EMCORE Corporation
EMCORE CORP (Form: 10-Q, Received: 08/17/2009 16:51:57)
 

 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended:  June 30, 2009
 
Commission File Number:   0-22175
 
 
EMCORE Corporation
(Exact name of Registrant as specified in its charter)

New Jersey
(State or other jurisdiction of incorporation or organization)

22-2746503
(IRS Employer Identification No.)

10420 Research Road SE, Albuquerque, NM  87123
(Address of principal executive offices)  (Zip Code)

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


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

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

[  ] Large accelerated filer                                                             [X]   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 Exchange Act).   Yes [  ]     No [X]

The number of shares outstanding of the registrant’s no par value common stock as of August 11, 2009 was 80,704,650.


 
 
 

 

EMCORE Corporation
FORM 10-Q
For the Quarterly Period Ended June 30, 2009
TABLE OF CONTENTS


 

 
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61
   

 
 

 

PART I.  FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS  
EMCORE CORPORATION
Condensed Consolidated Statements of Operations and Comprehensive Loss
For the three and nine months ended June 30, 2009 and 2008
(in thousands, except loss per share)
(unaudited)

   
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
     
2009
   
2008
   
2009
   
2008
 
                           
Product revenue
 
$
37,190
 
$
72,027
 
$
129,076
 
$
169,713
 
Service revenue
   
1,299
   
3,475
   
6,753
   
8,955
 
Total revenue
   
38,489
   
75,502
   
135,829
   
178,668
 
                           
Cost of product revenue
   
39,880
   
60,727
   
138,666
   
143,439
 
Cost of service revenue
   
1,037
   
1,129
   
5,007
   
4,832
 
Total cost of revenue
   
40,917
   
61,856
   
143,673
   
148,271
 
                           
Gross (loss) profit
   
(2,428
)
 
13,646
   
(7,844
)
 
30,397
 
                           
Operating expenses:
                         
Selling, general, and administrative
   
10,914
   
13,906
   
35,039
   
36,032
 
Research and development
   
5,654
   
11,382
   
20,655
   
28,132
 
Impairments
   
27,000
   
-
   
60,781
   
-
 
Total operating expenses
   
43,568
   
25,288
   
116,475
   
64,164
 
                           
Operating loss
   
(45,996
)
 
(11,642
)
 
(124,319
)
 
(33,767
)
                           
Other (income) expense:
                         
Interest income
   
(3
)
 
(124
)
 
(83
)
 
(778
)
Interest expense
   
105
   
-
   
443
   
1,580
 
Impairment of investment
   
-
   
-
   
366
   
-
 
Loss from conversion of subordinated notes
   
-
   
-
   
-
   
4,658
 
Stock–based expense from tolled options
   
-
   
-
   
-
   
4,316
 
Gain from sale of investments
   
-
   
(3,692
)
 
(3,144
)
 
(3,692
)
Loss on disposal of equipment
   
-
   
-
   
-
   
86
 
Foreign exchange (gain) loss
   
(745
)
 
(104
)
 
635
   
(302
)
Total other (income) expense
   
(643
)
 
(3,920
)
 
(1,783
)
 
5,868
 
                           
Net loss
 
$
(45,353
)
  $
(7,722
)
  $
(122,536
)
$
(39,635
)
                           
Foreign exchange translation adjustment
   
(131
)
 
82
   
353
   
(5
)
                           
Comprehensive loss
 
$
(45,484
)
$
(7,640
)
$
(122,183
)
$
(39,640
)
                           
                           
Per share data:
                         
Basic and diluted per share data:
                         
Net loss
 
$
(0.57
)
$
(0.10
)
$
(1.56
)
$
(0.62
)
                           
Weighted-average number of basic and diluted shares  outstanding
   
79,700
   
76,582
   
78,632
   
64,155
 
                           

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
 

 

EMCORE CORPORATION
Condensed Consolidated Balance Sheets
As of June 30, 2009 and September 30, 2008
(In thousands)
(unaudited)   
     
June 30, 2009
   
September 30, 2008
 
ASSETS
             
Current assets:
             
Cash and cash equivalents
 
$
9,386
 
$
18,227
 
Restricted cash
   
366
   
1,854
 
Available-for-sale securities
   
1,400
   
2,679
 
Accounts receivable, net of allowance of $7,320 and $2,377, respectively
   
41,892
   
60,313
 
Inventory, net
   
39,503
   
64,617
 
Prepaid expenses and other current assets
   
4,424
   
7,100
 
               
Total current assets
   
96,971
   
154,790
 
               
Property, plant, and equipment, net
   
57,695
   
83,278
 
Goodwill
   
20,384
   
52,227
 
Other intangible assets, net
   
13,539
   
28,033
 
Investments in unconsolidated affiliates
   
-
   
8,240
 
Available-for-sale securities, non-current
   
-
   
1,400
 
Long-term restricted cash
   
163
   
569
 
Other non-current assets, net
   
802
   
741
 
               
Total assets
 
$
189,554
 
$
329,278
 
               
LIABILITIES and SHAREHOLDERS’ EQUITY
             
Current liabilities:
             
Line of credit
 
$
4,984
 
$
-
 
Short-term debt
   
889
   
-
 
Accounts payable
   
21,861
   
52,266
 
Accrued expenses and other current liabilities
   
23,909
   
23,290
 
               
Total liabilities
   
51,643
   
75,556
 
               
Commitments and contingencies (Note 13)
             
               
Shareholders’ equity:
             
Preferred stock, $0.0001 par, 5,882 shares authorized, no shares outstanding
   
-
   
-
 
Common stock, no par value, 200,000 shares authorized, 80,647 shares issued and 80,488 outstanding at June 30, 2009; 77,920 shares issued and 77,761 shares outstanding at September 30, 2008
   
686,392
   
680,020
 
Accumulated deficit
   
(547,300
)
 
(424,764
)
Accumulated other comprehensive income
   
902
   
549
 
Treasury stock, at cost; 159 shares as of June 30, 2009 and September 30, 2008
   
(2,083
)
 
(2,083
)
               
Total shareholders’ equity
   
137,911
   
253,722
 
               
 Total liabilities and shareholders’ equity
 
$
189,554
 
$
329,278
 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
 

 

EMCORE CORPORATION
Condensed Consolidated Statements of Cash Flows
 For the nine months ended June 30, 2009 and 2008
 (in thousands)
(unaudited)
   
Nine Months Ended June 30,  
 
     
2009
   
2008
 
Cash flows from operating activities:
             
Net loss
 
$
(122,536
)
$
(39,635
)
Adjustments to reconcile net loss to net cash used for operating activities:
             
Impairments
   
60,781
   
-
 
Stock-based compensation expense
   
4,975
   
8,705
 
Depreciation and amortization expense
   
12,862
   
8,992
 
Provision for obsolete and excess inventory
   
14,934
   
2,427
 
Provision for doubtful accounts
   
4,818
   
167
 
Provision for losses on firm commitments
   
6,524
   
-
 
Impairment of investment
   
366
   
-
 
Loss on disposal of equipment
   
152
   
86
 
Compensatory stock issuances
   
438
   
1,648
 
Gain from sale of investments
   
(3,144
)
 
(3,692
)
Reduction of note receivable due for services received
   
-
   
390
 
Accretion of loss from convertible subordinated notes
   
-
   
41
 
Loss from convertible subordinated notes
   
-
   
1,169
 
Total non-cash adjustments
   
102,706
   
19,933
 
               
Changes in operating assets and liabilities, net of effect of acquisitions:
             
Accounts receivable
   
13,472
   
(30,135
)
Inventory
   
10,201
   
8,132
 
Prepaid expenses and other current assets
   
2,577
   
(1,674
)
Other assets
   
(684
)
 
(542
)
Accounts payable
   
(30,494
)
 
14,066
 
Accrued expenses and other current liabilities
   
(5,761
)
 
(6,004
)
Total change in operating assets and liabilities
   
(10,689
)
 
(16,157
)
               
Net cash used in operating activities
   
(30,519
)
 
(35,859
)
               
Cash flows from investing activities:
             
Purchase of plant and equipment
   
(1,182
)
 
(15,028
)
Proceeds from insurance recovery on equipment
   
-
   
1,189
 
Proceeds from sale of unconsolidated affiliates
   
11,017
   
6,540
 
Investment in unconsolidated affiliates
   
-
   
(1,503
)
Purchase of business
   
-
   
(75,779
)
Proceeds from (funding of) restricted cash
   
1,893
   
(874
)
Purchase of available-for-sale securities
   
-
   
(7,000
)
Sale of available-for-sale securities
   
2,679
   
32,806
 
               
Net cash provided by (used in) investing activities
   
14,407
   
(59,649
)
               

 
 

 

EMCORE CORPORATION
Condensed Consolidated Statements of Cash Flows - continued
 For the nine months ended June 30, 2009 and 2008
 (in thousands)
(unaudited)


   
Nine Months Ended June 30,  
 
     
2009
   
2008
 
               
Cash flows from financing activities:
             
Proceeds from borrowings from credit facility
 
$
88,771
 
$
-
 
Payments on borrowings from credit facility
   
(83,787
)
 
-
 
Proceeds from borrowing - long-term and short-term debt
   
911
   
-
 
Payments on borrowings - long-term and short-term debt
   
(22
)
 
-
 
Proceeds from private placement of common stock and warrants,
   net of issuance costs
   
-
   
93,692
 
Payments on capital lease obligations
   
-
   
(11
)
Proceeds from exercise of stock options
   
32
   
6,960
 
Proceeds from employee stock purchase plan
   
894
   
723
 
               
Net cash provided by financing activities
   
6,799
   
101,364
 
               
               
Effect of foreign currency
   
472
   
176
 
               
               
Net (decrease) increase in cash and cash equivalents
   
(8,841
)
 
6,032
 
               
Cash and cash equivalents, beginning of period
   
18,227
   
12,151
 
               
Cash and cash equivalents, end of period
 
$
9,386
 
$
18,183
 
               
               
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
             
Cash paid during the period for interest
 
$
511
 
$
3,314
 
               
Cash paid for income taxes
 
$
-
 
$
-
 
               
               
NON-CASH DISCLOSURE
             
Issuance of common stock for purchase of business
   
1,183
   
36,085
 
               
Issuance of common stock for conversion of subordinated notes
   
-
   
85,428
 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
 

 


EMCORE Corporation
Notes to Condensed Consolidated Financial Statements
(unaudited)
 
 
NOTE 1.  Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of EMCORE Corporation and its subsidiaries (the “Company” or “EMCORE”). All intercompany accounts and transactions have been eliminated in consolidation.

These statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim information, and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for annual financial statements. In the opinion of management, the interim financial statements reflect all normal adjustments that are necessary to provide a fair presentation of the financial results for the interim periods presented.  Operating results for interim periods are not necessarily indicative of results that may be expected for an entire fiscal year. The condensed consolidated balance sheet as of September 30, 2008 has been derived from the audited consolidated financial statements as of such date. For a more complete understanding of the Company’s financial position, operating results, risk factors and other matters, please refer to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2008.

We have evaluated subsequent events, as defined by Statement of Financial Accounting Standards (SFAS) No. 165, Subsequent Events , through the date that the financial statements were issued on August 17, 2009.


Use of Estimates

The preparation of the consolidated financial statements in conformity with 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 and the assessment of recovery of long-lived assets.

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.


Earnings (Loss) Per Share

Earnings (loss) per share (“EPS”) are calculated by dividing net earnings (loss) applicable to common stock by the weighted average number of common stock shares outstanding for the period.  For the three and nine months ended June 30, 2009, stock options representing 8,005,209 and 7,757,597 shares of common stock, respectively, and 1,400,003 warrants for both periods were excluded from the computation of diluted earnings per share since the Company incurred a net loss for these periods and any effect would have been anti-dilutive.  For the three and nine months ended June 30, 2008, stock options representing 3,800,327 and 5,134,376 shares of common stock, respectively, and 1,400,003 warrants for both periods were excluded from the computation of diluted earnings per share since the Company incurred a net loss for these periods and any effect would have been anti-dilutive.


Impairment of Long-lived Assets

During the three months ended June 30, 2009, the Company performed an evaluation of its Fiber Optics segment assets for impairment.  The impairment test was triggered by a determination that it was more likely than not that 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 estimated fair value, which was determined based on a combination of guideline public company comparisons and discounted estimated future cash flows.


 
 

 

The current adverse economic conditions had a significant negative effect on the Company’s assessment of the fair value of the Fiber Optics segment assets.  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 fair 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.

See Note 9, Goodwill and Intangible Assets, for more information on the impairment charges recorded by the Company in response to unfavorable macroeconomic conditions.


Liquidity Matters

The Company incurred a net loss of $122.5 million for the nine months ended June 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 has increased sequentially over the past several years, the Company has not been able to sustain historical revenue growth rates in 2009 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 June 30, 2009, cash, cash equivalents, and restricted cash totaled approximately $9.9 million and working capital totaled $45.3 million.  Historically, the Company has consumed cash from operations.  During the nine months ended June 30, 2009, it consumed approximately $30.5 million in cash from operations.

These matters raise substantial doubt about the Company’s ability to continue as a going concern.


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 recession in the United States and internationally may continue to impose formidable challenges for the Company’s businesses in the near term. Recently, the Company amended the terms of its asset-backed revolving credit facility with Bank of America that included the granting of waivers for prior covenant violations.  Although the total amount of available credit under the credit facility has been reduced from $25 million at September 30, 2008 to $14 million, the amendments addressed a modification of the borrowing base calculation which generally has resulted in higher borrowing capacity against any given schedule of accounts receivable.  The Company has also continued to take steps to lower costs and to conserve and generate cash.  Over the past year, management has implemented a series of measures and continues to evaluate opportunities intended to align the Company’s cost structure with its current revenue forecasts which has included several workforce reductions, salary reductions, the elimination of executive and employee merit increases, and the elimination or reduction of certain discretionary expenses.

With respect to measures taken to generate cash, the Company sold its minority ownership positions in Entech Solar, Inc. and Lightron Corporation earlier in the fiscal year.  The Company has also significantly lowered its quarterly capital expenditures and improved the management of its working capital.  During the third fiscal quarter, the Company lowered its net inventory by approximately 17% and achieved positive operating income within the Company’s space solar business.

In addition, the Company continues to pursue and evaluate a number of capital raising alternatives including debt and/or equity financings, product joint-venture opportunities and the potential sale of certain assets.


Conclusion

These initiatives are intended to conserve or generate cash in response to the deterioration in the global economy so that we can be assured of adequate liquidity through the next twelve months.  However, the full effect of many of these actions may not be realized until late in calendar year 2009, even if they are successfully implemented.  We are committed to exploring all of the initiatives discussed above but there is no assurance that capital market conditions will improve within that time frame. Our ability to continue as a going concern is substantially dependent on the successful execution of many of the actions referred to above. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.


 
 

 

Since cash generated from operations and cash on hand are not sufficient to satisfy the Company’s liquidity requirements, we will seek to raise additional cash through equity financing, additional debt, asset sales or a combination thereof.  Due to the unpredictable nature of the capital markets, additional funding may not be available when needed, or on terms acceptable to us.  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 the Company’s business, financial condition, results of operations, and cash flow.


Restatements

The Company identified an error in the classification of service and product revenues and related costs of revenue in the condensed consolidated statements of operations for the quarters ended in fiscal 2008.  The following table reflects the effects of the restatement on the condensed consolidated statements of operations for the quarter and nine-month period ended June 30, 2008. These misclassifications did not have an impact on the Company’s consolidated gross profit, operating loss, or net loss.

(in thousands)  
 
Three Months Ended June 30, 2008
 
Nine Months Ended June 30, 2008
 
     
As
previously
reported
   
Adjustment
   
As
restated
   
As previously reported
   
Adjustment
   
As
restated
 
                                       
Product revenue
 
 $
71,934
 
$
93
 
$
72,027
 
$
164,695
 
5,018
 
169,713
 
Service revenue
   
3,568
   
(93
)
 
3,475
   
13,973
   
(5,018
)
 
8,955
 
   Total revenue
   
75,502
   
-
   
75,502
   
178,668
   
-
   
178,668
 
                                       
Cost of product revenue
   
61,767
   
(1,040
)
 
60,727
   
139,212
   
4,227
   
143,439
 
Cost of service revenue
   
89
   
1,040
   
1,129
   
9,059
   
(4,227
)
 
4,832
 
   Total cost of revenue
   
61,856
   
-
   
61,856
   
148,271
   
-
   
148,271
 
                                       
Gross profit
 
$
13,646
 
$
-
 
$
13,646
 
$
30,397
 
$
-
 
$
30,397
 

The Company also identified errors in the condensed consolidated statements of cash flows for the quarters ended in fiscal 2008. In particular, provision for obsolete and excess inventory was not appropriately classified as a reconciling item to reconcile net loss to net cash used for operating activities.  In addition, certain other assets and accounts receivable were improperly classified as reconciling items to reconcile net loss to net cash used for operating activities. The following table reflects the effects of the restatement on the condensed consolidated statements of cash flows for the nine-month period ended June 30, 2008. These misclassifications did not have an impact on net cash used in operating activities.

   
June 30, 2008
 
   
As previously reported
 
Adjustment
 
As restated
 
Adjustments to reconcile net loss to net cash used for operating activities:
                         
Depreciation and amortization expense
 
$
9,509
   
$
(517
)
 
$
8,992
   
Provision for obsolete and excess inventory
   
-
     
2,427
     
2,427
   
Provision for doubtful accounts
   
204
     
(37
)
   
167
   
                           
Total non-cash adjustments
   
18,061
     
1,873
     
19,933
   
                           
Changes in operating assets and liabilities, net of effect of acquisitions:
                         
Accounts receivable
   
(30,172
)
   
37
     
(30,135
)
 
Inventory
   
10,559
     
(2,427
)
   
8,132
   
Other assets
   
(1,059
)
   
517
     
(542
)
 
                           
Total change in operating assets and liabilities
   
(14,284
)
   
(1,873
)
   
(16,157
)
 
                           
Net cash used in operating activities
   
(35,859
)
   
-
     
(35,859
)
 
 

NOTE 2.  Recent Accounting Pronouncements
 
SFAS 141(R) - In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) 141(R), Business Combinations . This statement replaces SFAS 141, Business Combinations, and requires an acquirer to recognize the assets acquired, the liabilities assumed, including those arising from contractual contingencies, any contingent consideration, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. SFAS 141(R) also requires the acquirer in a business combination achieved in stages (sometimes referred to as a step acquisition) to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with SFAS 141(R)). In addition, SFAS 141(R)'s requirement to measure the noncontrolling interest in the acquiree at fair value will result in recognizing the goodwill attributable to the noncontrolling interest in addition to that attributable to the acquirer. SFAS 141(R) amends SFAS No. 109, Accounting for Income Taxes , to require the acquirer to recognize changes in the amount of its deferred tax benefits that are recognizable because of a business combination either in income from continuing operations in the period of the combination or directly in contributed capital, depending on the circumstances. It also amends SFAS 142, Goodwill and Other Intangible Assets , to, among other things, provide guidance on the impairment testing of acquired research and development intangible assets and assets that the acquirer intends not to use. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Management is currently assessing the potential impact that the adoption of SFAS 141(R) could have on the Company’s financial statements in fiscal 2010.

SFAS 160 - In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements . SFAS 160 amends Accounting Research Bulletin 51, Consolidated Financial Statements , to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 also changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. SFAS 160 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is effective for fiscal periods, and interim periods within those fiscal years, beginning on or after December 15, 2008. Management is currently assessing the potential impact that the adoption of SFAS 160 could have on the Company’s financial statements in fiscal 2010.

SFAS 168 - In June 2009, the FASB issued SFAS 168, FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles , which replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles . SFAS 168 establishes the FASB Accounting Standards Codification as the sole source of authoritative accounting principles recognized by the FASB to be applied by all nongovernmental entities in the preparation of financial statements in conformity with GAAP. SFAS 168 is prospectively effective for financial statements for fiscal years ending on or after September 15, 2009, and interim periods within those fiscal years. The adoption of SFAS 168 on October 1, 2009 will not impact the Company’s results of operations or financial condition, but it will affect the reference of accounting pronouncements in future disclosures.

FSP 142-3 - In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets.   FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB Statement No. 142, Goodwill and Other Intangible Assets and the period of expected cash flows used to measure the fair value of intangible assets under FASB Statement No. 141, Business Combinations.   FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years.  Management is currently assessing the potential impact that the adoption of FSP 142-3 could have on the Company’s financial statements in fiscal 2010.

FSP APB 14-1 - In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) . FSP APB 14-1 requires the proceeds from the issuance of such convertible debt instruments to be allocated between a liability component (issued at a discount) and an equity component. The resulting debt discount is amortized over the period the convertible debt is expected to be outstanding as additional non-cash interest expense. The change in accounting treatment is effective for the Company beginning in fiscal 2010, and will be applied retrospectively to prior periods. Management is currently assessing the potential impact that the adoption of FSP APB 14-1 could have on the Company’s financial statements in fiscal 2010.



 
 

 

Recently Adopted Accounting Pronouncement:

SFAS 165 - In June 2009, the FASB issued SFAS 165, Subsequent Events, to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued.  In particular, SFAS 165 sets forth: (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS 165 is prospectively effective for financial statements issued for interim or annual periods ending after June 15, 2009. The adoption of SFAS 165 on June 30, 2009 did not impact the Company’s results of operations or financial condition.  See Note 1, Basis of Presentation, for related footnote disclosure.



NOTE 3.  Equity

Stock Options

The Company provide s long-term incentives to eligible officers, directors , and employees in the form of stock options.  Most of the stock options vest and become exercisable over four to five years and have a contractual life of ten years. The Company maintains two stock option plans: the 1995 Incentive and Non-Statutory Stock Option Plan (“1995 Plan” ) and the 2000 Stock Option Plan (“ 2000 Plan” and, together with the 1995 Plan, the “Option Plans”). The 1995 Plan authorizes the grant of options up to 2,744,118 shares of the Company 's common stock. On April 30, 2009, the Company’s shareholders approve d an increase in the number of shares reserved for issuance under the 2000 Plan from 12,850,000 to 15,850,000 shares of the Company’s common stock.   As of June 30, 2009 , no options were available for issuance under the 1995 Plan and 4,100,776 options were available for issuance under the 2000 Plan.   Certain options under the Option Plans are intended to qualify as incentive stock options pursuant to Section 422A of the Internal Revenue Code.   The Company issues new shares of common stock to satisfy the issuance of shares under this stock-based compensation plan.

The following table summarizes the activity under the Option Plans for the nine months ended June 30, 2009 :

   
 
 
 
 
Number of Shares
 
Weighted Average Exercise Price
 
Weighted Average
Remaining Contractual Life
(in years)
 
Outstanding as of September 30, 2008
   
8,929,453
   
$
6.57
     
8.22
   
Granted
   
615,439
     
1.25
           
Exercised
   
(10,675
)
   
3.02
           
Forfeited
   
(902,539
)
   
7.19
           
Cancelled
   
(526,673
)
   
4.51
           
                           
Outstanding as of June 30, 2009
   
8,105,005
   
$
6.28
     
7.53
   
                           
Exercisable as of June 30, 2009
   
3,747,079
   
$
5.81
     
6.26
   


As of June 30, 2009 there was approximately $9.0 million of total unrecognized compensation expense related to non-vested stock-based compensation arrangements granted under the Option Plans. This expense is expected to be recognized over an estimated weighted average life of 2.9 years.


 
 

 

Intrinsic value for stock options represents the “in-the-money” portion or the positive variance between a stock option’s exercise price and the underlying stock price.  There were no stock options exercised during the three months ended June 30, 2009.  The total intrinsic value related to stock options exercised during the nine months ended June 30, 2009 was approximately $10,000.  The total intrinsic value related to stock options exercised during the three and nine months ended June 30, 2008 was approximately $0.3 million and $11.5 million, respectively.  There was no intrinsic value related to fully vested and expected to vest stock options as of June 30, 2009 and no intrinsic value related to exercisable stock options as of June 30, 2009.
 
   
Number of Stock Options Outstanding
 
Options Exercisable
 
Exercise Price of Stock Options
 
Number Outstanding
 
Weighted Average Remaining Contractual Life (years)
 
Weighted- Average Exercise Price
 
Number Exercisable
 
Weighted- Average Exercise Price
 
>=$1.00 to <$5.00
   
2,326,974
     
6.21
   
$
2.89
     
1,625,748
   
$
2.96
 
>=$5.00 to <$10.00
   
5,643,111
     
8.17
     
7.40
     
2,024,211
     
7.41
 
>$10.00
   
134,920
     
3.71
     
17.74
     
97,120
     
20.18
 
TOTAL
   
8,105,005
     
7.53
   
$
6.28
     
3,747,079
   
$
5.81
 
 
Stock-based compensation expense is measured at the stock option grant date, based on the fair value of the award, over the requisite service period.  As required by SFAS 123(R), Share-Based Payment (revised 2004) , management has made an estimate of expected forfeitures and is recognizing compensation expense only for those equity awards expected to vest.

The effect of recording stock-based compensation expense during the three and nine months ended June 30, 2009 and 2008 was as follows:

(in thousands, except per share data)
 
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
     
2009
   
2008
   
2009
   
2008
 
                           
Stock-based compensation expense by award type:
                         
     Employee stock options
 
$
1,072
 
$
1,555
 
$
4,413
 
$
4,035
 
     Employee stock purchase plan
   
206
   
186
   
562
   
354
 
     Former employee stock options tolled
   
-
   
-
   
-
   
4,316
 
Total stock-based compensation expense
 
$
1,278
 
$
1,741
 
$
4,975
 
$
8,705
 
                           
Net effect on net loss per basic and diluted share
 
$
(0.02
)
$
(0.02
)
$
(0.06
)
$
(0.14
)


Tolled Stock 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 SFAS 123(R) and becomes subject to the recognition and measurement requirements of EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock , 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, the liability was relieved with an offset to income included in current earnings, which totaled approximately $58,000 in January 2008.

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.


Tender Offer

As a result of the Company's previously announced voluntary inquiry into its historical stock option granting practices, which was concluded in 2007, the Company determined that an incorrect grant date was used in the granting of certain stock options. As a result, certain stock options were determined to be granted at an exercise price below the fair market value of the Company's common stock as of the correct measurement grant date. Consequently, employees holding these stock options faced a potential tax liability under Section 409A of the Internal Revenue Code and similar sections of certain state tax codes, unless remedial action was taken to adjust the exercise price of these stock options prior to December 31, 2008.

In November 2008, the Company announced that it had commenced a tender offer for 164,088 stock options outstanding under its 2000 Plan which was held by 91 of its then current non-officer employees.  Under the terms of the tender offer, employees holding such stock options were given the opportunity to amend these options to increase the exercise price to a higher price that is equal to the fair market value on the date which has been determined to be the correct date of issuance for these stock options in return for a cash payment for each tendered stock option equal to the difference between the original exercise price and the new exercise price.  The tender offer remained open until 11:59 p.m. Mountain Time on December 17, 2008.  As a result of the tender offer, a total of 163,838 stock options were tendered, approximately $44,000 in cash payments were paid in January 2009, and the non-cash stock-based SFAS 123(R) expense due to the modification of stock options was determined to be immaterial.  Further details regarding the tender can be obtained from the filing on Schedule TO which the Company filed on December 18, 2008 with the SEC.


Valuation Assumptions

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option valuation model and the straight-line attribution approach using the following weighted-average assumptions.  The 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 weighted-average grant date fair value of stock options granted during the three and nine months ended June 30, 2009 was $1.30 and $1.25, respectively.  The weighted-average grant date fair value of stock options granted during the three and nine months ended June 30, 2008 was $8.23 and $7.79, respectively.

 
 

 


Black-Scholes Weighted-Average Assumptions
 
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
     
2009
   
2008
   
2009
   
2008
 
Stock Options:
                         
Expected dividend yield
   
-
%
 
-
%
 
-
%
 
-
%
Expected stock price volatility
   
147.7
%
 
72.3
%
 
187.6
%
 
80.8
%
Risk-free interest rate 
   
2.4
%
 
2.9
%
 
2.4
%
 
2.9
%
Expected term (in years)
   
6.2
   
6.2
   
5.8
   
5.6
 
Estimated pre-vesting forfeitures
   
31.9
%
 
23.3
%
 
31.9
%
 
23.3
%

           
     
Jan 1, 2009 –
Jun 30, 2009
   
Jul 1, 2008 –
Dec 31, 2008
   
Jan 1, 2008 –
Jun 30, 2008
       
Employee Stock Purchase Plan:
                         
Expected dividend yield
   
-
%
 
-
%
 
-
%
     
Expected stock price volatility
   
112.0
%
 
74.1
%
 
66.4
%
     
Risk-free interest rate 
   
0.3
%
 
2.1
%
 
3.3
%
     
Expected term
   
6 months
   
6 months
   
6 months
       

Expected Dividend Yield:   The Black-Scholes valuation model calls for a single expected dividend yield as an input. The Company has not issued any dividends.

Expected Stock Price Volatility:   The fair values of stock-based payments were valued using the Black-Scholes valuation method with a volatility factor based on the Company’s historical stock price.

Risk-Free Interest Rate :  The Company bases the risk-free interest rate used in the Black-Scholes valuation method on the implied yield that was currently available on U.S. Treasury zero-coupon notes with an equivalent remaining term. Where the expected term of stock-based awards do not correspond with the terms for which interest rates are quoted, the Company performed a straight-line interpolation to determine the rate from the available maturities.

Expected Term: Expected term represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based awards.

Estimated Pre-vesting Forfeitures: When estimating forfeitures, the Company considers voluntary termination behavior as well as workforce reduction programs.


P referred Stock

The Company’s Restated Certificate of Incorporation authorizes the Board of Directors to issue up to 5,882,352 shares of preferred stock upon such terms and conditions having such rights, privileges, and preferences as the Board of Directors may determine.  As of June 30, 2009 and September 30, 2008, no shares of preferred stock were issued or outstanding.


Warrants

As of June 30, 2009 and September 30, 2008, the Company had 1,400,003 warrants outstanding from the private placement transaction that closed on February 15, 2008.   The warrants grant the holder the right to purchase one share of the Company’s common stock at a price of $15.06 per share.  The warrants are immediately exercisable and remain exercisable for a period of 5 years from the closing date.



 
 

 

Employee Stock Purchase Plan

In fiscal 2000, the Company adopted an Employee Stock Purchase Plan (“ESPP”). The ESPP provides employees of the Company an opportunity to purchase common stock through payroll deductions. The ESPP is a 6-month duration plan with new participation periods beginning the first business day of January and July of each year. The purchase price is set at 85% of the average high and low market price of the Company's common stock on either the first or last day of the participation period, whichever is lower, and contributions are limited to the lower of 10% of an employee's compensation or $25,000.  In November 2006 through December 2007, the Company suspended the ESPP due to its review of historical stock option granting practices.  The Company reinstated the ESPP on January 1, 2008.   On April 30, 2009, the Company’s shareholders approve d an increase in the number of shares reserved for issuance under the ESPP from 2.0 million to 4.5 million shares.   The Company issues new shares of common stock to satisfy the issuance of shares under this stock-based compensation plan. The amounts of shares issued for the ESPP are as follows:

   
Number of Common Stock Shares
 
Purchase Price per Share of
Common Stock
                 
Amount of shares reserved for the ESPP
   
4,500,000
         
                 
Number of shares issued for calendar years 2000 through 2006
   
(1,000,000
)
   
$1.87 - $40.93
 
Number of shares issued for the first half of calendar year 2007
   
(123,857
)
   
$6.32
 
Number of shares issued for the first half of calendar year 2008
   
(120,791
)
   
$5.62
 
Number of shares issued for the second half of calendar year 2008
   
(471,798
)
   
$0.88
 
Number of shares issued for the first half of calendar year 2009
   
(522,924
)
   
$0.92
 
                 
Remaining shares reserved for the ESPP
   
2,260,630
         


Future Issuances  
 
As of June 30, 2009, the Company had reserved a total of 15.9 million shares of its common stock for future issuances as follows:

   
Number of Common Stock Shares Available
         
For exercise of outstanding common stock options
   
8,105,005
 
For future issuances to employees under the ESPP
   
2,260,630
 
For future common stock option awards
   
4,100,776
 
For future exercise of warrants
   
1,400,003
 
         
Total reserved
   
15,866,414
 


Subsequent event

On July 27, 2009, the Company’s Compensation Committee approved a retention grant for eligible employees which totaled 3,004,000 stock options.  The stock option exercise price for this grant was $1.25, which was based on the fair market value of the Company’s common stock on the date of grant.




 
 

 

NOTE 4.  Acquisitions

Intel’s Optical Platform Division

On February 22, 2008, the Company acquired assets of the telecom portion of Intel Corporation’s Optical Platform Division (“OPD”). The telecom assets acquired include inventory, fixed assets, intellectual property, and technology comprised of tunable lasers, tunable transponders, 300-pin transponders, and integrated tunable laser assemblies.  The purchase price was $75.0 million in cash and $10.0 million in the Company’s common stock, priced at a volume-weighted average price of $13.84 per share.  Under the terms of the asset purchase agreement, the purchase price of $85 million was subject to adjustment based on an inventory true-up, plus specifically assumed liabilities.  Direct transaction costs totaled approximately $0.8 million.  This acquisition was financed through proceeds received from the $100 million private placement of common stock and warrants that closed on February 15, 2008.

On April 20, 2008, the Company acquired the enterprise and storage assets of Intel Corporation’s OPD business, as well as Intel’s Connects Cables business.  The assets acquired include inventory, fixed assets, intellectual property, and technology relating to optical transceivers for enterprise and storage customers, as well as optical cable interconnects for high-performance computing clusters.  As consideration for the purchase of assets, the Company issued 3.7 million restricted shares of the Company’s common stock to Intel.  

On April 20, 2009, the Company issued an additional 1.3 million shares of unrestricted common stock to Intel, valued at $1.2 million using the closing share price of $0.91, as consideration for the final purchase price adjustment related to this asset acquisition.  This contingency payment was based solely on performance of the Company’s stock price subsequent to the transaction.  Accordingly, under SFAS 141, Business Combinations , resolution of a stock price-based contingency does not result in additional purchase price consideration.

The final purchase price was allocated as follows:

(in thousands)
Intel’s Optical Platform Division
   
         
Net purchase price
 
$
111,792
 
Net assets acquired
   
(79,444
)
         
Excess purchase price allocated to goodwill
 
$
32,348
 

Net assets acquired in the acquisition were as follows:

         
Inventory
 
$
33,287
 
Fixed assets
   
19,878
 
Intangible assets
   
26,279
 
         
Net assets acquired
 
$
79,444
 


The $26.3 million of acquired intangible assets have a weighted average life of approximately eight years.  The intangible assets that make up that amount include customer lists of $7.5 million (8 to 10 year useful life) and developed and core technology of $18.8 million (6 to 10 year useful life).  

In connection with this acquisition, Intel and the Company entered into a Transition Services Agreement (the “TSA”), which facilitated Intel’s ability to carve-out the business and deliver those assets to the Company. Intel also provided certain transition services to the Company, including financial services, supply chain support, data extraction, conversion services, facilities and site computing support, and office space services.  Operating expenses associated with the TSA were expensed as incurred and the TSA was substantially completed as of August 2008.

See Note 9, Goodwill and Intangible Assets, for information on impairment charges recorded by the Company in connection with assets acquired from this acquisition.




 
 

 

NOTE 5.  Investments

Auction Rate Securities
Historically, the Company has invested in securities with an auction reset feature (“auction rate securities”).  In February 2008, the auction market failed for the Company’s auction rate securities, which resulted in the Company being unable to sell its investments in auction rate securities.  As of September 30, 2008, the Company had approximately $3.1 million invested in auction rate securities.

During the three months ended December 31, 2008, the Company entered into agreements with its investment brokers for the settlement of auction rate securities at 100% par value, of which $1.7 million was settled at 100% par value in November 2008.  The remaining $1.4 million of auction rate securities should be settled by June 2010 and it is classified as a current asset based on its expected settlement date.  In December 2008, the Company borrowed $0.9 million from its investment broker, using its remaining $1.4 million in auction rate securities as collateral, which is classified as short-term debt.  Since the Company believes that it will receive full value of its remaining $1.4 million securities, we have not recorded any impairment on these investments as of June 30, 2009.

Lightron Equity Securities
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 $0.1 million due to the conversion from Korean Won to U.S. dollars.

Entech Solar, Inc. (formerly named WorldWater and Solar Technologies Corporation)
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. 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 between the Company and 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 2008, the Company sold one million shares of Series D Preferred Stock and 100,000 warrants of Entech Solar and recognized a gain on the sale of this investment of approximately $3.7 million.



NOTE 6.  Accounts Receivable

The components of accounts receivable consisted of the following:

(in thousands)
 
   
June 30,
2009
   
September 30, 2008
 
               
Accounts receivable
 
$
44,724
 
$
57,703
 
Accounts receivable – unbilled
   
4,488
   
4,987
 
               
Accounts receivable, gross
   
49,212
   
62,690
 
               
Allowance for doubtful accounts
   
(7,320
)
 
(2,377
)
               
Total accounts receivable, net
 
$
41,892
 
$
60,313
 



 
 

 

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

§  
During the three months ended June 30, 2009, the Company recorded $2.2 million in bad debt expense, of which $(0.1) million related to the Fiber Optics segment and $2.3 million related to the Photovoltaics segment.

§  
During the nine months ended June 30, 2009, the Company recorded $4.8 million in bad debt expense, of which $0.4 million related to the Fiber Optics segment and $4.4 million related to the Photovoltaics segment.



NOTE 7.  Inventory

Inventory is stated at the lower of cost or market, with cost being determined using the standard cost method that includes material, labor, and manufacturing overhead costs.  The components of inventory consisted of the following:

(in thousands)
 
   
June 30,
2009
   
September 30, 2008
 
               
Raw materials
 
$
29,983
 
$
38,304
 
Work-in-process
   
8,144
   
7,293
 
Finished goods
   
15,030
   
32,010
 
               
Inventory, gross
   
53,157
   
77,607
 
               
Less: allowance for excess and obsolescence
   
(13,654
)
 
(12,990
)
               
Total inventory, net
 
$
39,503
 
$
64,617
 

§  
During the three months ended June 30, 2009, the Company recorded $2.1 million in inventory write-downs, of which $1.9 million related to the Fiber Optics segment and $0.2 million related to the Photovoltaics segment.

§  
During the nine months ended June 30, 2009, the Company recorded $14.9 million in inventory write-downs, of which $9.1 million related to the Fiber Optics segment and $5.8 million related to the Photovoltaics segment.

We have incurred, and may in the future incur charges to write-down our inventory.



 
 

 

NOTE 8.  Property, Plant, and Equipment

The components of property, plant, and equipment consisted of the following:

(in thousands)
 
   
June 30,
 2009
   
September 30, 2008
 
               
Land
 
$
1,502
 
$
1,502
 
Building and improvements
   
34,922
   
44,607
 
Equipment
   
99,599
   
106,536
 
Furniture and fixtures
   
3,065
   
3,127
 
Computer hardware and software
   
2,665
   
2,687
 
Leasehold improvements
   
1,126
   
478
 
Construction in progress
   
2,946
   
4,395
 
               
Property, plant and equipment, gross
   
145,825
   
163,332
 
               
Less: accumulated depreciation and amortization
   
(88,130
)
 
(80,054
)
               
Total property, plant and equipment, net
 
$
57,695
 
$
83,278
 


The Company reclassified $2,687 as of September 30, 2008 to computer hardware and software from furniture and fixtures and equipment to conform to the current period presentation.

As of June 30, 2009 and September 30, 2008, the Company did not have any significant capital lease agreements.

During the nine months ended June 30, 2009, the Company wrote-off approximately $1.2 million of fully amortized fixed assets, related to the Company’s Photovoltaics segment, that were no longer in use.

Depreciation expense was $3.2 million and $9.6 million for the three and nine months ended June 30, 2009, respectively. Depreciation expense was $2.9 million and $6.7 million for the three and nine months ended June 30, 2008, respectively.

See Note 9, Goodwill and Intangible Assets, for information on impairment charges recorded by the Company in connection with plant and equipment related to the Fiber Optics segment.



NOTE 9.  Goodwill and Intangible Assets

Goodwill

The following table sets forth changes in the carrying value of goodwill by reporting segment:
 
(in thousands)
 
 
 
Fiber Optics
 
 
Photovoltaics
 
Total
Balance at September 30, 2008
   
31,843
     
20,384
     
52,227
 
                         
Goodwill impairment
   
(31,843
)
   
-
     
(31,843
)
                         
Balance at June 30, 2009
 
$
-
   
$
20,384
   
$
20,384
 



 
 

 

Valuation of 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 SFAS 142, Goodwill and Other Intangible Assets, 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 a five year period 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, 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 SFAS 142.  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 carrying value by over 15%.

§  
The Company continues to report goodwill related to its Photovoltaics reporting unit and the Company believes the remaining carrying amount of goodwill is recoverable.  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.


 
 

 

Intangible Assets

The following table sets forth changes in the carrying value of intangible assets by reporting segment:

(in thousands)  
 
June 30, 2009  
 
September 30, 2008  
 
     
  Gross
Assets  
   
Accumulated
Amortization
   
Net
Assets
   
Gross Assets
   
Accumulated
Amortization
   
Net
Assets
 
                                       
Fiber Optics
 
 $
24,419
 
$
(11,679
)
$
12,740
 
$
35,991
 
(8,502
)
27,489
 
Photovoltaics
   
1,370
   
(571
)
 
799
   
956
   
(412
)
 
544
 
                                       
Total
 
$
25,789
 
$
(12,250
)
$
13,539
 
$
36,947
 
$
(8,914
)
$
28,033
 


Valuation of Long-lived Assets and Other Intangible Assets .  Long-lived assets consist primarily of our property, plant, and equipment.  Our intangible assets consist primarily of intellectual property that has been internally developed or purchased.  Purchased intangible assets include existing and core technology, trademarks and trade names, and customer contracts.  Intangible assets are amortized using the straight-line method over estimated useful lives ranging from one to fifteen years.  Because all of the Company’s intangible assets are subject to amortization, the Company reviews these intangible assets for impairment in accordance with the provisions of FASB Statement No. 144, Accounting for the Impairment of Long-Lived Assets and Long-Lived  Assets to be Disposed Of.   As part of internal control procedures, the Company reviews long-lived assets and other intangible assets for impairment on an annual basis or whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.  Our impairment testing of intangible 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, 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 SFAS 144 at September 30, 2008.  As the long-lived asset (asset group) met the recoverability test, no further testing was required or performed under SFAS 144.

§  
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.

§  
During the three months ended June 30, 2009, the Company performed an evaluation of its Fiber Optics segment assets for impairment.  The impairment test was triggered by a determination that it was more likely than not that 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 estimated fair value, which was determined based on a combination of guideline public company comparisons and discounted estimated future 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 fair value of the Fiber Optics segment assets.  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 fair 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 fair value inputs to estimate enterprise value of its reporting units: internal discounted 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.

§  
The Company believes the carrying amount of its long-lived assets and intangible assets at June 30, 2009 is 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.

Amortization expense related to intangible assets is generally included in SG&A on the statements of operations. Amortization expense was $1.2 million and $3.3 million for the three and nine months ended June 30, 2009, respectively.  Amortization expense was $1.2 million and $2.3 million for the three and nine months ended June 30, 2008, respectively.

Based on the carrying amount of the intangible assets as of June 30, 2009, the estimated future amortization expense is as follows:

(in thousands)
 
 
Estimated Future Amortization
Expense
         
Three-months ended September 30, 2009
 
$
715
 
Fiscal year ended September 30, 2010
   
2,788
 
Fiscal year ended September 30, 2011
   
2,400
 
Fiscal year ended September 30, 2012
   
2,076
 
Fiscal year ended September 30, 2013
   
1,740
 
Thereafter
   
3,820
 
         
Total future amortization expense
 
$
13,539
 



 
 

 

NOTE 10.  Accrued Expenses and Other Current Liabilities

The components of accrued expenses and other current liabilities consisted of the following:

(in thousands)
 
 
June 30, 2009
 
September 30, 2008
Compensation-related
 
$
5,565
   
$
6,640
 
Loss on firm commitments
   
6,524
     
-
 
Warranty
   
4,333
     
4,640
 
Professional fees
   
1,913
     
2,099
 
Royalty
   
1,792
     
1,414
 
Self insurance
   
1,251
     
1,044
 
Deferred revenue and customer deposits
   
1,031
     
1,422
 
Income and other taxes
   
506
     
3,555
 
Inventory obligation
   
-
     
982
 
Accrued program loss
   
180
     
843
 
Restructuring accrual
   
89
     
331
 
Other
   
725
     
320
 
                 
Total accrued expenses and other current liabilities
 
$
23,909
   
$
23,290
 

See Note 13, Commitments and Contingencies, for information regarding the loss on firm commitments recorded by the Company.

During the three months ended March 31, 2009, the Company recorded $1.1 million in product warranty reserves in its Photovoltaics segment, which was primarily related to new CPV-related product launches.



NOTE 11.  Restructuring Charges
 
In accordance with SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities , SG&A expenses recognized as restructuring charges include costs associated with the integration of business acquisitions and overall cost-reduction efforts.

The Company has undertaken several cost cutting initiatives intended to conserve cash including recent reductions in force, employee furloughs, temporary reduction of salaries, the elimination of fiscal 2009 merit increases, a significant reduction in discretionary expenses and capital expenditures and a greater emphasis on improving its working capital management.  These initiatives are intended to conserve or generate cash in response to the uncertainties associated with the recent deterioration in the global economy.  Restructuring charges consisted of the following:

(in thousands)
 
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
     
2009
   
2008
   
2009
   
2008
 
Employee severance-related expense
 
$
57
 
$
4
 
$
968
 
$
313
 
Other restructuring-related expense
   
-
   
8
   
-
   
101
 
                           
Total restructuring charges
 
$
57
 
$
12
 
$
968
 
$
414
 


 
 

 

The following table sets forth changes in the severance and restructuring-related accrual accounts as of June 30, 2009:

(in thousands)
 
 
 
Severance-related
 Accrual
 
Restructuring-related
Accrual
 
Total
 
                           
Balance as of September 30, 2008
 
$
152
   
$
331
   
$
483
   
                           
Additional accruals
   
911
     
-
     
911
   
Cash payments or otherwise settled
   
(1,063
)
   
(242
)
   
(1,305
)
 
                           
Balance as of June 30, 2009
 
$
-
   
$
89
   
$
89
   


The severance-related and restructuring–related accruals are recorded as accrued expenses within current liabilities since they are expected to be settled with the next twelve months.  We may incur additional restructuring charges in the future for employee severance, facility-related or other exit activities.



NOTE 12.  Debt

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 June 30, 2009, the Company had a $5.0 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 management believes the Company is in compliance with for the three months ended June 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.  Over the last several months, 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.


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.




 
 

 

NOTE 13.  Commitments and Contingencies

The Company leases certain land, facilities, and equipment under non-cancelable operating leases. The leases typically provide for rental adjustments for increases in base rent (up to specific limits), property taxes, insurance and general property maintenance that would be recorded as rent expense. Net facility and equipment rent expense under such leases totaled approximately $0.6 million and $1.9 million for the three and nine months ended June 30, 2009, respectively and approximately $0.5 million and $1.1 million for the three and nine months ended June 30, 2008, respectively.

Estimated future minimum rental payments under the Company's non-cancelable operating leases with an initial or remaining term of one year or more as of June 30, 2009 are as follows:

(in thousands)
 
 
Estimated Future Minimum Lease Payments
Three months ended September 30, 2009
 
$
506
 
Fiscal year ended September 30, 2010
   
1,958
 
Fiscal year ended September 30, 2011
   
1,814
 
Fiscal year ended September 30, 2012
   
1,068
 
Fiscal year ended September 30, 2013
   
796
 
Thereafter
   
2,774
 
         
Total minimum lease payments
 
$
8,916
 


As of June 30, 2009, the Company had eleven standby letters of credit issued and outstanding which totaled approximately $3.3 million, of which $2.8 million was issued against the Company’s credit facility with Bank of America and the remaining $0.5 million in standby letters of credit are collateralized with other financial institutions and are listed on the Company’s balance sheet as restricted cash.


Loss on firm commitments

Recently, the Company has been challenged with higher than expected inventory positions of product in its Fiber Optics segment as quarterly sales were lower than internal projections of many of our customers, which has had a significant adverse effect on results of operations in fiscal 2009.  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 $6.5 million loss on purchase and sales commitments specifically related to inventory.  These impairment charges were recognized in cost of revenues.


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 2008, 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.


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, EMCORE 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.

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 the 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.  The Court has not yet consolidated the two class actions or selected the lead plaintiff for these class actions

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 has recently been transferred to Somerset County, New Jersey.  The plaintiff in the Thomas Derivative Action has recently voluntarily dismissed the action in U.S. District Court for the District of New Mexico.  The parties have stipulated that the statute of limitations in the Thomas Derivative Action will be tolled until December 31, 2009.  Plaintiff’s counsel has indicated that if the Thomas Derivative Action is re-filed, it would be filed in New Jersey state court in the County of Somerset, New Jersey, so that both derivative actions can be consolidated before a single judge.

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 EMCORE's voluntary production of documents relating to, among other things, the Company's business relationship with Green and Gold Energy, Inc., its licensees, and the 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 not yet been scheduled.

§  
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.



 
 

 

NOTE 14.  Income Taxes

On October 1, 2007, the Company adopted Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109.   As a result of the adoption of FIN 48, the Company recorded an increase in accumulated deficit and an increase in the liability for unrecognized state tax benefits of approximately $326,000 (net of the federal benefit for state tax liabilities).  All of this amount, if recognized, would reduce future income tax provisions and favorably impact effective tax rates.  During the three and nine months ended June 30, 2009 and 2008, there were no material increases or decreases in unrecognized tax benefits.  Management expects that over the next twelve months, the liability for unrecognized state tax benefits will substantially decrease and does not anticipate any material increases over the next twelve months.  As of June 30, 2009, the Company had approximately $139,000 of interest and penalties accrued as tax liabilities on the balance sheet.

The Company files income tax returns in the U.S. federal, state and local jurisdictions and, currently, no federal, state, and local income tax returns are under examination. Certain income tax returns for fiscal years 2006 through 2008 remain open to examination by U.S. federal, state and local tax authorities.



NOTE 15.  Segment Data and Related Information

The Company has 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 interconnect cells (“CICs”) and fully integrated solar panels.  For terrestrial applications, we offer concentrating photovoltaic (“CPV”) systems for utility scale solar applications as well as high-efficiency multi-junction solar cells and CPV components for use in solar power concentrator systems.  We periodically evaluate our reportable segments in accordance with SFAS 131, Disclosures about Segments of an Enterprise and Related Information. The Company’s Chief Executive Officer is the Chief Operating Decision Maker pursuant to SFAS 131, and he allocates resources to segments based on their business prospects, competitive factors, revenue, operating results and other non-GAAP financial ratios.

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

Segment Revenue
(in thousands)
 
 
Three Months Ended June 30,
   
2009
 
2008
   
 
Revenue
 
 
% of Revenue
 
 
Revenue
 
 
% of Revenue
                                 
Fiber Optics
 
$
22,399
     
58
%
 
$
53,589
     
71
%
Photovoltaics
   
16,090
     
42
     
21,913
     
29
 
                                 
Total revenue
 
$
38,489
     
100
%
 
$
75,502
     
100
%


Segment Revenue
(in thousands)
 
 
Nine Months Ended June 30,
   
2009
 
2008
   
 
Revenue
 
 
% of Revenue
 
 
Revenue
 
 
% of Revenue
                                 
Fiber Optics
 
$
89,979
     
66
%
 
$
125,179
     
70
%
Photovoltaics
   
45,850
     
34
     
53,489
     
30
 
                                 
Total revenue
 
$
135,829
     
100
%
 
$
178,668
     
100
%



 
 

 

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

Geographic Revenue
(in thousands)
 
 
Three Months Ended June 30,
   
2009
 
2008
   
 
Revenue
 
 
% of Revenue
 
 
Revenue
 
 
% of Revenue
                                 
United States
 
$
23,466
     
61
%
 
$
47,586
     
63
%
Asia
   
9,427
     
24
     
19,359
     
26
 
Europe
   
1,733
     
5
     
8,306
     
11
 
Other
   
3,863
     
10
     
251
     
-
 
                                 
Total revenue
 
$
38,489
     
100
%
 
$
75,502
     
100
%
 

Geographic Revenue
(in thousands)
 
 
Nine Months Ended June 30,
   
2009
 
2008
   
 
Revenue
 
 
% of Revenue
 
 
Revenue
 
 
% of Revenue
                                 
United States
 
$
80,562
     
59
%
 
$
114,656
     
64
%
Asia
   
41,473
     
31
     
42,823
     
24
 
Europe
   
6,906
     
5
     
20,624
     
12
 
Other
   
6,888
     
5
     
565
     
-