Certain amounts in prior period financial statements have been reclassified to conform to the current year presentation. The reclassification consists of a reduction to revenue of $78,000, a reduction to cost of goods sold of $64,000, and a reduction to research and development expense of $14,000 from the amounts previously recognized in first quarter of fiscal 2007.  This reclassification relates to a cost-sharing R&D arrangement, under which the actual costs of performance are divided between the U.S. Government and the Company, no revenue is recorded and the Company’s R&D expense is reduced for the amount of the cost-sharing receipts.  The Company also reclassed approximately $4.3 million of stock-based compensation expense from tolled options, related to former employees that were incurred in the first quarter of fiscal 2008 from selling, general and administrative expenses to other expense.

For the three and six months ended March 31, 2008, stock options representing 4,674,401 and 4,632,759 shares, respectively, of common stock were excluded from the diluted earnings per share calculations. For the three and six months ended March 31, 2007, stock options representing 2,912,823 and 2,961,337 shares, respectively, of common stock were excluded from the diluted earnings per share calculations. These stock options, and the shares underlying the Company’s convertible senior subordinated notes for the three and six months ended March 31, 2007, were not included in the computation of diluted earnings per share since the Company incurred a net loss for the periods presented and any effect would have been anti-dilutive.

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 our financial statements.

 

 

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SFAS 157 - In September 2006, the FASB issued SFAS 157, Fair Value Measurements, which defines fair value, providing 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.  However, in December 2007, the FASB issued FASB Staff Position FAS 157-b, which deferred the effective date of SFAS No. 157 for one year, as it relates to nonfinancial assets and liabilities. Although the Company continues 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. Although the Company continues to evaluate the application of SFAS 159, 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 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 our financial statements.

SFAS 161 - In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133. SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedge items are accounted for under Statement 133, Accounting for Derivative Instruments and Hedging Activities, and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is intended to enhance the current disclosure framework in SFAS 133 and requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk related contingent features in derivative agreements. The provisions of SFAS 161 are effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. Management is currently assessing the potential impact that the adoption of SFAS 161 could have on our financial statements.

NOTE 3.  Equity

Stock Options

The Company 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. The Company 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 stock options to purchase up to 2,744,118 shares of the Company's common stock.  On March 31, 2008, the 2000 Plan was amended to authorize an additional grant of 3,500,000 stock options for a total of 12,850,000 shares of the Company’s common stock.  As of March 31, 2008, no stock options were available for issuance under the 1995 Plan and 3,649,417 stock 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.

 

 

 

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The following table summarizes the activity under the Option Plans for the six months ended March 31, 2008:

		Number of Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life (in years)
Outstanding as of October 1, 2007			5,697,766			$	5.46
Granted			1,054,750				6.56
Exercised			(1,559,603	)			4.34
Tolled			658,989				5.19
Cancelled and expired			(185,743	)			8.34
Outstanding as of March 31, 2008			5,666,159			$	5.85				7.72
Vested as of March 31, 2008			3,959,717			$	5.60				7.31
Exercisable as of March 31, 2008			2,407,102			$	5.06				6.31

The weighted-average grant date fair value of stock options granted during the six months ended March 31, 2008 and 2007 was $4.34 and $3.99, respectively. The total intrinsic value of stock options exercised during the six months ended March 31, 2008 and 2007 was $11.3 million and $0.2 million, respectively.  The total fair value of stock options vested during the six months ended March, 31 2008 and 2007 was $4.6 million and $2.6 million, respectively. The aggregate intrinsic value of fully vested and expected to vest stock options as of March 31, 2008 was $5.0 million.  The aggregate intrinsic value of exercisable stock options as of March 31, 2008 was $4.3 million.

The following table summarizes the Company’s nonvested shares for the six months ended March 31, 2008:

		Number of Shares				Weighted-Average Grant Date  Fair Value
Nonvested as of October 1, 2007			2,979,486				4.82
Granted			1,054,750				4.34
Vested			(591,346	)			2.49
Forfeited			(183,833	)			6.57
Nonvested as of March 31, 2008			3,259,057			$	4.99

As of March 31, 2008 there was $7.9 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 3.0 years.

 

 

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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), 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 six months ended March 31, 2008 and 2007 was as follows:

(in thousands, except per share data)		Three Months Ended March 31,								Six Months Ended March 31,
		2008				2007				2008				2007
Stock-based compensation expense by award type:
Employee stock options		$	1,405			$	1,344			$	2,480			$	3,670
Employee stock purchase plan			168				-				168				-
Former employee stock options tolled			(58	)			-				4,316				-
Total stock-based compensation expense		$	1,515			$	1,344			$	6,964			$	3,670
Net effect on net loss per basic and diluted share		$	(0.02	)		$	(0.02	)		$	(0.12	)		$	(0.07	)

 

Former Employee Stock Options Tolled

Under the terms of stock option agreements issued under the 2000 Plan, terminated employees who have vested and exercisable stock options have 90 days after the date of termination to exercise stock options. In November 2006, the Company announced suspension of 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, terminated employees were precluded from exercising their stock options during the remaining contractual term (the “Blackout Period”).  To address this issue, the Company’s Board of Directors agreed in April 2007 to approve a stock option grant “modification” for these individuals by extending the normal 90-day exercise period after termination date to a date after which the Company became compliant with its SEC filings and the registration of the stock option shares was once again effective.  The Company communicated the terms of the tolling agreement 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”).   Former 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.  The Company accounted for the modification of stock options issued to terminated employees as additional compensation expense in accordance with SFAS 123(R) in the first quarter of fiscal 2008 and adjusted the stock options to market value in the first quarter of 2008 and recognized income on expired options in first and second quarter of 2008.   All tolled options were either exercised or expired by January 29, 2008.  No tolled stock options were outstanding as of March 31, 2008.

Valuation Assumptions

The Company estimated the fair value of stock options using a Black-Scholes model. 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.

Black-Scholes Weighted-Average Assumptions:		For the Six Months Ended March 31, 2008
Expected dividend yield			0	%
Expected stock price volatility			78.5	%
Risk-free interest rate			2.62	%
Expected term (in years)			5.40
Estimated pre-vesting forfeitures			23.3	%

 

 

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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 value of stock-based payments were valued using the Black-Scholes valuation method with a volatility factor based on the Company’s historical stock prices.

Risk-Free Interest Rate:  The Company 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 the Company’s 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: The Company’s 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 future workforce reduction programs, if any.

 

Preferred Stock

The Company’s Restated Certificate of Incorporation authorizes the Board of Directors to issue up to 5,882,352 shares of preferred stock of the Company upon such terms and conditions having such rights, privileges and preferences as the Board of Directors may determine.  As of March 31, 2008 and September 30, 2007, no shares of preferred stock are issued or outstanding.

Warrants

As of March 31, 2008, the Company had 1,400,003 warrants outstanding and exercisable.  No warrants were outstanding as of September 30, 2007.

Employee Stock Purchase Plan

In fiscal 2000, the Company adopted an Employee Stock Purchase Plan (the “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 for the Company's common stock on either the first or last day of the participation period, whichever is lower, and annual 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 Company reinstated the ESPP on January 1, 2008.  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, 2008			876,143

 

 

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Future Issuances 

 

As of March 31, 2008, the Company had reserved a total of 12,891,722 shares of its common stock for future issuances as follows:

		Number of Common Stock Shares Available
For exercise of outstanding common stock options			5,666,159
For future issuances to employees under the ESPP plan			876,143
For future common stock option awards			3,649,417
For future exercise of warrants			1,400,003
For future issuance in relation to the Intel’s Optical Platform Division Acquisition			1,300,000
Total reserved			12,891,722

Private Placement of Common Stock and Warrants

On February 20, 2008, the Company consummated the sale of $100 million of restricted common stock and warrants.  In this transaction, investors purchased 8 million shares of our common stock, no par value, and warrants to purchase an additional 1.4 million shares of our common stock.  The purchase price was $12.50 per share, priced at the 20 day volume-weighted average price.  The warrants grant the holder the right to purchase one share of our common stock at a price of $15.06 per share, representing a 20.48% premium over the purchase price.  The warrants are immediately exercisable and remain exercisable until February 20, 2013  In addition, the Company entered into a registration rights agreement with the investors to register for resale the shares of common stock issued in this transaction and the shares of common stock to be issued upon exercise of the warrants.  Beginning two years after their issuance, the warrants may be called by the Company for a price of $0.01 per underlying share if the closing price of its common stock has exceeded 150% of the exercise price for at least 20 trading days within a period of any 30 consecutive trading days and other conditions are met.  Total agent fees incurred were 5.75% of the gross proceeds, or $5.8 million.  The Company used a substantial portion of the net proceeds to acquire the telecom assets of Intel's Optical Platform Division and is using the remainder for working capital requirements.

 

In the registration rights agreement, the Company agreed that if (i) a registration statement covering all of the registrable securities required to be covered thereby and required to be filed by the Company is (A) not filed with the SEC on or before March 22, 2008 (the Company filed a registration statement on March 21, 2008 and has therefore met this deadline)  or (B) not declared effective by the SEC on or before May 21, 2008 (or June 20, 2008 if the SEC elects to review the registration statement)  (ii) on any day after the date such registration statement is declared effective (the “Effective Date”) sales of all of the registrable securities required to be included on such Registration Statement cannot be made; or (iii) after the date six months following the date of the private placement, EMCORE fails to file with the SEC any required reports under Section 13 or 15(d) of the 1934 Act such that it is not in compliance with Rule 144(c)(1) as a result of which holders are unable to sell registrable securities without restriction under Rule 144 then, EMCORE shall pay as liquidated damages to each holder of registrable securities relating an amount in cash equal to one (1) percent (1%) of the aggregate purchase price of such holder’s registrable securities included in such registration statement on  the day that such a failure first occurs and on every thirtieth day thereafter until such failure is cured.   Liquidated damages shall be paid on the earlier of (i) the last day of the calendar month during which such damages are incurred and (ii) the third business day after the event or failure giving rise to the damages is cured.  In the event the Company fails to make such payments in a timely manner, such liquidated damages shall bear simple interest at the rate of four (4) percent (4%) per month until paid in full.  In no event shall the aggregate amount of liquidated damages exceed, in the aggregate, ten (10) percent (10%) of the aggregate purchase price of the common stock sold in the private placement.  The Company also agreed not to issue shares in certain capital raising transactions or file registration statements relating to the same until 45 days after the earlier of the Effective Date and six months after the private placement.

 

The Company accounted for the various components of the private placement transaction using the provisions of EITF Issue No. 00-19 Accounting for Derivative Financial instruments Indexed to, and Potentially Settled in a Company’s Own Stock; and FASB Staff Position EITF 00-19-2, Accounting for Registration Payment Arrangements. Warrants issued to the investors were accounted for as an equity transaction with a value of $9.8 million recorded to common stock. The potential future payments to the investors are considered as a contingent liability in accordance with SFAS No. 5 Accounting for Contingencies. As of March 31, 2008, the Company did not record any contingent liability associated with the liquidated damages clause.

The costs associated with this offering were $6.1 million which was recorded as an offset to common stock.

Share Dilution

A following table summarizes the Company’s equity transactions and effect on share dilution for the six months ended March 31, 2008:

		Number of Common Stock Shares Outstanding
Common stock shares outstanding – as of October 1, 2007			51,048,481
Conversion of convertible senior subordinated notes to equity (see Note 11 - Debt)			12,186,656
Private placement transaction			8,000,000
Acquisition of Intel’s Optical Platform Division (see Note 4 – Acquisitions)			722,688
Stock option exercises and other compensatory stock issuances			1,617,863
Common stock shares outstanding – as of March 31, 2008			73,575,688

See Note 15 – Subsequent Event for further discussion of shares of common stock issued subsequent to March 31, 2008.

On March 31, 2008, the Board of Directors authorized an additional 100,000,000 shares of common stock available for issuance for a total of 200,000,000 shares authorized.

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NOTE 4.  Acquisitions

Intel Corporation’s Optical Platform Division

On February 22, 2008, the Company acquired assets of the telecom portion of Intel Corporation’s Optical Platform Division. 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 million in cash and $10 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 is subject to adjustment based on an inventory true-up, plus specifically assumed liabilities.  Direct transaction costs totaled $0.5 million.  This acquisition was financed through proceeds received from the $100 million private placement of common stock and warrants (see Note 3).

 

The purchase price allocation for the business has been prepared on a preliminary basis and is subject to change as new facts and circumstances emerge.  The Company is currently completing the purchase price allocation and valuation of the acquired assets.  The Company will adjust the preliminary purchase price allocation to reflect changes in the final valuation report, which is expected to be completed by September 2008. Amortization expense totaled $0.1 million for both the three and six months ended March 31, 2008.   Of the total goodwill recognized, approximately $47.9 million is expected to be deductible for tax purposes over a 15 year life.

 

 

The preliminary purchase price was allocated as follows:

 

(in thousands) Intel Corporation’s Optical Platform Division
Net purchase price		$	85,546
Net assets acquired			(37,627	)
Excess purchase price allocated to goodwill		$	47,919

Net assets acquired in the acquisition were as follows:

Inventory		$	17,940
Fixed assets			11,187
Intangible assets			8,500
Net assets acquired		$	37,627

 

 

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In connection with this acquisition, Intel and the Company entered into a Transition Services Agreement (the “TSA”), which allows Intel to carve-out the business and deliver those assets to the Company. Pursuant to the terms of the TSA, Intel intends to manufacture, assemble, test, and supply products that are sold by the business.  Intel will also provide 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.  The fees associated with the TSA are being expensed as incurred. For the quarter ended March 31, 2008, the Company incurred approximately $1.1 million of expense associated with the TSA.  The TSA is expected to continue through June 2008 or until such time when the Company can arrange its own resources to operate the acquired business.

The following unaudited condensed consolidated pro forma financial data has been prepared to give effect to the Company’s acquisition of certain assets and liabilities of Intel’s Optical Products Division (“OPD”). The pro forma financial information has been developed by the application of pro forma adjustments to the estimated results of operations of OPD, and the historical Condensed Consolidated Statements of Operations of the Company as if OPD had been acquired as of October 1, 2006. The pro forma financial information is based upon available information and assumptions that management believes are reasonable. The pro forma financial information does not purport to represent what our consolidated results of operations would have been had the Company’s acquisition of OPD occurred on the dates indicated, or to project our consolidated financial performance for any future period.

Condensed Consolidated Pro Forma Statement of Operations

(unaudited)

(in thousands, except per share data)		Three Months Ended March 31, 2008								Three Months Ended March 31, 2007
		EMCORE				PRO FORMA				EMCORE				PRO FORMA
Revenues		$	56,279			$	63,183			$	39,598			$	60,998
Net loss			(17,507	)			(17,162	)			(13,436	)			(12,366	)
Net loss per basic and diluted shares		$	(0.27	)		$	(0.25	)		$	(0.26	)		$	(0.22	)

(in thousands, except per share data)		Six Months Ended March 31, 2008								Six Months Ended March 31, 2007
		EMCORE				PRO FORMA				EMCORE				PRO FORMA
Revenues		$	103,166			$	122,270			$	78,194			$	111,794
Net loss			(31,913	)			(30,958	)			(26,701	)			(25,021	)
Net loss per basic and diluted shares		$	(0.55	)		$	(0.50	)		$	(0.52	)		$	(0.45	)

On April 20, 2008, the Company completed its acquisition of the enterprise and storage assets of Intel Corporation’s Optical Platform Division as well as the Intel Connects Cables business (See Note 15 – Subsequent Event).  The above pro forma statements do not include results of this acquisition.

Opticomm Corporation

 

In April 2007, the Company acquired privately-held Opticomm Corporation of San Diego, California, including its fiber optic video, audio and data networking business, technologies, and intellectual property.  Opticomm is one of the leading specialists in the field of fiber optic video, audio and data networking for the commercial, governmental and industrial sectors.  The Company paid $4.2 million initial consideration, less $0.1 million cash received at acquisition, for all of the shares of Opticomm. The Company also agreed to an additional earn-out payment based on Opticomm’s 2007 revenue which amounted to approximately $0.7 million.

 

 

The Company completed the valuation of Opticomm's inventory, property and equipment, and identifiable intangible assets and adjusted the preliminary purchase price allocation in March 2008 to reflect the final valuation of acquired assets.  Goodwill was adjusted by approximately $0.1 million to properly reflect purchased goodwill.  The purchase price allocation identified $2.2 million of intangible assets with a five year weighted average amortization period, which included $1.4 million in customer lists, $0.7 million in patents and $0.1 million in order backlog.  Amortization expense totaled $0.4 million and $0.5 million, for the three and six months ended March 31, 2008, respectively, and $0.1 million and $0.2 million for the three and six months ended March 31, 2007, respectively.

 

 

The final purchase price was allocated as follows:

 

(in thousands) Opticomm Corporation Acquisition		Preliminary				Adjustments				Final
Net purchase price		$	4,097			$	722			$	4,819
Net assets acquired			(3,573	)			103				(3,470	)
Excess purchase price allocated to goodwill		$	524			$	825			$	1,349

Net assets acquired in the acquisition were as follows:

Working capital		$	1,058			$	223			$	1,281
Fixed assets			81				-				81
Intangible assets			2,504				(326	)			2,178
Current liabilities			(70	)			-				(70	)
Net assets acquired		$	3,573			$	(103	)		$	3,470

All of these transactions were accounted for as purchases in accordance with SFAS 141, Business Combinations; therefore, the tangible assets acquired and liabilities assumed were recorded at fair value on the acquisition date. 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 the Company’s Fiber Optics operating segment.

 

 

 

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NOTE 5.  Receivables, net

The components of accounts receivable consisted of the following:

(in thousands)		As of March 31, 2008				As of September 30, 2007
Accounts receivable		$	47,234			$	35,558
Accounts receivable – unbilled			6,387				3,395
Accounts receivable, gross			53,621				38,953
Allowance for doubtful accounts			(820	)			(802	)
Total accounts receivable, net		$	52,801			$	38,151

Related party receivables consist of amounts owed from Velox Corporation, in which the Company has an insignificant ownership.

NOTE 6.  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, 2008				As of September 30, 2007
Raw materials		$	22,892			$	19,884
Work-in-process			9,605				6,842
Finished goods			26,624				10,891
Inventory, gross			59,121				37,617
Less: provisions for inventory			(15,600	)			(8,412	)
Total inventory, net		$	43,521			$	29,205

In February 2008, as part of our asset acquisition of Intel’s Optical Platform Division, the Company acquired inventory of approximately $17.9 million (see Note 4 - Acquisitions).

NOTE 7.  Property, Plant, and Equipment, net

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

(in thousands)		As of March 31, 2008				As of September 30, 2007
Land		$	1,502			$	1,502
Building and improvements			44,423				43,397
Equipment			93,113				75,631
Furniture and fixtures			5,278				5,643
Leasehold improvements			-				2,141
Construction in progress			6,144				3,744
Property, plant and equipment, gross			150,460				132,058
Less: accumulated depreciation and amortization			(76,295	)			(74,801	)
Total property, plant and equipment, net		$	74,165			$	57,257

In February 2008, as part of our asset acquisition of Intel’s Optical Platform Division, the Company acquired fixed assets of approximately $11.2 million (see Note 4 – Acquisitions).

As of March 31, 2008 and September 30, 2007, the Company did not have any significant capital lease agreements.

Depreciation expense was $2.1 million and $3.8 million for the three and six months ended March 31, 2008, respectively, and $1.8 million and $3.7 million for the three and six months ended March 31, 2007, respectively.

 

 

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NOTE 8.  Goodwill and Intangible Assets, net

The following table sets forth changes in the carrying value of goodwill by reportable segment during the six months ended March 31, 2008:

 

(in thousands)		Fiber Optics				Photovoltaics				Total
Balance as of October 1, 2007		$	20,606			$	20,384			$	40,990
Acquisition – earn-out payments			712				-				712
Acquisition – Intel’s Optical Platform Division			47,919				-				47,919
Final purchase price allocation adjustment: Opticomm acquisition			118				-				118
Balance as of March 31, 2008		$	69,355			$	20,384			$	89,739

The following table sets forth the carrying value of intangible assets, consisting of patents and acquired intellectual property (“IP”), as of March 31, 2008 and September 30, 2007, by reportable segment:

 

(in thousands)		As of March 31, 2008												As of September 30, 2007
		Gross Assets				Accumulated Amortization				Net Assets				Gross Assets				Accumulated Amortization				Net Assets
Fiber Optics:
Patents		$	949			$	(449	)		$	500			$	845			$	(358	)		$	487
Ortel acquired IP			3,274				(3,031	)			243				3,274				(2,893	)			381
JDSU acquired IP			1,040				(611	)			429				1,040				(512	)			528
Alvesta acquired IP			193				(193	)			-				193				(187	)			6
Molex acquired IP			558				(502	)			56				558				(446	)			112
Phasebridge acquired IP			603				(388	)			215				603				(347	)			256
Force acquired IP			1,075				(541	)			534				1,075				(443	)			632
K2 acquired IP			583				(299	)			284				583				(248	)			335
Opticomm acquired IP			2,178				(478	)			1,700				2,504				(321	)			2,183
Intel acquired IP			8,500				(142	)			8,358				-				-				-
Subtotal			18,953				(6,634	)			12,319				10,675				(5,755	)			4,920
Photovoltaics:
Patents			766				(332	)			434				615				(260	)			355
Tecstar acquired IP			1,900				(1,900	)			-				1,900				(1,900	)			-
Subtotal			2,666				(2,232	)			434				2,515				(2,160	)			355
Total		$	21,619			$	(8,866	)		$	12,753			$	13,190			$	(7,915	)		$	5,275

 

Amortization expense was $0.4 million and $1.0 million for the three and six months ended March 31, 2008, respectively, and $0.5 million and $1.1 million for the three and six months ended March 31, 2007, respectively.

 

 

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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, 2008		$	1,617
Year ended September 30, 2009			2,974
Year ended September 30, 2010			2,861
Year ended September 30, 2011			2,400
Year ended September 30, 2012			2,028
Thereafter			873
Total future amortization expense		$	12,753

NOTE 9.  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, 2008				As of September 30, 2007
Compensation-related		$	7,480			$	8,398
Interest			-				1,775
Warranty			1,579				1,310
Professional fees			4,661				6,213
Royalty			1,385				705
Self insurance			837				794
Deferred revenue and customer deposits			3,221				687
Tax-related			4,016				3,460
Restructuring accrual			502				2,112
Inventory obligation			1,499				1,499
Other			1,250				1,823
Total accrued expenses and other current liabilities		$	26,430			$	28,776

In the second quarter of fiscal 2008, the Company converted all of its convertible senior subordinated notes into shares of common stock (see Note 11 – Debt).  As of March 31, 2008, the Company did not have any debt or related accrued interest.

The Company entered into two Solar Power System contracts for a total loss accrual of $1.8 million as of March 31, 2008.

NOTE 10.  Restructuring Charges

 

As the Company has historically acquired businesses and consolidated them into its existing operations, the Company has incurred charges associated with the transition and integration of those activities. In accordance with SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities, expenses recognized as restructuring charges include costs associated with the integration of several business acquisitions and the Company’s overall cost-reduction efforts.   Restructuring charges are included in SG&A.  These charges primarily 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 Period				Cumulative Amount Incurred to Date				Amount Expected in Future Periods				Total Amount Expected to be Incurred
One-time termination benefits		$	402			$	3,581			$	-			$	3,581

 

 

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The following table sets forth changes in the accrual for restructuring charges during the six months ended March 31, 2008:

(in thousands)
Balance at October 1, 2007		$	2,112
Increase in liability due to relocation of corporate headquarters			275
Costs paid or otherwise settled			(1,885	)
Balance at March 31, 2008		$	502

NOTE 11.  Debt

In January 2008, the Company entered into agreements with holders of approximately 97.5%, or approximately $83.3 million of its outstanding 5.50% convertible senior subordinated notes due 2011 (the "Notes") pursuant to which the holders converted their Notes into the Company's common stock.  In addition, the Company called for redemption of all of its remaining outstanding Notes. Upon conversion of the Notes, the Company issued shares of its common stock, based on a conversion price of $7.01, in accordance with the terms of the Notes. To incentivize certain holders to convert their Notes, the Company made cash payments to such holders equal to 4% of the principal amount of the Notes converted, plus accrued interest.   By February 20, 2008, all Notes were redeemed and converted into the Company common stock. As a result of these transactions, 12.2 million shares of the Company common stock were issued.  The Company recognized a loss totaling $4.7 million on the conversion of Notes to equity of which $3.5 million was paid in cash.  Interest expense incurred on the Notes totaled $0.4 million and $1.6 million for the three and six months ended March 31, 2008, respectively, and $1.3 million and $2.5 million for the three and six months ended March 31, 2007, respectively.

NOTE 12.  Commitments and Contingencies

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

As of March 31, 2008 (in millions)		Total				2008				2009 to 2010				2011 to 2012				2013 and later
Operating lease obligations		$	7.1			$	0.7			$	2.2			$	1.3			$	2.9
Letters of credit			2.7				2.7				-				-				-
Purchase commitments (1)			259.9				34.3				134.9				90.7				-
Total contractual cash obligations and Commitments		$	269.7			$	37.7			$	137.1			$	92.0			$	2.9

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(1)	The purchase commitments primarily represent the value of purchase agreements issued for raw materials and services that have been scheduled for fulfillment over the next three to five years.

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

The Company 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 $0.3 million and $0.6 million for the three and six months ended March 31, 2008, respectively, and approximately $0.4 million and $0.8 million for the three and six months ended March 31, 2007, respectively.

As of March 31, 2008, the Company had twelve standby letters of credit issued totaling approximately $2.7 million.

 

 

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Credit Market Conditions

Currently, the U.S. capital markets are experiencing turbulent conditions in the credit markets, as evidenced by tightening of lending standards, reduced availability of credit vehicles, and reduction of certain asset values.  This potentially impacts the Company’s ability to obtain additional funding through financing or asset sales.

 

Auction Rate Securities