UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2001
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number: 0-22175
EMCORE Corporation
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-2746503
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
145 Belmont Drive, Somerset, NJ 08873
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (732) 271-9090
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark 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 10K or any amendment to this
Form 10-K. [ ]
The aggregate market value of common stock held by non-affiliates of the
registrant as of December 6, 2001 was approximately $329,550,431 (based on the
closing sale price of $16.51 per share).
The number of shares outstanding of the registrant's no par value common stock
as of December 6, 2001 was 36,475,803.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 2002 Annual
Meeting of Shareholders (to be filed with the Securities and Exchange Commission
on or before January 28, 2002) are incorporated by reference in Part III of this
Form 10-K.
EMCORE Corporation
FORM 10K
For the fiscal year ended September 30, 2001
INDEX
Part I page
Item 1. Business.........................................................................3
Item 2. Properties......................................................................27
Item 3. Legal Proceedings...............................................................28
Item 4. Submission of Matters to a Vote of Security Holders.............................28
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...........28
Item 6. Selected Financial Data.........................................................29
Item 7. Management's Discussion and Analysis of Financial Condition and Results of 31
Operations......................................................................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......................40
Item 8. Financial Statements and Supplementary Data.....................................41
Consolidated Statements of Operations for the years ended 41
September 30, 2001, 2000 and 1999..............................................
Consolidated Balance Sheets as of September 30, 2001 and 2000..................42
Consolidated Statements of Shareholders' Equity for the years 43
ended September 30, 2001, 2000 and 1999.........................................
Consolidated Statements of Cash Flows for the years ended September 30, 44
2001, 2000 and 1999.............................................................
Notes to Consolidated Financial Statements......................................46
Independent Auditors' Report....................................................63
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial 65
Disclosures.....................................................................
Part III
Item 10. Directors and Executive Officers of the Registrant..............................65
Item 11. Executive Compensation..........................................................65
Item 12. Security Ownership of Certain Beneficial Owners and Management..................65
Item 13. Certain Relationships and Related Transactions..................................65
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8K.................65
SIGNATURES......................................................................68
2
Forward-Looking Statements
This Annual Report on Form 10-K includes forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. These forward-looking statements are based largely on our current
expectations and projections about future events and financial trends affecting
the financial condition of our business. These forward-looking statements are
subject to a number of risks, uncertainties and assumptions about us, including,
among other things:
o general economic and business conditions, both globally and in
our markets;
o our expectations and estimates concerning our future financial
performance, financing plans and the effect of competition;
o anticipated trends in the compound semiconductor capital
equipment, wafers and devices business;
o existing and future regulations affecting the compound
semiconductor capital equipment, wafers and devices business; and
o other risk factors set forth in the "Risk Factors" section of
this Form 10-K
In addition, the words "believe", "may", "will", "estimate",
"continue", "anticipate", "intend", "expect" and similar expressions, as they
relate to our business, our management or us, are intended to identify
forward-looking statements. Certain factors referenced under "Risk Factors" in
this Annual Report and other public documents incorporated by reference could
cause actual results to differ materially from those in the forward-looking
statements. We assume no obligation to update the matters discussed in this
Annual Report.
PART I
Item 1. Business
Company Overview
EMCORE Corporation, headquartered in Somerset, New Jersey, develops
and manufactures compound semiconductor products to advance global
communications and solid state lighting applications. Established in 1984,
EMCORE offers a diverse portfolio of compound semiconductor products, including:
optical interconnects and devices for data and telecommunications applications
(such as Gigabit Ethernet, Fibre Channel, Infiniband(SM), OC-192, OC-768 and
OC-48), electronic materials for wireless and data and telecommunications, solar
cells for satellite communications and metal organic chemical vapor deposition
(MOCVD) tools for the growth of optoelectronic materials, including high
brightness light emitting diodes (HB LEDs), lasers, RF and electronic materials,
solar cells and magnetoresistive (MR) sensors. EMCORE's product philosophy
embodies state of the art technology, material science expertise and a shared
vision of our customers' goals and objectives to be leaders and pioneers in the
rapidly growing world of compound semiconductors.
Some of our customers include Agilent Technologies Ltd., AMP, Inc.,
Anadigics Inc., Blaze Networking Products, Boeing-Spectrolab, Corning, Inc.,
General Motors Corp., Hewlett Packard Co., Honeywell Int'l Inc., Infineon
Technologies AG, Loral Space & Communications Ltd., Lucent Technologies, Inc.,
LumiLeds Lighting (a joint venture between Philips Lighting and Agilent
Technologies), Motorola, Inc., Nortel Networks Corp., Siemens AG's Osram GmbH
subsidiary, TriQuint Semiconductor, Inc. and more than a dozen of the largest
electronics manufacturers in Japan. For further information about EMCORE, visit
http://www.emcore.com.
3
Industry Overview
Recent advances in information technologies have created a growing
need for efficient, high-performance electronic systems that operate at very
high frequencies, have increased storage capacity and computational and display
capabilities and can be produced cost-effectively in commercial volumes. In the
past, electronic systems manufacturers have relied on advances in silicon
semiconductor technology to meet many of these demands. However, the newest
generation of high-performance electronic and optoelectronic applications
requires certain functions that are generally not achievable using silicon-based
components.
Compound semiconductors have emerged as an enabling technology to meet
the complex requirements of today's advanced information systems. Many compound
semiconductor materials have unique physical properties that allow electrons to
move at least four times faster through them than through silicon-based devices.
Advantages of compound semiconductor devices over silicon devices include:
o higher operating speeds;
o lower power consumption;
o reduced noise and distortion; and
o light emitting and detecting optoelectronic properties.
Compound semiconductor devices can be used to perform individual
functions as discrete devices, such as vertical cavity surface emitting lasers
(VCSELs), photodetectors, RF and electronic materials, solar cells, HB LEDs and
MR sensors. Compound semiconductor devices can also be combined into integrated
circuits, such as transmitters, receivers and alphanumeric displays. Although
compound semiconductors are generally more expensive to manufacture than
silicon-based devices, electronics manufacturers are increasingly integrating
compound semiconductor devices into their products in order to achieve higher
performance in applications targeted for a wide variety of markets. These
include satellite communications, data communications, telecommunications,
wireless communications, consumer and automotive electronics, computers and
peripherals, and lighting.
The following factors have resulted in an increased demand for
compound semiconductor products and systems that enable electronic systems
manufacturers to reach the market faster with large volumes of high-performance
products and applications:
o widespread deployment of fiber optic networks and the increasing
use of optical systems within these networks;
o replacement of electrical backplanes with laser-based optical
backplanes in data and telecommunication systems;
o launch of new wireless services and wireless high-speed data
systems;
o rapid build-out of satellite communications systems;
o increasing use of infrared emitters and optical detectors in
computer systems;
o emergence of advanced consumer electronics applications, such as
DVDs and flat panel displays;
o increasing use of high-performance electronic devices in
automobiles; and
o the anticipated conversion to HB LEDs from incandescent, halogen
and compact fluorescent lighting.
4
The following chart summarizes the principal markets, examples of
applications for compound semiconductor devices, products incorporating these
devices and certain benefits and characteristics of these devices.
Market Representative Applications Products Benefits/Characteristics
Data communications High-speed fiber optic networks VCSEL and Increased network capacity
and optical links (including photodetector Increased data transmission
VSR OC-768, OC-192, components and speeds
OC-48, Gigabit Ethernet, arrays Increased bandwidth
asynchronous transfer mode HB LEDs Reduced power consumption
or ATM, and FibreChannel Lasers
networks) RF and electronic
materials
Array transceivers
Serial transceivers
Wireless Cellular telephones HB LEDs Improved display visibility
communication Pagers RF and electronic Improved signal to noise
PCS handsets materials performance
Direct broadcast systems RF and electronic Lower power consumption
PDAs devices Increased network capacity
Reduced network congestion
Extended battery life
Telecommunications High capacity fiber optic trunk VCSEL components Increased data transmission
lines and arrays speeds
Very Short Reach links Lasers Increased bandwidth
RF materials
Photodiode
components and
arrays
Array transceivers
VSR transponders
Lighting Flat panel displays HB LEDs Lower power consumption
Solid state lighting Miniature lamps Longer life
Outdoor signage and display
Digital readout signals
Satellite Power modules for satellites Solar cells Radiation tolerance
communications Satellite to ground RF materials Conversion of more light
communication to power than silicon
Reduced launch costs
Increased bandwidth
Automotive electronics Engine sensors MR sensors Reduced weight
Dashboard displays HB LEDs Lower power consumption
Indicator lights Lower emissions
Antilock brake systems
Computers and Local area networks VCSEL components Increased data transmission speeds
Peripherals Chip-to-chip and board-to-board and arrays Increased bandwidth
optical links Serial transceivers
Computer buses (Infiniband) Array transceivers
Consumer electronics DVDs HB LEDs Improved display visibility
Radios VCSEL components High-speed data transmission
Telephones and arrays Low power requirements
Calculators Integrated circuits
CD-ROMs Lasers
5
Compound Semiconductor Process Technology
Compound semiconductors are composed of two or more elements and
usually consist of a metal, such as gallium, aluminum or indium, and a
non-metal, such as arsenic, phosphorous or nitrogen. The resulting compounds
include gallium arsenide, indium phosphide, gallium nitride, indium antimonide
and indium aluminum phosphide. The performance characteristics of compound
semiconductors are dependent on the composition of these compounds. Many of the
unique properties of compound semiconductor devices are achieved by the layering
of different compound semiconductor materials in the same device. This layered
structure creates an optimal configuration to permit the emission or detection
of light and the detection of magnetic fields.
Accordingly, the composition and properties of each layer and the
control of the layering process, or epitaxy, are fundamental to the performance
of advanced electronic and optoelectronic compound semiconductor devices. The
variation of thickness and composition of layers determines the intensity and
color of the light emitted or detected and the efficiency of power conversion.
The ability to vary the intensity, color and the efficiency of light generation
and detection enables compound semiconductor devices to be used in a broad range
of advanced information systems.
Compound semiconductor device manufacturers predominantly use four
different methods to deposit compound materials: (i) molecular beam epitaxy;
(ii) vapor phase epitaxy; (iii) liquid phase epitaxy; and (iv) metal organic
chemical vapor deposition (MOCVD). The use of molecular beam epitaxy technology
can yield wafers having high thickness uniformity. Compound semiconductor
materials fabricated using vapor phase epitaxy or liquid phase epitaxy
technologies often have high electronic and optical properties. However, due to
the nature of the underlying processes, none of these methods can be easily
scaled up to high volume production, which is necessary for the commercial
viability of compound semiconductor devices. All four methods used to
manufacture compound semiconductor devices pose technical, training and safety
challenges that are not present in the manufacture of silicon devices. The
production systems typically require expensive reactant materials, use of
certain toxic chemicals and tight control over numerous manufacturing
parameters. The key differences between MOCVD and the three other methods are
that compound semiconductor wafers fabricated using MOCVD generally possess a
better combination of uniformity and optical and electronic properties and are
easier to produce in high volumes than wafers manufactured by the three more
traditional methods. Currently, MOCVD technology is being used to manufacture a
broad range of compound semiconductor devices.
Historically, manufacturers that use compound semiconductor devices in
their products have met research, pilot production and capacity needs with
in-house systems and technologies. However, as the need for the production of
commercial volumes of high-performance compound semiconductor devices and the
variety of these devices increase, manufacturers are often unable to meet these
requirements using inhouse solutions. In response to these growing demands for
higher volumes of a broad range of higher performance devices, manufacturers are
increasingly turning to outside vendors to meet their needs for compound
semiconductor wafers and devices.
The EMCORE Solution
EMCORE provides a broad range of compound semiconductor products and
services intended to meet its customers' diverse technology requirements. EMCORE
has developed extensive materials science expertise, process technology and
MOCVD production systems to address its customers' needs and believes that its
proprietary TurboDisc(R) deposition technology makes possible one of the most
cost-effective production processes for the commercial volume manufacture of
high-performance compound semiconductor wafers and devices. This platform
technology provides the basis for the production of various types of compound
semiconductor wafers and devices and enables EMCORE to address the critical need
of manufacturers to cost-effectively get to the market faster with high volumes
of new and improved high-performance products.
6
EMCORE's compound semiconductor products and services include:
o Development of compound semiconductor materials and processes;
o Design and development of devices;
o Fiber optic components and modules, including transceivers and
transponders;
o VCSEL devices and PIN photodiodes, including bare die, packaged
components and optical subassemblies;
o Electronic and RF materials, including pHEMTs, HBTs and FETs;
and,
o MOCVD production tools for the manufacture of epitaxial
materials, including GaAs, AlGaAs, InP, InGaP, InGaAlP, InGaAsP,
GaN, InGaN, AlGaN, and SiC
Customers can take advantage of EMCORE's vertically integrated
approach by purchasing custom-designed wafers and devices from EMCORE, or they
can manufacture their own devices in-house using a TurboDisc production system
configured to their specific needs.
Strategy
EMCORE's objective is to capitalize on its position in MOCVD process
technology and production systems to become the leading supplier of compound
semiconductor wafers, devices and production systems. The key elements of
EMCORE's strategy include:
Apply EMCORE's Core Materials and Manufacturing Expertise Across
Multiple Product Applications. EMCORE continually leverages its proprietary core
technology to develop compound semiconductor products for multiple applications
in a variety of markets. These activities include developing new products for
targeted applications as well as expanding existing products into new
applications. For example, EMCORE has introduced VCSELs and photodetectors for
communications products and through its joint venture with General Electric
Lighting, HB LEDs for broader lighting applications.
Target High Growth Market Opportunities. EMCORE's strategy is to
target high growth market opportunities where performance characteristics and
high volume production efficiencies can give compound semiconductors a
competitive advantage over other devices. Historically, while technologically
superior, compound semiconductors have not been widely deployed because they are
more expensive to manufacture than siliconbased semiconductors and other
existing solutions. EMCORE believes that as compound semiconductor production
costs are reduced, new customers will be compelled to use these products because
of their higher performance characteristics. For example, EMCORE has reduced the
average cost of compound semiconductor solar cells to the point where customers
are replacing silicon-based solar cells because of the compound semiconductor
solar cells' higher overall efficiency, better end-of-life performance and lower
weight.
Strategic Acquisitions and Partnerships with Industry Leading
Companies. EMCORE seeks to identify and develop long-term relationships with
leading companies in each of the industries it serves. EMCORE develops these
relationships in a number of ways that include long-term, high-volume supply
agreements, joint ventures, acquisitions and other arrangements. For example,
EMCORE entered into a joint venture with General Electric Lighting for the
development and marketing of white light and colored HB LED products for
automotive, traffic, flat panel display and other lighting applications. EMCORE
intends to actively seek similar strategic relationships with other key
customers and industry participants in order to further expand its technological
and production base.
Continue Investment in Research and Development to Maintain Technology
Leadership. Through substantial investment in research and development, EMCORE
seeks to expand its leadership position in compound semiconductor production
systems, wafers and devices. EMCORE works with its customers to identify
specific performance criteria and uses this information to enhance the
performance of its production systems and to further expand its process and
materials science expertise, including the development of new low-cost,
7
high-volume wafers and devices for its customers. In addition, EMCORE's
development efforts are focused on continually lowering the production costs of
its products.
Products
MOCVD Tools
EMCORE is a leading supplier of MOCVD compound semiconductor
production systems, with more than 400 systems shipped since inception in
October 1984. EMCORE believes that its TurboDisc production systems offer
significant ownership advantages over competing systems and that the high
throughput capabilities of its TurboDisc MOCVD tools make possible superior
reproducibility of thickness, composition, electronic properties and layer
accuracy required for electronic and optoelectronic devices. Each system can be
customized for the customer's throughput, wafer size and process chemistry
requirements. EMCORE's production tools also achieve a high degree of
reliability with an average uptime, based on customer data, of approximately
90%.
EMCORE believes its TurboDisc MOCVD tools enable the lowest cost of
ownership for the manufacture of compound semiconductor materials. The major
components of the cost of ownership include yield, throughput, direct costs and
capital costs. Yield primarily relates to material uniformity, which is a
function of the precision of the physical and chemical processes by which atomic
layers are deposited. Throughput, the volume of wafers produced per unit of
time, includes both the time required for a process cycle and the handling time
between process steps. Direct costs include consumables used in manufacturing
and processing, maintenance and spare parts and the clean room space required
for the equipment. Capital costs include the cost of acquisition and
installation of the process equipment.
EMCORE's proprietary TurboDisc technology utilizes a unique high speed
rotating disk in a stainless steel growth chamber with integrated
vacuum-compatible loading chambers. To produce a wafer, a bare substrate, such
as gallium arsenide, sapphire or germanium, is placed on a wafer carrier in the
TurboDisc growth chamber and subjected to high temperatures. Based on a
predetermined formula, metal organic gases are released into the growth chamber.
These gases decompose on the hot, rapidly spinning wafer. Semiconductor
materials are then deposited on the substrate in a highly uniform manner. The
resulting wafer thus carries one or more ultra-thin layers of compound
semiconductor material such as gallium arsenide, gallium nitride or indium
phosphide. The TurboDisc technology not only produces uniformity of deposition
across the wafer, but also offers flexibility for diverse applications with
improved material results and increased production rates. The unique precision
control of reactant gas flow in the TurboDisc technology platform allows users
to scale easily from research to commercial volumes with substantially reduced
time and effort. Upon removal from the growth chamber, the wafer is transferred
to a device processing facility for various steps such as photolithography,
etching, masking, metallization and dicing. Upon completion of these steps, the
devices are then sent for packaging and incorporation in the customer's product.
During fiscal year 2001, EMCORE announced several new application
specific TurboDisc reactors:
o The Enterprise 450 TurboDisc reactor with cassette to cassette
wafer handling and advanced temperature control is a high
efficiency reactor designed primarily for electronic materials
applications (configurations are also available for LEDs, solar
cells and optoelectronic applications);
o The Enterprise 300 GaNzilla is designed for the high-volume
commercial manufacture of high brightness blue and green LEDs and
GaN electronic materials;
o The Enterprise 300 LDM is designed for the high-volume commercial
manufacture of laser diodes for telecommunication and
datacommunication applications; and
o The Discovery 180 SpectraGaN is a second generation SpectraBlue
tool with higher throughput and greater efficiency used for the
commercial manufacture of high brightness blue and green LEDs and
GaN based electronics.
8
EMCORE's TurboDisc product line now consists of the following MOCVD
tools:
Tool Applications
Discovery Research and Development (RD) Customer determined
Discovery 180 LDM (Laser Diode Machine) VCSELs, laser diodes, AlGaAs and InGaAs detectors
Discovery 180 SpectraBlue / Discovery 180 SpectraGaN Blue and Green LEDs, blue lasers, GaN electronic devices
Enterprise 300 LDM Laser diodes
Enterprise 300 GaNzilla Blue and green LEDs, blue lasers, GaN electronic devices
Enterprise 400 Gold High-Brightness red, orange and yellow LEDs
Enterprise 400 EM PHEMTs, HBTs, FETs, E-mode devices
Enterprise 400 SC Solar cells
Enterprise 450 EM Electronic materials such as PHEMTs, HBTs, FETs,
E-mode devices,
Enterprise 450 LED High-Brightness red, orange and yellow LEDs
Enterprise 450 SC Solar cells
EMCORE's next generation of TurboDisc products is being designed to
provide a number of innovations including:
o new reactor design to improve source efficiency;
o digital control system to reduce electronic noise;
o modular component design to simplify component and design upgrades;
o improved temperature control with the ability to control the
deposition temperature to within 1 to 2 degrees Celsius; and
o greater up time and lower maintenance intervals.
During the first quarter of fiscal 2002, EMCORE signed an agreement
with LumiLeds Lighting, a joint venture between Agilent Technologies and Philips
Lighting, for the supply of MOCVD tools to be used in the production of high
brightness gallium nitride (GaN) LEDs.
Optical Devices
EMCORE manufactures optical devices employing VCSEL-based technology.
Vertical cavity surface-emitting lasers (VCSELs) are microscopic semiconductor
lasers that emit light from the top surface of the chip. They combine the
ability of batch process and on-wafer tests like LEDs and the superior
electro-optical performance of traditional edge-emitting lasers. In addition,
the cylindrical laser beam profile allows an easy and efficient coupling of the
light into a multi-mode fiber. The manufacturability for both wafer processing
and packaging enables a cost-effective high-bandwidth fiberoptic communication
solution. Therefore, VCSEL-based optical devices offer significant advantages
over traditional laser diodes used in fiber optic communications, including:
o greater control over beam size and wavelength;
o reduced manufacturing complexity and packaging costs;
o lower power consumption; and
o higher frequency performance.
There are two major fabrication processes for VCSELs, either by
ion-implantation or selective oxidation. Compared to implant VCSELs, the oxide
VCSELs provide many superior characteristics, which include lower turn-on
current, higher efficiency, higher speed, better performance linearity and
stability, and better reliability. Currently, the implant VCSELs are still
widely used for applications with transmission speeds up to 1 Gbps. However, the
oxide VCSEL is the technology of choice for applications requiring data rates
higher than 2 Gbps, which is the trend in the datacom industry. EMCORE
established a consistent manufacturing procedure for the oxide VCSEL fabrication
process despite the inherent challenges of this manufacturing technique compared
to the implant process. EMCORE believes that it is the only high-volume
manufacturer for oxide VCSELs.
9
EMCORE's strategy is to capitalize on its oxide VCSEL manufacturing
platform and expertise, by providing the industry with 1 Gbps, 2.5 Gbps, 10 Gbps
(OC-192), and 40 Gbps (OC-768) solutions through single-channel serial,
multi-channel parallel or wavelength-divisional multiplexing approaches.
Leading electronic systems manufacturers are integrating VCSELs into a
broad array of end-market applications including Internet access, digital
cross-connect telecommunications switches, Infiniband optical bus, and fiber
optic switching and routing, such as Gigabit Ethernet, and storage area
networks.
EMCORE's Optical Device division, located in Albuquerque, New Mexico
is primarily dedicated to the research and development of enabling VCSEL
technologies. EMCORE's optical device product line has achieved several
significant milestones since it commenced commercial production of VCSEL-based
products:
o February 1998 - EMCORE announced its first commercial high speed VCSEL
laser operating at 1.25 Gbps;
o December 1998 - EMCORE introduced its second VCSEL product, a VCSEL
array;
o March 2000 - EMCORE debuted the industry's first commercial 2.5Gbps,
850nm oxide VCSEL employing its patented OxideGuide(TM) technology;
o January 2000 - EMCORE entered into a three-year supply agreement with
Agilent, a leading supplier of fiber optic transceivers and integrated
circuits for infrastructure products for the Internet. Under this
agreement, EMCORE manufactures VCSEL arrays for use in parallel
optical transceivers. EMCORE began shipping commercial product in
December 2000;
o August 2000 - EMCORE announced the availability of its first 850nm 1x4
and 1x12 Oxide VCSEL arrays and its high speed gallium arsenide (GaAs)
photodetector arrays. The 1x4 array is capable of up to 10 Gbps
transmission speeds, while the 1x12 has a transmission speed of
30Gbps. EMCORE's photodetector arrays operate up to speeds of
3.125Gbps and provide the efficiency required for high-speed data
transmission;
o March 2001 - EMCORE debuted the industry's first 850 nm 10 Gbps VCSEL.
These VCSELs are designed to work in existing optical components and
are optimized for high-speed data transmission over multimode fiber.
Designed for optical interconnect applications under 300 meters,
including Local Area Networks ("LANs") such as Gigabit Ethernet and
Fibre Channel, these VCSEL products are available as bare die or can
be built into optical subassemblies; and
o March 2001 - EMCORE also debuted its first SC and LC Transmitter
Optical Subassemblies ("TOSA") designed for 850nm applications. These
TOSAs provide the market with a device that incorporates speed and
reliability in a low cost package. The package is cost effective and
ideal for integration into existing and new transceiver module
designs. Both products use EMCORE's 2.5 Gbps oxide VCSEL, which meets
the performance requirements of short reach and very short reach
multimode fiber optic applications, including LANs, SANs, backplane,
rack-to-rack and intraswitch. Both TOSA packages perform at the 1Gbps,
1.25Gbps, 2.1Gbps or 2.5Gbps data rates, which are suitable for
Gigabit Ethernet, Fibre Channel and OC-48 applications.
10
Photodetectors
Photodetectors are discrete semiconductor devices that detect light in
order to convert an optical signal into an electrical signal. Similar to VCSELs,
photodetectors combine the ability of batch processing and on-wafer testing with
superior electro-optical performance. The large aperture size readily permits
efficient coupling of the light from a multi-mode fiber. Furthermore, EMCORE has
demonstrated devices that are hermetically sealed, thus ensuring devices with
high reliability regardless of the nature of the device packaging.
EMCORE has successfully developed 1x12 1.25Gbps and 1x12 2.7Gbps 850nm
photodetector arrays. These arrays perform light to logic conversions for data
transmissions over multi-mode fiber ribbon cable. EMCORE began shipping these
photodetector arrays July 2000. In addition, EMCORE developed a 10 Gbps
photodetector and 10Gbps 1x4 array, and commenced commercial shipments in
October 2001.
In addition, EMCORE has developed a long-wavelength 1310nm
photodetector product. This product is geared largely toward the high-speed
telecom medium range market/application using single-mode fiber. EMCORE began
shipping 1x12 2.5Gbps long-wavelength photodetector arrays in November 2001.
VCSEL-Based Array Transceivers and Transponders
VCSEL-based array transceivers are penetrating telecommunication
markets as solutions for low-cost, very short reach (VSR) OC-192 (10 Gbps) SONET
optical links. The Optical Internetworking Forum (of which EMCORE is a member)
approved the specifications for VSR OC-192 optical links based on VCSEL arrays
in December 2000. Array transceivers are the preferred solutions of original
equipment manufacturers for high-speed optical backplanes, which are replacing
traditional electrical backplanes as bandwidth requirements have exceeded the
limits practical for copper connections.
EMCORE has successfully developed and made commercially available
high-speed array transceivers and transponders for the data and
telecommunications markets. EMCORE's transceivers and transponders offer OEM
equipment manufacturers several advantages, including:
o Fast transmission speeds up to 32Gbps aggregate throughput.
o Products are designed for high volume manufacturing.
o Utilize EMCORE's leading-edge VCSEL array and PIN photodiode
array components.
o Deliver significant cost-performance and application flexibility
advantages over traditional serial solutions.
Since EMCORE first introduced its new family of fiber optic products
to the market, the Company has made several accomplishments and provided the
marketplace with high speed solutions to alleviate data congestion. Some of
these achievements include:
o August 2001 - EMCORE announced the commercial production of its
new high speed, cost-effective 12 x 1.25Gbps parallel optical
array transmitter/receiver (transceiver) modules to significantly
improve data throughput capability. These modules perform logic
to light and light to logic conversions for data transmissions
over multi-mode fiber ribbon cable.
o October 2001 - EMCORE announced the commercial availability of a
new 300 pin MSA (multi source agreement) compliant transponder
module to provide very short reach interconnections over parallel
fiber links at SONET OC-192 data rates. The VSR transponder is
the first commercially available 300-pin transponder compliant
with the Optical Internetworking Forum's VSR-1 Implementation
Agreement (OIF-VSR4-0.10). This transponder is the initial
product offering from a family of EMCORE transponder products and
will soon be followed by a small form factor version
o November 2001 - EMCORE began shipping its next generation 12 x
2.7Gbps parallel optical array transceiver modules.
11
RF and Electronic Materials
Radio frequency ("RF") materials are compound semiconductor materials
that transmit and receive communications. Compound semiconductor RF materials
have a broader bandwidth and superior performance at higher frequencies than
silicon-based materials. EMCORE currently produces 4-inch and 6-inch InGaP HBT
and pHEMT materials including e-mode devices that are used for power amplifiers
for GSM, TDMA and CDMA multiband wireless handsets. InGaP HBT materials provide
higher linearity, higher power added efficiency as well as greater reliability
than first generation AlGaAs HBT technologies, and have become the technology of
choice for next generation HBT-based power amplifiers for wireless handsets. In
addition, recent developments and transfers to production of enhancement mode
pHEMT technologies have demonstrated their continued competitiveness for handset
applications.
EMCORE is also exploring opportunities to market RF materials to its
fiber optic customers for use in high speed digital components for OC-48 and
OC-192 fiber optic communication and to its power satellite customers for
satellite communication applications. EMCORE believes that its ability to
produce high volumes of RF materials at a low cost will facilitate their
adoption in new applications and products.
EMCORE's manufacturing facility in New Jersey has seven Enterprise
MOCVD production tools dedicated to electronic materials growth. In addition,
EMCORE is in the process of qualifying two new Enterprise 450 TurboDisc reactors
equipped with cassette to cassette wafer handling capability, leaving space for
an additional nine Enterprise Electronic Materials Production tools. EMCORE also
equipped its wafer fabrication area with state of the art cassette to cassette
characterization equipment.
In May 2000, EMCORE signed an agreement with Motorola to meet their
requirements for epitaxial tools, wireless electronic materials and technology.
This relationship includes supplying Motorola with epitaxial process technology
and multiple MOCVD production tools, as well as purchase orders for electronic
device epitaxial wafers. Motorola also announced that EMCORE was awarded their
Standard Supplier Designation, making EMCORE the only qualified supplier of
MOCVD tools for Motorola's compound semiconductor factories.
In October 2000 EMCORE received a multi-million dollar order from
Anadigics to supply 6-inch GaAs HBT and pHEMT wafers for their fiber optic and
wireless communications devices. Anadigics is using EMCORE's materials for power
amplifiers for GSM, TDMA and CDMA multiband wireless handsets and for high-speed
digital components for OC-192 data communication applications.
During late 2000 and throughout 2001, EMCORE devoted its development
efforts to making advances in compound semiconductor materials containing
nitrogen, including InGaAsN and InP HBT and GaN FET/pHEMT. EMCORE believes that
these next generation materials and device technologies into which they will be
employed will replace existing technologies. EMCORE has filed patents which it
believes are critical to InGaAsN HBT and GaN FET/pHEMT applications, which
include wireless handsets and base stations, as well as millimeter wave ground
and satellite communication systems. There can be no assurance that these
patents will be issued or, if obtained, that they will afford EMCORE
commercially significant protection of its technologies.
Solar Cells
Compound semiconductor solar cells are used to power satellites
because they are more resistant to radiation levels in space and convert
substantially more light to power, therefore weigh less per unit of power than
silicon-based solar cells. These characteristics increase satellite life,
increase payload capacity and reduce launch costs. In fiscal 2000, EMCORE
announced the manufacture and shipment of the world's highest efficiency
dual-junction solar cell for satellite applications. EMCORE also announced the
production of high-efficiency triple junction solar cells with a minimum average
efficiency of 26%. EMCORE began shipping the triple junction solar cells in
September 2000.
12
EMCORE is currently involved in several solar cell projects:
o EMCORE's solar cells were selected for use on two Space
Technology Research Vehicles (STRV 1c&1d). Arianspace launched
these micro-satellites in November 2000. EMCORE's solar cells
have also been selected for two European communication satellite
programs scheduled for launch in 2002. Additionally, EMCORE's
solar cells are being used for two Japanese scientific programs
sponsored by the National Space Development Agency of Japan
(NASDA);
o EMCORE is also working with TRW, Boeing and Lockheed to qualify
its high efficiency solar cells for spacecraft with high
electrical power requirements;
o In April 2000, EMCORE signed a Memorandum of Understanding with
Angewandte Solarenergie-ASE GmbH to provide solar cell material
for use in the manufacture of their solar cells; and
o In November 1998, EMCORE signed a long-term supply agreement with
Space Systems/Loral, a wholly owned subsidiary of Loral Space &
Communications. Under this agreement, EMCORE supplies compound
semiconductor high efficiency gallium arsenide solar cells for
Loral's satellites. To date, EMCORE has received purchase orders
from Space Systems/Loral that total $32.6 million and services
this agreement at our facility in Albuquerque, New Mexico.
HB LEDs
High-brightness light-emitting diodes ("HB LEDs") are solid state
compound semiconductor devices that emit light. The global demand for HB LEDs is
experiencing rapid growth because HB LEDs have a long useful life, consume
approximately 10% of the power consumed by incandescent or halogen lighting and
improve display visibility. In May 1999, EMCORE and General Electric Lighting
formed GELcore LLC ("GELcore"), a joint venture to develop and market HB LED
lighting products. The two parties have agreed that this joint venture will be
the exclusive vehicle for each party's participation in solid state lighting.
GELcore combines EMCORE's materials science expertise, process technology and
compound semiconductor production systems with General Electric Lighting's brand
name recognition and extensive marketing and distribution capabilities.
GELcore's current product line includes channel letters, flashlights and other
signage and display products incorporating HB LEDs. GELcore's long-term goal is
to develop products to replace traditional lighting. In September 2000, GELcore
acquired Ecolux, Inc. adding LED-signaling products to its growing line of LED
products. EMCORE believes that Ecolux is currently receiving the majority of
contracts for which it submits bids for the replacement of traditional traffic
lights with HB LEDs.
MR Sensors
Magneto resistive ("MR") sensors are compound semiconductor devices
that possess sensing capabilities. MR sensors improve vehicle performance
through more accurate control of engine and crank shaft timing, which allows for
improved spark plug efficiency and reduced emissions. In January 1997, EMCORE
initiated shipments of compound semiconductor MR sensors using technology
licensed to EMCORE from General Motors. This license allows EMCORE to
manufacture and sell products to anyone using this technology. As of September
30, 2001, EMCORE has delivered approximately 14.8 million devices to General
Motors Powertrain for crank and cam speed and position sensing applications for
5 different engine builds under 20 different vehicle platforms.
13
Customers
EMCORE's rapidly expanding customer base includes many of the largest
semiconductor, telecommunications, consumer goods and computer manufacturing
companies in the world. Some of our customers include Agilent Technologies Ltd.,
AMP, Inc., Anadigics Inc., Blaze Networking Products, Boeing-Spectrolab,
Corning, Inc., General Motors Corp., Hewlett Packard Co., Honeywell Int'l Inc.,
Infineon Technologies AG, Loral Space & Communications Ltd., Lucent
Technologies, Inc., LumiLeds Lighting (a joint venture between Philips Lighting
and Agilent Technologies), Motorola, Inc., Nortel Networks Corp., Siemens AG's
Osram GmbH subsidiary, TriQuint Semiconductor, Inc. and more than a dozen of the
largest electronics manufacturers in Japan.
Since its inception, EMCORE has worked closely with its customers to
design and develop process technology and material science expertise for use in
production systems for its customers' enduse applications. EMCORE has leveraged
its process and materials science knowledge base to manufacture a broad range of
compound semiconductor wafers and devices such as VCSELs, photodetectors, RF and
electronic materials, solar cells, HB LEDs and MR sensors. Within most of these
product lines, EMCORE has established strategic relationships through joint
ventures, long-term supply agreements, acquisitions and other certain
relationships. A summary of these relationships is found below:
PRODUCTS AND STRATEGIC RELATIONSHIPS
Product Line Company Nature of Relationship Application
Vertical cavity Agilent Long-term supply agreement Data communication systems
surface-emitting Infineon Customer (routers and switches)
lasers (VCSELs) Molex Customer Telecommunication systems
(cross connect switches,
Photodetectors at Very Short Reach OC-192
850 nm and links)
1310 nm Optical links (including
Gigabit Ethernet, ATM and
FibreChannel networks)
Radio frequency (RF) Motorola Long-term supply agreements Digital wireless and cellular
materials Anadigics applications
Solar cells Space Systems / Loral Long-term supply agreement Solar panels in
communications satellite
Union Miniere, Inc. Long-term germanium sourcing powered systems
agreement
High-brightness General Electric GELcore joint venture for the Traffic lights
light-emitting diodes Lighting development, marketing and Miniature lamps
(HB LEDs) distribution of white light Automotive lighting
and colored HB LED Flat panel displays
products
Magneto resistive (MR) General Motors Long-term supply agreement Cam and crank shaft sensors
sensors Corporation
Optek
14
EMCORE has a comprehensive total quality management program with
special emphasis on total customer satisfaction. EMCORE seeks to encourage
active customer involvement with the design and operation of its production
systems. To accomplish this, EMCORE conducts user group meetings among its
customers in Asia, Europe and North America. At annual meetings, EMCORE's
customers provide valuable feedback on key operations, process oriented
services, problems and recommendations to improve EMCORE products. This direct
customer feedback has enabled EMCORE to constantly update and improve the design
of its systems and processes. Changes that affect the reliability and
capabilities of EMCORE's systems are embodied in new designs to enable current
and future customers to utilize systems which EMCORE believes are high quality
and cost-efficient. As of September 30, 2001, EMCORE employed 47 field service
engineers who install systems and provide on-site support.
Marketing and Sales
EMCORE markets and sells its wafers, devices and systems through its
direct sales force in North America, Europe, Taiwan and through representatives
and distributors elsewhere in Asia. To market and service its products in China,
Japan and Singapore, EMCORE relies on a single marketing, distribution and
service provider, Hakuto Co., Ltd. EMCORE's agreements with Hakuto expire in
March 2008. Hakuto has exclusive distribution rights for certain EMCORE products
in Japan. Hakuto has marketed and serviced EMCORE's products since 1988, is a
minority shareholder in EMCORE and the President of Hakuto is a member of
EMCORE's Board of Directors. In August 1999, EMCORE entered into a distribution
agreement with DI Systems to market and service EMCORE's products in South
Korea. EMCORE has sales offices in California and Taiwan, ROC in order to
efficiently service EMCORE's rapidly expanding customer base in these areas.
EMCORE's sales and marketing, senior management and technical staff
work closely with existing and potential customers to provide compound
semiconductor products that meet their customers' needs. EMCORE seeks to match a
customer's requirements to an existing design or a modification of a standard
design. When necessary, EMCORE will work with the customer to develop the
appropriate design process and to configure and manufacture the production
system to meet the customer's needs. EMCORE will also produce samples to
demonstrate conformance to the customer's specifications. For production
systems, the period of time from the initial contact with the customer to the
customer's placement of an order is typically two to nine months or longer.
EMCORE's sales cycle for wafers and devices usually runs three to nine months,
during which time EMCORE develops the formula of elements necessary to meet the
customer's specifications and qualifies the materials which may also require the
delivery of samples. EMCORE believes that the marketing, management and
engineering support involved in this process is beneficial in developing
competitive differentiation and long-term relationships with its customers.
Service and Support
EMCORE maintains a worldwide service and support network responsible
for on-site maintenance and process monitoring on either a contractual or
time-and-materials basis. Customers may purchase annual service contracts under
which EMCORE is required to maintain an inventory of replacement parts and to
service the equipment upon the customer's request. EMCORE also sells replacement
parts from inventory to meet customer needs. EMCORE pursues a program of system
upgrades for customers to increase the performance of older systems. EMCORE
generally does not offer extended payment terms to customers and adheres to a
warranty policy of 1 year. Consistent with industry practice, EMCORE maintains
an inventory of components for servicing systems in the field and it believes
that its inventory is sufficient to satisfy foreseeable short-term customer
requirements. Since fiscal 1998, EMCORE has operated a warehouse depot in Taiwan
to provide improved service to its Asian customers.
15
Research and Development
To maintain and improve its competitive position, EMCORE's research
and development efforts are focused on designing new proprietary processes and
products, improving the performance of existing systems, wafers and devices and
reducing costs in the product manufacturing process. EMCORE has dedicated 34
TurboDisc systems and five device fabrication facilities for both research and
production that are capable of processing virtually all compound semiconductor
materials. Nine of those TurboDisc systems and two device fabrication areas are
dedicated fully to research and development efforts and are used by a staff of
over 100 scientists, engineers and technicians. Forty-one of EMCORE's staff
members have a Ph.D. degree. The research and development staff utilizes x-ray,
optical and electrical characterization equipment which provide instant data
allowing for shortened development cycles and rapid customer response. During
fiscal years 2001, 2000 and 1999, EMCORE invested $53.4 million, $32.7 million
and $20.7 million into research and development.
EMCORE believes that several research and development projects have
the potential to greatly improve its competitive position and to drive its
revenue growth in the next few years. In the field of VCSEL components, EMCORE
has led the industry in the development of 10 Gbps VCSELs and has successfully
tested 10 Gbps operation of prototype parts. These VCSELs can be produced as
singlets or as arrays for much higher bandwidth transceivers. EMCORE is the
first company to offer these devices and commenced shipments of the 10 Gbps
VCSEL to fiber optic customers in December 2000 and received additional purchase
orders for shipments beginning at the end of March 2001. Along with its VCSEL
efforts, EMCORE developed 850 nm and 1310 nm photodetector arrays, which operate
at speeds of up to 10 Gbps and are designed to work with these VCSEL devices.
EMCORE has invested aggressively in the development of array transceiver
products that capitalize on its VCSEL and photodetector components. By
manufacturing these components in-house, EMCORE is able to reduce the overall
cost of the transceiver module. With the first project of a 12 x 1.25 Gbps array
transceiver successfully demonstrated, EMCORE plans to continue with this
roadmap to introduce a family of state-of-the-art products for Very Short Reach
fiber optics modules. In the field of solar cells, development of advanced
device structures and growth techniques are enabling an increase in solar cell
efficiency from EMCORE's current industry leading 26% solar cell to a 28%
product. For electronic materials, EMCORE has continued to develop advanced HBT
and pHEMT structures using next generation materials, such as InGaAsN and InP.
EMCORE expects to introduce its next generation system design across its
TurboDisc product line this year. These new systems are intended to reduce the
overall cost of ownership of the TurboDisc systems by lowering manufacturing
costs for its customers.
EMCORE also competes for research and development funds. In view of
the high cost of development, EMCORE solicits research contracts that provide
opportunities to enhance its core technology base or promote the
commercialization of targeted EMCORE products. EMCORE is also positioned to
market technology and process development expertise directly to customers who
require it for their own product development efforts.
Intellectual Property and Licensing
EMCORE's success and competitive position for production systems,
wafers and devices depends significantly on its ability to obtain intellectual
property protection for its research and development efforts. EMCORE's strategy
is to rely on both patents and trade secrets to protect its intellectual
property. To date, EMCORE has been issued 14 U.S. patents and two foreign
patents, and others are either pending (50 patent applications filed) or under
in-house review (19 disclosures and draft patent applications). The U.S. patents
will expire between 2005 and 2018. These patents (granted and filed) claim
material aspects of current or planned commercial versions of EMCORE's systems,
wafers or devices. For example:
o U.S. Patent No. 6,197,121 granted on March 6, 2001 entitled
"Chemical Vapor Deposition Apparatus" covers material aspects of
our current reactor technology, and
o The 12 x 1.25 Gbps array transceiver project for Very Short Reach
fiber optics modules have generated eight patent applications to
date.
16
EMCORE only relies on trade secrets to protect its intellectual
property when it believes publishing patents would make it easier for others to
reverse engineer EMCORE's proprietary processes. A "trade secret" is information
that has value to the extent it is not generally known, not readily
ascertainable by others through legitimate means and protected in a way that
maintains its secrecy. Reliance on trade secrets is only an effective business
practice insofar as trade secrets remain undisclosed and a proprietary product
or process is not reverse engineered or independently developed. In order to
protect its trade secrets, EMCORE takes certain measures to ensure their
secrecy, such as partitioning the non-essential flow of information between its
different divisions and executing non-disclosure agreements with its employees,
joint venture partners, customers and suppliers.
EMCORE is a licensee of certain VCSEL technology and associated patent
rights owned by Sandia Corporation. The Sandia license grants EMCORE:
o non-exclusive rights to develop, manufacture and sell products
containing Sandia VCSEL technologies under five U.S. patents that
expire between 2007 and 2015; and
o non-exclusive rights to employ a proprietary oxidation
fabrication method in the manufacture of VCSEL products under a
sixth U.S. patent that expires in 2014. EMCORE's success and
competitive position as a producer of VCSEL products depends on
the continuation of its rights under the Sandia license, the
scope and duration of those rights and the ability of Sandia to
protect its proprietary interests in the underlying technology
and patents.
Environmental Regulations
EMCORE is subject to federal, state and local laws and regulations
concerning the use, storage, handling, generation, treatment, emission, release,
discharge and disposal of certain materials used in its research and development
and production operations, as well as laws and regulations concerning
environmental remediation and employee health and safety. The production of
wafers and devices involves the use of certain hazardous raw materials,
including, but not limited to, ammonia, phosphine and arsine. If EMCORE's
control systems are unsuccessful in preventing release of these or other
hazardous materials, EMCORE could experience a substantial interruption of
operations. EMCORE has in-house professionals to address compliance with
applicable environmental and health and safety laws and regulations, and
believes that it is currently, and in the past has been, in compliance with all
such laws and regulations.
Manufacturing
EMCORE's manufacturing operations are located at EMCORE's headquarters
in Somerset, New Jersey and in Albuquerque, New Mexico and include systems
engineering and production, wafer fabrication and design and production of
devices. Many of EMCORE's manufacturing operations are computer monitored or
controlled to enhance reliability and yield. EMCORE manufactures its own systems
and outsources some components and sub-assemblies, but performs all final system
integration, assembly and testing. As of September 30, 2001, EMCORE had 458
employees involved in manufacturing. EMCORE fabricates wafers and devices at its
facilities in Somerset, New Jersey and Albuquerque, New Mexico and has a
combined clean room area totaling approximately 41,000 square feet.
Currently, all of EMCORE's divisions have acquired and maintained
certification status for their Quality Management Systems. At the New Jersey
facility, EMCORE's TurboDisc Tools division is registered to ISO 9001 and
EMCORE's Electronic Devices and Electronic Materials divisions are registered to
ISO 9001 + QS 9000. At the New Mexico facility, EMCORE's Photovoltaics, Fiber
Optical Component and Optical Device divisions are registered to ISO 9001.
17
Outside contractors and suppliers are used to supply raw materials and
standard components and to assemble portions of end systems from EMCORE
specifications. EMCORE depends on sole, or a limited number of, suppliers of
components and raw materials. EMCORE generally purchases these single or limited
source products through standard purchase orders. EMCORE also seeks to maintain
ongoing communications with its suppliers to insure against interruptions in
supply and has, to date, generally been able to obtain sufficient supplies in a
timely manner. EMCORE maintains inventories it believes are sufficient to meet
its near term needs. EMCORE implemented a vendor program through which it
inspects quality and reviews suppliers and prices in order to standardize
purchasing efficiencies and design requirements to maintain as low a cost of
sales as possible. However, operating results could be materially and adversely
affected by a stoppage or delay of supply, receipt of defective parts or
contaminated materials, and increase in the pricing of such parts or EMCORE's
inability to obtain reduced pricing from its suppliers in response to
competitive pressures.
Competition
The markets in which EMCORE competes are highly competitive. EMCORE
competes with several companies for sales of MOCVD systems, primarily Aixtron
GmbH and Nippon-Sanso K.K. Ltd. The primary competitors for EMCORE's wafer
foundry include Hitachi-Cable, Kopin Corporation and IQE. EMCORE's principal
competitors for sales of VCSEL-related products include Honeywell, Inc., AXT and
Avalon Photonics for serial optics and Agilent, Infineon, Zarlink Semiconductor
and W.L. Gore for parallel optics. The principal competitors for MR sensors are
Honeywell, Inc., Matshushita Electric Industrial Co. Ltd., Siemens AG
Osterreich, Electrotechnik and Asahi Kasei Electronic Co., Ltd.. In
photovoltaics devices, EMCORE faces competition from Boeing and Tecstar. The
principal competitors for HB LEDs and EMCORE's joint venture with General
Electric Lighting include LumiLeds Lighting, a joint venture between Agilent
Technologies and Philips Lighting, Siemens AG's Osram GmbH subsidiary, Nichia
Chemical Industries and Toshiba Corporation. EMCORE also faces competition from
manufacturers that implement in-house systems for their own use. In addition,
EMCORE competes with many research institutions and universities for research
contract funding. EMCORE also sells its products to current competitors and
companies with the capability of becoming competitors. As the markets for
EMCORE's products grow, new competitors are likely to emerge and present
competitors may increase their market share.
EMCORE believes that the primary competitive factors in the markets in
which EMCORE's products compete are yield, throughput, performance, breadth of
product line, customer satisfaction, customer commitment to competing
technologies and, in the case of production systems, capital and direct costs
and size of installed base. Competitors may develop enhancements to or future
generations of competitive products that offer superior price and performance
factors. EMCORE believes that in order to remain competitive, it must invest
significant financial resources in developing new product features and
enhancements and in maintaining customer satisfaction worldwide.
Employees
At September 30, 2001, EMCORE had 867 employees, including 458
employees in manufacturing operations, 219 employees in research and
development, 170 employees in sales and general administration and 20 temporary
employees. This represented an increase of 242 employees or 39% from September
30, 2000. In order to meet the challenges of the current economic climate,
EMCORE announced a workforce reduction in October 2001 that decreased its
overall headcount by 105 employees or approximately 12%. None of EMCORE's
employees are covered by a collective bargaining agreement. EMCORE considers its
relationship with its employees to be good.
18
Risk Factors
We May Continue To Incur Operating Losses.
We started operations in 1984 and as of September 30, 2001, we had an
accumulated deficit of $121.2 million. We incurred net losses of $12.3 million
in fiscal 2001, $25.5 million in fiscal 2000 and $22.7 million in fiscal 1999.
In addition, as a result of the downturn in the economy, we expect a decline in
revenues in fiscal year 2002. Many of our expenses, particularly those relating
to capital equipment and manufacturing overhead, are fixed. Accordingly, reduced
revenue causes our fixed production costs to be allocated across reduced
production volumes, which adversely affects our gross margin and profitability.
Therefore, we expect to continue to incur operating losses until revenues
increase. We cannot currently predict whether or when demand will strengthen
across our product lines or how quickly our customers will consume their
inventories of our products. In addition, several of our customers have reduced
the lead times they give us when ordering product from us. While this trend has
enabled us to reduce inventory, it also restricts our ability to forecast
revenues. If our sales and profit margins do not increase to support the higher
levels of operating expenses and if our new product offerings are not
successful, our business, financial condition and results of operations will be
materially and adversely affected.
We Must Continually Improve Existing Products, Design And Sell New
Products And Manage The Costs Of Research And Development In Order To
Effectively Compete.
We compete in markets characterized by rapid technological change,
evolving industry standards and continuous improvements in products. Due to
constant changes in these markets, our future success depends on our ability to
improve our manufacturing processes, tools and products. To remain competitive
we must continually introduce new and improved products as well as production
tools with higher capacity and better production yields.
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 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 during fiscal year 2001.
We have recently introduced a number of new products, and, in
connection with a joint venture and internal development, we will be introducing
additional new products in the near future. The commercialization of new
products involves substantial expenditures in research and development,
production and marketing. We may be unable to successfully design or manufacture
these new products and may have difficulty penetrating new markets.
Because it is generally not possible to predict the amount of time
required and the costs involved in achieving certain research, development and
engineering objectives, actual development costs may exceed budgeted amounts and
estimated product development schedules may be extended. Our business, financial
condition and results of operations may be materially and adversely affected if:
o we are unable to improve our existing products on a timely basis;
o our new products are not introduced on a timely basis or do not
achieve sufficient market penetration;
o we incur budget overruns or delays in our research and
development efforts; or
o our new products experience reliability or quality problems.
We May Engage In Acquisitions That May Harm Our Operating Results, Dilute Our
Shareholders And Cause Us To Incur Debt Or Assume Contingent Liabilities.
We may pursue acquisitions to acquire new technologies, products or
service offerings. Future acquisitions by us may involve the following:
o use of significant amounts of cash;
o potentially dilutive issuances of equity securities; and
o incurrence of debt or amortization expenses related to goodwill
and other intangible assets.
19
In addition, acquisitions involve numerous risks, including:
o difficulties in the integration of the operations, technologies,
products and personnel of the acquired company;
o diversion of management's attention from other business concerns;
o risks of entering markets in which we have no or limited prior
experience; and
o potential loss of key employees of the acquired
company.
From time to time, we have engaged in discussions with acquisition
candidates regarding potential acquisitions of product lines, technologies and
businesses. If such an acquisition does occur, we cannot be certain that our
business, operating results and financial condition will not be materially and
adversely affected.
Our Rapid Growth Places A Strain On Our Resources.
We have experienced rapid growth, having added a significant number of
new employees within the last year. We have also expanded our manufacturing
facilities in Albuquerque, New Mexico and in Somerset, New Jersey. This growth
has placed and will continue to place a significant strain on our management,
financial, sales and other employees and on our internal systems and controls.
If we are unable to effectively manage multiple facilities and a joint venture
in geographically distant locations, our business, financial condition and
results of operations will be materially and adversely affected. We are also in
the process of installing new manufacturing and accounting software at our New
Jersey facility. Most of the new manufacturing software is customized to our
particular business and manufacturing processes. It will take time and require
evaluation to eliminate any malfunctions in the software and to train personnel
to use the new software. In this transition we may experience delays in
production, cost overruns and disruptions in our operations.
Our Industry Is Rapidly Changing
The compound semiconductor industry is changing rapidly due to, among
other things, continuous technological improvements in products and evolving
industry standards. This industry is marked by the continuous introduction of
new products and increased capacity for services similar to those provided by
us. Future technological advances in the compound semiconductor industry may
result in the availability of new products or increase the efficiency of
existing products. If a technology becomes available that is more cost effective
or creates a superior product, we may be unable to access such technology or its
use may involve substantial capital expenditures, which we may be unable to
finance. There can be no assurance that existing, proposed or as yet undeveloped
technologies will not render our technology less profitable or that we will have
available the financial and other resources necessary to compete effectively
against companies possessing such technologies. There can be no assurance that
we will be able to adapt to technological changes or offer competitive products
on a timely or cost effective basis.
Fluctuations In Our Quarterly Operating Results May Negatively Impact Our Stock
Price.
Our revenues and operating results may vary significantly from quarter
to quarter due to a number of factors particular to EMCORE and the compound
semiconductor industry. Not all of these factors are in our control. These
factors include:
o the volume and timing of orders for our products, particularly
TurboDisc systems, which have an average selling price in excess
of $1 million;
o the timing of our announcements and introduction of new products
and of similar announcements by our competitors;
o downturns in the market for our customers' products;
o regional economic conditions, particularly in Asia where we
derive a significant portion of our revenues;
o price volatility in the compound semiconductor industry;
o changes in product mix; and
o timing of customer orders.
These factors may cause our operating results for future periods to be
below the expectations of analysts and investors. This may cause a decline in
the price of our common stock.
20
Our Joint Venture Partner, Who Has Control Of The Venture, May Make Decisions
That We Do Not Agree With And That Adversely Affect Our Net Income.
We do not have a majority interest in our joint venture with General
Electric Lighting. A board of managers governs this joint venture with
representatives from both the strategic partner and us. Many fundamental
decisions must be approved by both parties to the joint venture, which means we
will be unable to direct the operation and direction of this joint venture
without the agreement of our joint venture partner. If we are unable to agree on
important issues with the joint venture partner, the business of that joint
venture may be delayed or interrupted, which may, in turn, materially and
adversely affect our business, financial condition and results of operations.
We have devoted and will be required to continue to devote significant
funds and technologies to our joint venture to develop and enhance their
products. In addition, our joint venture will require that some of our employees
devote much of their time to joint venture projects. This will place a strain on
our management, scientific, financial and sales employees. If our joint venture
is unsuccessful in developing and marketing their products, our business,
financial condition and results of operations may be materially and adversely
affected.
General Electric Lighting and EMCORE have agreed that our joint
venture will be the sole vehicle for each party's participation in the solid
state lighting market. General Electric Lighting and EMCORE have also agreed to
several limitations during the life of the venture and thereafter relating how
each of us can make use of the joint venture's technology. One consequence of
these limitations is that in certain circumstances, such as a material default
by us or certain sales of our interest in the joint venture, we would not be
permitted to use the joint venture's technology to compete against General
Electric Lighting in the solid state lighting market.
We Have A Significant Amount Of Investments In Marketable Securities.
EMCORE accounts for its investment in marketable securities as
available for sale securities in accordance with the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Unrealized
gains and losses for these securities are excluded from earnings and reported as
a separate component of shareholders' equity. Realized gains and losses on sales
of investments, as determined on a specific identification basis, are included
in the consolidated statements of operations. Fair values are determined by
reference to market prices for securities as quoted based on publicly traded
exchanges. In August 2001, EMCORE sold its minority ownership position in its
joint venture with Uniroyal Technology Corporation (UTCI) in exchange for
approximately 2.0 million shares of UTCI common stock. EMCORE's cost basis in
the UTCI stock is $7.10 per share or approximately $14.0 million. At September
30, 2001, the fair market value of UTCI stock was $3.14 per share. Therefore,
EMCORE had an unrealized loss of $7.8 million recorded as a component of
comprehensive loss. The investment of UTCI common stock is subject to market
risk of equity price changes. While EMCORE cannot predict or manage the future
price for such stock, management continues to evaluate its investment position
on an ongoing basis, which may result in the write down of the investment to an
estimated realizable value and our results of operations could be materially and
adversely affected.
21
Since A Large Percentage of Our Revenues Are From Foreign Sales, Certain Export
Risks May Disproportionately Affect Our Revenues.
Sales to customers located outside the United States accounted for
approximately 47.7% of our revenues in fiscal 2001, 38.6% of our revenues in
fiscal 2000 and 52.5% of our revenues in fiscal 1999. Sales to customers in Asia
represent the majority of our international sales. We believe that international
sales will continue to account for a significant percentage of our revenues.
Because of this, the following export risks may disproportionately affect our
revenues:
o political and economic instability may inhibit export of our
systems and devices and limit potential customers' access to U.S.
dollars;
o shipping and installation costs of our systems may increase;
o we may experience difficulties in the timeliness of collection of
foreign accounts receivable and be forced to write off
receivables from foreign customers;
o a strong dollar may make our systems less attractive to foreign
purchasers who may decide to postpone making such capital
expenditures;
o tariffs and other barriers may make our systems and devices less
cost competitive;
o we may have difficulty in staffing and managing our international
operations;
o the laws of certain foreign countries may not adequately protect
our trade secrets and intellectual property; and
o potentially adverse tax consequences to our customers may make
our systems and devices not cost-competitive.
We Will Lose Sales If We Are Unable To Obtain Government Authorization To Export
Our Products.
Exports of our products to certain destinations, such as the People's
Republic of China, Malaysia and Taiwan, may require pre-shipment authorization
from U.S. export control authorities, including the U.S. Departments of Commerce
and State. Authorization may be conditioned on end-use restrictions. On certain
occasions, we have been denied authorization, particularly with respect to the
People's Republic of China. Failure to receive these authorizations may
materially and adversely affect our revenues and in turn our business, financial
condition and results of operations from international sales. Additionally,
export jurisdiction relating to exports of satellites and associated components
has not been definitively settled. Such exports may in the future require a
license from the Department of State. This may cause delays in shipping solar
cells abroad. Delays in receiving export licenses for solar cells may materially
and adversely affect our revenues and in turn our business, financial condition
and results of operations.
Our Operating Results Could Be Harmed If We Lose Access To Sole Or Limited
Sources Of Materials Or Services.
We currently obtain some components and services for our products from
limited or single sources. We purchase these components and services on a
purchase order basis, do not carry significant inventories of these components
and do not have any long-term supply contracts with these vendors. Because we
often do not account for a significant part of our vendors' business, we may not
have access to sufficient capacity from these vendors in periods of high demand.
If we were to change any of our limited or sole source vendors, we would be
required to re-qualify each new vendor. Re-qualification could prevent or delay
product shipments that could negatively affect our results of operations. In
addition, our reliance on these vendors may negatively affect our production if
the components vary in quality or quantity. If we are unable to obtain timely
deliveries of sufficient components of acceptable quality or if the prices of
components for which we do not have alternative sources increase, our business,
financial condition and results of operations could be materially and adversely
affected.
22
Our Products Are Difficult To Manufacture And Our Production Could Be Disrupted
If We Are Unable To Avoid Manufacturing Difficulties
We manufacture all of our wafers and devices in our manufacturing
facilities. Minute impurities, difficulties in the production process, defects
in the layering of the devices' constituent compounds, wafer breakage or other
factors can cause a substantial percentage of wafers and devices to be rejected
or numerous devices on each wafer to be non-functional. These factors can result
in lower than expected production yields, which would delay product shipments
and may materially and adversely affect our operating results. We have
experienced difficulties in achieving planned yields in the past, particularly
in pre-production and upon initial commencement of full production volumes,
which have adversely affected our gross margins. Because the majority of our
costs of manufacture are relatively fixed, the number of shippable devices per
wafer for a given product is critical to our financial results. Therefore, it is
critical for us to improve the number of shippable product per wafer and
increase the production volume of wafers in order to maintain and improve our
results of operations. Additionally, because we manufacture all of our products
at our facilities in Somerset, New Jersey and Albuquerque, New Mexico, any
interruption in manufacturing resulting from fire, natural disaster, equipment
failures or otherwise would materially and adversely affect our business,
financial condition and results of operations.
We Face Lengthy Sales And Qualifications Cycles For Our Products And, In Many
Cases, Must Invest A Substantial Amount Of Time And Funds Before We Receive
Orders.
Sales of our TurboDisc systems primarily depend upon the decision of a
prospective customer to increase its manufacturing capacity, which typically
involves a significant capital commitment by the customer. Customers usually
place orders with us between two to nine months, or longer, after our initial
contact with them. We often experience delays in obtaining system sales orders
while customers evaluate and receive internal approvals for the purchase of
these systems. These delays may include the time necessary to plan, design or
complete a new or expanded compound semiconductor fabrication facility. Due to
these factors, we expend substantial funds and sales, marketing and management
efforts to sell our compound semiconductor production systems. These
expenditures and efforts may not result in sales.
In order to expand our materials production capabilities, we have
dedicated a number of our TurboDisc systems to the manufacture of wafers and
devices. Several of our products are currently being tested to determine whether
they meet customer or industry specifications. During this qualification period,
we invest significant resources and dedicate substantial production capacity to
the manufacture of these new products, prior to any commitment to purchase by
the prospective customer and without generating significant revenues from the
qualification process. If we are unable to meet these specifications or do not
receive sufficient orders to profitably use the dedicated production capacity,
our business, financial condition and results of operations would be materially
and adversely affected.
Our historical and future budgets for operating expenses, capital
expenditures, operating leases and service contracts are based upon our
assumptions as to the anticipated market acceptance of our products. Because of
the lengthy lead time required for our product development and the changes in
technology that typically occur during such period, it is difficult to estimate
customer demand for a product accurately. If our products do not achieve
expected customer demand, our business, financial condition and results of
operation will be materially and adversely affected.
Industry Demand For Skilled Employees, Particularly Scientific And Technical
Personnel With Compound Semiconductor Experience, Exceeds The Number Of Skilled
Personnel Available.
Our future success depends, in part, on our ability to attract and
retain certain key personnel, including scientific, operational and management
personnel. The competition for attracting and retaining these employees,
especially scientists, is intense. Because of this intense competition for these
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 keep up with our
expansion, our business, financial condition and results of operations will be
materially and adversely affected.
23
Protecting Our Trade Secrets And Obtaining Patent Protection Is Critical To Our
Ability To Effectively Compete For Business.
Our success and competitive position depend on protecting our trade
secrets and other intellectual property. Our strategy is to rely both on trade
secrets and patents to protect our manufacturing and sales processes and
products. Reliance on trade secrets is only an effective business practice
insofar as trade secrets remain undisclosed and a proprietary product or process
is not reverse engineered or independently developed. We take certain measures
to protect our trade secrets, including executing non-disclosure agreements with
our employees, our joint venture partner, customers and suppliers. If parties
breach these agreements or the measures we take are not properly implemented, we
may not have an adequate remedy. Disclosure of our trade secrets or reverse
engineering of our proprietary products, processes or devices could materially
and adversely affect our business, financial condition and results of
operations.
This is no assurance that any patents will afford us commercially
significant protection of our technologies or that we will have adequate
resources to enforce our patents. We are actively pursuing patents on some of
our recent inventions. In addition, the laws of certain other countries may not
protect our intellectual property to the same extent as U.S. laws.
Our Failure To Obtain Or Maintain The Right To Use Certain Intellectual Property
May Adversely Affect Our Financial Results.
The compound semiconductor, optoelectronics, and fiberoptic
communications industries are characterized by frequent litigation regarding
patent and other intellectual property rights. From time to time we have
received and may receive in the future, notice of claims of infringement of
other parties' proprietary rights and licensing offers to commercialize third
party patent rights. Although we are not currently involved in any litigation
relating to our intellectual property, there can be no assurance that:
o infringement claims (or claims for indemnification resulting from
infringement claims) will not be asserted against us or that such
claims will not be successful;
o future assertions will not result in an injunction against the
sale of infringing products or otherwise significantly impair our
business and results of operations; or
o we will not be required to obtain licenses, the expense of which
may adversely affect our results of operations and profitability.
Interruptions In Our Business And A Significant Loss Of Sales To Asia May Result
If Our Primary Asian Distributor Fails To Effectively Market And Service Our
Products.
We rely on a single marketing, distribution and service provider,
Hakuto Co. Ltd. to market and service many of our products in Japan, China and
Singapore. Hakuto is one of our shareholders and Hakuto's president is a member
of our Board of Directors. We have distributorship agreements with Hakuto which
expire in March 2008 and give Hakuto exclusive distribution rights for certain
of our products in Japan. Hakuto's failure to effectively market and service our
products or termination of our relationship with Hakuto could result in
significant delays or interruption in our marketing and service programs in
Asia. This could materially and adversely affect our business, financial
condition and results of operations.
Our Management's Stock Ownership Gives Them The Power To Control Business
Affairs And Prevent A Takeover That Could Be Beneficial To Unaffiliated
Shareholders.
Certain members of our management, specifically Thomas J. Russell,
Chairman of our Board, Reuben F. Richards, Jr., President, Chief Executive
Officer and a director, and Robert Louis-Dreyfus, a director, are former members
of Jesup & Lamont Merchant Partners, L.L.C. They collectively beneficially own
more than 20% of our common stock. Accordingly, such persons will continue to
hold sufficient voting power to control our business and affairs for the
foreseeable future. This concentration of ownership may also have the effect of
delaying, deferring or preventing a change in control of our company, which
could have a material adverse effect on our stock price.
24
Unsuccessful Control Of The Hazardous Raw Materials Used In Our Manufacturing
Process Could Result In Costly Remediation Fees, Penalties Or Damages Under
Environmental And Safety Regulations.
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 a release of these
materials into the environment or other adverse environmental conditions occur,
we could experience interruptions in our operations and incur substantial
remediation and other costs. Failure to comply with environmental and health and
safety laws and regulations may materially and adversely affect our business,
financial condition and results of operations.
Our Business Or Our Stock Price Could Be Adversely Affected By Issuance Of
Preferred Stock.
Our board of directors is authorized to issue up to 5,882,352 shares
of preferred stock with such dividend rates, liquidation preferences, voting
rights, redemption and conversion terms and privileges as our board of
directors, in its sole discretion, may determine. The issuance of shares of
preferred stock may result in a decrease in the value or market price of our
common stock, or our board of directors could use the preferred stock to delay
or discourage hostile bids for control of us in which shareholders may receive
premiums for their common stock or to make the possible sale of the company or
the removal of our management more difficult. The issuance of shares of
preferred stock could adversely affect the voting and other rights of the
holders of common stock.
Certain Provisions Of New Jersey Law And Our Charter May Make A Takeover Of Our
Company 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.
The Price Of Our Common Stock Has Fluctuated Widely In The Last Year And May
Fluctuate Widely In The Future.
Our common stock is traded on the NASDAQ National Market, which has
experienced and may continue to experience significant price and volume
fluctuations that could adversely affect the market price of our common stock
without regard to our operating performance. In addition, we believe that
factors such as quarterly fluctuations in financial results, earnings below
analysts' estimates, and financial performance and other activities of other
publicly traded companies in the semiconductor industry could cause the price of
our common stock to fluctuate substantially. In addition, in recent periods, our
common stock, the stock market in general, and the market for shares of small
capitalization and semiconductor industry-related stocks in particular, have
experienced extreme price fluctuations which have often been unrelated to the
operating performance of affected companies. Any similar fluctuations in the
future could adversely affect the market price of our common stock.
Our stock price has fluctuated widely in the last year and may
fluctuate widely in the future. Since September 30, 2000, our stock price has
been as high as $55.38 per share and as low as $7.67 per share. Volatility in
the price of our common stock may be caused by other factors outside of our
control and may be unrelated or disproportionate to our operating results.
25
The Markets In Which We Compete Are Highly Competitive. An Increase In
Competition Would Limit Our Ability To Maintain And Increase Our Market Share.
We face substantial competition from a number of companies, many of
which have greater financial, marketing, manufacturing and technical resources.
Larger competitors could spend more on research and development, which could
give those competitors an advantage in meeting customer demand. We expect that
existing and new competitors will improve the design of their existing products
and will introduce new products with enhanced performance characteristics. The
introduction of new products or more efficient production of existing products
by our competitors could diminish our market share and gross margins.
25
Item 2. Properties
In June 2001, EMCORE completed its third phase of expansion at its
Somerset, NJ manufacturing facility. EMCORE purchased its manufacturing building
and leased an additional 47,000 square foot building located nearby. With the
additional space, EMCORE's capital equipment division, which manufactures market
leading MOCVD tools, has the capacity to triple the amount of production tools
manufactured per year. The expansion of the Somerset, NJ manufacturing facility
also significantly increased production capacity for EMCORE's existing
photonics, RF materials and devices; and enables EMCORE to develop new product
lines and meet the requirements of a rapidly expanding customer base. In fiscal
2000, EMCORE completed the first and second phase expansions of its RF materials
division. The expansion added another 7,000 square feet of space, which
increased the electronic material production capability for its InGaP HBT and
pHEMT products by nearly 400%. The expansion accommodates the addition of up to
ten new Enterprise Electronic Materials MOCVD production tools, engineered and
manufactured by EMCORE. This brings the total number of materials-related
production tools in operation at Somerset, NJ to twenty-four, whereby 500,000
four-inch wafers or 210,000 six-inch wafers can be produced annually. The
facility expansion also more than doubles EMCORE's characterization capabilities
to ensure the unrestricted flow of high quality epitaxial materials. The
second-phase expansion also increased the manufacturing capacity of EMCORE's
electronic device division. The electronic device division of EMCORE has been
expanded to augment EMCORE's capability to produce both 850nm and 1310nm
photodetectors for high-speed array transceivers.
In January 2001, EMCORE announced the opening of its expanded facility
located at its Sandia Technology Park site in Albuquerque, New Mexico. This
recent expansion triples EMCORE's cleanroom manufacturing capacity. The new
expanded facility adds an additional 36,000 square feet to the existing 50,000
square foot building, which houses EMCORE's solar cell, optical components and
networking products. EMCORE believes the additional cleanroom capacity is
critical in order to serve its growing customer base, and provides an
opportunity for EMCORE to continually develop new product technologies for the
growing global communication markets. The original 50,000 square foot facility
was completed in October 1998. EMCORE's Solar Cell division manufactures
advanced triple junction solar cells for satellite applications. EMCORE's
Optical Device division provides the building blocks for high-speed telecom and
data communications applications, including the Internet infrastructure, by
designing and manufacturing reliable and efficient high-speed laser components
such as VCSELs ) and VCSEL arrays.
The following chart contains certain information regarding each of
EMCORE's principal facilities. Each of these facilities contains office space,
marketing and sales, and research and development space. EMCORE also leases
office space in Santa Clara, California and Hsinchu, Taiwan.
Location Function Sq. Feet Terms
Somerset, Headquarters 40,000 Lease Expires in 2005 (1)
New Jersey
Manufacturing building for RF materials, MR 80,000 Owned by EMCORE
sensors, photodetectors and MOCVD
production systems
47,000 Lease Expires in 2006 (1)
Storage facility
Albuquerque, Manufacturing buildings for solar cells and 86,000 Owned by EMCORE
New Mexico VCSELs
Manufacturing building for VCSELs and 37,000 Leases Expire in 2002 (1)
array transceivers
(1) All leases have the option to be renewed by EMCORE, subject to inflation
adjustments.
27
Item 3. Legal Proceedings
In March 2001, EMCORE recorded a net gain of $5.9 million related to
the settlement of litigation. EMCORE is not aware of any pending or threatened
litigation against it that could have a material adverse effect on its business,
financial condition and results of operations.
Item 4. Submission of matters to a vote of security holders
Not applicable.
PART II.
Item 5. Market for the Registrant's Common Equity and Related Shareholder
Matters
EMCORE's common stock is traded on the NASDAQ National Market and is
quoted under the symbol "EMKR." The following table sets forth the quarterly
high and low sale prices for EMCORE's common stock during the three most recent
fiscal years. Stock prices have been adjusted to reflect a two-for-one (2:1)
common stock split that was effective on September 18, 2000.
Fiscal Year Ended September 30, 2000 high low
---- ---
First Quarter............................................................................ $19.6250 $6.0310
Second Quarter........................................................................... $86.5000 $15.3130
Third Quarter ........................................................................... $61.0000 $20.0000
Fourth Quarter .......................................................................... $62.5000 $28.5630
Fiscal Year Ended September 30, 2001
First Quarter............................................................................ $55.3750 $28.2500
Second Quarter........................................................................... $52.5000 $20.0000
Third Quarter ........................................................................... $44.1300 $19.6000
Fourth Quarter .......................................................................... $30.6400 $7.6900
Fiscal Year Ended September 30, 2002
First Quarter (through December 6, 2001)................................................. $17.0400 $7.6700
The reported closing sale price of EMCORE's common stock on December
6, 2001 was $16.51 per share. As of December 6, 2001, EMCORE had approximately
6,500 shareholders of record.
EMCORE has never declared or paid dividends on its common stock since
its formation. EMCORE currently does not intend to pay dividends on its common
stock in the foreseeable future so that it may reinvest its earnings in its
business. The payment of dividends, if any, in the future will be at the
discretion of the Board of Directors.
On May 7, 2001, EMCORE sold $175,000,000 aggregate principal amount of
5% convertible subordinated notes due 2006. The notes are initially convertible
into 3,588,793 shares of our common stock at a per share price of $48.7629. The
notes were sold to Credit Suisse First Boston Corporation, Merrill Lynch,
Pierce, Fenner & Smith Incorporated and First Union Securities, Inc. (the
"Initial Purchasers") in a private placement pursuant to Section 4(2) of the
Securities Act of 1933, as amended (the "Act") and, we understand, were
subsequently resold to qualified institutional buyers in reliance on the
exemption from registration provided by Rule 144A under the Act. The notes were
sold to the Initial Purchasers at 97% of face value. EMCORE filed a registration
statement on Form S-3 for the resale of the notes and the common stock into
which the notes are convertible with the SEC on July 20, 2001.
28
Item 6. Selected Financial Data
The following selected consolidated financial data for the five most
recent fiscal years ended September 30, 2001 of EMCORE is qualified by reference
to and should be read in conjunction with the Financial Statements and the Notes
thereto, and Management's Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere in this document. The Statement of
Operations data set forth below with respect to fiscal years 2001, 2000 and 1999
and the Balance Sheet data as of September 30, 2001 and 2000 are derived from
EMCORE's audited financial statements included elsewhere in this document. The
Statement of Operations data for fiscal years 1998 and 1997 and the Balance
Sheet data as of September 30, 1999, 1998 and 1997 are derived from audited
financial statements not included herein. All share amounts have been restated
to reflect EMCORE's two-for-one (2:1) common stock split that was effective on
September 18, 2000.
On December 5, 1997, EMCORE acquired MicroOptical Devices, Inc. in a
stock transaction accounted for under the purchase method of accounting for a
purchase price of $32.8 million. In connection with this transaction, EMCORE
recorded a non-recurring, non-cash charge of $19.5 million for acquired
in-process research and development, which affects the comparability of EMCORE's
operating results and financial condition.
Effective October 1, 2000, EMCORE changed its revenue recognition
policy to defer the portion of revenue related to installation and final
acceptance until such installation and final acceptance are completed. This
change was made in accordance with the implementation of U.S. Securities and
Exchange Commission Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements ("SAB 101"). Previously, EMCORE had recognized 100 percent
of revenue for products at such time as the product specifications had been met
and the title and risks and rewards of ownership had transferred to the customer
since EMCORE has historically completed such installation services successfully
and since such services have required minimal costs to complete. The effect of
this change is reported as the cumulative effect of a change in accounting
principle in the year ended September 30, 2001. This net effect reflects the
deferral as of October 1, 2000 of $3.6 million of revenue and accrued
installation expense previously recognized. EMCORE recognized the revenue
included in the cumulative effect adjustment during the year ended September 30,
2001.
(in thousands) As of September 30,
--------------------------------------------------------------
2001 2000 1999 1998 1997
Balance Sheet data ----------- ---------- ----------- ----------- ----------