected.
If our contract manufacturers fail to deliver quality products at reasonable prices and on a timely basis, our business, financial
condition and results of operations could be materially adversely affected.
We are increasing our use of contract manufacturers located outside of the U.S. as a less-expensive alternative to performing our
own manufacturing of certain products. Contract manufacturers in Asia currently manufacture a significant portion of our high-
volume fiber optics products. We supply inventory to our contract manufacturers and we bear the risk of loss, theft or damage to
our inventory while it is held in their facilities.
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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 ability to oversee and control quality and delivery schedules.
The use of contract manufacturers located outside of the U.S. also subjects us to the following additional risks that could
significantly impair our ability to source our contract manufacturing requirements internationally, including:
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unexpected changes in regulatory requirements;
legal uncertainties regarding liability, tariffs and other trade barriers;
inadequate protection of intellectual property in some countries;
greater incidence of shipping delays;
greater difficulty in hiring talent needed to oversee manufacturing operations; and
potential political and economic instability.
potential adverse actions by the incoming Obama Administration pursuant to its stated intention to reduce the loss of
U.S. jobs
Prior to our customers accepting products manufactured at our contract manufacturers, they must requalify the product and
manufacturing processes. The qualification process can be lengthy and expensive, with no guarantee that any particular product
qualification process will lead to profitable product sales. The qualification process determines whether the product manufactured at
our contract manufacturer achieves our customers’ quality, performance and reliability standards. Our expectations as to the time
periods required to qualify a product line and ship products in volumes to customers may be erroneous. Delays in qualification can
impair the expected timing of the transfer of a product line to our contract manufacturer and may impair the expected amount of
sales of the affected products. We may, in fact, experience delays in obtaining qualification of products produced by our contract
manufacturers and, therefore, our operating results and customer relationships could be materially adversely affected.
If we do not keep pace with rapid technological change, our products may not be competitive.
We compete in markets that are characterized by rapid technological change, frequent new product introductions, changes in
customer requirements, evolving industry standards, continuous improvement in products and the use of our existing products in
new applications. We may not be able to develop the underlying core technologies necessary to create new products and
enhancements at the same rate as or faster than our competitors, or to license the technology from third parties that is necessary for
our products.
Product development delays may result from numerous factors, including:
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changing product specifications and customer requirements;
unanticipated engineering complexities;
expense reduction measures we have implemented and others we may implement;
difficulties in hiring and retaining necessary technical personnel; and
difficulties in allocating engineering resources and overcoming resource limitations.
We cannot assure you that we will be able to identify, develop, manufacture, market or support new or enhanced products
successfully, if at all, or on a timely, cost effective or repeatable basis. Our future performance will depend on our successful
development and introduction of, as well as market acceptance of, new and enhanced products that address market changes as well
as current and potential customer requirements and our ability to respond effectively to product announcements by competitors,
technological changes or emerging industry standards. Because it is generally not possible to predict the amount of time required
and the costs involved in achieving certain research, development and engineering objectives, actual development costs may exceed
budgeted amounts and estimated product development schedules may be extended. If we incur budget overruns or delays in our
research and development efforts, our business, financial condition and results of operations may be materially adversely affected.
The competitive and rapidly evolving nature of our industry has in the past resulted and is likely in the future to result in
reductions in our product prices and periods of reduced demand for our products.
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We face substantial competition in each of our reporting segments from a number of companies, many of which have greater
financial, marketing, manufacturing and technical resources than us. Larger-sized competitors often spend more on research and
development, which could give those competitors an advantage in meeting customer demands and introducing technologically
innovative products before we do. We expect that existing and new competitors will improve the design of their existing products
and will introduce new products with enhanced performance characteristics.
The introduction of new products and more efficient production of existing products by our competitors has resulted and is likely in
the future to result in price reductions and increases in expenses and reduced demand for our products. In addition, some of our
competitors may be willing to provide their products at lower prices, accept a lower profit margin or expend more capital in order to
obtain or retain business. Competitive pressures have required us to reduce the prices of some of our products. These competitive
forces could diminish our market share and gross margins, resulting in a material adverse affect on our business, financial condition
and results of operations.
New competitors may also enter our markets, including some of our current and potential customers who may attempt to integrate
their operations by producing their own components and subsystems or acquiring one of our competitors, thereby reducing demand
for our products. In addition, rapid product development cycles, increasing price competition due to maturation of technologies, the
emergence of new competitors in Asia with lower cost structures and industry consolidation resulting in competitors with greater
financial, marketing and technical resources could result in lower prices or reduced demand for our products.
Expected and actual introductions of new and enhanced products may cause our customers to defer or cancel orders for existing
products and may cause our products to become obsolete. A slowdown in demand for existing products ahead of a new product
introduction could result in a write-down in the value of inventory on hand related to existing products. We have in the past
experienced a slowdown in demand for existing products and delays in new product development and such delays may occur in the
future. To the extent customers defer or cancel orders for existing products due to a slowdown in demand or in anticipation of a new
product release or if there is any delay in development or introduction of our new products or enhancements of our products, our
business, financial condition and results of operations could be materially adversely affected.
Our products are difficult to manufacture. Our production could be disrupted and our results will suffer if our production yields
are low as a result of manufacturing difficulties.
We manufacture many of our wafers and devices in our own production facilities. Difficulties in the production process, such as
contamination, raw material quality issues, human error or equipment failure, can cause a substantial percentage of wafers and
devices to be nonfunctional. Lower-than-expected production yields may delay shipments or result in unexpected levels of warranty
claims, either of which can materially adversely affect our results of operations. We have experienced difficulties in achieving
planned yields in the past, particularly in pre-production and upon initial commencement of full production volumes, which have
adversely affected our gross margins. Because the majority of our manufacturing costs are fixed, achieving planned production
yields is critical to our results of operations. Because we manufacture many of our products in a single facility, we have greater risk
of interruption in manufacturing resulting from fire, natural disaster, equipment failures, or similar events than we would if we had
back-up facilities available for manufacturing these products. We could also incur significant costs to repair and/or replace products
that are defective and in some cases costly product redesigns and/or rework may be required to correct a defect. Additionally, any
defect could adversely affect our reputation and result in the loss of future orders.
Some of the capital equipment used in the manufacture of our products have been developed and made specifically for us, is not
readily available from multiple vendors and would be difficult to repair or replace if it were to become damaged or stop working. If
any of these suppliers were to experience financial difficulties or go out of business, or if there were any damage to or a breakdown
of our manufacturing equipment at a time when we are manufacturing commercial quantities of our products, our business, financial
condition and results of operations could be materially adversely affected.
We face lengthy sales and qualifications cycles for our new products and, in many cases, must invest a substantial amount of
time and funds before we receive orders.
Most of our products are tested by current and potential customers to determine whether they meet customer or industry
specifications. The length of the qualification process, which can span a year or more, varies substantially by product and customer,
and thus can cause our results of operations to be unpredictable. During a given qualification period, we invest significant resources
and allocate substantial production capacity to manufacture these new products prior to any commitment to purchase by customers.
In addition, it is difficult to obtain new customers during the qualification period as customers are reluctant to expend the resources
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necessary to qualify a new supplier if they have one or more existing qualified sources. If we are unable to meet applicable
specifications or do not receive sufficient orders to profitably use the allocated production capacity, our business, financial condition
and results of operations could be materially adversely affected.
Our historical and future budgets for operating expenses, capital expenditures, operating leases and service contracts are based upon
our assumptions as to the future market acceptance of our products. Because of the lengthy lead times required for product
development and the changes in technology that typically occur while a product is being developed, it is difficult to accurately
estimate customer demand for any given product. If our products do not achieve an adequate level of customer demand, our
business, financial condition and results of operations could be materially adversely affected.
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 may be
recorded. In addition, we write off inventories that are considered obsolete based upon changes in customer demand, manufacturing
process changes that result in existing inventory obsolescence or new product introductions, which eliminate demand for existing
products. Remaining inventory balances are adjusted to approximate the lower of our manufacturing cost or market value.
If future demand or market conditions are less favorable than our estimates, inventory write-downs may be required. We cannot
assure investors that obsolete or excess inventories, which may result from unanticipated changes in the estimated total demand for
our products and/or the estimated life cycles of the end products into which our products are designed, will not affect us beyond the
inventory charges that we have already taken.
The types of sales contracts which we use in the markets which we serve subject us to unique risks in each of those markets.
In our Fiber Optics reporting segment, we generally do not have long-term contracts with our customers and we typically sell our
products pursuant to purchase orders with short lead times. As a result, our customers could stop purchasing our products at any
time and we must fulfill orders in a timely manner to keep our customers. Risks associated with the absence of long-term contracts
with our customers include the following:
our customers can stop purchasing our products at any time without penalty;
our customers may purchase products from our competitors; and
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These risks are increased by the fact that our customers in this market are large, sophisticated companies which have considerable
purchasing power and control over their suppliers. In the Fiber Optics market, we generally sell our products pursuant to individual
purchase orders, which often have extremely short lead times. If we are unable to fulfill these orders in a timely manner, it is likely
that we will lose sales and customers. In addition, we sell some of our products to the U.S. Government and governmental
entities. These contracts are generally subject to termination for convenience provisions and may be cancelled at any time.
Cancellations or rescheduling of customer orders could result in the delay or loss of anticipated sales without allowing us sufficient
time to reduce, or delay the incurrence of, our corresponding inventory and operating expenses. In addition, changes in forecasts or
the timing of orders from these or other customers expose us to the risks of inventory shortages or excess inventory.
In contrast, in our Photovoltaics reporting segment, we generally enter into long-term firm fixed-price contracts, which could
subject us to losses if we have cost overruns. While firm fixed-price contracts allow us to benefit from cost savings, they also
expose us to the risk of cost overruns. If the initial estimates we used to determine the contract price and the cost to perform the
work prove to be incorrect, we could incur losses. In addition, some of our contracts have specific provisions relating to cost,
schedule, and performance. If we fail to meet the terms specified in those contracts, then our cost to perform the work could increase
or our price could be reduced, which would adversely affect our financial condition. These programs have risk for reach-forward
losses if our estimated costs exceed our estimated price.
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Fixed-price development work inherently has more uncertainty than production contracts and, therefore, more variability in
estimates of the cost to complete the work. Many of these development programs have very complex designs. As technical or
quality issues arise, we may experience schedule delays and cost impacts, which could increase our estimated cost to perform the
work or reduce our estimated price, either of which could adversely affect our financial condition. Some fixed-price development
contracts include initial production units in their scope of work. Successful performance of these contracts depends on our ability to
meet production specifications and delivery rates. If we are unable to perform and deliver to contract requirements, our contract
price could be reduced through the incorporation of liquidated damages, termination of the contract for default, or other financially
significant exposure. Management uses its best judgment to estimate the cost to perform the work and the price we will eventually
be paid on fixed-price development programs. While we believe the cost and price estimates incorporated in the financial statements
are appropriate, future events could result in either favorable or unfavorable adjustments to those estimates.
The risk of fixed price contracts in the photovoltaics market is increased by the new and rapidly changing nature of the terrestrial
photovoltaics market and the Company’s lack of experience in that market.
We are a party to several U.S. Government contracts, which are subject to unique risks.
In 2008, 5% of our revenue was derived from U.S. Government contracts. We intend to continue our policy of selectively pursuing
contract research, product development and market development programs funded by various agencies of the U.S. federal and state
governments to complement and enhance our own resources. Depending on the type of contract, funding from government grants is
either recorded as revenue or as an offset to our research and development expense.
In addition to normal business risks, our contracts with the U.S. Government are subject to unique risks, some of which are beyond
our control. We have had government contracts modified, curtailed or terminated in the past and we expect this will continue to
happen from time to time.
The funding of U.S. Government programs is subject to Congressional appropriations. Many of the U.S. Government programs in
which we participate may extend for several years; however, these programs are normally funded annually. Long-term government
contracts and related orders are subject to cancellation if appropriations for subsequent performance periods are not made. The
termination of funding for a U.S. Government program would result in a loss of anticipated future revenue attributable to that
program, which could have a material adverse effect on our operations.
The U.S. Government may modify, curtail, or terminate our contracts. The U.S. Government may modify, curtail, or terminate its
contracts and subcontracts without prior notice at its convenience upon payment for work done and commitments made at the time
of termination. A reduction or discontinuance of these programs or of our participation in these programs would materially increase
our research and development expenses, which would adversely affect our profitability and could impair our ability to develop our
solar power products and services. Modification, curtailment or termination of our major programs or contracts could have a
material adverse effect on our results of operations and financial condition.
Our contract costs are subject to audits by U.S. Government agencies. U.S. Government representatives may audit the costs we
incur on our U.S. Government contracts, including allocated indirect costs. Such audits could result in adjustments to our contract
costs. Any costs found to be improperly allocated to a specific contract will not be reimbursed, and such costs already reimbursed
must be refunded. We have recorded contract revenue based upon costs we expect to realize upon final audit. However, we do not
know the outcome of any future audits and adjustments and we may be required to reduce our revenue or profits upon completion
and final negotiation of audits. If any audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties
and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension
or prohibition from doing business with the U.S. Government. We have been audited in the past by the U.S. Government and expect
that we will be in the future.
Our business is subject to potential U.S. Government review. We are sometimes subject to certain U.S. Government reviews of our
business practices due to our participation in government contracts. Any such inquiry or investigation could potentially result in a
material adverse effect on our results of operations and financial condition.
Our U.S. Government business is also subject to specific procurement regulations and other requirements. These requirements,
although customary in U.S. Government contracts, increase our performance and compliance costs. These costs might increase in
the future, reducing our margins, which could have a negative effect on our financial condition. Failure to comply with these
regulations and requirements could lead to suspension or debarment, for cause, from U.S. Government contracting or subcontracting
for a period of time and could have an adverse effect on our reputation and ability to secure future U.S. Government contracts.
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We have significant international sales, which expose us to additional risks and uncertainties.
Sales to customers located outside the U.S. accounted for approximately 44% of our consolidated revenue in fiscal 2008, 27% of our
revenue in fiscal 2007 and 24% of our revenue in fiscal 2006. 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 revenue as we seek international
expansion opportunities. Because of this, the following international commercial risks may materially adversely affect our revenue:
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political and economic instability or changes in U.S. Government policy with respect to these foreign countries may
inhibit export of our devices and limit potential customers’ access to U.S. dollars in a country or region in which
those potential customers are located;
we may experience difficulties in the timeliness of collection of foreign accounts receivable and be forced to write
off these receivables;
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 damage our cost competitiveness;
currency fluctuations, which may make our products less cost competitive, affecting overseas demand for our
products or otherwise adversely affect our business; and
language and other cultural barriers may require us to expend additional resources competing in foreign markets or
hinder our ability to effectively compete.
In addition, we may be exposed to additional legal risks under the laws of both the countries in which we operate and in the United
States, including the Foreign Corrupt Practices Act.
We are increasing operations in China, which exposes us to risks inherent in doing business in China.
In May 2007, EMCORE Hong Kong, Ltd., a wholly owned subsidiary of EMCORE Corporation, announced the opening of a new
manufacturing facility in Langfang, China. Our new company, Langfang EMCORE Optoelectronics Co. Ltd., is located
approximately 20 miles southeast of Beijing and currently occupies a space of 44,000 square feet with a Class-10,000 clean room
for optoelectronic device packaging. Another 40,000 square feet is available for future expansion. We have begun the transfer of
our most cost sensitive optoelectronic devices to this facility. This facility, along with a strategic alignment with our existing
contract-manufacturing partners, should enable us to improve our cost structure and gross margins across product lines. We expect
to develop and provide improved service to our global customers by having a local presence in Asia. As we continue to consolidate
our manufacturing operations, we will incur additional costs to transfer product lines to our China facility, including costs of
qualification testing with our customers, which could have a material adverse impact on our operating results and financial
condition.
Our China-based activities are subject to greater political, legal and economic risks than those faced by our other operations. In
particular, the political, legal and economic climate in China (both at national and regional levels) is extremely fluid and
unpredictable. Our ability to operate in China may be adversely affected by changes in Chinese laws and regulations, such as those
relating to taxation, import and export tariffs, environmental regulations, land use rights, intellectual property and other matters,
which laws and regulations remain highly underdeveloped and subject to change, with little or no prior notice, for political or other
reasons. Moreover, the enforceability of applicable existing Chinese laws and regulations is uncertain. In addition, we may not
obtain the requisite legal permits to continue to operate in China and costs or operational limitations may be imposed in connection
with obtaining and complying with such permits. Our business could be materially harmed by any changes in the political, legal or
economic climate in China or the inability to enforce applicable Chinese laws and regulations.
As a result of a government order to ration power for industrial use, operations in our China facility may be subject to possible
interruptions or shutdowns, adversely affecting our ability to complete manufacturing commitments on a timely basis. If we are
required to make significant investments in generating capacity to sustain uninterrupted operations at our facility, we may not realize
the reductions in costs anticipated from our expansion in China. In addition, future outbreaks of avian influenza, or other
communicable diseases, could result in quarantines or closures of our facility, thereby disrupting our operations and expansion in
China.
We intend to export the majority of the products manufactured at our facilities in China. Accordingly, upon application to and
approval by the relevant governmental authorities, we will not be subject to certain Chinese taxes and are exempt from customs duty
assessment on imported components or materials when the finished products are exported from China. We are, however, required to
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pay income taxes in China, subject to certain tax relief. As the Chinese trade regulations are in a state of flux, we may become
subject to other forms of taxation and duty assessments in China or may be required to pay for export license fees in the future. In
the event that we become subject to any increased taxes or new forms of taxation imposed by authorities in China, our results of
operations could be materially and adversely affected.
We will lose sales if we are unable to obtain government authorization to export our products.
Exports of our products are subject to export controls imposed by the U.S. Government and administered by the U.S. Departments
of State and Commerce. In certain instances, these regulations may require pre-shipment authorization from the administering
department. For products subject to the Export Administration Regulations (“EAR”) administered by the Department of
Commerce’s Bureau of Industry and Security, the requirement for a license is dependent on the type and end use of the product, the
final destination and the identity of the end user. Virtually all exports of products subject to the International Traffic in Arms
Regulations (“ITAR”) regulations administered by the Department of State’s Directorate of Defense Trade Controls require a
license. Most of our fiber optics products and our terrestrial solar power products are subject to EAR; however, certain fiber optics
products and all of our commercially available solar cell satellite power products are currently subject to ITAR.
Given the current global political climate, obtaining export licenses can be difficult and time-consuming. Failure to obtain export
licenses for product shipments could significantly reduce our revenue and could materially adversely affect our business, financial
condition and results of operations. Compliance with U.S. Government regulations may also subject us to additional fees and costs.
The absence of comparable restrictions on competitors in those countries may adversely affect our competitive position.
Protecting our trade secrets and obtaining patent protection is critical to our ability to effectively compete.
Our success and competitive position depend on protecting our trade secrets and other intellectual property. Our strategy is to rely
on trade secrets and patents to protect our manufacturing and sales processes and products. Reliance on trade secrets is only an
effective business practice if trade secrets remain undisclosed and a proprietary product or process is not reverse engineered or
independently developed. We take measures to protect our trade secrets, including executing non-disclosure agreements with our
employees, customers and suppliers. If parties breach these agreements or the measures we take are not properly implemented, we
may not have an adequate remedy. Disclosure of our trade secrets or reverse engineering of our proprietary products, processes, or
devices could materially adversely affect our business, financial condition and results of operations.
Our failure to obtain or maintain the right to use certain intellectual property may materially adversely affect our business,
financial condition and results of operations.
The compound semiconductor, optoelectronics and fiber optic communications industries are characterized by frequent litigation
regarding patent and other intellectual property rights. From time to time we have received, and may receive in the future; notice of
claims of infringement of other parties’ proprietary rights and licensing offers to commercialize third party patent rights. There can
be no assurance that:
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infringement claims (or claims for indemnification resulting from infringement claims) will not be
asserted against us or that such claims will not be successful;
future assertions will not result in an injunction against the sale of infringing products, which could
significantly impair our business and results of operations;
any patent owned or licensed by us will not be invalidated, circumvented or challenged; or
we will not be required to obtain 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 and diversion of our resources, may be necessary to defend our rights or defend us against
claimed infringement of the rights of others. In certain circumstances, our intellectual property rights associated with government
contracts may be limited.
Protection of the intellectual property owned or licensed to us may require us to initiate litigation, which can be an extremely
expensive, protracted procedure with an uncertain outcome. The availability of financial resources may limit the Company’s ability
to commence or defend such litigation.
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Failure to comply with environmental and safety regulations, resulting in improper handling of hazardous raw materials used in our
manufacturing processes, could result in costly remediation fees, penalties or damages.
We are subject to laws and regulations and must obtain certain permits and licenses relating to the use of hazardous materials. Our
production activities involve the use of certain hazardous raw materials, including, but not limited to, ammonia, gallium, phosphate
and arsine. If our control systems are unsuccessful in preventing a release of these materials into the environment or other adverse
environmental conditions or human exposures occur, we could experience interruptions in our operations and incur substantial
remediation and other costs or liabilities. In addition, certain foreign laws and regulations place restrictions on the concentration of
certain hazardous materials, including, but not limited to, lead, mercury and cadmium, in our products. Failure to comply with such
laws and regulations could subject us to future liabilities or result in the limitation or suspension of the sale or production of our
products. These regulations include the European Union’s (“EU”) Restrictions on Hazardous Substances, Directive on Waste
Electrical and Electronic Equipment and the directive on End of Life for Vehicles. Failure to comply with environmental and health
and safety laws and regulations may limit our ability to export products to the EU and could materially adversely affect our
business, financial condition and results of operations. In addition, during the past year the Department of Homeland Security has
commenced a program to evaluate the security of certain chemicals which may be of interest to terrorists, including chemicals
utilized by the Company. This evaluation may lead to regulations or restrictions affecting the Company’s ability to utilize these
chemicals or the costs of doing so.
Our recent acquisitions have placed, and will continue to place, a significant strain on our management, personnel, systems, and
resources.
Our recent acquisitions have placed, and will continue to place, a significant strain on our management, personnel, systems, and
resources. To successfully manage our growth and handle the responsibilities of being a public company, we believe we must
effectively:
•
•
•
•
•
•
hire, train, integrate and manage additional qualified engineers for research and development activities,
sales and marketing personnel, and financial and information technology personnel;
retain key management and augment our management team, particularly if we lose key members;
continue to enhance our customer resource management and manufacturing management systems;
implement and improve additional and existing administrative, financial and operations systems,
procedures and controls, including the need to update and integrate our financial internal control systems;
expand and upgrade our technological capabilities; and
manage multiple relationships with our customers, suppliers and other third parties.
We may encounter difficulties in effectively managing the budgeting, forecasting and other process control issues presented by the
acquisitions. If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities,
develop new products, satisfy customer requirements, execute our business plan or respond to competitive pressures.
A failure to attract and retain managerial, technical and other key personnel could reduce our revenue and our operational
effectiveness.
Our future success depends, in part, on our ability to attract and retain certain key personnel, including scientific, operational,
financial, and managerial personnel. In addition, our technical personnel represent a significant asset and serve as the source of our
technological and product innovations. The competition for attracting and retaining key employees (especially scientists, technical
personnel, financial personnel and senior managers and executives) is intense. Because of this competition for skilled employees,
we may be unable to retain our existing personnel or attract additional qualified employees in the future. If we are unable to retain
our skilled employees and attract additional qualified employees to the extent necessary to keep up with our business demands and
changes, our business, financial condition and results of operations may be materially adversely affected. The risks involved in
recruiting and retaining these key personnel may be increased by our lack of profitability, the volatility of our stock price and the
perceived affect of reductions in force and other cost reduction efforts which we have recently implemented.
28
It may be difficult or costly to obtain director and officer insurance coverage as a result of our historical stock option granting
practices.
Although we have recently renewed our directors and officer insurance coverage on what we believe to be favorable terms, it may
become more difficult to obtain director and officer insurance coverage in the future. If we are able to obtain this coverage, it could
be significantly more expensive than in the past, which would have an adverse effect on our financial results and cash flow. As a
result of this and related factors, our directors and officers could face increased risks of personal liability in connection with the
performance of their duties. As a result, we may have difficultly attracting and retaining qualified directors and officers, which could
adversely affect our business.
We are subject to risks associated with the availability and coverage of insurance.
For certain risks, the Company does not maintain insurance coverage because of cost and/or availability. Because the Company
retains some portion of its insurable risks, and in some cases self-insures completely, unforeseen or catastrophic losses in excess of
insured limits may have a material adverse effect on the Company’s results of operations and financial position.
Our business and operations would be adversely impacted in the event of a failure of our information technology infrastructure.
We rely upon the capacity, reliability and security of our information technology hardware and software infrastructure and our
ability to expand and update this infrastructure in response to our changing needs. We are constantly updating our information
technology infrastructure. Any failure to manage, expand and update our information technology infrastructure or any failure in the
operation of this infrastructure could harm our business.
Despite our implementation of security measures, our systems are vulnerable to damages from computer viruses, natural disasters,
unauthorized access and other similar disruptions. Any system failure, accident or security breach could result in disruptions to our
operations. To the extent that any disruptions or security breach results in a loss or damage to our data, or inappropriate disclosure of
confidential information, it could harm our business. In addition, we may be required to incur significant costs to protect against
damage caused by these disruptions or security breaches in the future.
In addition, implementation of new software programs, including the implementation of an enterprise resource planning (“ERP”)
program which the Company intends to install during the upcoming year, may have adverse impact on the Company, including
interruption of operations, loss of data, budget overruns and the consumption of management time and resources.
If we fail to remediate deficiencies in our current system of internal controls, we may not be able to accurately report our
financial results or prevent fraud. As a result, our business could be harmed and current and potential investors could lose
confidence in our financial reporting, which could have a negative effect on the trading price of our equity securities.
The Company is subject to the ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002. These
provisions provide for the identification of material weaknesses in internal control over financial reporting, which is a process to
provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with U.S. GAAP. If
we cannot provide reliable financial reports or prevent fraud, our brand, operating results and the market value of our equity
securities could be harmed. We have in the past discovered, and may in the future discover, areas of our internal controls that need
improvement. In fiscal 2008 and 2007, the Company identified deficiencies in our internal controls over financial reporting.
We have devoted significant resources to remediate and improve our internal controls. We have also been monitoring the
effectiveness of these remediated measures. We cannot be certain that these measures will ensure adequate controls over our
financial processes and reporting in the future. We intend to continue implementing and monitoring changes to our processes to
improve internal controls over financial reporting. Any failure to implement required new or improved controls, or difficulties
encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations.
Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a
negative effect on the trading price of our equity securities. Further, the impact of these events could also make it more difficult for
us to attract and retain qualified persons to serve on our Board of Directors or as executive officers, which could harm our business.
The additions of our manufacturing facility in China and acquisitions increase the burden on our systems and infrastructure, and
impose additional risk to the ongoing effectiveness of our internal controls, disclosure controls, and procedures.
29
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.
Additional litigation may arise in the future relating to our historical stock option practices and other issues.
Although we have received final court approval of the settlement of the three derivative actions which were filed against certain of
our current and former directors and officers relating to historical stock options practices, and the SEC has indicated that is has
terminated its investigation of these matters, additional securities-related litigation (including possible litigation involving
employees) may still arise. Additional lawsuits, regardless of their underlying merit, could become time consuming and expensive,
and if they result in unfavorable outcomes, there could be material adverse effect on our business, financial condition, results of
operations and cash flows. We may be required to pay substantial damages or settlement costs in excess of our insurance coverage
related to these matters, which would have a further material adverse effect on our financial condition or results of operations.
Acquisitions of other companies or investments in joint ventures with other companies could adversely affect our operating
results, dilute our shareholders’ equity, or cause us to incur additional debt or assume contingent liabilities.
To increase our business and maintain our competitive position, we may acquire other companies or engage in joint ventures in the
future. Acquisitions and joint ventures involve a number of risks that could harm our business and result in the acquired business or
joint venture not performing as expected, including:
•
•
•
•
•
•
•
•
insufficient experience with technologies and markets in which the acquired business is involved, which
may be necessary to successfully operate and integrate the business;
problems integrating the acquired operations, personnel, technologies or products with the existing
business and products;
diversion of management time and attention from the core business to the acquired business or joint
venture;
potential failure to retain key technical, management, sales and other personnel of the acquired business
or joint venture;
difficulties in retaining relationships with suppliers and customers of the acquired business, particularly
where such customers or suppliers compete with us;
reliance upon joint ventures which we do not control;
subsequent impairment of the acquired assets, including intangible assets; and
assumption of liabilities including, but not limited to, lawsuits, tax examinations, warranty issues, etc.
We may decide that it is in our best interests to enter into acquisitions or joint ventures that are dilutive to earnings per share or that
negatively impact margins as a whole. In addition, acquisitions or joint ventures could require investment of significant financial
resources and require us to obtain additional equity financing, which may dilute our shareholders’ equity, or require us to incur
additional indebtedness.
30
Changes to financial accounting standards may affect our consolidated results of operations and cause us to change our business
practices.
We prepare our financial statements to conform with U.S. GAAP. These accounting principles are subject to interpretation by the
American Institute of Certified Public Accountants, the SEC and various bodies formed to interpret and create appropriate
accounting policies. A change in those policies can have a significant effect on our consolidated reported results and may affect our
reporting of transactions completed before a change is announced. Changes to those rules or the questioning of current practices
may adversely affect our reported financial results or the way we conduct our business. For example, in December 2003, the FASB
issued Staff Position Interpretation No. 46, “Consolidation of Variable Interest Entities”, or FIN 46(R). The accounting method
under FIN 46(R) may impact our accounting for future joint ventures or project companies. In the event that we are deemed the
primary beneficiary of a Variable Interest Entity (VIE) subject to the accounting of FIN 46(R), we may have to consolidate the
assets, liabilities and financial results of the joint venture. This could have an adverse impact on our financial position, gross margin
and operating results.
Our announced strategy to split the Company may not be successfully implemented.
On April 4, 2008, the Company announced that its Board of Directors had authorized the Company to proceed with the prospects of
splitting the Company into two separate corporations, one consisting of the Fiber Optics reporting segment and one consisting of the
Photovoltaics business segment. These studies continue, and certain steps have been undertaken to implement this strategy. There
can be no assurance, however, that this strategy will be successfully implemented, or when this implementation will occur. Among
the factors which may adversely impact or delay the implementation of this strategy include the following:
•
•
•
•
•
Further study may reveal issues which make such a split inadvisable or uneconomical, or future changes in laws,
regulations or accounting rules may create such issues;
Key customers or suppliers may not consent to contract assignments or other arrangements necessary to
implement this strategy;
It may not be possible to obtain shareholder consent for the implementation of this strategy;
Future capital market developments may prevent the Company from obtaining necessary financing for one or both
of the resulting corporations; and
It may not be possible to fully staff the Board of Directors of one or both resulting corporations.
In addition, because the future management of each of the resulting corporations has not been identified, it is not possible to
currently predict what the strategy of each of these corporations would be following their separation, or whether such strategy(ies)
would be successful
.
31
ITEM 1B.
Unresolved Staff Comments
Not Applicable.
ITEM 2.
Properties
The following chart contains certain information regarding each of our principal facilities.
Location
Function
Approximate
Square Footage
Term
(in calendar year)
Active Properties:
Albuquerque, New
Mexico
Corporate Headquarters
Manufacturing facility for photovoltaic products
Manufacturing facility for digital fiber optic
products
R&D facility
Alhambra, California
Manufacturing facility for CATV, FTTP and Satcom
products
R&D facility
Newark, California
R&D facility
Langfang, China
Manufacturing facility for fiber optics products
San Diego, California Manufacturing facility for video transport products
R&D facility (April 2007 - Acquisition of
Opticomm Corporation)
165,000
Facilities are owned by
the Company; certain
land is leased. Land lease
expires in 2050
91,000
Lease expires in 2011(1)
55,000
44,000
8,100
Lease expires in 2013(1)
Lease expires in 2012(1)
Lease expires in April
2009
Ivyland, Pennsylvania Manufacturing facility for CATV and Satcom
9,000
Lease expires in 2011(1)
Albuquerque, New
Mexico
products R&D facility
Storage warehouse
Taipei City, Taiwan
R&D facility
Somerset, New Jersey
R&D facility
Vacated Properties:
Sunnyvale, California Manufacturing facility for ECL lasers
R&D facility
Facility was vacated in August 2008
Naperville, Illinois
Manufacturing facility for LX4 modules
R&D facility
Facility was vacated in October 2007
6,000
Lease expires in 2010(1)
6,000
5,000
Lease expires in 2013
Lease to commence in
November 2008 and
expires in 2010(1)
15,000
Lease terminated.
11,000
Lease expires in February
2013 and it is in the
process of being
subleased.
Blacksburg, Virginia
Manufacturing facility for video transport products
R&D facility.
Facility was vacated in June 2007
6,000
Lease expired in
December 2008.
Note:
(1) This lease has the option to be renewed by the Company, subject to inflation adjustments.
32
ITEM 3.
Legal Proceedings
The Company is subject to various legal proceedings and claims as discussed below. The Company is also subject to certain other
legal proceedings and claims that have arisen in the ordinary course of business and which have not been fully adjudicated. The
Company does not believe it has a potential liability related to current legal proceedings and claims that could individually or in the
aggregate have a material adverse effect on its financial condition, liquidity or results of operations. However, the results of legal
proceedings cannot be predicted with certainty. Should the Company fail to prevail in any legal matters or should several legal
matters be resolved against the Company in the same reporting period, the operating results of a particular reporting period could be
materially adversely affected.
Shareholder Derivative Litigation Relating to Historical Stock Option Practices
On February 1, 2007, Plaintiff Lewis Edelstein filed a purported stockholder derivative action (the “Federal Court Action”) on
behalf of the Company against certain of its present and former directors and officers (the “Individual Defendants”), as well as the
Company as nominal defendant, in the U.S. District Court for the District of New Jersey, Edelstein v. Brodie, et. al., Case No. 3:07-
cv-00596-FLW-JJH (D.N.J.). On May 22, 2007, Plaintiffs Kathryn Gabaldon and Michael Sackrison each filed a purported
stockholder derivative action against the Individual Defendants, and the Company as nominal defendant, in the Superior Court of
New Jersey, Somerset County, Gabaldon v. Brodie, et. al., Case No. 3:07-cv-03185-FLW-JJH (D.N.J.) and Sackrison v. Brodie, et.
al., Case No. 3:07-cv-00596-FLW-JJH (D.N.J.) (collectively, the “State Court Actions”).
A motion to approve an agreement among the parties to settle the matter reflected in a stipulation of compromise and settlement was
filed with the U.S. District Court for the District of New Jersey on December 3, 2007. The Court granted the motion for
preliminary approval of the settlement on January 3, 2008, and, at a hearing held on March 28, 2008, the Court issued an order
giving final approval to the settlement. The settlement has become final and effective upon the expiration of the appeal period on
April 30, 2008. Thus, the settlement is now binding on all parties and represents a final settlement of both the Federal Court Action
and the State Court Actions. For additional information regarding this matter, please see the Company’s Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2008.
Intellectual Property Lawsuits
We protect our proprietary technology by applying for patents where appropriate and in other cases by preserving the technology,
related know-how and information as trade secrets. The success and competitive position of our product lines are significantly
impacted by our ability to obtain intellectual property protection for our R&D efforts.
We have, from time to time, exchanged correspondence with third parties regarding the assertion of patent or other intellectual
property rights in connection with certain of our products and processes. Additionally, on September 11, 2006, we filed a lawsuit
against Optium Corporation (Optium, a company purchased by Finisar Corporation in August 2008) in the U.S. District Court for
the Western District of Pennsylvania for patent infringement. In the suit, the Company and JDS Uniphase Corporation (JDSU)
allege that Optium is infringing on U.S. patents 6,282,003 and 6,490,071 with its Prisma II 1550nm transmitters. On March 14,
2007, following denial of a motion to add additional claims to its existing lawsuit, the Company and JDSU filed a second patent suit
in the same court against Optium alleging infringement of JDSU's patent 6,519,374 ("the '374 patent"). On March 15, 2007, Optium
filed a declaratory judgment action against the Company and JDSU. Optium sought in this litigation a declaration that certain
products of Optium do not infringe the '374 patent and that the patent is invalid, but the District Court dismissed the action on
January 3, 2008 without addressing the merits. The '374 patent is assigned to JDSU and licensed to the Company.
On December 20, 2007, the Company was served with a complaint in another declaratory relief action which Optium had filed in
the Federal District Court for the Western District of Pennsylvania. This action seeks to have U.S. patents 6,282,003 and 6,490,071
declared invalid or unenforceable because of certain conduct alleged to have occurred in connection with the grant of these
patents. These allegations are substantially the same as those brought by Optium by motion in the Company’s own case against
Optium, which motion had been denied by the Court. The Court denied the Company’s motion to dismiss this action and has
indicated that it will be tried at the same time as the Optium Plaintiff Matters. The Company filed its answer in this matter on May
12, 2008. In its complaint, Optium does not seek monetary damages but asks that the patents in question be declared unenforceable
and that it be awarded attorneys’ fees. The Company believes that this claim is without merit. On August 11, 2008, both actions
pending in the Western District of Pennsylvania were consolidated before a single judge, and a trial date of October 19, 2009 was
set.
33
On December 5, 2008, EMCORE, along with Fabrinet, its principal contract manufacturer, was also served with a complaint by
Avago Technologies filed in the United States District Court for the Northern District of California, San Jose Division alleging
infringement of two patents by the Company’s VCSEL products. The Company believes this complaint is without merit and intends
to file an answer denying the claims asserted.
Commercial Litigation
On July 15, 2008 the Company was served with a complaint filed by Avago Technologies and what appear to be affiliates thereof in
the United States District Court for the Northern District of California, San Jose Division. In this complaint, Avago asserts claims
for breach of contract and breach of express warranty against Venture Corporation Limited (one of the Company’s customers) and
asserts a tort claim for negligent interference with prospective economic advantage against the Company. The Company has not yet
filed an answer in this matter, but believes the complaint is without merit and intends to file an answer denying the claims asserted.
Shareholder Class Action
On December 23, 2008, Plaintiffs Maurice Prissert and Claude Prissert filed a purported shareholder class action (the “Action”)
pursuant to Federal Rule of Civil Procedure 23 allegedly on behalf of a class of Company shareholders against the Company and
certain of its present and former directors and officers (the “Individual Defendants”) in the United States District Court for the
District of New Mexico captioned, Maurice Prissert and Claude Prissert v. EMCORE Corporation, Adam Gushard, Hong Q. Hou,
Reuben F. Richards, Jr., David Danzilio and Thomas Werthan, Case No. 1:08cv1190 (D.N.M.). The Complaint alleges that the
Company and the Individual Defendants violated certain provisions of the federal securities laws, including Sections 10(b) and
20(a) of the Securities Exchange Act of 1934, arising out of the Company’s disclosure regarding its customer Green and Gold
Energy (“GGE”) and the associated backlog of GGE orders with the Company’s photovoltaic business segment. The Complaint in
the Action seeks, among other things, an unspecified amount of compensatory damages and other costs and expenses associated
with the maintenance of the Action. The Complaint in the Action has not yet been served upon the Company. The Company
believes the claims asserted in the Action are without merit and intends to defend the Action vigorously.
Securities Matters
a. SEC Communications.
On or about August 15, 2008, the Company received a letter from the Denver office of the Enforcement Division of the Securities
and Exchange Commission wherein it sought EMCORE's voluntary production of documents relating to, among other things, the
Company's business relationship with Green and Gold Energy, Inc., its licensees, and the photovoltaic backlog the Company
reported to the public. Since that time, the Company has produced documents to the staff of the SEC and met with the staff on
December 12, 2008 to make a presentation addressing certain issues relating to this matter. Since that meeting the Company has
received no requests for further documentation from the SEC.
b. NASDAQ Communication.
On or about November 13, 2008, the Company received a letter from the NASDAQ Listings Qualifications group concerning the
Company's removal of $79 million in backlog attributable to GGE which the Company announced on August 8, 2008 and the
remaining backlog exclusive of GGE. The Company advised NASDAQ that it would cooperate with its inquiry, and has begun
producing the requested information.
ITEM 4.
Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter ended September 30, 2008.
34
PART II
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
The Company’s common stock is traded on The NASDAQ Global Market and is quoted under the symbol "EMKR". The reported
closing sale price of our common stock on December 29, 2008 was $0.90 per share. As of December 29, 2008, we had
approximately 185 shareholders of record. Many of our shares of common stock are held by brokers and other institutions on behalf
of shareholders, and we are unable to estimate the number of these shareholders.
Price Range of Common Stock
The price range per share of common stock presented below represents the highest and lowest sales prices for the Company’s
common stock on The NASDAQ Global Market during each quarter of the two most recent fiscal years.
Fiscal 2008 price range per share of common stock
Fiscal 2007 price range per share of common stock
First Quarter
$7.22 – $15.90 $5.62 – $15.70
$4.60 – $ 6.47 $3.84 – $ 5.89
Second Quarter Third Quarter Fourth Quarter
$5.80 – $9.30 $3.90 – $6.65
$4.32 – $5.78 $5.45 – $9.91
Dividend Policy
We have never declared or paid dividends on our common stock since the Company's formation. We currently do not intend to pay
dividends on our common stock in the foreseeable future, so that we may reinvest any earnings in our business. The payment of
dividends, if any, in the future is at the discretion of the Board of Directors. Due to the Company’s credit facility signed in
September 2008, the Company agreed to not issue any dividends until full payment is made on the outstanding credit facility.
35
Performance Graph
The following stock performance graph does not constitute soliciting material, and should not be deemed filed or incorporated by
reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the
extent the Company specifically incorporates this stock performance graph by reference therein.
The following graph and table compares the cumulative total shareholders’ return on the Company’s common stock for the five-year
period from September 30, 2003 through September 30, 2008 with the cumulative total return on The NASDAQ Stock Market
Index, The NASDAQ Electronic Components Stocks Index (SIC Code 3674) and The NASDAQ Computer Stocks Index. The
comparison assumes $100 was invested on September 30, 2003 in the Company’s common stock. The Company did not declare,
nor did it pay, any dividends during the comparison period.
9/03
9/04
9/05
9/06
9/07
9/08
EMCORE Corporation
NASDAQ Composite
NASDAQ Electronic Components
NASDAQ Computer
100.00
100.00
100.00
100.00
67.01
107.74
80.82
99.32
208.16
123.03
97.22
113.13
201.36
131.60
93.26
119.80
326.53
158.88
114.21
144.37
168.03
119.05
79.72
109.15
Equity Compensation Plan Information
The description of equity compensation plans required by Regulation S-K, Item 201(d) is incorporated herein by reference to
Part III, Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
36
Sales of Unregistered Securities
On February 20, 2008, the Company completed the sale of $100.0 million of restricted common stock and warrants through a
private placement transaction to fund the Intel Acquisitions. In this transaction, investors purchased 8 million shares of our common
stock, no par value, and warrants to purchase an additional 1.4 million shares of our common stock. The purchase price was $12.50
per share, priced at the 20-day volume-weighted average price. The warrants grant the holder the right to purchase one share of our
common stock at a price of $15.06 per share, representing a 20.48% premium over the purchase price. The warrants are
immediately exercisable and remain exercisable until February 20, 2013. In addition, the Company entered into a registration rights
agreement with the investors to register for resale the shares of common stock issued in this transaction and the shares of common
stock to be issued upon exercise of the warrants. Beginning two years after their issuance, the warrants may be called by the
Company for a price of $0.01 per underlying share if the closing price of its common stock has exceeded 150% of the exercise price
for at least 20 trading days within a period of any 30 consecutive trading days and other certain conditions are met.
the event of certain fundamental transactions, principally the purchase of the Company’s outstanding common stock for cash, the
holders of the warrants may demand that EMCORE purchase the unexercised portions of their warrants for a price equal to the
Black-Scholes Value of such unexercised portions as of the time of the fundamental transaction. Total agent fees incurred were
5.75% of the gross proceeds, or $5.8 million. The Company used a substantial portion of the net proceeds to acquire the telecom-
related assets of Intel Corporation's Optical Platform Division in 2008.
In addition, in
37
ITEM 6.
Selected Financial Data
The following selected consolidated financial data of the Company's five most recent fiscal years ended September 30, 2008 is
qualified by reference to, and should be read in conjunction with, Management’s Discussion and Analysis of Financial Condition
and Results of Operations under Item 7 and Financial Statements and Supplementary Data under Item 8. The information set forth
below is not necessarily indicative of results for future operations. Significant transactions that affect the comparability of the
Company’s operating results and financial condition include:
Significant Transactions:
Fiscal 2008:
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
In June and July 2008, the Company sold a total of two million shares of Series D Preferred Stock of WorldWater
and Solar Technologies Corporation (WWAT), together with 200,000 warrants to a major shareholder of both the
Company and WWAT at a price equal to $6.54 per share. The Company recognized a total gain of $7.4 million on
the sale of this stock.
In February and April 2008, the Company acquired the telecom, datacom, and optical cable interconnects-related
assets of Intel’s Optical Platform Division for $120 million in cash and the Company’s common stock.
In February 2008, the Company completed the sale of $100 million of restricted common stock and warrants to
fund the Intel Acquisitions. Investors purchased 8 million shares of our common stock, no par value, and warrants
to purchase an additional 1.4 million shares of our common stock.
In January and February 2008, the Company redeemed all of its outstanding 5.5% convertible subordinated notes
due 2011 pursuant to which the holders converted their notes into the Company's common stock. The Company
recognized a loss totaling $4.7 million related to the conversion of notes to equity.
Fiscal 2008 operating expenses included $4.8 million related to Intel Corporation’s transition services agreement
charges associated with the acquisition of certain assets from Intel.
The Company recorded approximately $22.0 million of impairment charges on goodwill related to the fiber optics
reporting segment.
The Company accounted for the modification of stock options still held to terminated employees as additional
compensation expense of $4.3 million in accordance with SFAS 123(R) in the first quarter of fiscal 2008.
(cid:1) Other expenses included a charge of $1.5 million associated with the impairment of certain investments.
Fiscal 2007:
(cid:1)
(cid:1)
(cid:1)
(cid:1)
In November 2006, the Company invested $13.1 million in WWAT in return for convertible preferred stock and
warrants.
In April 2007, the Company modified its convertible subordinated notes to resolve an alleged default event. The
interest rate was increased from 5% to 5.5% and the conversion price was decreased from $8.06 to $7.01. The
Company also repurchased $11.4 million of outstanding notes to reduce interest expense and share dilution.
In April 2007, the Company acquired privately-held Opticomm Corporation for $4.1 million in cash.
Fiscal 2007 operating expenses included:
(cid:2)
(cid:2)
(cid:2)
$10.6 million related to our review of historical stock option granting practices;
$6.1 million related to non-recurring legal expenses; and,
$2.8 million related to severance charges associated with facility closures and consolidation of
operations.
38
Fiscal 2006:
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
In November 2005, the Company exchanged $14.4 million of convertible subordinated notes due in May 2007 for
$16.6 million of newly issued convertible senior subordinated notes due May 15, 2011. As a result of this
transaction, the Company recognized approximately $1.1 million in the first quarter of fiscal 2007 related to the
early extinguishment of debt.
The Company received manufacturing equipment valued at $2.0 million less tax of $0.1 million as a final earn-out
payment from Veeco Instruments, Inc. (Veeco) in connection with the sale of the TurboDisc division.
In August 2006, the Company sold its Electronic Materials & Device (EMD) division to IQE plc (IQE) for $16.0
million. The net gain associated with the sale of the EMD business totaled approximately $7.6 million, net of tax
of $0.5 million. The results of operations of the EMD division have been reclassified to discontinued operations
for all periods presented.
In August 2006, the Company sold its 49% membership interest in GELcore, LLC for $100.0 million to General
Electric Corporation, which prior to the transaction owned the remaining 51% membership interest in
GELcore. The Company recorded a net gain of $88.0 million, before tax, on the sale of GELcore, after netting the
Company’s investment in this joint venture of $10.8 million and transaction expenses of $1.2 million.
The Company recorded approximately $2.2 million of impairment charges on goodwill and intellectual property
associated with the June 2004 acquisition of Corona Optical Systems.
Fiscal 2006 operating expense included $1.3 million related to our review of historical stock option granting
practices.
(cid:1) Other expense included a charge of $0.5 million associated with the write-down of the Archcom investment.
(cid:1)
The Company recognized a provision for income taxes of $1.9 million from continuing operations for the year
ended September 30, 2006.
Fiscal 2005:
(cid:1)
(cid:1)
SG&A expense included approximately $0.9 million in severance-related charges and $2.3 million of charges
associated with the consolidation of the Company’s City of Industry, California location to Albuquerque, New
Mexico.
The Company received a $12.5 million net earn-out payment from Veeco in connection with the 2003 sale of the
TurboDisc division.
Fiscal 2004:
(cid:1)
(cid:1)
(cid:1)
In November 2003, the Company sold its TurboDisc division to Veeco. The results of operations of TurboDisc
have been reclassified to discontinued operations for all periods presented. The net gain associated with the sale of
the TurboDisc business totaled approximately $19.6 million.
In February 2004, the Company exchanged approximately $146.0 million, or 90.2%, of the convertible
subordinated notes due in May 2007 for approximately $80.3 million of new convertible subordinated notes due
May 15, 2011 and approximately 7.7 million shares of the Company common stock. The total net gain from debt
extinguishment was $12.3 million.
SG&A expense included approximately $1.2 million in severance-related charges.
(cid:1) Other expense included a charge of $0.5 million associated with the write-down of the Archcom investment.
39
$
$
$
$
$
106,656
8,801
115,367
19,302
(20,371)
(24,685)
11,200
(13,485) $
77,782
4,103
81,885
4,473
(35,604)
(28,376)
14,422
(13,954)
(0.52) $
(0.52) $
(0.66)
(0.66)
Selected Financial Data
Statements of Operations Data
For the fiscal years ended September 30
(in thousands, except per share data)
2008
2007
2006 (1)
2005 (1)
2004 (1)
Product revenue
Services revenue
Total revenue
Gross profit
Operating loss
(Loss) income from continuing operations
Income from discontinued operations
Net (loss) income
$
$
228,977
10,326
239,303
29,895
(75,281)
(80,860)
-
$
148,334
21,272
169,606
30,368
(57,456)
(58,722)
-
$
(80,860) $
(58,722) $
132,304
11,229
143,533
25,952
(34,150)
45,039
9,884
54,923
Per share data:
(Loss) income from continuing operations:
Per basic share
Per diluted share
Balance Sheet Data
As of September 30
(in thousands)
Cash, cash equivalents, restricted cash and current
available-for-sale securities
Working capital
Total assets
Long-term liabilities
Shareholders’ equity
_______________________
$
$
$
(1.20) $
(1.20) $
(1.15) $
(1.15) $
0.91
0.87
2008
2007
2006
2005
2004
$
$
22,760
79,234
329,278
-
253,722
41,226
63,204
234,736
84,981
98,157
$
123,967
129,683
287,547
84,516
149,399
$
40,175
56,996
206,287
94,701
75,563
51,572
58,486
213,243
96,051
85,809
(1) In August 2006, EMCORE sold its Electronic Materials & Device (EMD) division to IQE plc (IQE). The results of
operations of the EMD division have been reclassified to discontinued operations for fiscal years ended September 30,
2006, 2005 and 2004.
40
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
EMCORE Corporation (the “Company”, “we”, or “EMCORE”) is a leading provider of compound semiconductor-based
components and subsystems for the broadband, fiber optic, satellite and terrestrial solar power markets. We have two reporting
segments: Fiber Optics and Photovoltaics. EMCORE's Fiber Optics segment offers optical components, subsystems and systems
that enable the transmission of video, voice and data over high-capacity fiber optic cables for high-speed data and
telecommunications, cable television (“CATV”) and fiber-to-the-premises (“FTTP”) networks. EMCORE's Photovoltaics segment
provides solar products for satellite and terrestrial applications. For satellite applications, EMCORE offers high-efficiency
compound semiconductor-based gallium arsenide (“GaAs”) solar cells, covered interconnect cells (“CICs”) and fully integrated
solar panels. For terrestrial applications, EMCORE offers Concentrating Photovoltaic Systems (“CPV”) for utility scale solar
applications as well as offering its high-efficiency GaAs solar cells for use in solar power concentrator systems. For specific
information about our Company, our products or the markets we serve, please visit our website at http://www.emcore.com. We were
established in 1984 as a New Jersey corporation.
Management Summary
Our principal objective is to maximize shareholder value by leveraging our expertise in advanced compound semiconductor-based
technologies to be a leading provider of high-performance, cost-effective product solutions in each of the markets we serve.
We target market opportunities that we believe have large potential growth and where the favorable performance characteristics of
our products and high volume production efficiencies may give us a competitive advantage over our competitors. We believe that as
compound semiconductor production costs continue to be reduced, existing and new customers will be compelled to increase their
use of these products because of their attractive performance characteristics and superior value.
Through several strategic acquisitions and divestures over the past few years, EMCORE has developed a strong business focus and
comprehensive product portfolios in two main sectors: Fiber Optics and Photovoltaics.
Fiber Optics
Our fiber optics products enable information that is encoded on light signals to be transmitted, routed (switched) and received in
communication systems and networks. Our Fiber Optics segment primarily offers the following products:
(cid:1)
(cid:1)
Telecom Optical Products – We are the leading supplier of 10 gigabit per second (Gb/s) fully C-band and L-band tunable
dense wavelength division multiplexed (DWDM) and coarse wavelength division multiplexed (CWDM) products for the next
generation tele-communications systems. We are one of the few suppliers who offer vertically-integrated products, including
external-cavity laser modules, integrated tunable laser assemblies (ITLAs) and 300-pin transponders. The laser module operates
at a continuous wave mode, and is capable for applications of 10, 40, and 100 Gb/s due to the superior narrow linewidth
characteristics. The ITLA and transponder products are fully Telcordia® qualified and comply with multi-source agreements
(MSAs). We also offer a range of XFP platform OC-192 products for telecom applications. We supply to almost all major
telecom equipment companies worldwide.
Enterprise Datacom Products – We provide leading-edge optical components and transceiver modules for data applications
that enable switch-to-switch, router-to-router and server-to-server backbone connections at aggregate speeds of 10 Gb/s and
above. We offer the broadest range of products with XENPAK form factor which comply with 10 Gb/s Ethernet (10-GE)
IEEE802.3ae standard. Our 10-GE products include short-reach (SR), long-reach (LR), extended-reach (ER), coarse WDM
LX4 optical transceivers to connect between the photonic physical layer and the electrical section layer and CX4
transceivers. In addition to the 10-GE products, EMCORE offers traditional MSA Gigabit Ethernet (GE) 1310-nm small form
factor (SFF) and small form factor pluggable (SFP) optical transceivers. These transceivers also provide integrated duplex data
links for bi-directional communication over single mode optical fiber providing high-speed Gigabit Ethernet data links
operating at 1.25Gbps.
(cid:1) Cable Television (CATV) Products - We are a market leader in providing radio frequency (RF) over fiber products for the
CATV industry. Our products are used in hybrid fiber coaxial (HFC) networks that enable cable service operators to offer
multiple advanced services to meet the expanding demand for high-speed Internet, on-demand and interactive video and other
41
advanced services, such as high-definition television (HDTV) and voice over IP (VoIP). Our CATV products include forward
and return-path analog and digital lasers, photodetectors and subassembly components, broadcast analog and digital fiber-optic
transmitters and quadrature amplitude modulation (QAM) transmitters and receivers. Our products provide our customers with
increased capacity to offer more cable services; increased data transmission distance, speed and bandwidth; lower noise video
receive; and lower power consumption.
Fiber-To-The-Premises (FTTP) Products - Telecommunications companies are increasingly extending their optical
infrastructure to their customers’ location in order to deliver higher bandwidth services. We have developed and maintained
customer qualified FTTP components and subsystem products to support plans by telephone companies to offer voice, video
and data services through the deployment of new fiber optics-based access networks. Our FTTP products include passive
optical network (PON) transceivers, analog fiber optic transmitters for video overlay and high-power erbium-doped fiber
amplifiers (EDFA), analog and digital lasers, photodetectors and subassembly components, analog video receivers and multi-
dwelling unit (MDU) video receivers. Our products provide our customers with higher performance for analog and digital
characteristics; integrated infrastructure to support competitive costs; and additional support for multiple standards.
Parallel Optical Transceiver and Cable Products – EMCORE is the technology and product leader of the optical transmitter
and receiver products utilizing arrays of optical emitting or detection devices, e.g., vertical-cavity surface-emitting lasers
(VCSELs) or photodetectors (PDs). These optical transmitter, receiver, and transceiver products are used for back-plane
interconnects, switching/routing between telecom racks and high-performance computing clusters. EMCORE’s products
include 12-lane SNAP-12 MSA transmitter and receivers with single, double, and quadruple data rates and 4-lane optical media
converters with single and double data rates. Based on the core competency of 4-lane parallel optical transceivers, we offer the
optical fiber ribbon cables with embedded parallel-optical transceivers in the connectors, EMCORE Connects Cables (ECC).
These products, with aggregated bandwidth between 10-40 Gb/s, are ideally suited for high-performance computing clusters.
Our products provide our customers with increased network capacity; increased data transmission distance and speeds;
increased bandwidth; lower power consumption; improved cable management over copper interconnects; and lower cost optical
interconnections for massively parallel multi-processors.
Fibre Channel Transceiver Products - EMCORE offers tri-rate SFF and SFP optical transceivers for storage area networks.
The MSA transceiver module is designed for high-speed Fibre Channel data links supporting up to 4.25 Gb/s (4X Fibre Channel
rate). The products provide integrated duplex data links for bi-directional communication over Multimode optical fiber.
Satellite Communications (Satcom) Products - We believe we are a leading provider of optical components and systems for
use in equipment that provides high-performance optical data links for the terrestrial portion of satellite communications
networks. Our products include transmitters, receivers, subsystems and systems that transport wideband radio frequency and
microwave signals between satellite hub equipment and antenna dishes. Our products provide our customers with increased
bandwidth and lower power consumption.
Laser/photodetector Component Products - We believe we are a leading provider of optical components including lasers,
photodetectors and various forms of packaged subassemblies. Products include chip, TO, and TOSA forms of high-speed
850nm vertical cavity VCSELs, distributed feedback Bragg (DFB) lasers, positive-intrinsic-negative (pin) and avalanche
photodiode (APD) components for 2G, 8G and 10G Fibre Channel, Ethernet and 10 GE, FTTP, and Telecom
applications. While we provide the component products to the entire industry, we do enjoy the benefits of vertically-integrated
infrastructure through a low-cost and early availability for new product introduction.
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1)
(cid:1) Video Transport - Our video transport product line offers solutions for broadcasting, transportation, IP television (IPTV),
mobile video and security & surveillance applications over private and public networks. EMCORE’s video, audio, data and RF
transmission systems serve both analog and digital requirements, providing cost-effective, flexible solutions geared for network
reconstruction and expansion.
(cid:1) Defense and Homeland Security - Leveraging our expertise in RF module design and high-speed parallel optics, we provide a
suite of ruggedized products that meet the reliability and durability requirements of the U.S. Government and defense
markets. Our specialty defense products include fiber optic gyro components used in precision guided munitions, ruggedized
parallel optic transmitters and receivers, high-frequency RF fiber optic link components for towed decoy systems, optical delay
lines for radar systems, EDFAs, terahertz spectroscopy systems and other products. Our products provide our customers with
high frequency and dynamic range; compact form-factor; and extreme temperature, shock and vibration tolerance.
42
Photovoltaics
We believe our high-efficiency compound semiconductor-based multi-junction solar cell products provide our customers with
compelling cost and performance advantages over traditional silicon-based solutions. These advantages include higher solar cell
efficiency allowing for greater conversion of light into electricity as well as a superior ability to withstand extreme heat and
radiation environments. These advantages enable a reduction in a customer’s solar product footprint by providing more power
output with less solar cells, which is an enhanced benefit when our product is used in concentrating photovoltaic (CPV)
systems. Our Photovoltaics segment primarily targets the following markets:
(cid:1)
(cid:1)
Satellite Solar Power Generation - We are a leader in providing solar power generation solutions to the global
communications satellite industry and U.S. government space programs. A satellite’s operational success and corresponding
revenue depend on its available power and its capacity to transmit data. We provide advanced compound semiconductor-based
solar cells and solar panel products, which are more resistant to radiation levels in space and generate substantially more power
from sunlight than silicon-based solutions. Space power systems using our multi-junction solar cells weigh less per unit of
power than traditional silicon-based solar cells. Our products provide our customers with higher conversion efficiency for
reduced solar array size and launch costs, higher radiation tolerance, and longer lifetime in harsh space environments.
We design and manufacture multi-junction compound semiconductor-based solar cells for both commercial and military
satellite applications. We currently manufacture and sell one of the most efficient and reliable, radiation resistant advanced
triple-junction solar cells in the world, with an average "beginning of life" efficiency of 28.5%. EMCORE is in the final stages
of qualifying the next generation high efficiency multi-junction solar cell platform for space applications and this product
family will have an average conversion efficiency of 30%, providing our customers with expanded capability.
Additionally, we are developing an entirely new class of advanced multi-junction solar cell with even higher conversion
efficiency. This new architecture, called inverted metamorphic (IMM), is being developed in conjunction with the National
Renewable Energy Laboratory and the US Air Force Research Laboratory and to date has demonstrated conversion efficiency
of exceeding 33% on an R&D scale. EMCORE is also the only manufacturer to supply true monolithic bypass diodes for
shadow protection, utilizing several EMCORE patented methods.
EMCORE also provides covered interconnect cells (CICs) and solar panel lay-down services, giving us the capability to
manufacture fully integrated solar panels for space applications. We can provide satellite manufacturers with proven integrated
satellite power solutions that considerably improve satellite economics. Satellite manufacturers and solar array integrators rely
on EMCORE to meet their satellite power needs with our proven flight heritage. The pictures below represent a solar cell and
solar panel used for satellite space power applications.
Terrestrial Solar Power Generation - Solar power generation systems utilize photovoltaic cells to convert sunlight to
electricity and have been used in space programs and, to a lesser extent, in terrestrial applications for several decades. The
market for terrestrial solar power generation solutions has grown significantly as solar power generation technologies improve
in efficiency, as global prices for non-renewable energy sources (i.e., fossil fuels) continue to rise over the long term, and as
concern has increased regarding the effect of carbon emissions on global warming. Terrestrial solar power generation has
emerged as one of the most rapidly expanding renewable energy sources due to certain advantages solar power holds over other
energy sources, including reduced environmental impact, elimination of fuel price risk, installation flexibility, scalability,
distributed power generation (i.e., electric power is generated at the point of use rather than transmitted from a central station to
the user), and reliability. The rapid increase in demand for solar power has created a growing need for highly efficient, reliable,
and cost-effective concentrating solar power systems.
EMCORE has adapted its high-efficiency compound semiconductor-based multi-junction solar cell products for terrestrial
applications, which are intended for use with concentrator photovoltaic (CPV) systems in utility-scale installations. EMCORE
has attained 39% peak conversion efficiency under 1000x illumination on its terrestrial concentrating solar cell products in
volume production. This compares favorably to typical efficiency of 15-21% on silicon-based solar cells and approximately
35% for competing multi-junction cells. We believe that solar concentrator systems assembled using our compound
semiconductor-based solar cells will be competitive with silicon-based solar power generation systems, in certain geographic
regions, because they are more efficient and, when combined with the advantages of concentration, we believe will result in a
lower cost of power generated. Our multi-junction solar cell technology is not subject to silicon shortages, which have led to
increasing prices in the raw materials required for silicon-based solar cells.
While the terrestrial power generation market is still developing, we are currently shipping production orders of CPV
components to several solar concentrator companies, and providing samples to many others, including major system
manufacturers in the United States, Europe, and Asia. We have finished installations of a total of approximately 1 megawatt
43
(MW) CPV systems in Spain, China, and US with our own Gen-II design (as shown in the picture above). EMCORE has
recently responded to several RFPs from public utility companies in the US for a total of several hundred MWs using its Gen-
III design. The Gen-III product, with enhanced performance (including a module efficiency of approximately 30%) and much
improved cost structure, is scheduled to be in volume production by the second half of calendar 2009.
We are committed to the ongoing evaluation of strategic opportunities that can expand our addressable markets and strengthen our
competitive position. Where appropriate, we will acquire additional products, technologies, or businesses that are complementary to,
or broaden the markets in which we operate. We plan to pursue strategic acquisitions, investments, and partnerships to increase
revenue and allow for higher overhead absorption that will improve our gross margins.
Recent acquisitions include:
On February 22, 2008, EMCORE acquired telecom-related assets of Intel Corporation’s Optical Platform
Division (“OPD”) that included inventory, fixed assets, intellectual property, and technology comprised of
tunable lasers, tunable transponders, 300-pin transponders, and integrated tunable laser assemblies.
On April 20, 2008, EMCORE acquired the enterprise and storage-related assets of Intel Corporation’s OPD
business, as well as Intel’s Connects Cables business. The assets acquired include inventory, fixed assets,
intellectual property, and technology relating to optical transceivers for enterprise and storage customers, as
well as optical cable interconnects for high-performance computing clusters.
All of these acquired businesses are part of EMCORE's Fiber Optics reporting segment. Please refer to Risk Factors under
Item 1A and Financial Statements and Supplemental Data under Item 8 for further discussion of these transactions.
EMCORE is committed to achieving profitability by increasing revenue through the introduction of new products, reducing our cost
structure and lowering the breakeven points of our product lines. We have significantly streamlined our manufacturing operations
by focusing on core competencies to identify cost efficiencies. Where appropriate, we transferred the manufacturing of certain
product lines to low-cost contract manufacturers when we can lower costs while maintaining quality and reliability.
EMCORE’s restructuring programs are designed to further reduce the number of manufacturing facilities, in addition to the
divesture or exit from selected businesses and product lines that are not strategic and/or are not capable of achieving desired revenue
or profitability goals.
Our results of operations and financial condition have and will continue to be significantly affected by severance, restructuring
charges, impairment of long-lived assets and idle facility expenses incurred during facility closing activities. Please refer to Risk
Factors under Item 1A and Financial Statements and Supplemental Data under Item 8 for further discussion of these items.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
(“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and
expenses during the reported period. Management develops estimates based on historical experience and on various assumptions
about the future that are believed to be reasonable based on the best information available. EMCORE’s reported financial position or
results of operations may be materially different under changed conditions or when using different estimates and assumptions,
particularly with respect to significant accounting policies, which are discussed below. In the event that estimates or assumptions
prove to differ from actual results, adjustments are made in subsequent periods to reflect more current information. EMCORE's
most significant estimates relate to accounts receivable, inventory, goodwill, intangibles, other long-lived assets, warranty accruals,
revenue recognition, and valuation of stock-based compensation.
Valuation of Accounts Receivable. The Company regularly evaluates the collectibility of its accounts receivable and
accordingly maintains allowances for doubtful accounts for estimated losses resulting from the inability of our customers to
meet their financial obligations to us. The allowance is based on the age of receivables and a specific identification of
receivables considered at risk. The Company classifies charges associated with the allowance for doubtful accounts as
SG&A expense. If the financial condition of our customers were to deteriorate impacting their ability to pay us, additional
allowances may be required.
44
Valuation of Inventory. Inventory is stated at the lower of cost or market, with cost being determined using the standard
cost method. The Company reserves against inventory once it has been determined that: (i) conditions exist that may not
allow the inventory to be sold for its intended purpose, (ii) the inventory’s value is determined to be less than cost, or (iii)
the inventory is determined to be obsolete. The charge related to inventory reserves is recorded as a cost of revenue. The
majority of the inventory 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 the Company 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. The
Company does not track the selling price of individual raw material components that have been previously written down or
written off, since such raw material components usually are only a portion of the resultant finished products and related
sales price. The Company 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. 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. The Company evaluates its goodwill for impairment on an
annual basis, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
Management has elected December 31 as its annual assessment date. 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 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 is attributed. As of December 31, 2007 and 2006, we tested for impairment of our goodwill and
based on that analysis, we determined that the carrying amount of the reporting units did not exceed their fair value, and
therefore, no impairment was recognized for any period presented in the consolidated financial statements. As of
September 30, 2008, due to the recent decline in the Company’s stock price and economic downturn, we tested again for
impairment of our goodwill. Based on that analysis, we determined that an impairment of $22.0 million should
be recognized for the period ended September 30, 2008. Subsequent to our fiscal year-end, we’ve experienced further
price decline in our common stock. Accordingly, an impairment test will be performed on our annual schedule and further
impairment is likely to result.
Valuation of Long-lived Assets and Other Intangible Assets. Long-lived assets consist primarily of our property, plant, and
equipment. Other intangible assets consist primarily of intellectual property that has been internally developed or
purchased. Purchased intangible assets include existing and core technology, trademarks and trade names, and customer
contracts. Intangible assets are amortized using the straight-line method over estimated useful lives ranging from one to
fifteen years. Because all of intangible assets are subject to amortization, the Company reviews these intangible assets for
impairment in accordance with the provisions of FASB Statement No. 144, Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of. The Company reviews long-lived assets and other intangible assets for
impairment on an annual basis or whenever events or changes in circumstances indicate that its carrying amount may not
be recoverable. A long-lived asset or other intangible asset is considered impaired when its anticipated undiscounted cash
flow is less than its carrying value. In making this determination, the Company uses certain assumptions, including, but not
limited to: (a) estimates of the fair market value of these assets; and (b) estimates of future cash flows expected to be
generated by these assets, which are based on additional assumptions such as asset utilization, length of service that assets
will be used in our operations, and estimated salvage values. As of September 30, 2008, due to the recent decline in the
Company’s stock price and economic downturn, we tested for impairment of our long-lived assets and other intangible
assets and based on that analysis, we determined that no impairment was recognized for any period presented in the
consolidated financial statements.
Product Warranty Reserves. The Company provides its customers with limited rights of return for non-conforming
shipments and warranty claims for certain products. In accordance with SFAS 5, Accounting for Contingencies, the
Company makes estimates of product warranty expense using historical experience rates as a percentage of revenue and
accrues estimated warranty expense as a cost of revenue. We estimate the costs of our warranty obligations based on our
historical experience of known product failure rates, use of materials to repair or replace defective products and service
45
delivery costs incurred in correcting product issues. 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 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 the Company 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, the Company ships its products cost insurance
and freight (“CIF”). Under this arrangement, revenue is recognized under FCA shipping point terms, but the Company pays
(and bills the customer) for the cost of shipping and insurance to the customer's designated location. The Company
accounts for shipping and related transportation costs by recording the charges that are invoiced to customers as revenue,
with the corresponding cost recorded as cost of revenue. In those instances where inventory is maintained at a consigned
location, revenue is recognized only when our customer pulls product for its use and title and ownership have transferred to
the customer. Revenue from time and material contracts is recognized at the contractual rates as labor hours and direct
expenses are incurred. The Company also generates service revenue from hardware repairs and calibrations that is
recognized as revenue upon completion of the service. Any cost of warranties and remaining obligations that are
inconsequential or perfunctory are accrued when the corresponding revenue is recognized.
Distributors - The Company uses a number of distributors around the world. In accordance with Staff Accounting
Bulletin No. 104, Revenue Recognition, the Company recognizes revenue upon shipment of product to these
distributors. Title and risk of loss pass to the distributors upon shipment, and our distributors are contractually
obligated to pay the Company on standard commercial terms, just like our other direct customers. The Company
does not sell to its distributors on consignment and, except in the event of product discontinuance, does not give
distributors a right of return.
Solar Panel and Solar Power Systems Contracts - The Company records revenues from certain solar panel and
solar power systems contracts using the percentage-of-completion method in accordance with AICPA Statement of
Position 81-1 ("SOP 81-1"), Accounting for Performance of Construction-Type and Certain Production-Type
Contracts. 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. The Company has numerous contracts that are in various stages of
completion. Such contracts require estimates to determine the appropriate cost and revenue recognition. The
Company 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. Due to the fact that the Company accounts for these contracts under the percentage-of-completion
method, unbilled accounts receivable represent revenue recognized but not yet billed pursuant to contract terms or
accounts billed after the period end.
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 the Company may elect to retain ownership of inventions made in performing the work, subject to a
non-exclusive license retained by the U.S. Government to practice the inventions for governmental purposes. The
R&D contract funding may be based on a cost-plus, cost reimbursement, or a firm fixed price arrangement. The
amount of funding under each R&D contract is determined based on cost estimates that include both direct and
indirect costs. Cost-plus funding is determined based on actual costs plus a set margin. As we incur costs under
cost reimbursement type contracts, we record revenue. Contract costs include material, labor, special tooling and
test equipment, subcontracting costs, as well as an allocation of indirect costs. An R&D contract is considered
complete when all significant costs have been incurred, milestones have been reached, and any reporting
obligations to the customer have been met. Government contract revenue is primarily recognized as service
revenue.
46
The Company also has certain cost-sharing R&D arrangements. Under such arrangements in which the actual
costs of performance are divided between the U.S. Government and the Company on a best efforts basis, no
revenue is recorded and the Company’s R&D expense is reduced for the amount of the cost-sharing receipts.
The U.S. Government may terminate any of our government contracts at their convenience as well as for default
based on our failure to meet specified performance measurements. If any of our government contracts were to be
terminated for convenience, we generally would be entitled to receive payment for work completed and allowable
termination or cancellation costs. If any of our government contracts were to be terminated for default, generally
the U.S. Government would pay only for the work that has been accepted and can require us to pay the difference
between the original contract price and the cost to re-procure the contract items, net of the work accepted from the
original contract. The U.S. Government can also hold us liable for damages resulting from the default.
Stock-Based Compensation. The Company uses the Black-Scholes option-pricing model and the straight-line attribution
approach to determine the fair-value of stock-based awards under SFAS 123(R), Share-Based Payment (revised 2004). The
Company elected to use the modified prospective transition method as permitted by SFAS 123(R) and accordingly prior
periods were not restated to reflect the impact of SFAS 123(R). The modified prospective transition method requires that
stock-based compensation expense be recorded for all new and unvested stock options and employee stock purchase plan
shares that are ultimately expected to vest as the requisite service is rendered beginning on October 1, 2005, the first day of
the Company’s fiscal year 2006. The option-pricing model requires the input of highly subjective assumptions, including
the option’s expected life and the price volatility of the underlying stock. EMCORE’s expected term represents the period
that stock-based awards are expected to be outstanding and is determined based on historical experience of similar awards,
giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future
employee behavior as influenced by changes to the terms of its stock-based awards. The expected stock price volatility is
based on EMCORE’s historical stock prices. See Note 4, Equity, of the Notes to Consolidated Financial Statements for
further details.
***
The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting
treatment of a particular transaction is specifically dictated by U.S. GAAP. There also are areas in which management's judgment in
selecting any available alternative would not produce a materially different result. See our audited consolidated financial statements
and notes thereto included in this Annual Report on Form 10-K, which contain a discussion of our accounting policies, recently
adopted accounting pronouncements and other required U.S. GAAP disclosures.
Business Segments, Geographic Revenue, Significant Customers and Backlog
EMCORE has five operating segments: (1) EMCORE Digital Fiber-Optic Products, (2) EMCORE Broadband Fiber-Optic
Products, and (3) EMCORE Hong Kong, which are aggregated as a separate reporting segment, Fiber Optics, and (4) EMCORE
Photovoltaics and (5) EMCORE Solar Power, which are aggregated as a separate reporting segment, Photovoltaics. EMCORE's
Fiber Optics revenue is derived primarily from sales of optical components and subsystems for CATV, FTTP, enterprise routers and
switches, telecom grooming switches, core routers, high performance servers, supercomputers, and satellite communications data
links. EMCORE's Photovoltaics revenue is derived primarily from the sales of solar power conversion products for the space and
terrestrial markets, including solar cells, covered interconnect solar cells, solar panel concentrator solar cells and Concentrating
Photovoltaic Systems (“CPV”) receiver assemblies. EMCORE evaluates its reportable segments in accordance with SFAS 131,
Disclosures About Segments of an Enterprise and Related Information. EMCORE’s Chief Executive Officer is EMCORE’s Chief
Operating Decision Maker pursuant to SFAS 131, and he allocates resources to segments based on their business prospects,
competitive factors, net revenue, operating results and other non-GAAP financial ratios.
47
The following table sets forth the revenue and percentage of total revenue attributable to each of EMCORE's reporting segments for
the fiscal years ended September 30, 2008, 2007 and 2006.
Segment Revenue
(in thousands)
Fiber Optics
Photovoltaics
Total revenue
2008
2007
2006
Revenue
% of Revenue
Revenue
% of Revenue
Revenue
$
$
171,276
68,027
239,303
72% $
28
100% $
110,377
59,229
169,606
65% $
35
100% $
104,852
38,681
143,533
% of Revenue
73%
27
100%
The following table sets forth EMCORE's consolidated revenue by geographic region for the fiscal years ended September 30, 2008,
2007 and 2006. Revenue was assigned to geographic regions based on our customers’ or contract manufacturers’ billing address.
Geographic Revenue
(in thousands)
United States
Asia
Europe
Other
Total revenue
2008
2007
2006
Revenue
% of Revenue
Revenue
% of Revenue
Revenue
$
$
134,796
73,311
20,420
10,776
239,303
56% $
31
8
5
100% $
124,012
34,574
10,821
199
169,606
73% $
20
7
-
100% $
109,614
28,537
4,152
1,230
143,533
% of Revenue
76%
20
3
1
100%
The following table sets forth significant customers by reporting segment.
Significant Customers
As a percentage of total consolidated revenue
Fiber Optics-related customers:
Customer A
Customer B
Customer C
Customer D
Photovoltaics
-related customer:
Customer E
2008
2007
2006
14%
12%
-
-
-
-
-
13%
-
11%
-
-
-
12%
-
As of September 30, 2008, we had an order backlog of approximately $117.2 million compared to $149 million in the prior
year. Our order backlog is defined as purchase orders or supply agreements accepted by the Company with expected product
delivery and / or services to be performed in the future. The September 30, 2008 order backlog is comprised of $96.1 million
related to our Photovoltaics segment of which $60.9 million is expected to be delivered subsequent to fiscal 2009 and $21.1 million
related to our Fiber Optics segment expected to be delivered in the fiscal 2009.
On December 17, 2007, EMCORE announced that it had received a purchase order to supply 5.7 Megawatts of CPV, along with a
letter of intent for follow-on projects of 14.3 MW, from DI Semicon, a South Korean semiconductor packaging company, and that it
had also executed an agreement with the same company relating to the formation of a joint venture in South ever Korea to
manufacture CPV systems in South Korea. No amounts from this order were included in EMCORE’s backlog, and, due to DI
Semicon’s inability to obtain necessary financing, EMCORE no longer expects any product orders from, or other arrangements
with, DI Semicon to result in the foreseeable future.
48
From time to time, our customers may request that we delay shipment of certain orders and our backlog could also be adversely
affected if customers unexpectedly cancel purchase orders that we’ve previously accepted. A majority of our fiber optics products
typically ship within the same quarter as when the purchase order is received; therefore, our backlog at any particular date is not
necessarily indicative of actual revenue or the level of orders for any succeeding period.
The following table sets forth operating losses attributable to each EMCORE reporting segment for the fiscal years ended
September 30, 2008, 2007 and 2006.
Statement of Operations Data
(in thousands)
Operating loss by segment:
Fiber Optics
Photovoltaics
Corporate
Operating loss
2008
2007
2006
$
$
(49,903) $
(25,238)
(140)
(75,281) $
(25,877) $
(11,202)
(20,377)
(57,456) $
(18,950)
(8,365)
(6,835)
(34,150)
In fiscal 2008, the Company recognized several one-time gains and a significant reduction in interest expense which were not
allocated to the reporting segments due to these being corporate charges in prior periods.
The following table sets forth the depreciation and amortization attributable to each of EMCORE's reporting segments for the fiscal
years ended September 30, 2008, 2007 and 2006.
Segment Depreciation and Amortization
(in thousands)
Fiber Optics
Photovoltaics
Corporate
Total depreciation and amortization
2008
2007
2006
$
$
9,067 $
4,472
77
13,616 $
6,991 $
2,860
271
10,122 $
8,378
3,470
484
12,332
Long-lived assets (consisting of property, plant and equipment, goodwill and intangible assets) for each reporting segment as of
September 30, 2008 and 2007 are as follows:
Long-lived Assets
(in thousands)
Fiber Optics
Photovoltaics
Corporate
Total long-lived assets
2008
2007
$
$
107,684
55,232
622
163,538
$
$
56,816
46,706
-
103,522
49
Results of Operations
The following table sets forth the consolidated statements of operations data of EMCORE expressed as a percentage of total revenue
for the fiscal years ended September 30, 2008, 2007, and 2006.
STATEMENT OF OPERATIONS DATA
Product revenue
Service revenue
Total revenue
Cost of product revenue
Cost of service revenue
Total cost of revenue
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Impairment of goodwill and/or intellectual property
Total operating expenses
Operating loss
Other expense (income):
Interest income
Interest expense
Loss from conversion of subordinated notes
Loss from convertible subordinated notes exchange offer
Loss from early redemption of convertible notes
Stock-based compensation expense from tolled options
Gain from insurance proceeds
Gain from sale of WWAT Investment
Impairment of investment
Loss on disposal of property, plant and equipment
Net gain on sale of GELcore investment
Equity in net loss of GELcore investment
Equity in net loss of Velox investment
Foreign exchange loss
Total other expense (income)
2008
2007
2006
95.7%
4.3
100.0
87.5%
12.5
100.0
92.2%
7.8
100.0
87.3
0.2
87.5
12.5
18.2
16.5
9.3
44.0
73.3
8.7
82.0
18.0
34.1
17.8
-
51.9
75.4
6.5
81.9
18.1
26.6
13.7
1.6
41.9
(31.5)
(33.9)
(23.8)
(0.4)
0.7
1.9
-
-
1.8
-
(3.1)
0.7
0.4
-
-
-
0.3
2.3
(2.4)
2.9
-
-
0.3
-
(0.2)
-
0.1
-
-
-
-
0.7
(0.9)
3.7
-
0.8
-
-
-
0.3
0.3
(61.3)
0.4
0.2
-
(56.5)
32.7
1.3
31.4
0.3
6.6
6.9
(Loss) income from continuing operations before income taxes
(33.8)
(34.6)
Provision for income taxes
(Loss) income from continuing operations
Discontinued operations:
Income from discontinued operations, net of tax
Gain on disposal of discontinued operations, net of tax
Income from discontinued operations
-
-
(33.8)
(34.6)
-
-
-
-
-
-
Net (loss) income
(33.8)%
(34.6)%
38.3%
50
Comparison of Fiscal Years Ended September 30, 2008 and 2007
Consolidated Revenue
EMCORE’s consolidated revenue increased $69.7 million, or 41%, to $239.3 million from $169.6 million, as reported in the prior
year. International sales increased $57.8 million, or 126%, when compared to the prior year. Government contract revenue, which is
primarily service revenue, decreased $10.3 million, or 47%, to $11.6 million from $21.9 million, as reported in the prior year. A
comparison of revenue achieved within each of EMCORE’s reporting segments is as 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.
Major customers for the Fiber Optics segment include: Alcatel-Lucent, Aurora Networks, BUPT-GUOAN Broadband, C-Cor
Electronics, Ciena, Cisco, Fujitsu, Hewlett-Packard, Huawei, IBM, Intel, Jabil, JDSU, Merge Optics, Motorola, Network Appliance,
Sycamore Networks, Inc., Tellabs, and ZTE.
Annual Fiber Optics revenue increased $60.9 million, or 55%, to $171.3 million from $110.4 million, as reported in the prior year.
Fiscal 2008 revenue, on a sequential quarterly basis, was $34.0 million, $37.6 million, $53.6 million and $46.1 million. Fiscal 2007
revenue, on a sequential quarterly basis, was $31.3 million, $27.6 million, $26.2 million and $25.3 million. The annual increase in
Fiber Optics revenue was primarily due to our recent acquisitions, which totaled approximately $41.6 million in revenue in fiscal
2008. In February and April 2008, the Company acquired the telecom, datacom, and optical cable interconnects-related assets of
Intel’s Optical Platform Division for $120 million in cash and shares of the Company’s common stock. There was no Fiber Optics-
related U.S. Government contract revenue in fiscal 2008 and U.S. Government contract revenue in fiscal 2007 totaled $1.5
million. Fiber Optics revenue represented 72% and 65% of EMCORE's total consolidated revenue for fiscal 2008 and 2007,
respectively.
Photovoltaics
EMCORE is a leader in providing solar power generation solutions to the global communications satellite industry and U.S.
Government space programs. EMCORE manufactures advanced compound semiconductor-based solar cell products and solar
panels, which are more resistant to radiation levels in space and convert substantially more power from sunlight than silicon-based
solutions. EMCORE’s Photovoltaics segment designs and manufactures multi-junction compound semiconductor-based solar cells
for both commercial and military satellite applications.
Major customers for the Photovoltaics segment include Boeing, General Dynamics, Indian Space Research Organization (“ISRO”),
NASA JPL, Lockheed Martin, Menova Energy, Northrop Grumman, Space Systems/Loral, Maxima Energies Renovables
Ibahernando, ISFOC, and Solarig.
Annual photovoltaics revenue increased $8.8 million, or 15%, to $68.0 million from $59.2 million, as reported in the prior year.
Fiscal 2008 revenue, on a sequential quarterly basis, was $12.9 million, $18.7 million, $21.9 million and $14.5 million. Fiscal 2007
revenue, on a sequential quarterly basis, was $15.8 million, $16.8 million, $13.4 million and $13.2 million. The increase in annual
revenue was primarily due the Company’s launch of its new concentrating photovoltaic components (including solar cells and solar
cell receivers) and to CPV power system installations. The increase in CPV-related revenue was offset by a decrease in Government
contract revenue. Government contract revenue totaled $11.6 million and $20.4 million in fiscal 2008 and 2007, respectively.
Photovoltaics revenue represented 28% and 35% of EMCORE's total consolidated revenue for fiscal 2008 and 2007, respectively.
51
Gross Profit
EMCORE’s consolidated gross profit decreased by $0.5 million, or 2%, to $29.9 million from $30.4 million as reported in the prior
year. Consolidated gross margins decreased from 17.9% in fiscal 2007 to 12.5% in fiscal 2008. On a segment basis, annual Fiber
Optics gross margins increased from 18.4% to 20.7% which was primarily due to increased revenue which provided a greater base
on which to allocate certain fixed costs, benefits associated from the use of contract manufacturers and better utilization of our
China manufacturing facility. Gross margins also increased due to the implementation of certain cost reduction initiatives and
improved efficiencies driven by facility consolidations. Our Fiber Optics segment also incurred approximately $5.4 million in
expenses related to inventory write-downs and product warranty accruals in fiscal 2008. Such write-downs pertained primarily to
the telecom assets purchased in the OPD acquisition. Annual Photovoltaics gross margins decreased from 17.0% in fiscal 2007 to a
negative 8.3% in fiscal 2008 due to significant project losses on several initial CPV solar power systems installation projects, which
was primarily the result of higher than expected material, freight and installation costs. Our Photovoltaics segment also incurred
approximately $13.5 million in expenses related to inventory write-downs, contract losses, and product warranty accruals associated
with our CPV-related business in fiscal 2008. The CPV products were in the early stages of deployment and therefore certain
additional expenses were incurred during installations that are not expected to recur. The inventory write-downs pertained mainly to
product obsolescence related to the progression from generation 2 to Generation 3 products.
Initiatives designed to improve our gross margins (through product mix improvements, cost reductions associated with product
transfers and product rationalization, maximizing production yields on high-performance devices and quality improvements, among
other things) continue to be a principal focus for us. We focus much of our activities on developing new process control and yield
management tools that enable us to accelerate the adoption of new technologies into full-volume production, while minimizing their
associated risks.
Operating Expenses
Selling, General and Administrative. EMCORE’s consolidated SG&A expenses decreased by $14.3 million, or 25%, to $43.5
million from $57.8 million as reported in the prior year. As a percentage of revenue, SG&A expenses decreased from 34.1% to
18.2%. The decrease in annual SG&A expenses was primarily due to a reduction of non-recurring legal and professional fees of
approximately $17.4 million associated with the Company’s review of historical stock option grants and patent litigation in fiscal
2007. In fiscal 2008, approximately $7.6 million of SG&A was related to the Intel Acquisitions with $2.2 million related to Intel
Corporation’s transition services agreement (TSA) charges associated with the Intel Acquisitions.
The Company continues to focus on lowering SG&A expenses through reducing headcount and minimizing the use of external
consultants where appropriate.
Research and Development. Our R&D efforts have been focused on maintaining our technological leadership position by working
to improve the quality and attributes of our product lines. We also invest significant resources to develop new products and
production technology to expand into new market opportunities by leveraging our existing technology base and infrastructure. Our
efforts are focused on designing new proprietary processes and products, on improving the performance of our existing materials,
components, and subsystems, and on reducing costs in the product manufacturing process. In addition to using our internal capacity
to develop and manufacture products for our target markets, EMCORE continues to expand its portfolio of products and
technologies through acquisitions.
EMCORE’s consolidated R&D expenses increased $9.5 million, or 32%, to $39.5 million from $30.0 million in the prior year. The
increase in R&D expenses is primarily related to our recent acquisitions and significant product development within our Fiber
Optics business. We incurred approximately $7.9 million of R&D expense associated with our recent acquisitions, of which $2.6
million related to Intel transition service charges. The majority of the increase in R&D expense relates to our efforts to release new
products in the telecommunications and enterprise sectors directly related to the Intel acquisitions. These are highly competitive
areas that require continuous investment to keep pace with market developments. We believe that recently completed R&D projects
have the potential to significantly improve our competitive position and drive revenue growth over the next few years.
As part of the ongoing effort to reduce costs, many of our projects involve developing lower cost versions of our existing products
and of our existing processes while, at the same time, improving quality and reliability. Also, we have implemented a program to
focus our research and product development efforts on projects that we expect to generate returns within one year. As a result, over
the last several years, EMCORE has reduced overall R&D costs as a percentage of revenue without, we believe, jeopardizing future
revenue opportunities. Our technology and product leadership is an important competitive advantage. Based upon current and
anticipated demand, we will continue to invest in new technologies and products that offer our customers increased efficiency,
higher performance, greater reliability, improved functionality, and/or higher levels of integration.
52
Impairment. The Company recorded approximately $0.2 million of impairment charges on intellectual property associated with the
January 2006 acquisition of K2 Optronics, Inc. As a result of the ongoing financial liquidity crisis, the current economic recession,
reductions to our internal revenue forecasts, changes to our internal operating forecasts and a drastic reduction in our market
capitalization, during the period, we performed an analysis to determine if there was an indication of impairment of our intangible
assets. As a result of this analysis, we determined that the goodwill related to our Fiber Optics reporting unit was impaired. As a
result, we recorded an estimated impairment charge of $22.0 million during the quarter ended September 30, 2008.
Other Income & Expenses
Interest Income. The Company realized a significant decrease in interest income of $3.3 million for 2008 primarily due to its lower
average cash, cash equivalents and investment balances when compared to the prior year.
Interest Expense. The Company realized a significant decrease in interest expense of $3.4 million for 2008 primarily due to the
February 2008 conversion of its convertible subordinated notes to equity.
Loss from Conversion of Subordinated Notes. In January 2008, the Company entered into agreements with holders of
approximately 97.5%, or approximately $83.3 million of its outstanding 5.50% convertible senior subordinated notes due 2011 (the
"Notes") pursuant to which the holders converted their Notes into the Company's common stock. In addition, the Company called
for redemption all of its remaining outstanding Notes. Upon conversion of the Notes, the Company issued shares of its common
stock, based on a conversion price of $7.01 per share, in accordance with the terms of the Notes. To incentivize certain holders to
convert their Notes, the Company made cash payments to such holders equal to 4% of the principal amount of the Notes converted,
plus accrued interest. By February 20, 2008, all Notes were redeemed and converted into the Company’s common stock. As a result
of this transaction, 12.2 million shares of the Company common stock were issued. The Company recognized a loss totaling $4.7
million on the conversion of Notes to equity. The Notes conversion resulted in a reduction of future interest payments of
approximately $4.7 million, on an annual basis, through May 2011.
Stock-based compensation expense from tolled options. Under the terms of stock option agreements issued under the 2000 Incentive
Stock Option Plan, terminated employees who have vested and exercisable stock options have 90 days subsequent to the date of
their termination to exercise their stock options. In November 2006, the Company announced that it was suspending its reliance on
previously issued financial statements, which in turn caused the Company’s Form S-8 registration statements for shares of common
stock issuable under the Option Plans not to be available. Therefore, terminated employees were precluded from exercising their
stock options during the remaining contractual term (the “Blackout Period”). To address this issue, the Company’s Board of
Directors agreed in April 2007 to approve a stock option grant “modification” for these individuals by extending the normal 90-day
exercise period after termination date to a date after which the Company became compliant with its SEC filings and the registration
of the stock option shares was once again effective. The Company communicated the terms of the tolling agreement with its
terminated employees in November 2007. The Company’s Board of Directors approved an extension of the stock option expiration
date equal to the number of calendar days during the Blackout Period before such stock option would have otherwise expired (the
“Tolling Period”). Former employees were able to exercise their vested stock options beginning on the first day after the lifting of
the Blackout Period for a period equal to the Tolling Period. The Company accounted for the modification of stock options issued
to terminated employees as additional compensation expense of $4.3 million in accordance with SFAS 123(R) in the first quarter of
fiscal 2008 and adjusted the stock options to market value in the first and second quarters of 2008. All tolled stock options were
either exercised or expired by January 29, 2008.
Gain from sale of investment. In June and July 2008, the Company sold two million shares of Series D Preferred Stock and 200,000
warrants of WorldWater & Solar Technologies Corporation. Total cash proceeds from the sale approximated $13.1 million with a
gain from the sale totaling $7.4 million.
Impairment of Investments. In April 2008, the Company invested approximately $1.5 million in Lightron Corporation, a Korean
Company publicly traded on the Korean Stock Market. The Company initially accounted for this investment as a long-term
available for sale security. Due to the decline in the market value of this investment and the expectation of non-recovery of this
investment beyond its current market value, the Company recorded a $0.5 million “other than temporary” impairment loss on this
investment as of September 30, 2008. The Company also wrote off its remaining investment in Velox Corporation, which totaled
approximately $1.0 million, due to the company’s current financial and operational condition.
Foreign exchange gain. For fiscal 2008, the Company recognized a loss on foreign currency exchange primarily due to its operating
activities in Spain, the Netherlands and in China primarily due to the weakening of the US Dollar compared to the EURO.
53
Provision for Income Taxes
As a result of its losses, the Company did not incur any income tax expense in fiscal 2008 or 2007.
Comparison of Fiscal Years Ended September 30, 2007 and 2006
EMCORE sold its Electronic, Materials and Device (“EMD”) division in August 2006. All financial information in fiscal 2006 that
related to this division has been excluded from operations for comparison of historical financial performance.
Consolidated Revenue
EMCORE’s consolidated revenue increased $26.1 million, or 18%, to $169.6 million from $143.5 million, as reported in the prior
year. International sales increased $11.7 million, or 34%, when compared to the prior year. Government contract revenue, which is
primarily service revenue, increased $10.8 million, or 97%, to $21.9 million from $11.1 million, as reported in the prior year. A
comparison of revenue achieved within each of EMCORE’s reporting segments is as follows:
Fiber Optics
Annual Fiber Optics revenue increased $5.5 million, or 5%, to $110.4 million from $104.9 million, as reported in the prior year. On
a sequential quarterly basis, fiscal 2007 revenue was $25.3 million, $26.2 million, $27.6 million and $31.3 million. On a sequential
quarterly basis, fiscal 2006 revenue was $25.0 million, $25.9 million, $26.0 million and $28.0 million. The annual increase in
revenue was primarily due to recent acquisitions and a significant increase in the demand for our CATV products, satellite
communications, telecommunications and FTTP components. Also, despite higher revenue for this segment, revenue from our
legacy products that serve the digital fiber optics sector was lower than the prior year due to customer inventory management and
increased competition. Government contract revenue in fiscal 2007 and 2006 totaled $1.5 million and $1.9 million,
respectively. Fiber Optics revenue represented 65% and 73% of EMCORE's total consolidated revenue for fiscal 2007 and 2006,
respectively.
Photovoltaics
Annual photovoltaics revenue increased $20.5 million, or 53%, to $59.2 million from $38.7 million, as reported in the prior year. On
a sequential quarterly basis, fiscal 2007 revenue was $13.2 million, $13.4 million, $16.8 million and $15.8 million. On a sequential
quarterly basis, fiscal 2006 revenue was $10.7 million, $10.3 million, $10.4 million and $7.3 million. In fiscal 2007, our
Photovoltaics division continued to experience increased demand for its space and terrestrial solar cells, solar panels and U.S.
Government-related research contracts. Revenue for the quarter ended September 30, 2006 was reduced because EMCORE did not
receive export licenses covering three international satellite programs in sufficient time to ship product. Subsequently, EMCORE
received license approvals on all three of the programs and the delayed orders were shipped to the customers in the first quarter of
fiscal 2007. Government contract revenue totaled $20.4 million and $9.2 million in fiscal 2007 and 2006,
respectively. Photovoltaics revenue represented 35% and 27% of EMCORE's total consolidated revenue for fiscal 2007 and 2006,
respectively.
In fiscal 2006 and 2007, EMCORE had been engaged in a multi-year cost reimbursable solar cell development and production
contract for a major U.S. aerospace corporation. Subsequently, the Company reported that the contract would exceed $40.0 million
in development and production revenue over the next several years. Although we recognized significant revenue for this program
during fiscal 2007, our customer notified us in August 2007 that their program had been terminated for convenience by the U.S.
Government.
Gross Profit
EMCORE’s consolidated gross profit increased $4.4 million, or 17%, to $30.4 million from $26.0 million in the prior year.
Compared to the prior year, gross margins remained constant at 18%. On a segment basis, gross margins for Fiber Optics decreased
slightly from 20% in 2006 to 19% in 2007 primarily due to unabsorbed overhead as a result of lower revenue from our legacy
products that serve the digital fiber optics sector. Gross margins for the Photovoltaics segment increased from 12% in 2006 to 17%
in 2007. This increase was due to increased revenues and improved product mix, a shift to generally higher margin products along
with higher overhead absorption. In October 2006, EMCORE consolidated its solar panel manufacturing into a state-of-the-art
facility located in Albuquerque, New Mexico. The establishment of a modern solar panel manufacturing facility, adjacent to our
solar cell fabrication operations, facilitates consistency, as well as lower manufacturing costs.
54
Operating Expenses
Selling, General and Administrative. EMCORE’s consolidated SG&A expenses increased $19.6 million, or 51%, to $57.8 million
from $38.2 million in the prior year. Consistent with prior years, SG&A expense includes corporate overhead expenses. As a
percentage of revenue, SG&A increased from 27% to 34%. The increase in SG&A expense is primarily due to:
(cid:1)
(cid:1)
(cid:1)
$10.6 million related to professional fees associated with our review of historical stock option granting practices;
$6.1 million in non-recurring legal expenses and $2.8 million in restructuring and severance-related charges
associated with facility closures and consolidation of operations; and
continued investment in personnel strategic to our business.
Research and Development. EMCORE’s consolidated R&D expenses increased $10.3 million, or 52%, to $30.0 million from $19.7
million in the prior year. The increase in R&D is due to $7.9 million of R&D expenses incurred in our newly formed terrestrial
solar power business. As a percentage of revenue, R&D increased to 18% from 14% reported in the prior year.
Other Income & Expenses
Loss from Convertible Subordinated Notes Exchange Offer. In November 2005, EMCORE exchanged $14.4 million of convertible
subordinated notes due in May 2006 for $16.6 million of newly issued convertible subordinated notes due May 15, 2011. As a result
of this transaction, EMCORE recognized approximately $1.1 million of expense in the first quarter of fiscal 2006 related to the early
extinguishment of debt.
Loss from Early Redemption of Convertible Subordinated Notes. In April 2007, EMCORE redeemed $11.4 million of convertible
subordinated notes due in May 2011. As a result of this transaction, EMCORE recognized a loss of approximately $0.6 million in
the third quarter of fiscal 2007 related to the redemption of debt.
Impairment of Investment. In February 2002, EMCORE purchased preferred stock of Archcom Technologies, Inc., a venture-
funded, start-up optical networking components company that designs, manufactures and markets a series of high performance
lasers and photodiodes for datacom and telecom industries. In fiscal 2006, EMCORE wrote-off its remaining investment in
Archcom totaling $0.5 million.
Gain on Insurance Proceeds. During the three months ended March 31, 2007, we recognized a gain of $0.4 million related to
insurance proceeds received.
Net Gain on Sale of GELcore Investment. In August 2006, EMCORE sold its 49% membership interest in GELcore, LLC for $100.0
million to General Electric Corporation which, prior to the transaction, owned the remaining 51% membership interest in
GELcore. EMCORE recorded a net gain of $88.0 million, before tax, on the sale of GELcore, after netting EMCORE’s investment
in this joint venture of $10.8 million and transaction expenses of $1.2 million.
Provision for Income Taxes
As a result of its losses, the Company did not incur any income tax expense in fiscal 2007. EMCORE recorded a provision for
income taxes totaling $1.9 million in connection with the gain on the sale of GELcore in fiscal 2006.
Discontinued Operations
On August 18, 2006, EMCORE completed the sale of the assets of its EMD division, including inventory, fixed assets, and
intellectual property to IQE. Under the terms of the purchase agreement, EMCORE sold the EMD division to IQE for $16.0
million, consisting of $13.0 million in cash and $3.0 million in the form of a secured promissory note from IQE, guaranteed by
IQE's affiliates. The note was completely repaid in fiscal 2007, via four quarterly installments with an annual interest rate of
7.5%. EMCORE recorded a net gain of $7.6 million, after tax, on the sale of EMD, after netting EMCORE’s investment in EMD of
$6.0 million and transaction expenses of $2.4 million.
In November 2003, EMCORE sold its TurboDisc division in an asset sale to a subsidiary of Veeco Instruments Inc. (Veeco). The
selling price was $60.0 million in cash at closing, with a potential additional earn-out up to $20.0 million over the next two years,
calculated based on the net sales of TurboDisc products. In March 2005, EMCORE received $13.2 million of earn-out payment
from Veeco in connection with its first year of net sales of TurboDisc products. After offsetting this receipt against expenses related
to the discontinued operation, EMCORE recorded a net gain from the disposal of discontinued operations of $12.5 million. In
March 2006, EMCORE received manufacturing equipment valued at $2.0 million less $0.1 million tax as a final earn-out payment
55
from Veeco in connection with Veeco’s second year of net sales of TurboDisc products. The cumulative additional earn-out totaled
$15.2 million or 76% of the maximum available payout of $20.0 million.
Liquidity Matters
The Company commenced operations in 1984 and as of September 30, 2008, the Company had an accumulated deficit of $424.8
million. We incurred a net loss of $80.9 million in fiscal 2008, net loss of $58.7 million in fiscal 2007, and net income of $54.9
million in fiscal 2006. Fiscal 2006 results included the sale of our GELcore joint venture that resulted in a net gain, before tax, of
$88.0 million. Our operating results for future periods are subject to numerous uncertainties and we cannot assure you that we will
not continue to experience net losses for the foreseeable future. Although our revenue has grown in recent years, we may be unable
to sustain such growth rates if there are adverse changes in market or economic conditions. If we are not able to increase revenue
and/or reduce our costs, we may not be able to achieve profitability.
At September 30, 2008, cash, cash equivalents, available-for-sale securities and restricted cash totaled approximately $24.7 million.
Historically, the Company has consumed cash from operations. During fiscal 2008, we consumed cash from operations of
approximately $41.9 million, with the rate of cash consumption declining in the third and fourth quarters. Historically, we have
addressed our liquidity requirements through a series of cost reduction initiatives, capital markets transactions and the sale of assets.
As of September 30, 2008, we had approximately $79.2 million in working capital. Although we expect our operating performance
to improve in future periods, we anticipate that the recession in the United States and the slowdown of economic growth in the rest
of the world may create a more challenging business environment for us in the near term.
These matters raise substantial doubt about the Company's ability to continue as a going concern.
Management Actions and Plans
Recently, we have revised the assumptions underlying our operating plans and recognized that additional actions were needed to
position our operations to minimize cash usage. Accordingly, we undertook a number of initiatives aimed at conserving or
generating cash on an incremental basis through the end of 2009. These initiatives included business realignment, structural cost and
headcount reductions, reduction of capital spending, a greater emphasis on managing our working capital, and certain asset sales. In
December 2008, we announced an agreement to sell our non-core equity interests for approximately $11.4 million in cash.
In addition to these operational measures, we are actively pursuing a number of capital raising initiatives including the sale of a
minority ownership position in the Company’s photovoltaics business as an initial step towards a potential spin off of the business.
In October 2008, we announced the closing of a $25 million secured credit facility with Bank of America and, in November 2008,
the Company sold $1.7 million of our auction rate securities at 100% par value with the remaining $1.4 million in auction rate
securities expected to be settled at 100% par value by June 2010.
These initiatives are intended to conserve or generate cash in response to the deterioration in the global economy so that we can
preserve adequate liquidity through December 2009. However, the full effect of many of these actions will not be realized until later
in 2009, even if they are successfully implemented. We are committed to exploring all of the initiatives discussed above and there is
no assurance that capital markets conditions will improve within that time frame. Our ability to continue as a going concern is
substantially dependent on the successful execution of many of the actions referred to above within the timeline contemplated by
our plans.
Conclusion
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. Due to the unpredictable nature of the capital markets, 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.
Auction Rate Securities
Historically, the Company has invested in securities with an auction reset feature (“auction rate securities”). In February 2008, the
auction market failed for the Company’s auction rate securities, which meant that the Company was unable to sell its investments in
auction rate securities. At September 30, 2008, the Company had approximately $3.1 million in auction rate securities. The
underlying assets for $1.7 million of this total are currently AAA rated, the highest rating by a rating agency. The remaining $1.4
56
million of investments are securities whose underlying assets are primarily student loans which are substantially backed by the U.S.
Government. In October 2008, the Company received agreements from its investment brokers announcing settlement of the auction
rate securities at 100% par value, of which $1.7 million was settled at 100% par value in November 2008 and the remaining $1.4
million is expected to be settled by June 2010. The Company classified the $1.7 million securities as a current asset and the
remaining $1.4 million securities as a long-term asset based on actual and expected settlement dates. Due to the fact the Company
believes that it will receive full value of its remaining $1.4 million securities, we have not recorded any impairment on these
investments as of September 30, 2008. If we are unable to liquidate and settle these auction rate securities on favorable terms and
conditions, such liquidity limitations could have a material adverse effect on the Company's financial condition, results of
operations, and cash flow.
Working Capital
As of September 30, 2008, the Company had working capital of approximately $79.2 million compared to $63.2 million as of
September 30, 2007. Cash, cash equivalents, and current available-for-sale securities at September 30, 2008 totaled $22.8 million,
which reflects a net decrease of $18.4 million from September 30, 2007.
Cash Flow
Cash Used for Operations
In fiscal 2008, net cash used by operating activities totaled approximately $41.9 million, which represents a decrease of
$4.5 million from $46.4 million in cash used by operating activities in fiscal 2007. In fiscal 2008, cash usage was primarily
due the Company’s net loss and an increase in working capital. The Company experienced an increase in accounts
receivable of approximately $24.1 million, an increase in inventory, net of acquisitions, of approximately $7.4 million and
an increase in prepaid and other current assets and other assets of approximately $4.5 million. A net increase in accounts
payable and all other current liabilities represented cash provided by operating activities of approximately $22.3
million. Adjustments to reconcile net loss to net cash used in operating activities included $13.6 million related to
depreciation and amortization expense, $22.2 million of impairment charges against goodwill and intangibles, and $11.3
million related to stock-based compensation expense.
Net Cash Used for Investing Activities
In fiscal 2008, net cash used by investing activities totaled $53.9 million, which represents an increase of $100.9 million
from $47.0 million in cash provided by investing activities in fiscal 2007. Changes in cash flow from investing activities
for fiscal 2008 and 2007 consisted primarily of:
(cid:1)
(cid:1)
(cid:1)
(cid:1)
In February 2008, the Company purchased the telecom-assets from Intel Corporation’s Optical Platform Division
for $85.0 million, of which $75.0 million plus direct transactions costs of $0.7 million was in cash.
The Company increased spending on capital expenditures. In fiscal 2008, capital expenditures totaled $17.2
million, which was primarily related to the purchase of our CPV-related production lines and certain MOCVD
reactor upgrades in our Photovoltaics segment of approximately $11.5 million and additional equipment for our
Fiber Optics segment of approximately $5.8 million. In fiscal 2007, capital expenditures totaled $10.1 million.
In November 2006, EMCORE invested $13.5 million, and incurred $0.4 million in transaction costs, to acquire
preferred stock and warrants in WorldWater & Solar Technologies Corporation (“WWAT”). In June 2008, the
Company agreed to sell two million shares of preferred stock of WWAT, together with 200,000 warrants to a
major shareholder of both EMCORE and WWAT at a price equal to $6.54 per share. The sale took place through
two closings, one for one million shares and 100,000 warrants, which closed in June 2008, and one for an equal
number of shares and warrants which closed in July 2008. Total proceeds from the sale were approximately $13.1
million.
In April 2008, the Company purchased common stock of Lightron Corporation, a publicly traded Korean
Corporation, for approximately $1.5 million.
57
(cid:1)
(cid:1)
(cid:1)
In April 2007, the Company acquired privately-held Opticomm Corporation for $4.1 million in cash.
In August 2006, the Company completed the sale of the assets of its EMD division to IQE for $16.0 million,
consisting of $13.0 million in cash and $3.0 million in the form of a secured promissory note from IQE,
guaranteed by IQE's affiliates. The $3.0 million note from IQE was completely repaid in fiscal 2007.
Proceeds from the sale of securities deceased $45.9 million year-over-year. In fiscal 2008, net sales of available-
for-sale securities totaled $26.4 million. In fiscal 2007, net sales of available-for-sale securities totaled $72.3
million.
Net Cash Provided by Financing Activities
In fiscal 2008, net cash provided by financing activities totaled $101.4 million, which represents an increase of $112.4
million from $11.0 million in cash used in financing activities in fiscal 2007. Changes in cash flow from financing
activities was due to net proceeds from a private placement of common stock and warrants in fiscal 2008 of $93.6 million,
plus the proceeds from the exercise of stock options of $7.0 million. In fiscal 2007, the Company paid a principal payment
on its convertible subordinated notes totaling $11.4 million.
Private Placement of Common Stock and Warrants
On February 20, 2008, the Company completed the sale of $100.0 million of restricted common stock and warrants through a
private placement transaction to fund the Intel Acquisitions. In this transaction, investors purchased 8 million shares of our common
stock, no par value, and warrants to purchase an additional 1.4 million shares of our common stock. The purchase price was $12.50
per share, priced at the 20-day volume-weighted average price. The warrants grant the holder the right to purchase one share of our
common stock at a price of $15.06 per share, representing a 20.48% premium over the purchase price. The warrants are
immediately exercisable and remain exercisable until February 20, 2013. In addition, the Company entered into a registration rights
agreement with the investors to register for resale the shares of common stock issued in this transaction and the shares of common
stock to be issued upon exercise of the warrants. Beginning two years after their issuance, the warrants may be called by the
Company for a price of $0.01 per underlying share if the closing price of its common stock has exceeded 150% of the exercise price
for at least 20 trading days within a period of any 30 consecutive trading days and other certain conditions are met. In addition, in
the event of certain fundamental transactions, principally the purchase of the Company’s outstanding common stock for cash, the
holders of the warrants may demand that EMCORE purchase the unexercised portions of their warrants for a price equal to the
Black-Scholes Value of such unexercised portions as of the time of the fundamental transaction. Total agent fees incurred were
5.75% of the gross proceeds, or $5.8 million. The Company used a substantial portion of the net proceeds to acquire the telecom-
related assets of Intel Corporation's Optical Platform Division in 2008.
In the registration rights agreement, the Company agreed to pay liquidated damages in the event that it did not file a registration
statement with the SEC with respect to the registrable securities, or if the registration statement was not declared effective, within
certain deadlines. The Company filed the registration statement, and it was declared effective within the deadlines specified in the
registration rights agreement. The Company further agreed to pay liquidated damages if sales of the registrable securities included
in the registration statement are unable to be made or, if after a period of six months following the closing, the Company does not
file with the SEC the reports required to be filed pursuant to Rule 144(c)(1) under the Securities Act and, as a result, holders are
unable to sell their registrable securities. In such events, the Company agreed to pay as liquidated damages to each holder of
registrable securities an amount in cash equal to one percent (1.0%) of the aggregate purchase price of such holder’s registrable
securities included in such registration statement on the day that such a failure first occurs and on every thirtieth day thereafter until
such failure is cured. Liquidated damages shall be paid on the earlier of (i) the last day of the calendar month during which such
damages are incurred and (ii) the third business day after the event or failure giving rise to the damages is cured. In the event the
Company fails to make such payments in a timely manner, such liquidated damages shall bear simple interest at the rate of four
percent (4.0%) per month until paid in full. In no event shall the aggregate amount of liquidated damages exceed, in the aggregate,
ten percent (10.0%) of the aggregate purchase price of the common stock sold in the private placement.
58
Share Dilution
The following table summarizes the Company’s equity transactions for the year ended September 30, 2008:
Common stock shares outstanding – as of October 1, 2007
Conversion of convertible subordinated notes to equity
Private placement transaction
Acquisition of Intel Corporation’s Optical Platform Division
Stock option exercises and other compensatory stock issuances
Common stock shares outstanding – as of September 30, 2008
Number of
Common
Stock
Shares
Outstanding
51,048,481
12,186,656
8,000,000
4,422,688
2,103,138
77,760,963
Contractual Obligations and Commitments
EMCORE’s contractual obligations and commitments over the next five years are summarized in the table below:
As of September 30, 2008
(in millions)
Total
2009
2010 to
2011
2012 to
2013
2014
and later
Operating lease obligations
Letters of credit
Purchase commitments (1)
$
$
11.7
2.4
226.1
$
2.8
2.4
68.4
$
4.5
-
134.8
$
1.7
-
22.9
Total contractual cash obligations and
commitments
$
240.2
$
73.6
$
139.3
$
24.6
$
2.7
-
-
2.7
_______________
(1) The purchase commitments primarily represent the value of purchase agreements issued for raw materials and services that
have been scheduled for fulfillment over the next three to five years.
Operating leases include non-cancelable terms and exclude renewal option periods, property taxes, insurance and maintenance
expenses on leased properties. As of September 30, 2008, EMCORE does not have any significant purchase obligations or other
long-term liabilities beyond those listed in the table above.
Change in Management
On March 31, 2008, Dr. Hong Q. Hou was appointed the Company’s Chief Executive Officer. The Company also appointed Mr.
Reuben F. Richards, the former Chief Executive Officer, as Executive Chairman and Chairman of the Board of Directors and Dr.
Thomas J. Russell, the former Chairman, as Chairman Emeritus and Lead Director.
On August 18, 2008, John M. Markovich was appointed the Company’s Chief Financial Officer.
59
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in currency exchange rates and interest rates. We do not use derivative
financial instruments for speculative purposes.
Currency Exchange Rates. The United States dollar is the functional currency for the Company’s consolidated financials. The
functional currency of the Company’s Spanish subsidiary is the Euro and for the China subsidiary it is the Yuan Renminbi. The
financial statements of these entities are translated to United States dollars using period end rates for assets and liabilities, and the
weighted average rate for the period for all revenue and expenses. During the normal course of business, the Company is exposed to
market risks associated with fluctuations in foreign currency exchange rates, primarily the Euro. To reduce the impact of these risks
on the Company’s earnings and to increase the predictability of cash flows, the Company uses natural offsets in receipts and
disbursements within the applicable currency as the primary means of reducing the risk. 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. The Company does not currently hedge its foreign currency exposure.
Interest Rates. We maintain an investment portfolio in a variety of high-grade (AAA), short-term debt and money market
instruments that includes auction-rate securities. As a result, our future investment income may be less than expected because of
changes in interest rates, or we may suffer losses in principal if forced to sell securities that have experienced a decline in market
value because of changes in interest rates. The Company does not currently hedge its interest rate exposure.
Credit Market Conditions
Recently, the U.S. and global capital markets have been experiencing turbulent conditions, particularly in the credit markets, as
evidenced by tightening of lending standards, reduced availability of credit, and reductions in certain asset values. This could
impact the Company’s ability to obtain additional funding through financing or asset sales.
Auction Rate Securities
Historically, the Company has invested in securities with an auction reset feature (“auction rate securities”). In February 2008, the
auction market failed for the Company’s auction rate securities, which meant that the Company was unable to sell its investments in
auction rate securities. At September 30, 2008, the Company had approximately $3.1 million in auction rate securities. The
underlying assets for $1.7 million of this total are currently AAA rated, the highest rating by a rating agency. The remaining $1.4
million of investments are securities whose underlying assets are primarily student loans which are substantially backed by the U.S.
Government. In October 2008, the Company received agreements from its investment brokers announcing settlement of the auction
rate securities at 100% par value, of which $1.7 million was settled at 100% par value in November 2008 and the remaining $1.4
million is expected to be settled by June 2010. The Company classified the $1.7 million securities as a current asset and the
remaining $1.4 million securities as a long-term asset based on actual and expected settlement dates. Due to the fact the Company
believes that it will receive full value of its remaining $1.4 million securities; we have not recorded any impairment on these
investments as of September 30, 2008. If we are unable to liquidate and settle these auction rate securities on favorable terms and
conditions, such liquidity limitations could have a material adverse effect on the Company's financial condition, results of
operations, and cash flow.
60
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EMCORE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the fiscal years ended September 30, 2008, 2007 and 2006
(in thousands, except per share data)
Product revenue
Service revenue
Total revenue
Cost of product revenue
Cost of service revenue
Total cost of revenue
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Impairment of goodwill and/or intellectual property
Total operating expenses
Operating loss
Other expense (income):
Interest income
Interest expense
Loss from conversion of subordinated notes
Loss from convertible subordinated notes exchange offer
Loss from early redemption of convertible subordinated notes
Stock-based compensation expense from tolled options
Gain from insurance proceeds
Gain from sale of WWAT Investment
Impairment of investment
Loss on disposal of property, plant and equipment
Net gain on sale of GELcore investment
Equity in net loss of GELcore investment
Equity in net loss of Velox investment
Foreign exchange loss (gain)
Total other expense (income)
(Loss) income from continuing operations before income taxes
Provision for income taxes
(Loss) income from continuing operations
Discontinued operations:
Income from discontinued operations
Gain on disposal of discontinued operations, net of tax
Income from discontinued operations
Net (loss) income
Per share data:
Basic per share data:
(Loss) income from continuing operations
Income from discontinued operations
Net (loss) income
Diluted per share data:
(Loss) income from continuing operations
Income from discontinued operations
Net (loss) income
Weighted-average number of shares outstanding:
Basic
Diluted
$
$
$
$
$
$
2008
2007
2006
$
228,977
10,326
239,303
208,963
445
209,408
29,895
43,460
39,483
22,233
105,176
(75,281)
(862)
1,580
4,658
-
-
4,316
-
(7,384)
1,461
1,064
-
-
-
746
5,579
(80,860)
-
(80,860)
-
-
-
$
148,334
21,272
169,606
124,480
14,758
139,238
30,368
57,844
29,980
-
87,824
(57,456)
(4,120)
4,985
-
-
561
-
(357)
-
-
210
-
-
-
(13)
1,266
(58,722)
-
(58,722)
-
-
-
132,304
11,229
143,533
109,880
7,701
117,581
25,952
38,177
19,692
2,233
60,102
(34,150)
(1,286)
5,352
-
1,078
-
-
-
-
500
424
(88,040)
599
332
-
(81,041)
46,891
1,852
45,039
373
9,511
9,884
(80,860) $
(58,722) $
54,923
(1.20) $
-
(1.20) $
(1.20) $
-
(1.20) $
(1.15) $
-
(1.15) $
(1.15) $
-
(1.15) $
0.91
0.20
1.11
0.87
0.19
1.06
67,568
67,568
51,001
51,001
49,687
52,019
The accompanying notes are an integral part of these consolidated financial statements.
61
EMCORE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
As of September 30, 2008 and 2007
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Available-for-sale securities
Accounts receivable, net of allowance of $2,377 and $802, respectively
Receivables, related parties
Income tax receivable
Inventory, net
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Goodwill
Other intangible assets, net
Investments in unconsolidated affiliates
Available-for-sale securities, non-current
Long-term restricted cash
Other non-current assets, net
2008
2007
$
$
18,227
1,854
2,679
60,313
-
130
64,617
6,970
12,151
1,538
29,075
38,151
332
-
29,205
4,350
154,790
114,802
83,278
52,227
28,033
8,240
1,400
569
741
57,257
40,990
5,275
14,872
-
-
1,540
Total assets
$
329,278
$
234,736
LIABILITIES and SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Income taxes payable
Total current liabilities
Convertible subordinated notes
Total liabilities
Commitments and contingencies (Note 14)
Shareholders’ equity:
$
$
52,266
22,696
594
22,685
28,776
137
75,556
51,598
-
84,981
75,556
136,579
Preferred stock, $0.0001 par, 5,882 shares authorized, no shares outstanding
Common stock, no par value, 200,000 shares authorized, 77,920 shares issued and 77,761 shares
outstanding as of September 30, 2008; 51,208 shares issued and 51,049 shares outstanding as
of September 30, 2007
Accumulated deficit
Accumulated other comprehensive income (loss)
Treasury stock, at cost; 159 shares as of September 30, 2008 and 2007
Total shareholders’ equity
-
-
680,020
(424,764)
549
(2,083)
253,722
443,835
(343,578)
(17)
(2,083)
98,157
Total liabilities and shareholders’ equity
$
329,278
$
234,736
The accompanying notes are an integral part of these consolidated financial statements.
62
EMCORE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss)
For the fiscal years ended September 30, 2008, 2007 and 2006
(in thousands)
Common
Stock Shares
Common
Stock
Amount
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
Shareholders’
Equity
Balance at October 1, 2005
48,003
$
416,274
$
(339,779) $
-
$
(932) $
75,563
Net income (and comprehensive
income)
Stock-based compensation
Stock option exercises
Compensatory stock issuances
Issuance of common stock – ESPP
Issuance of common stock for
acquisition of:
Force, Inc.
Phasebridge, Inc.
K2 Optronics, Inc.
Shares issued in lieu of royalties
Treasury stock
54,923
1,655
97
217
240
128
549
53
(139)
4,994
6,326
758
1,108
1,625
700
4,135
418
54,923
4,994
6,326
758
1,108
1,625
700
4,135
418
(1,151)
(1,151)
Balance at September 30, 2006
50,803
436,338
(284,856)
-
(2,083)
149,399
(58,722)
(58,722)
(17)
(17)
Net loss
Translation adjustment
Comprehensive loss
Stock-based compensation
Stock option exercises
Compensatory stock issuances
Discount on debt due to early
redemption of convertible
subordinated notes
Proceeds from executives for profits
received upon exercise of stock
options
86
160
5,939
202
787
293
276
(58,722)
(17)
(58,739)
5,939
202
787
293
276
Balance at September 30, 2007
51,049
443,835
(343,578)
(17)
(2,083)
98,157
Net loss
Translation adjustment
Comprehensive loss
Cumulative adjustment for the
implementation of FIN 48
Stock-based compensation
Stock option exercises
Compensatory stock issuances
Issuance of common stock - ESPP
Proceeds from Section 16 Officers
Conversion of subordinated
convertible notes
Issuance of common stock in private
placement transaction
Issuance of common stock in
Opticomm acquisition
Issuance of common stock in Intel
acquisitions
-
-
(80,860)
566
566
-
(80,860)
(326)
1,659
178
121
-
12,187
8,000
145
4,422
11,278
7,047
1,282
679
31
85,429
93,647
707
36,085
(80,860)
566
(80,294)
(326)
11,278
7,047
1,282
679
31
85,429
93,647
707
36,085
Balance at September 30, 2008
77,761
$
680,020
$
(424,764) $
549
$
(2,083) $
253,722
The accompanying notes are an integral part of these consolidated financial statements.
63
EMCORE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the fiscal years ended September 30, 2008, 2007 and 2006
(in thousands)
Cash flows from operating activities:
Net (loss) income
2008
2007
2006
$
(80,860) $
(58,722) $
54,923
Adjustments to reconcile net (loss) income to net cash used in operating
activities:
Stock-based compensation expense
Income from discontinued operations
Gain on disposal of discontinued operations
Gain on sale of GELcore investment
Depreciation and amortization expense
Loss on disposal of property, plant and equipment
Provision for doubtful accounts
Inventory write-downs
Accretion of loss from convertible subordinated notes exchange offer
Loss from conversion of subordinated notes
Loss from convertible subordinated notes exchange offer
Loss from early redemption of convertible subordinated notes
Equity in net loss of unconsolidated affiliates
Gain from sale of WWAT investment
Compensatory stock issuances
Reduction of note receivable due for services received
Impairment of goodwill and/or intellectual property
Impairment of investment
Forgiveness of shareholders’ notes receivable
Total non-cash adjustments
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable
Related party receivables
Inventory
Prepaid and other current assets
Other assets
Accounts payable
Accrued expenses and other current liabilities
Total change in operating assets and liabilities
11,278
-
-
-
13,616
1,064
1,892
5,053
41
1,169
-
-
-
(7,384)
1,282
520
22,233
1,461
-
52,225
5,939
-
-
-
10,122
210
1,341
3,513
198
-
-
561
-
-
787
521
-
-
82
23,274
(24,062)
332
(7,360)
(2,646)
(1,895)
29,581
(7,257)
(13,307)
(10,408)
-
(8,760)
358
(631)
2,187
6,320
(10,934)
4,727
(373)
(9,511)
(88,040)
12,332
424
183
1,955
165
-
1,078
-
931
-
758
521
2,233
500
2,613
(69,504)
(7,690)
67
(7,478)
(48)
(302)
4,148
1,248
(10,055)
Net cash used in operating activities of continuing operations
Net cash used in operating activities of discontinued operations
(41,942)
-
(46,382)
-
(24,636)
(1,652)
Net cash used in operating activities
(41,942)
(46,382)
(26,288)
Cash flows from investing activities:
Cash proceeds from sale of investment
Purchase of plant and equipment
Proceeds from insurance recovery
Investments in unconsolidated affiliates
Proceeds from employee notes receivable
Proceeds from notes receivable
Proceeds from associated company
Purchase of businesses, net of cash acquired
Purchase of available-for-sale securities
Sale of available-for-sale securities
Funding of restricted cash
Proceeds from disposals of property, plant and equipment
Investing activities of discontinued operations
13,080
(17,238)
1,189
(1,503)
-
-
-
(75,707)
(7,000)
33,392
(316)
162
-
-
(10,065)
362
(13,891)
121
3,000
-
(4,097)
(26,000)
98,300
(800)
22
-
100,000
(7,311)
-
-
-
-
500
610
(100,325)
19,600
(138)
21
11,267
Net cash (used in) provided by investing activities
$
(53,941) $
46,952 $
24,224
The accompanying notes are an integral part of these consolidated financial statements.
64
EMCORE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the fiscal years ended September 30, 2008, 2007 and 2006
(in thousands)
(Continued from previous page)
Cash flows from financing activities:
Payments on other long-term obligations
Payments on capital lease obligations
Proceeds from exercise of stock options
Proceeds from employee stock purchase plan
Proceeds from executives for profits received upon exercise of stock options
Payments of convertible debt obligation
Proceeds from private placement of common stock and warrants, net of issuance
$
costs
Convertible debt/equity issuance costs
2008
2007
2006
$
-
(11)
7,047
679
31
-
$
-
(44)
202
-
276
(11,428)
93,647
-
-
-
(839)
-
6,326
1,108
-
(1,350)
-
(114)
Net cash provided by (used in) financing activities
101,393
(10,994)
5,131
Effect of foreign currency
566
(17)
-
Net increase (decrease) in cash and cash equivalents
6,076
(10,441)
3,067
Cash and cash equivalents at beginning of year
12,151
22,592
19,525
Cash and cash equivalents at end of year
$
18,227
$
12,151
$
22,592
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest
NON-CASH INVESTING AND FINANCING ACTIVITIES
Acquisition of property and equipment under capital leases
Common stock issued in connection with Intel acquisition
Common stock issued in connection with Opticomm acquisition
Issuance of common stock for conversion of convertible senior subordinated
notes
Issuance of common stock in lieu of royalties
Note receivable received in connection with sale of discontinued operations
Purchase of property, plant and equipment on account
Manufacturing equipment received in lieu of earn-out proceeds from disposition
of discontinued operations
$
$
$
$
$
$
$
$
$
3,314
$
4,836
$
4,428
-
36,085
707
85,429
-
-
-
-
$
$
$
$
$
$
$
$
-
-
-
-
-
-
390
-
$
$
$
$
$
$
$
$
126
6,460
-
-
418
3,000
339
2,012
The accompanying notes are an integral part of these consolidated financial statements.
65
EMCORE Corporation and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 1. Description of Business
EMCORE Corporation and consolidated subsidiaries (the “Company” or “EMCORE”) designs, manufactures and markets a broad
portfolio of compound semiconductor-based products for the broadband, fiber optic, satellite and solar power markets. The
Company has two reporting segments: Fiber Optics and Photovoltaics. The Fiber Optics segment offers optical components,
subsystems and systems that enable the transmission of video, voice and data over high-capacity fiber optic cables for high-speed
data communications and telecommunications networks, cable television (“CATV”) and fiber-to-the-premises (“FTTP”) networks.
The products enable information that is encoded on light signals to be transmitted, routed (switched) and received in communication
networks. The Photovoltaics segment provides products for satellite and terrestrial applications. For satellite applications, the
Company offers high efficiency gallium arsenide (“GaAs”) solar cells, covered interconnect cells (“CICs”) and fully integrated solar
panels. For terrestrial applications, the Company has adapted its high-efficiency GaAs solar cells for use in concentrating
photovoltaic (CPV) systems. Furthermore, the Company has developed CPV systems for the utility scale solar market. The
Company believes its products provide their customers with compelling cost and performance advantages over traditional silicon-
based solutions. These advantages include higher solar cell efficiency allowing for greater conversion of light into electricity as well
as a superior ability to withstand extreme heat and radiation environments. These advantages enable a reduction in a customer’s
solar product footprint by providing more power output with less solar cells, which is an enhanced benefit when our product is used
in CPV systems.
Liquidity Matters
The Company commenced operations in 1984 and as of September 30, 2008, the Company had an accumulated deficit of $424.8
million. We incurred a net loss of $80.9 million in fiscal 2008, net loss of $58.7 million in fiscal 2007, and net income of $54.9
million in fiscal 2006. Fiscal 2006 results included the sale of our GELcore joint venture that resulted in a net gain, before tax, of
$88.0 million. Our operating results for future periods are subject to numerous uncertainties and we cannot assure you that we will
not continue to experience net losses for the foreseeable future. Although our revenue has grown in recent years, we may be unable
to sustain such growth rates if there are adverse changes in market or economic conditions. If we are not able to increase revenue
and/or reduce our costs, we may not be able to achieve profitability.
At September 30, 2008, cash, cash equivalents, available-for-sale securities and restricted cash totaled approximately $24.7 million.
Historically, the Company has consumed cash from operations. During fiscal 2008, we consumed cash from operations of
approximately $41.9 million, with the rate of cash consumption declining in the third and fourth quarters. Historically, we have
addressed our liquidity requirements through a series of cost reduction initiatives, capital markets transactions and the sale of assets.
As of September 30, 2008, we had approximately $79.2 million in working capital. Although we expect our operating performance
to improve in future periods, we anticipate that the recession in the United States and the slowdown of economic growth in the rest
of the world may create a more challenging business environment for us in the near term.
These matters raise substantial doubt about the Company's ability to continue as a going concern.
Management Actions and Plans
Recently, we have revised the assumptions underlying our operating plans and recognized that additional actions were needed to
position our operations to minimize cash usage. Accordingly, we undertook a number of initiatives aimed at conserving or
generating cash on an incremental basis through the end of 2009. These initiatives included business realignment, structural cost and
headcount reductions, reduction of capital spending, a greater emphasis on managing our working capital, and certain asset sales. In
December 2008, we announced an agreement to sell our non-core equity interests for approximately $11.4 million in cash.
In addition to these operational measures, we are actively pursuing a number of capital raising initiatives including the sale of a
minority ownership position in the Company’s photovoltaics business as an initial step towards a potential spin off of the business.
In October 2008, we announced the closing of a $25 million secured credit facility with Bank of America and, in November 2008,
the Company sold $1.7 million of our auction rate securities at 100% par value with the remaining $1.4 million in auction rate
securities expected to be settled at 100% par value by June 2010.
66
These initiatives are intended to conserve or generate cash in response to the deterioration in the global economy so that we can
preserve adequate liquidity through December 2009. However, the full effect of many of these actions will not be realized until later
in 2009, even if they are successfully implemented. We are committed to exploring all of the initiatives discussed above and there is
no assurance that capital markets conditions will improve within that time frame. Our ability to continue as a going concern is
substantially dependent on the successful execution of many of the actions referred to above within the timeline contemplated by
our plans.
Conclusion
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. Due to the unpredictable nature of the capital markets, 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.
NOTE 2. Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”) and include EMCORE and its wholly owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates. The preparation of financial statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reported period. Management develops estimates based on historical
experience and on various assumptions about the future that are believed to be reasonable based on the best information available.
EMCORE’s reported financial position or results of operations may be materially different under changed conditions or when using
different estimates and assumptions, particularly with respect to significant accounting policies. In the event that estimates or
assumptions prove to differ from actual results, adjustments are made in subsequent periods to reflect more current information.
Concentration of Credit Risk. Financial instruments that may subject EMCORE to concentrations of credit risk consist primarily of
cash and cash equivalents, marketable securities and accounts receivable. EMCORE’s cash and cash equivalents and marketable
securities are held in safekeeping by certain large creditworthy financial institutions in excess of the $250,000 insured limit of the
Federal Deposit Insurance Corporation. EMCORE has established guidelines relative to credit ratings, diversification and maturities
that seek to maintain safety and liquidity. From time to time, EMCORE performs credit evaluations of its customers' financial
condition and occasionally requests deposits or letters of credit in advance of shipping to 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
patterns, bad debt write-off experience, and financial review of the customer.
Cash and Cash Equivalents. Cash and cash equivalents consist primarily of highly liquid short-term investments with an original
maturity of three months or less at the time of purchase.
Restricted Cash. Restricted cash represents interest-bearing investments in bank certificates of deposit and money market funds
which act as collateral supporting the issuance of letters of credit and performance bonds for the benefit of third parties.
Available-for-Sale Securities. Investments in securities with remaining maturities in excess of three months, which are held for
purposes of funding our current operations, are classified as available for sale and reported at fair value in accordance with
Statement of Financial Standard No. 115, Accounting for Certain Investments in Debt and Equity Securities (“SFAS 115”). The
investments consist of auction rate securities, which have interest rates that reset generally every 7 to 35 days, and equity securities.
Valuation of Accounts Receivable. The Company regularly evaluates the collectibility of its accounts receivable and accordingly
maintains allowances for doubtful accounts for estimated losses resulting from the inability of our customers to meet their financial
obligations to us. The allowance is based on the age of receivables and a specific identification of receivables considered at risk. The
Company classifies charges associated with the allowance for doubtful accounts as SG&A expense. If the financial condition of our
customers were to deteriorate impacting their ability to pay us, additional allowances may be required.
Valuation of Inventory. Inventory is stated at the lower of cost or market, with cost being determined using the standard cost
method. The Company reserves against inventory once it has been determined that: (i) conditions exist that may not allow the
inventory to be sold for its intended purpose, (ii) the inventory’s value is determined to be less than cost, or (iii) the inventory is
67
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 the Company 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. The Company does not track the selling price of individual raw
material components that have been previously written down or written off, since such raw material components usually are only a
portion of the resultant finished products and related sales price. The Company 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
following estimated useful lives of the assets:
Buildings
Leasehold Improvements
Machinery and equipment
Furniture and fixtures
Estimated
Useful Life
40 years
5 - 7 years
5 years
years
5
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. 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. The Company evaluates its goodwill for impairment on an annual basis, or
whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Management has elected
December 31 as its annual assessment date. 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 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 is attributed. The Company has determined it has four operating
units. As of December 31, 2007 and 2006, we tested for impairment of our goodwill and based on that analysis, we determined that
the carrying amount of the reporting units did not exceed their fair value, and therefore, no impairment was recognized for any
period presented in the consolidated financial statements. As of September 30, 2008, due to the recent decline in the Company’s
stock price and economic downturn, we tested again for impairment of our goodwill. Based on that analysis, we determined that an
impairment of $22.0 million should be recognized for the period ended September 30, 2008. Subsequent to our fiscal year-end,
we’ve experienced further price decline in our common stock. Accordingly, an impairment test will be performed on our annual
schedule and further impairment is likely to result.
Valuation of Long-lived Assets and Other Intangible Assets. Long-lived assets consist primarily of our property, plant, and
equipment. Other intangible assets consist primarily of intellectual property that has been internally developed or
purchased. Purchased intangible assets include existing and core technology, trademarks and trade names, and customer
contracts. Intangible assets are amortized using the straight-line method over estimated useful lives ranging from one to fifteen
years. Because all of intangible assets are subject to amortization, the Company reviews these intangible assets for impairment in
accordance with the provisions of FASB Statement No. 144, Accounting for the Impairment of Long-Lived Assets and Long-
Lived Assets to be Disposed Of. The Company reviews long-lived assets and other intangible assets for impairment on an annual
basis or whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. A long-lived asset or
other intangible asset is considered impaired when its anticipated undiscounted cash flow is less than its carrying value. In making
this determination, the Company uses certain assumptions, including, but not limited to: (a) estimates of the fair market value of
these assets; and (b) estimates of future cash flows expected to be generated by these assets, which are based on additional
assumptions such as asset utilization, length of service that assets will be used in our operations, and estimated salvage values. As of
68
September 30, 2008, due to the recent decline in the Company’s stock price and economic downturn, we tested for impairment of
our long-lived assets and other intangible assets and based on that analysis, we determined that no impairment was recognized for
any period presented in the consolidated financial statements.
Investments. EMCORE accounts for its investments in common stock over which it has the ability to exercise significant influence,
using the equity method of accounting. EMCORE accounts for similar investments that do not permit the Company to exercise
significant influence over the entity in which EMCORE is investing by using the cost method of accounting. The recorded amounts
generally represent the Company’s cost of the investment less any adjustments made when it is determined 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.
Fair Value of Financial Instruments. The carrying amounts of cash and cash equivalents, marketable securities, accounts receivable,
accounts payable, accrued expenses and other current liabilities approximate fair value because of the short maturity of these
instruments. 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.
Revenue Recognition. Revenue is recognized upon shipment provided persuasive evidence of a contract exists, (such as when a
purchase order or contract is received from a customer), the price is fixed, the product meets its specifications, title and ownership
have transferred to the customer, and there is reasonable assurance of collection of the sales proceeds. In those few instances where
a given sale involves post shipment obligations, formal customer acceptance documents, or subjective rights of return, revenue is
not recognized until all post-shipment conditions have been satisfied and there is reasonable assurance of collection of the sales
proceeds. The majority of our products have shipping terms that are free on board (“FOB”) or free carrier alongside (“FCA”)
shipping point, which means that the Company 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,
the Company ships its products cost insurance and freight (“CIF”). Under this arrangement, revenue is recognized under FCA
shipping point terms, but the Company pays (and bills the customer) for the cost of shipping and insurance to the customer's
designated location. The Company accounts for shipping and related transportation costs by recording the charges that are invoiced
to customers as revenue, with the corresponding cost recorded as cost of revenue. In those instances where inventory is maintained
at a consigned location, revenue is recognized only when our customer pulls product for its use and title and ownership have
transferred to the customer. Revenue from time and material contracts is recognized at the contractual rates as labor hours and direct
expenses are incurred. The Company also generates service revenue from hardware repairs and calibrations that is recognized as
revenue upon completion of the service. Any cost of warranties and remaining obligations that are inconsequential or perfunctory
are accrued when the corresponding revenue is recognized.
Distributors - The Company uses a number of distributors around the world. In accordance with Staff Accounting Bulletin
No. 104, Revenue Recognition, the Company recognizes revenue upon shipment of product to these distributors. Title and
risk of loss pass to the distributors upon shipment, and our distributors are contractually obligated to pay the Company on
standard commercial terms, just like our other direct customers. The Company does not sell to its distributors on
consignment and, except in the event of product discontinuance, does not give distributors a right of return.
Solar Panel and Solar Power Systems Contracts - The Company records revenues from certain solar panel and solar
power systems contracts using the percentage-of-completion method in accordance with AICPA Statement of Position 81-1
("SOP 81-1"), Accounting for Performance of Construction-Type and Certain Production-Type Contracts. 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. The Company has numerous contracts that are in various stages of completion. Such contracts require
estimates to determine the appropriate cost and revenue recognition. The Company 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. Due to the fact that the Company accounts for these
contracts under the percentage-of-completion method, unbilled accounts receivable represent revenue recognized but not
yet billed pursuant to contract terms or accounts billed after the period end.
69
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 the
Company may elect to retain ownership of inventions made in performing the work, subject to a non-exclusive license
retained by the U.S. Government to practice the inventions for governmental purposes. The R&D contract funding may be
based on a cost-plus, cost reimbursement, or a firm fixed price arrangement. The amount of funding under each R&D
contract is determined based on cost estimates that include both direct and indirect costs. Cost-plus funding is determined
based on actual costs plus a set margin. As we incur costs under cost reimbursement type contracts, we record revenue.
Contract costs include material, labor, special tooling and test equipment, subcontracting costs, as well as an allocation of
indirect costs. An R&D contract is considered complete when all significant costs have been incurred, milestones have
been reached, and any reporting obligations to the customer have been met. Government contract revenue is primarily
recognized as service revenue.
The Company also has certain cost-sharing R&D arrangements. Under such arrangements in which the actual costs of
performance are divided between the U.S. Government and the Company on a best efforts basis, no revenue is recorded
and the Company’s R&D expense is reduced for the amount of the cost-sharing receipts.
The U.S. Government may terminate any of our government contracts at their convenience as well as for default based on
our failure to meet specified performance measurements. If any of our government contracts were to be terminated for
convenience, we generally would be entitled to receive payment for work completed and allowable termination or
cancellation costs. If any of our government contracts were to be terminated for default, generally the U.S. Government
would pay only for the work that has been accepted and can require us to pay the difference between the original contract
price and the cost to re-procure the contract items, net of the work accepted from the original contract. The U.S.
Government can also hold us liable for damages resulting from the default.
Product Warranty Reserves. EMCORE provides its customers with limited rights of return for non-conforming shipments and
warranty claims for certain products. In accordance with SFAS 5, Accounting for Contingencies, EMCORE makes estimates of
product warranty expense using historical experience rates as a percentage of revenue and accrues estimated warranty expense as a
cost of revenue. We estimate the costs of our warranty obligations based on our historical experience of known product failure rates,
use of materials to repair or replace defective products and service delivery costs incurred in correcting product issues. 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 as an expense as they are 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. See Note 15, Income Taxes.
Comprehensive Income (Loss). SFAS 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 (loss) consists of net earnings and foreign currency translation
adjustments and is presented in the accompanying consolidated statements of shareholders' equity.
70
Earnings Per Share. Basic earnings per share (“EPS”) are 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 and the convertible subordinated notes has been excluded from the diluted earnings per share calculation if the
effect of such securities is anti-dilutive. The following table reconciles the numerators and denominators used in the computations
of both basic and diluted EPS:
(in thousands)
Numerator:
2008
2007
2006
(Loss) income from continuing operations
$
(80,860) $
(58,722) $
45,039
Denominator:
Basic EPS:
Weighted average common shares outstanding
67,568
51,001
Basic EPS for (loss) income from continuing operations
$
(1.20) $
(1.15) $
Diluted EPS:
Weighted average common shares outstanding
Stock options
67,568
-
67,568
51,001
-
51,001
Diluted EPS for (loss) income from continuing operations
$
(1.20) $
(1.15) $
49,687
0.91
49,687
2,332
52,019
0.87
For the periods ended September 30, 2008 and 2007, respectively, 2,255,527 and 5,697,766 common shares representing options
were excluded from the diluted earnings per share calculations. These options, along with the Company’s convertible subordinated
notes, were not included in the computation of diluted earnings per share in the periods ended September 30, 2008 and 2007 as the
Company incurred a net loss for the periods and any effect would have been anti-dilutive. For the period ended September 30,
2006, 2,331,715 common shares representing options were excluded from the diluted earnings per share calculations. There was no
dilutive effect from these shares or the shares related to our convertible subordinated notes of 12,016,930 at September 30, 2006
because the average market price of our common stock during that period did not exceed the conversion price.
Stock-Based Compensation. The Company uses the Black-Scholes option-pricing model and the straight-line attribution approach
to determine the fair-value of stock-based awards under SFAS 123(R), Share-Based Payment (revised 2004). The Company elected
to use the modified prospective transition method as permitted by SFAS 123(R) and accordingly prior periods were not restated to
reflect the impact of SFAS 123(R). The modified prospective transition method requires that stock-based compensation expense be
recorded for all new and unvested stock options and employee stock purchase plan shares that are ultimately expected to vest as the
requisite service is rendered beginning on October 1, 2005, the first day of the Company’s fiscal year 2006. The option-pricing
model requires the input of highly subjective assumptions, including the option’s expected life and the price volatility of the
underlying stock. The Company’s expected term represents the period that stock-based awards are expected to be outstanding and is
determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based
awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based
awards. The expected stock price volatility is based on EMCORE’s historical stock prices. See Note 4, Equity, of the Notes to
Consolidated Financial Statements for further details.
NOTE 3. Recent Accounting Pronouncements
SFAS 141(R) - In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting
Standard (“SFAS”) 141(R), Business Combinations. This statement replaces SFAS 141, Business Combinations, and requires an
acquirer to recognize the assets acquired, the liabilities assumed, including those arising from contractual contingencies, any
contingent consideration, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of
that date, with limited exceptions specified in the statement. SFAS 141(R) also requires the acquirer in a business combination
achieved in stages (sometimes referred to as a step acquisition) to recognize the identifiable assets and liabilities, as well as the
noncontrolling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with
SFAS 141(R)). In addition, SFAS 141(R)'s requirement to measure the noncontrolling interest in the acquiree at fair value will result
in recognizing the goodwill attributable to the noncontrolling interest in addition to that attributable to the acquirer. SFAS 141(R)
71
amends SFAS No. 109, Accounting for Income Taxes, to require the acquirer to recognize changes in the amount of its deferred tax
benefits that are recognizable because of a business combination either in income from continuing operations in the period of the
combination or directly in contributed capital, depending on the circumstances. It also amends SFAS 142, Goodwill and Other
Intangible Assets, to, among other things, provide guidance on the impairment testing of acquired research and development
intangible assets and assets that the acquirer intends not to use. SFAS 141(R) applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.
Management is currently assessing the potential impact that the adoption of SFAS 141(R) in fiscal 2010 could have on the
Company’s financial statements.
SFAS 157 - In September 2006, the FASB issued SFAS 157, Fair Value Measurements, which defines fair value, providing a
framework for measuring fair value, and expands the disclosures required for fair value measurements. SFAS 157 applies to other
accounting pronouncements that require fair value measurements; it does not require any new fair value measurements. SFAS 157 is
effective for fiscal years beginning after November 15, 2007. In February 2008, the Financial Accounting Standards Board
(“FASB”) finalized FASB Staff Position (“FSP”) No. 157-2. This FSP delays the effective date of SFAS No. 157 for nonfinancial
assets and liabilities to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years, except for
those items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).
Management is currently assessing the potential impact that the adoption of SFAS 157 in fiscal 2009 could have on the Company’s
financial statements. In October 2008, the FASB issued FSP SFAS No. 157-3, “Determining the Fair Value of a Financial Asset
When The Market for That Asset Is Not Active” (FSP 157-3), to clarify the application of the provisions of SFAS 157 in an inactive
market and how an entity would determine fair value in an inactive market. FSP 157-3 is effective immediately and applies to our
financial statements on September 30, 2008. The application of the provisions of FSP 157-3 did not materially affect our results of
operations or financial condition.
SFAS 159 - In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities –
Including an Amendment of FASB Statement No. 115. The fair value option permits entities to choose to measure eligible financial
instruments at fair value at specified election dates. The entity will report unrealized gains and losses on the items on which it has
elected the fair value option in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007 and is required to
be adopted by the Company on October 1, 2008. Management has elected to not apply the fair value option and does not believe the
adoption of SFAS 159 will have a material impact on the Company’s financial statements.
SFAS 160 - In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS
160 amends Accounting Research Bulletin 51, Consolidated Financial Statements, to establish accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated
financial statements. SFAS 160 also changes the way the consolidated income statement is presented by requiring consolidated net
income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also
requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to
the parent and to the noncontrolling interest. SFAS 160 requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and
distinguish between the interests of the parent owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is
effective for fiscal periods, and interim periods within those fiscal years, beginning on or after December 15, 2008. Management is
currently assessing the potential impact that the adoption of SFAS 160 in calendar 2009 could have on our financial statements.
SFAS 161 - In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities an
amendment of FASB Statement No. 133. SFAS 161 changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments,
(b) how derivative instruments and related hedge items are accounted for under Statement 133, Accounting for Derivative
Instruments and Hedging Activities, and its related interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is intended to enhance the current disclosure
framework in SFAS 133 and requires qualitative disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk related
contingent features in derivative agreements. The provisions of SFAS 161 are effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early application encouraged. Management is currently
assessing the potential impact that the adoption of SFAS 161 in calendar 2009 could have on our financial statements.
72
FSP 142-3 - In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets. FSP 142-3
amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of
recognized intangible assets under FASB Statement No. 142, Goodwill and Other Intangible Assets and the period of expected cash
flows used to measure the fair value of under FASB Statement No. 141, Business Combinations. FSP 142-3 is effective for the
Company beginning January 1, 2009. Management is currently assessing the potential impact that the adoption of FSP 142-3 in
calendar 2009 could have on our financial statements.
FSP APB 14-1 - In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled
in Cash upon Conversion (Including Partial Cash Settlement) (FSP APB 14-1). FSP APB 14-1 requires the proceeds from the
issuance of such convertible debt instruments to be allocated between a liability component (issued at a discount) and an equity
component. The resulting debt discount is amortized over the period the convertible debt is expected to be outstanding as additional
non-cash interest expense. The change in accounting treatment is effective for the Company beginning in fiscal 2010, and will be
applied retrospectively to prior periods. Management is currently assessing that the adoption of FSP APB 14-1 in fiscal 2010 could
have on the Company’s financial statements.
NOTE 4. Equity
Stock Options
EMCORE has stock option plans to provide long-term incentives to eligible officers, directors and employees in the form of stock
options. Most of the stock options vest and become exercisable over four to five years and have a contractual life of ten years.
EMCORE maintains two stock option plans: the 2000 Incentive 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 gra
of options to purchase up to 2,744,118 shares of EMCORE's common stock. The 2000 Plan authorizes the grant of options to
purchase up to 9,350,000 shares of EMCORE's common stock. As of September 30, 2008, no options were available for issuance
under the 1995 Plan and 287,003 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. EMCORE issues new
shares of common stock to satisfy the issuance of shares under this stock-based compensation plan.
-
nt
The following table summarizes the activity under the Option Plans:
Outstanding as of October 1, 2005
Granted
Exercised
Cancelled
Outstanding as of September 30, 2006
Granted
Exercised
Forfeited
Cancelled
Outstanding as of September 30, 2007
Granted
Tolled
Exercised
Forfeited
Cancelled
Outstanding as of September 30, 2008
Exercisable as of September 30, 2008
Expected to vest after September 30, 2008
73
Weighted
Average
Remaining
Contractual
Life
(in years)
Weighted
Average
Exercise
Price
4.16
7.79
3.82
4.57
5.49
6.24
2.33
11.40
9.78
5.46
7.40
5.19
4.25
6.94
14.01
6.57
5.22
6.36
8.22
6.12
7.89
Number of
Shares
6,166,226
$
2,184,407
(1,654,535)
(463,563)
6,232,535
1,340,200
(86,484)
(285,000)
(1,503,485)
5,697,766
4,695,250
658,989
(1,658,723)
(406,898)
(56,931)
8,929,453
2,765,276
6,449,371
$
$
$
As of September 30, 2008 there was approximately $18.0 million of total unrecognized compensation expense related to non-vested
stock-based compensation arrangements granted under the Option Plans. This expense is expected to be recognized over an
estimated weighted average life of 3.41 years. The total intrinsic value of options exercised during fiscal 2008, 2007, and 2006 was
$11.6 million, $0.3 million, and $8.0 million, respectively. Intrinsic value for stock options is the in-the-money portion of the stock
option's premium. The aggregate intrinsic value of fully vested and expected to vest share options as of September 30, 2008 was
$3.5 million. The aggregate intrinsic value of exercisable stock options as of September 30, 2008 was $3.3 million.
Exercise Price of Stock Options
>=$1.00 to <$5.00
>=$5.00 to <$10.00
>$10.00
TOTAL
Number of Stock Options Outstanding
Weighted
Average
Remaining
Contractual
Life (years)
6.39
8.91
4.89
8.22
Number
Outstanding
2,212,084
6,566,299
151,070
8,929,453
Weighted-
Average
Exercise
Price
3.23
7.45
17.08
6.57
$
$
$
$
Options Exercisable
Weighted-
Average
Exercise
Price
$
$
$
$
2.82
7.22
20.91
5.22
Number
Exercisable
1,533,465
1,142,431
89,380
2,765,276
Stock-based compensation expense is measured at grant date, based on the fair value of the award, over the requisite service
period. As required by SFAS 123(R), Share-Based Payment (revised 2004), management has made an estimate of expected
forfeitures and is recognizing compensation expense only for those equity awards expected to vest. The effect of recording
stock-based compensation expense during 2008 and 2007 was as follows:
(in thousands, except per share data)
Stock-based compensation expense by award type:
Employee stock options
Employee stock purchase plan
Former employee stock options tolled
Total stock-based compensation expense
2008
2007
$
6,455 $
507
4,316
$ 11,278 $
5,939
-
-
5,939
Net effect on net loss per basic and diluted share
$
(0.17) $
(0.12)
Former Employee Stock Options Tolled
Under the terms of stock option agreements issued under the 2000 Plan, terminated employees who have vested and exercisable
stock options have 90 days subsequent to the date of their termination to exercise their stock options. In November 2006, the
Company announced that it was suspending its reliance on previously issued financial statements, which in turn caused the
Company’s Form S-8 registration statements for shares of common stock issuable under the Option Plans not to be available.
Therefore, terminated employees were precluded from exercising their stock options during the remaining contractual term (the
“Blackout Period”). To address this issue, the Company’s Board of Directors agreed in April 2007 to approve a stock option grant
“modification” for these individuals by extending the normal 90-day exercise period after the termination date to a date after which
the Company became compliant with its SEC filings and the registration of the stock option shares was once again effective. The
Company communicated the terms of the tolling agreement with its terminated employees in November 2007. The Company’s
Board of Directors approved an extension of the stock option expiration date equal to the number of calendar days during the
Blackout Period before such stock option would have otherwise expired (the “Tolling Period”). Former employees were able to
exercise their vested stock options beginning on the first day after the lifting of the Blackout Period for a period equal to the Tolling
Period. Approximately 50 individuals were impacted by this modification. The Company accounted for the modification of stock
options issued to terminated employees as additional compensation expense in accordance with SFAS 123(R) in the first quarter of
fiscal 2008 and adjusted the stock options to market value in the first quarter of 2008 and recognized income on expired options in
the quarters ended December 31, 2007 and March 31, 2008. All tolled options were either exercised or expired by January 29,
2008.
74
Valuation Assumptions
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option valuation model and the straight-
line attribution approach using the following weighted-average assumptions. The weighted-average grant date fair value of stock
options granted during fiscal 2008, 2007, and 2006 was $5.02, $4.87, and $6.22, respectively.
Black-Scholes Weighted-Average Assumptions
Expected dividend yield
Expected stock price volatility
Risk-free interest rate
Expected term (in years)
Estimated pre-vesting forfeitures
2008
2007
2006
0.0%
71.0%
3.1%
5.0
17.4%
0.0%
94.0%
4.5%
6.0
24.9%
0.0%
97.0%
4.7%
6.1
18.7%
Expected Dividend Yield: The Black-Scholes valuation model calls for a single expected dividend yield as an input.
EMCORE has not issued any dividends.
Expected Stock Price Volatility: The fair values of stock-based payments were valued using the Black-Scholes valuation
method with a volatility factor based on EMCORE’s historical stock prices.
Risk-Free Interest Rate: EMCORE bases the risk-free interest rate used in the Black-Scholes valuation method on the
implied yield that was currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term. Where
the expected term of EMCORE’s stock-based awards do not correspond with the terms for which interest rates are quoted,
EMCORE performed a straight-line interpolation to determine the rate from the available maturities.
Expected Term: Expected term represents the period that EMCORE’s stock-based awards are expected to be outstanding
and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the
stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms
of its stock-based awards.
Estimated Pre-vesting Forfeitures: When estimating forfeitures, EMCORE considers voluntary termination behavior as
well as workforce reduction programs.
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. As of September 30, 2008 and 2007, there is no preferred stock outstanding.
Warrants
As of September 30, 2008, EMCORE had 1,400,003 outstanding warrants from the private placement of common stock and
warrants in February 2008 exercisable immediately at $15.06 per share of common stock. As of September 30, 2007, EMCORE did
not have any outstanding warrants.
75
Employee Stock Purchase Plan
In fiscal 2000, EMCORE adopted an Employee Stock Purchase Plan (ESPP). The ESPP provides employees of EMCORE an
opportunity to purchase common stock through payroll deductions. The ESPP is a 6-month duration plan with new participation
periods beginning the first business day of January and July of each year. The purchase price is set at 85% of the average high and
low market price for EMCORE's common stock on either the first or last day of the participation period, whichever is lower, and
contributions are limited to the lower of 10% of an employee's compensation or $25,000. In November 2006 through December
2007, the Company suspended the ESPP due to its review of historical stock option granting practices. The Company reinstated the
ESPP on January 1, 2008. The number of shares of common stock reserved for issuance under the ESPP is 2,000,000 shares.
EMCORE issues new shares of common stock to satisfy the issuance of shares under this stock-based compensation plan.
The amount of shares issued for the ESPP are as follows:
Amount of shares reserved for the ESPP
Number of shares issued in calendar years 2000 through 2003
Number of shares issued in June 2004 for first half of calendar year 2004
Number of shares issued in December 2004 for second half of calendar year 2004
Number of shares issued in June 2006 for first half of calendar year 2006
Number of shares issued in December 2006 for second half of calendar year 2006
Number of shares issued in June 2007 for first half of calendar year 2007
Number of shares issued in June 2008 for first half of calendar year 2008
Number of
Common
Stock Shares
Issued
2,000,000
Purchase
Price per
Common
Stock Share
(398,159) $1.87-$40.93
2.73
(166,507) $
2.95
(167,546) $
2.93
(174,169) $
3.48
(93,619) $
6.32
(123,857) $
5.62
(120,791) $
Remaining shares reserved for the ESPP as of September 30, 2008
755,352
Future Issuances
As of September 30, 2008, EMCORE has reserved a total of 12,671,811 shares of its common stock for future issuances as follows:
For exercise of outstanding common stock options
For future issuances to employees under the ESPP plan
For future common stock option awards
For future exercise of warrants
For future issuance in relation to the acquisition of Intel’s Optical Platform Division (See Note 5 - Acquisitions)
Total reserved
Private Placement of Common Stock and Warrants
Number of
Common
Stock Shares
Available
8,929,453
755,352
287,003
1,400,003
1,300,000
12,671,811
On February 20, 2008, the Company completed the sale of $100.0 million of restricted common stock and warrants through a
private placement transaction to fund the Intel Acquisitions. In this transaction, investors purchased 8 million shares of our common
stock, no par value, and warrants to purchase an additional 1.4 million shares of our common stock. The purchase price was $12.50
per share, priced at the 20-day volume-weighted average price. The warrants grant the holder the right to purchase one share of our
common stock at a price of $15.06 per share, representing a 20.48% premium over the purchase price. The warrants are
immediately exercisable and remain exercisable until February 20, 2013. In addition, the Company entered into a registration rights
76
agreement with the investors to register for resale the shares of common stock issued in this transaction and the shares of common
stock to be issued upon exercise of the warrants. Beginning two years after their issuance, the warrants may be called by the
Company for a price of $0.01 per underlying share if the closing price of its common stock has exceeded 150% of the exercise price
for at least 20 trading days within a period of any 30 consecutive trading days and other certain conditions are met. Total agent fees
incurred were 5.75% of the gross proceeds, or $5.8 million. The Company used a substantial portion of the net proceeds to acquire
the telecom-related assets of Intel Corporation's Optical Platform Division. See Note 5 – Acquisitions.
In the registration rights agreement, the Company agreed to pay liquidated damages in the event that it did not file a registration
statement with the SEC with respect to the registrable securities, or if the registration statement was not declared effective, within
certain deadlines. The Company filed the registration statement, and it was declared effective within the deadlines specified in the
registration rights agreement. The Company further agreed to pay liquidated damages if sales of the registrable securities included
in the registration statement are unable to be made or, if after a period of six months following the closing, the Company does not
file with the SEC the reports required to be filed pursuant to Rule 144(c)(1) under the Securities Act and, as a result, holders are
unable to sell their registrable securities. In such events, the Company agreed to pay as liquidated damages to each holder of
registrable securities an amount in cash equal to one percent (1.0%) of the aggregate purchase price of such holder’s registrable
securities included in such registration statement on the day that such a failure first occurs and on every thirtieth day thereafter until
such failure is cured. Liquidated damages shall be paid on the earlier of (i) the last day of the calendar month during which such
damages are incurred and (ii) the third business day after the event or failure giving rise to the damages is cured. In the event the
Company fails to make such payments in a timely manner, such liquidated damages shall bear simple interest at the rate of four
percent (4.0%) per month until paid in full. In no event shall the aggregate amount of liquidated damages exceed, in the aggregate,
ten percent (10.0%) of the aggregate purchase price of the common stock sold in the private placement.
The Company accounted for the various components of the private placement transaction using the provisions of EITF Issue No. 00-
19, Accounting for Derivative Financial instruments Indexed to, and Potentially Settled in a Company’s Own Stock; and FASB Staff
Position EITF 00-19-2, Accounting for Registration Payment Arrangements. Warrants issued to the investors were accounted for as
an equity transaction with a value of $9.8 million recorded to common stock. The potential future payments to the investors were
considered a contingent liability in accordance with SFAS No. 5 Accounting for Contingencies. As of September 30, 2008, the
Company did not record any contingent liability associated with the liquidated damages clause.
The costs associated with this equity offering were $6.3 million which were recorded against the issuance of common stock.
Share Dilution
The following table summarizes the Company’s equity transactions and effect on share dilution for the year ended September 30,
2008:
Common stock shares outstanding – as of October 1, 2007
Conversion of convertible subordinated notes to equity (see Note 13 - Debt)
Private placement transaction
Acquisition of Intel’s Optical Platform Division (see Note 5 – Acquisitions)
Stock option exercises and other compensatory stock issuances
Common stock shares outstanding – as of September 30, 2008
Number of
Common Stock
Shares
Outstanding
51,048,481
12,186,656
8,000,000
4,422,688
2,103,138
77,760,963
On March 31, 2008, the Board of Directors authorized an additional 100 million shares of common stock available for issuance for a
total of 200 million shares authorized.
77
NOTE 5. Acquisitions
Intel’s Optical Platform Division
On February 22, 2008, the Company acquired assets of the telecom portion of Intel Corporation’s Optical Platform Division
(“OPD”). The telecom assets acquired include inventory, fixed assets, intellectual property, and technology comprised of tunable
lasers, tunable transponders, 300-pin transponders, and integrated tunable laser assemblies. The purchase price was $75 million in
cash and $10 million in the Company’s common stock, priced at a volume-weighted average price of $13.84 per share. Under the
terms of the asset purchase agreement, the purchase price of $85 million is subject to adjustment based on an inventory true-up, plus
specifically assumed liabilities. Direct transaction costs totaled $0.5 million. This acquisition was financed through proceeds
received from the $100 million private placement of common stock and warrants (see Note 4 - Equity).
On April 20, 2008, the Company acquired the enterprise and storage assets of Intel Corporation’s OPD business, as well as Intel’s
Connects Cables business. The assets acquired include inventory, fixed assets, intellectual property, and technology relating to
optical transceivers for enterprise and storage customers, as well as optical cable interconnects for high-performance computing
clusters. As consideration for the purchase of assets, the Company issued 3.7 million restricted shares of the Company’s common
stock to Intel. In addition, the Company may be required to make an additional payment to Intel based on the Company’s stock
price twelve months after the closing of the transaction. The final valuation and purchase price allocation is expected to be
completed in fiscal 2009. In the event that the Company is required to make an additional payment, it has the option to make that
payment in cash, common stock or both (but not to exceed the equivalent value of 1.3 million shares).
The purchase price was allocated as follows:
(in thousands)
Intel’s Optical Platform Division
Net purchase price
Net assets acquired
Excess purchase price allocated to goodwill
Net assets acquired in the acquisition were as follows:
Inventory
Fixed assets
Intangible assets
Net assets acquired
$ 111,792
(79,444)
$ 32,348
$ 33,287
19,878
26,279
$ 79,444
The primary reason for the acquisition of Intel Corporation’s OPD business was to expand the product line of EMCORE’s Fiber
Optics business. The main factor that contributed to the recognition of goodwill in the transaction was that OPD was an established
business with significant assets and customer recognition. The assets include certain non-quantifiable benefits that accrue to
EMCORE such as customer acceptance of the OPD products, ready market for EMCORE’s existing products and customers for any
new products EMCORE may bring to the market.
The $26.3 million of acquired intangible assets have a weighted average life of approximately eight years. The intangible assets that
million
make up that amount include customer lists of $7.5
(6 to 10 year useful life), and in-process research and development of $2.2
. Amortization expense totaled $2.3 million for
the fiscal 2008. Of the total goodwill recognized, approximately $32.3 million is expected to be deductible for tax purposes over a
15 year life.
(8 to 10 year useful life), developed and core technology of $16.6
million
million
78
In connection with this acquisition, Intel and the Company entered into a Transition Services Agreement (the “TSA”), which
facilitated Intel to carve-out the business and deliver those assets to the Company. Intel also provided certain transition services to
the Company, including financial services, supply chain support, data extraction, conversion services, facilities and site computing
support, and office space services. Operating expenses associated with the TSA were expensed as incurred. For the year ended
September 30, 2008, the Company incurred $4.8 million of TSA-related fees in operating expenses and the TSA was substantially
completed as of August 2008.
The following unaudited condensed consolidated pro forma financial data has been prepared to give effect to the Company’s
acquisition of certain assets and liabilities of OPD. The pro forma financial information has been developed by the application of
pro forma adjustments to the estimated results of operations of OPD, and the historical Condensed Consolidated Statements of
Operations of the Company as if OPD had been acquired as of October 1, 2006. The pro forma financial information is based upon
available information and assumptions that management believes are reasonable. The pro forma financial information does not
purport to represent what our consolidated results of operations would have been had the Company’s acquisition of OPD occurred
on the dates indicated, or to project our consolidated financial performance for any future period.
Condensed Consolidated Pro Forma Statement of Operations
(unaudited)
(in thousands, except per share data)
Revenues
Net loss
Net loss per basic and diluted shares
Opticomm Corporation
Period Ended
September 30, 2008
Period Ended
September 30, 2007
EMCORE
Pro Forma
EMCORE
Pro Forma
$
$
239,303
(58,640)
$
276,828
(57,285)
$
169,606
(58,722)
$
273,063
(55,542)
(0.87) $
(0.85) $
(1.15) $
(1.03)
In April 2007, the Company acquired privately-held Opticomm Corporation of San Diego, California, including its fiber optic video,
audio and data networking business, technologies, and intellectual property. At the time, Opticomm was one of the leading
specialists in the field of fiber optic video, audio and data networking for the commercial, governmental and industrial sectors. The
Company paid $4.2 million initial consideration, less $0.1 million cash received at acquisition, for all of the shares of Opticomm.
The Company also agreed to an additional earn-out payment based on Opticomm’s 2007 revenue which amounted to approximately
$0.7 million.
The Company completed the valuation of Opticomm's inventory, property and equipment, and identifiable intangible assets and
adjusted the preliminary purchase price allocation in March 2008 to reflect the final valuation of acquired assets. Goodwill was
adjusted by approximately $0.1 million to properly reflect purchased goodwill, $1.4 million of goodwill will not be deductible for
tax purposes. The purchase price allocation identified $2.2 million of intangible assets with a five year weighted average
amortization period, which included $1.4 million in customer lists, $0.7 million in patents and $0.1 million in order
backlog. Amortization expense totaled $0.3 million and $0.3 million, for the fiscal ended September 30, 2008 and 2007,
respectively.
79
The final purchase price was allocated as follows:
(in thousands)
Opticomm Corporation Acquisition
Net purchase price
Net assets acquired
Excess purchase price allocated to goodwill
Net assets acquired in the acquisition were as follows:
Working capital
Fixed assets
Intangible assets
Current liabilities
Net assets acquired
Preliminary Adjustments
Final
$
$
$
4,097 $
(3,573)
781 $
103
4,878
(3,470)
524 $
884 $
1,408
1,058 $
81
2,504
(70)
223 $
-
(326)
-
1,281
81
2,178
(70)
$
3,573 $
(103) $
3,470
These transactions were accounted for as a business combination using the purchase method of accounting in accordance with SFAS
141, Business Combinations; therefore, the tangible assets acquired and liabilities assumed were recorded at fair value on the
acquisition date. The operating results of the entire business acquired are included in the accompanying consolidated statement of
operations from the date of acquisition. The acquired business is part of the Company’s Fiber Optics reporting segment.
NOTE 6. Investments
Auction Rate Securities
In fiscal 2008, the Company purchased $7.0 million of available-for-sale securities and sold approximately $33.4 million to fund
operations. See Note 14 – Commitments and Contingencies for further discussion regarding the Company’s investment in auction
rate securities.
Lightron Equity Securities
In April 2008, the Company invested approximately $1.5 million in Lightron Corporation, a Korean Company publicly traded on
the Korean Stock Market. The Company initially accounted for this investment as an available for sale security. Due to the decline
in the market value of this investment and the expectation of non-recovery of this investment beyond its current market value, the
Company recorded a $0.5 million “other than temporary” impairment loss on this investment as of September 30, 2008.
WorldWater & Solar Technologies and Velox Corporation
See Note 18 – Related Party Transactions for a discussion regarding the Company’s investment in WorldWater & Solar
Technologies Corporation and Velox Corporation.
NOTE 7. Restructuring Charges
As EMCORE has acquired businesses and consolidated them into its existing operations, EMCORE has incurred charges associated
with the transition and integration of those activities. In accordance with Statement of Financial Standards No. 146, Accounting for
Costs Associated with Exit or Disposal Activities (“SFAS 146”), expenses recognized as restructuring charges include costs
associated with the integration of several business acquisitions and EMCORE’s overall cost-reduction efforts. Restructuring charges
80
are included in SG&A. The charges recognized in fiscal 2008 and restructuring activities expected to be completed in fiscal 2009
are primarily related to our Fiber Optics reporting segment. Restructuring charges incurred and expected to be incurred consist of
the following:
(in thousands)
One-time termination benefits
Contract termination Costs
Other associated costs
Total restructuring charges
Amount
Incurred in
Period
Cumulative
Amount
Incurred to
Date
Amount
Expected in
Future
Periods
Total
Amount
Expected to
be Incurred
Accrual as of
September 30,
2008
$
$
96
-
-
96
$
$
3,275
590
3,436
7,301
$
$
-
-
-
-
$
$
3,275 $
590
3,436
7,301 $
79
152
100
331
The following table sets forth changes in the accrual for restructuring charges:
(in thousands)
Balance at September 30, 2006
Increase in liability due to restructuring activities within our Photovoltaics segment
Costs paid or otherwise settled
Balance at September 30, 2007
Increase in liability due to restructuring activities within our Fiber Optics segment
Costs paid or otherwise settled
Balance at September 30, 2008
NOTE 8. Receivables
The components of accounts receivable as of September 30, 2008 and 2007 consisted of the following:
$
256
3,752
(1,896)
2,112
96
(1,877)
$
331
(in thousands)
Accounts receivable
Accounts receivable – unbilled
Accounts receivable, gross
Allowance for doubtful accounts
Total accounts receivable, net
$
2008
57,703 $
4,987
2007
35,558
3,395
62,690
38,953
(2,377)
(802)
$
60,313 $
38,151
The following table summarizes the changes in the allowance for doubtful accounts for the years ended September 30, 2008, 2007
and 2006:
(in thousands)
Balance at beginning of year
Charge to provision (recovery)
Write-offs (deductions against receivables)
Balance at end of year
2008
2007
2006
$
802
1,892
(317)
$
552
494
(244)
320
364
(132)
2,377
$
802
$
552
$
$
See discussion on related party receivables in Note 18 – Related Party Transactions.
81
NOTE 9. 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 as of September 30, 2008 and 2007 consisted of the
following:
(in thousands)
Raw Materials
Work-in-process
Finished goods
Inventory, gross
Less: reserves
Total inventory, net
$
2008
2007
$
38,304
7,293
32,010
77,607
19,884
6,842
10,891
37,617
(12,990)
(8,412)
$
64,617
$
29,205
The following table summarizes the changes in the inventory reserve accounts for the years ended September 30, 2008, 2007 and
2006:
(in thousands)
Balance at beginning of year
Account adjustments charged to cost of sales
Write-offs
Balance at end of year
2008
2007
2006
$
8,412
5,053
(475)
$
6,472
3,513
(1,573)
8,039
1,955
(3,522)
12,990
$
8,412
$
6,472
$
$
The significant increase in the Company’s inventory reserve is due to the increase in inventory related to the acquisition of Intel
Corporation’s OPD business (See Note 5 – Acquisitions for further detail) as well as significant valuation reserves taken by the
Company due to the declining market and overall economic downturn at the end of fiscal 2008.
NOTE 10. Property, Plant, and Equipment, net
The components of property, plant, and equipment as of September 30, 2008 and 2007 consisted of the following:
(in thousands)
Land
Building and improvements
Equipment
Furniture and fixtures
Leasehold improvements
Construction in progress
Property, plant and equipment, gross
Less: accumulated depreciation and amortization
$
$
2008
1,502
44,607
106,947
5,403
478
4,395
163,332
2007
1,502
43,397
75,631
5,643
2,141
3,744
132,058
(80,054)
(74,801)
Total property, plant and equipment, net
$
83,278
$
57,257
As of September 30, 2008 and 2007, EMCORE did not have any significant capital lease agreements.
Depreciation expense was $10.1 million, $7.8 million and $9.6 million in fiscal 2008, 2007 and 2006, respectively.
82
NOTE 11. Goodwill and Intangible Assets, net
The following table sets forth changes in the carrying value of goodwill by reporting segment:
(in thousands)
Balance at September 30, 2006
Acquisition – Opticomm Corporation
Acquisition – earn-out payments
Balance at September 30, 2007
Acquisition – earn-out payments
Acquisition – Intel’s Optical Platform Division
Final purchase price allocation adjustment: Opticomm acquisition
Impairment of goodwill
Fiber Optics Photovoltaics
Total
$
$
20,063
524
19
20,606
771
32,348
118
(22,000)
$
20,384
-
-
20,384
-
-
-
-
40,447
524
19
40,990
771
32,348
118
(22,000)
Balance at September 30, 2008
$
31,843
$
20,384
$
52,227
The Company’s step one analysis under SFAS 142 as of September 30, 2008 has provided an indicator that goodwill impairment is
probable in its EDP reporting unit. Accordingly, the Company is required to perform step two of the SFAS 142 impairment
analysis, determining the amount of goodwill impairment to be recorded. The amount is calculated by comparing the implied fair
value of the goodwill to its carrying amount. This exercise requires the Company to allocate the fair value determined in step one to
the individual assets and liabilities of the reporting unit. Any remaining fair value would be the implied fair value of goodwill on
the testing date. As of the filing of this 10-K, the Company had not completed its analysis due to the complexities involved in
determining the implied fair value of the goodwill for that particular reporting unit, which is based on the determination of the fair
value of all assets and liabilities in the reporting unit. However, based on the work performed through the date of the filing, the
Company concluded that an impairment loss can be reasonably estimated. Accordingly, the Company has recorded a $22.0 million
non-cash goodwill impairment charge, representing its best estimate of the impairment loss present at September 30, 2008.
The Company expects to finalize its goodwill impairment analysis prior to the filing of its 10-Q for the first fiscal 2009 quarter.
There could be material adjustments to the goodwill impairment charge when the goodwill impairment test is completed. Any
adjustments to its preliminary estimates as a result of completing this evaluation will be recorded in the financial statements for the
quarter ended December 31, 2008.
The following table sets forth changes in the carrying value of intangible assets by reporting segment:
(in thousands)
Fiber Optics
Photovoltaics
Total
As of September 30, 2008
Accumulated
Amortization
Gross
Assets
Net Assets
As of September 30, 2007
Accumulated
Amortization
Gross
Assets
Net Assets
$
$
35,991 $
956
36,947 $
(8,502) $
(412)
(8,914) $
27,489
544
28,033
$
$
10,675
2,515
13,190
$
$
(5,755) $
(2,160)
(7,915) $
4,920
355
5,275
83
During 2008, the Company acquired intellectual property assets for $26.3 million with a weighted-average life of eight years, based
on the preliminary purchase price allocation. All of the Company’s identified intangible assets are subject to amortization.
Amortization expense for intellectual property assets was $3.6 million and $2.0 million during fiscal 2008 and 2007, respectively.
The amortization of an intellectual property asset is generally included in SG&A on the consolidated statements of operations.
Based on the carrying amount of the intangible assets as of September 30, 2008, and assuming no future impairment of the
underlying assets, the estimated future amortization expense is as follows:
(in thousands)
Fiscal year ending:
September 30, 2009
September 30, 2010
September 30, 2011
September 30, 2012
September 30, 2013
Thereafter
Total future amortization expense
$
5,691
5,578
4,163
3,105
2,876
6,620
$
28,033
NOTE 12. Accrued Expenses and Other Current Liabilities
The components of accrued expenses and other current liabilities as of September 30, 2008 and 2007 consisted of the following:
(in thousands)
Compensation-related
Interest
Warranty
Professional fees
Royalty
Self insurance
Deferred revenue and customer deposits
Tax-related
Acquisition-related
Accrued program loss
Inventory obligation
Restructuring accrual
Other
2008
2007
$
6,640
-
4,640
2,099
1,414
1,044
1,422
2,961
-
843
982
331
320
8,398
1,775
1,310
6,213
705
794
687
3,460
310
-
1,499
2,112
1,513
Total accrued expenses and other current liabilities
$
22,696
28,776
In February 2008, the Company converted all of its convertible subordinated notes into shares of common stock (see Note 13 –
Debt). As of September 30, 2008, the Company did not have any long-term debt or related accrued interest.
The following table sets forth changes in the product warranty accrual account:
(in thousands)
For the fiscal years ended September 30, 2008 and 2007
Balance at beginning of year
Provision adjustments
Utilization of warranty accrual
Balance at end of year
$
2008
2007
1,310 $
3,330
-
1,074
236
-
$
4,640 $
1,310
84
The majority of the increased product warranty accrual relates to the Photovoltaics reporting segment. Specifically as of September
30, 2008, the Company had accrued $0.8 million related to estimated contract losses on certain CPV system-related orders. The
Company had noted potential failures related to materials used in the manufacturing process which could experience failures in the
field. The remaining portion of the increase primarily related to product issues within our terrestrial line. These issues mainly were
in relation to epoxy failures which have been corrected by moving to a solder process.
NOTE 13. Debt
Convertible Subordinated Notes
In January 2008, the Company entered into agreements with holders of approximately 97.5%, or approximately $83.3 million of its
outstanding 5.50% convertible subordinated notes due 2011 (the "Notes") pursuant to which the holders converted their Notes into
the Company's common stock. In addition, the Company called for redemption of all of its remaining outstanding Notes. Upon
conversion of the Notes, the Company issued shares of its common stock, based on a conversion price of $7.01 per share, in
accordance with the terms of the Notes. To incentivize certain holders to convert their Notes, the Company made cash payments to
such holders equal to 4% of the principal amount of the Notes converted, plus accrued interest. By February 20, 2008, all Notes
were redeemed and converted into the Company common stock. As a result of these transactions, 12.2 million shares of the
Company common stock were issued. The Company recognized a loss totaling $4.7 million on the conversion of Notes to equity of
which $3.5 million was paid in cash. Interest expense incurred on the Notes totaled $1.6 million, $5.0 million and $5.4 million for
fiscal 2008, 2007 and 2006, respectively.
Revolving Credit Facility
In September 2008, the Company closed a $25 million revolving credit facility with Bank of America. The asset-backed credit
facility provides for borrowings up to $25 million and can be used for working capital, letters of credit and other general corporate
purposes. The credit facility, which incorporates both LIBOR and Prime-based borrowing alternatives, is subject to certain financial
covenants and a borrowing base formula. As of September 30, 2008, the Company had the ability to borrow up to $16.9 million
against the credit facility. The agreement matures in September 2011 and is secured by virtually all assets of the Company. As of
September 30, 2008, the Company had no outstanding borrowings against the credit facility. As of December 30, 2008, the
Company borrowed $15.0 million against this facility for working capital purposes.
NOTE 14. Commitments and Contingencies
EMCORE leases certain land, facilities, and equipment under non-cancelable operating leases. The leases provide for rental
adjustments for increases in base rent (up to specific limits), property taxes, insurance and general property maintenance that would
be recorded as rent expense. Net facility and equipment rent expense under such leases amounted to approximately $1.6 million,
$1.6 million, and $2.1 million for the fiscal years ended September 30, 2008, 2007, and 2006, 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, 2008 are as follows:
(in thousands)
Operating Leases
Fiscal year ending:
September 30, 2009
September 30, 2010
September 30, 2011
September 30, 2012
September 30, 2013
Thereafter
Total minimum lease payments
$
2,766
2,609
1,865
1,076
565
2,776
$
11,657
As of September 30, 2008, EMCORE had ten standby letters of credit issued and outstanding which totaled approximately $2.4
million.
85
Credit Market Conditions
Recently, the U.S. and global capital markets have been experiencing turbulent conditions, particularly in the credit markets, as
evidenced by tightening of lending standards, reduced availability of credit, and reductions in certain asset values. This could
impact the Company’s ability to obtain additional funding through financing or asset sales.
Auction Rate Securities
Historically, the Company has invested in securities with an auction reset feature (“auction rate securities”). In February 2008, the
auction market failed for the Company’s auction rate securities, which meant that the Company, was unable to sell its investments in
auction rate securities. At September 30, 2008, the Company had approximately $3.1 million in auction rate securities. The
underlying assets for $1.7 million of this total are currently AAA rated, the highest rating by a rating agency. The remaining $1.4
million of investments are securities whose underlying assets are primarily student loans which are substantially backed by the U.S.
Government. In October 2008, the Company received agreements from its investment brokers announcing settlement of the auction
rate securities at 100% par value, of which $1.7 million was settled at 100% par value in November 2008 and the remaining $1.4
million is expected to be settled by June 2010. The Company classified the $1.7 million securities as a current asset and the
remaining $1.4 million securities as a long-term asset based on actual and expected settlement dates. Due to the fact the Company
believes that it will receive full value of its remaining $1.4 million securities; we have not recorded any impairment on these
investments as of September 30, 2008.
The Company is subject to various legal proceedings and claims that are discussed below. The Company is also subject to certain
other legal proceedings and claims that have arisen in the ordinary course of business and which have not been fully
adjudicated. The Company does not believe it has a potential liability related to current legal proceedings and claims that could
individually or in the aggregate have a material adverse effect on its financial condition, liquidity or results of operations. However,
the results of legal proceedings cannot be predicted with certainty. Should the Company fail to prevail in any legal matters or should
several legal matters be resolved against the Company in the same reporting period, the operating results of a particular reporting
period could be materially adversely affected. The Company settled certain matters during 2008 that did not individually or in the
aggregate have a material impact on the Company’s results of operations.
Shareholder Derivative Litigation Relating to Historical Stock Option Practices
On February 1, 2007, Plaintiff Lewis Edelstein filed a purported stockholder derivative action (the “Federal Court Action”) on
behalf of the Company against certain of its present and former directors and officers (the “Individual Defendants”), as well as the
Company as nominal defendant, in the U.S. District Court for the District of New Jersey, Edelstein v. Brodie, et. al., Case No. 3:07-
cv-00596-FLW-JJH (D.N.J.). On May 22, 2007, Plaintiffs Kathryn Gabaldon and Michael Sackrison each filed a purported
stockholder derivative action against the Individual Defendants, and the Company as nominal defendant, in the Superior Court of
New Jersey, Somerset County, Gabaldon v. Brodie, et. al., Case No. 3:07-cv-03185-FLW-JJH (D.N.J.) and Sackrison v. Brodie, et.
al., Case No. 3:07-cv-00596-FLW-JJH (D.N.J.) (collectively, the “State Court Actions”).
A motion to approve an agreement among the parties to settle the matter reflected in a stipulation of compromise and settlement was
filed with the U.S. District Court for the District of New Jersey on December 3, 2007. The Court granted the motion for
preliminary approval of the settlement on January 3, 2008, and, at a hearing held on March 28, 2008, the Court issued an order
giving final approval to the settlement. The settlement has become final and effective upon the expiration of the appeal period on
April 30, 2008. Thus, the settlement is now binding on all parties and represents a final settlement of both the Federal Court Action
and the State Court Actions. For additional information regarding this matter, please see EMCORE’s Quarterly Report on Form 10-
Q for the quarterly period ended March 31, 2008.
Intellectual Property Lawsuits
We protect our proprietary technology by applying for patents where appropriate and in other cases by preserving the technology,
related know-how and information as trade secrets. The success and competitive position of our product lines are significantly
impacted by our ability to obtain intellectual property protection for our R&D efforts.
We have, from time to time, exchanged correspondence with third parties regarding the assertion of patent or other intellectual
property rights in connection with certain of our products and processes. Additionally, on September 11, 2006, we filed a lawsuit
against Optium Corporation (Optium) in the U.S. District Court for the Western District of Pennsylvania for patent infringement. In
the suit, the Company and JDS Uniphase Corporation (JDSU) allege that Optium is infringing on U.S. patents 6,282,003 and
6,490,071 with its Prisma II 1550nm transmitters. On March 14, 2007, following denial of a motion to add additional claims to its
existing lawsuit, the Company and JDSU filed a second patent suit in the same court against Optium alleging infringement of
86
JDSU's patent 6,519,374 ("the '374 patent"). On March 15, 2007, Optium filed a declaratory judgment action against the Company
and JDSU. Optium sought in this litigation a declaration that certain products of Optium do not infringe the '374 patent and that the
patent is invalid, but the District Court dismissed the action on January 3, 2008 without addressing the merits. The '374 patent is
assigned to JDSU and licensed to the Company.
On December 20, 2007, the Company was served with a complaint in another declaratory relief action which Optium had filed in
the Federal District Court for the Western District of Pennsylvania. This action seeks to have U.S. patents 6,282,003 and 6,490,071
declared invalid or unenforceable because of certain conduct alleged to have occurred in connection with the grant of these
patents. These allegations are substantially the same as those brought by Optium by motion in the Company’s own case against
Optium, which motion had been denied by the Court. The Court denied the Company’s motion to dismiss this action and has
indicated that it will be tried at the same time as the Optium Plaintiff Matters. The Company filed its answer in this matter on May
12, 2008. In its complaint, Optium does not seek monetary damages but asks that the patents in question be declared unenforceable
and that it be awarded attorneys’ fees. The Company believes that this claim is without merit. On August 11, 2008, both actions
pending in the Western District of Pennsylvania were consolidated before a single judge, and a trial date of October 19, 2009 was
set.
On December 5, 2008, EMCORE, along with Fabrinet, its principal contract manufacturer, was also served with a complaint by
Avago Technologies filed in the United States District Court for the Northern District of California, San Jose Division alleging
infringement of two patents by the Company’s VCSEL products. The Company believes this complaint is without merit and intends
to file an answer denying the claims asserted.
Commercial Litigation
On July 15, 2008 the Company was served with a complaint filed by Avago Technologies and what appear to be affiliates thereof in
the United States District Court for the Northern District of California, San Jose Division. In this complaint, Avago asserts claims
for breach of contract and breach of express warranty against Venture Corporation Limited (one of the Company’s customers) and
asserts a tort claim for negligent interference with prospective economic advantage against the Company. The Company has not yet
filed an answer in this matter, but believes the complaint is without merit and intends to file an answer denying the claims asserted.
Shareholder Class Action
On December 23, 2008, Plaintiffs Maurice Prissert and Claude Prissert filed a purported shareholder class action (the “Action”)
pursuant to Federal Rule of Civil Procedure 23 allegedly on behalf of a class of Company shareholders against the Company and
certain of its present and former directors and officers (the “Individual Defendants”) in the United States District Court for the
District of New Mexico captioned, Maurice Prissert and Claude Prissert v. EMCORE Corporation, Adam Gushard, Hong Q. Hou,
Reuben F. Richards, Jr., David Danzilio and Thomas Werthan, Case No. 1:08cv1190 (D.N.M.). The Complaint alleges that the
Company and the Individual Defendants violated certain provisions of the federal securities laws, including Sections 10(b) and
20(a) of the Securities Exchange Act of 1934, arising out of the Company’s disclosure regarding its customer Green and Gold
Energy (“GGE”) and the associated backlog of GGE orders with the Company’s photovoltaic business segment. The Complaint in
the Action seeks, among other things, an unspecified amount of compensatory damages and other costs and expenses associated
with the maintenance of the Action. The Complaint in the Action has not yet been served upon the Company. The Company
believes the claims asserted in the Action are without merit and intends to defend the Action vigorously.
Securities Matters
a. SEC Communications.
On or about August 15, 2008, the Company received a letter from the Denver office of the Enforcement Division of the Securities
and Exchange Commission wherein it sought EMCORE's voluntary production of documents relating to, among other things, the
Company's business relationship with Green and Gold Energy, Inc., its licensees, and the photovoltaic backlog the Company
reported to the public. Since that time, the Company has produced documents to the staff of the SEC and met with the staff on
December 12, 2008 to make a presentation addressing certain issues relating to this matter. Since that meeting the Company has
received no requests for further documentation from the SEC.
b. NASDAQ Communication.
On or about November 13, 2008, the Company received a letter from the NASDAQ Listings Qualifications group concerning the
Company's removal of $79 million in backlog attributable to GGE which the Company announced on August 8, 2008 and the
remaining backlog exclusive of GGE. The Company advised NASDAQ that it would cooperate with its inquiry, and has begun
producing the requested information.
87
NOTE 15. Income Taxes
EMCORE, incorporated in the state of New Jersey, incurred income tax expense of $0, $0, and $1.9 million, during the years ended
September 30, 2008, 2007 and 2006, respectively. A reconciliation of the provision for income taxes, with the amount computed by
applying the statutory U.S. Federal and state income tax rates to income before provision for income taxes for the years ended
September 30, 2008, 2007 and 2006 is as follows:
(in millions)
Income tax (benefit ) expense computed at U.S. Federal statutory rate
State taxes, net of U.S. Federal effect
Non-deductible executive compensation
Debt conversion
Other
Valuation allowance
Income tax expense (benefit)
Effective tax rate
Significant components of EMCORE’s deferred tax assets are as follows:
(in thousands)
Deferred tax assets (liabilities):
Federal net operating loss carryforwards
Foreign net operating loss carryforwards
Research credit carryforwards (state and U.S. Federal)
Inventory reserves
Accounts receivable reserves
Accrued warranty reserve
State net operating loss carryforwards
Investment write-down
Legal reserves
Deferred compensation
Tax reserves
Other
Fixed assets and intangibles
Total deferred tax assets
Valuation allowance
Net deferred tax assets
$
$
2008
2007
2006
(27.5) $
(4.1)
-
1.6
0.8
29.2
-
$
0%
(19.5) $
(3.4)
-
-
-
22.9
-
$
16.4
2.7
0.9
-
-
(18.1)
1.9
0%
3.95%
September 30,
2008
September 30,
2007
$
$
110,963
1,814
2,338
5,200
992
1,937
20,128
6,461
426
1,756
663
1,471
3,901
158,050
(158,050)
-
$
84,539
1,951
2,797
226
445
16,403
4,766
1,831
2,588
1,112
538
(6,611)
110,585
(110,585)
-
$
As of September 30, 2008, EMCORE had net operating loss carryforwards for U.S. Federal income tax purposes of approximately
$326.3 million, which expire beginning in the year 2021 through 2028. EMCORE has foreign net operating loss carryforwards of
$7.1 million. EMCORE also has state net operating loss carryforwards of approximately $259.9 million, which expire beginning in
the year 2009. EMCORE also has U.S. Federal and state research and development tax credits of approximately $1.5 million and
$0.9 million, respectively. The research credits will begin to expire in the year 2009 through 2025. Utilization of EMCORE’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 adopted the provisions of Financial Standards Accounting Board Interpretation No. 48, “Accounting for Income
Taxes” (“FIN 48”) an interpretation of SFAS No. 109 on October 1, 2007. The Interpretation prescribes recognition threshold and
measurement parameters for the financial statement recognition and measurement of tax positions taken or expected to be taken in
the Company’s tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon
88
examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement. At the adoption date of October 1, 2007, the Company recorded an increase in
accumulated deficit and an increase in the liability for unrecognized state tax benefits of approximately $326,000 (net of the federal
benefit for state tax liabilities). All of this amount, if recognized, would reduce future income tax provisions and favorably impact
effective tax rates. During the year ended September 30, 2008, there were no material increases or decreases in unrecognized tax
benefits.
A reconciliation of the beginning and ending amount of unrecognized gross tax benefits is as follows:
(in thousands)
Balance at October 1, 2007:
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Expiration of statute of limitations
Balance at September 30, 2008
$
$
338
-
-
-
-
338
As of September 30, 2008, management does not anticipate any material increases or decreases in the amounts of unrecognized tax
benefits over the next twelve months.
The Company’s historical accounting policy with respect to interest and penalties related to tax uncertainties has been to classify
these amounts as income taxes, and the Company continued this classification upon the adoption of FIN 48. At September 30,
2008, the Company had approximately $139,000 of interest and penalties accrued as tax liabilities.
The Company files income tax returns in the U.S. federal, state and local jurisdictions. No federal, state and local income tax
returns are currently under examination. Certain income tax returns for fiscal years 2004 through 2007 remain open to examination
by U.S. federal, state and local tax authorities.
The following tax years remain open to income tax examination for each of the more significant jurisdictions where the company is
subject to income taxes: after fiscal year 2004 for U.S. federal; after fiscal year 2003 for the state of California and after fiscal year
2004 for the state of New Mexico.
89
NOTE 16. Segment Data and Related Information
EMCORE has two reporting segments: Fiber Optics and Photovoltaics. EMCORE's Fiber Optics segment offers optical
components, subsystems and systems that enable the transmission of video, voice and data over high-capacity fiber optic cables for
high-speed data and telecommunications, cable television (“CATV”) and fiber-to-the-premises (“FTTP”) networks. EMCORE's
Photovoltaics segment provides solar products for satellite and terrestrial applications. For satellite applications, EMCORE offers
high-efficiency compound semiconductor-based gallium arsenide (“GaAs”) solar cells, covered interconnect cells (“CICs”) and
fully integrated solar panels. For terrestrial applications, EMCORE offers concentrating photovoltaic (“CPV”) systems for utility
scale solar applications as well as offering its high-efficiency GaAs solar cells and CPV components for use in solar power
concentrator systems. EMCORE evaluates its reportable segments in accordance with SFAS 131, Disclosures About Segments of an
Enterprise and Related Information. EMCORE’s Chief Executive Officer is EMCORE’s Chief Operating Decision Maker pursuant
to SFAS 131, and he allocates resources to segments based on their business prospects, competitive factors, net revenue, operating
results and other non-GAAP financial ratios.
The following table sets forth the revenue and percentage of total revenue attributable to each of EMCORE's reporting segments for
the fiscal years ended September 30, 2008, 2007 and 2006.
Segment Revenue
(in thousands)
Fiber Optics
Photovoltaics
Total revenue
2008
2007
2006
Revenue
% of Revenue
Revenue
% of Revenue
Revenue
$
$
171,276
68,027
239,303
72% $
28
100% $
110,377
59,229
169,606
65% $
35
100% $
104,852
38,681
143,533
% of Revenue
73%
27
100%
The following table sets forth EMCORE's consolidated revenue by geographic region for the fiscal years ended September 30, 2008,
2007 and 2006. Revenue was assigned to geographic regions based on our customers’ or contract manufacturers’ billing address.
Geographic Revenue
(in thousands)
United States
Asia
Europe
Other
Total revenue
2008
2007
2006
Revenue
% of Revenue
Revenue
% of Revenue
Revenue
$
$
134,796
73,311
20,420
10,776
239,303
56% $
31
8
5
100% $
124,012
34,574
10,821
199
169,606
73% $
20
7
-
100% $
109,614
28,537
4,152
1,230
143,533
% of Revenue
76%
20
3
1
100%
The following table sets forth significant customers by reporting segment.
Significant Customers
As a percentage of total consolidated revenue
Fiber Optics-related customers:
Customer A
Customer B
Customer C
Customer D
Photovoltaics – related customer:
Customer E
90
2008
2007
2006
14%
12%
-
-
-
-
-
13%
-
11%
-
-
-
12%
-
The following table sets forth operating losses attributable to each EMCORE reporting segment for the fiscal years ended
September 30, 2008, 2007 and 2006:
Statement of Operations Data
(in thousands)
Operating loss by segment:
Fiber Optics
Photovoltaics
Corporate
Operating loss
2008
2007
2006
$
$
(49,903) $
(25,238)
(140)
(75,281) $
(25,877) $
(11,202)
(20,377)
(57,456) $
(18,950)
(8,365)
(6,835)
(34,150)
In fiscal 2008, the Company recognized several one-time gains and a significant reduction in interest expense which were not
allocated to the reporting segments due to these being corporate charges in prior periods.
The following table sets forth the depreciation and amortization attributable to each of EMCORE's reporting segments for the fiscal
years ended September 30, 2008, 2007 and 2006.
Segment Depreciation and Amortization
(in thousands)
Fiber Optics
Photovoltaics
Corporate
Total depreciation and amortization
2008
2007
2006
$
$
9,067 $
4,472
77
13,616 $
6,991 $
2,860
271
10,122 $
8,378
3,470
484
12,332
Long-lived assets (consisting of property, plant and equipment, goodwill and intangible assets) for each reporting segment as of
September 30, 2008 and 2007 are as follows:
Long-lived Assets
(in thousands)
Fiber Optics
Photovoltaics
Corporate
Total long-lived assets
NOTE 17. Employee Benefit Plans
2008
2007
$
$
107,684
55,232
622
163,538
$
$
56,816
46,706
-
103,522
EMCORE has a 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 fiscal years ended September
30, 2008, 2007, and 2006, EMCORE contributed approximately $1.0 million, $1.0 million, and $0.9 million, respectively, in
common stock to the Savings Plan.
91
NOTE 18. Related Party Transactions
Investments
On November 29, 2006, EMCORE invested $13.5 million, and incurred $0.4 million in transaction costs, in WorldWater & Solar
Technologies Corporation (“WWAT”), a leader in solar electric engineering, water management solutions and solar energy
installations and products. At September 30, 2007, EMCORE held an approximately 21% equity ownership in WWAT. In
connection with the investment, EMCORE received two seats on WWAT's Board of Directors. EITF 02-14, Whether an Investor
Should Apply the Equity Method of Accounting to Investments Other Than Common Stock, provides guidance on whether an
investor should apply the equity method of accounting to investments other than common stock. In accordance with EITF 02-14,
although the investment in WWAT provides us the ability to exercise significant influence over the operating and financial policies
of the investee, since the investment does not qualify as in-substance common stock, the equity method of accounting is not
appropriate. In-substance common stock is an investment in an entity that has risk and reward characteristics that are substantially
similar to the entity’s common stock. The risk and reward characteristics of our investment are not substantially similar to WWAT’s
common stock because our investment’s liquidation preference is considered substantive. Therefore, we are accounting for the
investment in WWAT under the cost method of accounting and evaluating it for other-than-temporary impairment each reporting
period.
In June 2008, the Company agreed to sell two million shares of Series D Preferred Stock of WWAT, together with 200,000 warrants
to a major shareholder of both EMCORE and WWAT at a price equal to $6.54 per share. The sale took place through two closings,
one for one million shares and 100,000 warrants, which closed in June 2008, and one for an equal number of shares and warrants
which closed in July 2008. Total proceeds from the sale were approximately $13.1 million. In the three months ended June 30,
2008, the Company recognized a gain of $3.7 million on the first sale of stock that occurred in June 2008. In the fourth quarter of
2008, the Company recognized an additional gain of $3.7 million related to the second closing in July 2008. As of September 30,
2008, the Company had approximately $8.2 million invested in WWAT which approximates a 16% ownership.
Receivables
In the September quarter of 2008, the Company took impairment against our $1.0 million investment in Velox Corporation. The
Company also fully reserved against a receivable balance of $0.2 million owed from Velox Corporation. During fiscal 2008, the
Company received payment of $0.1 million on the Velox receivable. These losses are included in total net loss for fiscal 2008. The
Company took this charge against the investment in Velox Corporation and receivable from Velox, due to the company’s current
financial and operational condition.
92
NOTE 19. Selected Quarterly Financial Information (unaudited)
The following tables present EMCORE’s unaudited results of operations 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.
Statements of Operations
Fiscal 2008
(in thousands, except per share data)
Product revenue
Service revenue
Total revenue
Cost of product revenue
Cost of service revenue
Total cost of revenue
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Impairment of goodwill and intellectual property
Total operating expenses
Operating loss
Other (income) expense:
Interest income
Interest expense
Impairment of investment
Loss from conversion of convertible subordinated notes
Stock-based compensation expense from tolled options
Loss on disposal of property, plant and equipment
Gain on sale of WWAT investment
Foreign exchange (gain) loss
Total other (income) expenses
Net loss
Per share data:
Basic and diluted per share data:
Net loss
Weighted-average number of shares outstanding:
Basic and diluted
Quarter 1
December 31,
2007
Quarter 2
March 31,
2008
Quarter 3
June 30,
2008
Quarter 4
September 30,
2008
$
$
$
$
44,501
2,386
46,887
36,611
173
36,784
10,103
11,863
7,420
-
19,283
(9,180)
(427)
1,205
-
-
4,374
86
-
(12)
5,226
$
$
54,236
2,043
56,279
49,556
75
49,631
6,648
10,263
9,330
-
19,593
(12,945)
(227)
375
-
4,658
(58)
-
-
(186)
4,562
$
71,941
3,561
75,502
61,763
93
61,856
13,646
13,906
11,382
-
25,288
(11,642)
(124)
-
-
-
-
-
(3,692)
(104)
(3,920)
58,299
2,336
60,635
61,033
104
61,137
(502)
7,428
11,351
)
(22,233
41,012
(41,514)
(84)
-
1,461
-
-
978
(3,692)
1,048
(289)
(14,406) $
(17,507) $
(7,722) $
(41,225)
(0.28) $
(0.27) $
(0.10) $
(0.53)
52,232
$
64,560
$
76,582
$
77,734
93
Statements of Operations
Fiscal 2007
(in thousands, except per share data)
Product revenue
Service revenue
Total revenue
Cost of product revenue
Cost of service revenue
Total cost of revenue
Gross profit
Operating expenses:
Selling, general and administrative
Research and development
Total operating expenses
Operating loss
Other (income) expense:
Interest income
Interest expense
Loss from early redemption of convertible subordinated notes
Gain from insurance proceeds
Loss on disposal of property, plant and equipment
Foreign exchange gain
Total other (income) expenses
Net loss from continuing operations
Per share data:
Basic and diluted per share data:
Net loss from continuing Operations
Weighted-average number of shares outstanding:
Basic and diluted
Quarter 1
December 31,
2006
Quarter 2
March 31,
2007
Quarter 3
June 30,
2007
Quarter 4
September 30,
2007
$
$
$
$
35,626
2,970
38,596
30,941
2,159
33,100
5,496
$
33,716
5,882
39,598
28,170
4,459
32,629
6,969
$
39,565
4,863
44,428
32,181
2,542
34,723
9,705
39,427
7,557
46,984
33,188
5,598
38,786
8,198
12,539
6,611
19,150
(13,654)
(1,651)
1,262
-
-
-
-
(389)
13,143
7,528
20,671
(13,702)
(1,169)
1,260
-
(357)
-
-
(266)
15,516
7,668
23,184
(13,479)
16,646
8,173
24,819
(16,621)
(723)
1,254
561
-
-
(12)
1,080
(577)
1,209
-
-
210
(1)
841
(13,265) $
(13,436) $
(14,559) $
(17,462)
(0.26) $
(0.26) $
(0.29) $
(0.34)
50,875
50,947
51,043
51,081
94
NOTE 20. Subsequent Events
1.
Tender Offer
In November 2008, EMCORE announced that it had commenced a tender offer for 164,088 stock options outstanding under its 2000
Incentive Stock Option Plan which are held by 91 of its current non-officer employees. As a result of the Company's previously
announced voluntary inquiry into its historical stock option granting practices, which was concluded in 2006, the Company
determined that an incorrect grant date was used in the granting certain options. As a result, the options were granted at an exercise
price below the fair market value of the Company's common stock as of the correct date of grant. Consequently, employees holding
these options face a potential tax liability under Section 409A of the Internal Revenue Code and similar sections of certain state tax
codes, unless remedial action is taken to adjust the exercise price of these options prior to December 31, 2008.
Under the terms of the tender, employees holding such options were given the opportunity to amend these options to increase the
exercise price to a higher price that is equal to the fair market value on the date which has been determined to be the correct date of
issuance for these options. In addition, employees electing to tender their options will also receive a cash payment for each tendered
option equal to the difference between the original exercise price and the new exercise price. If all eligible options are tendered, the
anticipated cash payment will total $44,000. The tender offer remained open until 11:59 p.m. Mountain Time on December 17,
2008. As a result of the tender offer 163,838 options were tendered and the cash payment totaled an aggregate amount of up to
approximately $44,050. Further details regarding the tender can be obtained from the filing on Schedule TO which the Company
filed on December 18, 2008 with the Securities and Exchange Commission.
2.
Auction Rate Securities
In October 2008, the Company received agreements from its investment brokers announcing settlement of the auction rate securities
at 100% par value, of which $1.7 million was settled in November 2008 and $1.4 million is expected to be settled by June 2010.
95
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
EMCORE Corporation
Albuquerque, NM
We have audited the accompanying consolidated balance sheets of EMCORE Corporation and subsidiaries (the "Company") as of
September 30, 2008 and 2007, and the related consolidated statements of operations, shareholders' equity and comprehensive
income (loss), and cash flows for each of the three years in the period ended September 30, 2008. 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 and subsidiaries as of September 30, 2008 and 2007, and the results of their operations and their cash flows for each of
the three years in the period ended September 30, 2008, in conformity with accounting principles generally accepted in the United
States of America.
The accompanying consolidated financial statements for the year ended September 30, 2008 have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company's
recurring losses from operations raise substantial doubt about its ability to continue as a going concern. Management's plans
concerning these matters are also discussed in Note 1 to the consolidated financial statements. The consolidated financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company's internal control over financial reporting as of September 30, 2008, 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 30, 2008 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Dallas, TX
December 30, 2008
96
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to provide reasonable assurance that information required to
be disclosed in reports filed under the Securities Exchange Act of 1934 (the “Act”) is recorded, processed, summarized and reported
within the specified time periods and accumulated and communicated to management, including its Chief Executive Officer
(Principal Executive Officer) and Chief Financial Officer (Principal Accounting Officer), as appropriate, to allow timely decisions
regarding required disclosure.
Management, under the supervision and with the participation of its Chief Executive Officer (Principal Executive Officer) and Chief
Financial Officer (Principal Accounting Officer), evaluated the effectiveness of the Company’s disclosure controls and procedures
(as defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Act), as of the end of the period covered by this report. Based on
that evaluation, management concluded that, as of that date, the Company’s disclosure controls and procedures were effective at the
reasonable assurance level.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining effective internal control over financial reporting of the
Company. Management’s intent is to design this system 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 in the United States of America.
The 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 GAAP, 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.
Management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of
September 30, 2008, utilizing the criteria described in the “Internal Control — Integrated Framework” issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”). The objective of this assessment was to determine whether the
Company’s internal control over financial reporting was effective as of September 30, 2008. In its assessment of the effectiveness of
internal control over financial reporting as of September 30, 2008, management determined that the Company’s internal control over
financial reporting was effective as of September 30, 2008.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the fourth quarter of 2008 that have
materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
97
Limitations on the Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or
our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within EMCORE have been detected. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also
be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the
controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time,
controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated
policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud
may occur and not be detected.
98
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
EMCORE Corporation
Albuquerque, NM
We have audited the internal control over financial reporting of EMCORE Corporation and subsidiaries (the "Company") as of
September 30, 2008, 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,
included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on 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, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, 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, the Company maintained, in all material respects, effective internal control over financial reporting as of September
30, 2008, 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, 2008 of the Company and our report dated December
30, 2008 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the
Company’s ability to continue as a going concern.
/s/ DELOITTE & TOUCHE LLP
Dallas, TX
December 30, 2008
99
ITEM 9B.
Other Information
None.
PART III
ITEM 10.
Directors, Executive Officers and Corporate Governance
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 2009 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, 2008. 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).
ITEM 11.
Executive Compensation
Information required by this Item is incorporated by reference to the section entitled “Executive Compensation” in the Proxy
Statement.
ITEM 12.
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.
ITEM 13.
Certain Relationships, Related Transactions and Director Independence
Information regarding 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.
ITEM 14.
Principal Accounting Fees and Services
Information required by this Item is incorporated by reference to the section entitled “Independent Auditors” in the Proxy Statement.
PART IV
ITEM 15.
Exhibits and Financial Statement Schedules.
(a)(1)
Financial Statements
Included in Part II, Item 8 of this Annual Report on Form 10-K:
Consolidated Statements of Operations for the fiscal years ended September 30, 2008, 2007, and 2006
Consolidated Balance Sheets as of September 30, 2008 and 2007
Consolidated Statements of Shareholders’ Equity for the fiscal years ended September 30, 2008, 2007, and 2006
Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2008, 2007, and 2006
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
(a)(2)
Financial Statement Schedules
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.
100
(a)(3)
Exhibits
2.1
2.2
2.3
2.4
Merger Agreement, dated January 12, 2006, by and among K2 Optronics, Inc., EMCORE Corporation, and
EMCORE Optoelectronics Acquisition Corp. (incorporated by reference to Exhibit 2.1 to Registrant’s Current Report
on Form 8-K filed on January 19, 2006).
Asset Purchase Agreement between IQE RF, LLC, IQE plc, and EMCORE Corporation, dated July 19, 2006.
(incorporated by reference to Exhibit 2.1 to Registrant’s Current Report on Form 8-K filed on July 24, 2006).
Membership Interest Purchase Agreement, dated as of August 31, 2006, by and between General Electric Company,
acting through the GE Lighting operations of its Consumer and Industrial division, and EMCORE Corporation
(incorporated by reference to Exhibit 2.1 to Registrant’s Current Report on Form 8-K filed on September 7, 2006).
Stock Purchase Agreement, dated as of April 13, 2007, by and among Registrant, Opticomm Corporation and the
persons named on Exhibit 1 thereto (incorporated by reference to Exhibit 2.1 to Registrant’s Current Report on Form
8-K filed April 19, 2007).
2.5*
Loan and Security Agreement dated as of September 29, 2008, between Bank of America, N.A. and Registrant.
2.6
2.7
2.8
3.1
3.2
4.1
4.2
4.3
10.1†
10.2†
Asset Purchase Agreement, dated December 17, 2007, between EMCORE Corporation and Intel Corporation
(incorporated by reference to Exhibit 2.1 to the Registrant’s Form 10-Q filed on February 11, 2008)
Asset Purchase Agreement, dated April 9, 2008, between EMCORE Corporation and Intel Corporation (incorporated
by reference to Exhibit 2.1 to the Registrant’s Form 10-Q filed on May 12, 2008)
Securities Purchase Agreement, dated February 15, 2008, between EMCORE Corporation and each investor
identified on the signature pages thereto (Filed as part of the Company’s Current Report on Form 8-K, Commission
file no. 000-22175, dated February 20, 2008, and incorporated herein by reference)
Restated Certificate of Incorporation, dated April 4, 2008 (incorporated by reference to Exhibit 3.1 to Registrant's
Current Report on Form 8-K filed on April 4, 2008).
Amended By-Laws, as amended through August 7, 2008 (incorporated by reference to Exhibit 3.1 to Registrant’s
Current Report on Form 8-K filed on August 13, 2008).
Registration Rights Agreement, dated February 15, 2008, between EMCORE Corporation and the investors
identified on the signature pages thereto (Filed as part of the Company’s Current Report on Form 8-K, Commission
file no. 000-22175, dated February 20, 2008, and incorporated herein by reference)
Form of Warrant, dated February 15, 2008 (Filed as part of the Company’s Current Report on Form 8-K,
Commission file no. 000-22175, dated February 20, 2008, and incorporated herein by reference)
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).
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).
1996 Amendment to Option Plan (incorporated by reference to Exhibit 10.2 to Amendment No. 1 to the Registration
Statement on Form S-1 filed on February 6, 1997).
10.3† MicroOptical Devices 1996 Stock Option Plan (incorporated by reference to Exhibit 99.1 to the Registration
Statement on Form S-8 filed on February 6, 1998).
10.4†
10.5†
10.6†
2000 Stock Option Plan, as amended and restated on March 31, 2008 (incorporated by reference to the attached
Exhibit to the Company’s Definitive Proxy Statement filed on March 4, 2008).
2000 Employee Stock Purchase Plan, as amended and restated on February 13, 2006 (incorporated by reference to
Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed on February 17, 2006).
Directors’ Stock Award Plan (incorporated herein by reference to Exhibit 99.1 to Registrant’s Original Registration
Statement of Form S-8 filed on November 5, 1997), as amended by the Registration Statement on Form S-8 filed on
August 10, 2004.
10.7 Memorandum of Understanding, dated as of September 26, 2007 between Lewis Edelstein and Registrant regarding
shareholder derivative litigation (incorporated by reference to Exhibit 10.10 to Registrant’s Annual Report on Form
10-K for the fiscal year ended September 20, 2006).
101
10.8†
10.9†
Fiscal 2008 Executive Bonus Plan (incorporated by reference to Exhibit 10.1 the Registrant’s Form 10-Q filed on
May 12, 2008).
Executive Severance Policy (incorporated by reference to Exhibit 10.2 to Registrant’s Current Report on Form 8-K
filed on April 19, 2007).
10.10† Outside Directors Cash Compensation Plan, as amended and restated on February 13, 2006 (incorporated by
reference to Exhibit 10.3 to Registrant’s Current Report on Form 8-K filed on February 17, 2006).
10.11
10.12
10.13
10.14
10.15
10.16
Exchange Agreement, dated as of November 10, 2005, by and between Alexandra Global Master Fund Ltd. and
Registrant (incorporated by reference to Exhibit 10.15 to Registrant’s Annual Report on Form 10-K for the fiscal
year ended September 30, 2005).
Consent to Amendment and Waiver, dated as of April 9, 2007, by and among EMCORE Corporation and certain
holders of the 2004 Notes party thereto (incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on
Form 8-K filed on April 10, 2007).
Consent to Amendment and Waiver, dated as of April 9, 2007, by and between EMCORE Corporation and the holder
of the 2005 Notes (incorporated by reference to Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed on
April 10, 2007).
Investment Agreement between WorldWater and Power Corp. and Registrant, dated November 29, 2006
(incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on December 5, 2006).
Registration Rights Agreement between WorldWater and Power Corp. and Registrant, dated November 29, 2006
(incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on December 5, 2006).
Letter Agreement between WorldWater and Power Corp. and Registrant, dated November 29, 2006 (incorporated by
reference to Exhibit 10.3 to Registrant’s Current Report on Form 8-K filed on December 5, 2006). Confidential
Treatment has been requested by the Company with respect to portions of this document. Such portions are indicated
by “*****”.
10.17† Dr. Hong Hou Offer Letter dated December 14, 2006 (incorporated by reference to Exhibit 10.1 to Registrant’s
Current Report filed on December 20, 2006).
10.18
Stipulation of Compromise and Settlement, dated as of November 28, 2007 executed by the Company and the other
defendants and the plaintiffs in the Federal Court Action and the State Court Actions (incorporated by reference to
Exhibit 10.19 to the Registrant’s Form 10-K filed of December 31, 2007).
10.19†
2008 Director’s Stock Award Plan (incorporated by reference to Exhibit 10.1 to Registrant’s Form 10-Q filed on
February 11, 2008).
10.20†* Mr. John M. Markovich Offer Letter dated August 7, 2008.
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).
21.1*
Subsidiaries of the Registrant.
23.1*
Consent of Deloitte & Touche LLP.
31.1*
31.2*
32.1*
32.2*
Certificate of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated December
30, 2008.
Certificate of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated
December 30, 2008.
Certificate of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated December
30, 2008.
Certificate of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated December
30, 2008.
__________
* Filed herewith
† Management contract or compensatory plan
102
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.
SIGNATURES
Date: December 30, 2008
EMCORE CORPORATION
By:
/s/ Hong Q. Hou, Ph.D.
Hong Q. Hou, Ph.D.
President and Chief Executive Officer
(Principal Executive Officer)
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints and hereby authorizes Hong Q. Hou, Ph.D. and, 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 30, 2008.
Signature
Title
/s/ Thomas Russell
Chairman Emeritus and Lead Director
Thomas J. Russell, Ph.D
/s/ Reuben Richards
Reuben F. Richards, Jr.
/s/ Hong Hou
Hong Q. Hou, Ph.D
Executive Chairman & Chairman of the Board
Chief Executive Officer and Director (Principal Executive Officer)
/s/ John M. Markovich
Chief Financial Officer (Principal Financial and Accounting Officer)
John M. Markovich
/s/ Charles Scott
Charles T. Scott
/s/ John Gillen
John Gillen
Director
Director
/s/ Robert Bogomolny
Director
Robert Bogomolny
103
SUBSIDIARIES OF REGISTRANT*
Exhibit 21.1
Corona Optical Systems, Inc., a Delaware corporation
K2 Optronics, Inc. a Delaware corporation
EMCORE IRB Company, Inc., a New Mexico corporation
EMCORE Hong Kong, Limited, a Hong Kong corporation
Langfang EMCORE Optoelectronics Company, Limited, a Chinese corporation
Opticomm Corporation, a Delaware corporation
EMCORE Solar Power, Inc., a Delaware corporation
EMCORE Netherlands B.V.
EMCORE Spain S.L.
EMCORE IRB Company, LLC, a New Mexico limited liability company
*As of December 30, 2008
104
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-27507, 333-37306, 333-36445, 333-39547, 333-
60816, 333-45827, 333-118074, 333-118076, 333-132317, and 333-132318 of EMCORE Corporation on Form S-8, Registration
Statement No. 333-111585 of EMCORE Corporation on Form S-4, Registration Statement Nos. 333-94911, 333-87753, 333-65526,
333-71791, 333-42514, and 333-135639 of EMCORE Corporation on Form S-3, and Amendment No. 1 to Registration No. 333-
149860 on Form S-1 of our reports dated December 30, 2008, relating to the consolidated financial statements of EMCORE
Corporation and subsidiaries (the “Company”) (which report expresses an unqualified opinion and includes an explanatory paragraph
relating to the Company’s ability to continue as a going concern), and the effectiveness of the Company’s internal control over
financial reporting, appearing in this Annual Report on Form 10-K of EMCORE Corporation for the year ended September 30, 2008.
/s/ DELOITTE & TOUCHE LLP
Dallas, TX
December 30, 2008
105
EMCORE CORPORATION
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Hong Q. Hou, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of EMCORE Corporation ("Report");
Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this Report;
Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this Report;
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report
is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this Report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this Report based on such evaluation; and
Disclosed in this Report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: December 30, 2008
By:
/s/ Hong Q. Hou
Hong Q. Hou, Ph.D.
Chief Executive Officer
(Principal Executive Officer)
106
EMCORE CORPORATION
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, John M. Markovich, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of EMCORE Corporation ("Report");
Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this Report;
Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this Report;
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report
is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, 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;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this Report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this Report based on such evaluation; and
Disclosed in this Report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: December 30, 2008
By:
/s/ John M. Markovich
John M. Markovich
Chief Financial Officer
(Principal Financial and Accounting Officer)
107
STATEMENT REQUIRED BY 18 U.S.C. Sec. 1350, AS ADOPTED
PURSUANT TO Sec. 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report on Form 10-K of EMCORE Corporation (the "Company") for the fiscal year ended September
30, 2008, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Hong Q. Hou, Chief Executive
Officer (Principal Executive Officer) of the Company, certify, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the
Sarbanes-Oxley Act of 2002, that:
1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: December 30, 2008
By:
/s/ Hong Q. Hou
Hong Q. Hou, Ph.D.
Chief Executive Officer
(Principal Executive Officer)
A signed original of this written statement required by Section 906 has been provided to EMCORE Corporation and will be retained
by EMCORE Corporation and furnished to the Securities and Exchange Commission or its staff upon request. This certification has
not been, and shall not be deemed to be, filed with the Securities and Exchange Commission.
STATEMENT REQUIRED BY 18 U.S.C. §1350, AS ADOPTED
PURSUANT TO §906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report on Form 10-K of EMCORE Corporation (the "Company") for the fiscal year ended September
30, 2008, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John M. Markovich, Chief
Financial Officer (Principal Financial and Accounting Officer) of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: December 30, 2008
By:
/s/ John M. Markovich
John M. Markovich
Chief Financial Officer
(Principal Financial and Accounting Officer)
A signed original of this written statement required by Section 906 has been provided to EMCORE Corporation and will be retained
by EMCORE Corporation and furnished to the Securities and Exchange Commission or its staff upon request. This certification has
not been, and shall not be deemed to be, filed with the Securities and Exchange Commission.
108
CORPORATE PROFILE
EMCORE Corporation is a leading provider of compound semiconductor-based
components and subsystems for the broadband, fiber optic, satellite and terrestrial
solar power markets. EMCORE's Fiber Optics segment offers optical components,
subsystems and systems that enable the transmission of video, voice and data over
high-capacity fiber optic cables for high-speed data and telecommunications, cable
television (CATV) and fiber-to-the-premises (FTTP) networks. EMCORE's Solar
Photovoltaics segment provides solar products for satellite and terrestrial
applications. For satellite applications, EMCORE offers high- efficiency compound
semiconductor-based gallium arsenide (GaAs) solar cells, covered interconnect cells
and fully integrated solar panels. For terrestrial applications, EMCORE offers
concentrating photovoltaic (CPV) systems for utility scale solar applications as well
as offering its high-efficiency GaAs solar cells and CPV components for use in solar
power concentrator systems.
For specific information about our company, our products or the markets
we serve, please visit our website at www.emcore.com
Board of Directors
Thomas J. Russell, Ph.D.
Chairman Emeritus
Reuben F. Richards, Jr.
Executive Chairman, Chairman of the Board
Hong Q. Hou, Ph.D.
Chief Executive Officer and Director
Robert Bogomolny
Director
Charles T. Scott
Director
John Gillen
Director
Auditors
Deloitte & Touche LLP
JPMorgan Chase Tower
2200 Ross Avenue
Suite 1600
Dallas, TX 75201
Transfer Agent
American Stock Transfer & Trust Company
59 Maiden Lane
New York, NY 10038
Investor Relations
TTC Group
Victor Allgeier
(646) 290-6400
info@ttcominc.com
Stock Listing
The Company’s common stock is traded
on the NASDAQ National Market
under the symbol “EMKR”
corporate headquarters
solar power
fiber optics
EMCORE Corporation
10420 Research Rd, SE
Albuquerque, NM 87123 USA
505 332 5000
505 332 5038
Space Solar Cells
10420 Research Rd, SE, Bldg 1
Albuquerque, NM 87123 USA
505 332 5000
505 332 5100
Digital Products
1600 Eubank Rd SE
Albuquerque, NM 87123 USA
505 559 2600
505 323 3402
CPV Systems
10420 Research Rd, SE, Bldg 2
Albuquerque, NM 87123 USA
505 332 5000
505 332 5038
Broadband
2015 Chestnut St
Alhambra, CA 91803 USA
626 293 3400
626 293 3428
CPV Design Center
14 World’s Fair Dr, Unit A
Somerset, NJ 08873
732 271 6410
732 271 6424
Broadband East
One Ivybrook Blvd, Suite 150
Warminster, PA 18974 USA
215 672 8093
215 672 9097
Broadband Video
6827 Nancy Ridge Dr
San Diego, CA 92121
858 450 0143
858 450 0155
Enterprise Telecom &
Connects Cables
8674 Thornton Ave
Newark, CA 94560 USA
510 896 2100
510 896 2133
Broadband Sales Europe
Europe, Middle East & Africa
44 1344 827 306
Broadband China
Room No. A0902, 9th Floor,
Qingya Mansion
8 Wenhuiyuan North Road
Haidian District, Beijing, China
Post code:100088
86 10 68577566
Langfang EMCORE
Optoelectronics Co. Ltd.
East of Wanfu Road
Economic Development Area
Langfang City, Hebei Province,
PR China
86 316 529 5100
www.emcore.com