form10q.htm


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:  March 31, 2007
 
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)

(505) 332-5000
(Registrant's telephone number)

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  oNo  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): 
o Large accelerated filer
x Accelerated filer
 o Non-accelerated filer
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o No  x

The number of shares outstanding of the registrant’s no par value common stock as of October 19, 2007 was 51,218,629.
 




EMCORE Corporation
FORM 10-Q
For the Quarterly Period Ended March 31, 2007
TABLE OF CONTENTS
 
     
   
PAGE
PART I.  FINANCIAL INFORMATION  
 
 
 
ITEM 1.
3
ITEM 2.
31
ITEM 3.
47
ITEM 4. 
47
     
PART II.  OTHER INFORMATION  
     
ITEM 1.
50
ITEM 1A. 
53
ITEM 2.
53
ITEM 3.
53
ITEM 4.
53
ITEM 5.
53
ITEM 6.
53
 
 
 
SIGNATURES
54
 

PART I.  FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
EMCORE CORPORATION
Condensed Consolidated Statements of Operations
For the three and six months ended March 31, 2007 and 2006
(in thousands, except per share data)
(unaudited)

   
Three Months Ended
March 31,
   
Six Months Ended
March 31,
 
   
2007
   
(As restated) (1)
2006
   
2007
   
(As restated) (1)
2006
 
                         
Revenue
  $
39,838
    $
36,115
    $
78,512
    $
71,844
 
Cost of revenue
   
32,716
     
28,248
     
65,880
     
57,629
 
Gross profit
   
7,122
     
7,867
     
12,632
     
14,215
 
                                 
Operating expenses:
                               
Selling, general and administrative
   
13,143
     
10,652
     
25,681
     
17,706
 
Research and development
   
7,550
     
4,734
     
14,177
     
9,007
 
Total operating expenses
   
20,693
     
15,386
     
39,858
     
26,713
 
                                 
Operating loss
    (13,571 )     (7,519 )     (27,226 )     (12,498 )
                                 
Other (income) expenses:
                               
Interest income
    (1,169 )     (246 )     (2,820 )     (576 )
Interest expense
   
1,260
     
1,359
     
2,522
     
2,656
 
Loss from convertible notes exchange offer
   
-
     
-
     
-
     
1,078
 
Gain from insurance proceeds
    (357 )    
-
      (357 )    
-
 
Equity in net loss of unconsolidated affiliates
   
-
     
547
     
-
     
182
 
Total other (income) expenses
    (266 )    
1,660
      (655 )    
3,340
 
                                 
Loss from continuing operations
    (13,305 )     (9,179 )     (26,571 )     (15,838 )
                                 
Discontinued operations:
                               
Income (loss)  from discontinued operations
   
-
     
170
     
-
      (44 )
Gain on disposal of discontinued operations, net of tax
   
-
     
2,012
     
-
     
2,012
 
Income from discontinued operations
   
-
     
2,182
     
-
     
1,968
 
                                 
Net loss
  $ (13,305 )   $ (6,997 )   $ (26,571 )   $ (13,870 )
                                 
Per share data:
                               
Basic and diluted per share data:
                               
Loss from continuing operations
  $ (0.26 )   $ (0.18 )   $ (0.52 )   $ (0.32 )
Income from discontinued operations
   
-
     
0.04
     
-
     
0.04
 
                                 
Net loss
  $ (0.26 )   $ (0.14 )   $ (0.52 )   $ (0.28 )
                                 
Weighted-average number of basic and diluted shares outstanding
   
50,947
     
49,410
     
50,911
     
48,789
 
______________________
(1) See Note 18 “Restatement of the Condensed Consolidated Financial Statements” in Notes to the Condensed Consolidated Financial Statements.

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


EMCORE CORPORATION
Condensed Consolidated Balance Sheets
As of March 31, 2007 and September 30, 2006
(in thousands)
(unaudited)
 
   
As of
March 31,
2007
   
As of
September 30, 2006
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $
28,824
    $
22,592
 
Restricted cash
   
1,158
     
738
 
Marketable securities
   
48,425
     
101,375
 
Accounts receivable, net
   
36,445
     
27,387
 
Receivables, related parties
   
332
     
453
 
Notes receivable
   
1,500
     
3,000
 
Inventory, net
   
27,243
     
23,252
 
Prepaid expenses and other current assets
   
4,408
     
4,518
 
                 
Total current assets
   
148,335
     
183,315
 
                 
Property, plant and equipment, net
   
54,236
     
55,186
 
Goodwill
   
40,460
     
40,447
 
Other intangible assets, net
   
3,476
     
4,293
 
Investments in unconsolidated affiliates
   
14,855
     
981
 
Long-term receivables, related parties
   
-
     
82
 
Other non-current assets, net
   
2,870
     
3,243
 
                 
Total assets
  $
264,232
    $
287,547
 
                 
LIABILITIES and SHAREHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $
19,033
    $
20,122
 
Accrued expenses and other current liabilities
   
21,768
     
22,082
 
Convertible subordinated notes, current portion
   
11,428
     
11,428
 
                 
Total current liabilities
   
52,229
     
53,632
 
                 
Convertible subordinated notes
   
84,613
     
84,516
 
                 
Total liabilities
   
136,842
     
138,148
 
                 
Commitments and contingencies (Note 16)
               
                 
Shareholders’ equity:
               
Preferred stock, $0.0001 par, 5,882 shares authorized, no shares outstanding
   
-
     
-
 
Common stock, no par value, 100,000 shares authorized, 51,146 shares issued and
50,987 outstanding at March 31, 2007; 50,962 shares issued and 50,803 shares
outstanding at September 30, 2006
   
440,900
     
436,338
 
Accumulated deficit
    (311,427 )     (284,856 )
Treasury stock, at cost; 159 shares
    (2,083 )     (2,083 )
                 
Total shareholders’ equity
   
127,390
     
149,399
 
                 
Total liabilities and shareholders’ equity
  $
264,232
    $
287,547
 

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


EMCORE CORPORATION
Condensed Consolidated Statements of Cash Flows
For the six months ended March 31, 2007 and 2006
 (in thousands)
(unaudited)
 
   
Six Months Ended
March 31,
 
   
2007
   
(As restated) (1)
2006
 
             
Cash flows from operating activities:
           
Net loss
  $ (26,571 )     (13,870 )
Adjustments to reconcile net loss to net cash used for operating activities:
               
Gain on disposal of discontinued operations
   
-
      (2,012 )
Loss from discontinued operations
   
-
     
44
 
Stock-based compensation expense
   
3,670
     
2,311
 
Depreciation and amortization expense
   
4,880
     
6,361
 
Accretion of loss from convertible subordinated notes exchange offer
   
98
     
67
 
Loss from convertible subordinated notes exchange offer
   
-
     
1,078
 
Provision for doubtful accounts
   
266
     
13
 
Equity in net loss of unconsolidated affiliates
   
-
     
182
 
Compensatory stock issuances
   
412
     
369
 
Forgiveness of shareholders’ notes receivable
   
82
     
2,613
 
Reduction of note receivable due for services received
   
261
     
260
 
Total non-cash adjustments
   
9,669
     
11,286
 
Changes in operating assets and liabilities, net of effect of acquisitions:
               
Accounts receivable
    (9,323 )     (954 )
Receivables, related parties
   
-
     
157
 
Inventory
    (3,992 )     (2,133 )
Prepaid expenses and other current assets
   
111
     
525
 
Other assets
    (281 )     (319 )
Accounts payable
    (1,090 )    
129
 
Accrued expenses and other current liabilities
    (644 )     (4,611 )
Total change in operating assets and liabilities
    (15,219 )     (7,206 )
                 
Net cash used for operating activities of continuing operations
    (5,550 )    
4,080
 
Net cash used for operating activities of discontinued operations
   
-
      (959 )
                 
Net cash used for operating activities
    (32,121 )     (10,749 )
                 
Cash flows from investing activities:
               
Purchase of plant and equipment
    (2,731 )     (1,203 )
Proceeds from insurance recovery
   
362
     
-
 
Proceeds from K2 Optronics
   
-
     
500
 
Investment in unconsolidated affiliate
    (13,873 )    
-
 
Proceeds from employee notes receivable
   
121
     
-
 
Proceeds from notes receivable
   
1,500
     
-
 
Purchase of business, net of cash acquired
   
-
     
610
 
Funding of restricted cash
    (420 )     (98 )
Purchase of marketable securities
    (22,150 )     (350 )
Sale of marketable securities
   
75,100
     
10,850
 
Investing activities of discontinued operations
   
-
      (1,552 )
Net cash provided by investing activities
   
37,909
     
8,757
 
                 
______________________
(1) See Note 18 “Restatement of the Condensed Consolidated Financial Statements” in Notes to the Condensed Consolidated Financial Statements.

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


EMCORE CORPORATION
Condensed Consolidated Statements of Cash Flows
For the six months ended March 31, 2007 and 2006
 (in thousands)
(unaudited)

(Continued from previous page)
 
Six Months Ended
 
   
March 31,
 
   
2007
   
2006
 
Cash flows from financing activities:
           
Payments on capital lease obligations
  $ (32 )   $ (82 )
Proceeds from exercise of stock options
   
274
     
5,385
 
Proceeds from employee stock purchase plan
   
202
     
326
 
Convertible debt/equity issuance costs
   
-
      (114 )
Net cash provided by financing activities
   
444
     
5,515
 
                 
Net increase in cash and cash equivalents
   
6,232
     
3,523
 
Cash and cash equivalents, beginning of period
   
22,592
     
19,525
 
Cash and cash equivalents, end of period
  $
28,824
    $
23,048
 
                 
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
Cash paid during the period for interest
  $
2,421
    $
2,580
 
Cash paid for income taxes
  $
2,351
    $
-
 
                 
NON-CASH INVESTING AND FINANCING ACTIVITIES:
               
Acquisition of property and equipment under capital leases
  $
-
    $
126
 
Issuance of common stock in conjunction with acquisitions
  $
-
    $
6,460
 
Manufacturing equipment received in lieu of earn-out proceeds from disposition of discontinued operations
  $
-
    $
2,012
 
 
______________________
(1) See Note 18 “Restatement of the Condensed Consolidated Financial Statements” in Notes to the Condensed Consolidated Financial Statements.

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 material 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, all information considered necessary for a fair presentation of the financial statements has been included. 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, 2006 has been derived from the audited consolidated financial statements as of such date. For a more complete understanding of EMCORE’s financial position, operating results, risk factors and other matters, please refer to EMCORE's Annual Report on Form 10-K for the fiscal year ended September 30, 2006.

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 at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. 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. EMCORE’s reported financial position or results of operations may be materially different under changed conditions or when using different estimates and assumptions. In the event that estimates or assumptions prove to differ from actual results, adjustments are made in subsequent periods to reflect more current information.
 
For the three and six-month periods ended March 31, 2007, options representing 3,224,884 shares of common stock were excluded from the diluted earnings per share calculations. For the three and six-month periods ended March 31, 2006, warrants representing 14,796 shares of common stock and options representing 4,530,247 shares of common stock were excluded from the diluted earnings per share calculations. These options and warrants, along with the Company’s convertible subordinated notes, were not included in the computation of diluted earnings per share in the periods as the Company incurred a net loss for the period and any effect would have been anti-dilutive.
 
Mr. Scott T. Massie, an Executive Vice President and Chief Operating Officer of the Company, resigned and left the Company on December 29, 2006.  Dr. Hong Q. Hou was appointed as President and Chief Operating Officer and was elected to the Company’s Board of Directors.  The Company also reported that Mr. Reuben F. Richards will continue to serve as Chief Executive Officer until the Company’s Annual Meeting in 2008, at which time he will become Executive Chairman of the Board of Directors and Dr. Thomas J. Russell, the current Chairman, will become Chairman Emeritus and Lead Director. The Board of Directors has offered Dr. Hong Q. Hou the position of Chief Executive Officer after Mr. Richards becomes Chairman.


NOTE 2.  Recent Accounting Pronouncements

SAB 108 - In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 provides guidance on how prior year misstatements should be considered when quantifying misstatements in current year financial statements for purposes of determining whether the current year’s financial statements are materially misstated. SAB 108 is effective for fiscal years ending after November 15, 2006.  Although the Company will continue to evaluate the application of SAB 108, management does not currently believe that this pronouncement will have a material impact on the Company’s results of operations or financial position.

SFAS 157 - In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) 157, Fair Value Measurements, which defines fair value, provides a framework for measuring fair value, and expands the disclosures required for fair value measurements. SFAS 157 applies to other accounting pronouncements that require fair value measurements; it does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and is required to be adopted by the Company on October 1, 2008. Although the Company will continue to evaluate the application of SFAS 157, management does not currently believe adoption of this pronouncement will have a material impact on the Company’s results of operations or financial position.


SFAS 159 - In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115. The fair value option permits entities to choose to measure eligible financial instruments at fair value at specified election dates. The entity will report unrealized gains and losses on the items on which it has elected the fair value option in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007 and is required to be adopted by the Company on October 1, 2008. The Company is currently evaluating the effect of adopting SFAS 159, but does not expect it to have a material impact on its consolidated results of operations or financial condition.

FIN 48 - In June 2006, the FASB issued Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 applies to all tax positions related to income taxes subject to SFAS 109, Accounting for Income Taxes. Differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption should be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. FIN 48 is effective for fiscal years beginning after December 15, 2006 and was required to be adopted by the Company on October 1, 2007. EMCORE does not believe the adoption of FIN 48 will have a material impact on its financial statements.
 
EITF 06-3 - In March 2006, FASB’s Emerging Issues Task Force (“EITF”) issued No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement.  The pronouncement requires a policy be adopted to present externally imposed taxes on revenue-producing transactions on either a gross or net basis. Gross or net presentation may be elected for each different type of tax, but similar taxes should be presented consistently. Taxes within the scope of this issue would include taxes that are imposed on a revenue transaction between a seller and a customer.  EITF 06-3 is effective for interim and annual financial periods beginning after December 15, 2006 and was required to be adopted by the Company on January 1, 2007. We adopted EITF 06-3 by presenting externally imposed taxes on revenue-producing transactions on a net basis, and it has not had a material impact on our financial statements.


NOTE 3.  Equity

Stock Options

EMCORE has stock option plans to provide long-term incentives to eligible employees, officers, and directors in the form of stock options.  Most of the stock options vest and become exercisable over four to five years and have ten year terms. EMCORE maintains two incentive stock option plans: the 2000 Stock Option Plan (“2000 Plan”), and the 1995 Incentive and Non-Statutory Stock Option Plan (“1995 Plan” and, together with the 2000 Plan, the “Option Plans”). The 1995 Plan authorizes the grant of options to purchase up to 2,744,118 shares of EMCORE's common stock. The 2000 Plan authorizes the grant of options to purchase up to 9,350,000 shares of EMCORE's common stock. As of March 31, 2007, no options were available for issuance under the 1995 Plan and 1,292,796 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 following table summarizes the activity under the Option Plans:
   
Number of Shares
 
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual
Life
(in years)
Outstanding as of September 30, 2006
   
6,232,535
   
$
5.49
         
Granted
   
659,900
     
5.11
         
Exercised
   
(86,484
)
   
2.33
         
Expired
   
(13,970
)
   
4.75
         
Forfeited
   
(285,000
)
   
11.40
         
Cancelled
   
(424,598
)
   
5.37
         
                         
Outstanding as of March 31, 2007
   
6,082,383
   
$
5.23
     
7.25
 
                         
Expected to vest as of March 31, 2007
   
 2,661,091
   
 $
 5.49
     
 8.49
 
                         
Exercisable as of March 31, 2007
   
2,922,038
   
$
4.95
     
5.91
 
                         
Non-vested as of March 31, 2007
   
3,160,345
   
$
5.49
     
8.48
 
 
As of March 31, 2007 there was $11.7 million of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the Option Plans. This expense is expected to be recognized over an estimated weighted-average life of 3.1 years. The total intrinsic value of options exercised during the three and six months ended March 31, 2007 was $0 million and $0.2 million, respectively, and $5.2 million and $5.8 million for the three and six months ended March 31, 2006, respectively.  The aggregate intrinsic value of fully vested share options as of March 31, 2007 was $4.1 million.

On October 1, 2005, EMCORE adopted SFAS 123(R), Share-Based Payment (revised 2004), using the modified prospective application transition method, which establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation expense is measured at grant date, based on the fair value of the award, over the requisite service period.

As required by SFAS 123(R), 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 six month periods ended March 31, 2007 and 2006 was as follows (in thousands, except per share data):

   
Three Months Ended
March 31,
   
Six Months Ended
March 31,
 
   
2007
   
2006
   
2007
   
2006
 
   
 
   
 
   
 
   
 
 
Stock-based compensation expense by award type:
                       
Employee stock options
  $
1,344
    $
718
    $
3,670
    $
2,057
 
Employee stock purchase plan
   
-
     
288
     
-
     
410
 
Total stock-based compensation expense
  $
1,344
    $
1,006
    $
3,670
    $
2,467
 
                                 
Net effect on net loss per basic and diluted share
  $ (0.03 )   $ (0.02 )   $ (0.07 )   $ (0.05 )


Valuation Assumptions

EMCORE estimated the fair value of stock options using a Black-Scholes model. The fair value of each 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 weighted-average grant-date fair value of stock options granted during the three and six months ended March 31, 2007 was $3.70 and $3.99, respectively, and $6.44 and $6.11 for the three and six months ended March 31, 2006, respectively.



Black-Scholes Weighted-Average Assumptions
 
 
 
For the six months
ended March 31,
2007
Expected dividend yield
   
0
%
Expected stock price volatility
   
95.0
%
Risk-free interest rate
   
4.6
%
Expected term (in years)
   
5.8
 
Estimated pre-vesting forfeitures
   
19.3
%


Expected Dividend Yield:  The Black-Scholes valuation model calls for a single expected dividend yield as an input. EMCORE 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 EMCORE’s historical stock prices.

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

Expected Term: EMCORE’s expected term represents the period that EMCORE’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, EMCORE considers voluntary termination behavior as well as future workforce reduction programs.


Preferred Stock

EMCORE’s certificate of incorporation authorizes the Board of Directors to issue up to 5,882,352 shares of preferred stock of EMCORE upon such terms and conditions having such rights, privileges and preferences as the Board of Directors may determine.


Warrants

EMCORE does not have any outstanding warrants as of March 31, 2007.
 

Employee Stock Purchase Plan

In fiscal 2000, EMCORE adopted an Employee Stock Purchase Plan (ESPP). The ESPP provides employees of EMCORE 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 for EMCORE'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, the Company suspended the ESPP due to its review of historical stock option granting practices.  The number of shares of common stock available for issuance under the ESPP is 2,000,000 shares.


The amount of shares issued for the ESPP are as follows:  
 
 
Number of Common Stock Shares Issued
 
Purchase Price per Common Stock Share
Amount of shares reserved for the ESPP
   
2,000,000
 
       
     
 
 
       
Number of shares issued in calendar years 2000 through 2003
   
(398,159
)
  $
1.87 - $40.93
 
Number of shares issued in June 2004 for first half of calendar year 2004
   
(166,507
)
  $
2.73
 
Number of shares issued in December 2004 for second half of calendar year 2004
   
(167,546
)
  $
2.95
 
Number of shares issued in June 2005 for first half of calendar year 2005
   
(174,169
)
  $
2.93
 
Number of shares issued in December 2005 for second half of calendar year 2005
   
(93,619
)
  $
3.48
 
Number of shares issued in June 2006 for first half of calendar year 2006
   
(123,857
)
  $
6.32
 
     
 
 
       
Remaining shares reserved for the ESPP as of March 31, 2007
   
876,143
 
       


Future Issuances 
 
As of March 31, 2007, EMCORE has reserved a total of 20,268,252 shares of its common stock for future issuances as follows:

 
 
Number of
Common Stock
Shares Available
For exercise of outstanding common stock options
   
6,082,383
 
For conversion of subordinated notes
   
12,016,930
 
For future issuances to employees under the ESPP plan
   
876,143
 
For future common stock option awards
   
1,292,796
 
         
Total reserved
   
20,268,252
 


NOTE 4.  Sale of GELcore Investment

On August 31, 2006, EMCORE sold its 49% membership interest in GELcore, LLC for $100.0 million to General Electric Corporation, which prior to the transaction owned the remaining 51% membership interest in GELcore.  For the three and six months ended March 31, 2006, EMCORE recognized a loss of $0.4 million and income of $0.2 million, respectively, related to GELcore, which was recorded as a component of other income and expenses.


NOTE 5.  Acquisitions

K2 Optronics, Inc.

On January 12, 2006, EMCORE entered into an Agreement and Plan of Merger (“Merger Agreement”) with K2 Optronics, Inc. (“K2”), a privately-held company located in Sunnyvale, CA and EMCORE Optoelectronics Acquisition Corporation, a wholly owned subsidiary of EMCORE (“Merger Sub”).  Pursuant to the Merger Agreement, EMCORE acquired K2 in a transaction in which Merger Sub merged with and into K2, with K2 becoming a wholly owned subsidiary of EMCORE. EMCORE, an investor in K2, paid approximately $4.1 million in EMCORE common stock, and paid approximately $0.7 million in transaction-related expenses, to acquire the remaining part of K2 that EMCORE did not already own. Prior to the transaction EMCORE owned a 13.6% equity interest in K2 as a result of a $1.0 million investment that EMCORE made in K2 in October 2004. In addition, K2 was a supplier to EMCORE of analog external cavity lasers for CATV applications. In connection with the merger, EMCORE issued a total of 548,688 shares of EMCORE common stock, no par value, (based on a 20-trading day weighted average price), to K2’s shareholders. 


 Including EMCORE’s initial $1.0 million investment in K2, the purchase price was allocated as follows:

(in thousands)
K2 Optronics, Inc. Acquisition
 
 
         
Net purchase price
 
$
5,135
 
Historical net liabilities acquired
   
872
 
         
Excess purchase price allocated to goodwill
 
$
6,007
 

Historical net assets acquired in the acquisition were as follows:

         
Current assets
 
$
1,374
 
Fixed assets
   
388
 
Intellectual property
   
583
 
Current liabilities
   
(2,412
)
Debt
   
(805
)
 
       
Historical net liabilities acquired
 
$
(872
)

Force, Inc.

On December 18, 2005, EMCORE entered into an Asset Purchase Agreement with Force, Inc., a privately-held company located in Christiansburg, Virginia. In connection with the asset purchase, EMCORE issued 240,000 shares of EMCORE common stock, no par value, with a market value of $1.6 million at the measurement date and paid $0.5 million in cash. The acquisition included Force’s fiber optic transport and video broadcast products, technical and engineering staff, certain assets and intellectual properties and technologies. The purchase price was allocated as follows:

(in thousands)
Force, Inc. Acquisition
 
 
         
Net purchase price
 
$
2,125
 
Historical net assets acquired
   
(985
)
         
Excess purchase price allocated to goodwill
 
$
1,140
 

Historical net assets acquired in the acquisition were as follows:

         
Current assets
 
$
450
 
Inventory
   
570
 
Fixed assets
   
60
 
Intellectual property
   
1,075
 
Current liabilities
   
(1,170
)
         
Historical net assets acquired
 
$
985
 
 

Phasebridge, Inc.

On November 8, 2005, EMCORE entered into an Asset Purchase Agreement with Phasebridge, Inc., a privately-held company located in Pasadena, California. In connection with the asset purchase and based on a closing price of $5.46, EMCORE issued 128,205 shares of EMCORE common stock, no par value, that were valued in the transaction at $0.7 million.  The acquisition included Phasebridge’s products, technical and engineering staff, certain assets, and intellectual properties and technologies. The purchase price was allocated as follows:

(in thousands)
Phasebridge, Inc. Acquisition
 
 
         
Net purchase price
 
$
700
 
Historical net assets acquired
   
(678
)
         
Excess purchase price allocated to goodwill
 
$
22
 

Historical net assets acquired in the acquisition were as follows:

Current Assets
 
$
39
 
Fixed Assets
   
127
 
Intangible Assets
   
603
 
Current Liabilities
   
(91
)
         
Historical net assets acquired
 
$
678
 


All of these transactions were accounted for as purchases in accordance with SFAS 141, Business Combinations; therefore, the tangible assets acquired were recorded at fair value on the acquisition date. These acquisitions were not significant on a pro-forma basis, and therefore, pro-forma financial statements have not been presented. The operating results of the businesses acquired are included in the accompanying consolidated statement of operations from the date of acquisition. All of these acquired businesses are part of EMCORE's Fiber Optics operating segment.
 

NOTE 6.  Marketable Securities

Investments in securities with remaining maturities in excess of three months, which are held for purposes of funding our current operations are classified as available for sale and reported as short-term marketable securities in the condensed consolidated balance sheets.  The investments consist primarily of auction rate securities, which have interest rates that reset generally every 7 to 35 days.  There were no unrealized holding gains or losses on the marketable securities as of March 31, 2007 and September 30, 2006 and the fair value of these securities was $48.4 million and $101.4 million at March 31, 2007 and September 30, 2006, respectively.


NOTE 7.  Discontinued Operations and Restructuring Charges

Discontinued Operations

On August 18, 2006, EMCORE completed the sale of the assets of its Electronic Materials & Device (“EMD”) division, including inventory, fixed assets, and intellectual property, pursuant to an Asset Purchase Agreement, dated July 19, 2006 (Purchase Agreement), between EMCORE, IQE, plc, a public limited company organized under the laws of the United Kingdom, and IQE RF, LLC, a New Jersey limited liability company and a wholly owned subsidiary of IQE.  Under the terms of the Purchase Agreement, EMCORE sold the EMD division to IQE for $16.0 million, consisting of $13.0 million in cash and $3.0 million in the form of a secured promissory note of IQE, guaranteed by IQE's affiliates. The note was completely repaid in fiscal 2007, via four quarterly installments at an annual interest rate of 7.5%.  In accordance with the provisions of SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, EMCORE’s financial statements have been reclassified to reflect the EMD division as a discontinued operation for all prior periods presented.  EMD revenues from operations for the three and six months ended March 31, 2006 were $5.0 million and $9.2 million, respectively.  For the three months ended March 31, 2006 income from operations related to EMD was $0.2 million and losses from operations for the six months ended March 31, 2006 were $44,000.


In November 2003, EMCORE sold its TurboDisc capital equipment business in an asset sale to a subsidiary of Veeco Instruments Inc. (“Veeco”). In March 2006, EMCORE received manufacturing equipment valued at $2.0 million as a final earn-out payment from Veeco in connection with Veeco’s second year of net sales of TurboDisc products, which was recognized as a gain on disposal of discontinued operations for the three and six months ended March 31, 2006. 


Restructuring Charges

As EMCORE has acquired businesses and consolidated them into its existing operations, EMCORE has incurred charges associated with the transition and integration of those activities. Expenses recognized as restructuring charges include costs associated with the integration of several business acquisitions and EMCORE’s overall cost-reduction efforts.   Restructuring charges are included in SG&A.  The charges recognized in fiscal year 2006 were primarily related to our Photovoltaics operating segment. Fiscal 2007 charges relate to our Fiber Optics operating segment.  These restructuring efforts are expected to be completed in calendar year 2008.  Costs incurred and expected to be incurred consist of the following:

(in thousands)
 
 
 
Amount Incurred in Three-Month Period
   
Cumulative Amount Incurred to Date
   
Amount Expected in Future Periods
   
Total Amount Expected to be Incurred
 
   
 
   
 
         
 
 
One-time termination benefits
  $
512
    $
1,085
    $
2,353
    $
3,438
 
Contract termination Costs
   
-
     
295
     
344
     
639
 
Other associated costs
   
3
     
3,005
     
467
     
3,472
 
Total restructuring charges
  $
515
    $
4,385
    $
3,164
    $
7,549
 

 The following table sets forth changes in the accrual for restructuring charges:

(in thousands)
 
 
Balance at September 30, 2006
 
$
256
 
Increase in liability due to restructuring of corporate headquarters
   
932
 
Costs paid or otherwise settled
 
 
(369
)
   
 
 
 
Balance at March 31, 2007
 
$
819
 


NOTE 8. Investments

In April 2005, EMCORE divested product technology focused on gallium nitride-based power electronic devices for the power device industry.  The divesture resulted in a new company, Velox Semiconductor Corporation (“Velox”) and EMCORE contributed intellectual property and equipment for a 19.2% ownership stake in Velox.  During fiscal 2006, EMCORE reduced its voting percentage and relinquished its Velox Board seat, and its right to a Velox Board seat.  As a result of these modifications, EMCORE reported its investment in Velox under the cost method of accounting for the three and six months ended March 31, 2007. Previously, under the equity method of accounting, EMCORE recognized losses of $0.2 million and $0.3 million, for the three and six months ended March 31, 2006, respectively, which were recorded as a component of other income and expenses. Under the cost method of accounting, the Velox investment is carried at cost and adjusted only for other-than-temporary declines in fair value, distribution of earnings and additional investments. As of March 31, 2007, EMCORE's net investment in Velox amounted to approximately $1.0 million.

On November 29, 2006, EMCORE invested $13.5 million, and incurred $0.4 million in transaction costs, in WorldWater & Solar Technologies Corporation (“WorldWater”), a leader in solar electric engineering, water management solutions and solar energy installations and products. This investment represents EMCORE’s first tranche of its intended $18.0 million investment, in return for convertible preferred stock and warrants of WorldWater, equivalent to approximately 31% equity ownership in WorldWater, or approximately 26.5% on a fully diluted basis.  In connection with the investment, EMCORE received two seats on WorldWater's Board of Directors.  EITF 02-14, Whether an Investor Should Apply the Equity Method of Accounting to Investments Other Than Common Stock, provides guidance on whether an investor should apply the equity method of accounting to investments other than common stock.  In accordance with EITF 02-14, although the investment in WorldWater gives us the ability to exercise significant influence over the operating and financial policies of the investee, since the investment does not qualify as in-substance common stock the equity method of accounting is not appropriate.  In-substance common stock is an investment in an entity that has risk and reward characteristics that are substantially similar to the entity’s common stock.  The risk and reward characteristics of our investment are not substantially similar to WorldWater’s common stock because our investment’s liquidation preference is considered substantive. Therefore, we are accounting for the investment in WorldWater under the cost method of accounting and evaluating it for other-than-temporary impairment each reporting period.  As of March 31, 2007, our net investment in WorldWater amounted to approximately $13.9 million.  See Note 19 - Subsequent Events for discussion of an additional strategic investment in WorldWater.


NOTE 9.  Receivables

The components of accounts receivable consisted of the following:

 
(in thousands)
 
As of
 March 31,
2007
   
As of
September 30, 
2006
 
             
Accounts receivable
  $
31,942
    $
25,597
 
Accounts receivable – unbilled
   
5,176
     
2,342
 
Accounts receivable, gross
   
37,118
     
27,939
 
Allowance for doubtful accounts
    (673 )     (552 )
                 
Total accounts receivable, net
  $
36,445
    $
27,387
 


Receivables from related parties consisted of the following: 

 
(in thousands)
 
As of
March 31,
2007
   
As of
September 30,
2006
 
             
Current assets:
           
Velox investment-related
  $
332
    $
332
 
Employee loans
   
-
     
121
 
                 
Subtotal
   
332
     
453
 
                 
Long-term assets:
               
Employee loans
   
-
     
82
 
                 
Total receivables from related parties
  $
332
    $
535
 
 
 
Employee Loans

From time to time, prior to July 2002, EMCORE loaned money to certain of its executive officers and directors. Pursuant to due authorization of EMCORE's Board of Directors, EMCORE loaned $85,000 to Mr. Werthan, the former Chief Financial Officer in December 1995.  This loan does not bear interest and provided for offset of the loan via bonuses payable to Mr. Werthan over a period of up to 25 years.  As discussed in Note 19 – Subsequent Events, in connection with Mr. Werthan’s resignation in February 2007 and pursuant to the terms of his promissory note, the Board of Directors forgave the remaining portion of his outstanding loan that totaled $82,000.  Mr. Werthan was responsible for the personal taxes related to the loan forgiveness.

The remaining related party receivable balance approximately $121,000 as of September 30, 2006 relates to multiple interest bearing loans from EMCORE to an officer (who is not an executive officer) that were made during 1997 through 2000 and were payable on demand.  These loans, including accrued interest, were paid back to the Company in December 2006.


NOTE 10.  Inventory, net

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)
 
As of
March 31,
2007
   
As of
September 30,
2006
 
             
Raw materials
  $
18,820
    $
14,990
 
Work-in-process
   
5,990
     
6,074
 
Finished goods
   
10,400
     
8,660
 
Inventory, gross
   
35,210
     
29,724
 
                 
Less: reserves
    (7,967 )     (6,472 )
                 
Total inventory, net
  $
27,243
    $
23,252
 

We establish provisions for excess and obsolete inventories after evaluation of historical sales and usage, current economic trends, market conditions, product rationalization, forecasted sales, product lifecycles, and current inventory levels. This evaluation requires us to make estimates regarding future events in an industry where rapid technological changes are prevalent. It is possible that increases in inventory reserves may be required in the future if there is a decline in market conditions or if changes in expected product lifecycles occur. Alternatively, if market conditions improve or product lifecycles extend, we may have greater success in selling inventory that had previously been written down. In either event, the actual value of our inventory may be higher or lower and recognition of such difference will affect our cost of sales in a future period.


NOTE 11.  Property, Plant, and Equipment, net

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

 
(in thousands)
 
As of
March 31, 2007
   
As of
September 30, 2006
 
             
Land
  $
1,502
    $
1,502
 
Building and improvements
   
40,251
     
40,035
 
Equipment
   
72,919
     
64,275
 
Furniture and fixtures
   
5,519
     
5,362
 
Leasehold improvements
   
2,624
     
2,696
 
Construction in progress
   
2,330
     
8,553
 
                 
Property, plant and equipment, gross
   
125,145
     
122,423
 
                 
Less: accumulated depreciation and amortization
    (70,909 )     (67,237 )
                 
Total property, plant and equipment, net
  $
54,236
    $
55,186
 

As of March 31, 2007 and September 30, 2006, EMCORE did not have any significant capital lease agreements.


NOTE 12.  Goodwill and Intangible Assets, net

The following table sets forth changes in the carrying value of goodwill by reportable segment:
 
(in thousands)
 
Fiber Optics
   
Photovoltaics
   
Total
 
                   
Balance as of September 30, 2006
  $
20,063
    $
20,384
    $
40,447
 
                         
Acquisition – earn-out payments
   
13
     
-
     
13
 
                         
Balance as of March 31, 2007
  $
20,076
    $
20,384
    $
40,460
 
 

The following table sets forth changes in the carrying value of intangible assets by reportable segment:
 
(in thousands)
 
As of March 31, 2007
   
As of September 30, 2006
 
   
Gross Assets
   
Accumulated
Amortization
   
Net Assets
   
Gross Assets
   
Accumulated
Amortization
   
Net Assets
 
                                     
Fiber Optics:
                                   
Patents
  $
705
    $ (281 )   $
424
    $
579
    $ (218 )   $
361
 
Ortel acquired IP
   
3,274
      (2,676 )    
598
     
3,274
      (2,394 )    
880
 
JDSU acquired IP
   
1,040
      (413 )    
627
     
1,040
      (314 )    
726
 
Alvesta acquired IP
   
193
      (167 )    
26
     
193
      (148 )    
45
 
Molex acquired IP
   
558
      (391 )    
167
     
558
      (335 )    
223
 
Phasebridge acquired IP
   
603
      (355 )    
248
     
603
      (244 )    
359
 
Force acquired IP
   
1,075
      (374 )    
701
     
1,075
      (227 )    
848
 
K2 acquired IP
   
583
      (197 )    
386
     
583
      (126 )    
457
 
Subtotal
   
8,031
      (4,854 )    
3,177
     
7,905
      (4,006 )    
3,899
 
                                                 
Photovoltaics:
                                               
Patents
   
504
      (205 )    
299
     
382
      (162 )    
220
 
Tecstar acquired IP
   
1,900
      (1,900 )    
-
     
1,900
      (1,726 )    
174
 
Subtotal
   
2,404
      (2,105 )    
299
     
2,282
      (1,888 )    
394
 
                                                 
Total
  $
10,435
    $ (6,959 )   $
3,476
    $
10,187
    $ (5,894 )   $
4,293
 
 
 
Based on the carrying amount of the intangible assets, and assuming no future impairment of the underlying assets, the estimated future amortization expense is as follows:
 
(in thousands)
 
 
 
 
 
 
 
 
 
Period ending:
 
 
 
 
Six-month period ended September 30, 2007
 
$
624
 
Year ended September 30, 2008
 
 
1,071
 
Year ended September 30, 2009
 
 
765
 
Year ended September 30, 2010
 
 
653
 
Year ended September 30, 2011
 
 
191
 
Thereafter
 
 
172
 
Total future amortization expense
 
$
3,476
 

Goodwill represents the excess of the purchase price of an acquired business or assets over the fair value of the identifiable assets acquired and liabilities assumed. 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 base and contracts. Intangible assets are amortized using the straight-lined method over estimated useful lives ranging from one to fifteen years.

EMCORE evaluates its goodwill and intangible assets for impairment on an annual basis, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Circumstances that could trigger an impairment test include but are not limited to: a significant adverse change in the business climate or legal factors; an adverse action or assessment by a regulator; unanticipated competition; loss of key personnel; the likelihood that a reporting unit or significant portion of a reporting unit will be sold or otherwise disposed; results of testing for recoverability of a significant asset group within a reporting unit; and recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit. The determination as to whether a write-down of goodwill or intangible assets is necessary involves significant judgment based on the short-term and long-term projections of the future performance of the operating segment to which the goodwill or intangible assets are attributed. As of December 31, 2006, and 2005, EMCORE tested for impairment of its goodwill and intangible assets.  In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 142, Goodwill and Other Intangible Assets, the fair value of the reporting units was determined by using a valuation technique based on each reporting unit’s multiples of revenues. Based on that analysis, we determined that the carrying amount of the reporting units did not exceed their fair value.


NOTE 13.  Accrued Expenses and Other Current Liabilities

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

 
 
(in thousands)
 
 
As of
March 31,
2007
 
As of
September 30,
2006
Compensation-related
 
$
6,476
   
$
6,973
 
Interest
   
1,830
     
1,830
 
Warranty
   
1,043
     
1,074
 
Professional fees
   
3,172
     
2,529
 
Royalty
   
474
     
535
 
Self insurance
   
722
     
784
 
Deferred revenue and customer deposits
   
475
     
324
 
Tax-related
   
3,755
     
4,418
 
Litigation-related
   
700
     
700
 
Other
   
3,121
     
2,915
 
                 
Total accrued expenses and other current liabilities
 
$
21,768
   
$
22,082
 


Product Warranty Reserves. EMCORE provides its customers with limited rights of return for non-conforming shipments and warranty claims for certain products. In accordance with SFAS No. 5, Accounting for Contingencies, EMCORE makes estimates of product warranty expense using historical experience rates as a percentage of revenue and accrues estimated warranty expense as a cost of revenue. We estimate the costs of our warranty obligations based on our historical experience of known product failure rates, use of materials to repair or replace defective products and service delivery costs incurred in correcting product failures. In addition, from time to time, specific warranty accruals may be made if unforeseen technical problems arise. Should our actual experience relative to these factors differ from our estimates, we may be required to record additional warranty reserves. Alternatively, if we provide more reserves than we need, we may reverse a portion of such provisions in future periods.


NOTE 14.  Convertible Subordinated Notes

In May 2001, EMCORE issued $175.0 million aggregate principal amount of its 5% convertible subordinated notes due in May 2006 (“2006 Notes”). In December 2002, EMCORE purchased $13.2 million principal amount of the 2006 Notes at prevailing market prices for an aggregate of approximately $6.3 million, resulting in a gain of approximately $6.6 million after netting unamortized debt issuance costs of approximately $0.3 million. In February 2004, EMCORE exchanged approximately $146.0 million, or 90.2%, of its remaining 2006 Notes for approximately $80.3 million aggregate principal amount of new 5% Convertible Senior Subordinated Notes due May 15, 2011 (“2011 Notes”) and approximately 7.7 million shares of EMCORE common stock. Interest on the 2011 Notes is payable in arrears semiannually on May 15 and November 15 of each year. The notes were convertible into EMCORE common stock at a conversion price of $8.06 per share, subject to adjustment under customary anti-dilutive provisions. They also are redeemable should EMCORE's common stock price reach $12.09 per share. As a result of this transaction, EMCORE reduced debt by approximately $65.7 million, and recorded a gain from early debt extinguishment of approximately $12.3 million.

In November 2005, EMCORE exchanged $14.4 million aggregate principal amount of the 2006 Notes for $16.6 million aggregate principal amount of newly issued Convertible Senior Subordinated Notes due May 15, 2011 (“New 2011 Notes”) pursuant to an Exchange Agreement (“Agreement”) with Alexandra Global Master Fund Ltd. (“Alexandra”).  The terms of the New 2011 Notes are identical in all material respects to the 2011 Notes.  The New 2011 Notes are ranked pari passu with the existing 2011 Notes.  The New 2011 Notes will be convertible at any time prior to maturity, unless previously redeemed or repurchased by EMCORE, into the shares of EMCORE common stock, no par value, at the conversion rate of 124.0695 shares of common stock per $1,000 principal amount.  The effective conversion rate was $8.06 per share of common stock, subject to adjustment under customary anti-dilutive provisions. They also are redeemable should EMCORE's common stock price reach $12.09 per share.  As a result of this transaction, EMCORE recognized approximately $1.1 million in the first quarter of fiscal 2006. EMCORE will also incur an additional expense of approximately $1.1 million over the life of the subordinated notes issued to Alexandra, which will be charged as interest expense. Furthermore, the 2006 Notes exchanged by Alexandra represented approximately 91.4% of the $15.8 million total amount of existing 2006 Notes outstanding at the time of the transaction.  EMCORE paid the remaining $1.4 million of 2006 Notes on the May 15, 2006 maturity date.  See Note 19 - Subsequent Events for recent modifications to the convertible subordinated notes and April 2007 note settlement.


For the three months ended March 31, 2007 and 2006, interest expense relating to the notes approximated $1.3 million and $1.4 million, respectively, and $2.5 million and $2.7 million, respectively, for the six months ended March 31, 2007 and 2006, respectively.
 
The $2.3 million of costs incurred in connection with the issuance of the 2006 Notes, 2011 Notes and the New 2011 Notes were capitalized and are being amortized to SG&A expense on a straight-line basis for over the remaining life of the notes which approximates the charge using the implied interest method.  Issuance costs related to the notes, net of amortization, was $1.2 million and $1.1 million as of March 31, 2007 and September 30, 2006, respectively. The unamortized portions of the issuance costs are included in  “Prepaid expenses and other assets” on the condensed consolidated balance sheets.


NOTE 15. Employee Benefit Plans

EMCORE has a Savings Plan that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the Savings Plan, participating employees may defer a portion of their pretax earnings, up to the Internal Revenue Service annual contribution limit. All employer contributions are made in EMCORE's common stock. For the three and six months ended March 31, 2007, EMCORE contributed approximately $0.3 million and $0.5 million, respectively, in common stock to the Savings Plan, compared to $0.3 million and $0.4 million for the three and six months ended March 31, 2006, respectively.


NOTE 16.  Commitments and Contingencies

EMCORE leases certain land, facilities, and equipment under non-cancelable operating leases. The leases 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 amounted to approximately $0.4 million and $0.6 million for the three months ended March 31, 2007 and 2006 respectively, and $0.8 million and $1.1 million for the six months ended March 31, 2007 and 2006, respectively.

As of March 31, 2007, EMCORE had six standby letters of credit issued totaling approximately $1.2 million.

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, the operating results of a particular reporting period could be materially adversely affected. The Company settled certain matters during 2007 that did not individually or in the aggregate have a material impact on the Company’s results of operations.


Shareholder Derivative Litigation Relating to Historical Stock Option Practices

On February 1, 2007, Plaintiff Lewis Edelstein filed a purported stockholder derivative action (the “Federal Court 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 United States District Court for the District of New Jersey, Edelstein v. Brodie, et. al., Case No. 3:07-cv-00596-FLW-JJH (D.N.J.).   On May 22, 2007, Plaintiffs Kathryn Gabaldon and Michael Sackrison each filed a purported stockholder derivative action against the Individual Defendants, and the Company as nominal defendant, in the Superior Court of New Jersey, Somerset County, Gabaldon v. Brodie, et. al., Case No. 3:07-cv-03185-FLW-JJH (D.N.J.) and Sackrison v. Brodie, et. al., Case No. 3:07-cv-00596-FLW-JJH (D.N.J.) (collectively, the “State Court Actions”).


Both the Federal Court Action and the State Court Actions alleged, using essentially identical contentions that the Individual Defendants engaged in improprieties and violations of law in connection with the Company’s historical issuances of stock options.  Each of the actions seeks the same relief on behalf of the Company, including, among other things, damages, equitable relief, corporate governance reforms, an accounting, rescission, restitution and costs and disbursements of the lawsuit.  On July 10, 2007, the State Court Actions were removed to the United States District Court for the District of New Jersey.

On September 26, 2007, the plaintiff in the Federal Court Action signed an agreement in principle with the Individual Defendants and the Company to settle that litigation in accordance with the Memorandum of Understanding (the “MOU”) filed as Exhibit 10.10 to this Annual Report on Form 10-K.  That same day, the plaintiffs in the State Court Actions advised the Federal Court that the settlement embodied in the MOU would also constitute the settlement of the State Court Actions.

The MOU provides that the Company will adhere to certain policies and procedures relating to the issuance of stock options, stock trading by directors, officers and employees, the composition of its Board of Directors, and the functioning of the Board’s Audit and Compensation Committees.  The MOU also provides for the payment of $700,000 relating to plaintiff’s attorneys’ fees, costs and expenses, which the Company’s insurance carrier has committed to pay on behalf of the Company.  To be fully implemented, the MOU will be embodied in a more detailed stipulation of settlement and will be expressly conditioned on Court approval following a period for comment by potentially affected parties.

We have recorded $700,000 as a liability for the stipulated settlement as of September 30, 2006 since events that led to the litigation existed as of that date.  Although we anticipate that our insurance carrier will cover the stipulated settlement, we have not recorded any receivable, or gain contingency, since the settlement is still contingent upon certain future events.

 
NASDAQ Delisting Proceeding
 
On December 18, 2006, EMCORE received a NASDAQ Staff Determination letter stating that the Company was not in compliance with the filing requirements for continued listing set forth in NASDAQ Marketplace Rule 4310(c)(14) and that its common stock was subject to delisting from The NASDAQ Stock Market. The notice, which the Company expected, was issued as a result of the Company’s failure to file its annual report on Form 10-K for the year ended September 30, 2006 with the SEC by the required deadline. The Company had previously filed a Form 12b-25 with the SEC indicating that the Company would be unable to file its Form 10-K by the original filing deadline of December 14, 2006 due to the Company’s ongoing review of its prior stock option grants.
 
On February 13, 2007, EMCORE received a NASDAQ Staff Determination letter stating that the Company was not in compliance with the filing requirements for continued listing set forth in NASDAQ Marketplace Rule 4310(c)(14) and that its common stock was subject to delisting from The NASDAQ Stock Market. The notice, which the Company expected, was issued as a result of the Company’s failure to file its report on Form 10-Q for the fiscal quarter ended December 31, 2006 with the SEC by the required deadline. The Company had previously filed a Form 12b-25 with the SEC indicating that the Company would be unable to file its Form 10-Q by the original filing deadline of February 9, 2007 due to the Company’s ongoing review of its prior stock option grants.

The Company attended a hearing before the NASDAQ Listing Qualifications Panel (the “Panel”) on February 15, 2007 to review both the Staff Determination letter received by the Company on December 18, 2006 as a result of the Company's inability to file its Form 10-K for the year ended September 30, 2006 by the required deadline and the Staff Determination letter received by the Company on February 13, 2007 as a result of the Company's inability to file its Form 10-Q for the quarter ended December 31, 2006 by the required deadline.

On April 3, 2007, the Company received notice from the NASDAQ Stock Market that the Panel granted the Company’s request for continued listing on the NASDAQ Stock Market subject to the Company filing both its Form 10-K for the fiscal year ended September 30, 2006 and its Form 10-Q for the quarter ended December 31, 2006 with the SEC by no later than May 10, 2007.

On May 10, 2007, the Company received notice from the NASDAQ Stock Market that the Panel had granted the Company’s request for an extension of the May 10, 2007 deadline. The extension was conditioned on the Company filing its Form 10-K for the fiscal year ended September 30, 2006, its Form 10-Q for the quarter ended December 31, 2006 and all required restatements with the SEC by no later than June 18, 2007.

On May 14, 2007, the Company received a NASDAQ Staff Determination letter stating that the Company was not in compliance with the filing requirements for continued listing set forth in NASDAQ Marketplace Rule 4310(c)(14) and that its common stock was subject to delisting from the NASDAQ Stock Market. The notice, which the Company expected, was issued as a result of the Company’s failure to file its report on Form 10-Q for the fiscal quarter ended March 31, 2007 with the SEC by the required deadline. The Company had previously filed a Form 12b-25 with the SEC indicating that the Company would be unable to file its Form 10-Q by the original filing deadline of May 10, 2007 due to the Company’s ongoing review of its prior stock option grants.


On May 25, 2007, EMCORE filed an appeal of the May 10, 2007 Panel decision to grant the Company’s request for an extension through June 18, 2007.  EMCORE appealed the May 25, 2007 decision on the sole ground that the Panel could not grant the Company beyond June 18, 2007 to file the missing Form 10-K, Form 10-Qs and restatements.  On June 8, 2007, the Company requested that NASDAQ stay the Panel’s May 10, 2007 decision pending the Company’s appeal of that action.

On June 15, 2007, the Company received a letter from the NASDAQ Stock Market stating that the NASDAQ Listing and Hearing Review Council (the “Listing Council”) has stayed the previously reported May 10, 2007 decision of the Panel and any future Panel determinations to suspend the Company’s securities from trading on NASDAQ, pending further review by the Listing Council. Consequently, the Company’s securities would continue to be listed and tradable on the NASDAQ Global Market System until further action by the Listing Council to lift the stay, which would not occur prior to August 10, 2007.  In addition, the Company was invited to submit any additional information to the Listing Council for consideration in its review by no later August 10, 2007.

On August 10, 2007, the Company submitted a letter, in response to the Listing Council’s invitation, requesting that the Listing Council exercise its discretionary authority in favor of granting the Company an additional extension to regain compliance with NASDAQ’s filing requirement.  The Company is awaiting the Listing Council’s response to this letter.

On August 13, 2007, the Company received a NASDAQ Staff Determination letter stating that the Company was not in compliance with the filing requirements for continued listing set forth in NASDAQ Marketplace Rule 4310(c)(14) and that its common stock was subject to delisting from the NASDAQ Stock Market.  The notice, which the Company expected, was issued as a result of the Company’s failure to file its Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2007 with the SEC by the required deadline. The Company had previously filed a Notification of Late Filing on Form 12b-25 with the SEC indicating that the Company would be unable to file this Quarterly Report by the original filing deadline of August 9, 2007 due to the Company’s ongoing review of its prior stock option grants.

On October 2, 2007, the Company received a NASDAQ Staff Determination letter stating that the Company was not in compliance with holding its annual meeting of shareholders within twelve months of the Company’s fiscal year end, as set forth in NASDAQ Marketplace Rules 4350(e) and 4350(g) and that its common stock was subject to delisting from the NASDAQ Stock Market.  The notice, which the Company expected, was issued as a result of the Company’s failure to hold its annual shareholder meeting by September 30, 2007.

On October 5, 2007, the Company has received a decision from the Listing Council stating that, pursuant to its discretionary authority, it has granted the Company an exception and allowed the Company until December 4, 2007 to demonstrate compliance with all of the Global Market continued listing requirements (the “Decision”).  The Decision requires that the Company file its Form 10-K for the fiscal year ended September 30, 2006 and its Form 10-Q for the quarters ended December 31, 2006, March 31, 2007 and June 30, 2007 with the SEC by the close of business on December 4, 2007.  The Decision also provides that if the Company has not filed these delinquent reports with the SEC by the close of business on December 4, 2007, the Company’s securities will be suspended at the opening of business on December 6, 2007.

Although we believe the filing of our Annual Report on Form 10-K as of September 30, 2006 and our concurrent filings of the Form 10-Qs for the quarters ended December 31, 2006, March 31, 2007, and June 30, 2007 satisfy the Panel’s requirements, we cannot assure you that the Panel will be satisfied with these filings.  See the Explanatory Note in our Annual Report on Form 10-K for the fiscal year ended September 30, 2006 for a discussion of stock option restatements that caused the delay in our SEC filings.


SEC Investigation

The Company informed the staff of the SEC of the Special Committee’s investigation on November 6, 2006.  After the Company’s initial contact with the SEC, the SEC opened a non-public investigation concerning the Company’s historic option granting practices since the Company’s initial public offering.  The Company has cooperated fully with the SEC’s investigation.  Although we cannot predict the outcome of this matter, we do not expect that such matter will have a material adverse effect on our consolidated financial position or results of operations.
 
Indemnification Obligations

Subject to certain limitations, we are obligated to indemnify our current and former directors, officers and employees in connection with the investigation of our historical stock option practices, related government investigation and shareholder litigation. These obligations arise under the terms of our certificate of incorporation, our bylaws, applicable contracts, and New Jersey law. The obligation to indemnify generally means that we are required to pay or reimburse the individuals’ reasonable legal expenses and possibly damages and other liabilities incurred in connection with these matters. We are currently paying or reimbursing legal expenses being incurred in connection with these matters by a number of our current and former directors, officers and employees. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a director and officer liability insurance policies that limits its exposure and enables it to recover a portion of any future amounts paid. 


Intellectual Property Lawsuits

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 (Optium) in the United States District Court for the Western District of Pennsylvania for patent infringement. In the suit, EMCORE 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, EMCORE and JDSU filed a second patent suit in the same court against Optium alleging infringement of JDSU's patent 6,519,374.  On March 15, 2007, Optium filed a declaratory judgment action against the Company and JDSU. Optium seeks in this litigation a declaration that certain products of Optium do not infringe United States Patent No. 6,519,374 ("the '374 patent") and that the patent is invalid. The '374 patent is assigned to JDSU and licensed to the Company. Other than the filing of a Complaint, Optium has taken no action in this case, and the Company has not been served.


NOTE 17.  Segment Data and Related Information

EMCORE has two operating segments: Fiber Optics and Photovoltaics.  EMCORE's Fiber Optics revenue is derived primarily from sales of optical components and subsystems for cable television (CATV), fiber to the premise (FTTP), enterprise routers and switches, telecom grooming switches, core routers, high performance servers, supercomputers, and satellite communications data links.  EMCORE's Photovoltaics revenue is derived primarily from the sales of solar power conversion products, including solar cells, covered interconnect solar cells, and solar panels.   EMCORE evaluates its reportable segments in accordance with SFAS 131, Disclosures About Segments of an Enterprise and Related Information. EMCORE’s Chief Executive Officer is EMCORE’s Chief Operating Decision Maker pursuant to SFAS 131, and he allocates resources to segments based on their business prospects, competitive factors, net 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 EMCORE's operating segments.
 
(in thousands)
Segment Revenue
 
Three Months Ended
March 31, 2007
   
Three Months Ended
March 31, 2006
 
   
Revenue
   
% of Revenue
   
Revenue
   
% of Revenue
 
   
 
   
 
   
 
   
 
 
Fiber Optics
  $
26,237
      66 %   $
25,852
      72 %
Photovoltaics
   
13,601
     
34
     
10,263
     
28
 
Total revenue
  $
39,838
      100 %   $
36,115
      100 %

(in thousands)
Segment Revenue
 
Six Months Ended
March 31, 2007
   
Six Months Ended
March 31, 2006
 
   
Revenue
   
% of Revenue
   
Revenue
   
% of Revenue
 
   
 
   
 
   
 
   
 
 
Fiber Optics
  $
51,559
      66 %   $
50,857
      71 %
Photovoltaics
   
26,953
     
34
     
20,987
     
29
 
Total revenue
  $
78,512
      100 %   $
71,844
      100 %


The following table sets forth EMCORE's consolidated revenue by geographic region.  Revenue was assigned to geographic regions based on the customers’ or contract manufacturers’ billing address.

 
(in thousands)
Geographic Revenue
 
Three Months Ended
March 31, 2007
   
Three Months Ended
March 31, 2006
 
   
Revenue
   
% of Revenue
   
Revenue
   
% of Revenue
 
   
 
   
 
   
 
   
 
 
North America
  $
28,762
      72 %   $
29,525
      82 %
Asia and South America
   
8,267
     
21
     
5,437
     
15
 
Europe
   
2,809
     
7
     
1,153
     
3
 
Total revenue
  $
39,838
      100 %   $
36,115
      100 %
 
(in thousands)
Geographic Revenue
 
Six Months Ended
March 31, 2007
   
Six Months Ended
March 31, 2006
 
   
Revenue
   
% of Revenue
   
Revenue
   
% of Revenue
 
   
 
   
 
   
 
   
 
 
North America
  $
54,586
      69 %   $
59,412
      83 %
Asia and South America
   
19,303
     
25
     
10,685
     
15
 
Europe
   
4,623
     
6
     
1,747
     
2
 
Total revenue
  $
78,512
      100 %   $
71,844
      100 %


The following table sets forth operating losses attributable to each EMCORE operating segment:

(in thousands)
Statement of Operations Data
 
Three Months Ended
March 31,
   
Six Months Ended
March 31,
 
   
2007
   
2006
   
2007
   
2006
 
                         
Operating loss by segment:
                       
Fiber Optics
  $ (6,408 )   $ (3,096 )   $ (12,613 )   $ (6,026 )
Photovoltaics
    (2,251 )     (1,188 )     (6,247 )     (2,868 )
Corporate
    (4,912 )     (3,235 )     (8,366 )     (3,604 )
Operating loss
    (13,571 )     (7,519 )     (27,226 )     (12,498 )
                                 
Other (income) expenses:
                               
Interest income
    (1,169 )     (246 )     (2,820 )     (576 )
Interest expense
   
1,260
     
1,359
     
2,522
     
2,656
 
Loss from convertible subordinated notes exchange offer
   
-
     
-
     
-
     
1,078
 
Gain from insurance proceeds
    (357 )    
-
      (357 )    
-
 
Equity in net loss of unconsolidated affiliates
   
-
     
547
     
-
     
182
 
Total other expenses
    (266 )    
1,660
      (655 )    
3,340
 
                                 
Loss from continuing  operations
  $ (13,305 )   $ (9,179 )   $ (26,571 )   $ (15,838 )
 

Long-lived assets (consisting of property, plant and equipment, goodwill and intangible assets) for each operating segment are as follows:
 
(in thousands)
Long-lived Assets
 
 
As of
March 31,
2007
   
As of
September 30,
2006
 
             
Fiber Optics
  $
54,165
    $
57,817
 
Photovoltaics
   
44,007
     
42,087
 
Corporate
   
-
     
22
 
                 
Total
  $
98,172
    $
99,926
 


NOTE 18.  Restatement of the Condensed Consolidated Financial Statements

Background

In May 2006, EMCORE’s senior management voluntarily began an inquiry into the Company’s historical stock option granting practices.  The inquiry was not in response to any governmental investigation, shareholder lawsuit, whistleblower compliant or inquiries from media organizations.  Based on an initial review, senior management approached the Board of Directors and recommended that it form a Special Committee to examine EMCORE’s historical stock option granting practices.  The Board of Directors, pursuant to senior management’s recommendation, appointed a Special Committee of three independent EMCORE directors to investigate the Company’s historical stock option granting practices.

Based on this independent investigation, senior management, in consultation with the Audit Committee of the Board of Directors, concluded that it was likely that the most appropriate measurement dates for certain stock option grants, under the appropriate accounting treatment for stock options, differed from the recorded grant dates for such awards.  Accordingly, on November 6, 2006, as initially disclosed in a Current Report on Form 8-K, senior management and the Audit Committee determined that the Company’s financial statements included in its annual and interim reports and any related reports of its independent registered public accounting firm, earnings press releases and similar communications previously issued by the Company for the periods beginning with fiscal year 2000 should no longer be relied upon.
 
After comparing the most appropriate measurement dates to the measurement dates used by the Company in preparing its condensed consolidated financial statements, the Company determined that certain stock options were granted at an exercise price below the fair market value of the Company’s common stock on the most appropriate measurement date. As a result of this determination, the Company has restated the condensed consolidated financial statements for the three and six months ended March 31, 2006 included in this Form 10-Q to record additional stock-based compensation expense of $0.1 million and $0.4 million, respectively.  In addition, EMCORE’s quarterly financial information has been reclassified to reflect the sale of the Company’s EMD division as a discontinued operation.

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