|
EMCORE
Corporation |
Thomas
G. Werthan
Chief
Financial Officer
145
Belmont Drive
Somerset,
NJ 08873 USA |
Tel:
(732)
302-4031
Fax:
(732)
627-8769
Email: tom.werthan@emcore.com
Web: www.emcore.com |
 |
March 11,
2005
VIA
EDGAR AND FEDERAL EXPRESS
United
States Securities and Exchange Commission
Division
of Corporation Finance
Attn:
Brian Cascio
450 Fifth Street, N.W.Washington,
D.C. 20549
| Re: |
SEC
Comment Letter dated February 11, 2005 regarding EMCORE Corporation’s 10-K
for the fiscal year ended September 30, 2004. File
No. 000-22175 |
Dear Mr.
Cascio:
EMCORE
Corporation (“Emcore”) submits the following responses to the questions raised
in your letter, dated February 11, 2005, to Thomas G. Werthan. For ease of
reference, we have reproduced your questions below in italics with our responses
following.
Form
10-K for the fiscal year ended September 30, 2004
Item
7. Management’s Discussion and Analysis
Results
of Operations - Page 49
Discontinued
Operations
| 1. |
We
see that you sold your TurboDisc business in 2003. In future filings,
consider including the followings in your MD&A discussion related to
the discontinued business: |
| a. |
Discuss
the likely effects on reported results and liquidity of material
contingent liabilities, such as product or environmental liabilities or
litigation, that may remain with you notwithstanding disposal of the
underlying business; |
Response:
In November 2003, we sold our TurboDisc equipment product line to VEECO
Instruments, Inc. The transaction was an asset deal that included accounts
receivables, inventory, accounts payables and accrued expenses of the product
line as well as some intangibles. As such, we have no material contingencies. As
part of the Asset Purchase Agreement, we did provide general representations and
warranties that survive for 24 months. To date, the buyer has not contacted us
regarding any breaches of representations and/or warranties, and Management
believes there are no breaches. We will discuss the effects, if any,
on reported results and liquidity in future filings.
1
| b. |
If
you retain a financial interest in the discontinued component or in the
buyer of that component that is material to you, include a discussion of
known trends, events, and uncertainties, such as the financial condition
and operating results of the issuer of the security that may be reasonably
expected to affect the amounts ultimately realized on the
investments. |
Refer
to SAB Topic 5-Z and FIN 45.
Response:
We maintain no financial interest in the discontinued component or in the buyer
of the product line, except for, as disclosed in the 10-K, we can receive up to
an additional $20 million based solely on the revenue performance of the product
line during Calendar 2004 and Calendar 2005. We have relied on information from
Veeco for our earn-out estimates. We do not believe we are in a position to
meaningfully comment on the trends, events, financial condition or operating
results of Veeco or its capital equipment business. We believe we have
adequately disclosed all information relating to this potential receipt of
funds. In future filings, we will add to our existing disclosure to emphasize
that the TurboDisc transaction was a sale of assets. Supplementally, we direct
the Staff’s attention to our 8-K dated February 17, 2005 updating the status of
the earn-out.
Severance
Charges/Restructuring - Page 52
| 2. |
We
see your MD&A disclosure of your severance/restructuring charges. In
future filings provide the following additional disclosures for each
separate restructuring activity: |
| a. |
Describe
the specific conditions or events leading management to realign or
consolidate certain operations, including specific factors related to
products, processes, customers and/or market
conditions; |
| b. |
Identify
the number and describe the nature of the positions being
eliminated; |
| c. |
Disclose
the intended effects of your restructuring on your financial position,
future operating results and
liquidity; |
| d. |
Discuss
details of each of the charges and how these amounts were
determined; |
| e. |
Quantify
the anticipated and actual cost savings derived from your restructuring
efforts during the periods presented. |
Refer
to SFAS 146, EITF 94-3 and SAB Topic 5-P
Response:
After reviewing your comment, we intend to enhance our MD&A severance
disclosure in future filings to be compliant with SFAS 146, EITF 94-3 and SAB
Topic 5-P.
Impairment
Charges - Page 54
| 3. |
We
note your disclosure of $30.8 million non-cash impairment charges related
to fixed assets in fiscal 2002. Supplementally tell us and in future
filings include the following additional
disclosures: |
| (a) |
Describe
the facts and circumstances leading to the impairment. What specific
events occurred that caused the impairment and when did those events
occur? |
| (b) |
Disclose
the method and significant assumptions used to determine the fair
value. |
Response:
The disclosure of our fiscal 2002 impairment charge in the fiscal 2004 annual
report was not as detailed as the original disclosure in the fiscal 2002 annual
report. EMCORE reviews long-lived assets on an annual basis or whenever events
or circumstances indicate that the assets may be impaired. At the beginning of
2001, the telecommunications industry experienced a dramatic downturn and has
since remained very volatile. By December 2001, EMCORE completed the
construction of several new facilities in anticipation of expanding market
prospects. Business forecasts updated in fiscal 2002
2
indicated
significantly diminished prospects and as a result of these circumstances,
management determined that the long-lived assets should be assessed for
impairment. Because of the prolonged economic downturn affecting our operations
and expected future sales and as we determined that the continued decline in
market conditions within our industry was significant, we recorded charges to
long-lived assets totaling $30.8 million based on the amounts by which the
carrying amounts of these assets exceeded their fair value. Of the total
impairment, $23.5 million related to a non-cash fixed asset impairment charge to
EMCORE’s Electronic Materials and Devices and Fiber Optics operating segments.
The fair values of the assets were determined based upon a calculation of the
present value of the expected future cash flows to be generated by its
facilities. The remainder of the impairment charge totaling $7.3 million related
to certain manufacturing assets that were disposed of. Such decision was made
based upon the downturn in the economic environment that affected certain
product lines causing these manufacturing assets to become idle. Fair value was
determined based on discounted future cash flows for the operating entities that
had separately identifiable cash flows. We assumed a cash flow period of 10.75
years and an average discount rate of 5%. The long-term annual growth rates were
higher in the early years of the cash flow period, representing our estimated
growth in the period of industry recovery, and a reduced growth rate in the
later years. The assumptions supporting the estimated future cash flows for the
impairment analyses, including the long-term annual revenue growth rates and
discount rates reflect management’s best estimates. The discount rates were
based upon our weighted average cost of capital as adjusted for the risks
associated with our operations.
If any
impairments arise in the future, we will provide the requested additional
disclosures. We note that the disclosure related to non-cash impairment
charges for fixed assets in fiscal 2002 will not be applicable in our fiscal
2005 10-K filing.
| 4. |
In
addition, supplementally and in future filings provide more
details of the inventory impairments recorded during each of the
periods. Please clarify whether the impaired inventory is
subsequently sold, scraped or otherwise disposed. The impact of any sales
of this inventory on gross margins should also be addressed in future
filings. |
Response:
EMCORE reserves against inventory once it has been determined that conditions
exist which may not allow it to be sold for its intended purpose, the
inventory’s value is determined to be less than cost or it is determined to be
obsolete. The charge related to inventory reserves is recorded as a cost of
revenue. Inventory identified as obsolete is generally disposed of. There have
been no significant sales transactions involving inventory previously
written-down or written-off in a prior period that would have impacted gross
margins. EMCORE evaluates inventory levels at least quarterly against sales
forecasts on a part-by-part basis, in addition to determining its overall
inventory risk. Reserves are adjusted to reflect inventory values in excess of
forecasted sales, as well as overall inventory risk assessed by management. If
future demand or market conditions are less favorable than our estimates,
additional inventory write-downs may be required. In fiscal 2002, as a result of
the business downturn and declining demand for our telecommunications products,
EMCORE wrote down a substantial portion of its inventory as sales forecasts
continued to decline. The recorded charge of $7.3 million related to
discontinued product lines, excess and obsolete inventory. We have incurred, and
may in the future incur, charges to write down our inventory. While we believe,
based on current information, that the amount recorded for inventory is properly
reflected on our balance sheet, if market conditions are less favorable than our
forecasts, our future sales mix differs from our forecasted sales mix, or actual
demand from our customers is lower than our estimates, we may be required to
record additional inventory write-downs.
We will
comply with the Staff’s request in future filings.
Liquidity
and Capital Resources - Page 57
| 5. |
We
note that your accounts receivable balance increased significantly for the
fiscal year ended 2004 when compared with the fiscal year ended 2003. In
future filings provide details of the reasons for the significant changes
in balance sheet amounts. |
Response:
We will comply with this request in future filings.
3
|
6.
|
In
future filings, remove the subtotal and caption “adjusted loss from
continuing operations” from the disclosures on page 58 or tell us how this
non-GAAP measure complies with the requirements of Item 10 or Regulation
S-K. |
Response:
We will comply with the Staff’s request in future filings by removing
the non-GAAP measure from the table.
| 7. |
Please
provide details of how the $12.3 million gain on early extinguishment of
debt was determined. In addition, tell us whether the conversion price of
$8.06 per share represents fair market value at the date of the note
exchange. |
Response:
In response to your comment, below you will find supplementary disclosure
related to our $12.3 million gain on early extinguishment of debt, and our
calculation of how the conversion price of $8.06 per share represents fair
market value at the date of our note exchange:
GAIN
CALCULATION:
The gain
is calculated in the table below:
|
in
millions (except $/ share data) |
||||
|
Debt
eliminated |
$ |
146.0 |
||
|
Less:
New notes issued |
(80.3 |
) | ||
|
New
common stock issued |
(51.1 |
) | ||
|
Gain
from net debt/equity eliminated |
$ |
14.6 |
||
|
Write-off
of deferred financing costs related to debt tendered |
(2.3 |
) | ||
|
Total
gain from early debt extinguishment |
$ |
12.3 |
The total
gain from early debt extinguishment was calculated in accordance with Paragraph
21 of APB 26, Early Debt Extinguishment, which states, “The extinguishment of
convertible debt before maturity does not change the character of the security
as between debt and equity at that time. Therefore, a difference between the
cash acquisition price of the debt and its net carrying amount should be
recognized currently in income in the period of extinguishment as losses or
gains.”
FAIR
MARKET VALUE OF CONVERSION PRICE CALCULATION:
The terms
of our New Note Exchange Offer contained a 50% conversion premium over the
closing price of the last trading session prior to the time the terms of the
Exchange Offer were fixed (the “Closing Price”). The Closing Price on December
24, 2003, the date of our Tender Offer statement filed with the SEC, was $5.37.
This set the conversion price at $8.06.
Financial
Statements
Note
2: Summary of Significant Accounting Principles and
Policies
Valuation
of Goodwill and Intangible Assets - Page 71
| 8. |
Supplementally
and in future filings provide more details of the goodwill impairment
test, including when the test is performed each year and the reporting
units identified and used in the test. In addition, provide more details
of the results of the most recent test, which did not result in any
impairment. |
4
Response:
EMCORE evaluates its goodwill for impairment on an annual basis, during the
quarter ended March 31st, or whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Circumstances that
could trigger an impairment test include but are not limited to: a significant
adverse change in the business climate or legal factors; an adverse action or
assessment by a regulator; unanticipated competition; loss of key personnel; the
likelihood that a reporting unit or significant portion of a reporting unit will
be sold or otherwise disposed; results of testing for recoverability of a
significant asset group within a reporting unit; and recognition of a goodwill
impairment loss in the financial statements of a subsidiary that is a component
of a reporting unit. The determination as to whether a write down of goodwill is
necessary involves significant judgment based on the short-term and long-term
projections of the future performance of the reporting unit to which the
goodwill is attributed. The assumptions supporting the estimated future cash
flows of the reporting unit, including the discount rate used, reflect
management’s best estimates.
During
fiscal 2004, we recorded no impairment charges on any of EMCORE’s patents, other
intangibles assets, or goodwill. As part of our quarterly review of financial
results, we did not identify any impairment indicators suggesting that the
carrying value of our goodwill may not be recoverable. We tested for impairment
of goodwill on an annual basis. Under the first step of the SFAS No. 142
analysis, the fair value of the reporting units was determined. Based on that
analysis, we determined that the carrying amount of the reporting units within
the Electronic Materials and Devices, Photovoltaics and Fiber Optics operating
segments did not exceed their fair value.
In future
filings we will provide more details of the goodwill impairment
test.
Revenue
Recognition - Page - 72
| 9. |
We
note on page 22 that you utilize distributors to market products in
certain foreign locations. Please tell us whether you recognize revenue
upon shipment of product to distributors or upon shipment of product to
third party customers of distributors. If you recognize revenue on
shipment of product to distributors, tell us why you believe this practice
is appropriate. Clarify whether these arrangements have any rights of
return, customer acceptance, price protection, sales incentives or other
discounts that impact revenue recognition. In future filings, revise to
expand your revenue recognition policy to specifically address
transactions with distributors. |
Response:
EMCORE uses a number of distributors around the world. In 2004, total
sales to distributors were less than 10% of EMCORE's annual revenues. In
accordance with SAB 104 (Dec. 17, 2003), we recognize revenue upon shipment of
product to these distributors. Title and risk of loss pass to the
distributors upon delivery, and our distributors are contractually obligated to
pay EMCORE on standard commercial terms, just like our other direct
customers. EMCORE does not sell to its distributors on consignment
and, except in the event of a product discontinuance, does not give its
distributors a right of return. Our prices to distributors are established in
the same commercial manner as we sell to other direct customers, without any
special incentives. In future filings, we will expand our discussion
regarding distributors to provide additional information regarding the scope of
revenues due to indirect sales channels, and a specific assessment whether the
non-warranty product return exposure from such channels is material to our
revenues and earnings.
| 10. |
With
respect to product sales, revise and expand future filings to describe the
nature and extent of any post shipment obligations, customer acceptance or
rights of return and how those obligations are considered in your revenue
practices. |
Response:
In response to your request, we note that in respect of product sales we
currently do not have any post-shipment obligations, customer acceptance or
rights of return other than normal, commercial warranty provisions. We
will comply with the Staff’s request in our future filings to the extent that
there are any post shipment obligations, customer acceptance or rights of
return.
5
| 11. |
In
future filings clarify the accounting for contract revenue. Are these
amounts included in revenue or is this reflected as a reduction to
expenses as a cost reimbursement activity? Clarify the basis for the
accounting treatment. |
Response:
We will comply with the Staff’s request in our future filings. We include
contracts as revenues pursuant to ARB #43, specifically chapter 11, Section A
paragraph 20. We act as more than just an agent. We are responsible to creditors
for materials and services purchased, to employees for salaries and wages, and
we use our own facilities in carrying out our agreements. In view of these
facts, and the desirability of indicating the volume of our activities, we
include reimbursable costs, as well as fees, in revenues. Revenue from
government contracts was $4.6 million in fiscal 2004, $5.2 million in fiscal
2003, and $3.3 million in fiscal 2002. These amounts represent less than
10% of total revenues for each of the years presented.
Product
Warranty Reserves - Page 73
| 12. |
Revise
and expand future filings to include all the disclosure requirements of
FIN 45. Refer to paragraphs 13 through 16 of FIN
45. |
Response:
We will comply with the Staff’s request in our future filings.
Note 3 - Stock Options and Warrants - Page 75
| 13. |
We
note that you issued a total of 2,972,149 options in exchange for tendered
options on May 1, 2003. Clarify the accounting for these options and those
not tendered. Tell us how you considered paragraph 171 of EITF 00-23 in
the voluntary stock options exchange. Revise future filings as
necessary. |
Response:
Under the terms of the option exchange tender offer, new options were issued on
the first business day following six months plus one day after the old options
were cancelled. Accordingly, the terms of the offer complied with FIN 44 and did
not trigger any variable accounting issues. Since variable accounting is not
required by FIN 44 when an award is cancelled and a subsequent option
replacement is awarded at least six months and one day later, most EITF 00-23
Issues had no ramifications, particularly Issue 36(b) that paragraph 171
addresses. Those options not tendered continue to be treated as ISOs under their
original terms. In future filings, we will explicitly state that we have
considered EITF 00-23 and that variable accounting is not required.
Note 6 - Impairment and Severance Charges - Page 78
| 14. |
For
each restructuring program, supplementally provide us with a roll-forward
reconciliation of the beginning and ending liability balances showing
separately the changes during the period attributable to costs incurred
and charges to expenses, costs paid or settled, and any adjustments to the
liability. Refer to SFAS 146 for guidance. Revise future filings as
necessary. |
Response:
In response to your comment and for future filings, we have attached a draft
version of an additional table that will be added to our enhanced severance
charges footnote.
Addition
to the SEVERANCE CHARGES footnote:
The
following table includes the activity and balances of the severance accrual
account:
6
Severance
Accrual
(in
thousands) |
||||
|
Balance
at September 30, 2002 |
$ |
266 |
||
|
New
Charges |
- |
|||
|
Payments |
(266 |
) | ||
|
Accrual
adjustments |
- |
|||
|
Balance
at September 30, 2003 |
- |
|||
|
New
Charges |
1,156 |
|||
|
Payments |
(634 |
) | ||
|
Accrual
adjustments |
- |
|||
|
Balance
at September 30, 2004 |
$ |
522 |
||
We will revise future filings in response to your request.
Note
7 - GELcore (HB-LED) Joint Venture - Page 79
| 15. |
Provide
the summarized financial information required by Rule 4-08 (g) of
Regulation S-X for the equity investment in GELcore in future filings or
tell us why this information is not
required. |
Response:
Rule 4-08(g) of Regulation S-X requires summarized financial data if
any one of the following 3 criteria are met. Since we have not met any of the
three criteria presented, we are not required to disclose this summary financial
data.
Investment
Test
|
(in
thousands) |
FY
2004 |
|||
|
Total
assets of registrant |
$ |
213,434 |
||
|
10%
criteria |
21,343 |
|||
|
Investment
in GELcore |
$ |
10,003 |
||
Asset
Test
|
(in
thousands) |
FY
2004 |
|||
|
Total
assets of registrant |
$ |
213,434 |
||
|
10%
criteria |
21,343 |
|||
|
Total
assets of GELcore |
29,289 |
|||
|
Registrant’s
percent of ownership |
49 |
% | ||
|
Registrant’s
proportionate share of total assets |
$ |
14,352 |
||
7
Income
Test
|
(in
thousands) |
FY
2004 |
|||
|
Loss
from continuing operations |
$ |
(30,965 |
) | |
|
Equity
in net income of GELcore |
789 |
|||
|
Loss
from continuing operations used in Rule 4-08 calculation |
(31,754 |
) | ||
|
10%
criteria |
3,175 |
|||
|
Equity
in net income of GELcore |
$ |
789 |
||
In
addition, we have not met any of these criteria in prior years.
Note
13 - Related Parties - Page 85
| 16. |
Revise
future filings to state separately on the face of the balance sheet,
amounts receivable from related parties since the total related party
notes receivable exceeded 10 percent of total receivables. Refer to
Rule 5-02-3(a) and (b) of Regulation
S-X. |
Response:
In response to the Staff's comments, we will revise future filings to state
separately on the face of the balance sheet amounts receivable from related
parties.
Note
14 - Segment Data and Related Information - Page 86
| 17. |
It
appears that you have several different operating segments; based on the
nature of the products that you sell and the types of customers that you
have. Additionally, it appears that your chief operating decision maker
has access to and reviews detailed financial information, such as total
sales to customers in several different markets. Please revise future
filings to comply with the disclosure requirements of SFAS 131 or tell us
how you applied the guidance in paragraphs 10 through
24. |
Response:
In connection with your comments, we plan to expand our segment disclosure in
future filings.
In
connection with this response letter, the Company acknowledges
that:
| · |
the company is responsible for the adequacy and accuracy of
the disclosure in the filings; |
| · |
staff comments or changes to disclosure in response to staff
comments in the filings reviewed by the staff do not foreclose the
Commission from taking any action with respect to the filing;
and |
| · |
the company may not assert staff comments as a defense in
any proceeding initiated by the Commission or any person under the federal
securities laws of the United
States. |
Should
you have any questions during the course of your review, please do not hesitate
to contact me at (732) 302-4031.
|
Sincerely, | |
| /s/ Thomas G. Werthan | |
|
Thomas
G. Werthan | |
| Chief Financial Officer |
8