UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2002
/ / 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 (I.R.S. Employer Identification No.)
of incorporation or organization)
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 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of common stock held by non-affiliates of the
registrant as of March 28, 2002 was approximately $228,315,543 (based on the
closing sale price of $9.61 per share).
The number of shares outstanding of the registrant's no par value common stock
as of December 20, 2002 was 36,833,069.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 2003 Annual
Meeting of Shareholders (to be filed with the Securities and Exchange Commission
on or before January 28, 2003) are incorporated by reference in Part III of this
Form 10-K.
EMCORE Corporation
FORM 10-K
For the fiscal year ended September 30, 2002
INDEX
Part I page
- ------ ----
Item 1. Business............................................................4
Item 2. Properties.........................................................31
Item 3. Legal Proceedings..................................................31
Item 4. Submission of Matters to a Vote of Security
Holders............................................................31
Part II
- -------
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters............................................................32
Item 6. Selected Financial Data............................................33
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................35
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...............................................................51
Item 8. Financial Statements and Supplementary Data........................52
Consolidated Statements of Operations for the years ended
September 30, 2002, 2001 and 2000..................................52
Consolidated Balance Sheets as of September 30, 2002 and
2001...............................................................53
Consolidated Statements of Shareholders' Equity for the years
ended September 30, 2002, 2001 and 2000............................54
Consolidated Statements of Cash Flows for the years ended
September 30, 2002, 2001 and 2000..................................55
Notes to Consolidated Financial Statements.........................57
Independent Auditors' Report.......................................78
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures..........................................79
Part III
- --------
Item 10. Directors and Executive Officers of the Registrant.................79
Item 11. Executive Compensation.............................................79
Item 12. Security Ownership of Certain Beneficial Owners and Management.....79
Item 13. Certain Relationships and Related Transactions.....................79
Item 14. Controls and Procedures............................................79
Part IV
- -------
Item 15. Exhibits, Financial Statement Schedules and Reports on Form
8-K................................................................80
SIGNATURES.........................................................82
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. Words such as "expects", "anticipates",
"intends", "plans", "believes" and "estimates", and variations of these words
and similar expressions, identify these forward-looking statements. These
forward-looking statements include, without limitation, any and all statements
or implications regarding:
o EMCORE Corporation's (EMCORE) ability to remain competitive and a
leader in its industry and the future growth of EMCORE, the
industry and the economy in general;
o the expected level and timing of benefits to EMCORE from its
restructuring and realignment efforts, including:
o expected cost reductions and their impact on EMCORE's financial
performance,
o expected improvement to EMCORE's product and technology
development programs, and
o the belief that restructuring and realignment efforts will
position EMCORE well in the current business environment and
prepare it for future growth with increasingly competitive new
product offerings and long-term cost structure;
o the anticipated cost of restructuring and realignment efforts;
o the possibility of charges to be recorded by EMCORE to reduce the
carrying value of excess and obsolete inventory and doubtful
accounts;
o difficulties in integrating recent or future acquisitions into
EMCORE's operations;
o EMCORE's ability to obtain or maintain quality system Certificates of
Registration; and
o guidance provided by EMCORE regarding its expected financial
performance in current or future periods, including, without
limitation, with respect to anticipated revenues for any period in
fiscal 2003 and subsequent periods.
These forward-looking statements involve risks and uncertainties that could
cause actual results to differ materially from those projected, including
without limitation, the following:
o EMCORE's restructuring and realignment efforts may not be successful
in achieving expected benefits, may be insufficient to align
EMCORE's operations with customer demand and the changes affecting
our industry, or may be more costly than currently anticipated;
o due to the current economic slowdown, in general, and setbacks in our
customers' businesses, in particular, our ability to predict
EMCORE's financial performance for future periods is far more
difficult than in the past; and
o other risks and uncertainties described in EMCORE's filings with the
Securities and Exchange Commission (SEC) (including under the
heading "Risk Factors" in this Annual Report), such as:
o cancellations, rescheduling or delays in product shipments;
o manufacturing capacity constraints;
o lengthy sales and qualification cycles;
o difficulties in the production process;
o changes in semiconductor industry growth;
o increased competition; and
o delays in developing and commercializing new products.
We assume no obligation to update the matters discussed in this Annual Report,
except as required by applicable law or regulation.
3
PART I
Item 1. Business
Company Overview
- ----------------
EMCORE Corporation, a New Jersey corporation established in 1984, offers a
versatile portfolio of compound semiconductor products for the broadband,
wireless communications and solid-state lighting markets. EMCORE's integrated
solutions philosophy embodies state-of-the-art technology, material science
expertise and a shared vision of our customer's goals and objectives to be
leaders and pioneers in the world of compound semiconductors. EMCORE's solutions
include: optical components for high-speed data and telecommunications; solar
cells and solar panels for global satellite communications; electronic materials
for high bandwidth communications systems, such as Internet access and wireless
telephones; metal organic chemical vapor deposition (MOCVD) production systems
for the growth of GaN, InGaN, AlGaN, GaAs, AlGaAs, InP, InGaP, InGaAlP, InGaAsP
and SiC epitaxial materials used in numerous applications, including data and
telecommunications modules, cellular telephones, solar cells and high-brightness
light-emitting diodes (HB-LEDs). For further information about EMCORE, visit
http://www.emcore.com. The information on EMCORE's web site is not incorporated
by reference into and is not made a part of this report.
Industry Overview
- -----------------
Recent advances in information technologies have created a growing need for
efficient and high-performance electronic systems that operate at very high
frequencies, require increased storage capacity, have augmented computational
and display capabilities and can be produced cost-effectively in commercial
volumes. In the past, manufacturers of electronic systems have relied on
advances in silicon semiconductor technology to meet many of these demands;
however, the new generation of high-performance electronic and optoelectronic
applications require 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 electronic 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;
o increased tolerance to high temperatures; 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, solar cells, HB-LEDs, radio frequency (RF) materials, electronic
materials and magneto resistive (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. Furthermore, the unique properties of compound
semiconductors enable a wide variety of optoelectronic applications for
fiber-optic transmission, display, and power generation. The markets targeted
include data, satellite and wireless communications, telecommunications,
lighting, consumer and automotive electronics and computers and peripherals.
4
The following factors have driven electronic systems' manufacturers who
require high-performance products and applications to compound semiconductor
systems and device solutions:
o launch of new wireless services and wireless high-speed data
systems;
o replacement of electrical backplanes with laser-based
optical backplanes in data and telecommunication systems;
o conversion to more efficient solar cells in satellite power
systems;
o widespread deployment of fiber optic networks and the
increased use of optical systems within these networks;
o increased 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 increased use of high-performance electronic devices in
automobiles; and
o the conversion to HB-LEDs from incandescent, halogen and
compact fluorescent lighting.
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 another element,
such as arsenic, phosphorous, nitrogen or antimony. 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 its compounds.
Many of the unique properties of compound semiconductor devices are
achieved by the layering of different 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) MOCVD. The
production systems that use these methods typically require expensive reactant
materials, use of certain toxic chemicals and tight control over numerous
manufacturing parameters that can pose technical, training and safety challenges
more rigorous than in methods used to manufacture of silicon devices. Although
the first three methods can yield wafers having high thickness uniformity with
acceptable electronic and optical properties, none of these methods can be
easily scaled up to high volume production, which is necessary for the
commercial viability of compound semiconductor devices. Compound semiconductor
wafers fabricated using the MOCVD method generally possess a better combination
of uniformity, 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.
5
The following chart summarizes (i) principal markets for, (ii) examples of
applications for, (iii) some products that incorporate, and (iv) certain
benefits and characteristics of compound semiconductor devices produced on
EMCORE's MOVCD production systems:
Market Representative Applications Products Benefits/Characteristics
- ------------------------- ---------------------------------- ------------------------ -------------------------------------
Satellite Power modules for satellites Solar cells and panels Radiation tolerance
Communications Satellite to ground RF materials Conversion of more light
Communication to power than silicon
Reduced launch costs
Increased bandwidth
Wireless Cellular telephones RF and electronic Increased network capacity
Communications Pagers Materials Lower power consumption
PCS handsets RF and electronic Reduced network congestion
Direct broadcast systems Devices Extended battery life
PDAs HB-LEDs Improved signal to noise
performance
Improved display visibility
Data communications High-speed fiber optic networks VCSEL components Increased network capacity
And optical links (including And arrays Increased data transmission
VSR OC-768, OC-192, Lasers speeds
OC-48, Gigabit Ethernet, Photodetector Increased bandwidth
Asynchronous transfer mode Components and Lower power consumption
or ATM, and Fibre Channel Arrays
networks) RF and electronic
Materials
Array transceivers
Serial transceivers
HB-LEDs
Telecommunications High capacity fiber optic trunk VCSEL components Increased data transmission
Lines And arrays speeds
Very Short Reach (VSR) 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 Lower temperature operation
Outdoor signage and displays Longer life
Digital readout signals
Traffic signals
Illumination applications
Consumer electronics DVDs VCSEL components High-speed data transmission
CD-ROMs And arrays Low power requirements
Telephones Integrated circuits Improved display visibility
Radios Lasers
Calculators HB-LEDs
Automotive electronics Engine sensors MR sensors Reduced weight
Dashboard displays HB-LEDs Lower power consumption
Indicator lights Increased heat tolerance
Antilock brake systems Lower emissions
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
6
The EMCORE Solution
- -------------------
EMCORE provides a broad range of compound semiconductor products and
services intended to meet its customers' diverse technology requirements.
Founded in 1984, EMCORE pioneered the development of a complete line of MOCVD
production systems and is currently the industry's only fully integrated
commercial supplier of the complete spectrum of compound semiconductor products.
EMCORE combines materials science expertise and process engineering aptitude to
provide MOCVD production systems, epitaxial wafers, package-ready devices,
packaged VCSELs and fiber optic modules to customers around the world.
EMCORE has two reportable operating segments: the systems-related business
and the materials-related business. The systems-related business is our
TurboDisc(R) MOCVD product line, which designs, develops and manufactures
systems and manufacturing processes. Revenues for the systems-related business
are derived primarily from sales of TurboDisc systems, as well as spare parts,
services and related products. The materials-related business is comprised of
our Photovoltaics, Optical Devices and Components and Electronic Materials and
Devices product lines. Revenues for the materials-related business are derived
primarily from the sales of solar cell products (including epitaxial material
(epi), cells, covered interconnect solar cells (CICs) and panels), VCSELs and
VCSEL-based transceiver and transponder modules, RF materials (including
heterojunction bipolar transistors (HBTs) and enhancement-mode pseudomorphic
high electron mobility transistors (pHEMTS)), MR sensors and process development
technology. The segments reported are the segments of EMCORE for which separate
financial information is available and are evaluated regularly by executive
management in deciding how to allocate resources and in assessing performance.
EMCORE's compound semiconductor product lines include:
o TurboDisc(R)MOCVD - EMCORE develops and manufactures advanced MOCVD
production systems and engineers and designs next-generation systems
to improve efficiency and lower production costs. Through 18 years of
development and manufacturing experience, EMCORE has developed
extensive materials science, process technology and MOCVD production
system manufacturing expertise to address its customers' needs and
believes that its proprietary TurboDisc deposition technology makes
possible one of the most cost-effective production processes for the
commercial volume manufacture of high-performance compound
semiconductor materials and devices. This technology coupled with
EMCORE's process expertise, provides the production platform for
various types of compound semiconductor materials 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. Customers can take advantage of
EMCORE's vertically integrated approach by purchasing custom-designed
materials and devices from EMCORE, or they can manufacture their own
products in-house using a TurboDisc MOCVD production system configured
to their specific needs.
o Photovoltaics - EMCORE manufactures advanced high-efficiency,
multijunction solar cells, CICs and solar panels. With smaller, more
efficient power generation, EMCORE's photovoltaic products help enable
satellite weight reduction, wing area reduction, improved radiation
tolerance and higher light to power conversion, which increases
payload capacity and economic return.
o Optical Devices and Components - EMCORE designs and manufactures
VCSELs which provide enhanced performance benefits to market
applications such as Internet access, onboard photonics, Gigabit
Ethernet and fiber optic switching, as well as Fibre Channel and
storage area network (SAN) applications. EMCORE also designs, develops
and manufactures high-speed optical transmitter modules, receiver
modules and transponders. EMCORE's line of VCSEL and PIN (the "P",
"I", "N" represent P-type, intrinsic and n-type semiconductor
materials, respectively) photodiode-based parallel optic modules are
designed for high speed optical networking applications, including VSR
OC-192 interconnection and high-speed optical backplanes used in data
switching and routing.
o Electronic Materials and Devices - Using TurboDisc MOCVD production
systems, EMCORE manufactures electronic materials, including pHEMTs
and HBTs for wireless communication instruments, and devices such as
MR sensors. Materials and devices are produced on a foundry basis in
partnership with specific customers according to their requirements
and under strict confidentiality.
7
In January 1999, General Electric Lighting and EMCORE formed GELcore
(GELcore), a joint venture to develop and market HB-LED lighting products.
HB-LEDs are solid state compound semiconductor devices that emit light and are
used in miniature packages for everyday applications such as indicator lights on
automobiles, traffic lights, computers and other electronic equipment. General
Electric Lighting and EMCORE have agreed that this joint venture will be the
exclusive vehicle for each party's participation in solid state lighting. Under
the terms of the joint venture agreement, EMCORE has a 49% non-controlling
interest in the GELcore venture and accounts for its investment under the equity
method of accounting.
See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations for information on EMCORE's financial results by segment
and product line revenues.
EMCORE's Strategy
- -----------------
EMCORE's objective is to maximize shareholder value by capitalizing on its
position in MOCVD process technology to become the leading supplier of compound
semiconductor materials, devices and production systems. The key elements of
EMCORE's strategy include:
I. 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.
EMCORE uses the most appropriate semiconductor process technology when designing
solutions to a customer's particular application. For example, EMCORE recently
introduced its Enterprise(R) 300LDM MOCVD production tool designed to achieve
high quality materials and high yields for consumer electronic applications.
This new tool produces devices for several applications, including DVDs and
CD-ROMs that allow for high data storage capacity. Engineered specifically for
the high-volume production of long-wavelength infrared and visible lasers,
VCSELs and InP-based electronic materials, EMCORE's 300LDM provides customers
with unparalleled run-to-run process control and is designed to accomplish
excellent uniformity of thickness, doping and epitaxial layer composition.
II. Target Potential High Growth Market Opportunities.
EMCORE's strategy is to target potential high growth market opportunities
where performance characteristics and high volume production efficiencies can
give compound semiconductors a competitive advantage over other devices.
Historically, while technologically superior, compound semiconductors have not
been widely deployed because they are more expensive to manufacture than
silicon-based semiconductors and other existing solutions. EMCORE believes that
as compound semiconductor production costs are reduced, new customers will be
compelled to use these products because of their higher performance
characteristics. For example, EMCORE focuses its efforts in high-growth areas in
communication infrastructure by providing complete solutions based on widely
accepted platforms such as Synchronous Optical Network (SONET), Asynchronous
Transfer Mode (ATM) and Gigabit Ethernet. EMCORE's Optical Devices and
Components product line manufactures high-speed optical transmitter modules,
receiver modules and transponders utilizing EMCORE's leading-edge VCSEL and PIN
photodiode array components for the data communications and telecommunications
markets. EMCORE's modules, designed to help solve the data bottle necking
problems for distances under 300 meters in central office and point-of-presence
environments, provide a cost effective alternative to more costly comparable
serial interconnects.
III. Pursue 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. Recently,
acquisitions have been a focus in order to enhance technologies.
8
Recent acquisitions include:
- In March 2002, EMCORE acquired certain assets, including equipment and
intellectual property, of the Applied Solar Division of Tecstar, Inc.
and its subsidiary, Tecstar Power Systems, Inc. (this acquired
business is referred to herein as "Tecstar"). Tecstar provides CICs
and solar panel lay-down services and has a flight heritage dating
back to 1958. Consequently, this acquisition augments EMCORE's
capability to penetrate the satellite communications' market by
providing EMCORE with the capacity to manufacture complete solar
panels using EMCORE's solar cells, thereby enabling EMCORE to provide
satellite manufacturers with proven integrated satellite power
solutions that considerably improve satellite economics. Satellite
manufacturers and solar array integrators can now rely on EMCORE as a
single supply source that meets all of their satellite power needs
with proven flight heritage.
- In December 2002, EMCORE acquired certain assets of privately held
Alvesta Corporation (Alvesta) of Sunnyvale, California. Alvesta is an
industry leader in the research and development of parallel optic
transceivers for fiber optic communication networks. Alvesta pioneered
four channel parallel optic transceivers for the Optical
Internetworking Forum, 10G Fibre Channel, 10 Gigabit Ethernet and
Infiniband applications. Alvesta's product revenues from sales of its
four-channel products were approximately $5 million in 2001. The
transaction included the acquisition of intellectual property and
inventory. In addition, EMCORE hired several Alvesta product
designers.
EMCORE is currently pursuing additional strategic acquisitions to acquire
new technologies, products and service offerings to broaden our market
penetration in the communications sector.
IV. Continually Invest 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,
materials 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 and
fiber optic module design expertise, including the development of new low-cost,
high-volume wafers, devices and modules for its customers. In order to remain a
leader in our market segments, EMCORE not only addresses our customers' current
needs, but we also work with them regarding their evolving requirements. In
addition, EMCORE's development efforts are focused on continually lowering the
production costs of its products. For example, continuing EMCORE's standing as
the world leader in GaN production platforms, EMCORE formally released in fiscal
2001 the E300 GaNzilla(TM), one of the most powerful tools available for the
production of high brightness blue and green LEDs. Similarly, EMCORE recently
released the latest version of its high-efficiency advanced triple junction
solar cells, which now incorporates a monolithic integrated diode. In March
2002, EMCORE introduced its first 10 Gigabit per second (Gbps) Transmit Optical
Subassembly (TOSA) and Receive Optical Subassembly (ROSA).
V. Target Positive Cash Flows From Operations.
Management is committed to reducing EMCORE's cost structure by focusing on
lowering the breakeven points for each of its product lines. During fiscal 2002,
EMCORE proceeded with a restructuring program, consisting of the realignment of
all engineering, manufacturing and sales/marketing operations, as well as
workforce reductions. Included in the provision for restructuring and impairment
charges recorded in fiscal 2002 were severance and fringe benefit charges
related to employee termination costs for 330 employees. We expect this program
to lower our expenditures by approximately $4.9 million per quarter in fiscal
2003. EMCORE also essentially eliminated all outside contractor and temporary
employees and significantly reduced overall expenditures for materials, software
and capital assets. As part of the ongoing effort to cut costs, EMCORE
implemented a program to focus research and development efforts on projects that
can be expected to generate returns within one year. As a result, EMCORE has
been able to reduce overall research and development costs without, we believe,
jeopardizing future revenue opportunities. These combined actions should result
in a cost reduction of approximately $6.0 million to $8.0 million per quarter in
fiscal 2003, which we believe should enable us to achieve our goal of having
positive cash flow from operations by the end of fiscal 2003, assuming revenues
in fiscal 2003 are consistent with revenues in fiscal 2002.
9
EMCORE's Product Lines
- ----------------------
TurboDisc(R) MOCVD
EMCORE is an industry leader in MOCVD system manufacturing for the
production of advanced epitaxial materials. Headquartered in Somerset, New
Jersey, EMCORE pioneered the use of stainless steel growth chambers in the
mid-1980s to enhance the safety of the MOCVD process and allow the use of
automated loading systems to transport wafers into the growth chamber.
Since its founding in 1984, EMCORE's proprietary TurboDisc technology has
used a unique high-speed rotating disc in a stainless steel growth chamber with
integrated vacuum-compatible loading chambers. To produce an epitaxial wafer, a
bare substrate, such as gallium arsenide, indium phosphide or germanium, is
placed on a wafer carrier in the TurboDisc growth chamber and heated to high
temperatures. Based on a predetermined formula, metal organic materials and
hydride gases are introduced 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 repeatable manner.
TurboDisc technology not only ensures uniformity of deposition across the
wafer, but also offers flexibility for diverse applications. Our E450 system for
solar cells and E300 GaNzilla system for LEDs, are among the largest production
systems with high throughput and low cost of ownership commercially available.
The precise control of reactant gas flow leads to exceptional material
utilization efficiency.
EMCORE's MOCVD production systems, focused on the III-V semiconductor
industry, are configured specifically for end-market applications such as
HB-LEDs and advanced electronic materials and devices. This approach provides
customers with expedited ramping times from install to material production,
resulting in, we believe, the most cost effective solutions in the industry.
EMCORE's tool-development strategy is supplemented by expertise in epi growth
and device manufacturing. With a large staff of expert epi growers, EMCORE
integrates feedback about the critical parameters involved with the growth of
high quality materials into its design of MOCVD production systems. This
knowledge has enabled EMCORE to develop MOCVD systems that produce the materials
results required to meet stringent device performance standards. In order to
meet our objective of being a provider of complete solutions to the
high-performance equipment market, we offer several MOCVD systems that
manufacture a variety of products. The following table illustrates the
flexibility of EMCORE's product line, listing each MOCVD system and the
associated market applications.
EMCORE's MOCVD Systems Product Applications
- ----------------------------- --------------------------------------------------
Pioneer 75 University and research & development, various
applications
Discovery 180 LDM VCSELs, laser diodes, AlGaAs and InGaAs detectors
Discovery 180 GaN 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 450 EM Electronic materials such as pHEMTs, HBTs, FETs,
E-mode devices
Enterprise 450 LED High-brightness red, orange and yellow LEDs
EMCORE believes its TurboDisc MOCVD production systems, which have an
average selling price in excess of $1.2 million, 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.
10
EMCORE also believes that its MOCVD products are well positioned to take
advantage of recent trends in the LED marketplace, particularly in the Asian
marketplace where EMCORE has derived a significant portion of its revenues. LEDs
are being designed into miniature packages in everyday applications such as
indicator lights on automobiles, computers, cellphones and other electronic
equipment. LEDs offer substantial advantages over small incandescent bulbs,
including longer life, lower maintenance costs and energy consumption and
smaller space requirements. Handset manufacturers recently have begun to use
blue or white backlighting in new models, rather than the traditional
yellow-green backlighting that has been common during the last several years. We
believe that LED chips produced on our MOCVD production systems meet the blue
and/or white lighting characteristics that the market is now demanding. In
addition, we believe that the development of full color displays for mobile
handsets will increase demand for white LEDs in order to maximize the
effectiveness of the full color display. We believe our E300 GaNzilla MOCVD
system is the world's most powerful tool available for the production of high-
brightness blue and green LEDs, offering one of the highest throughputs in the
industry for the growth of GaN materials.
We are consistently focused on development efforts on further improving the
efficiency, as well as lowering the manufacturing cost, of our products and
improving other performance characteristics of devices for certain markets.
EMCORE's latest generation of TurboDisc products for GaAs and InP materials were
released in fiscal 2001 with many innovations including:
o new reactor design to improve source efficiency, greater up-time and
lower maintenance;
o digital control system to reduce electronic noise;
o modular component design to simplify component and design upgrades;
and,
o improved temperature control with the ability to monitor and control
the deposition temperature to within 1 to 2 degrees Celsius.
In fiscal 2001, EMCORE introduced with positive customer acceptance, the
E300 GaNzilla featuring a reactor design with greater source efficiency and
larger batch size than our previous GaN reactors. This product release has been
highly successful with 14 reactors sold through fiscal 2002 and installed in 3
continents.
Photovoltaics
EMCORE serves the global communications market by providing advanced solar
cell products and solar panels for application in the space industry. Compound
semiconductor solar cells are used to power satellites because they are more
resistant to radiation levels in space and convert substantially more power from
light, therefore weighing less per unit of power than silicon-based solar cells.
These characteristics increase satellite life, increase payload capacity and
reduce launch costs. Solar cells are typically the largest single cost component
of a satellite.
A solar cell works as follows: the "photovoltaic effect" is the basic
physical process through which a solar cell converts sunlight into electricity.
Sunlight is composed of photons, or particles of solar energy. These photons
contain various amounts of energy corresponding to the different wavelengths of
the solar spectrum. When photons strike a solar cell, they may be reflected or
absorbed, or they may pass right through the cell. Only the absorbed photons
generate electricity. When this happens, the energy of the photon is transformed
into an electric current. Special electrical properties of the solar cell
provide the voltage needed to drive the current through an external load (such
as a solar array for a spacecraft).
EMCORE designs and manufactures multi-junction compound semiconductor solar
cells for commercial satellite applications in its facility in Albuquerque, New
Mexico. This facility includes an automated manufacturing system that monitors
production processes, uses electronic run cards and provides real-time
production rates and yields for process engineering. EMCORE currently
manufactures the most efficient commercially available radiation resistant solar
cell in the world, using an advanced triple-junction cell design and with an
average beginning of life efficiency of 27.5%. Satellite success and
corresponding revenues depend on power efficiency and the satellite's capacity
to transmit data.
11
In March 2002, EMCORE acquired Tecstar, which provides CICs and solar panel
lay-down services. Consequently, this acquisition augments EMCORE's capability
to penetrate the satellite communications market by providing EMCORE with the
capacity to manufacture complete solar panels using EMCORE's solar cells,
thereby enabling EMCORE to provide satellite manufacturers with proven
integrated satellite power solutions that considerably improve satellite
economics. Satellite manufacturers and solar array integrators can now rely on
EMCORE as a single supply source that meets all of their satellite power needs
with proven flight heritage. Furthermore, EMCORE obtained significant patents in
this acquisition that will enable EMCORE to significantly improve the
engineering and design of solar cell products. EMCORE will continue Tecstar's
impressive flight heritage and solar component manufacturing expertise, which
dates back to 1958 when the Vanguard satellite with Tecstar solar cells was
launched. Tecstar's solar panel technology has flown on numerous successful
satellite missions, including Lockheed Martin's Chinastar, Loral's Telstar
satellite and Orbital Sciences' ORBCOMM Constellation. EMCORE is currently
completing the process of qualifying its advanced solar cells with Tecstar's
proven solar panel processes for Low Earth Orbits (LEO) and Geosynchronous Earth
Orbits (GEO). The combination of Tecstar's demonstrated success with well-known
space programs and EMCORE's solar cell technology should enable EMCORE to
dramatically improve satellite economics. Through well-established partnerships
with major satellite manufacturers and a proven qualification process, EMCORE
believes it can play a vital role in the evolution of telecommunications and
data communications around the world.
Recent Highlights:
- EchoStar VIII was successfully launched in August 2002. EchoStar VIII
is the first high-power GEO satellite in orbit powered by EMCORE
high-efficiency solar cells.
- In July 2002, EMCORE was awarded a contract by ESA/ASTRIUM to supply
high efficiency solar panels for use in the CRYOSAT Satellite program,
the purpose of which is to investigate climate change behavior
patterns.
Optical Devices and Components
Over the past several years, communication networks have experienced
dramatic growth in data transmission traffic due to worldwide Internet access,
e-mail and e-commerce. These communication networks include those used by local
and long distance carriers as well as Internet service providers. The bulk of
this traffic is routed through the optical networking infrastructure. Optical
fiber offers substantially greater capacity, is less error prone and is easier
to administer than copper wire. SONET is the primary standard for high-speed
transmission of communication over optic fiber. More recently, the demand for
system bandwidth is being addressed by a technique called Wavelength Division
Multiplexing (WDM). WDM increases bandwidth by allowing several optical signals,
each of a different wavelength, to be transmitted simultaneously on a signal
optic fiber. To ensure that routing and switching of information occurs
accurately, ATM is utilized on top of the SONET optical base. ATM is designed to
efficiently integrate voice, data and video and easily scale bandwidth. More
recently, performance improvements in processors require high-speed data
interconnect and networking applications. Fibre Channel is capable of
transmitting data at rates exceeding 1 Gbps in both directions simultaneously
and is used for achieving high-speed data transfer among workstations,
mainframes, data storage devices and other peripherals. EMCORE's objective is to
be a leading supplier of high-performance optical devices and components for the
global communications market. EMCORE's Optical Devices and Components groups are
located in Albuquerque, New Mexico.
VCSELs
EMCORE designs, develops and manufactures high-speed VCSELs and PIN
photodiode components and subassemblies for the data communications and
telecommunications markets. EMCORE offers a complete product line of VCSEL and
PIN photodiode solutions, including bare die, packaged components and optical
subassemblies for integration into Gigabit Ethernet, Fibre Channel, Infiniband,
WDM, ATM systems, and high-speed telecom applications, including VSR OC-192 and
high speed optical backplanes.
12
VCSELs are revolutionary compound semiconductor microlaser diodes that emit
light vertically from the surface of a fabricated wafer. 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 fiber optic communication
solution.
There are two major fabrication processes for VCSELs: ion-implantation and
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
preferable for applications requiring data rates higher than 1 Gbps, which is
the trend in the datacom industry. EMCORE established a consistent manufacturing
process for the oxide VCSEL fabrication process despite the inherent challenges
of this manufacturing technique compared to the implant process. EMCORE is the
leading high-volume manufacturer of oxide VCSELs.
VCSELs have many advantages, including ultra-high modulation rates for
advanced information processing, extremely low power consumption, high fiber
optic coupling efficiencies, circular output beams and photolithography-defined
geometries. Key features of EMCORE's VCSELs, arrays and subassemblies are:
o fast transmission speed ranging from 1 to 10 Gbps, transitioning to 20
Gbps per channel;
o consistent manufacturing process resulting in VCSELs with consistent
output power and threshold current over a wide operating temperature
range;
o greater device uniformity enabling simplification of circuit design
and seamless integration into OEM systems; and,
o significant performance advantages over traditional laser diodes,
including greater control over beam size and wavelength, reduced
manufacturing complexity and packaging costs, and lower power
consumption.
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 WDM 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, fiber optic switching and routing, such as
Gigabit Ethernet and SAN.
VCSEL-based array transceivers and transponders
VCSEL-based array transceivers and transponders, EMCORE's primary fiber
optic products, are penetrating telecommunication markets as solutions for
low-cost, 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 delivered commercially available
high-speed array transceivers and transponders for the data and
telecommunications markets. We work closely with our customers' systems design
teams to better understand product applications in new and existing systems.
EMCORE's transceivers and transponders offer OEMs several advantages, including
products that:
o have fast transmission speeds up to 40 Gbps aggregate throughput;
o are designed for high volume manufacturing;
o utilize EMCORE's leading-edge VCSEL array and PIN photodiode array
components; and
o deliver significant cost-performance and application flexibility
advantages over traditional serial solutions.
13
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 light from a multi-mode fiber.
EMCORE has successfully developed an 850 nm 1x12 photodetector array at
operating speeds of 1.25 Gbps and 2.7 Gbps per channel. In addition, 850 nm
singlets and 1x4 arrays at 10 Gbps have been developed. The arrays perform light
to logic conversions for data transmissions over multi-mode fiber ribbon cable.
The long-wavelength 1310 nm photodetector product is geared largely toward the
high-speed telecom medium range market/application using single-mode fiber.
Furthermore, EMCORE can produce devices that are hermetically sealed, ensuring
high reliability regardless of the nature of device packaging.
Since EMCORE first introduced its new family of fiber optic products to the
market, EMCORE has had several accomplishments that have provided the
marketplace with high-speed solutions to alleviate data congestion. Some of
these recent achievements include:
- In March 2002, EMCORE released transmitting optical subassembly (TOSA)
and receiving optical subassembly (ROSA) products operating at a data
rate of 10 Gbps. EMCORE offers TOSAs and ROSAs in both LC and SC
coupling formats. These OSAs are built upon EMCORE's photodetectors
and award-winning 10 Gbps VCSELs (2001 Circle of Excellence Product
Award by Photonics Spectrum), demonstrating superior electro-optical
performance and reliability. The design and processes of these
subassemblies are highly leveraged by and compatible with those of the
standard products for 2.5 Gbps. This design philosophy for the
products and processes provides, we believe, the most cost-effective
solutions. Most of the leading OEMs have selected EMCORE's 10 Gbps
TOSAs and ROSAs as the key components for their small-form-factor and
low-cost transceivers and transponders. These XFP and XPAK
transceivers will be widely used in applications such as 10 Gigabit
Ethernet, 10 Gigabit Fibre Channel, and proprietary links.
- In July 2002, EMCORE received a prestigious R&D 100 Award in a
competition sponsored annually by R&D Magazine. The award was in
recognition of advanced fiber optic module development work,
accomplished by EMCORE in conjunction with Sandia National
Laboratories, for the MTR8500 VSR OC-192 Parallel Array Transponder.
The MTR8500, which provides VSR interconnections over parallel fiber
links at SONET OC-192 data rates, was the first commercially available
300-pin transponder compliant with the Optical Internetworking Forum's
VSR-1 Implementation Agreement (OIF-VSR4-0.10).
- During fiscal 2002, EMCORE announced the expansion of its optical
device product portfolio with the commercial availability of two new
1310 nm, high speed, high performance PIN diodes designed for use in
OC-48 and OC-192 data and telecom applications. The 2.5 GHz, 1X12 PIN
diode array and 10 GHz PIN diode singlet are designed to meet all
requirements of "Telcordia 468" standard including chip-level
hermeticity, and therefore, offer significant cost savings as a result
of their minimal packaging requirements. Furthermore, PIN diodes from
EMCORE feature a high degree of responsivity, low capacitance, low
dark current, and high bandwidth.
14
Electronic Materials and Devices
The manufacturing process for electronic materials is based on EMCORE's
proprietary TurboDisc technology which 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.
Electronic Materials
RF materials are compound semiconductor materials used in wireless
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 AlGaAs pHEMT materials
including E-mode devices that are used for power amplifiers for next generation
wireless infrastructure such as 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. In
addition, recent developments and transfers to production of enhancement mode
pHEMT technologies have demonstrated their continued competitiveness for handset
applications. EMCORE believes that its ability to produce high volumes of RF
materials at a low cost will encourage their adoption in new applications and
products.
EMCORE's Somerset, New Jersey manufacturing facility has six TurboDisc
MOCVD production systems dedicated to electronic materials production. EMCORE
also equipped its wafer fabrication area with state of the art cassette to
cassette characterization equipment.
Electronic Devices
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
using this technology. Through fiscal 2002, EMCORE had delivered more than 15
million devices to General Motors Powertrain for crank and cam speed and
position sensing applications.
15
HB-LED Joint Venture
HB-LEDs are solid state compound semiconductor devices that emit light and
are used in miniature packages in everyday applications such as indicator lights
on automobiles, computers and other electronic equipment. HB-LEDs offer
substantial advantages over small incandescent bulbs, including longer life,
lower maintenance costs and energy consumption and smaller space requirements.
Groups of HB-LEDs can make up single or full-color electronic displays.
Presently, HB-LED chips produced on EMCORE's MOCVD production systems are used
for backlighting in applications such as wireless handsets, computer monitors
and automotive dashboard lighting. In addition, they are used in consumer
products and office equipment as indicator lighting, in full color displays,
message advertising and informational signs, landscape lighting and traffic
signals. Some of our customers manufacture HB-LED components that emit white
light using blue or ultraviolet HB-LEDs produced on EMCORE's MOCVD production
systems. By passing blue HB-LED light through certain conversion materials such
as phosphors, or by using blue in combination with HB-LEDs of other appropriate
colors, white light emission can be obtained.
In January 1999, EMCORE and General Electric Lighting formed GELcore LLC
(GELcore), a joint venture to develop and market HB-LED lighting products. Under
the terms of the joint venture agreement, EMCORE has a 49% non-controlling
interest in the joint venture. Both 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 and device design
expertise with General Electric Lighting's brand name recognition, phosphor
technology and extensive marketing and distribution capabilities. GELcore's
current product line includes traffic lights, 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 HB-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.
Recent highlight: In July 2002, EMCORE announced that it received a patent
for its invention of a semiconductor laser separation technique for gallium
nitride-based and other materials grown on sapphire substrates. The new
technique, which uses a patterned laser projection to separate the processed
wafer into several thousand individual devices, solves many challenges inherent
with current separation techniques. The new method designed by EMCORE, which has
been successfully employed in a high-volume HB-LED manufacturing production
facility for over 2 years, will expedite manufacturing times of GaN-based blue
and green HB-LEDs and improve GaN materials device yields and throughput. It
will also have a significant impact on the cost and manufacturability of all
devices on sapphire substrate. The new device separation technique from EMCORE
virtually eliminates yield loss, requires low maintenance and significantly
improves device fabrication cycle times. Using EMCORE's method, device
separation is achieved by laser ablation, where a laser beam is passed through
optical elements and masks to produce a patterned laser projection. The
patterned laser projection is then directed at the wafer surface and applied for
a specified time at a specified power to achieve a precise cut into the wafer
and dramatically increase the number of devices that can be achieved from a
single wafer.
Government Research Contract Funding
- ------------------------------------
EMCORE derives a portion of its revenue from funding of research contacts
with the U.S. Government (Government). These contracts typically cover work
performed from over several months up to four years. These contracts may be
modified or terminated at the convenience of the Government. Therefore, these
programs may be subject to Government budgetary fluctuations. The contracts
generally provide that we may elect to retain title to inventions made in the
course of research with the Government obtaining a non-exclusive license to
practice such inventions for Government purposes. For the fiscal years ended
September 30, 2002, 2001, and 2000, Government funding represented 4%, 1% and 2%
of total revenue, respectively.
Recent highlight: In June 2002, EMCORE signed a contract with Defense
Advanced Research Projects Agency (DARPA) under which it will participate in the
Department of Defense agency's mission to develop wide bandgap
semiconductor-based high power, high frequency electronics for use in military
applications based on EMCORE's GaN technology. The contract consists of a $3.0
million baseline project to be completed over an 18-month period, and $1.0
million of additional work to be performed at the Government's option over a
subsequent 10-month period. The Government has not yet exercised this option.
EMCORE will recognize revenue to the extent of costs incurred plus the estimated
gross profit as stipulated within the contract, based upon contract performance.
16
Customers
- ---------
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' end-use 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. EMCORE's customer
base includes many of the largest semiconductor, telecommunications, consumer
goods and computer manufacturing companies in the world. Some of our customers
include Agere Systems, Inc., Agilent Technologies Ltd., Anadigics Inc.,
Boeing-Spectrolab, Corning, Inc., General Motors Corp., Hewlett Packard Co.,
Honeywell International, Inc., Infineon Technologies AG, Loral Space &
Communications Ltd., 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., Tyco, Inc., many of the
largest electronics manufacturers in Japan and a number of Taiwanese, Chinese
and Korean companies. EMCORE also sells to a number of other customers whose
names cannot be identified because of confidentiality obligations.
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.
Marketing and Sales
- -------------------
EMCORE actively markets its products through select advertising and
participation at trade shows. Our customers work directly with our internal
sales force and senior management for sales in North America, Europe and Taiwan.
To market, sell, and service certain of our products in Japan and China, EMCORE
relies on Hakuto Co., Ltd. Hakuto has exclusive distribution rights for certain
systems-related products in China and Japan through March 2008. Hakuto has
marketed and serviced EMCORE's products since 1988 via six branch offices and
owns approximately 4% of EMCORE's common stock. Until he retired in 2002, the
President of Hakuto had also been a member of EMCORE's Board of Directors since
1997. EMCORE uses DI Systems to market and service EMCORE's systems-related
products in South Korea and Nissho Iwai Corporation to market photovoltaic
products in Japan, Korea and India.
In addition to EMCORE's three manufacturing facilities, it also maintains
one domestic sales office located in Santa Clara, California and two overseas
sales offices located in France and Taiwan. These offices were opened to
efficiently service and provide engineering support closer to EMCORE's customer
base in these areas. As a result of the introduction of many new products during
fiscal 2002, EMCORE's management perceives the need for more frequent
interaction with our customers. As a result, EMCORE is considering opening
additional overseas sales offices to facilitate business transactions and act as
a liaison between our Asia Pacific customers and our U.S. corporate office.
EMCORE allows each product line to maximize its reach into each market
segment. While there are common technologies used by each product line, the
customers and market segments are much more diverse. Each product line has a
marketing and sales organization that can focus completely on the customer
needs, the service required both before and after the order is received, as well
as on the competitive threats each product and market segment faces. With
regards to systems-related products, EMCORE seeks to match 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 sales cycle is
typically lengthy and requires continued participation from salespersons, field
engineers and product designers. The period of time from the initial contact
with the customer to the customer's placement of an order is typically three to
nine months or longer. EMCORE's sales cycle for materials-related products
usually runs three months to in excess of a year, during which time EMCORE
develops the formula of
17
elements necessary to meet the customer's specifications and qualifies the
materials, which may also require the delivery of samples. Accordingly, EMCORE
is able to develop strategic, and therefore long lasting, customer relationships
and technologies that are industry leading and that customers want, which EMCORE
believes will enable it to ultimately achieve EMCORE's objective of becoming
market leaders as well as technology leaders in each of its product lines.
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 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 or less. 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. EMCORE operates warehouse depots in Taiwan and
in Europe to provide improved timely service to its overseas customers. As of
September 30, 2002, EMCORE employed 26 field service engineers and staff who
install MOCVD systems and provide on-site support.
Backlog
- -------
As of September 30, 2002, EMCORE had a backlog believed to be firm of
approximately $45 million, consisting of approximately $26 million of
system-related orders and $19 million of materials-related orders. This compares
to a backlog of $75 million as reported at the end of the prior year. The
decrease in backlog was primarily attributable to decreased demand experienced
within EMCORE's systems-related product line, which resulted in a significantly
lower number of new orders booked in fiscal 2002 as compared to fiscal 2001. The
current economic climate has reduced capital spending dramatically during the
past year, particularly in the data and telecommunication sectors, where EMCORE
has traditionally sold a significant portion of systems-related and
material-related products. Historically, significant portions of our
materials-related revenues are not reported in backlog since our customers have
reduced lead times. Many of our materials-related sales usually occur within the
same month when the purchase order is received. The backlog does not include
orders for product that have not met qualification specifications, nor does it
include anticipated service or component orders, estimated at $8 million
annually, since these orders have very short lead times. We believe the entire
backlog could be filled during fiscal 2003. However, especially given the
current market environment, customers may delay shipment of certain orders until
fiscal 2004. Backlog also could be adversely affected if customers unexpectedly
cancel purchase orders accepted by us.
Manufacturing
- -------------
EMCORE's operations include MOCVD system engineering and manufacture, wafer
fabrication, design and device production, solar panel engineering and assembly
and fiber optic module design and manufacture. Many of EMCORE's manufacturing
operations are computer monitored or controlled to enhance reliability and
yield. EMCORE manufactures its own MOCVD systems. EMCORE outsources the
manufacture of some components and sub-assemblies, but performs all final system
integration, assembly and testing. As of September 30, 2002, EMCORE had 350
employees involved in manufacturing. The location of and products manufactured
at EMCORE's facilities are summarized below:
Location EMCORE product line
- ------------------------------ -----------------------------------------------
Somerset, New Jersey - TurboDisc MOCVD (production systems)
(headquarters) - Electronic Materials and Devices (HBTs,
pHEMTs and MR sensors)
Albuquerque, New Mexico - Photovoltaics (solar cells)
- Optical Devices and Components (VCSELs and
fiber optic modules)
City of Industry, California - Photovoltaics (CICs and solar panels)
18
EMCORE fabricates electronic materials and devices at its facilities in New
Jersey and New Mexico, which have a combined clean room area totaling
approximately 41,000 square feet. Unlike silicon semiconductor technology, which
could involve up to a 100-step manufacturing process, our materials-related
products are manufactured in a four-part process: epitaxial deposition,
fabrication, testing and packaging. Up to 80% of the manufacturing process is
completed in our internally manufactured MOCVD production systems. The epitaxial
deposition process represents the growth of thin layers of SiC, GaN or other
materials on a polished wafer, depending on the nature of the device under
production. Following epitaxy, chips are fabricated in a clean room environment.
The final steps involve testing and cutting prior to shipment to the customer.
The manufacturing process also involves extensive quality assurance systems
and performance testing. Both EMCORE's New Jersey and New Mexico facilities have
acquired and maintain certification status for their Quality Management Systems.
The New Jersey facility, which is used by EMCORE's TurboDisc MOCVD and
Electronic Materials and Devices groups, is registered to ISO 9001 + QS
9000-1998. The New Mexico facility, which is used by EMCORE's Photovoltaics and
Optical Devices and Components groups and the California facility, which is also
used by the Photovoltaics group are registered to ISO 9001.
Sources of Raw Materials
- ------------------------
Outside contractors and vendors are used to supply raw materials and
standard components and to assemble portions of end systems from EMCORE
specifications. In certain cases, EMCORE depends on sole, or a limited number
of, vendors of components and raw materials; however, EMCORE is continually
reviewing efforts to mitigate risks. We generally do not carry significant
inventories of any raw materials. EMCORE maintains inventories it believes are
sufficient to meet its near term needs. 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. EMCORE maintains ongoing
communications with its vendors to try to ensure against interruptions in supply
and has, to date, generally been able to obtain sufficient supplies in a timely
manner. EMCORE implemented a vendor program to inspect quality and review
suppliers and prices in order to standardize purchasing efficiencies and design
requirements in order to maintain as low a cost of sales as possible. If we were
to change any of our limited or sole source vendors, we would be required to
re-qualify each new vendor. Re-qualification could prevent or delay product
shipments that could negatively affect our results of operations. In addition,
our reliance on these vendors may negatively affect our production if the
components vary in quality or quantity. If we are unable to obtain timely
deliveries of sufficient components of acceptable quality, or if the prices of
components for which we do not have alternative sources increase, our business,
financial condition, results of operations and cash flows could be materially
and adversely affected.
Research and Development
- ------------------------
The semiconductor industry is characterized by rapid changes in process
technologies with increasing levels of functional integration. To maintain and
improve its competitive position, EMCORE invests significant resources in
research and development. Our 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 23 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 65 scientists, engineers, technicians and staff, 36
of which have a Ph.D. degree. The research and development staff utilizes x-ray,
optical and electrical characterization equipment that provides instant data
allowing for shortened development cycles and rapid customer response. During
fiscal years 2002, 2001 and 2000, EMCORE invested $41.0 million, $53.4 million
and $32.7 million towards our product research and development activities. As
part of the ongoing effort to cut costs, EMCORE implemented a program to focus
research and development efforts on projects that can be expected to generate
returns within one year. As a result, EMCORE has been able to reduce overall
research and development costs without, we believe, jeopardizing future revenue
opportunities. 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. For example:
o During fiscal 2002, EMCORE's E300 GaNzilla system has seen market
penetration in every major geographical market area with tools
shipping within North America and to Europe and Asia. The initial
system installations have proven to the market the versatility of our
E300 GaNzilla system and its ability
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to perform in a robust and stable mode for production. We have
continuously improved our blue (470 nm) and green (525 nm) HB-LED
growth processes throughout the year, resulting in typical emission
powers of 3.0 mW and 2.0 mW, respectively, for standard die conditions
from both the E300 and D180 GaN reactor platforms. We have also
started work on ultraviolet HB-LEDs (~ 400 nm), intended for
solid-state-lighting, where we have achieved 30 mW power from a
flip-chip design structure. Furthermore, we have developed AlGaN-based
solar-blind detectors for a government-sponsored contract, achieving
almost 50% external quantum efficiency in the 250-280 nm wavelength
detection range.
o EMCORE is currently designing new products for the high-performance
optical communications market. In the field of optical devices and
components, EMCORE has been the leader in the development of
high-speed VCSELs. The 10 Gbps VCSEL chips and packages have been
successfully developed and released to production. These high-speed
VCSELs can be produced as singlets or as arrays for much higher
bandwidth transceivers. EMCORE has invested significant resources in
developing VCSELs operating near 1310 nm wavelength. Steady progress
has been made. The success of this project will lead to a low-cost key
component for OC-48 and OC-192 transceiver components. 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 VSR OC-192 transponder and 12 x 2.7 Gbps array
transceiver successfully qualified and implemented by OEMs, EMCORE
plans to continue with this roadmap to introduce a family of
state-of-the-art products for VSR fiber optics modules. Through its
acquisition of Alvesta, EMCORE has added four-channel transceivers and
transponders to its fiber optic product offering.
o In the field of solar cells, development of advanced device structures
and growth techniques are enabling both an increase in solar cell
efficiency from EMCORE's current industry leading 27.5% solar cell to
a 28.5% product and the integration of a true monolithic bypass diode
on the solar cell.
o For electronic materials, EMCORE has continued to develop advanced HBT
and pHEMT structures using next generation materials, such as InGaAsN
and InP.
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 and 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
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EMCORE's success and competitive position in sales of semiconductor
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 28 U.S. patents and three
foreign patents, and others are either pending (65 patent applications filed) or
under in-house review (2 disclosures and draft patent applications). Included in
these amounts are patents and patent applications acquired from Tecstar. 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. In addition, EMCORE actively markets and
licenses its intellectual property.
Some recently issued patents and filed patent applications include:
o U.S. Patent No. 6,413,839 granted on July 2, 2002 entitled
"Semiconductor Device Separation" covers the device separation
technique for gallium nitride-based and other materials grown on
sapphire substrates, and
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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 VSR fiber optics
modules have generated eight patent applications to date.
EMCORE 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 groups
and executing non-disclosure agreements with its employees, joint venture
partners, customers and suppliers.
As is typical in our industry, we have, from time to time, received, and
may continue to receive in the future, letters from third parties, asserting
patent rights or other intellectual property rights against certain of our
products and processes. None of the claims to date has resulted in the
commencement of any litigation against us. From time to time, EMCORE licenses
from third parties technology and patent rights to manufacture and sell its
products. For example, 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
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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. EMCORE has
in-house professionals to address compliance with applicable environmental and
health and safety laws and regulations.
If EMCORE's control systems are unsuccessful in preventing release of these
or other hazardous materials, EMCORE could experience a substantial interruption
of operations and could be subject to significant liability for clean-up and
other claims. On May 7, 2002, EMCORE received a warning letter from the US
Environmental Protection Agency regarding alleged failure in the Albuquerque
facility to maintain the paperwork required of a Large Quantity Generator as
required by the Resource Conservation and Recovery Act of 1976 (RCRA). EMCORE is
in the process of implementing a comprehensive program to address the concerns
raised by this letter. EMCORE believes that it is currently in compliance with
all applicable environmental laws, including RCRA, except such violations as
could not reasonably be expected to have a material effect on the financial
condition or results of operations of EMCORE.
Competition
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The semiconductor industry is intensely competitive and is characterized by
rapid technological change, price erosion and substantial foreign competition.
EMCORE faces actual and potential competition from a number of established
domestic and international compound semiconductor companies. Many of these
companies have greater engineering, manufacturing, marketing and financial
resources than we have. EMCORE competes with primarily
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two competitors for sales of MOCVD systems: Aixtron GmbH and Nippon-Sanso K.K.
Ltd. EMCORE also faces competition from manufacturers that implement in-house
systems for their own use. We believe our systems segment currently enjoys a
favorable position in today's markets due to our pioneering technology and
engineering development breakthroughs that have provided our customers with a
level of process control, reliability and lower manufacturing costs formerly
unavailable in the MOCVD industry. For photovoltaics products, EMCORE primarily
competes with Boeing-Spectrolab, Sharp Electronics and RWE Solar. The primary
competitors for EMCORE's Electronic Materials wafer foundry include
Hitachi-Cable, Kopin Corporation and IQE. Competition is also strong in the
optical market due to the high potential market growth, which attracts both
larger and smaller competitors. EMCORE's principal competitors for sales of
VCSEL-related products include Honeywell, Inc. and Avalon Photonics for serial
optics and Agilent, Infineon and Stratos Lightwave for parallel optics. The
principal competitors for MR sensors are Honeywell, Inc., Matsushita Electric
Industrial Co. Ltd., Siemens AG Osterreich, Electrotechnik and Asahi Kasei
Electronic Co., Ltd.. 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 Corporation and Toyoda Gosei Co., Ltd. In addition,
Epistar, Arima, UEC and other Asian based companies in recent years have begun
production of LEDs.
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. Furthermore, in the EU,
political and legal requirements encourage the purchase of EU-produced goods,
which can put EMCORE at a competitive disadvantage as against European
competitors.
There are substantial barriers to entry by new competitors across EMCORE's
product lines. These barriers include: the large number of existing patents,
time and costs to be incurred to develop products, technical difficulty in
manufacturing semiconductor products, lengthy sales and qualification cycles,
and difficulties in hiring and retaining skilled employees with the required
scientific and technical backgrounds. EMCORE believes that the primary
competitive factors in the markets in which EMCORE's products compete are yield,
throughput, performance, breadth of product line, product heritage, 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.
Investments
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In February 2002, EMCORE purchased $1.0 million of preferred stock of
Archcom Technology, Inc., a venture-funded, start-up optical networking
components company that designs, manufactures, and markets a series of high
performance lasers and photodiodes for datacom and telecom industries. EMCORE
does not exercise significant influence over financial and operating policies,
and the investment represents less than 20% of ownership. Therefore, EMCORE
accounts for this investment under the cost method of accounting.
Employees
- ---------
At September 30, 2002, EMCORE had 558 employees, including 350 employees in
manufacturing operations, 62 employees in research and development, 144
employees in sales, general and administration and 2 temporary employees. This
represented a decrease of 309 employees or 36% from September 30, 2001. Due to
dramatically reduced capital spending during the past year, EMCORE announced a
restructuring that included workforce reductions during fiscal 2002. The
workforce, all of whom were entitled to termination benefits, was reduced in
both of EMCORE's business segments. Management does not believe that the
restructuring will have a material impact on future revenues. Our ability to
attract and retain qualified personnel is essential to our continued success.
None of EMCORE's employees are covered by a collective bargaining agreement, nor
have we ever experienced any labor-related work stoppage. We believe our
employee relations are good.
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Risk Factors
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YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW. IF ANY OF THE
FOLLOWING RISKS ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF
OPERATIONS COULD BE MATERIALLY AND ADVERSELY AFFECTED. WE CAUTION THE READER
THAT THESE RISK FACTORS MAY NOT BE EXHAUSTIVE. WE OPERATE IN A CONTINUALLY
CHANGING BUSINESS ENVIRONMENT, AND NEW RISK FACTORS EMERGE FROM TIME TO TIME. WE
CANNOT PREDICT SUCH NEW RISK FACTORS, AND WE CANNOT ASSESS THE EFFECT, IF ANY,
OF SUCH NEW RISK FACTORS ON OUR BUSINESSES OR THE EXTENT TO WHICH ANY FACTOR, OR
COMBINATION OF FACTORS, MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
PROJECTED IN ANY FORWARD-LOOKING STATEMENTS CONTAINED IN THIS REPORT.
ACCORDINGLY, FORWARD-LOOKING STATEMENTS SHOULD NOT BE RELIED UPON AS A
PREDICTION OF ACTUAL RESULTS. IN ADDITION, OUR MANAGEMENT'S ESTIMATES OF FUTURE
OPERATING RESULTS ARE BASED ON THE CURRENT COMPLEMENT OF BUSINESSES, WHICH IS
CONSTANTLY SUBJECT TO CHANGE AS MANAGEMENT IMPLEMENTS ITS FIX, SELL OR GROW
STRATEGY.
We May Continue To Incur Operating Losses.
We started operations in 1984 and as of September 30, 2002, we had an
accumulated deficit of $250.9 million. We incurred net losses of $129.8 million
in fiscal 2002, $12.3 million in fiscal 2001 and $25.5 million in fiscal 2000.
In addition, as a result of the continuing downturn in the economy, we expect
that overall revenues will remain flat, or at best, modestly increase in fiscal
2003 compared to fiscal 2002. While we have reduced our cost structure
substantially, we may continue to lose money. Many of our expenses, particularly
those relating to capital equipment, debt service and manufacturing overhead are
fixed. Accordingly, lower revenue causes our fixed production costs to be
allocated across reduced production volumes, which adversely affects our gross
margin and profitability. 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.
Reduced Customer Lead Times Means We Are Less Able To Forecast Revenues And, As
A Result, May Be Unable To Accurately Predict Growth And Manage Our Cost.
Several of our customers have reduced the lead times they give us when
ordering product from us. While this trend has enabled us to reduce inventory,
it also restricts our ability to forecast revenues. If our sales and profit
margins do not increase to support the higher levels of operating expenses and
if our new product offerings are not successful, our business, financial
condition, results of operations and cash flows could be materially and
adversely affected.
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, India, Russia, Malaysia and Taiwan, may require pre-shipment
authorization from U.S. export control authorities, including the U.S.
Departments of Commerce and State. Authorization may be conditioned on end-use
restrictions. 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, results of operations and cash flows
from international sales.
Our photovoltaics business is particularly sensitive to export control
issues. All of our photovoltaic products are export-controlled and subject to
the jurisdiction of the U.S. Department of Commerce. In addition, many of our
potential customers are located in countries, like Russia, India and Argentina,
for which export licenses are required. Moreover, given the current global
political climate, obtaining export licenses may be more difficult and
time-consuming than in the past. Failure to obtain export licenses for
photovoltaic shipments could significantly reduce revenues of our
materials-related segment and could have a material adverse effect on our
financial condition, results of operations and cash flows.
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We Have Substantial Debt And If We Are Unable To Generate Sufficient Cash Flow
Or Otherwise Obtain Funds, We May Not Be Able To Pay Our Debt And Other
Obligations.
In May 2001, we sold $175.0 million of convertible subordinated notes due
in 2006 in a private placement for resale to qualified institutional buyers.
Approximately, $161.7 million of these notes is currently outstanding. We also
have approximately $3.6 million of guarantee obligations in respect of the
GELcore joint venture. In addition, we may incur additional debt in the future.
This significant amount of debt could, among other things:
o make it difficult for us to make payments on the notes and any other
debt we may have;
o make it difficult for us to obtain any necessary future financing for
working capital, capital expenditures, debt service requirements or
other purposes;
o require us to dedicate a substantial portion of our cash flow from
operations to service our debt, which would reduce the amount of our
cash flow available for other purposes, including working capital and
capital expenditures;
o limit our flexibility in planning for, or reacting to, changes in our
business; and
o make us more vulnerable in the event of a further or continued
downturn in our business.
Furthermore, if our cash flow is inadequate to meet our obligations or we
are unable to generate sufficient cash flow or otherwise obtain funds necessary
to make required payments on the notes or our other obligations, we would be in
default under the terms thereof. Default under the note indenture would permit
the holders of the notes to accelerate the maturity of the notes and could cause
defaults under future indebtedness we may incur. Any such default would have a
material adverse effect on our business, prospects, financial condition, results
of operations and cash flows. In addition, we cannot assure you that we would be
able to repay amounts due in respect of the notes if payment of the notes were
to be accelerated following the occurrence of an event of default as defined in
the note indenture.
Our Success Depends On Our Ability To Introduce New Products On A Timely Basis.
We compete in markets characterized by rapid technological change, evolving
industry standards and continuous improvements in products. Due to constant
changes in these markets, our future success depends on our ability to improve
our manufacturing processes, systems and products. To remain competitive we must
continually introduce new and improved products as well as production systems
with higher capacity and better production yields. Furthermore, we have reduced
research and development spending in fiscal 2002, and we expect to reduce it
further in fiscal 2003, which could negatively impact our ability to introduce
new products. Our business, financial condition, results of operations and cash
flows 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; or
o our new products experience reliability or quality problems.
Shifts In Industry-wide Demands And Inventories Could Result In Significant
Inventory Write-downs.
The life cycles of some of our products depend heavily upon the life cycles
of the end products into which our products are designed. Products with short
life cycles require us to manage production and inventory levels closely. We
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 2002.
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The Time And Costs Of Developing New Products May Exceed Our Budget And Our
Products May Not Be Commercially Successful.
We have recently introduced a number of new products and expect to 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, results of operations and cash flows could suffer if we incur budget
overruns or delays in our research and development efforts.
We May Engage In Acquisitions That May Harm Our Operating Results, Dilute Our
Shareholders And Cause Us To Incur Debt.
We may pursue acquisitions to acquire new technologies, products or service
offerings. Future acquisitions by us may involve the following:
o use of significant amounts of cash;
o potentially dilutive issuances of equity securities on
potentially unfavorable items; and
o incurrence of debt on potentially unfavorable terms, as well as,
amortization expenses related to other intangible assets.
In addition, acquisitions involve numerous risks, including:
o inability to achieve anticipated synergies;
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 or of
EMCORE.
From time to time, we have engaged in discussions with acquisition
candidates regarding potential acquisitions of product lines, technologies and
businesses. If acquisitions occur, we cannot be certain that our business,
operating results and financial condition will not be materially and adversely
affected.
With the Tecstar acquisition, EMCORE has fully integrated the production of
solar panels using EMCORE's solar cells. However, if EMCORE is unable to secure
contractual solar panel supply agreements for recently approved satellite
builds, EMCORE's revenues could be significantly reduced and it could have an
adverse effect on our financial condition, results of operations and cash flows
for the materials-related segment of our business.
Our Rapid Growth Places A Strain On Our Resources.
We have experienced rapid growth, even after giving effect to our recent
downsizing and restructuring. For example, in March 2002, we acquired Tecstar
located in City of Industry, California and hired approximately 80 former
Tecstar employees. 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, results of operations and cash flows could be
materially and adversely affected.
25
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 and payments 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; and
o changes in product mix.
These factors may cause our operating results for future periods to be
below the expectations of analysts and investors. This may cause a decline in
the price of our common stock.
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 General Electric Lighting 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, results of operations and
cash flows.
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, results of operations and cash flows 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.
26
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 33.0% of our revenues in fiscal 2002, 47.7% of our revenues in
fiscal 2001 and 38.6% of our revenues in fiscal 2000. 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 in a
country or region in which our customers are located;
o shipping and installation costs of our systems may increase;
o we may experience difficu