EMCORE Corporation
EMCORE CORP (Form: 10-K, Received: 12/29/2009 15:46:59)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
T
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2009
or

£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___

Commission File Number 0-22175




EMCORE Corporation
(Exact name of registrant as specified in its charter)

New Jersey
22-2746503
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
10420 Research Road, SE, Albuquerque, New Mexico
87123
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code:   (505) 332-5000

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, no par value
(Title of each class)
NASDAQ Stock Market
(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act:   None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    £ Yes     T No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    £ Yes     T No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    T   Yes     £ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   £   Yes    £ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer”, ”accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):      £   Large accelerated filer      T   Accelerated filer      £   Non-accelerated filer      £   Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   £ Yes   T No

The aggregate market value of common stock held by non-affiliates of the registrant as of March 31, 2009 (the last business day of the registrant's most recently completed second fiscal quarter) was approximately $56.4 million, based on the closing sale price of $0.76 per share of common stock as reported on The NASDAQ Global Market.

The number of shares outstanding of the registrant’s no par value common stock as of December 21, 2009 was 81,123,911.
 


 
 

 

DOCUMENTS INCORPORATED BY REFERENCE

In accordance with General Instruction G(3) of Form 10-K, certain information required by Part III hereof will either be incorporated into this Form 10-K by reference to the Company's Definitive Proxy Statement for the Company’s 2010 Annual Meeting of Stockholders filed within 120 days of September 30, 2009 or will be included in an amendment to this Form 10-K filed within 120 days of September 30, 2009.


CAUTIONARY STATEMENT
FOR PURPOSES OF “SAFE HARBOR PROVISIONS”
OF THE PRIVATE SECURITIES LITIGATION ACT OF 1995


This Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Exchange Act of 1934.  These forward-looking statements are largely based on our current expectations and projections about future events and financial trends affecting the financial condition of our business.  Such forward-looking statements include, in particular, projections about our future results included in our Exchange Act reports, statements about our plans, strategies, business prospects, changes and trends in our business and the markets in which we operate.  These forward-looking statements may be identified by the use of terms and phrases such as “anticipates”, “believes”, “can”, “could”, “estimates”, “expects”, “forecasts”, “intends”, “may”, “plans”, “projects”, “targets”, “will”, and similar expressions or variations of these terms and similar phrases.  Additionally, statements concerning future matters such as the development of new products, enhancements or technologies, sales levels, expense levels and other statements regarding matters that are not historical are forward-looking statements. Management cautions that these forward-looking statements relate to future events or our future financial performance and are subject to business, economic, and other risks and uncertainties, both known and unknown, that may cause actual results, levels of activity, performance or achievements of our business or our industry to be materially different from those expressed or implied by any forward-looking statements.  Factors that could cause or contribute to such differences in results and outcomes include without limitation those discussed under Item 1A - Risk Factors, as well as those discussed elsewhere in this Annual Report.  The cautionary statements should be read as being applicable to all forward-looking statements wherever they appear in this Annual Report and they should also be read in conjunction with the consolidated financial statements, including the related footnotes.

Neither management nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements.  All forward-looking statements in this Annual Report are made as of the date hereof, based on information available to us as of the date hereof, and subsequent facts or circumstances may contradict, obviate, undermine, or otherwise fail to support or substantiate such statements.  We caution you not to rely on these statements without also considering the risks and uncertainties associated with these statements and our business that are addressed in this Annual Report.  Certain information included in this Annual Report may supersede or supplement forward-looking statements in our other Exchange Act reports filed with the Securities and Exchange Commission.  We assume no obligation to update any forward-looking statement to conform such statements to actual results or to changes in our expectations, except as required by applicable law or regulation.

 
2

 

EMC ORE Corporation
FORM 10-K
For The Fiscal Year Ended September 30, 2009
TABLE OF CONTENTS


     
PAGE
Part I
     
 
4
 
17
 
31
 
32
 
32
 
35
       
Part II
     
 
35
 
37
 
40
 
58
 
59
       
   
59
       
   
60
       
   
61
       
   
62
       
   
64
       
   
100
       
 
101
 
101
 
104
       
Part III
   
104
 
104
 
104
 
104
 
104
 
105
       
Part IV
     
 
105
       
   
109


PART I

ITEM 1.   Business


Company Overview

EMCORE Corporation (the “Company”, “we”, “our”, or “EMCORE”) is a provider of compound semiconductor-based components and subsystems for the fiber optics and solar power markets.  We were established in 1984 as a New Jersey corporation and have two reporting segments: Fiber Optics and Photovoltaics.  Our Fiber Optics segment offers optical components, subsystems and systems that enable the transmission of video, voice and data over high-capacity fiber optic cables for high-speed data and telecommunications, cable television (“CATV”) and fiber-to-the-premises (“FTTP”) networks.  Our Photovoltaics segment provides solar products for satellite and terrestrial applications. For satellite applications, we offer high-efficiency compound semiconductor-based multi-junction solar cells, covered interconnected cells (“CICs”) and fully integrated solar panels.  For terrestrial applications, we offer concentrating photovoltaic (“CPV”) power systems for commercial and utility scale solar applications as well as high-efficiency multi-junction solar cells and integrated CPV components for use in other solar power concentrator systems.  Our headquarters and principal executive offices are located at 10420 Research Road, SE, Albuquerque, New Mexico, 87123, and our main telephone number is (505) 332-5000.  For specific information about our Company, our products or the markets we serve, please visit our website at http://www.emcore.com.  The information on our website is not incorporated by reference into and is not made a part of this Annual Report on Form 10-K or a part of any other report or filing with the Securities and Exchange Commission (“SEC”).

The Company is subject to the information requirements of the Securities Exchange Act of 1934. We file periodic reports, current reports, proxy statements and other information with the SEC.  The SEC maintains a website at http://www.sec.gov that contains all of our information that has been filed electronically.  We make available free of charge on our website a link to our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.


Industry Overview

Compound semiconductor-based products provide the foundation of components, subsystems and systems used in a broad range of technology markets, including broadband, datacom, telecom and satellite communication equipment and networks, advanced computing technologies and satellite and terrestrial solar power generation systems.  Compound semiconductor materials are capable of providing electrical or electro-optical functions, such as emitting optical communications signals, detecting optical communications signals, and converting sunlight into electricity.


Our Markets

Collectively, our products serve the telecommunications, datacom, cable television, fiber-to-the-premises, high-performance computing, defense and homeland security, and satellite and terrestrial solar power markets.

Fiber Optics

Our fiber optics products enable information that is encoded on light signals to be transmitted, routed (switched) and received in communication systems and networks.   Our Fiber Optics segment primarily offers the following product lines:

 
§
Telecom Optical Products – We believe we are a leading supplier of 10 gigabit per second (“Gb/s”) fully C-band and L-band tunable dense wavelength division multiplexed (“DWDM”) transponders for telecommunications transport systems. We are one of the few suppliers who offer vertically-integrated products, including external-cavity laser modules, integrated tunable laser assemblies (“ITLAs”) and 300-pin transponders. Our internally developed laser technology is highly suited for applications of 10, 40, and 100 Gb/s due to the superior narrow linewidth and low noise characteristics. All DWDM products are fully Telcordia® qualified and comply with industry multi-source agreements (“MSAs”). We are currently sampling customers with our MSA compliant tunable XFP (“TXFP”) product which we believe will rapidly replace 300-pin based transponders over the next few years, enabling a higher density transport solution required by carriers.  The Company’s TXFP products leverage our unique external cavity laser technology to offer identical performance to currently deployed network specifications, without the need for any specification compromise.




 
§
Enterprise Products We believe we provide leading-edge optical components and transceiver modules for data applications that enable switch-to-switch, router-to-router and server-to-server backbone connections at aggregate speeds of 10 Gb/s and above. We offer the broadest range of products with XENPAK form factor which comply with 10 Gb/s Ethernet (“10-GE”) IEEE802.3ae standard. Our 10-GE products include short-reach (“SR”), long-reach (“LR”), extended-reach (“ER”), coarse WDM LX4 optical transceivers to connect between the photonic physical layer and the electrical section layer and CX4 transceivers.  In addition to the 10-GE products, we offer traditional MSA compliant small form factor (“SFF”) and small form factor pluggable (“SFP”) optical transceivers for use in Gigabit Ethernet and Fiber Channel local-area and storage-area networks.  These transceivers provide integrated duplex data links for bi-directional communication over both single-mode and multimode optical fibers at data rates of 1.25Gb/s and 4 Gb/s, respectively.



 
§
Laser/Photodetector Component Products - We believe we are a leading provider of optical components including lasers, photodetectors, and various forms of packaged subassemblies. Products include bare die (or chip), TO, and TOSA forms of high-speed 850nm vertical cavity surface emitting lasers (“VCSELs”), distributed feedback (“DFB”) lasers, positive-intrinsic-negative (“PIN”) and avalanche photodiode (“APD”) components for 2G, 8G and 10G Fiber Channel, 1G and 10G Ethernet, FTTP, and telecom applications.  While we provide component products to the entire industry, we also leverage the benefits of our vertically-integrated infrastructure through low-cost manufacturing and early accessibility to newly developed internally produced components.




 
§
Parallel Optical Transceiver and Cable Products – We have been a technology and product leader of optical transmitter and receiver products utilizing arrays of optical emitting or detection devices, e.g., VCSELs and photodetectors (“PDs”). These optical transmitter, receiver, and transceiver products are used for back-plane interconnects, switching/routing between telecom racks and high-performance computing clusters. Our products include 12-lane SNAP-12 MSA compliant transmitter and receivers with single and double data rates. Based on the core competency of 4-lane parallel optical transceivers, we offer optical fiber ribbon cables (ECC - EMCORE Connects Cables) with parallel-optical transceivers embedded within the connectors.  These products, with aggregated bandwidths of up to 40 Gb/s, are ideally suited for high-performance computing clusters. Our products provide our customers with increased network capacity; increased data transmission distance and speeds; increased bandwidth; lower power consumption; improved cable management over copper interconnects (less weight and bulk); and lower cost optical interconnections for massively parallel multi-processor installations.



 
§
Fiber Channel Transceiver Products – We offer tri-rate SFF and SFP optical transceivers for storage area networks. The MSA compliant transceiver module is designed for high-speed Fiber Channel data links supporting up to 4.25 Gb/s (4X Fiber Channel rate). The products provide integrated duplex data links for bi-directional communication over Multimode optical fiber.


 
 
§
Cable Television (or CATV) Products - We are a market leader in providing radio frequency (“RF”) over fiber products for the CATV industry.  Our products are used in hybrid fiber coaxial (“HFC”) networks that enable cable service operators to offer multiple advanced services to meet the expanding demand for high-speed Internet, on-demand and interactive video and other advanced services, such as high-definition television (“HDTV”) and voice over IP (“VoIP”).  Our CATV products include forward and return-path analog and digital lasers, photodetectors and subassembly components, broadcast analog and digital fiber-optic transmitters and quadrature amplitude modulation (“QAM”) transmitters and receivers.  Our products provide our customers with increased capacity to offer more cable services; increased data transmission distance, speed and bandwidth; lower noise video receive; and lower power consumption.




 
§
Fiber-To-The-Premises (or FTTP) Products - Telecommunications companies are increasingly extending their optical infrastructure to their customers’ location in order to deliver higher bandwidth services. We have developed customer qualified FTTP components and subsystem products to support plans by telephone companies to offer voice, video and data services through the deployment of new fiber optics-based access networks.  Our FTTP products include passive optical network (“PON”) transceivers, analog fiber optic transmitters for video overlay and high-power erbium-doped fiber amplifiers (“EDFA”), analog and digital lasers, photodetectors and subassembly components, analog video receivers and multi-dwelling unit (“MDU”) video receivers.  Our products provide our customers with higher performance for analog and digital characteristics; integrated infrastructure to support competitive costs; and additional support for multiple standards.



 
§
Satellite Communications (or Satcom) Products - We believe we are a leading provider of optical components and systems for use in equipment that provides high-performance optical data links for the terrestrial portion of satellite communications networks. Our products include transmitters, receivers, subsystems and systems that transport wideband radio frequency and microwave signals between satellite hub equipment and antenna dishes.  Our products provide our customers with increased bandwidth and lower power consumption.




 
§
Video Transport - Our video transport product line offers solutions for broadcasting, transportation, IP television (“IPTV”), mobile video and security & surveillance applications over private and public networks. Our video, audio, data and RF transmission systems serve both analog and digital requirements, providing cost-effective, flexible solutions geared for network reconstruction and expansion.


 
 
§
Defense and Homeland Security - Leveraging our expertise in RF module design and high-speed parallel optics, we provide a suite of ruggedized products that meet the reliability and durability requirements of the U.S. government and defense markets.  Our specialty defense products include fiber optic gyro components used in precision guided munitions, ruggedized parallel optic transmitters and receivers, high-frequency RF fiber optic link components for towed decoy systems, optical delay lines for radar systems, EDFAs, terahertz spectroscopy systems and other products.  Our products provide our customers with high frequency and dynamic range; compact form-factor; and extreme temperature, shock and vibration tolerance.


 
Major customers for our Fiber Optics segment include: Aurora Networks, BUPT-GUOAN Broadband, Arris/C-Cor Electronics, Cisco, Fujitsu, Hewlett-Packard, Huawei, IBM, Motorola, Network Appliance, Nortel, Tellabs, and ZTE.


Photovoltaics

We believe our high-efficiency compound semiconductor-based multi-junction solar cell products provide our customers with compelling cost and performance advantages over traditional silicon-based solutions.  These advantages include higher solar cell efficiency allowing for greater conversion of light into electricity as well as a superior ability to withstand extreme heat and radiation environments. These advantages enable our customers to reduce their solar product footprint by providing more power output with fewer solar cells, which is an enhanced benefit when our product is used in terrestrial concentrating photovoltaic (“CPV”) systems.


Our Photovoltaics segment primarily targets the following markets:

 
§
Satellite Solar Power Generation - We believe we are a leader in providing solar power generation solutions to the global communications and science satellite industry and U.S. government space programs.  A satellite’s operational success depends on its available power and its capacity to transmit data. We provide advanced compound semiconductor-based solar cells and solar panel products, which are more resistant to radiation levels in space and generate substantially more power from sunlight than silicon-based solutions.  Space power systems using our multi-junction solar cells weigh less per unit of power than traditional silicon-based solar cells. Our products provide our customers with higher conversion efficiency for reduced solar array size and launch costs, higher radiation tolerance, and longer expected lifetime in harsh space environments.

We design and manufacture multi-junction compound semiconductor-based solar cells for both commercial and military satellite applications. We currently manufacture and sell one of the most efficient and reliable, radiation resistant advanced triple-junction solar cells in the world, with an average "beginning of life" efficiency of 28.5%.  We are in the final stages of qualifying the next generation high efficiency multi-junction solar cell platform for space applications which we believe will have an average conversion efficiency of 30%, providing our customers with expanded capability.  We believe we are the only manufacturer to supply true monolithic bypass diodes for shadow protection by utilizing several EMCORE patented methods.

Additionally, we are developing an entirely new class of advanced multi-junction solar cells with even higher conversion efficiency.  This new architecture, called inverted metamorphic (“IMM”), is being developed in conjunction with the National Renewable Energy Laboratory and the US Air Force Research Laboratory and to date has demonstrated conversion efficiency exceeding 33% on an R&D scale.

We also offer covered interconnected cells (“CICs”) and solar panel lay-down services, providing us the capability to manufacture fully integrated solar panels for space applications. We can provide satellite manufacturers with proven, integrated, satellite power solutions that can significantly improve satellite economics. Satellite manufacturers and solar array integrators rely on us to meet their satellite power needs with our proven flight heritage.




 
§
Terrestrial Solar Power Generation - Solar power generation systems utilize photovoltaic cells to convert sunlight to electricity and have been used in space programs and, to a lesser extent, in terrestrial applications for several decades.  The market for terrestrial solar power generation solutions will continue to grow as solar power generation technologies improve in efficiency, as global prices for non-renewable energy sources ( i.e ., fossil fuels) continue to fluctuate considerably, and as concern has increased regarding the effect of fossil fuel-based carbon emissions on global warming. Terrestrial solar power generation has emerged as one of the most rapidly expanding renewable energy sources due to certain advantages solar power has when compared to other energy sources, including reduced environmental impact, elimination of fuel price risk, installation flexibility, scalability, distributed power generation ( i.e ., electric power is generated at the point of use rather than transmitted from a central station to the user), and reliability. The rapid increase in demand for solar power has created a growing need for highly efficient, reliable and cost-effective concentrating solar power systems.

We have adapted our high-efficiency compound semiconductor-based multi-junction solar cell products for terrestrial applications, which are intended for use with CPV power systems in utility-scale installations.  We have attained 39% peak conversion efficiency under 1000x illumination with our terrestrial concentrating solar cell products in volume production. This compares favorably to average efficiency of 15-21% of silicon-based solar cells and approximately 35% for competing multi-junction cells. We believe that solar concentrator systems assembled using our compound semiconductor-based solar cells will be competitive with silicon-based solar power generation systems, in certain geographic regions, because they are more efficient, and when combined with the advantages of concentration, will result in a lower cost of power generated.  Our multi-junction solar cell technology is not subject to silicon shortages which, in the past, have led to increasing prices in the raw materials required for silicon-based solar cells.  We currently serve the terrestrial solar market with two levels of CPV products: components (including solar cells and solar cell receivers) and CPV terrestrial solar power systems.

While the terrestrial power generation market is still developing, we have shipped production orders of CPV components to several solar concentrator companies, and have provided samples to others, including major system manufacturers in the United States, Europe, and Asia.  We have finished installations of a total of approximately 1 megawatt (“MW”) of CPV systems in Spain, China, and the US with our own Gen-II CPV power system design.  The Gen-III product, with enhanced performance (including a module efficiency of approximately 30%) and much improved cost structure, is scheduled to be in volume production in the first half of calendar 2010.




Major customers for the Photovoltaics segment include: ATK, Dutch Space, Lockheed Martin, NASA-JPL, Northrop Grumman, Loral Space & Communications, SanAn Optoelectronics, and Sierra Nevada Space.


The following table sets forth the revenue and percentage of total revenue attributable to each of the Company’s reporting segments.

Segment Revenue
(in thousands)
 
2009
   
2008
   
2007
 
   
Revenue
   
% of Revenue
   
Revenue
   
% of Revenue
   
Revenue
   
% of Revenue
 
Fiber Optics
  $ 114,134       65 %   $ 171,276       72 %   $ 110,377       65 %
Photovoltaics
    62,222       35       68,027       28       59,229       35  
Total revenue
  $ 176,356       100 %   $ 239,303       100 %   $ 169,606       100 %


The following table sets forth our significant market sectors, defined as product line sales that represented greater than 10% of total consolidated revenue, by reporting segment.

Significant Market Sectors
As a percentage of total consolidated revenue
 
For the Fiscal Years
Ended September 30,
 
                   
   
2009
   
2008
   
2007
 
Fiber Optics – related:
                 
Cable Television Products
    13 %     19 %     29 %
Laser/Photodetector Component Products
    -       11 %     -  
Telecom Optical Products
    -       12 %     -  
                         
Photovoltaics – related:
                       
Satellite Solar Power Generation
    33 %     21 %     35 %


Our Strategy

The Company’s management has believed for some time that, due to significant differences in operating strategy between the Company’s Fiber Optics and Photovoltaics businesses, they would provide greater value to shareholders if they were operated as two separate business entities.  Over the past two years, the Company has completed several acquisitions to strengthen one or both of these businesses with a view toward their eventual separation. On April 4, 2008, the Company announced that its Board of Directors had formally authorized management to prepare a comprehensive operational and strategic plan for the separation of these businesses into separate corporations.  Management began assessing alternative methods for achieving this goal; however, the subsequent onset of the recent worldwide economic and financial crisis has had a significant adverse impact on these plans.  A dramatic reduction in customer demand for many of the Company’s Fiber Optics products through June 2009 has significantly lowered revenue and cash flow in that business unit, while a shortage of debt and equity capital, a decline in the price of conventional energy sources, and a generally cautious and conservative attitude in all business sectors has delayed the opportunities for expanded deployment of the Company’s terrestrial photovoltaic products and systems.  As a result, while the Company is continuing to pursue strategic alternatives for separating its two operating segments, the Company has also instituted a series of initiatives aimed at conserving and generating cash over the next twelve months.

During fiscal 2009, management implemented a series of measures and continues to evaluate opportunities intended to align the Company’s cost structure with its revenue forecasts.  Such measures included establishing a line of credit with Bank of America, several workforce reductions, salary reductions, the elimination of executive and employee merit increases, and the elimination or reduction of certain discretionary expenses.  The Company has also significantly lowered its spending on capital expenditures and focused on improving the management of its working capital.  During fiscal 2009, the Company monetized approximately $16.8 million of inventory, generated $16.0 million in cash from lowering its accounts receivable balances and achieved positive cash flow from operations during the quarters ended June 30, 2009 and September 30, 2009.

In fiscal 2010, the Company will continue to remain focused on cash flow while accessing a range of strategic options for the purpose of maximizing shareholder value, including joint-venture business opportunities and the potential sale of certain assets.

With respect to measures taken to generate cash, the Company sold its minority ownership positions in Entech Solar, Inc. and Lightron Corporation in the second quarter of fiscal 2009.  In April 2009, the Company amended the terms of its asset-backed revolving credit facility with Bank of America which reduced the total loan availability to $14 million but also generally resulted in higher borrowing capacity against any given schedule of accounts receivable.  On October 1, 2009, the Company entered into an equity line of credit arrangement with Commerce Court Small Cap Value Fund, Ltd. (“Commerce Court”).  Upon issuance of a draw-down request by the Company, Commerce Court has committed to purchasing up to $25 million worth of shares of the Company’s common stock over the 24-month term of the purchase agreement, provided that the number of shares the Company may sell under the facility is limited to no more than 15,971,169 shares of common stock or that would result in the beneficial ownership of more than 9.9% of the then issued and outstanding shares of the Company’s common stock.


Operationally, the key elements of our strategy include:


 
-
Drive Business Growth through Customer Focus and Expansion of Product Lines

Within our Fiber Optics business segment, business development and product development efforts will be mostly devoted to several world-leading communication equipment manufacturers.  Our objective is to expand business opportunities with these key accounts by offering an enhanced product portfolio, improved customer service, technical support and order fulfillment at a competitive cost.  Through our extensive technical resources, established vertical integration and low-cost manufacturing infrastructure, we are well positioned to leverage these resources to grow revenue and drive market share gain.

Within our Satellite Photovoltaics business, we will continue to offer industry leading high-efficiency solar cells and components.  As a result of our recently announced solar panel program awards, we plan to significantly grow our business through the expansion of new product offerings at the solar panel level.  The improved utilization of our solar panel manufacturing infrastructure will lower our fixed costs per unit, enabling a much more competitively priced solar panel product line.


-
Reduce Product and Business Costs and Improve Profitability

We will continue to drive cost reduction throughout the organization. We expect several cost reduction initiatives that were commenced in fiscal 2009 to come to fruition in fiscal 2010.  We believe these initiatives will improve our gross profit and margins.  We are committed to achieving profitability by the second half of the fiscal year through increased revenue and cost reductions.  We have significantly streamlined our manufacturing operation by focusing on core competencies and addressing cost efficiencies. Where appropriate, we have transferred the manufacturing of certain product lines to low-cost contract manufacturers which allow us to reduce variable costs while still maintaining quality and reliability. Our restructuring programs are designed to reduce the Company’s overhead through several avenues. We will continue to review and take action to divest or exit the businesses and product lines that are not strategic and/or incapable of achieving desired revenue or profitability goals.  In fiscal 2010, we will continue to place increased emphasis on improving our working capital management and we expect capital expenditures will be reduced significantly compared to prior years.


 
-
Continue to Invest in R&D to Stay Ahead of Competition

We have invested significantly in research and development and product engineering over the past several years and developed a clear technology leadership position in many of our product lines. In fiscal 2010, we will continue to invest in R&D, but we will be very selective in allocating R&D resources to develop competitive technologies and products as a means to maintain technology leadership over our competitors.  In the meantime, we will continue to focus R&D and product engineering investments to develop a broader range of products for a focused customer base and product cost reduction efforts.


 
-
Grow Our CPV Business by Penetrating into Emerging Markets through Strategic Partnerships

We are committed to launching our next generation CPV products in fiscal 2010. We will focus our business development efforts on solar power opportunities in emerging markets.  We expect our Gen-III CPV terrestrial solar power system to provide a competitive cost of energy for commercial and utility scale projects in certain geographic regions. We have implemented a new marketing strategy which will focus our traditional competencies in technological innovation, systems design, and engineering, while retaining our unique competitive advantage as the only vertically-integrated supplier to the CPV market.  We will continue to develop and expand partnerships with major companies, both domestically and internationally, to drive deployment of our terrestrial CPV components and systems.


 
-
Leverage Internal Advanced Technology Programs for Expanded Government Applications

Through extensive R&D investment in both our specialty fiber optics and satellite photovoltaic technology areas, we have developed a suite of unique and enabling technology solutions for programs related to defense and government interests. We will be investing significant resources to develop new business opportunities and build programs within this area.  We believe this market represents a significant growth opportunity for the Company.


Government Research Contracts

We derive a portion of our revenue from funding by various agencies of the U.S. government through research contracts and subcontracts. These contracts typically cover work performed over extended periods of time, from several months up to several years. These contracts may be modified or terminated at the convenience of the U.S. government and may be subject to government budgetary fluctuations.


Sources of Raw Materials

We depend on a limited number of suppliers for certain raw materials, components and equipment used in our products. We continually review our vendor relationships to mitigate risks and lower costs, especially where we depend on one or two vendors for critical components or raw materials. While maintaining inventories that we believe are sufficient to meet our near-term needs, we strive not to carry significant inventories of raw materials. Accordingly, we maintain ongoing communications with our vendors in order to prevent any interruptions in supply, and have implemented a supply-chain management program to maintain quality and lower purchase prices through standardized purchasing efficiencies and design requirements. To date, we generally have been able to obtain sufficient quantities of quality supplies in a timely manner.


Manufacturing

The Company utilizes dedicated MOCVD (metal-organic chemical vapor deposition) systems for both development and production, which are capable of processing virtually all compound semiconductor-based materials and devices.  Our operations include wafer fabrication; device design and production; fiber optic module, subsystem and system design and manufacture; and, solar panel engineering and assembly.  Many of our manufacturing operations are computer monitored or controlled to enhance production output and statistical control. We employ a strategy of minimizing ongoing capital investments, while maximizing the variable nature of our cost structure. We maintain supply agreements with certain key suppliers throughout our supply chain management function. Where we can gain cost advantages while maintaining quality and intellectual property control, we outsource the production of certain products, subsystems, components and subassemblies to contract manufacturers located overseas. Our contract manufacturers must maintain comprehensive quality and delivery systems, and we continuously monitor them for compliance.

Our various manufacturing processes involve extensive quality assurance systems and performance testing. Our facilities have acquired and maintain certification status for their quality management systems. Our manufacturing facilities located in Albuquerque, New Mexico; Alhambra, California and Langfang, China are registered to ISO 9001 standards.


Restructuring Programs

The Company is committed to achieving profitability by increasing revenue through the introduction of new products and reducing costs.  We have significantly streamlined our manufacturing operations by focusing on core competencies to identify cost efficiencies. Where appropriate, we transferred the manufacturing of certain product lines to low-cost contract manufacturers or our own manufacturing facility in China whenever such transfer can lower costs while maintaining quality and reliability.

The Company’s restructuring programs are designed to further reduce the number of our manufacturing facilities, in addition to the divestiture or exit from selected businesses and product lines that are not strategic or are not capable of achieving desired revenue or profitability goals.  In addition, we will continue to drive operational efficiency and reduce overhead costs.

Our results of operations and financial condition have and will continue to be significantly affected by severance, restructuring charges, impairment of long-lived assets and idle facility expenses incurred during facility closing activities.


Sales and Marketing

We sell our products worldwide through our direct sales force, external sales representatives and distributors and application engineers. Our sales force communicates with our customers’ engineering, manufacturing and purchasing personnel to determine product design, qualifications, performance and cost. Our strategy is to use our direct sales force to sell to key accounts and to expand our use of external sales representatives for increased coverage in international markets and certain domestic segments.

Throughout our sales cycle, we work closely with our customers to qualify our products into their product lines. As a result, we develop strategic and long-lasting customer relationships with products and services that are tailored to our customers’ requirements.


We focus our marketing communication efforts on increasing brand awareness, communicating our technologies’ advantages and generating leads for our sales force.  We use a variety of marketing methods, including our website, participation at trade shows and selective advertising to achieve these goals.

Externally, our marketing group works with customers to define requirements, characterize market trends, define new product development activities, identify cost reduction initiatives and manage new product introductions.  Internally, our marketing group communicates and manages customer requirements with the goal of ensuring that our product development activities are aligned with our customers’ needs.  These product development activities allow our marketing group to manage new product introductions and new product and market trends.


Research and Development

Our research and development (R&D) efforts have been focused on maintaining our technological competitive position by working to improve the quality and attributes of our product lines. We also invest significant resources to develop new products and production technology to expand into new market opportunities by leveraging our existing technology base and infrastructure. Our industry is characterized by rapid changes in process technologies with increasing levels of functional integration. Our efforts are focused on designing new proprietary processes and products, on improving the performance of our existing materials, components and subsystems, and on reducing costs in the product manufacturing process.

As part of the ongoing effort to cut costs, many of our projects are used to develop lower cost versions of our existing products. We also actively compete for R&D funds from U.S. government agencies and other entities. In view of the high cost of development, we solicit research contracts that provide opportunities to enhance our core technology base and promote the commercialization of targeted products. Generally, internal R&D funding is used for the development of products that will be released within twelve months and external funding is used for long-term R&D efforts.

R&D expense was $27.1 million, $39.5 million, and $30.0 million for the fiscal years ended September 30, 2009, 2008, and 2007, respectively.


Intellectual Property and Licensing

We protect our proprietary technology by applying for patents, where appropriate, and in other cases by preserving the technology, related know-how and information as trade secrets. The success and competitive position of our product lines depends significantly on our ability to obtain intellectual property protection for our R&D efforts. We also acquire, through license grants or assignments, rights to patents on inventions originally developed by others.  As of September 30, 2009, we held approximately 175 U.S. patents and 25 foreign patents and have over 100 additional patent applications pending. Our U.S. patents will expire on varying dates between 2010 and 2027.  These patents and patent applications claim various aspects of current or planned commercial versions of our materials, components, subsystems and systems.

We also have entered into license agreements with the licensing agencies of universities and other organizations, under which we have obtained exclusive or non-exclusive rights to practice inventions claimed in various patents and applications issued or pending in the U.S. and other foreign countries. We do not believe the financial obligations under any of these agreements materially adversely affect our business, financial condition or results of operations.

We rely on trade secrets to protect our intellectual property when we believe that publishing patents would make it easier for others to reverse engineer our proprietary processes. A “trade secret” is information that has value to the extent it is not generally known, not readily ascertainable by others through legitimate means, and protected in a way that maintains its secrecy. Reliance on trade secrets is only an effective business practice insofar as trade secrets remain undisclosed and a proprietary product or process is not reverse engineered or independently developed. To protect our trade secrets, we take certain measures to ensure their secrecy, such as partitioning the non-essential flow of information between our different groups and executing non-disclosure agreements with our employees, customers and suppliers. We also rely upon other intellectual property rights such as trademarks and copyrights where appropriate.


Environmental Regulations

We are subject to U.S. federal, state, and local laws and regulations concerning the use, storage, handling, generation, treatment, emission, release, discharge, and disposal of certain materials used in our R&D and production operations, as well as laws and regulations concerning environmental remediation, homeland security, and employee health and safety. The production of wafers and devices involves the use of certain hazardous raw materials, including, but not limited to, ammonia, phosphine, and arsine.  We have in-house professionals to address compliance with applicable environmental, homeland security, and health and safety laws and regulations. We believe that we are currently in compliance with all applicable environmental laws, including the Resource Conservation and Recovery Act.  If our control systems are unsuccessful in preventing release of these or other hazardous materials or we fail to comply with such environmental provisions, our actions, whether intentional or inadvertent, could result in fines and other liabilities to the U.S. government or third parties, and injunctions requiring us to suspend or curtail operations which could have a material adverse effect on our business.


Competition

The markets for our products in each of our reporting segments are extremely competitive and are characterized by rapid technological change, frequent introduction of new products, short product life cycles and significant price erosion. We face actual and potential competition from numerous domestic and international companies. Many of these companies have greater engineering, manufacturing, marketing and financial resources than we have.

Partial lists of our competitors within the markets we participate in include:

Fiber Optics

CATV Networks .  Our main competitors include Applied Optoelectronics and Finisar at the subsystem level and Applied Optoelectronics and Sumitomo Electric Device Innovations at the component product level.

FTTP and Telecommunications Networks .  Our competitors include Cyoptics, Mitsubishi, and Source Photonics for FTTP components and transceivers.  For 10Gb/s tunable transponders, our principal competitors include Finisar, JDSU, and Opnext.

Data Communications, Storage Area Networks and Parallel Optic Device Products .   Our principal competitors include Avago, Finisar, and Opnext.

Satellite Communications Networks .   Our primary competitors are Foxcom and MITEQ, Inc.

Video Transport Products .   Our primary competitors are Evertz and Telecast.


Photovoltaics

Satellite Solar Power Generation.   In the market for satellite solar power products, we primarily compete with Azure Solar, Sharp, and Spectrolab, a subsidiary of Boeing.

Terrestrial Solar Power Generation .  In the market for terrestrial solar power products, we primarily compete with Azure Solar and Spectrolab in the solar cell market, and Amonix, Concentrix, and SolFocus in the solar power systems market.


In addition to the companies listed above, we compete with many research institutions and universities for research contract funding. We also sell our products to current competitors and companies with the capability of becoming competitors. As the markets for our products grow, new competitors are likely to emerge and current competitors may increase their market share. In the European Union (“EU”), political and legal requirements encourage the purchase of EU-produced goods, which may put us at a competitive disadvantage against our European competitors.

There are substantial barriers to entry by new competitors across our product lines. These barriers include the large number of existing patents, the time and costs to be incurred to develop products, the technical difficulty in manufacturing semiconductor-based products, the lengthy sales and qualification cycles and the difficulties in hiring and retaining skilled employees with the required scientific and technical backgrounds. We believe that the primary competitive factors within our current markets are product cost, yield, throughput, performance, reliability, breadth of product line, product heritage, customer satisfaction and customer commitment to competing technologies. Competitors may develop enhancements to or future generations of competitive products that offer superior price and performance characteristics. We believe that in order to remain competitive, we must invest significant financial resources in developing new product features and enhancements and in maintaining customer satisfaction worldwide.


Order Backlog

As of September 30, 2009, the Company had a consolidated order backlog of approximately $62.6 million comprised of $47.7 million in order backlog related to our Photovoltaics segment and $14.9 million in order backlog related to our Fiber Optics segment.  As of September 30, 2008, the Company had a consolidated order backlog of approximately $61.9 million comprised of $40.8 million in order backlog related to our Photovoltaics segment and $21.1 million in order backlog related to our Fiber Optics segment. Order backlog is defined as purchase orders or supply agreements accepted by the Company with expected product delivery and/or services to be performed within the next twelve months.

From time to time, our customers may request that we delay shipment of certain orders and our backlog could also be adversely affected if customers unexpectedly cancel purchase orders that we’ve previously accepted.  A majority of our fiber optics products typically ship within the same quarter as when the purchase order is received; therefore, our backlog at any particular date is not necessarily indicative of actual revenue or the level of orders for any succeeding period.


Employees

As of September 30, 2009, we had approximately 700 employees, including approximately 150 international employees that are located primarily in China.   This represented a decrease of approximately 300 employees when compared to September 30, 2008.

None of our employees are covered by a collective bargaining agreement.  We have never experienced any labor-related work stoppage and believe that our employee relations are good.

Competition is intense in the recruiting of personnel in the semiconductor industry.  Our ability to attract and retain qualified personnel is essential to our continued success. We are focused on retaining key contributors, developing our staff and cultivating their level of commitment to the Company.


ITEM 1A .    Risk Factors


Our disclosure and analysis in this 2009 Annual Report on Form 10-K contain some forward-looking statements, within the meaning of Section 27A of the Securities Act and Section 21E of Exchange Act, that set forth anticipated results based on management’s plans and assumptions. From time to time, we also provide forward-looking statements in other materials we release to the public.  These statements are based largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business.  They relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause the actual results, levels of activity, performance or achievements of our business or our industry to be materially different from those expressed or implied by any forward-looking statements. Such statements include, in particular, projections about our future results, statements about our plans, strategies, business prospects, changes and trends in our business and the markets in which we operate.  These forward-looking statements may be identified by the use of terms and phrases such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, “targets”, “can”, “may”, “could”, “will”, and variations of these terms and similar phrases.

We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should keep this in mind as you consider forward-looking statements.

We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Form 10-Qs and Current Reports on Form 8-K filed with the SEC. Also note that we provide the following cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to our businesses. These are factors that, individually or in the aggregate, we think could cause our actual results to differ materially from historical and expected results. We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties.


We have a history of incurring significant net losses and our future profitability is not assured.

We commenced operations in 1984 and as of September 30, 2009, we had an accumulated deficit of $560.8 million. We incurred a net loss of $136.1 million in fiscal 2009, net loss of $80.9 million in fiscal 2008, and a net loss of $58.7 million in fiscal 2007.   Our operating results for future periods are subject to numerous uncertainties and we cannot assure you that we will not continue to experience net losses for the foreseeable future.   If we are not able to increase revenue and reduce our costs, we may not be able to achieve profitability.


Negative worldwide economic conditions could continue to result in a decrease in our sales and revenue and an increase in our operating costs, which could continue to adversely affect our business and operating results.

If the recent worldwide economic downturn continues, many of our direct and indirect customers may delay or reduce their purchases of our products and systems containing our products. In addition, several of our customers rely on credit financing in order to purchase our products. If the negative conditions in the global credit markets prevent our customers’ access to credit, orders for our products may decrease, which would result in lower revenue. Likewise, if our suppliers face challenges in obtaining credit, in selling their products or otherwise in operating their businesses, they may become unable to offer the materials we use to manufacture our products. These actions could result in reductions in our revenue, increased price competition and increased operating costs, which could adversely affect our business, results of operations and financial condition.


Our future revenue is inherently unpredictable.  As a result, our operating results are likely to fluctuate from period to period, and we may fail to meet the expectations of our analysts and/or investors, which may cause volatility in our stock price and may cause our stock price to decline.

Our quarterly and annual operating results have fluctuated substantially in the past and are likely to fluctuate significantly in the future due to a variety of factors, some of which are outside of our control.  Factors that could cause our quarterly or annual operating results to fluctuate include:

 
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market acceptance of our products;
 
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market demand for the products and services provided by our customers;
 
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disruptions or delays in our manufacturing processes or in our supply of raw materials or product components;
 
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changes in the timing and size of orders by our customers;
 
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cancellations and postponements of previously placed orders;


 
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reductions in prices for our products or increases in the costs of our raw materials;
 
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the introduction of new products and manufacturing processes;
 
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fluctuations in manufacturing yields;
 
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the emergence of new industry standards;
 
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failure to anticipate changing customer product requirements;
 
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the loss or gain of important customers;
 
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product obsolescence;
 
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the amount of research and development expenses associated with new product introductions;
 
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the continuation or worsening of the current global economic slowdown;
 
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economic conditions in various geographic areas where we or our customers do business;
 
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acts of terrorism and international conflicts or crises;
 
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other conditions affecting the timing of customer orders;
 
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a downturn in the markets for our customers’ products, particularly the telecommunications components markets;
 
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significant warranty claims, including those not covered by our suppliers;
 
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intellectual property disputes;
 
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loss of key personnel or the shortage of available skilled workers; and
 
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the effects of competitive pricing pressures, including decreases in average selling prices of our products.

In addition, the limited lead times with which several of our customers order our products restrict our ability to forecast revenue.  We may also experience a delay in generating or recognizing revenue for a number of reasons.  For example, orders at the beginning of each quarter typically represent a small percentage of expected revenue for that quarter and are generally cancelable at any time. We depend on obtaining orders during each quarter for shipment in that quarter to achieve our revenue objectives. Failure to ship these products by the end of a quarter may adversely affect our results of operations.

Our credit facility agreement with Bank of America, N.A., contains customary covenants and defaults, including among others, limitations on dividends, incurrence of indebtedness and liens and mergers and acquisitions and may restrict our operating flexibility.  The facility is also subject to certain financial covenants which the Company was in compliance with for the three months ended June 30, 2009 and September 30, 2009.   Depending on the Company’s operating results in fiscal 2010, the Company may not continue to be compliant with the credit facility’s financial covenants.

As a result of the foregoing, we believe that period-to-period comparisons of our results of operations should not be relied upon as indications of future performance.  In addition, our results of operations in one or more future quarters may fail to meet the expectations of analysts or investors, which would likely result in a decline in the trading price of our common stock.


Our ability to achieve operational and material cost reductions and to realize production efficiencies for our operations is critical to our ability to achieve long-term profitability.

We have implemented a number of operational and material cost reductions and productivity improvement initiatives, which are intended to reduce our expense structure at both the cost of goods sold and the operating expense levels. Cost reduction initiatives often involve facility consolidation and re-design of our products, which requires our customers to accept and qualify the new designs, potentially creating a competitive disadvantage for our products.  These initiatives can be time-consuming and disruptive to our operations and costly in the short-term.  Successfully implementing these and other cost-reduction initiatives throughout our operations is critical to our future competitiveness and ability to achieve long-term profitability. However, there can be no assurance that these initiatives will be successful in creating profit margins sufficient to sustain our current operating structure and business.


Financial markets worldwide have recently experienced an unprecedented crisis which may have a continuing materially adverse impact on the Company, our customers and our suppliers.

Financial markets have recently experienced an unprecedented financial crisis worldwide, affecting both debt and equity markets, which has substantially limited the amount of financing available to all companies, including companies with substantially greater resources, better credit ratings and more successful operating histories than us.  It is impossible to predict how long the impact of this crisis will last or how it will be resolved.  It may, however, have a materially adverse affect on the Company for a number of reasons, such as:

 
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The Company’s historic lack of profitability has caused it to consume cash, through acquisitions, operations and as a result of the research and development and capital expenditures necessary to expand the market which the Company serves (particularly the terrestrial solar market), as discussed in more detail below.  The Company may be unable to acquire the cash necessary to finance these activities from either the debt or the equity markets and as a result the Company may be unable to continue operations.


 
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The Company’s fiber optics products are sold principally to large publicly held companies which are also dependent on public debt and equity markets.  Our customers may be unable to obtain the financing necessary to continue their own operations.

 
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The market for the products of the Company’s fiber optics customers, into which the Company’s fiber optics products are incorporated, is dependent on capital spending from telecommunications and data communications companies, which may also be adversely affected by the lack of financing.

 
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The market for the Company’s satellite solar cells may also be adversely affected by the worldwide financial crisis, because the market for commercial satellites depends on capital spending by telecommunications companies and the market for military satellites depends on resources allocated for military intelligence spending, which may be restricted.  The market for the Company’s terrestrial solar products is dependent on the availability of project financing for photovoltaic projects, which may no longer be available, and is also largely dependent on government support of various types, such as investment tax credits, which may no longer be available as governments allocate scarce resources to deal with the financial crisis.

 
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A reduction in the Company’s sales will adversely affect the Company’s ability to draw on its existing line of credit with Bank of America because that line of credit is largely dependent on the level of the Company’s accounts receivable.

 
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Negative worldwide economic conditions and market instability make it difficult for us, our customers and our suppliers to accurately forecast future product demand trends, which could cause us to produce excess products that can depress product prices, increase our inventory carrying costs and result in obsolete inventory. Alternatively, this forecasting difficulty could cause a shortage of products, or materials used in our products, that could result in an inability to satisfy demand for our products and a loss of market share.

 
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Negative global economic conditions increase the risk that we could suffer unrecoverable losses on our customers’ accounts receivable, which would adversely affect our financial results.  We extend credit and payment terms to some of our customers. We could suffer significant losses if customers fail to pay us, which would  have a negative impact on our financial results.

In addition, the worldwide financial crisis may adversely affect certain assets held by the Company.


The market price for our common stock has experienced significant price and volume volatility and is likely to continue to experience significant volatility in the future.  This volatility may impair our ability to finance strategic transactions with our stock and otherwise harm our business

The closing price of our common stock fluctuated from a high of $5.50 per share to a low of $0.50 per share during the fiscal year ended September 30, 2009.  As of December 21, 2009 the closing price of our common stock was $1.09.  Our stock price is likely to experience significant volatility in the future as a result of numerous factors outside our control.  Significant declines in our stock price may interfere with our ability to raise additional funds through equity financing or to finance strategic transactions with our stock.  We have historically used equity incentive compensation as part of our overall compensation arrangements.  The effectiveness of equity incentive compensation in retaining key employees may be adversely impacted by volatility in our stock price.  In addition, there may be increased risk of securities litigation following periods of fluctuations in our stock price.  Securities class action lawsuits are often brought against companies after periods of volatility in the market price of their securities. These and other consequences of volatility in our stock price could have the effect of diverting management’s attention and could materially harm our business, and could be exacerbated by the recent worldwide financial crisis.


We have significant liquidity and capital requirements and may require additional capital in the future.  If we are unable to obtain the additional capital necessary to meet our requirements, our business may be adversely affected.

Historically, the Company has consumed cash from operations.   We have managed our liquidity situation through a series of cost reduction initiatives, capital markets transactions and the sale of assets.  We currently have approximately $37.5 million in working capital as of September 30, 2009.  The global credit market crisis has had a dramatic effect on the markets we serve and has created a substantially more difficult business environment for us. We do not believe it is likely that these adverse economic conditions, and their effect on the technology industry, will improve significantly in the near term, notwithstanding the unprecedented intervention by the U.S. and other governments in the global banking and financial systems.


On October 1, 2009, the Company entered into what is sometimes termed an equity line of credit arrangement with Commerce Court Small Cap Value Fund, Ltd. (“Commerce Court”). Specifically, the Company entered into a Common Stock Purchase Agreement (“Purchase Agreement”), that provides that, upon issuance of a draw-down request by the Company, Commerce Court has committed to purchase up to $25 million worth of our common stock over the 24-month term of the Purchase Agreement; provided, however, in no event may we sell under the Purchase Agreement more than 15,971,169 shares of common stock or more shares that would result in the beneficial ownership or more than 9.9% of the then issued and outstanding shares of our common stock.

If our cash on hand is not sufficient to fund the cash used by our operating activities and meet our other liquidity requirements, we will seek to obtain additional equity or debt financing or dispose of assets to provide additional working capital in the future.

Due to the unpredictable nature of the capital markets, particularly in the technology sector, we cannot assure you that we will be able to raise additional capital if and when it is required, especially if we experience disappointing operating results.  If adequate funds are not available or not available on acceptable terms, our ability to continue to fund expansion, develop and enhance products and services, or otherwise respond to competitive pressures may be severely limited.  Such a limitation could have a material adverse effect on our business, financial condition, results of operations and cash flow.


The market for our terrestrial solar power products for utility-scale applications may take time to develop, is rapidly changing and extremely price-sensitive, involves issues with which the Company has little experience, and is currently dependent on the policy decisions of governments both inside and outside the United States.

We have invested and intend to continue to invest significant resources in the adaptation of our high-efficiency compound semiconductor-based GaAs solar cell products for terrestrial applications, including the sale of both concentrator photovoltaics (“CPV”) components and systems.  We generated our first revenue from the sale of CPV systems in 2008, which involved the design, manufacture and installation of large and complex structures intended for outdoor operation, with which the Company has had no previous experience.

Factors such as changes in energy prices or the development of new and efficient alternative energy technologies could also limit growth in, or reduce the market for, our terrestrial solar power products.  In addition, we experienced difficulties in applying our satellite-based solar products to terrestrial applications.  We may experience further difficulties in the future in competing with new and emerging terrestrial solar power products, which we have determined to be extremely price sensitive and rapidly changing as well as obtaining financing for utility-scale projects utilizing our technology, particularly in view of the recent worldwide financial crisis.

We have determined that the terrestrial solar power business will require substantial additional funding for the hiring of employees, research and development and investment in capital equipment in order to successfully compete.   In addition, historically much of the market for CPV systems has been outside the U.S.  This has involved partnering with non-U.S. entities, which (because terrestrial solar power generation is a relatively new industry) may have little experience in the field and which may be new companies.  Participation in non-U.S. markets will involve evaluation and compliance with non-U.S. laws, regulations, and government electric supply contracts which the Company has limited experience in. The rates available under non-U.S. government electric supply contracts are subject to policy decisions of these governments, which can change in unpredictable ways.  Because of a reduction in rates offered under non-U.S. electric supply contracts, we believe that most of our future business in the near term will involve projects located within the United States, which has a substantially less developed program for encouraging the use of solar power and where the economic competitiveness of our products will be even more significant.  There can be no assurance that our bids on solar power installations will be accepted, that we will win any of these bids, that our CPV systems will be qualified for these projects, or that governments will continue to offer electric supply contracts and other incentives that will make our products economically viable.  If our terrestrial solar power cell products are not cost competitive or accepted by the market, our business, financial condition and results of operations may be materially and adversely affected.

Successful deployment of our solar power systems may require us to assume roles with respect to solar power projects with which we have limited or no experience (such as acting as general contractor) and which may expose us to certain financial risks (such as cost overruns and performance guaranties) which we may not have the expertise to properly evaluate or manage.  In addition, we may be subject to unexpected warranty expense; if we are subject to warranty and product liability claims, such claims could adversely affect our business, financial condition, results of operations, and cash flow.


Our Photovoltaics segment recognizes certain contract revenue on a “percentage-of-completion” basis and upon the achievement of contractual milestones and any delay or cancellation of a project could adversely affect our business.

Our Photovoltaics segment recognizes certain revenue on a “percentage-of-completion” basis and, as a result, revenue from this segment is driven by the performance of our contractual obligations. The percentage-of-completion method of accounting for revenue recognition is inherently subjective because it relies on management estimates of total project cost as a basis for recognizing revenue and profit. Accordingly, revenue and profit we have recognized under the percentage-of-completion method are potentially subject to adjustments in subsequent periods based on refinements in estimated costs of project completion that could materially impact our future revenue and profit.

As with any project-related business, there is the potential for delays within or cancellation of any particular customer project. Variation of project timelines and estimates may impact our ability to recognize revenue in a particular period. Moreover, incurring penalties involving the return of the contract price to the customer for failure to timely install one project could negatively impact our ability to continue to recognize revenue on a “percentage-of-completion” basis generally for other projects. In addition, certain customer contracts may include payment milestones due at specified points during a project. Because our Photovoltaics segment usually must invest substantial time and incur significant expense in advance of achieving milestones and the receipt of payment, failure to achieve such milestones could adversely affect our business, financial condition, results of operations, and cash flows.


As supply of polysilicon increases, the corresponding increase in the global supply of silicon-based solar cells and panels may cause substantial downward pressure on the prices of our terrestrial solar power products, resulting in lower revenues.

As additional polysilicon becomes available, we expect solar panel production globally to increase. Decreases in polysilicon pricing and increases in silicon-based solar panel production could each result in substantial downward pressure on the price of solar cells and panels, including our terrestrial solar power products. Such price reductions could have a negative impact on our revenue, and our business, financial condition results of operations and cash flows may be materially and adversely affected.


We are substantially dependent on a small number of customers and the loss of any one of these customers could adversely affect our business, financial condition and results of operations.

In fiscal 2009, 2008 and 2007, our top five customers accounted for 43%, 46%, and 48%, respectively of our total annual consolidated revenue.  There can be no assurance that we will continue to achieve historical levels of sales of our products to our largest customers.  Even though our customer base is expected to increase and our revenue streams to diversify, a substantial portion of our net revenues could continue to depend on sales to a limited number of customers.  Our agreements with these customers may be cancelled if we fail to meet certain product specifications or materially breach the agreement, and our customers may seek to renegotiate the terms of current agreements or renewals. The loss of or a reduction in sales to one or more of our larger customers could have a material adverse affect on our business, financial condition and results of operations.


Long-term, firm commitment supply agreements could result in insufficient or excess inventory or place us at a competitive disadvantage.

We manufacture our products utilizing materials, components, and services provided by third parties. We seek to obtain a lower cost of inventory by negotiating multi-year, binding contractual commitments directly with our suppliers. Under such agreements, we may be required to purchase a specified quantity of products or use a certain amount of services, which is often over a period of twelve months or more. We also may be required to make substantial prepayments or issue secured letters of credit to these suppliers against future deliveries. These contractual commitments, or any other “take or pay” agreement we enter into, allows the supplier to invoice us for the full purchase price of product or services that we are under contract for, whether or not we actually order the required volume or services. If for any reason we fail to order the required volume or services, the resulting monetary damages could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

We do not obtain contracts or commitments from customers for all of our products manufactured with materials purchased under such firm commitment contracts. Instead, we rely on our long-term internal forecasts to determine the timing of our production schedules and the volume and mix of products to be manufactured. The level and timing of orders placed by customers may vary for many reasons. As a result, at any particular time, we may have insufficient or excess inventory, which could render us unable to fulfill customer orders or increase our cost of production.  This would place us at a competitive disadvantage to our competitors, and could have a material adverse effect on our business, financial condition, results of operations, and cash flows.


Long-term contractual commitments also expose us to specific counter-party risk, which can be magnified when dealing with suppliers without a long, stable production and financial history. For example, if one or more of our contractual counterparties is unable or unwilling to provide us with the contracted amount of product, we could be required to attempt to obtain product in the open market, which could be unavailable at that time, or only available at prices in excess of our contracted prices. In addition, in the event any such supplier experiences financial difficulties, it may be difficult or impossible, or may require substantial time and expense, for us to recover any or all of our prepayments. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations, and cash flows.


Our operating results could be harmed if we lose access to sole or limited sources of materials, components or services.

We currently obtain some materials, components and services used in our products from limited or single sources.  We generally do not carry significant inventories of any raw materials. Because we often do not account for a significant part of our suppliers’ businesses, we may not have access to sufficient capacity from these suppliers in periods of high demand. In addition, since we generally do not have guaranteed supply arrangements with our suppliers, we risk serious disruption to our operations if an important supplier terminates product lines, changes business focus, or goes out of business. Because some of these suppliers are located overseas, we may be faced with higher costs of purchasing these materials if the U.S. dollar weakens against other currencies. If we were to change any of our limited or sole source suppliers, we would be required to re-qualify each new supplier. Re-qualification could prevent or delay product shipments that could materially adversely affect our results of operations. In addition, our reliance on these suppliers may materially adversely affect our production if the components vary in quality or quantity. If we are unable to obtain timely deliveries of sufficient components of acceptable quality or if the prices of components for which we do not have alternative sources increase, our business, financial condition and results of operations could be materially adversely affected.


If our contract manufacturers fail to deliver quality products at reasonable prices and on a timely basis, our business, financial condition and results of operations could be materially adversely affected.

We are increasing our use of contract manufacturers located outside of the U.S. as a less-expensive alternative to performing our own manufacturing of certain products.  Contract manufacturers in Asia currently manufacture a significant portion of our high-volume fiber optics products.  We supply inventory to our contract manufacturers and we bear the risk of loss, theft or damage to our inventory while it is held in their facilities.

If these contract manufacturers do not fulfill their obligations to us, or if we do not properly manage these relationships and the transition of production to these contract manufacturers, our existing customer relationships may suffer.  In addition, by undertaking these activities, we run the risk that the reputation and competitiveness of our products and services may deteriorate as a result of the reduction of our ability to oversee and control quality and delivery schedules.
The use of contract manufacturers located outside of the U.S. also subjects us to the following additional risks that could significantly impair our ability to source our contract manufacturing requirements internationally, including:

 
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unexpected changes in regulatory requirements;
 
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legal uncertainties regarding liability, tariffs and other trade barriers;
 
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inadequate protection of intellectual property in some countries;
 
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greater incidence of shipping delays;
 
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greater difficulty in overseeing manufacturing operations;
 
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greater difficulty in hiring talent needed to oversee manufacturing operations;
 
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potential political and economic instability;
 
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potential adverse actions by the U.S. government pursuant to its stated intention to reduce the loss of U.S. jobs; and
 
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the outbreak of infectious diseases such as the H1N1 influenza virus, severe acute respiratory syndrome (“SARS”), or the avian flu, which could result in travel restrictions or the closure of our facilities or the facilities of our customers and suppliers.

Any of these factors could significantly impair our ability to source our contract manufacturing requirements internationally.

Prior to our customers accepting products manufactured at our contract manufacturers, they must requalify the product and manufacturing processes. The qualification process can be lengthy and expensive, with no guarantee that any particular product qualification process will lead to profitable product sales. The qualification process determines whether the product manufactured at our contract manufacturer achieves our customers’ quality, performance and reliability standards. Our expectations as to the time periods required to qualify a product line and ship products in volumes to customers may be erroneous. Delays in qualification can impair the expected timing of the transfer of a product line to our contract manufacturer and may impair the expected amount of sales of the affected products. We may, in fact, experience delays in obtaining qualification of products produced by our contract manufacturers and, therefore, our operating results and customer relationships could be materially adversely affected.


If we do not keep pace with rapid technological change, our products may not be competitive.

We compete in markets that are characterized by rapid technological change, frequent new product introductions, changes in customer requirements, evolving industry standards, continuous improvement in products and the use of our existing products in new applications.  We may not be able to develop the underlying core technologies necessary to create new products and enhancements at the same rate as or faster than our competitors, or to license the technology from third parties that is necessary for our products.

Product development delays may result from numerous factors, including:

 
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changing product specifications and customer requirements;
 
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unanticipated engineering complexities;
 
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expense reduction measures we have implemented and others we may implement;
 
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difficulties in hiring and retaining necessary technical personnel; and
 
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difficulties in allocating engineering resources and overcoming resource limitations.

We cannot assure you that we will be able to identify, develop, manufacture, market or support new or enhanced products successfully, if at all, or on a timely, cost effective or repeatable basis. Our future performance will depend on our successful development and introduction of, as well as market acceptance of, new and enhanced products that address market changes as well as current and potential customer requirements and our ability to respond effectively to product announcements by competitors, technological changes or emerging industry standards. Because it is generally not possible to predict the amount of time required and the costs involved in achieving certain research, development and engineering objectives, actual development costs may exceed budgeted amounts and estimated product development schedules may be extended. If we incur budget overruns or delays in our research and development efforts, our business, financial condition and results of operations may be materially adversely affected.


Spending to develop and improve our technology may negatively impact our financial results.

We may need to increase our capital expenditures and expenses above our historical run-rate model in order to attempt to improve our existing technology and develop new technology. Increasing our investments in research and development of technology could cause our cost structure to fall out of alignment with demand for our products, which would have a negative impact on our financial results.


The competitive and rapidly evolving nature of our industries has in the past resulted and is likely in the future to result in reductions in our product prices and periods of reduced demand for our products.

We face substantial competition in each of our reporting segments from a number of companies, many of which have greater financial, marketing, manufacturing and technical resources than us. Larger-sized competitors often spend more on research and development, which could give those competitors an advantage in meeting customer demands and introducing technologically innovative products before we do. We expect that existing and new competitors will improve the design of their existing products and will introduce new products with enhanced performance characteristics.

The introduction of new products and more efficient production of existing products by our competitors has resulted and is likely in the future to result in price reductions and increases in expenses and reduced demand for our products.  In addition, some of our competitors may be willing to provide their products at lower prices, accept a lower profit margin or spend more capital in order to obtain or retain business.  Competitive pressures have required us to reduce the prices of some of our products. These competitive forces could diminish our market share and gross margins, resulting in a material adverse affect on our business, financial condition and results of operations.

New competitors may also enter our markets, including some of our current and potential customers who may attempt to integrate their operations by producing their own components and subsystems or acquiring one of our competitors, thereby reducing demand for our products.  In addition, rapid product development cycles, increasing price competition due to maturation of technologies, the emergence of new competitors in Asia with lower cost structures and industry consolidation resulting in competitors with greater financial, marketing and technical resources could result in lower prices or reduced demand for our products.

Expected and actual introductions of new and enhanced products may cause our customers to defer or cancel orders for existing products and may cause our products to become obsolete. A slowdown in demand for existing products ahead of a new product introduction could result in a write-down in the value of inventory on hand related to existing products. We have in the past experienced a slowdown in demand for existing products and delays in new product development and such delays may occur in the future. To the extent customers defer or cancel orders for existing products due to a slowdown in demand or in anticipation of a new product release or if there is any delay in development or introduction of our new products or enhancements of our products, our business, financial condition and results of operations could be materially adversely affected.


Our products are difficult to manufacture.  Our production could be disrupted and our results will suffer if our production yields are low as a result of manufacturing difficulties.

We manufacture many of our wafers and devices in our own production facilities. Difficulties in the production process, such as contamination, raw material quality issues, human error or equipment failure, can cause a substantial percentage of wafers and devices to be nonfunctional. Lower-than-expected production yields may delay shipments or result in unexpected levels of warranty claims, either of which can materially adversely affect our results of operations. We have experienced difficulties in achieving planned yields in the past, particularly in pre-production and upon initial commencement of full production volumes, which have adversely affected our gross margins. Because the majority of our manufacturing costs are fixed, achieving planned production yields is critical to our results of operations. Because we manufacture many of our products in a single facility, we have greater risk of interruption in manufacturing resulting from fire, natural disaster, equipment failures, or similar events than we would if we had back-up facilities available for manufacturing these products.  We could also incur significant costs to repair and/or replace products that are defective and in some cases costly product redesigns and/or rework may be required to correct a defect.  Additionally, any defect could adversely affect our reputation and result in the loss of future orders.

Some of the capital equipment used in the manufacture of our products have been developed and made specifically for us, is not readily available from multiple vendors and would be difficult to repair or replace if it were to become damaged or stop working. If any of these suppliers were to experience financial difficulties or go out of business, or if there were any damage to or a breakdown of our manufacturing equipment at a time when we are manufacturing commercial quantities of our products, our business, financial condition and results of operations could be materially adversely affected.


We are subject to warranty claims, product recalls and product liability.

We may be subject to warranty or product liability claims that may lead to increased expenses in order to defend or settle such claims. Such warranty claims may arise in areas such as terrestrial solar components or systems where our operating experience is limited. We maintain product liability insurance, but such insurance is subject to significant deductibles and there is no guarantee that such insurance will be available or adequate to protect against all such claims. We may incur costs and expenses relating to a recall of one of our customers’ products containing one of our products. The process of identifying a recalled product in devices that have been widely distributed may be lengthy and require significant resources, and we may incur significant replacement costs, contract damage claims from our customers and reputational harm. Payments and expenses in connection with warranty and product liability claims could materially affect our financial condition and results of operations.


We face lengthy sales and qualifications cycles for our new products and, in many cases, must invest a substantial amount of time and funds before we receive orders.

Most of our products are tested by current and potential customers to determine whether they meet customer or industry specifications. The length of the qualification process, which can span a year or more, varies substantially by product and customer, and thus can cause our results of operations to be unpredictable. During a given qualification period, we invest significant resources and allocate substantial production capacity to manufacture these new products prior to any commitment to purchase by customers. In addition, it is difficult to obtain new customers during the qualification period as customers are reluctant to expend the resources necessary to qualify a new supplier if they have one or more existing qualified sources.  If we are unable to meet applicable specifications or do not receive sufficient orders to profitably use the allocated production capacity, our business, financial condition and results of operations could be materially adversely affected.

Our historical and future budgets for operating expenses, capital expenditures, operating leases and service contracts are based upon our assumptions as to the future market acceptance of our products. Because of the lengthy lead times required for product development and the changes in technology that typically occur while a product is being developed, it is difficult to accurately estimate customer demand for any given product. If our products do not achieve an adequate level of customer demand, our business, financial condition and results of operations could be materially adversely affected.


Shifts in industry-wide demands and inventories could result in significant inventory write-downs.

The life cycles of some of our products depend heavily upon the life cycles of the end products into which our products are designed. Products with short life cycles require us to manage production and inventory levels closely. We evaluate our ending inventories on a quarterly basis for excess quantities, impairment of value and obsolescence. This evaluation includes analysis of sales levels by product and projections of future demand based upon input received from our customers, sales team and management estimates. If inventories on hand are in excess of demand, or if they are greater than 12-months old, appropriate reserves may be recorded. In addition, we write off inventories that are considered obsolete based upon changes in customer demand, manufacturing process changes that result in existing inventory obsolescence or new product introductions, which eliminate demand for existing products. Remaining inventory balances are adjusted to approximate the lower of our manufacturing cost or market value.


If future demand or market conditions are less favorable than our estimates, inventory write-downs may be required. We cannot assure investors that obsolete or excess inventories, which may result from unanticipated changes in the estimated total demand for our products and/or the estimated life cycles of the end products into which our products are designed, will not affect us beyond the inventory charges that we have already taken.


The types of sales contracts which we use in the markets which we serve subject us to unique risks in each of those markets.

In our Fiber Optics reporting segment, we generally do not have long-term supply contracts with our customers and we typically sell our products pursuant to purchase orders with short lead times, and even where we do have supply contracts, our customers are not obligated to purchase any minimum amount of our products.  As a result, our customers could stop purchasing our products at any time and we must fulfill orders in a timely manner to keep our customers.  Risks associated with the absence of long-term purchase commitments with our customers include the following:

 
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our customers can stop purchasing our products at any time without penalty;
 
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our customers may purchase products from our competitors; and
 
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our customers are not required to make minimum purchases.

These risks are increased by the fact that our customers in this market are large, sophisticated companies which have considerable purchasing power and control over their suppliers. In the Fiber Optics market, we generally sell our products pursuant to individual purchase orders, which often have extremely short lead times.  If we are unable to fulfill these orders in a timely manner, it is likely that we will lose sales and customers.  In addition, we sell some of our products to the U.S. government and related entities.  These contracts are generally subject to termination for convenience provisions and may be cancelled at any time.
Cancellations or rescheduling of customer orders could result in the delay or loss of anticipated sales without allowing us sufficient time to reduce, or delay the incurrence of, our corresponding inventory and operating expenses. In addition, changes in forecasts or the timing of orders from these or other customers expose us to the risks of inventory shortages or excess inventory.

In contrast, in our Photovoltaics reporting segment, we generally enter into long-term firm fixed-price contracts, which could subject us to losses if we have cost overruns. While firm fixed-price contracts allow us to benefit from cost savings, they also expose us to the risk of cost overruns. If the initial estimates we used to determine the contract price and the cost to perform the work prove to be incorrect, we could incur losses. In addition, some of our contracts have specific provisions relating to cost, schedule, and performance. If we fail to meet the terms specified in those contracts, then our cost to perform the work could increase or our price could be reduced, which would adversely affect our financial condition. These programs have risk for reach-forward losses if our estimated costs exceed our estimated price.

Fixed-price development work inherently has more uncertainty than production contracts and, therefore, more variability in estimates of the cost to complete the work. Many of these development programs have very complex designs. As technical or quality issues arise, we may experience schedule delays and cost impacts, which could increase our estimated cost to perform the work or reduce our estimated price, either of which could adversely affect our financial condition. Some fixed-price development contracts include initial production units in their scope of work. Successful performance of these contracts depends on our ability to meet production specifications and delivery rates.  If we are unable to perform and deliver to contract requirements, our contract price could be reduced through the incorporation of liquidated damages, termination of the contract for default, or other financially significant exposure. Management uses its best judgment to estimate the cost to perform the work and the price we will eventually be paid on fixed-price development programs. While we believe the cost and price estimates incorporated in the financial statements are appropriate, future events could result in either favorable or unfavorable adjustments to those estimates.

The risk of fixed price contracts in the photovoltaics market is increased by the new and rapidly changing nature of the terrestrial photovoltaics market and the Company’s limited experience in that market.


We are a party to several U.S. government contracts, which are subject to unique risks.

We intend to continue our policy of selectively pursuing contract research, product development and market development programs funded by various agencies of the U.S. federal and state governments to complement and enhance our own resources. Depending on the type of contract, funding from government grants is either recorded as revenue or as an offset to our research and development expense.

In addition to normal business risks, our contracts with the U.S. government are subject to unique risks, some of which are beyond our control.  We have had government contracts modified, curtailed or terminated in the past and we expect this will continue to happen from time to time.


The funding of U.S. government programs is subject to Congressional appropriations. Many of the U.S. government programs in which we participate may extend for several years; however, these programs are normally funded annually. Long-term government contracts and related orders are subject to cancellation if appropriations for subsequent performance periods are not made. The termination of funding for a U.S. government program would result in a loss of anticipated future revenue attributable to that program, which could have a material adverse effect on our operations.

The U.S. government may modify, curtail, or terminate our contracts. The U.S. government may modify, curtail, or terminate its contracts and subcontracts without prior notice at its convenience upon payment for work done and commitments made at the time of termination.  A reduction or discontinuance of these programs or of our participation in these programs would materially increase our research and development expenses, which would adversely affect our profitability and could impair our ability to develop our solar power products and services. Modification, curtailment or termination of our major programs or contracts could have a material adverse effect on our results of operations and financial condition.

Our contract costs are subject to audits by U.S. government agencies. U.S. government representatives may audit the costs we incur on our U.S. government contracts, including allocated indirect costs. Such audits could result in adjustments to our contract costs. Any costs found to be improperly allocated to a specific contract will not be reimbursed, and such costs already reimbursed must be refunded. We have recorded contract revenue based upon costs we expect to realize upon final audit. However, we do not know the outcome of any future audits and adjustments and we may be required to reduce our revenue or profits upon completion and final negotiation of audits. If any audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S. government.  We have been audited in the past by the U.S. government and expect that we will be in the future.

Our business is subject to potential U.S. government review. We are sometimes subject to certain U.S. government reviews of our business practices due to our participation in government contracts. Any such inquiry or investigation could potentially result in a material adverse effect on our results of operations and financial condition.

Our U.S. government business is also subject to specific procurement regulations and other requirements. These requirements, although customary in U.S. government contracts, increase our performance and compliance costs. These costs might increase in the future, reducing our margins, which could have a negative effect on our financial condition. Failure to comply with these regulations and requirements could lead to suspension or debarment, for cause, from U.S. government contracting or subcontracting for a period of time and could have an adverse effect on our reputation and ability to secure future U.S. government contracts.


We have significant international sales, which expose us to additional risks and uncertainties

Sales to customers located outside the U.S. accounted for approximately 38% of our consolidated revenue in fiscal 2009, 44% of our revenue in fiscal 2008 and 27% of our revenue in fiscal 2007, with revenue assigned to geographic regions based on our customers’ billing address. Sales to customers in Asia represent the majority of our international sales. We believe that international sales will continue to account for a significant percentage of our revenue as we seek international expansion opportunities. Because of this, the following international commercial risks may materially adversely affect our revenue:

 
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political and economic instability or changes in U.S. government policy with respect to these foreign countries may inhibit export of our devices and limit potential customers’ access to U.S. dollars in a country or region in which those potential customers are located;

 
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we may experience difficulties in the timeliness of collection of foreign accounts receivable and be forced to write off these receivables;

 
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tariffs and other barriers may make our devices less cost competitive;

 
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the laws of certain foreign countries may not adequately protect our trade secrets and intellectual property or may be burdensome to comply with;

 
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potentially adverse tax consequences to our customers may damage our cost competitiveness;

 
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currency fluctuations, which may make our products less cost competitive, affecting overseas demand for our products or otherwise adversely affect our business; and

 
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language and other cultural barriers may require us to expend additional resources competing in foreign markets or hinder our ability to effectively compete.

In addition, we may be exposed to additional legal risks under the laws of both the countries in which we operate and in the United States, including the Foreign Corrupt Practices Act.


We are increasing operations in China, which exposes us to risks inherent in doing business in China.

In May 2007, EMCORE Hong Kong, Ltd., a wholly owned subsidiary of EMCORE Corporation, announced the opening of a new manufacturing facility in Langfang, China. Our Chinese subsidiary, Langfang EMCORE Optoelectronics Co. Ltd., is located approximately 20 miles southeast of Beijing and currently occupies a space of 48,000 square feet with a Class-10,000 clean room for optoelectronic device packaging.  Another 40,000 square feet is available for future expansion.  We have begun the transfer of our most cost sensitive optoelectronic devices to this facility.  This facility, along with a strategic alignment with our existing contract-manufacturing partners, should enable us to improve our cost structure and gross margins across product lines. We expect to develop and provide improved service to our global customers by having a local presence in Asia.   As we continue to consolidate our manufacturing operations, we will incur additional costs to transfer product lines to our China facility, including costs of qualification testing with our customers, which could have a material adverse impact on our operating results and financial condition.

Our China-based activities are subject to greater political, legal and economic risks than those faced by our other operations.  In particular, the political, legal and economic climate in China (both at national and regional levels) is extremely fluid and unpredictable. Our ability to operate in China may be adversely affected by changes in Chinese laws and regulations, such as those relating to taxation, import and export tariffs, environmental regulations, land use rights, intellectual property and other matters, which laws and regulations remain highly underdeveloped and subject to change, with little or no prior notice, for political or other reasons. Moreover, the enforceability of applicable existing Chinese laws and regulations is uncertain.  In addition, we may not obtain the requisite legal permits to continue to operate in China and costs or operational limitations may be imposed in connection with obtaining and complying with such permits. Our business could be materially harmed by any changes in the political, legal or economic climate in China or the inability to enforce applicable Chinese laws and regulations.

As a result of a government order to ration power for industrial use, operations in our China facility may be subject to possible interruptions or shutdowns, adversely affecting our ability to complete manufacturing commitments on a timely basis. If we are required to make significant investments in generating capacity to sustain uninterrupted operations at our facility, we may not realize the reductions in costs anticipated from our expansion in China.

We intend to export the majority of the products manufactured at our facilities in China. Accordingly, upon application to and approval by the relevant governmental authorities, we will not be subject to certain Chinese taxes and are exempt from customs duty assessment on imported components or materials when the finished products are exported from China. We are, however, required to pay income taxes in China, subject to certain tax relief. As the Chinese trade regulations are in a state of flux, we may become subject to other forms of taxation and duty assessments in China or may be required to pay for export license fees in the future. In the event that we become subject to any increased taxes or new forms of taxation imposed by authorities in China, our results of operations could be materially and adversely affected.


We will lose sales if we are unable to obtain government authorization to export our products.

Exports of our products are subject to export controls imposed by the U.S. government and administered by the U.S. Departments of State and Commerce. In certain instances, these regulations may require pre-shipment authorization from the administering department.  For products subject to the Export Administration Regulations (“EAR”) administered by the Department of Commerce’s Bureau of Industry and Security, the requirement for a license is dependent on the type and end use of the product, the final destination and the identity of the end user.  Virtually all exports of products subject to the International Traffic in Arms Regulations (“ITAR”) regulations administered by the Department of State’s Directorate of Defense Trade Controls require a license.  Most of our fiber optics products, terrestrial solar power products, and commercially available solar cell satellite power products are subject to EAR; however, certain fiber optics products and certain solar cell satellite power products with an efficiency rating above 31% are currently subject to ITAR.

Given the current global political climate, obtaining export licenses can be difficult and time-consuming.  Failure to obtain export licenses for product shipments could significantly reduce our revenue and could materially adversely affect our business, financial condition and results of operations. Compliance with U.S. government regulations may also subject us to additional fees and costs. The absence of comparable restrictions on foreign competitors may adversely affect our competitive position.


Protecting our trade secrets and obtaining patent protection is critical to our ability to effectively compete.

Our success and competitive position depend on protecting our trade secrets and other intellectual property. Our strategy is to rely on trade secrets and patents to protect our manufacturing and sales processes and products. Reliance on trade secrets is only an effective business practice if trade secrets remain undisclosed and a proprietary product or process is not reverse engineered or independently developed. We take measures to protect our trade secrets, including executing non-disclosure agreements with our employees, customers and suppliers. If parties breach these agreements, the measures we take are not properly implemented, or if a competitor is able to reproduce or otherwise capitalize on our technology despite the safeguards we have in place, it may be difficult, expensive or impossible for us to obtain necessary legal protection. Disclosure of our trade secrets or reverse engineering of our proprietary products, processes, or devices could materially adversely affect our business, financial condition and results of operations.


Our failure to obtain or maintain the right to use certain intellectual property may materially adversely affect our business, financial condition and results of operations.

The compound semiconductor, optoelectronics and fiber optic communications industries are characterized by frequent litigation regarding patent and other intellectual property rights. From time to time we have received, and may receive in the future; notice of claims of infringement of other parties’ proprietary rights and licensing offers to commercialize third party patent rights. There can be no assurance that:

 
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infringement claims (or claims for indemnification resulting from infringement claims) will not be asserted against us or that such claims will not be successful;

 
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future assertions will not result in an injunction against the sale of infringing products, which could significantly impair our business and results of operations;

 
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any patent owned or licensed by us will not be invalidated, circumvented or challenged; or

 
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we will not be required to obtain licenses, the expense of which may adversely affect our results of operations and profitability.

In addition, effective copyright and trade secret protection may be unavailable or limited in certain foreign countries. Litigation, which could result in substantial cost and diversion of our resources, may be necessary to defend our rights or defend us against claimed infringement of the rights of others.  In certain circumstances, our intellectual property rights associated with government contracts may be limited.

Protection of the intellectual property owned or licensed to us may require us to initiate litigation, which can be an extremely expensive, protracted procedure with an uncertain outcome.  The availability of financial resources may limit the Company’s ability to commence or defend such litigation.


Failure to comply with environmental and safety regulations, resulting in improper handling of hazardous raw materials used in our manufacturing processes or waste product generated there from, could result in costly remediation fees, penalties or damages.

We are subject to laws and regulations and must obtain certain permits and licenses relating to the use of hazardous materials. Our production activities involve the use of certain hazardous raw materials, including, but not limited to, ammonia, gallium, phosphine and arsine. If our control systems are unsuccessful in preventing a release of these materials into the environment or other adverse environmental conditions or human exposures occur, we could experience interruptions in our operations and incur substantial remediation and other costs or liabilities.  In addition, certain foreign laws and regulations place restrictions on the concentration of certain hazardous materials, including, but not limited to, lead, mercury and cadmium, in our products. Failure to comply with such laws and regulations could subject us to future liabilities or result in the limitation or suspension of the sale or production of our products. These regulations include the European Union’s (“EU”) Restrictions on Hazardous Substances and Directive on Waste Electrical and Electronic Equipment. Failure to comply with environmental and health and safety laws and regulations may limit our ability to export products to the EU and could materially adversely affect our business, financial condition and results of operations.   In addition, the Department of Homeland Security has commenced a program to evaluate the security of certain chemicals which may be of interest to terrorists, including chemicals utilized by the Company.  This evaluation may lead to regulations or restrictions affecting the Company’s ability to utilize these chemicals or the costs of doing so. In connection with our compliance with such environmental laws and regulations, as well as our compliance with industry environmental initiatives, the standards of business conduct required by some of our customers, and our commitment to sound corporate citizenship in all aspects of our business, we could incur substantial compliance and operating costs and be subject to disruptions to our operations. In addition, in the last few years, there has been increased media scrutiny and associated reports focusing on a potential link between working in semiconductor manufacturing clean room environments and certain illnesses, primarily different types of cancers. Regulatory agencies and industry associations have begun to study the issue to see if any actual correlation exists. Because we utilize clean rooms, we may become subject to liability claims. In addition, these reports may also affect our ability to recruit and retain employees. If we were found to be in violation of environmental and safety regulations laws or noncompliance with industry initiatives or standards of conduct, we could be subject to governmental fines or liability to our customers, which could adversely affect our business, results of operations, cash flows, and financial condition.


A failure to attract and retain managerial, technical and other key personnel could reduce our revenue and our operational effectiveness

Our future success depends, in part, on our ability to attract and retain certain key personnel, including scientific, operational, financial, and managerial personnel.  In addition, our technical personnel represent a significant asset and serve as the source of our technological and product innovations. The competition for attracting and retaining key employees (especially scientists, technical personnel, financial personnel and senior managers and executives) is intense. Because of this competition for skilled employees, we may be unable to retain our existing personnel or attract additional qualified employees in the future. If we are unable to retain our skilled employees and attract additional qualified employees to the extent necessary to keep up with our business demands and changes, our business, financial condition and results of operations may be materially adversely affected.  The risks involved in recruiting and retaining these key personnel may be increased by our lack of profitability, the volatility of our stock price and the perceived affect of reductions in force and other cost reduction efforts which we have recently implemented.


We are subject to risks associated with the availability and coverage of insurance.

For certain risks, the Company does not maintain insurance coverage because of cost and/or availability. Because the Company retains some portion of its insurable risks, and in some cases self-insures completely, unforeseen or catastrophic losses in excess of insured limits may have a material adverse effect on the Company’s results of operations and financial position.


Our business and operations would be adversely impacted in the event of a failure of our information technology infrastructure.

We rely upon the capacity, reliability and security of our information technology hardware and software infrastructure and our ability to expand and update this infrastructure in response to our changing needs. We are constantly updating our information technology infrastructure. Any failure to manage, expand and update our information technology infrastructure or any failure in the operation of this infrastructure could harm our business.

Despite our implementation of security measures, our systems are vulnerable to damages from computer viruses, natural disasters, unauthorized access and other similar disruptions. Our business is also subject to break-ins, sabotage and intentional acts of vandalism by third parties as well as employees. Any system failure, accident or security breach could result in disruptions to our operations. To the extent that any disruptions or security breach results in a loss or damage to our data, or inappropriate disclosure of confidential information, it could harm our business. In addition, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.

In addition, implementation of new software programs, including the implementation of an enterprise resource planning (“ERP”) program which the Company intends to install at one of the Company’s divisions during fiscal year 2010, may have adverse impact on the Company, including interruption of operations, loss of data, budget overruns and the consumption of management time and resources.


If we fail to remediate deficiencies in our current system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, our business could be harmed and current and potential investors could lose confidence in our financial reporting, which could have a negative effect on the trading price of our equity securities.

The Company is subject to the ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002. These provisions provide for the identification of material weaknesses in internal control over financial reporting, which is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with U.S. GAAP.  If we cannot provide reliable financial reports or prevent fraud, our brand, operating results and the market value of our equity securities could be harmed. We have in the past discovered, and may in the future discover, areas of our internal controls that need improvement.

We have devoted significant resources to remediate and improve our internal controls. We have also been monitoring the effectiveness of these remediated measures. We cannot be certain that these measures will ensure adequate controls over our financial processes and reporting in the future. We intend to continue implementing and monitoring changes to our processes to improve internal controls over financial reporting. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations.


Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our equity securities. Further, the impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors or as executive officers, which could harm our business. The additions of our manufacturing facility in China and acquisitions increase the burden on our systems and infrastructure, and impose additional risk to the ongoing effectiveness of our internal controls, disclosure controls, and procedures.


Certain provisions of New Jersey law and our charter may make a takeover of the Company difficult even if such takeover could be beneficial to some of our shareholders.

New Jersey law and our certificate of incorporation, as amended, contain certain provisions that could delay or prevent a takeover attempt that our shareholders may consider in their best interests. Our Board of Directors is divided into three classes. Directors are elected to serve staggered three-year terms and are not subject to removal except for cause by the vote of the holders of at least 80% of our capital stock. In addition, approval by the holders of 80% of our voting stock is required for certain business combinations unless these transactions meet certain fair price criteria and procedural requirements or are approved by two-thirds of our continuing directors. We may in the future adopt other measures that may have the effect of delaying or discouraging an unsolicited takeover, even if the takeover were at a premium price or favored by a majority of unaffiliated shareholders. Certain of these measures may be adopted without any further vote or action by our shareholders and this could depress the price of our common stock.


Acquisitions of other companies or investments in joint ventures with other companies could adversely affect our operating results, dilute our shareholders’ equity, or cause us to incur additional debt or assume contingent liabilities.

To increase our business and maintain our competitive position, we may acquire other companies or engage in joint ventures in the future. Acquisitions and joint ventures involve a number of risks that could harm our business and result in the acquired business or joint venture not performing as expected, including:

 
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insufficient experience with technologies and markets in which the acquired business is involved, which may be necessary to successfully operate and integrate the business;

 
-
problems integrating the acquired operations, personnel, technologies or products with the existing business and products;

 
-
diversion of management time and attention from the core business to the acquired business or joint venture;

 
-
potential failure to retain key technical, management, sales and other personnel of the acquired business or joint venture;

 
-
difficulties in retaining relationships with suppliers and customers of the acquired business, particularly where such customers or suppliers compete with us;

 
-
reliance upon joint ventures which we do not control;

 
-
subsequent impairment of the acquired assets, including intangible assets; and

 
-
assumption of liabilities including, but not limited to, lawsuits, tax examinations, warranty issues, etc.

We may decide that it is in our best interests to enter into acquisitions or joint ventures that are dilutive to earnings per share or that negatively impact margins as a whole. In addition, acquisitions or joint ventures could require investment of significant financial resources and require us to obtain additional equity financing, which may dilute our shareholders’ equity, or require us to incur additional indebtedness.


Changes to financial accounting standards may affect our consolidated results of operations and cause us to change our business practices.

We prepare our financial statements to conform to U.S. GAAP. These accounting principles are subject to interpretation by the American Institute of Certified Public Accountants, the SEC and various bodies formed to interpret and create appropriate accounting policies. A change in those policies can have a significant effect on our consolidated reported results and may affect our reporting of transactions completed before a change is announced. Changes to those rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.  For example, the Financial Accounting Standards Board issued authoritative guidance related to the consolidation of variable interest entities that may impact our accounting for future joint ventures or project companies. In the event that we are deemed the primary beneficiary of a variable interest entity, we may have to consolidate the assets, liabilities and financial results of the joint venture. This could have an adverse impact on our financial position, gross margin and operating results.  Also, the Securities and Exchange Commission (“SEC”) issued its long-anticipated proposed International Financial Reporting Standards (“IFRS”) roadmap outlining milestones that, if achieved, could lead to mandatory transition to IFRS for U.S. domestic registrants starting in 2014. IFRS is a comprehensive series of accounting standards published by the International Accounting Standards Board (“IASB”). Under the proposed roadmap, the Company could be required to prepare financial statements in accordance with IFRS, and the SEC will make a determination in 2011 regarding the mandatory adoption of IFRS for U.S. domestic registrants. Management is currently assessing the impact that this potential change would have on the Company’s consolidated financial statements, and will continue to monitor the development of the potential implementation of IFRS.


Natural disasters or other catastrophic events could have a material adverse affect on our business .

Natural disasters, such as hurricanes, earthquakes, and fires, particularly in California or in New Mexico, could unfavorably affect our operations and financial performance.  Such events could result in physical damage to one or more of our facilities, the temporary closure of one or more of our facilities or those of our suppliers, the temporary lack of an adequate work force in a market, the temporary or long-term disruption in the supply of products from some local and overseas suppliers, the temporary disruption in the transport of goods from overseas, and delays in the delivery of goods. Public health issues, such as a potential H1N1 flu pandemic (swine flu), whether occurring in the United States or abroad, could disrupt our operations, disrupt the operations of suppliers or customers, or have an adverse impact on customer demand. We may be required to suspend operations in some or all of our locations, which could have a material adverse effect on our business, financial condition, and results of operations. These events could also reduce demand for our products or make it difficult or impossible to receive products from suppliers. Although we maintain business interruption insurance and other insurance intended to cover some or all of these risks, such insurance may be inadequate, whether because of coverage amount, policy limitations, the financial viability of the insurance companies issuing such policies, or other reasons.


ITEM 1B.    Unresolved Staff Comments

Not Applicable.


ITEM 2 .    Properties

The following chart contains certain information regarding each of our principal facilities.

Location
 
Function
 
Approximate
Square Footage
 
Term
(in calendar year)
             
Albuquerque,
New Mexico
 
Corporate Headquarters
Manufacturing and R&D facilities
for both photovoltaic and fiber optics products
 
165,000
 
Facilities are 100% owned by the Company.  Certain land is leased, which expires in 2050
             
Alhambra, California
 
Manufacturing and R&D facilities
for fiber optics products
 
83,000
 
Multiple leases, which expire in 2011 through 2013 (1)
             
Newark, California
 
R&D facilities for fiber optics products
 
55,000
 
Multiple leases, which expire in 2013 (1)
             
Langfang, China
 
Manufacturing facility for fiber optics products
 
48,000
 
Multiple leases, which expire in 2012 through 2013 (1)
             
Sonora, Mexico
 
Manufacturing facility for photovoltaics products
 
20,000
 
This facility is in the process of being vacated.  This lease will expire by December 31, 2009
             
Ivyland, Pennsylvania
 
Manufacturing & R&D facility for fiber optics products
 
9,000
 
Lease expires in 2011 (1)
             
Albuquerque,
New Mexico
 
Storage warehouse
 
6,000
 
Lease expires in 2010 (1)
             
Taipei City, Taiwan
 
R&D facility for fiber optics products
 
7,000
 
Lease expires in 2013
             
Somerset, New Jersey
 
R&D facility
 
5,000
 
Lease expires in 2010 (1)
             
San Diego, California
 
R&D facility
 
1,000
 
Month-to-month lease
             
Albuquerque,
New Mexico
 
Apartment
 
1,000
 
One year lease commitment through September 2010 was signed in November 2009 (1)
             
Vacated Property:
           
             
Naperville, Illinois
 
Facility was vacated in October 2008
 
11,000
 
Lease expires in February 2013. The Company continues to work on subleasing this property.

Footnote
(1)
This lease has the option to be renewed by the Company, subject to inflation adjustments.


ITEM 3 .    Legal Proceedings

The Company is subject to various legal proceedings and claims that are discussed below. The Company is also subject to certain other legal proceedings and claims that have arisen in the ordinary course of business and which have not been fully adjudicated.  The Company does not believe it has a potential liability related to current legal proceedings and claims that could individually, or in the aggregate, have a material adverse effect on its financial condition, liquidity or results of operations. However, the results of legal proceedings cannot be predicted with certainty. Should the Company fail to prevail in any legal matters or should several legal matters be resolved against the Company in the same reporting period, then the operating results of that particular reporting period could be materially adversely affected.  During fiscal year 2009, the Company settled certain matters that did not individually, or in the aggregate, have a material impact on the Company’s results of operations.


 a) Intellectual Property Lawsuits

We protect our proprietary technology by applying for patents where appropriate and, in other cases, by preserving the technology, related know-how and information as trade secrets. The success and competitive position of our product lines are significantly impacted by our ability to obtain intellectual property protection for our R&D efforts.

We have, from time to time, exchanged correspondence with third parties regarding the assertion of patent or other intellectual property rights in connection with certain of our products and processes. Additionally, on September 11, 2006, we filed a lawsuit against Optium Corporation, currently part of Finisar Corporation (Optium) in the U.S. District Court for the Western District of Pennsylvania for patent infringement of certain patents associated with our Fiber Optics segment. In the suit, the Company and JDS Uniphase Corporation (JDSU) allege that Optium is infringing on U.S. patents 6,282,003 and 6,490,071 with its Prisma II 1550nm transmitters. On March 14, 2007, following denial of a motion to add additional claims to its existing lawsuit, the Company and JDSU filed a second patent suit in the same court against Optium alleging infringement of JDSU's patent 6,519,374 ("the '374 patent").  On March 15, 2007, Optium filed a declaratory judgment action against the Company and JDSU. Optium sought in this litigation a declaration that certain products of Optium do not infringe the '374 patent and that the patent is invalid, but the District Court dismissed the action on January 3, 2008 without addressing the merits. The '374 patent is assigned to JDSU and licensed to the Company.

On December 20, 2007, the Company was served with a complaint in another declaratory relief action which Optium had filed in the Federal District Court for the Western District of Pennsylvania.  This action seeks to have U.S. patents 6,282,003 and 6,490,071 declared invalid or unenforceable because of certain conduct alleged to have occurred in connection with the grant of these patents.  These allegations are substantially the same as those brought by Optium by motion in the Company’s own case against Optium, which motion had been denied by the Court.  On August 11, 2008, both actions pending in the Western District of Pennsylvania were consolidated before a single judge, and a trial date of October 19, 2009 was set.  On February 18, 2009, the Company’s motion for a summary judgment dismissing Optium’s declaratory relief action was granted, and on March 11, 2009, the Company was notified that Optium intended to file an appeal of this order. In October 2009 the consolidated matters were tried before a jury, which found that all patents asserted against Optium were valid, that all claims asserted were infringed, and that such infringement by Optium was willful where willfulness was asserted.  The jury awarded EMCORE and JDSU monetary damages totaling approximately $3.4 million.  Post trial motions are currently pending, including EMCORE’s request for enhanced damages and an injunction.


b) Avago-related Litigation

On July 15, 2008, the Company was served with a complaint filed by Avago Technologies and what appear to be affiliates thereof in the United States District Court for the Northern District of California, San Jose Division (Avago Technologies U.S., Inc., et al. , Emcore Corporation, et al. , Case No.:  C08-3248 JW).  In this complaint, Avago asserts claims for breach of contract and breach of express warranty against Venture Corporation Limited (one of the Company’s customers) and asserts a tort claim for negligent interference with prospective economic advantage against the Company.

On December 5, 2008, the Company was also served with a complaint by Avago Technologies filed in the United States District Court for the Northern District of California, San Jose Division alleging infringement of two patents by the Company’s VCSEL products. (Avago Technologies Singapore et al. , Emcore Corporation, et al. , Case No.:  C08-5394 EMC).  This matter has been stayed pending resolution of the International Trade Commission matter described immediately below.

On March 5, 2009, the Company was notified that, based on a complaint filed by Avago alleging the same patent infringement that formed the basis of the complaint previously filed in the Northern District of California, the U.S. International Trade Commission had determined to begin an investigation titled “In the Matter of Certain Optoelectronic Devices, Components Thereof and Products Containing the Same”, Inv. No. 337-TA-669.  This matter was tried before an administrative law judge of the International Trade Commission from November 16-20, 2009, and final briefings have been completed but no decision has yet been rendered.

The Company intends to vigorously defend against the allegations of all of the Avago complaints.


c) Green and Gold related litigation

On December 23, 2008, Plaintiffs Maurice Prissert and Claude Prissert filed a purported stockholder class action (the “Prissert Class Action”) pursuant to Federal Rule of Civil Procedure 23 allegedly on behalf of a class of Company shareholders against the Company and certain of its present and former directors and officers (the “Individual Defendants”) in the United States District Court for the District of New Mexico captioned, Maurice Prissert and Claude Prissert v. EMCORE Corporation, Adam Gushard, Hong Q. Hou, Reuben F. Richards, Jr., David Danzilio and Thomas Werthan , Case No. 1:08cv1190 (D.N.M.).  The Complaint alleges that Company and the Individual Defendants violated certain provisions of the federal securities laws, including Section 10(b) of the Securities Exchange Act of 1934, arising out of the Company’s disclosure regarding its customer Green and Gold Energy (“GGE”) and the associated backlog of GGE orders with the Company’s Photovoltaics business segment.  The Complaint in the Class Action seeks, among other things, an unspecified amount of compensatory damages and other costs and expenses associated with the maintenance of the Action.

On or about February 12, 2009, a second purported stockholder class action ( Mueller v. EMCORE Corporation et al. , Case No. 1:09cv 133 (D.N.M.)) was filed in the United States District Court for the District of New Mexico against the same defendants named in the Prissert Class Action, based on substantially the same facts and circumstances, containing substantially the same allegations and seeking substantially the same relief.  Plaintiffs in both class actions have moved to consolidate the matters into a single action, and several alleged EMCORE shareholders have moved to be appointed lead class plaintiff of the to-be consolidated action.  Selection of a lead plaintiff in this matter is currently pending before the Court.

On January 23, 2009, Plaintiff James E. Stearns filed a purported stockholder derivative action (the “Stearns Derivative Action”) on behalf of the Company against certain of its present and former directors and officers (the “Individual Defendants”), as well as the Company as nominal defendant in the Superior Court of New Jersey, Atlantic County, Chancery Division ( James E. Stearns, derivatively on behalf of  EMCORE Corporation v. Thomas J. Russell, Robert Bogomolny, Charles Scott, John Gillen, Reuben F. Richards, Jr., Hong Q. Hou, Adam Gushard, David Danzilio and Thomas Werthan , Case No. Atl-C-10-09).  This action is based on essentially the same factual contentions as the Class Action, and alleges that the Individual Defendants engaged in improprieties and violations of law in connection with the reporting of the GGE backlog.  The Derivative Action seeks several forms of relief, allegedly on behalf of the Company, including, among other things, damages, equitable relief, corporate governance reforms, an accounting of, rescission of, restitution of, and costs and disbursements of the lawsuit.

On March 11, 2009, Plaintiff Gary Thomas filed a second purported shareholder derivative action (the “Thomas Derivative Action”; together with the Stearns Derivative Action, the “Derivative Actions”) in the U.S. District Court for the District of New Mexico against the Company and certain of  the Individual Defendants   ( Gary Thomas, derivatively on behalf of  EMCORE Corporation v. Thomas J. Russell, Robert Bogomolny, Charles Scott, John Gillen, Reuben F. Richards, Jr., Hong Q. Hou, and EMCORE Corporation , Case No. 1.09-cv-00236, (D.N.M.)).  The Thomas Derivative Action makes the same allegations as the Stearns Derivative Action and seeks essentially the same relief.

The Stearns Derivative Action and the Thomas Derivative action have been consolidated before a single judge in Somerset County, New Jersey, and have been stayed pending the Class Actions.

The Company intends to vigorously defend against the allegations of both the Class Actions and the Derivative Action.


d) Securities Matters

 
-
SEC Communications.  On or about August 15, 2008, the Company received a letter from the Denver office of the Enforcement Division of the Securities and Exchange Commission wherein it sought the Company's voluntary production of documents relating to, among other things, the Company's business relationship with Green and Gold Energy, Inc., its licensees, and the Photovoltaics segment backlog the Company reported to the public.  Since that time, the Company has provided documents to the staff of the SEC and met with the staff on December 12, 2008 to address this matter.  On June 10, 2009, the SEC staff requested that the Company voluntarily provide documentary backup for certain information presented at the December 2008 meeting, which was provided on July 17, 2009, and arrange for a telephone interview with one former employee, which has been completed.  On August 24, 2009, in a telephone call with the Company’s counsel, the staff posed certain questions relating to the material provided on July 17, 2009, which were answered via the production of additional information and documentation on October 9, 2009.


 
-
NASDAQ Communication.  On or about November 13, 2008, the Company received a letter from the NASDAQ Listings Qualifications group (“NASDAQ”) concerning the Company's removal of $79 million in backlog attributable to GGE which the Company announced on August 8, 2008 and the remaining backlog exclusive of GGE. The Company advised NASDAQ that it would cooperate with its inquiry.  To date, the Company has received three additional requests for information from NASDAQ (the latter 2 of which requested updates on the SEC matter).  The Company has complied with each of NASDAQ’s requests.  In early November 2009 the NASDAQ orally requested to be advised of developments in the SEC matter.


ITEM 4.    Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter ended September 30, 2009.


PART II

ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s common stock is traded on The NASDAQ Global Market and is quoted under the symbol "EMKR". The reported closing sale price of our common stock on December 21, 2009 was $1.09 per share. As of December 21, 2009, we had approximately 176 shareholders of record.  Many of our shares of common stock are held by brokers and other institutions on behalf of shareholders, and we are unable to estimate the number of these shareholders.


Price Range of Common Stock

The price range per share of common stock presented below represents the highest and lowest sales prices for the Company’s common stock on The NASDAQ Global Market during each quarter of the two most recent fiscal years.

High and Low Price Range
 
 
First
Quarter
   
Second
Quarter
   
Third
Quarter
   
Fourth
Quarter
 
Fiscal 2009
    $0.76 – $  5.50       $0.50 – $  1.55       $0.72 – $1.75       $1.00 – $1.54  
Fiscal 2008
    $7.22 – $15.90       $5.62 – $15.70       $5.80 – $9.30       $3.90 – $6.65  


Dividend Policy

We have never declared or paid dividends on our common stock since the Company's formation. We currently do not intend to pay dividends on our common stock in the foreseeable future, so that we may reinvest any earnings in our business. The payment of dividends, if any, in the future is at the discretion of the Board of Directors.  Due to the Company’s credit facility signed in September 2008, the Company agreed to not issue any dividends until full payment is made on any amounts outstanding under the credit facility.


Performance Graph

The following stock performance graph does not constitute soliciting material, and should not be deemed filed or incorporated by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates this stock performance graph by reference therein.

The following graph and table compares the cumulative total shareholders’ return on the Company’s common stock for the five-year period from September 30, 2004 through September 30, 2009 with the cumulative total return on The NASDAQ Stock Market Index, The NASDAQ Electronic Components Stocks Index (SIC Code 3674) and The NASDAQ Computer Stocks Index.  The comparison assumes $100 was invested on September 30, 2004 in the Company’s common stock.  The Company did not declare, nor did it pay, any dividends during the comparison period.



 
Fiscal Year Ended
September 30,
 
 
2004
   
2005
   
2006
   
2007
   
2008
   
2009
 
EMCORE Corporation
  $ 100.00     $ 310.66     $ 300.51     $ 487.31     $ 250.76     $ 65.99  
NASDAQ Composite
  $ 100.00     $ 113.78     $ 121.50     $ 143.37     $ 109.15     $ 112.55  
NASDAQ Electronic Components
  $ 100.00     $ 118.95     $ 112.83     $ 137.42     $ 95.53     $ 98.63  
NASDAQ Computer
  $ 100.00     $ 115.31     $ 121.76     $ 149.58     $ 111.69     $ 128.44  


Equity Compensation Plan Information

The description of equity compensation plans required by Regulation S-K, Item 201(d) is incorporated herein by reference to Part III, Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.


Sales of Unregistered Securities

On February 20, 2008, the Company completed the sale of $100.0 million of restricted common stock and warrants to investors deemed to be “accredited investors” as defined in Rule 501(a) under the Securities Act or “qualified institutional buyers” as defined in Rule 144A(a) under the Securities Act, through a private placement transaction exempt from the SEC’s registration requirements pursuant to Section 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D.  In this transaction, investors purchased 8 million shares of our common stock, no par value, and warrants to purchase an additional 1.4 million shares of our common stock.  The purchase price was $12.50 per share, priced at the 20-day volume-weighted average price.  The warrants grant the holder the right to purchase one share of our common stock at a price of $15.06 per share, representing a 20.48% premium over the purchase price.  The warrants are immediately exercisable and remain exercisable until February 20, 2013.  Beginning two years after their issuance, the warrants may be called by the Company for a price of $0.01 per underlying share if the closing price of its common stock has exceeded 150% of the exercise price for at least 20 trading days within a period of any 30 consecutive trading days and other certain conditions are met.   In addition, in the event of certain fundamental transactions, principally the purchase of the Company’s outstanding common stock for cash, the holders of the warrants may demand that the Company purchase the unexercised portions of their warrants for a price equal to the Black-Scholes Value of such unexercised portions as of the time of the fundamental transaction.  In addition, the Company entered into a registration rights agreement with the investors to register for resale the shares of common stock issued in this transaction and the shares of common stock to be issued upon exercise of the warrants.  Warrants issued to the investors were accounted for as an equity transaction with a value of $9.8 million recorded to common stock.  As part of the sale documentation each investor provided representations and warranties in the securities purchase agreement, upon which the Company relied, with respect to such investor’s status as an “accredited investor” or “qualified institutional buyer”.  No party acted as underwriter for this transaction.   Total agent fees incurred were 5.75% of the gross proceeds, or $5.8 million.  The total cost associated with this equity offering was approximately $6.3 million which was recorded against the issuance of common stock.  The Company used the proceeds from this private placement transaction to acquire the telecom-related assets of Intel Corporation's Optical Platform Division in 2008.


ITEM 6.    Selected Financial Data

The following selected consolidated financial data of the Company's five most recent fiscal years ended September 30, 2009 is qualified by reference to, and should be read in conjunction with, Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 7 and Financial Statements and Supplementary Data under Item 8.  The information set forth below is not necessarily indicative of results for future operations.  Significant transactions that affect the comparability of the Company’s operating results and financial condition include:


Significant Accounting Transactions:

Fiscal 2009:

 
-
In December 2008, the Company recorded non-cash impairment charges totaling $33.8 million related to goodwill and intangible assets in the Fiber Optics segment.

 
-
In January 2009, the Company sold its remaining interest in Entech Solar Inc (formerly WorldWater and Solar Technologies Corporation) for a gain of $3.1 million.

 
-
In June 2009, the Company recorded a non-cash impairment charge totaling $27.0 million related to long-lived assets in the Fiber Optics segment.

 
-
In fiscal 2009, the Company incurred the following significant non-cash expenses within operations:

 
-
Additional inventory provisions related to excess, obsolete, and lower of cost or market valuation adjustments totaling $13.6 million;
 
-
Provisions for losses on firm purchase agreements totaling $8.5 million; and,
 
-
Additional provisions for doubtful accounts totaling $5.1 million.

 
-
In fiscal 2009, the Company incurred $2.0 million related to severance and restructuring charges and $5.6 million related to legal expenses associated with certain patent and other litigation, all of which was recorded as SG&A expense.


Fiscal 2008:

 
-
In February 2008, the Company redeemed all of its outstanding convertible notes.  The Company recognized a loss totaling $4.7 million related to the conversion of notes to equity.

 
-
In February 2008, the Company completed the sale of $100 million of restricted common stock and warrants.   The Company used the proceeds from this private placement transaction to acquire the telecom-related assets of Intel Corporation's Optical Platform Division in 2008.

 
-
In February and April 2008, the Company acquired the telecom, datacom, and optical cable interconnects-related assets of Intel Corporation’s Optical Platform Division for $112 million in cash and the Company’s common stock.

 
-
In June and July 2008, the Company sold a portion of its investment in Entech Solar for a total gain of $7.4 million.

 
-
In September 2008, the Company recorded a non-cash impairment charge totaling $22.0 million related to goodwill in the Fiber Optics segment.

 
-
In September 2008, the Company recorded a $1.5 million non-cash impairment charge related to investments.

 
-
In fiscal 2008, the Company incurred the following significant non-cash expenses within operations:

 
-
Additional inventory provisions related to excess, obsolete, and lower of cost or market valuation adjustments totaling $9.6 million; and,
 
-
Additional provisions for doubtful accounts totaling $2.1 million.

 
-
Fiscal 2008 operating expenses also included $4.8 million related to transition service agreement charges associated with the fiber optics businesses acquired from Intel Corporation.

 
-
In fiscal 2008, the Company incurred non-cash expense totaling $4.3 million associated with the modification of stock options issued to terminated employees.


Fiscal 2007:

 
-
In November 2006, the Company invested $13.1 million in Entech Solar Inc. in return for convertible preferred stock and warrants.

 
-
In April 2007, the Company modified its convertible subordinated notes.  The interest rate was increased from 5% to 5.5% and the conversion price was decreased from $8.06 to $7.01.  The Company also repurchased $11.4 million of outstanding notes to reduce interest expense and share dilution.

 
-
In April 2007, the Company acquired privately-held Opticomm Corporation for $4.1 million in cash.

 
-
In fiscal 2007, the Company incurred the following significant expenses within operations:

 
-
$10.6 million related to our review of historical stock option granting practices;
 
-
$6.1 million related to non-recurring corporate legal expenses; and,
 
-
$2.8 million related to severance charges associated with facility closures and consolidation of operations.


Fiscal 2006:

 
-
In November 2005, the Company exchanged $14.4 million of convertible subordinated notes due in May 2007 for $16.6 million of newly issued convertible senior subordinated notes due May 15, 2011. As a result of this transaction, the Company recognized approximately $1.1 million of expense in the first quarter of fiscal 2007 related to the early extinguishment of debt.

 
-
The Company received manufacturing equipment valued at $2.0 million less tax of $0.1 million as a final earn-out payment from Veeco Instruments, Inc. (Veeco) in connection with the sale of the TurboDisc division.  The results of operations of the TurboDisc division have been reclassified to discontinued operations for all periods presented.

 
-
In August 2006, the Company sold its Electronic Materials & Device   (EMD) division to IQE plc (IQE) for $16.0 million. The net gain associated with the sale of the EMD business totaled approximately $7.6 million, net of tax of $0.5 million.  The results of operations of the EMD division have been reclassified to discontinued operations for all periods presented.


 
-
In August 2006, the Company sold its 49% membership interest in GELcore, LLC for $100.0 million to General Electric Corporation, which prior to the transaction owned the remaining 51% membership interest in GELcore.  The Company recorded a net gain of $88.0 million, before tax, on the sale of GELcore, after netting the Company’s investment in this joint venture of $10.8 million and transaction expenses of $1.2 million.

 
-
The Company recorded approximately $2.2 million of non-cash impairment charges on goodwill and intellectual property associated with the June 2004 acquisition of Corona Optical Systems.

 
-
Fiscal 2006 operating expense included $1.3 million related to our review of historical stock option granting practices.

 
-
Other expense included a charge of $0.5 million associated with the write-down of the Archcom investment.

 
-
The Company recognized a provision for income taxes of $1.9 million from continuing operations for the fiscal year ended September 30, 2006.


Fiscal 2005:

 
-
SG&A expense included approximately $0.9 million in severance-related charges and $2.3 million of charges associated with the consolidation of the Company’s City of Industry, California location to Albuquerque, New Mexico.

 
-
The Company received a $12.5 million net earn-out payment from Veeco in connection with the sale of the TurboDisc division in November 2003.


Selected Financial Data

Statements of Operations Data
 
For the Fiscal Years Ended September 30,
 
(in thousands, except income (loss) per share)
     
   
2009
   
2008
   
2007
   
2006 (1)(2)
   
2005 (1)
 
Total revenue
  $ 176,356     $ 239,303     $ 169,606     $ 143,533     $ 115,367  
Gross (loss) profit
    (3,774 )     29,895       30,368       25,952       19,302  
Operating loss
    (138,234 )     (75,281 )     (57,456 )     (34,150 )     (20,371 )
(Loss) income from continuing operations
    (136,069 )     (80,860 )     (58,722 )     45,039       (24,685 )
Income from discontinued operations
    -       -       -       9,884       11,200  
Net (loss) income
    (136,069 )     (80,860 )     (58,722 )     54,923       (13,485 )
                                         
Per share data:
                                       
(Loss) income from continuing operations:
                                       
Per basic share
  $ (1.72 )   $ (1.20 )   $ (1.15 )   $ 0.91     $ (0.52 )
Per diluted share
  $ (1.72 )   $ (1.20 )   $ (1.15 )   $ 0.87     $ (0.52 )


Balance Sheet Data
 
As of September 30,
 
(in thousands)
     
   
2009
   
2008
   
2007
   
2006
   
2005
 
Cash, cash equivalents, restricted cash and current available-for-sale securities
  $ 16,899     $ 22,760     $ 41,226     $ 123,967     $ 40,175  
Working capital
    37,457       79,234       63,204       129,683       56,996  
Total assets
    184,559       329,278       234,736       287,547       206,287  
Long-term liabilities
    104       -       84,981       84,516       94,701  
Shareholders’ equity
    126,663       253,722       98,157       149,399       75,563  

_______________________

 
(1)
In August 2006, the Company sold its Electronic Materials & Device   (EMD) division to IQE plc (IQE) for $16 million. The results of operations of the EMD division have been reclassified to discontinued operations for fiscal years ended September 30, 2006 and 2005.

 
(2)
In August 2006, the Company sold its 49% membership interest in GELcore, LLC for $100.0 million to General Electric Corporation, which prior to the transaction owned the remaining 51% membership interest in GELcore.  The Company recorded a net gain of $88.0 million, before tax, on the sale of GELcore, after netting the Company’s investment in this joint venture of $10.8 million and transaction expenses of $1.2 million.


ITEM 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations


Business Overview

EMCORE Corporation (the “Company”, “we”, “our”, or “EMCORE”) is a provider of compound semiconductor-based components and subsystems for the fiber optics and solar power markets.  We were established in 1984 as a New Jersey corporation and have two reporting segments: Fiber Optics and Photovoltaics.  Our Fiber Optics segment offers optical components, subsystems and systems that enable the transmission of video, voice and data over high-capacity fiber optic cables for high-speed data and telecommunications, cable television (“CATV”) and fiber-to-the-premises (“FTTP”) networks.  Our Photovoltaics segment provides solar products for satellite and terrestrial applications. For satellite applications, we offer high-efficiency compound semiconductor-based multi-junction solar cells, covered interconnected cells (“CICs”) and fully integrated solar panels.  For terrestrial applications, we offer concentrating photovoltaic (“CPV”) power systems for commercial and utility scale solar applications as well as high-efficiency multi-junction solar cells and integrated CPV components for use in other solar power concentrator systems.  Our headquarters and principal executive offices are located at 10420 Research Road, SE, Albuquerque, New Mexico, 87123, and our main telephone number is (505) 332-5000.  For specific information about our Company, our products or the markets we serve, please visit our website at http://www.emcore.com.


Management Summary

The Company’s management has believed for some time that, due to significant differences in operating strategy between the Company’s Fiber Optics and Photovoltaics businesses, they would provide greater value to shareholders if they were operated as two separate business entities.  Over the past two years, the Company has completed several acquisitions to strengthen one or both of these businesses with a view toward their eventual separation. On April 4, 2008, the Company announced that its Board of Directors had formally authorized management to prepare a comprehensive operational and strategic plan for the separation of these businesses into separate corporations.  Management began assessing alternative methods for achieving this goal; however, the subsequent onset of the recent worldwide economic and financial crisis has had a significant adverse impact on these plans.  A dramatic reduction in customer demand for many of the Company’s Fiber Optics products through June 2009 has significantly lowered revenue and cash flow in that business unit, while a shortage of debt and equity capital, a decline in the price of conventional energy sources, and a generally cautious and conservative attitude in all business sectors has delayed the opportunities for expanded deployment of the Company’s terrestrial photovoltaic products and systems.  As a result, while the Company is continuing to pursue strategic alternatives for separating its two operating segments, the Company has also instituted a series of initiatives aimed at conserving and generating cash over the next twelve months.

During fiscal 2009, management implemented a series of measures and continues to evaluate opportunities intended to align the Company’s cost structure with its revenue forecasts.  Such measures included establishing a line of credit with Bank of America, several workforce reductions, salary reductions, the elimination of executive and employee merit increases, and the elimination or reduction of certain discretionary expenses.  The Company has also significantly lowered its spending on capital expenditures and focused on improving the management of its working capital.  During fiscal 2009, the Company monetized approximately $16.8 million of inventory, generated $16.0 million in cash from lowering its accounts receivable balances and achieved positive cash flow from operations during the quarters ended June 30, 2009 and September 30, 2009.

In fiscal 2010, the Company will continue to remain focused on cash flow while accessing a range of strategic options for the purpose of maximizing shareholder value, including joint-venture business opportunities and the potential sale of certain assets.

With respect to measures taken to generate cash, the Company sold its minority ownership positions in Entech Solar, Inc. and Lightron Corporation in the second quarter of fiscal 2009.  In April 2009, the Company amended the terms of its asset-backed revolving credit facility with Bank of America which reduced the total loan availability to $14 million but also generally resulted in higher borrowing capacity against any given schedule of accounts receivable.  On October 1, 2009, the Company entered into an equity line of credit arrangement with Commerce Court Small Cap Value Fund, Ltd. (“Commerce Court”).  Upon issuance of a draw-down request by the Company, Commerce Court has committed to purchasing up to $25 million worth of shares of the Company’s common stock over the 24-month term of the purchase agreement, provided that the number of shares the Company may sell under the facility is limited to no more than 15,971,169 shares of common stock or that would result in the beneficial ownership of more than 9.9% of the then issued and outstanding shares of the Company’s common stock.


Critical Accounting Policies

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management of the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, as of the date of the financial statements, and the reported amounts of revenue and expenses during the reported period.   The accounting estimates that require our most significant, difficult, and subjective judgments include:

 
-
the valuation of inventory, goodwill, intangible assets, and stock based compensation;
 
-
assessment of recovery of long-lived assets;
 
-
revenue recognition associated with the percentage of completion method; and
 
-
the allowance for doubtful accounts and warranty accruals.

Management develops estimates based on historical experience and on various assumptions about the future that are believed to be reasonable based on the best information available. The Company’s reported financial position or results of operations may be materially different under changed conditions or when using different estimates and assumptions, particularly with respect to significant accounting policies.  In the event that estimates or assumptions prove to differ from actual results, adjustments are made in subsequent periods to reflect more current information.

A listing and description of the Company’s critical accounting policies includes:

Accounts Receivable . The Company regularly evaluates the collectibility of its accounts receivable and accordingly maintains allowances for doubtful accounts for estimated losses resulting from the inability of our customers to meet their financial obligations to us. The allowance is based on the age of receivables and a specific identification of receivables considered at risk of collection. The Company classifies charges associated with the allowance for doubtful accounts as SG&A expense. If the financial condition of our customers were to deteriorate, impacting their ability to pay us, additional allowances may be required.

 
-
During the fiscal year ended September 30, 2009, the Company recorded $5.1 million in bad debt expense, of which $0.7 million related to the Fiber Optics segment and $4.4 million related to the Photovoltaics segment, primarily related to receivables from the sale of terrestrial solar power products.

Inventory .  Inventory is stated at the lower of cost or market, with cost being determined using the standard cost method. The Company reserves against inventory once it has been determined that conditions exist that may not allow the inventory to be sold for its intended purpose or the inventory is determined to be excess or obsolete based on the Company’s forecasted future revenue.  The charge related to inventory reserves is recorded as a cost of revenue. The majority of the inventory write-downs are related to estimated allowances for inventory whose carrying value is in excess of net realizable value and on excess raw material components resulting from finished product obsolescence. In most cases where the Company sells previously written down inventory, it is typically sold as a component part of a finished product. The finished product is sold at market price at the time resulting in higher average gross margin on such revenue. The Company does not track the selling price of individual raw material components that have been previously written down or written off, since such raw material components usually are only a portion of the resultant finished products and related sales price. The Company evaluates inventory levels at least quarterly against sales forecasts on a significant part-by-part basis, in addition to determining its overall inventory risk.  We have incurred, and may in the future incur charges to write-down our inventory.

 
-
During the fiscal year ended September 30, 2009, the Company recorded $13.6 million in inventory write-downs, of which $10.3 million related to the Fiber Optics segment and $3.3 million related to the Photovoltaics segment.   The significant portion of the inventory write-downs in fiscal 2009 was related to inventory acquired from the acquisition of Intel Corporation’s Optical Platform Division.

Goodwill .  Goodwill represents the excess of the purchase price of an acquired business over the fair value of the identifiable assets acquired and liabilities assumed.  As required by ASC 350, Intangibles - Goodwill and Other, the Company evaluates its goodwill for impairment on an annual basis, or whenever events or changes in circumstances indicate that the carrying value of a reporting unit may exceed its fair value.  Management has elected December 31 st as the annual assessment date.  Circumstances that could trigger an interim impairment test include but are not limited to: a significant adverse change in the market value of the Company’s common stock, the business climate or legal factors; an adverse action or assessment by a regulator; unanticipated competition; loss of key personnel; the likelihood that a reporting unit or significant portion of a reporting unit will be sold or otherwise disposed; results of testing for recoverability of a significant asset group within a reporting unit; and recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.


In performing goodwill impairment testing, the Company determines the fair value of each reporting unit using a weighted combination of a market-based approach and a discounted cash flow (“DCF”) approach.  The market-based approach relies on values based on market multiples derived from comparable public companies. In applying the DCF approach, management forecasts cash flows over the remaining useful life of its primary asset using assumptions of current economic conditions and future expectations of earnings.  This analysis requires the exercise of significant judgment, including judgments about appropriate discount rates based on the assessment of risks inherent in the amount and timing of projected future cash flows.  The derived discount rate may fluctuate from period to period as it is based on external market conditions.  All of these assumptions are critical to the estimate and can change from period to period.  Updates to these assumptions in future periods, particularly changes in discount rates, could result in different results of goodwill impairment tests.

 
-
As disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2008, as a result of the unfavorable macroeconomic environment and a significant reduction in our market capitalization since the completion of the asset acquisitions from Intel Corporation (the “Intel Acquisitions”), the Company reduced its internal revenue and profitability forecasts and revised its operating plans to reflect a general decline in demand and average selling prices, especially for the Company’s recently acquired telecom-related fiber optics component products.  The Company also performed an interim test as of September 30, 2008 to determine whether there was impairment of its goodwill.  The fair value of each of the Company’s reporting units was determined by using a weighted average of the Guideline Public Company, Guideline Merged and Acquired Company, and the DCF methods.  Due to uncertainty in the Company’s business outlook arising from the ongoing financial liquidity crisis and the current economic recession, management believed the most appropriate approach would be an equally weighted approach, amongst the three methods, to arrive at an indicated value for each of the reporting units.  The indicated fair value of each of the reporting units was then compared with the reporting unit’s carrying value to determine whether there was an indication of impairment of goodwill under ASC 350, Intangibles – Goodwill and Other .  As a result, the Company determined that the goodwill related to one of its Fiber Optics reporting units may be impaired.  Since the second step of the Company’s goodwill impairment test was not completed before the fiscal year-end financial statements were issued and a goodwill impairment loss was probable and could be reasonably estimated, management recorded a non-cash goodwill impairment charge of $22.0 million, as a best estimate, during the three months ended September 30, 2008.

 
-
During the three months ended December 31, 2008, there was further deterioration of the Company’s market capitalization, significant adverse changes in the business climate primarily related to product pricing and profit margins, and an increase in the discount rate.  The Company performed its annual goodwill impairment test as of December 31, 2008 and management weighted the market-based approach heavier than the DCF method using information that was available at the time.

 
-
Based on this analysis, the Company determined that goodwill related to its Fiber Optics reporting units was fully impaired.  As a result, the Company recorded a non-cash impairment charge of $31.8 million and the Company’s balance sheet no longer reflects any goodwill associated with its Fiber Optics reporting units.

 
-
The Company’s annual impairment test as of December 31, 2008, indicated that there was no impairment of goodwill for the Photovoltaics reporting unit.  Based upon revised operational and cash flow forecasts, the Photovoltaics reporting unit’s fair value exceeded its carrying value.

 
-
As of September 30, 2009, the Company performed an interim goodwill impairment test on its remaining goodwill based on revised operational and cash flow forecasts.  The impairment testing indicated that no impairment existed and that fair value exceeded carrying value by approximately 40%.

 
-
The Company continues to report goodwill related to its Photovoltaics reporting unit and the Company believes the remaining carrying amount of goodwill as of September 30, 2009 is not impaired.  However, if there is further erosion of the Company’s market capitalization or the Photovoltaics reporting unit is unable to achieve its projected cash flows, management may be required to perform additional impairment tests of its remaining goodwill.  The outcome of these additional tests may result in the Company recording additional goodwill impairment charges.


Valuation of Long-lived Assets .   Long-lived assets consist primarily of property, plant, and equipment and intangible assets.  Because most of the Company’s long-lived assets are subject to amortization, the Company reviews these assets for impairment in accordance with the provisions of ASC 360, Property, Plant, and Equipment.   As part of internal control procedures, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.  Our impairment testing of long-lived assets consists of determining whether the carrying amount of the long-lived asset (asset group) is recoverable, in other words, whether the sum of the future undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group) exceeds its carrying amount.   The determination of the existence of impairment involves judgments that are subjective in nature and may require the use of estimates in forecasting future results and cash flows related to an asset or group of assets.  In making this determination, the Company uses certain assumptions, including estimates of future cash flows expected to be generated by these assets, which are based on additional assumptions such as asset utilization, the length of service that assets will be used in our operations, and estimated salvage values.

 
-
As disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2008, as a result of reductions to our internal revenue and profitability forecasts, changes to our internal operating forecasts and a significant reduction in our market capitalization since the completion of the Intel Acquisitions, the Company tested for impairment of its long-lived assets and other intangible assets.  The sum of future undiscounted cash flows exceeded the carrying value for each of the reporting units’ long-lived and other intangible assets.  Accordingly, no impairment existed under ASC 360, Property, Plant, and Equipment as of September 30, 2008.  As the long-lived asset (asset group) met the recoverability test, no further testing was required or performed.

 
-
During the three months ended December 31, 2008, the Company recorded a non-cash impairment charge totaling $1.9 million related to certain intangible assets that were acquired from the Intel Acquisitions that were subsequently abandoned.

 
-
As of December 31, 2008, due to further changes in estimates of future operating performance and cash flows that occurred during the quarter, the Company tested for impairment of its long-lived assets and other intangible assets and based on that analysis, determined that no impairment existed.

 
-
As of June 30, 2009, the Company performed an evaluation of its Fiber Optics segment asset group for impairment.  The impairment test was triggered by a determination that it was more likely than not those certain assets would be sold or otherwise disposed of before the end of their previously estimated useful lives.  As a result of the evaluation, it was determined that an impairment existed, and a charge of $27.0 million was recorded to write down the long-lived assets to an estimated value, which was determined based on a combination of guideline public company comparisons and future undiscounted cash flows.  Of the total impairment charge, $17.2 million related to plant and equipment and $9.8 million related to intangible assets.

 
-
The current adverse economic conditions had a significant negative effect on the Company’s assessment of the value of the Fiber Optics segment asset group.  The impairment charge primarily resulted from the combined effect of the current slowdown in product orders and lower pricing exacerbated by currently high discount rates used in estimating values and the effects of recent declines in market values of debt and equity securities of comparable public companies. This impairment charge in combination with other non-cash charges will not cause the Company to be in default under any of its financial covenants associated with its credit facility nor will it have a material adverse impact on the Company’s liquidity position or cash flows.

 
-
The determination of enterprise value involved a number of assumptions and estimates. The Company uses a combination of two value inputs to estimate enterprise value of its reporting units: internal future undiscounted cash flow analyses (income approach) and comparable company equity values.  Recent pending and/or completed relevant transactions method was not used due to lack of recent transactions. The income approach involved estimates of future performance that reflected assumptions regarding, among other things, sales volumes and expected margins. Another key variable in the income approach was the discount rate, or weighted average cost of capital. The determination of the discount rate takes into consideration the capital structure, debt ratings and current debt yields of comparable companies as well as an estimate of return on equity that reflects historical market returns and current market volatility for the industry. Enterprise value estimates based on comparable company equity values involve using trading multiples of revenue of those selected companies to derive appropriate multiples to apply to the revenue of the reporting units. This approach requires an estimate, using historical acquisition data, of an appropriate control premium to apply to the reporting unit values calculated from such multiples. Critical judgments include the selection of comparable companies and the weighting of the two value inputs in developing the best estimate of enterprise value.


 
-
As of September 30, 2009, the Company performed impairment tests on its long-lived assets for its asset groups based on revised operational and cash flow forecasts.  The impairment testing indicated that no impairment existed and that future undiscounted cash flows exceeded carrying value by over 7% for each of the Company’s asset groups.

 
-
The Company believes the carrying amount of its long-lived assets and intangible assets as of September 30, 2009 are recoverable.  However, if there is further erosion of the Company’s market capitalization or the Company is unable to achieve its projected cash flows, management may be required to perform additional impairment tests of its remaining long-lived assets and intangible assets.  The outcome of these additional tests may result in the Company recording additional impairment charges.

Product Warranty Reserves . The Company provides its customers with limited rights of return for non-conforming shipments and warranty claims for certain products. In accordance with ASC 450, Contingencies, the Company makes estimates of product warranty expense using historical experience rates as a percentage of revenue and accrues estimated warranty expense as a cost of revenue. We estimate the costs of our warranty obligations based on our historical experience of known product failure rates, use of materials to repair or replace defective products and service delivery costs incurred in correcting product issues. In addition, from time to time, specific warranty accruals may be made if unforeseen technical problems arise. Should our actual experience relative to these factors differ from our estimates, we may be required to record additional warranty reserves. Alternatively, if we provide more reserves than we need, we may reverse a portion of such provisions in future periods.

 
-
During the fiscal year ended September 30, 2009, the Company recorded $1.1 million in product warranty reserves in its Photovoltaics segment that was primarily related to older generation CPV-related product launches.

Revenue Recognition . Revenue is recognized upon shipment, provided persuasive evidence of a contract exists, (such as when a purchase order or contract is received from a customer), the price is fixed, the product meets its specifications, title and ownership have transferred to the customer, and there is reasonable assurance of collection of the sales proceeds. In those few instances where a given sale involves post shipment obligations, formal customer acceptance documents, or subjective rights of return, revenue is not recognized until all post-shipment conditions have been satisfied and there is reasonable assurance of collection of the sales proceeds. The majority of our products have shipping terms that are free on board (“FOB”) or free carrier alongside (“FCA”) shipping point, which means that the Company fulfills its delivery obligation when the goods are handed over to the freight carrier at our shipping dock. This means the buyer bears all costs and risks of loss or damage to the goods from that point. In certain cases, the Company ships its products cost insurance and freight (“CIF”). Under this arrangement, revenue is recognized under FCA shipping point terms, but the Company pays (and bills the customer) for the cost of shipping and insurance to the customer's designated location. The Company accounts for shipping and related transportation costs by recording the charges that are invoiced to customers as revenue, with the corresponding cost recorded as cost of revenue. In those instances where inventory is maintained at a consigned location, revenue is recognized only when our customer pulls product for its use and title and ownership have transferred to the customer. Revenue from time and material contracts is recognized at the contractual rates as labor hours and direct expenses are incurred.  The Company also generates service revenue from hardware repairs and calibrations that is recognized as revenue upon completion of the service.  Any cost of warranties and remaining obligations that are inconsequential or perfunctory are accrued when the corresponding revenue is recognized.

 
-
Distributors - The Company uses a number of distributors around the world and recognizes revenue upon shipment of product to these distributors. Title and risk of loss pass to the distributors upon shipment, and our distributors are contractually obligated to pay the Company on standard commercial terms, just like our other direct customers.  The Company does not sell to its distributors on consignment and, except in the event of product discontinuance, does not give distributors a right of return.

 
-
Solar Panel and Solar Power Systems Contracts - The Company records revenues from certain solar panel and solar power systems contracts using the percentage-of-completion method.  Revenue is recognized in proportion to actual costs incurred compared to total anticipated costs expected to be incurred for each contract.  Such contracts require estimates to determine the appropriate cost and revenue recognition. The Company uses all available information in determining dependable estimates of the extent of progress towards completion, contract revenues, and contract costs.  Estimates are revised as additional information becomes available.  If estimates of costs to complete long-term contracts indicate a loss, a provision is made for the total loss anticipated.  As of September 30, 2009 and 2008, the Company had accrued $0.1 million and $0.8 million, respectively, related to estimated contract losses on certain CPV system-related orders.  Unbilled accounts receivable represents revenue recognized but not yet billed pursuant to contract terms or accounts billed after the period end.  As of September 30, 2009 and 2008, unbilled accounts receivable totaled $6.1 million and $5.0 million, respectively.


 
-
Government R&D Contracts - R&D contract revenue represents reimbursement by various U.S. government entities, or their contractors, to aid in the development of new technology. The applicable contracts generally provide that the Company may elect to retain ownership of inventions made in performing the work, subject to a non-exclusive license retained by the U.S. government to practice the inventions for governmental purposes. The R&D contract funding may be based on a cost-plus, cost reimbursement, or a firm fixed price arrangement. The amount of funding under each R&D contract is determined based on cost estimates that include both direct and indirect costs. Cost-plus funding is determined based on actual costs plus a set margin. As we incur costs under cost reimbursement type contracts, we record revenue. Contract costs include material, labor, special tooling and test equipment, subcontracting costs, as well as an allocation of indirect costs. An R&D contract is considered complete when all significant costs have been incurred, milestones have been reached, and any reporting obligations to the customer have been met.  Government contract revenue is primarily recognized as service revenue.

The Company also has certain cost-sharing R&D arrangements.  Under such arrangements in which the actual costs of performance are split between the U.S. government and the Company on a best efforts basis, no revenue is recorded and the Company’s R&D expense is reduced for the amount of the cost-sharing receipts.

The U.S. government may terminate any of our government contracts at their convenience as well as for default based on our failure to meet specified performance measurements. If any of our government contracts were to be terminated for convenience, we generally would be entitled to receive payment for work completed and allowable termination or cancellation costs. If any of our government contracts were to be terminated for default, generally the U.S. government would pay only for the work that has been accepted and can require us to pay the difference between the original contract price and the cost to re-procure the contract items, net of the work accepted from the original contract. The U.S. government can also hold us liable for damages resulting from the default.

Stock-Based Compensation . The Company uses the Black-Scholes option-pricing model and the straight-line attribution approach to determine the fair-value of stock-based awards in accordance with ASC 718, Compensation.   The option-pricing model requires the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. The Company’s expected term represents the period that stock-based awards are expected to be outstanding and is determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based awards. The expected stock price volatility is based on the Company’s historical stock prices.

***

The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP.  There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result. For a complete discussion of our accounting policies, recently adopted accounting pronouncements, and other required U.S. GAAP disclosures, we refer you to the accompanying footnotes to the Company’s consolidated financial statements in Item 8 of this Annual Report.


Business Segments, Geographic Revenue, Significant Customers, and Backlog

The Company has five operating segments: (1) EMCORE Digital Fiber Optics Products, (2) EMCORE Broadband Fiber Optics Products, and (3) EMCORE Hong Kong, which are aggregated as a separate reporting segment, Fiber Optics, and (4) EMCORE Photovoltaics and (5) EMCORE Solar Power, which are aggregated as a separate reporting segment, Photovoltaics.  Fiber Optics revenue is derived primarily from sales of optical components and subsystems for CATV, FTTP, enterprise routers and switches, telecom grooming switches, core routers, high performance servers, supercomputers, and satellite communications data links.   Photovoltaics revenue is derived primarily from the sales of solar power conversion products for the space and terrestrial markets, including solar cells, covered interconnected solar cells, solar panel concentrator solar cells and concentrating photovoltaic systems (“CPV”) and receiver assemblies. The Company evaluates its reportable segments in accordance with ASC 280, Segment Reporting. The Company’s Chief Executive Officer is the Chief Operating Decision Maker pursuant to ASC 280, and he allocates resources to segments based on their business prospects, competitive factors, net revenue, operating results and other non-GAAP financial ratios.  Operating income or expense that is not specifically related to an operating segment is charged to a separate unallocated corporate division.


The following table sets forth the revenue and percentage of total revenue attributable to each of the Company’s reporting segments.

Segment Revenue
(in thousands)
 
2009
   
2008
   
2007
 
 
 
Revenue
   
% of Revenue
   
Revenue
   
% of Revenue
   
Revenue
   
% of Revenue
 
Fiber Optics
  $ 114,134       65 %   $ 171,276       72 %   $ 110,377       65 %
Photovoltaics
    62,222       35       68,027       28       59,229       35  
Total revenue
  $ 176,356       100 %   $ 239,303       100 %   $ 169,606       100 %


The following table sets forth the Company’s consolidated revenue by geographic region with revenue assigned to geographic regions based on our customers’ billing address.

Geographic Revenue
(in thousands)
 
2009
   
2008
   
2007
 
 
 
Revenue
   
% of Revenue
   
Revenue
   
% of Revenue
   
Revenue
   
% of Revenue
 
United States
  $ 108,563       62 %   $ 134,796       56 %   $ 124,012       73 %
Asia
    50,973       29       73,311       31       34,574       20  
Europe
    8,878       5       20,420       8       10,821       7  
Other
    7,942       4       10,776       5       199       -  
Total revenue
  $ 176,356       100 %   $ 239,303       100 %   $ 169,606       100 %


The following table sets forth our significant customer, defined as customers that represented greater than 10% of total consolidated revenue, by reporting segment.

Significant Customers
As a percentage of total consolidated revenue
 
For the Fiscal Years
Ended September 30,
 
                   
   
2009
   
2008
   
2007
 
Fiber Optics – related customer:
                 
Cisco
    15 %     18 %     12 %
Motorola
    -       -       13 %
                         
Photovoltaics – related customer:
                       
Loral Space & Communications
    14 %     10 %     -  
Confidential U.S. government-related customer
    -       -       11 %


The following table sets forth operating losses attributable to each of the Company’s reporting segments and Corporate division.

Statement of Operations Data
(in thousands)
 
 
2009
   
2008
   
2007
 
Operating loss:
 
 
   
 
   
 
 
Fiber Optics segment
  $ (124,184 )   $ (49,903 )   $ (25,877 )
Photovoltaics segment
    (14,050 )     (25,238 )     (11,202 )
Corporate division
    -       (140 )     (20,377 )
Operating loss
  $ (138,234 )   $ (75,281 )   $ (57,456 )


The following table sets forth the depreciation and amortization attributable to each of the Company’s reporting segments and Corporate division.

Segment Depreciation and Amortization
(in thousands)
 
 
2009
 
2008
 
2007
Fiber Optics segment
 
$
10,314
 
 
$
9,067
 
 
$
6,991
 
Photovoltaics segment
 
 
5,768
 
 
 
4,472
 
 
 
2,860
 
Corporate division
 
 
-
 
 
 
78
 
 
 
271
 
Total depreciation and amortization
 
$
16,082
 
 
$
13,617
 
 
$
10,122
 


Long-lived assets consist primarily of property, plant, and equipment and also goodwill and intangible assets.  The following table sets forth long-lived assets for each of the Company’s reporting segments and Corporate division.

Long-lived Assets
(in thousands)
 
2009
 
2008
 
 
 
 
 
 
 
 
 
Fiber Optics segment
 
$
37,399
 
 
$
107,684
 
Photovoltaics segment
 
 
50,169
 
 
 
55,232
 
Corporate division
 
 
826
 
 
 
622
 
Total long-lived assets
 
$
88,394
 
 
$
163,538
 


Order Backlog

As of September 30, 2009, the Company had a consolidated order backlog of approximately $62.6 million comprised of $47.7 million in order backlog related to our Photovoltaics segment and $14.9 million in order backlog related to our Fiber Optics segment.  As of September 30, 2008, the Company had a consolidated order backlog of approximately $61.9 million comprised of $40.8 million in order backlog related to our Photovoltaics segment and $21.1 million in order backlog related to our Fiber Optics segment. Order backlog is defined as purchase orders or supply agreements accepted by the Company with expected product delivery and/or services to be performed within the next twelve months.

From time to time, our customers may request that we delay shipment of certain orders and our backlog could also be adversely affected if customers unexpectedly cancel purchase orders that we’ve previously accepted.  A majority of our fiber optics products typically ship within the same quarter as when the purchase order is received; therefore, our backlog at any particular date is not necessarily indicative of actual revenue or the level of orders for any succeeding period.


Results of Operations

The following table sets forth the Company’s consolidated statements of operations data expressed as a percentage of total revenue.

STATEMENT OF OPERATIONS DATA
 
 
For the Fiscal Years
Ended September 30,
 
   
2009
   
2008
   
2007
 
                   
Revenue
    100.0 %     100.0 %     100.0 %
Cost of revenue
    102.1       87.5       82.0  
                         
Gross (loss) profit
    (2.1 )     12.5       18.0  
                         
Operating expenses:
                       
Selling, general, and administrative
    26.4       18.2       34.1  
Research and development
    15.4       16.5       17.8  
Impairments
    34.5       9.3       -  
Total operating expenses
    76.3       44.0       51.9  
                         
Operating loss
    (78.4 )     (31.5 )     (33.9 )
                         
Other (income) expense:
                       
Interest income
    -       (0.4 )     (2.4 )
Interest expense
    0.3       0.7       2.9  
Foreign exchange loss
    0.1       0.3       -  
Gain from sale of investments
    (1.8 )     (3.1 )     -  
Impairment of investment
    0.2       0.7       -  
Loss on disposal of equipment
    -       0.4       0.1  
Stock-based expense from tolled options
    -       1.8       -  
Loss from conversion of subordinated notes
    -       1.9       -  
Loss from early redemption of convertible subordinated notes
    -       -       0.3  
Gain from insurance proceeds
    -       -       (0.2 )
Total other (income) expense
    (1.2 )     2.3       0.7  
                         
Net loss
    (77.2 )%     (33.8 )%     (34.6 )%


Comparison of Fiscal Years Ended September 30, 2009 and 2008

Revenue:
Revenue for the fiscal year ended September 30, 2009 was $176.4 million, a decrease of $62.9 million, or 26%, from $239.3 million reported in the same period last year.

On a segment basis, annual revenue for the Fiber Optics segment was $114.1 million, a decrease of $57.2 million, or 33%, from $171.3 million reported in the same period last year.  The decrease in Fiber Optics revenue was primarily due to a significant drop in demand from our customers due to the very unfavorable macroeconomic environment as well as continued pressure on selling prices as we compete to maintain or increase our market share positions.   For the fiscal year, the Fiber Optics segment represented 65% of the Company's consolidated revenue compared to 72% in the same period last year.

Annual revenue for the Photovoltaics segment was $62.2 million, a decrease of $5.8 million, or 9%, from $68.0 million reported in the same period last year.  On a year-over-year basis, our satellite solar power product lines experienced an increase in revenue while our CPV terrestrial solar power product lines and government service contracts experienced a decrease in revenue. For the fiscal year, the Photovoltaics segment represented 35% of the Company's consolidated revenue compared to 28% in the same period last year.

Gross Profit / (Loss):
For the fiscal year ended September 30, 2009, the consolidated gross loss was $3.8 million, a decrease of $33.7 million from $29.9 million in gross profit reported in the same period last year.  For the fiscal year, the consolidated gross margin was negative 2.1% compared to a positive 12.5% gross margin reported in the same period last year.


Fiber Optics gross margin for the fiscal year ended September 30, 2009 was negative 10.7%, a decrease from a 20.7% gross margin reported in the same period last year.  The decrease in Fiber Optics gross margin was primarily due to losses recorded on firm inventory purchase commitments, unabsorbed overhead expenses due to declining revenues, and inventory valuation write-downs.  In addition, the decrease was also caused by the Company’s efforts to monetize older-generation product inventory as it transitions to newer lower cost and more competitive design platforms.

Photovoltaics gross margin for the fiscal year ended September 30, 2009 was 13.6%, an increase from a negative 8.3% gross margin reported in the same period last year.  The significant increase in Photovoltaics gross margin was primarily due to increased sales of higher margin satellite solar power products along with improved manufacturing yields on certain satellite solar panel contracts.

Operating Expenses:
Sales, general, and administrative expenses for the fiscal year ended September 30, 2009 totaled $46.6 million, a $3.1 million in crease from $43.5 million reported in the same period last year.  The overall increase of SG&A expenses was primarily due to legal and consulting expenses and an increase in reserves for bad debts.  The Company recorded $5.1 million in bad debt expense, of which $0.7 million related to the Fiber Optics segment and $4.4 million related to the Photovoltaics segment, primarily related to receivables from the sale of terrestrial solar power products.  The allowance is based on the age of receivables and a specific identification of receivables considered at risk of collection.  During the fiscal year, management implemented a series of measures intended to realign the Company’s cost structure with lower revenues including several reductions in workforce, the furloughing of employees, salary reductions, the elimination of executive and employee merit increases, and the reduction or elimination of certain discretionary expenses.  As a percentage of revenue, annual SG&A expenses were 26.4%, an increase from 18.2% in the same period last year.

Research and development expenses for the fiscal year ended September 30, 2009 totaled $27.1 million, a decrease of $12.4 million, or 31%, from $39.5 million reported in the same period last year.   As part of the Company’s ongoing effort to reduce expenses, many long-term projects have been placed on hold in order to focus on research and product development efforts on projects that we expect to generate returns within one year.  As a percentage of revenue, annual R&D expenses were 15.4%, a decrease from 16.5% in the same period last year.

Impairments:
As a result of the financial liquidity crisis, economic recession, reductions to internal revenue forecasts, changes to internal operating forecasts, and a drastic reduction in the Company’s market capitalization, the Company performed an analysis to determine if there was an indication of impairment of goodwill. As a result of this analysis, the Company determined that the goodwill related to our Fiber Optics segment asset group was impaired. As a result, the Company recorded an estimated impairment charge of $22.0 million during the quarter ended September 30, 2008.

As disclosed in the first fiscal quarter of 2009, the Company performed its annual goodwill impairment test as of December 31, 2008 and, based on that analysis, determined that goodwill related to its Fiber Optics segment was fully impaired.  As a result, the Company recorded a non-cash impairment charge of $31.8 million in the first quarter of fiscal 2009 and the Company’s balance sheet no longer reflects any goodwill associated with its Fiber Optics segment.   During the first fiscal quarter, the Company also recorded a $1.9 million non-cash impairment charge related to certain intangible assets acquired from Intel Corporation that were subsequently abandoned.

As of June 30, 2009, the Company performed an evaluation of its Fiber Optics segment asset group for impairment.  The impairment test was triggered by a determination that it was more likely than not those certain assets would be sold or otherwise disposed of before the end of their previously estimated useful lives.  As a result of the evaluation, it was determined that an impairment existed, and a charge of $27.0 million was recorded to write down the long-lived assets to an estimated value, which was determined based on a combination of guideline public company comparisons and future undiscounted cash flows.

Consolidated operating expenses for the fiscal year ended September 30, 2009 totaled $134.5 million, an increase of $29.3 million from $105.2 million reported in the same period last year.

Operating and Net Loss:
For the fiscal year ended September 30, 2009, the consolidated operating loss was $138.2 million, an increase of $62.9 million from an operating loss of $75.3 million reported in the same period last year.

Non-operating income and expenses recognized in the fiscal year ended September 30, 2009 included $0.5 million of net interest expense and $3.1 million of income related to the sale of the Company’s investment in Entech Solar, Inc. (formerly named WorldWater and Solar Technologies Corporation).

For the fiscal year ended September 30, 2009, the consolidated net loss was $136.1 million, an increase of $55.2 million from $80.9 million reported in the same period last year.  The annual net loss per share was $1.72, an increase of $0.52 per share, from a net loss of $1.20 per share reported in the same period last year.


Other Income & Expenses

Impairment of investment .
In April 2008, the Company invested approximately $1.5 million in Lightron Corporation, a Korean company that is publicly traded on the Korean Stock Market.  The Company initially accounted for this investment as an available-for-sale security.  Due to the decline in the market value of this investment and the expectation of non-recovery of this investment beyond its current market value, the Company recorded a $0.5 million “other than temporary” impairment loss on this investment as of September 30, 2008 and another $0.4 million “other than temporary” impairment loss on this investment as of December 31, 2008.  During the quarter ended March 31, 2009, the Company sold its interest in Lightron Corporation, via several transactions, for a total of $0.5 million in cash.  The Company recorded a gain on the sale of this investment of approximately $21,000, after consideration of impairment charges recorded in previous periods, and the Company also recorded a foreign exchange loss of $0.1million due to the conversion from Korean Won to U.S. dollars.

Loss from Conversion of Subordinated Notes .
In January 2008, the Company entered into agreements with holders of approximately 97.5%, or approximately $83.3 million of its outstanding 5.50% convertible subordinated notes due 2011 (the "Notes") pursuant to which the holders converted their Notes into the Company's common stock.  In addition, the Company called for redemption of all of its remaining outstanding Notes. Upon conversion of the Notes, the Company issued shares of its common stock, based on a conversion price of $7.01 per share, in accordance with the terms of the Notes.  As an incentive to holders to convert their Notes, the Company made cash payments to such holders equal to 4% of the principal amount of the Notes converted (the “Incentive Payment”), plus accrued interest.  By February 20, 2008, all Notes were redeemed and converted into the Company common stock. As a result of these transactions, 12.2 million shares of the Company common stock were issued.  The Company recognized a loss totaling $4.7 million on the conversion of Notes to equity of which $3.5 million was related to the Incentive Payment and $1.2 million related to the accelerated write-off of capitalized finance charges associated with the convertible notes.

Stock-based expense from tolled options .
Under the terms of the Company’s stock option agreements issued under the Option Plans , employees that have vested and exercisable stock options have 90 days subsequent to the date of their termination to exercise their stock options.  In November 2006, the Company announced that it was suspending its reliance on previously issued financial statements, which in turn caused the Company’s Form S-8 registration statements for shares of common stock issuable under the Option Plans not to be available.  Therefore, employees and terminated employees were precluded from exercising stock options until the Company became compliant with its SEC filings and the registration of the stock option shares was once again effective (the “Blackout Period”).  In April 2007, the Company’s Board of Directors approved a stock option grant “modification” for terminated employees by extending the normal 90-day exercise period after date of termination to a date after which the Blackout Period was lifted.  The Company communicated the terms of the stock option grant modification with its terminated employees in November 2007.  The Company’s Board of Directors approved an extension of the stock option expiration date equal to the number of calendar days during the Blackout Period before such stock option would have otherwise expired (the “Tolling Period”).  Terminated employees were able to exercise their vested stock options beginning on the first day after the lifting of the Blackout Period for a period equal to the Tolling Period.  Approximately 50 terminated employees were impacted by this modification.  All tolled stock options were either exercised or expired by January 29, 2008.

To account for a stock option grant modification, when the rights conveyed by a stock-based compensation award are no longer dependent on the holder being an employee, the award ceases to be accounted for under ASC 718, Compensation , and becomes subject to the recognition and measurement requirements of ASC 815, Derivatives and Hedging , which results in liability classification and measurement of the award.  On the date of modification, stock options that receive extended exercise terms are initially measured at fair value and expensed as if the stock options awards were new grants.   Subsequent changes in fair value are reported in earnings and disclosed in the financial statements as long as the stock options remain classified as liabilities.

During the three months ended December 31, 2007, the Company incurred a non-cash expense of $4.4 million associated with the modification of stock options issued to terminated employees which was calculated using the Black-Scholes option valuation model.  The modified stock options were 100% vested at the time of grant with an estimated life of no greater than 90 days.  When the stock options classified as liabilities were ultimately settled in stock, any gains or losses on those stock options were included in additional paid-in capital.  For unexercised stock options that ultimately expired in January 2008, the liability was relieved with a gain of $0.1 million recorded in current earnings.

Since these modified stock options were issued to terminated employees of the Company, and therefore no services were required to receive this grant and no contractual obligation existed at the Company to issue these modified stock options, the Company concluded it was more appropriate to classify this non-cash expense within “other income and expense” in the Company’s statement of operations.


Gain from sale of investment.
In January 2009, the Company announced that it completed the closing of a two step transaction involving the sale of its remaining interests in Entech Solar, Inc. (formerly named WorldWater and Solar Technologies Corporation).  The Company sold its remaining shares of Entech Solar Series D Convertible Preferred Stock and warrants to a significant shareholder of both the Company and Entech Solar, for approximately $11.6 million, which included additional consideration of $0.2 million as a result of the termination of certain operating agreements with Entech Solar.  During the three months ended March 31, 2009, the Company recognized a gain on the sale of this investment of approximately $3.1 million.

In June and July 2008, the Company sold a portion of its investment in Entech Solar for a total gain of $7.4 million.

Foreign exchange.
The Company recognizes gains and losses on foreign currency exchange primarily due to the Company’s operations in Spain, the Netherlands and China.


Comparison of Fiscal Years Ended September 30, 2008 and 2007

Revenue:
Revenue for the fiscal year ended September 30, 2008 was $239.3 million, an increase of $69.7 million, or 41%, from $169.6 million reported in the same period last year.

On a segment basis, annual revenue for the Fiber Optics segment was $171.3 million, an increase of $60.9 million, or 55%, from $110.4 million reported in the same period last year.  The annual increase in Fiber Optics revenue was primarily due to acquisitions, which totaled approximately $41.6 million in revenue in fiscal 2008.  In February and April 2008, the Company acquired the telecom, datacom, and optical cable interconnects-related assets of Intel Corporation’s Optical Platform Division.  For the fiscal year, the Fiber Optics segment represented 72% of the Company's consolidated revenue compared to 65% in the same period last year.

Annual revenue for the Photovoltaics segment was $68.0 million, an increase of $8.8 million, or 15%, from $59.2 million reported in the same period last year.   The increase in annual revenue was primarily due the Company’s launch of its new concentrating photovoltaic components (including solar cells and solar cell receivers) and to CPV power system installations.  The increase in CPV-related revenue was offset by a decrease in government contract revenue.  For the fiscal year, the Photovoltaics segment represented 28% of the Company's consolidated revenue compared to 35% in the same period last year.

Gross Profit:
For the fiscal year ended September 30, 2008, the consolidated gross profit was $29.9 million, a decrease of $0.5 million from $30.4 million in gross profit reported in the same period last year.  For the fiscal year, the consolidated gross margin was 12.5% compared to 17.9% gross margin reported in the same period last year.

Fiber Optics gross margin for the fiscal year ended September 30, 2008 was 20.7%, an increase from a 18.4% gross margin reported in the same period last year.   The increase in annual gross margin was primarily due to increased revenue which provided a greater base on which to allocate certain fixed costs, benefits associated from the use of contract manufacturers and better utilization of our China manufacturing facility.  Gross margins also increased due to the implementation of certain cost reduction initiatives and improved efficiencies driven by facility consolidations.  Our Fiber Optics segment also incurred approximately $5.4 million in expenses related to inventory write-downs and product warranty accruals in fiscal 2008.  Such write-downs pertained primarily to the telecom assets purchased in the OPD acquisition.

Photovoltaics gross margin for the fiscal year ended September 30, 2008 was negative 8.3%, a decrease from a positive 17.0% gross margin reported in the same period last year.   The decrease in gross margins was due to significant project losses on several initial CPV solar power systems installation projects, which was primarily the result of higher than expected material, freight and installation costs.  Our Photovoltaics segment also incurred approximately $13.5 million in expenses related to inventory write-downs, contract losses, and product warranty accruals associated with our CPV-related business in fiscal 2008.  The CPV products were in the early stages of deployment and therefore certain additional expenses were incurred during installations that are not expected to recur.  The inventory write-downs pertained mainly to product obsolescence related to the progression from Gen-II to Gen-III products.

Operating Expenses:
Sales, general, and administrative expenses for the fiscal year ended September 30, 2008 totaled $43.5 million, a $14.3 million de crease from $57.8 million reported in the same period last year.    The decrease in annual SG&A expenses was primarily due to a reduction of non-recurring legal and professional fees of approximately $17.4 million associated with the Company’s review of historical stock option grants and patent litigation in fiscal 2007.  In fiscal 2008, approximately $7.6 million of SG&A was related to the Intel Acquisitions with $2.2 million related to Intel Corporation’s transition services agreement (TSA) charges associated with the Intel Acquisitions.  As a percentage of revenue, annual SG&A expenses were 18.2%, a decrease from 34.1% in the same period last year.


Research and development expenses for the fiscal year ended September 30, 2008 totaled $39.5 million, an increase of $9.5 million, or 32%, from $30.0 million reported in the same period last year.   The increase in R&D expenses is primarily related to our recent acquisitions and significant product development within our Fiber Optics business.  We incurred approximately $7.9 million of R&D expense associated with our recent acquisitions, of which $2.6 million related to Intel transition service charges.  The majority of the increase in R&D expense relates to our efforts to release new products in the telecommunications and enterprise sectors directly related to the Intel acquisitions.  As a percentage of revenue, annual R&D expenses were 16.5%, a decrease from 17.8% in the same period last year.

Impairment:
As a result of the ongoing financial liquidity crisis, the current economic recession, reductions to our internal revenue forecasts, changes to our internal operating forecasts and a drastic reduction in our market capitalization, during the period, we performed an analysis to determine if there was an indication of impairment of our intangible assets. As a result of this analysis, we determined that the goodwill related to our Fiber Optics reporting unit was impaired. As a result, we recorded an estimated impairment charge of $22.0 million during the quarter ended September 30, 2008.

Consolidated operating expenses for the fiscal year ended September 30, 2008 totaled $105.2 million, an increase of $17.4 million from $87.8 million reported in the same period last year.

Operating and Net Loss:
For the fiscal year ended September 30, 2008, the consolidated operating loss was $75.3 million, an increase of $17.8 million from an operating loss of $57.5 million reported in the same period last year.

Non-operating expenses recognized in the fiscal year ended September 30, 2008 included $0.7 million of net interest expense, $0.7 million related to net foreign exchange losses, $7.4 million of income related to sales of the Company’s investment in Entech Solar, Inc. (formerly named WorldWater and Solar Technologies Corporation), $1.5 million loss related to impairment on investments, $1.0 million loss related to the loss on disposals of equipment, $4.3 million loss related to stock-based expense on tolled stock options, and $4.7 million loss from conversion of subordinated notes.

For the fiscal year ended September 30, 2008, the consolidated net loss was $80.9 million, an increase of $22.1 million from $58.7 million reported in the same period last year.  The annual net loss per share was $1.20, an increase of $0.05 per share, from a net loss of $1.15 per share reported in the same period last year.

Other Income & Expenses

Foreign exchange gain.
In fiscal 2008, the Company recognized a loss on foreign currency exchange primarily due to its operating activities in Spain, the Netherlands and in China.  This loss was primarily due to the weakening of the US Dollar compared to the Euro.

Gain from sale of investment.
In June 2008, the Company agreed to sell two million shares of Series D Preferred Stock of Entech Solar, together with 200,000 warrants to a major shareholder of both the Company and Entech Solar at a price equal to $6.54 per share.  The sale took place through two closings, one for one million shares and 100,000 warrants, which closed in June 2008, and one for an equal number of shares and warrants which closed in July 2008. Total proceeds from the sale were approximately $13.1 million.  In the three months ended June 30, 2008, the Company recognized a gain of $3.7 million on the first sale of stock that occurred in June 2008.  In the fourth quarter of 2008, the Company recognized an additional gain of $3.7 million related to the second closing in July 2008.  As of September 30, 2008, the Company had approximately $8.2 million invested in WWAT which approximates a 16% ownership.

Impairment of Investments.
In April 2008, the Company invested approximately $1.5 million in Lightron Corporation, a Korean company that is publicly traded on the Korean Stock Market.  The Company initially accounted for this investment as an available-for-sale security.  Due to the decline in the market value of this investment and the expectation of non-recovery of this investment beyond its current market value, the Company recorded a $0.5 million “other than temporary” impairment loss on this investment as of September 30, 2008.  The Company also wrote off its remaining investment in Velox Corporation, which totaled approximately $1.0 million, due to the company’s current financial and operational condition.


Loss from Conversion of Subordinated Notes .
In January 2008, the Company entered into agreements with holders of approximately 97.5%, or approximately $83.3 million of its outstanding 5.50% convertible subordinated notes due 2011 (the "Notes") pursuant to which the holders converted their Notes into the Company's common stock.  In addition, the Company called for redemption of all of its remaining outstanding Notes. Upon conversion of the Notes, the Company issued shares of its common stock, based on a conversion price of $7.01 per share, in accordance with the terms of the Notes.  As an incentive to holders to convert their Notes, the Company made cash payments to such holders equal to 4% of the principal amount of the Notes converted (the “Incentive Payment”), plus accrued interest.  By February 20, 2008, all Notes were redeemed and converted into the Company common stock. As a result of these transactions, 12.2 million shares of the Company common stock were issued.  The Company recognized a loss totaling $4.7 million on the conversion of Notes to equity of which $3.5 million was related to the Incentive Payment and $1.2 million related to the accelerated write-off of capitalized finance charges associated with the convertible notes.

Stock-based expense from tolled options .
Under the terms of the Company’s stock option agreements issued under the Option Plans , employees that have vested and exercisable stock options have 90 days subsequent to the date of their termination to exercise their stock options.  In November 2006, the Company announced that it was suspending its reliance on previously issued financial statements, which in turn caused the Company’s Form S-8 registration statements for shares of common stock issuable under the Option Plans not to be available.  Therefore, employees and terminated employees were precluded from exercising stock options until the Company became compliant with its SEC filings and the registration of the stock option shares was once again effective (the “Blackout Period”).  In April 2007, the Company’s Board of Directors approved a stock option grant “modification” for terminated employees by extending the normal 90-day exercise period after date of termination to a date after which the Blackout Period was lifted.  The Company communicated the terms of the stock option grant modification with its terminated employees in November 2007.  The Company’s Board of Directors approved an extension of the stock option expiration date equal to the number of calendar days during the Blackout Period before such stock option would have otherwise expired (the “Tolling Period”).  Terminated employees were able to exercise their vested stock options beginning on the first day after the lifting of the Blackout Period for a period equal to the Tolling Period.  Approximately 50 terminated employees were impacted by this modification.  All tolled stock options were either exercised or expired by January 29, 2008.

To account for a stock option grant modification, when the rights conveyed by a stock-based compensation award are no longer dependent on the holder being an employee, the award ceases to be accounted for under ASC 718, Compensation and becomes subject to the recognition and measurement requirements of ASC 815, Derivatives and Hedging , which results in liability classification and measurement of the award.  On the date of modification, stock options that receive extended exercise terms are initially measured at fair value and expensed as if the stock options awards were new grants.   Subsequent changes in fair value are reported in earnings and disclosed in the financial statements as long as the stock options remain classified as liabilities.

During the three months ended December 31, 2007, the Company incurred a non-cash expense of $4.4 million associated with the modification of stock options issued to terminated employees which was calculated using the Black-Scholes option valuation model.  The modified stock options were 100% vested at the time of grant with an estimated life of no greater than 90 days.  When the stock options classified as liabilities were ultimately settled in stock, any gains or losses on those stock options were included in additional paid-in capital.  For unexercised stock options that ultimately expired in January 2008, the liability was relieved with a gain of $0.1 million recorded in current earnings.

Since these modified stock options were issued to terminated employees of the Company, and therefore no services were required to receive this grant and no contractual obligation existed at the Company to issue these modified stock options, the Company concluded it was more appropriate to classify this non-cash expense within “other income and expense” in the Company’s statement of operations.


Balance Sheet Highlights:

-
As of September 30, 2009, cash, cash equivalents, restricted cash, and current available-for-sale securities totaled approximately $16.9 million and working capital totaled $37.5 million.

-
For the fiscal year ended September 30, 2009, the Company generated $16.8 million from the reduction in inventory levels and $16.0 million from the collection of accounts receivable while, at the same time, lowering its accounts payable obligations by $27.4 million.

-
Long-lived assets consist primarily of property, plant, and equipment and also goodwill and intangible assets.  The carrying amount of the Company’s long-lived assets decreased 46% primarily due to impairment charges totaling $60.8 million and depreciation and amortization expense totaling $16.1 million in fiscal 2009.

-
As of September 30, 2009, the Company had a $10.3 million prime rate loan outstanding, with an interest rate of 8.25%, against the Company’s credit facility with Bank of America and the Company was in full compliance with its financial covenants.


Liquidity and Capital Resources

The Company incurred a net loss of $136.1 million for the fiscal year ended September 30, 2009, which included a non-cash impairment charge of $60.8 million related to the write-down of fixed assets, goodwill and intangible assets associated with the Company’s Fiber Optics segment.  The Company’s operating results for future periods are subject to numerous uncertainties and it is uncertain if the Company will be able to reduce or eliminate its net losses for the foreseeable future.  Although total revenue had increased sequentially over the past several years prior to 2009, the Company has not been able to sustain historical revenue growth rates due to material adverse changes in market and economic conditions.  If management is not able to increase revenue and/or manage operating expenses in line with revenue forecasts, the Company may not be able to achieve profitability.

As of September 30, 2009, cash, cash equivalents, available-for-sale securities and restricted cash totaled approximately $16.9 million. Historically, the Company has consumed cash from operations.  During fiscal 2009, we consumed cash from operations of approximately $29.6 million, with the rate of cash consumption declining each quarter.


Management Actions and Plans

Historically, management has addressed liquidity requirements through a series of cost reduction initiatives, capital markets transactions and the sale of assets.  Management anticipates that the current recession in the United States and internationally may continue to impose formidable challenges for the Company’s businesses in the near term.

The Company’s management has believed for some time that, due to significant differences in operating strategy between the Company’s Fiber Optics and Photovoltaics businesses, they would provide greater value to shareholders if they were operated as two separate business entities.  Over the past two years, the Company has completed several acquisitions to strengthen one or both of these businesses with a view toward their eventual separation. On April 4, 2008, the Company announced that its Board of Directors had formally authorized management to prepare a comprehensive operational and strategic plan for the separation of these businesses into separate corporations.  Management began assessing alternative methods for achieving this goal; however, the subsequent onset of the recent worldwide economic and financial crisis has had a significant adverse impact on these plans.  A dramatic reduction in customer demand for many of the Company’s Fiber Optics products through June 2009 has significantly lowered revenue and cash flow in that business unit, while a shortage of debt and equity capital, a decline in the price of conventional energy sources, and a generally cautious and conservative attitude in all business sectors has delayed the opportunities for expanded deployment of the Company’s terrestrial photovoltaic products and systems.  As a result, while the Company is continuing to pursue strategic alternatives for separating its two operating segments, the Company has also instituted a series of initiatives aimed at conserving and generating cash over the next twelve months.

During fiscal 2009, management implemented a series of measures and continues to evaluate opportunities intended to align the Company’s cost structure with its revenue forecasts.  Such measures included establishing a line of credit with Bank of America, several workforce reductions, salary reductions, the elimination of executive and employee merit increases, and the elimination or reduction of certain discretionary expenses.  The Company has also significantly lowered its spending on capital expenditures and focused on improving the management of its working capital.  During fiscal 2009, the Company monetized approximately $16.8 million of inventory, generated $16.0 million in cash from lowering its accounts receivable balances and achieved positive cash flow from operations during the quarters ended June 30, 2009 and September 30, 2009.

In fiscal 2010, the Company will continue to remain focused on cash flow while accessing a range of strategic options for the purpose of maximizing shareholder value, including joint-venture business opportunities and the potential sale of certain assets.

With respect to measures taken to generate cash, the Company sold its minority ownership positions in Entech Solar, Inc. and Lightron Corporation in the second quarter of fiscal 2009.  In April 2009, the Company amended the terms of its asset-backed revolving credit facility with Bank of America which reduced the total loan availability to $14 million but also generally resulted in higher borrowing capacity against any given schedule of accounts receivable.  On October 1, 2009, the Company entered into an equity line of credit arrangement with Commerce Court Small Cap Value Fund, Ltd. (“Commerce Court”).  Upon issuance of a draw-down request by the Company, Commerce Court has committed to purchasing up to $25 million worth of shares of the Company’s common stock over the 24-month term of the purchase agreement, provided that the number of shares the Company may sell under the facility is limited to no more than 15,971,169 shares of common stock or that would result in the beneficial ownership of more than 9.9% of the then issued and outstanding shares of the Company’s common stock.


Conclusion

We believe that our existing balances of cash, cash equivalents, and available-for-sale securities, together with the cash expected to be generated from operations, amounts expected to be available under our revolving credit facility with Bank of America and the equity line of credit agreement with Commerce Court will provide us with sufficient financial resources to meet our cash requirements for operations, working capital, and capital expenditures for the next 12 months.  However, in the event of unforeseen circumstances, or unfavorable market or economic developments, we may have to raise additional funds by any one or a combination of the following: issuing equity, debt or convertible debt, or selling certain product lines and/or portions of our business. There can be no guarantee that we will be able to raise additional funds on terms acceptable to us, or at all. A significant contraction in the capital markets, particularly in the technology sector, may make it difficult for us to raise additional capital if or when it is required, especially if we experience disappointing operating results.  If adequate capital is not available to us as required, or is not available on favorable terms, our business, financial condition and results of operations may be adversely affected.


Cash Flow

Cash Used for Operations

For the fiscal year ended September 30, 2009, net cash used by operating activities totaled approximately $29.6 million, which represents a decrease of $12.3 million from $41.9 million in cash used by operating activities for the fiscal year ended September 30, 2008, and a decrease of $16.8 million from $46.4 million in cash used by operating activities for the fiscal year ended September 30, 2007.

For the fiscal year ended September 30, 2009, the $29.6 million cash usage was primarily due to the Company’s net loss of $136.1 million and a net increase in certain components of working capital of approximately $5.5 million.  The net increase in certain components of working capital was primarily due to a $27.4 million decrease in accounts payable and a $12.5 million decrease in accrued expenses and other liabilities offset by a $16.0 million decrease in accounts receivable, a $16.8 million decrease in inventory and a $1.6 million decrease in prepaid expenses and other assets. Non-cash adjustments used to reconcile net loss to net cash used in operating activities included $60.8 million in impairment of goodwill, intangible assets, and plant and equipment within the Fiber Optics segment, $16.1 million related to depreciation and amortization expense, $13.6 million related to inventory reserve adjustments, $7.0 million related to stock-based compensation expense, $5.1 million related to an increase in the provision for doubtful accounts, $8.5 million related to a provision for losses on firm inventory commitments, $2.6 million related to provisions for product warranty, and $3.1 million related to a gain on the sale of investments.

For the fiscal year ended September 30, 2008, the $41.9 million cash usage was primarily due to the Company’s net loss of $80.9 million and a net increase in certain components of working capital of approximately $22.6 million.  The net increase in certain components of working capital was primarily due to a $24.3 million increase in accounts receivable, a $11.9 million increase in inventory, a $4.5 million increase in prepaid expenses and other assets and a decrease of $11.7 million in accrued expenses and other current liabilities offset by an increase in accounts payable of $29.6 million.  Non-cash adjustments used to reconcile net loss to net cash used in operating activities included $22.2 million in impairment of goodwill within the Fiber Optics segment, $13.6 million related to depreciation and amortization expense, $9.6 million related to inventory reserve adjustments, $11.3 million related to stock-based compensation expense, $2.1 million related to an increase in the provision for doubtful accounts, $1.5 million related to impairment of an investment, $1.1 million related to a loss on the disposal of equipment, $1.2 million related to a loss from the conversion of subordinated notes, $4.5 million related to provisions for product warranty, and $7.4 million related to a gain on the sale of investments.

For the fiscal year ended September 30, 2007, the $46.4 million cash usage was primarily due to the Company’s net loss of $58.7 million and a net increase in certain components of working capital of approximately $11.9 million.  The net increase in certain components of working capital was primarily due to a $10.4 million increase in accounts receivable, a $8.3 million increase in inventory, and a $0.3 million increase in prepaid expenses and other assets offset by an increase of $2.2 million in accounts payable and an increase of $4.9 million in accrued expenses and other current liabilities.  Non-cash adjustments used to reconcile net loss to net cash used in operating activities included $10.1 million related to depreciation and amortization expense, $3.0 million related to inventory reserve adjustments, $5.9 million related to stock-based compensation expense, $1.3 million related to an increase in the provision for doubtful accounts, and $1.5 million related to provisions for product warranty.


Net Cash Used for Investing Activities

For the fiscal year ended September 30, 2009, net cash provided by investing activities totaled $13.3 million, which represents an increase of $67.2 million from $53.9 million in cash used for investing activities for the fiscal year ended September 30, 2008, and an decrease of $33.7 million from $47.0 million in cash provided by investing activities for the fiscal year ended September 30, 2007.


For the fiscal year ended September 30, 2009, the $13.3 million in net cash provided by investing activities was primarily due to $11.0 million received from the sale of the Company’s investments, $2.7 million received from the sale of available-for-sale securities and $0.7 million from the release of restricted cash offset by $1.3 million in capital expenditures.

For the fiscal year ended September 30, 2008, the $53.9 million in net cash usage from investing activities was primarily due to $75.7 million paid to Intel Corporation for the purchase of certain fiber optics-related assets, $17.2 million in capital expenditures, $1.5 million invested in unconsolidated affiliates, and $7.0 million for the purchase of available-for-sale securities offset by $33.4 million received from the sale of available-for-sale securities, $13.1 million received from the sale of unconsolidated affiliates and $1.2 million received from an insurance recovery on equipment.

For the fiscal year ended September 30, 2007, the $47.0 million in net cash provided by investing activities was primarily due to $98.3 million received from the sale of available-for-sale securities and $3.0 million received from a notes receivable offset by $4.1 million paid to purchase a fiber optics-related business, $10.1 million in capital expenditures, $13.9 million invested in unconsolidated affiliates, and $26.0 million for the purchase of available-for-sale securities.


Net Cash Provided by Financing Activities

For the fiscal year ended September 30, 2009, net cash provided by financing activities totaled $12.1 million, which represents a decrease of $89.3 million from $101.4 million in cash provided by financing activities for the fiscal year ended September 30, 2008 and an increase of $23.1 million from $11.0 million in cash used in financing activities for the fiscal year ended September 30, 2007.

For the fiscal year ended September 30, 2009, the $12.1 million in net cash provided by financing activities consisted of $10.3 million in net borrowings under the Company’s credit facility with Bank of America, $0.8 million in other borrowings and $0.9 million in proceeds from the Company’s employee stock purchase plan.

For the fiscal year ended September 30, 2008, the $101.4 million in net cash provided by financing activities consisted of $93.6 million received from the sale of common stock and warrants, $7.0 million received from the exercise of employee stock options and $0.7 million in proceeds from the Company’s employee stock purchase plan.

For the fiscal year ended September 30, 2007, the $11.0 million in net cash used in financing activities consisted primarily of $11.4 million payment on the Company’s convertible debt obligation.


Contractual Obligations and Commitments

The Company’s contractual obligations and commitments over the next five years are summarized in the table below:

(in thousands)
       
For the Fiscal Years Ended September 30,
 
                               
   
Total
   
2010
   
2011 to 2012
   
2013 to 2014
   
2015 and later
 
                               
Operating lease obligations
  $ 8,403     $ 1,944     $ 2,886     $ 875     $ 2,698  
Line of credit
    10,332       10,332       -       -       -  
Short-term debt
    842       842       -       -       -  
Purchase obligations
    22,722       22,691       25       6       -  
                                         
Total contractual obligations and commitments
  $ 42,299     $ 35,809     $ 2,911     $ 881     $ 2,698  


Operating leases

Operating leases include non-cancelable terms and exclude renewal option periods, property taxes, insurance and maintenance expenses on leased properties.


Loss on firm commitments

In fiscal 2009, the Company was challenged with higher than expected inventory positions in its Fiber Optics segment as quarterly sales were lower than internal projections of many of our customers, which had a significant adverse effect on results of operations.  Management performed an analysis of the Company’s inventory position, including a review of open purchase and sales commitments, and determined that certain inventory was impaired which resulted in a $8.5 million loss on purchase and sales commitments specifically related to inventory during fiscal 2009.  This impairment was recognized in cost of revenue.


Line of Credit

In September 2008, the Company closed a $25 million asset-backed revolving credit facility with Bank of America which can be used for working capital, letters of credit and other general corporate purposes.  Subsequently, the credit facility was amended resulting in a reduction in the total loan availability to $14 million.  The credit facility matures in September 2011 and is secured by virtually all of the Company’s assets.  The credit facility is subject to a borrowing base formula based on eligible accounts receivable and provides for prime-based borrowings.

As of September 30, 2009, the Company had a $10.3 million prime rate loan outstanding, with an interest rate of 8.25%, and approximately $2.8 million in outstanding standby letters of credit under this credit facility.

The facility is also subject to certain financial covenants which the Company was in compliance with for the three months ended June 30, 2009 and September 30, 2009.  For the three months ended December 31, 2008, the Company did not meet the requirements under the EBITDA financial covenant and for the three months ended March 31, 2009, the Company did not meet the requirements under the Fixed Charge Coverage Ratio and EBITDA financial covenants.  During the fiscal year, the Company has entered into several amendments to the credit facility with Bank of America which has, among other things: (i) increased the amount of eligible accounts receivable under the borrowing base formula, (ii) waived certain events of default of financial covenants by the Company, (iii) decreased the total maximum loan availability amount to $14 million, (iv) increased applicable interest rates with respect to loans and letters of credit, and (v) adjusted certain financial covenants.  Adjustments were also made to the borrowing base formula and the calculation of eligible accounts receivable which, generally resulted in greater loan availability against accounts receivable subject to the $14 million overall loan limit.  Depending on the Company’s operating results in fiscal 2010, the Company may not continue to be compliant with the credit facility’s financial covenants.


Short-term Debt

In December 2008, the Company borrowed $0.9 million from UBS that is collateralized with $1.4 million of auction rate securities.  The average interest rate on the loan is approximately 1.4% and the term of the loan is dependent upon the timing of the settlement of the auction rate securities with UBS which is expected to occur by June 2010 at 100% par value.


Letters of credit

As of September 30, 2009, the Company had 10 standby letters of credit issued and outstanding which totaled approximately $3.4 million, of which $2.8 million was issued against the Company’s credit facility with Bank of America and the remaining $0.6 million in standby letters of credit are collateralized with other financial institutions and are listed on the Company’s balance sheet as restricted cash.


Other

In February 2010, the Company’s 2000 Stock Option Plan is scheduled to expire.  Management is currently developing a new 10-year equity compensation plan, which may include both stock options and other forms of equity compensation.


Recent Accounting Pronouncements

In the Notes to the Consolidated Financial Statements, see Footnote 3 for details related to recent accounting pronouncements.


ITEM 7A .    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to financial market risks, including changes in currency exchange rates and interest rates.  We do not use derivative financial instruments for speculative purposes.

Currency Exchange Rates . The United States dollar is the functional currency for the Company’s consolidated financials. The functional currency of the Company’s Spanish subsidiary is the Euro and for the China subsidiary it is the Yuan Renminbi. The financial statements of these entities are translated to United States dollars using period end rates for assets and liabilities, and the weighted average rate for the period for all revenue and expenses. During the normal course of business, the Company is exposed to market risks associated with fluctuations in foreign currency exchange rates, primarily the Euro. To reduce the impact of these risks on the Company’s earnings and to increase the predictability of cash flows, the Company uses natural offsets in receipts and disbursements within the applicable currency as the primary means of reducing the risk. Some of our foreign suppliers may adjust their prices (in $US) from time to time to reflect currency exchange fluctuations, and such price changes could impact our future financial condition or results of operations.  The Company does not currently hedge its foreign currency exposure.


Credit Market Conditions

Recently, the U.S. and global capital markets have been experiencing turbulent conditions, particularly in the credit markets, as evidenced by tightening of lending standards, reduced availability of credit, and reductions in certain asset values.  This could impact the Company’s ability to obtain additional funding through financing or asset sales.


ITEM 8 .    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

EMC ORE CORPORATION
Consolidated Statements of Operations
For the fiscal years ended September 30, 2009, 2008 and 2007
(in thousands, except loss per share)

   
2009
   
2008
   
2007
 
                   
Product revenue
  $ 168,300     $ 227,780     $ 147,931  
Service revenue
    8,056       11,523       21,675  
Total revenue
    176,356       239,303       169,606  
                         
Cost of product revenue
    173,877       203,164       124,481  
Cost of service revenue
    6,253       6,244       14,757  
Total cost of revenue
    180,130       209,408       139,238  
                         
Gross (loss) profit
    (3,774 )     29,895       30,368  
                         
Operating expenses:
                       
Selling,