form10-q.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, 2009
 
Commission File Number:  0-22175

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

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

22-2746503
(IRS Employer Identification No.)

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

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


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

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

The number of shares outstanding of the registrant’s no par value common stock as of May 4, 2009 was 79,838,237.


 
 
 
 

EMCORE Corporation
FORM 10-Q
For the Quarterly Period Ended March 31, 2009
TABLE OF CONTENTS


 

 
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PART I.  FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS 
EMCORE CORPORATION
Condensed Consolidated Statements of Operations and Comprehensive Loss
For the three and six months ended March 31, 2009 and 2008
(in thousands, except loss per share)
(unaudited)

   
Three Months Ended
March 31,
  
Six Months Ended
March 31,
  
     
2009
    
2008
    
2009
    
2008
  
                           
Product revenue
  
$
41,160
  
$
54,236
  
$
91,886
  
$
98,737
  
Service revenue
    
2,124
    
2,043
    
5,454
    
4,429
  
Total revenue
    
43,284
    
56,279
    
97,340
    
103,166
  
                           
Cost of product revenue
    
48,572
    
49,556
    
98,786
    
86,167
  
Cost of service revenue
    
1,717
    
75
    
3,970
    
248
  
Total cost of revenue
    
50,289
    
49,631
    
102,756
    
86,415
  
                           
Gross (loss) profit
    
(7,005
)
  
6,648
    
(5,416
)
  
16,751
  
                           
Operating expenses:
                          
Selling, general, and administrative
    
11,966
    
10,263
    
24,124
    
22,126
  
Research and development
    
6,891
    
9,330
    
15,001
    
16,750
  
Impairment of goodwill and intangible assets
    
-
    
-
    
33,781
    
-
  
Total operating expenses
    
18,857
    
19,593
    
72,906
    
38,876
  
                           
Operating loss
    
(25,862
)
  
(12,945
)
  
(78,322
)
  
(22,125
)
                           
Other (income) expense:
                          
Interest income
    
(30
)
  
(227
)
  
(80
)
  
(654
)
Interest expense
    
143
    
375
    
338
    
1,580
  
Impairment of investment
    
-
    
-
    
367
    
-
  
Loss from conversion of subordinated notes
    
-
    
4,658
    
-
    
4,658
  
Stock–based expense from tolled options
    
-
    
(58
)
  
-
    
4,316
  
Gain from sale of investments
    
(3,144
)
  
-
    
(3,144
)
  
-
  
Loss on disposal of equipment
    
-
    
-
    
-
    
86
  
Foreign exchange loss (gain)
    
908
    
(186
)
  
1,380
    
(198
)
Total other (income) expense
    
(2,123
)
  
4,562
    
(1,139
)
  
9,788
  
                           
Net loss
  
$
(23,739
)
 $
(17,507
)
 $
(77,183
)
$
(31,913
)
                           
Foreign exchange translation adjustment
    
376
    
(84
)
  
484
    
(77
)
                           
Comprehensive loss
  
$
(23,363
)
$
(17,591
)
$
(76,699
)
$
(31,990
)
                           
                           
Per share data:
                          
Basic and diluted per share data:
                          
Net loss
  
$
(0.30
)
$
(0.27
)
$
(0.99
)
$
(0.55
)
                           
Weighted-average number of basic and diluted shares outstanding
    
78,384
    
64,560
    
78,097
    
57,975
  
                           

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

 
 
 

EMCORE CORPORATION
Condensed Consolidated Balance Sheets
As of March 31, 2009 and September 30, 2008
(In thousands)
(unaudited)  
     
March 31, 2009
    
September 30, 2008
  
ASSETS
              
Current assets:
              
Cash and cash equivalents
  
$
10,614
  
$
18,227
  
Restricted cash
    
773
    
1,854
  
Available-for-sale securities
    
-
    
2,679
  
Accounts receivable, net of allowance of $5,039 and $2,377, respectively
    
49,066
    
60,313
  
Inventory, net
    
47,359
    
64,617
  
Prepaid expenses and other current assets
    
3,620
    
7,100
  
               
Total current assets
    
111,432
    
154,790
  
               
Property, plant, and equipment, net
    
77,932
    
83,278
  
Goodwill
    
20,384
    
52,227
  
Other intangible assets, net
    
24,290
    
28,033
  
Investments in unconsolidated affiliates
    
-
    
8,240
  
Available-for-sale securities, non-current
    
1,400
    
1,400
  
Long-term restricted cash
    
163
    
569
  
Other non-current assets, net
    
804
    
741
  
               
Total assets
  
$
236,405
  
$
329,278
  
               
LIABILITIES and SHAREHOLDERS’ EQUITY
              
Current liabilities:
              
Line of credit
  
$
6,202
  
$
-
  
Accounts payable
    
27,860
    
52,266
  
Accrued expenses and other current liabilities
    
19,839
    
23,290
  
               
Total current liabilities
    
53,901
    
75,556
  
               
Long-term debt
    
888
    
-
  
               
Total liabilities
    
54,789
    
75,556
  
               
Commitments and contingencies
              
               
Shareholders’ equity:
              
Preferred stock, $0.0001 par, 5,882 shares authorized, no shares outstanding
    
-
    
-
  
Common stock, no par value, 200,000 shares authorized, 78,697 shares issued and 78,538 outstanding at March 31, 2009; 77,920 shares issued and 77,761 shares outstanding at September 30, 2008
    
684,613
    
680,020
  
Accumulated deficit
    
(501,947
)
  
(424,764
)
Accumulated other comprehensive loss
    
1,033
    
549
  
Treasury stock, at cost; 159 shares as of March 31, 2009 and September 30, 2008
    
(2,083
)
  
(2,083
)
               
Total shareholders’ equity
    
181,616
    
253,722
  
               
 Total liabilities and shareholders’ equity
  
$
236,405
  
$
329,278
  

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

 
 
 

EMCORE CORPORATION
Condensed Consolidated Statements of Cash Flows
 For the six months ended March 31, 2009 and 2008
 (in thousands)
(unaudited)
   
Six Months Ended
March 31,  
  
     
2009
    
2008
  
Cash flows from operating activities:
              
Net loss
  
$
(77,183
)
$
(31,913
)
Adjustments to reconcile net loss to net cash used for operating activities:
              
Impairment of goodwill and intangible assets
    
33,781
    
-
  
Stock-based compensation expense
    
3,636
    
6,964
  
Depreciation and amortization expense
    
8,509
    
4,842
  
Inventory reserve adjustments
    
6,262
    
(832
)
Provision for doubtful accounts
    
2,662
    
101
  
Impairment of investment
    
367
    
-
  
Loss on disposal of equipment
    
167
    
86
  
Compensatory stock issuances
    
267
    
545
  
Gain from sale of investments
    
(3,144
)
  
-
  
Reduction of note receivable due for services received
    
-
    
260
  
Loss from convertible subordinated notes
    
-
    
1,210
  
Total non-cash adjustments
    
52,507
    
13,176
  
               
Changes in operating assets and liabilities, net of effect of acquisitions:
              
Accounts receivable
    
7,885
    
(14,714
)
Inventory
    
10,993
    
4,456
  
Prepaid expenses and other current assets
    
3,331
    
(590
)
Other assets
    
(455
)
  
(678
)
Accounts payable
    
(24,398
)
  
5,258
  
Accrued expenses and other current liabilities
    
(3,293
)
  
(4,004
)
Total change in operating assets and liabilities
    
(5,937
)
  
(10,272
)
               
Net cash used in operating activities
    
(30,613
)
  
(29,009
)
               
Cash flows from investing activities:
              
Purchase of plant and equipment
    
(1,133
)
  
(9,624
)
Proceeds from insurance recovery
    
-
    
1,189
  
Sale of (investment in) unconsolidated affiliates
    
11,017
    
(45
)
Purchase of business, net of cash acquired
    
-
    
(75,546
)
Proceeds from (funding of) restricted cash
    
1,487
    
(1,153
)
Purchase of available-for-sale securities
    
-
    
(7,000
)
Sale of available-for-sale securities
    
2,679
    
30,800
  
               
Net cash provided by (used for) investing activities
    
14,050
    
(61,379
)
               
Cash flows from financing activities:
              
Proceeds from borrowings from credit facility
    
44,142
    
-
  
Payments on borrowings from credit facility
    
(37,940
)
  
-
  
Proceeds from borrowing - long-term debt
    
910
    
-
  
Payments on borrowings - long-term debt
    
(22
)
  
-
  
Proceeds from private placement of common stock and warrants,
   net of issuance costs
    
-
    
93,773
  
Payments on capital lease obligations
    
-
    
(10
)
Proceeds from exercise of stock options
    
32
    
6,800
  
Proceeds from employee stock purchase plan
    
613
    
485
  
               
Net cash provided by financing activities
    
7,735
    
101,048
  


 
 
 

EMCORE CORPORATION
Condensed Consolidated Statements of Cash Flows - continued
 For the six months ended March 31, 2009 and 2008
 (in thousands)
(unaudited)


   
Six Months Ended
March 31,  
  
     
2009
    
2008
  
               
Effect of foreign currency
  
$
1,215
  
$
(77
)
               
Net (decrease) increase in cash and cash equivalents
    
(7,613
)
  
10,583
  
               
Cash and cash equivalents, beginning of period
    
18,227
    
12,151
  
               
Cash and cash equivalents, end of period
  
$
10,614
  
$
22,734
  
               
               
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
              
Cash paid during the period for interest
  
$
393
  
$
3,314
  
               
Cash paid for income taxes
  
$
-
  
$
-
  
               
               
NON-CASH DISCLOSURE
              
Issuance of common stock for purchase of business
    
-
    
10,000
  
               
Issuance of common stock for conversion of subordinated notes
    
-
    
85,428
  

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

 
 
 


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

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

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


Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management of the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue 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. The Company’s reported financial position or results of operations may be materially different under changed conditions or when using different estimates and assumptions, particularly with respect to significant accounting policies.  In the event that estimates or assumptions prove to differ from actual results, adjustments are made in subsequent periods to reflect more current information.


Earnings Per Share

Earnings per share (“EPS”) are calculated by dividing net earnings (loss) applicable to common stock by the weighted average number of common stock shares outstanding for the period.  For the three and six months ended March 31, 2009, stock options representing 8,067,089 and 8,024,395 shares of common stock, respectively, and 1,400,003 warrants for both periods were excluded from the computation of diluted earnings per share since the Company incurred a net loss for these periods and any effect would have been anti-dilutive.  For the three and six months ended March 31, 2008, stock options representing 4,674,401 and 4,632,759 shares of common stock, respectively, and 1,400,003 warrants for both periods were excluded from the computation of diluted earnings per share since the Company incurred a net loss for these periods and any effect would have been anti-dilutive.


Liquidity Matters

The Company incurred a net loss of $77.2 million for the six months ended March 31, 2009, which included a non-cash impairment charge of $33.8 million related to the write-down of goodwill and intangible assets.  Our operating results for future periods are subject to numerous uncertainties and we cannot assure you that we will not continue to experience net losses for the foreseeable future.  Although our revenue has increased sequentially over the past several years, in fiscal 2009, we have not been able to sustain historical revenue growth rates due to adverse changes in market and economic conditions.  If we are not able to increase revenue and/or reduce our operating costs, we may not be able to achieve profitability.

As of March 31, 2009, cash, cash equivalents, and restricted cash totaled approximately $11.6 million and working capital totaled $57.5 million.  Historically, the Company has consumed cash from operations.  During the six months ended March 31, 2009, we consumed approximately $30.1 million in cash from operations.  Historically, we have addressed our liquidity requirements through a series of cost reduction initiatives, capital markets transactions and the sale of assets.  We anticipate that the recession in the United States and the global slowdown in economic growth may continue to impose challenges for our business in the near term.

These matters raise substantial doubt about the Company's ability to continue as a going concern.
 
 
 
Management Actions and Plans

Recently, the Company amended the terms of its Loan and Security Agreement with Bank of America that waived the default of certain financial covenants, adjusted certain covenants for future periods, increased the amount of eligible accounts receivable available under the borrowing base formula, increased certain interest rates and fees on loans and letters of credit, and decreased the maximum total loan availability to $14 million. The adjustments to the borrowing base formula and the calculation of eligible accounts receivable are intended to provide the Company with additional borrowing capacity.

As a result of the continuation of very unfavorable macroeconomic conditions, in combination with adverse credit market conditions, the Company has continued to take steps to lower costs and conserve and generate cash. Over the last two fiscal quarters, we have implemented a series of measures intended to align our cost structure with lower revenues including several reductions in the workforce, the temporary furloughing of employees, salary reductions, the elimination of executive and employee merit increases, and the elimination or reduction in certain discretionary expenses.

With respect to measures taken to conserve and generate cash, we have sold our minority ownership positions in Entech Solar, Inc. and Lightron Corp., have significantly lowered our quarterly capital expenditures and improved the management of our working capital.  During the second fiscal quarter, on a consolidated basis, we generated $7.8 million in cash from improved working capital management and, for the quarter, our satellite business generated positive cash flow from operations. In addition, the Company’s Fiber Optics segment generated positive cash flow from operations for the last two months the second quarter.

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


Conclusion

These initiatives are intended to conserve or generate cash in response to the deterioration in the global economy so that we can preserve adequate liquidity through the next twelve months.  However, the full effect of many of these actions will not be realized until mid to late 2009, even if they are successfully implemented.  We are committed to exploring all of the initiatives discussed above but there is no assurance that capital markets conditions will improve within that time frame. Our ability to continue as a going concern is substantially dependent on the successful execution of many of the actions referred to above.

Since cash generated from operations and cash on hand are not sufficient to satisfy the Company’s liquidity requirements, we will seek to raise additional cash through an equity financing, additional debt, asset sales or a combination thereof.  Due to the unpredictable nature of the capital markets, additional funding may not be available when needed, or on terms acceptable to us.  If adequate funds are not available or not available on acceptable terms, our ability to continue to fund expansion, develop and enhance products and services, or otherwise respond to competitive pressures may be severely limited.  Such a limitation could have a material adverse effect on the Company’s business, financial condition, results of operations, and cash flow.


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


 
 
 

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

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

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

FSP SFAS No. 107-1 - In April 2009, the FASB issued Staff Position SFAS No. 107-1 and Accounting Principles Board (“APB”) Opinion No. 28-1, Interim Disclosures about Fair Value of Financial Instruments. SFAS No. 107-1 and APB No. 28-1 amend FASB Statement No. 107, Disclosures about Fair Values of Financial Instruments, to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. SFAS No. 107-1 and APB No. 28-1 also amend APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in all interim financial statements.  SFAS No. 107-1 and APB No. 28-1 are effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009.  The Company plans to adopt SFAS No. 107-1 and APB No. 28-1, but does not believe this guidance will have a significant impact on the Company’s disclosures.


NOTE 3.  Equity

Stock Options

The Company has stock option plans to provide long-term incentives to eligible officers, directors, and employees in the form of stock options.  Most of the stock options vest and become exercisable over four to five years and have a contractual life of ten years. The Company maintains two stock option plans: the 1995 Incentive and Non-Statutory Stock Option Plan (“1995 Plan”) and the 2000 Incentive Stock Option Plan (“2000 Plan” and, together with the 1995 Plan, the “Option Plans”). The 1995 Plan authorizes the grant of options to purchase up to 2,744,118 shares of the Company's common stock. As of March 31, 2009, the 2000 Plan authorized the grant of options to purchase up to 12,850,000 shares of the Company’s common stock. As of March 31, 2009, no options were available for issuance under the 1995 Plan and 1,070,136 options were available for issuance under the 2000 Plan. On April 30, 2009, the Company’s shareholders approved an increase in the number of shares reserved for issuance under the 2000 Plan to 15,850,000 shares of the Company’s common stock.  Certain options under the Option Plans are intended to qualify as incentive stock options pursuant to Section 422A of the Internal Revenue Code.  The Company issues new shares of common stock to satisfy the issuance of shares under this stock-based compensation plan.


 
 
 

The following table summarizes the activity under the Option Plans for the six months ended March 31, 2009:

   
 
 
 
 
Number of Shares
  
Weighted Average Exercise Price
  
Weighted Average
Remaining Contractual Life
(in years)
  
Outstanding as of September 30, 2008
    
8,929,453
    
$
6.57
      
8.22
    
Granted
    
321,439
      
1.12
            
Exercised
    
(10,675
)
    
3.02
            
Forfeited
    
(635,088
)
    
7.49
            
Cancelled
    
(469,484
)
    
4.26
            
                           
Outstanding as of March 31, 2009
    
8,135,645
    
$
6.46
      
7.49
    
                           
Exercisable as of March 31, 2009
    
3,130,063
    
$
5.36
      
5.94
    


As of March 31, 2009 there was approximately $10.3 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 3.1 years.

Intrinsic value for stock options represents the “in-the-money” portion or the positive variance between a stock option’s exercise price and the underlying stock price.  There were no stock options exercised during the three months ended March 31, 2009.  The total intrinsic value related to stock options exercised during the six months ended March 31, 2009 was approximately $10,000.  The total intrinsic value related to stock options exercised during the three and six months ended March 31, 2008 was approximately $3.2 million and $11.3, respectively.  There was no intrinsic value related to fully vested and expected to vest stock options as of March 31, 2009 and no intrinsic value related to exercisable stock options as of March 31, 2009.

   
Number of Stock Options Outstanding
  
Options Exercisable
  
Exercise Price of Stock Options
  
Number Outstanding
  
Weighted Average Remaining Contractual Life (years)
  
Weighted- Average Exercise Price
  
Number Exercisable
  
Weighted- Average Exercise Price
  
>=$1.00 to <$5.00
    
2,134,924
      
5.71
    
$
3.13
      
1,619,198
    
$
2.,95
  
>=$5.00 to <$10.00
    
5,865,401
      
8.22
      
7.42
      
1,416,445
      
7.10
  
>$10.00
    
135,320
      
3.95
      
17.72
      
94,420
      
20.45
  
TOTAL
    
8,135,645
      
7.49
    
$
6.46
      
3,130,063
    
$
5.36
  

Stock-based compensation expense is measured at the stock option grant date, based on the fair value of the award, over the requisite service period.  As required by SFAS 123(R), Share-Based Payment (revised 2004), management has made an estimate of expected forfeitures and is recognizing compensation expense only for those equity awards expected to vest.


 
 
 

The effect of recording stock-based compensation expense during the three and six months ended March 31, 2009 and 2008 was as follows:

(in thousands, except per share data)
  
 
Three Months Ended
March 31,
  
Six Months Ended
March 31,
  
     
2009
    
2008
    
2009
    
2008
  
                           
Stock-based compensation expense by award type:
                          
     Employee stock options
  
$
1,346
  
$
1,405
  
$
3,341
  
$
2,480
  
     Employee stock purchase plan
    
140
    
168
    
295
    
168
  
     Former employee stock options tolled
    
-
    
(58
)
  
-
    
4,316
  
Total stock-based compensation expense
  
$
1,486
  
$
1,515
  
$
3,636
  
$
6,964
  
                           
Net effect on net loss per basic and diluted share
  
$
(0.02
)
$
(0.02
)
$
(0.12
)
$
(0.12
)


Tolled Stock Options

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

To account for a stock option grant modification, when the rights conveyed by a stock-based compensation award are no longer dependent on the holder being an employee, the award ceases to be accounted for under SFAS 123(R) and becomes subject to the recognition and measurement requirements of EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, which results in liability classification and measurement of the award.  On the date of modification, stock options that receive extended exercise terms are initially measured at fair value and expensed as if the stock options awards were new grants.   Subsequent changes in fair value are reported in earnings and disclosed in the financial statements as long as the stock options remain classified as liabilities.

During the three months ended December 31, 2007, the Company incurred a non-cash expense of $4.4 million associated with the modification of stock options issued to terminated employees which was calculated using the Black-Scholes option valuation model.  The modified stock options were 100% vested at the time of grant with an estimated life of no greater than 90 days.  When the stock options classified as liabilities were ultimately settled in stock, any gains or losses on those stock options were included in additional paid-in capital.  For unexercised stock options that ultimately expired, the liability was relieved with an offset to income included in current earnings, which totaled approximately $58,000 in January 2008.

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

 
 
 

Tender Offer

As a result of the Company's previously announced voluntary inquiry into its historical stock option granting practices, which was concluded in 2007, the Company determined that an incorrect grant date was used in the granting of certain stock options. As a result, certain stock options were determined to be granted at an exercise price below the fair market value of the Company's common stock as of the correct measurement grant date. Consequently, employees holding these stock options faced a potential tax liability under Section 409A of the Internal Revenue Code and similar sections of certain state tax codes, unless remedial action was taken to adjust the exercise price of these stock options prior to March 31, 2009.

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


Valuation Assumptions

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option valuation model and the straight-line attribution approach using the following weighted-average assumptions.  The option-pricing model requires the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock.  The weighted-average grant date fair value of stock options granted during the three months ended March 31, 2009 and 2008 was $2.95 and $6.29, respectively.

Black-Scholes Weighted-Average Assumptions
 
  
Three Months Ended
March 31,
  
Six Months Ended
March 31,
  
     
2009
    
2008
    
2009
    
2008
  
                           
Expected dividend yield
    
0.0
%
  
0.0
%
  
0.0
%
  
0.0
%
Expected stock price volatility
    
115.0
%
  
81.3
%
  
115.0
%
  
78.5
%
Risk-free interest rate 
    
3.0
%
  
3.5
%
  
2.6
%
  
2.6
%
Expected term (in years)
    
7.8
    
5.5
    
7.8
    
5.4
  
Estimated pre-vesting forfeitures
    
25.8
%
  
23.3
%
  
25.8
%
  
23.3
%


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

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

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

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

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

 
 
 

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 upon such terms and conditions having such rights, privileges, and preferences as the Board of Directors may determine.  As of March 31, 2009 and September 30, 2008, no shares of preferred stock were issued or outstanding.


Warrants

As of March 31, 2009 and September 30, 2008, the Company had 1,400,003 warrants outstanding from the private placement transaction that closed on February 15, 2008.   The warrants grant the holder the right to purchase one share of the Company’s common stock at a price of $15.06 per share.  The warrants are immediately exercisable and remain exercisable for a period of 5 years from the closing date.


Employee Stock Purchase Plan

In fiscal 2000, the Company adopted an Employee Stock Purchase Plan (“ESPP”). The ESPP provides employees of the Company an opportunity to purchase common stock through payroll deductions. The ESPP is a 6-month duration plan with new participation periods beginning the first business day of January and July of each year. The purchase price is set at 85% of the average high and low market price of the Company's common stock on either the first or last day of the participation period, whichever is lower, and contributions are limited to the lower of 10% of an employee's compensation or $25,000.  In November 2006 through December 2007, the Company suspended the ESPP due to its review of historical stock option granting practices.  The Company reinstated the ESPP on January 1, 2008.  As of March 31, 2009, the number of shares of common stock reserved for issuance under the ESPP was 2,000,000 shares.  On April 30, 2009, the Company’s shareholders approved an increase in the number of shares reserved for issuance under the ESPP to 4,500,000 shares.  The Company issues new shares of common stock to satisfy the issuance of shares under this stock-based compensation plan. The amounts of shares issued for the ESPP are as follows:

   
Number of Common Stock Shares
  
Purchase Price per Share of
Common Stock
                 
Amount of shares reserved for the ESPP
    
2,000,000
          
                 
Number of shares issued in calendar years 2000 through 2006
    
(1,000,000
)
    
$1.87 - $40.93
  
Number of shares issued in June 2007 for the first half of calendar year 2007
    
(123,857
)
    
$6.32
  
Number of shares issued in June 2008 for the first half of calendar year 2008
    
(120,791
)
    
$5.62
  
Number of shares issued in December 2008 for the second half of calendar year 2008
    
(468,080
)
    
$0.88
  
                 
Remaining shares reserved for the ESPP as of March 31, 2009
    
287,272
          

Future Issuances 
 
As of March 31, 2009, the Company had reserved a total of 12.2 million shares of its common stock for future issuances as follows:

   
Number of Common Stock Shares Available
         
For exercise of outstanding common stock options
    
8,135,645
  
For future issuances to employees under the ESPP
    
287,272
  
For future common stock option awards
    
1,070,136
  
For future exercise of warrants
    
1,400,003
  
For future issuance in relation to purchase of business
    
1,300,000
  
         
Total reserved
    
12,193,056
  

On April 17, 2009, the Company issued 1.3 million shares of unrestricted common stock to Intel Corporation as consideration for the final purchase price adjustment related to an asset acquisition that was completed in April 2008.

 
 
 

NOTE 4.  Investments

Auction Rate Securities

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

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


Lightron Equity Securities

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


WorldWater & Solar Technologies Corporation

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


NOTE 5.  Accounts Receivable

The components of accounts receivable consisted of the following:

(in thousands)
 
    
March 31,
2009
    
September 30, 2008
  
               
Accounts receivable
  
$
49,105
  
$
57,703
  
Accounts receivable – unbilled
    
5,000
    
4,987
  
               
Accounts receivable, gross
    
54,105
    
62,690
  
               
Allowance for doubtful accounts
    
(5,039
)
  
(2,377
)
               
Total accounts receivable, net
  
$
49,066
  
$
60,313
  


 
 
 

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

·  
During the three months ended December 31, 2008, the Company recorded $0.9 million in bad debt expense, of which $0.1 million related to the Fiber Optics segment and $0.8 million related to the Photovoltaics segment.

·  
During the three months ended March 31, 2009, the Company recorded $1.7 million in bad debt expense, of which $0.5 million related to the Fiber Optics segment and $1.2 million related to the Photovoltaics segment.


NOTE 6.  Inventory

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

(in thousands)
 
    
March 31, 2009
    
September 30, 2008
  
               
Raw materials
  
$
33,758
  
$
38,304
  
Work-in-process
    
7,601
    
7,293
  
Finished goods
    
25,252
    
32,010
  
               
Inventory, gross
    
66,611
    
77,607
  
               
Less: allowance for excess and obsolescence
    
(19,252
)
  
(12,990
)
               
Total inventory, net
  
$
47,359
  
$
64,617
  


Reserves are adjusted to reflect inventory values in excess of forecasted sales, as well as overall inventory risk assessed by management.  We have incurred, and may in the future incur, charges to write-down our inventory.

·  
During the three months ended December 31, 2008, the Company recorded $5.6 million in inventory write-downs, of which $4.8 million related to the Fiber Optics segment and $0.8 million related to the Photovoltaics segment.

·  
During the three months ended March 31, 2009, the Company recorded $7.8 million in inventory write-downs, of which $2.2 million related to the Fiber Optics segment and $5.6 million related to the Photovoltaics segment.



 
 
 

NOTE 7.  Property, Plant, and Equipment

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

(in thousands)
 
    
March 31, 2009
    
September 30, 2008
  
               
Land
  
$
1,502
  
$
1,502
  
Building and improvements
    
44,317
    
44,607
  
Equipment
    
107,134
    
106,947
  
Furniture and fixtures
    
5,483
    
5,403
  
Leasehold improvements
    
1,201
    
478
  
Construction in progress
    
3,335
    
4,395
  
               
Property, plant and equipment, gross
    
162,972
    
163,332
  
               
Less: accumulated depreciation and amortization
    
(85,040
)
  
(80,054
)
               
Total property, plant and equipment, net
  
$
77,932
  
$
83,278
  


As of March 31, 2009 and September 30, 2008, the Company did not have any significant capital lease agreements.

During the six months ended March 31, 2009, the Company wrote-off approximately $1.2 million of fully amortized fixed assets, related to the Company’s Photovoltaics segment, that were no longer in use.

Depreciation expense was $3.1 million and $6.3 million for the three and six months ended March 31, 2009, respectively. Depreciation expense was $2.0 million and $3.8 million for the three and six months ended March 31, 2008, respectively.


NOTE 8.  Goodwill and Intangible Assets

Goodwill

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


Valuation of Goodwill.  Goodwill represents the excess of the purchase price of an acquired business over the fair value of the identifiable assets acquired and liabilities assumed.  As required by SFAS 142, Goodwill and Other Intangible Assets, the Company evaluates its goodwill for impairment on an annual basis, or whenever events or changes in circumstances indicate that the carrying value of a reporting unit may exceed its fair value.  Management has elected December 31st as the annual assessment date.  Circumstances that could trigger an interim impairment test include but are not limited to: a significant adverse change in the market value of the Company’s common stock, the business climate or legal factors; an adverse action or assessment by a regulator; unanticipated competition; loss of key personnel; the likelihood that a reporting unit or significant portion of a reporting unit will be sold or otherwise disposed; results of testing for recoverability of a significant asset group within a reporting unit; and recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.


 
 
 

In performing goodwill impairment testing, the Company determines the fair value of each reporting unit using a weighted combination of a market-based approach and a discounted cash flow (“DCF”) approach.  The market-based approach relies on values based on market multiples derived from comparable public companies. In applying the DCF approach, management forecasts cash flows over a five year period using assumptions of current economic conditions and future expectations of earnings.  This analysis requires the exercise of significant judgment, including judgments about appropriate discount rates based on the assessment of risks inherent in the amount and timing of projected future cash flows.  The derived discount rate may fluctuate from period to period as it is based on external market conditions.

All of these assumptions are critical to the estimate and can change from period to period.  Updates to these assumptions in future periods, particularly changes in discount rates, could result in different results of goodwill impairment tests.

·  
As disclosed in the Company’s Annual Report on Form 10-K, as a result of the unfavorable macroeconomic environment and a significant reduction in our market capitalization since the completion of the asset acquisitions from Intel Corporation (the “Intel Acquisitions”), the Company reduced its internal revenue forecasts and revised its operating plans to reflect a general decline in demand and average selling prices, especially for the Company’s recently acquired telecom-related fiber optics component products.  The Company also performed an interim test as of September 30, 2008 to determine whether there was impairment of its goodwill.  The fair value of each of the Company’s reporting units was determined by using a weighted average of the Guideline Public Company, Guideline Merged and Acquired Company, and the DCF methods.  Due to uncertainty from the ongoing financial liquidity crisis and the current economic recession, management believed the most appropriate approach would be an equally weighted approach, amongst the three methods, to arrive at an indicated value for each of the reporting units.  The indicated fair value of each of the reporting units was then compared with the reporting unit’s carrying value to determine whether there was an indication of impairment of goodwill under SFAS 142.  As a result, the Company determined that the goodwill related to one of its Fiber Optics reporting units may be impaired.  Since the second step of the Company’s goodwill impairment test was not completed before the fiscal year-end financial statements were issued and a goodwill impairment loss was probable and could be reasonably estimated, management recorded a non-cash goodwill impairment charge of $22.0 million, as a best estimate, during the three months ended September 30, 2008.

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

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

o  
The Company’s annual impairment test as of December 31, 2008, indicated that there was no impairment of goodwill for the Photovoltaics reporting unit.  Based upon revised operational and cash flow forecasts, the Photovoltaics reporting unit’s fair value exceeded carrying value by over 15%.

·  
The Company continues to report goodwill related to its Photovoltaics reporting unit and the Company believes the remaining carrying amount of goodwill is recoverable.  However, if there is further erosion of the Company’s market capitalization or the Photovoltaics reporting unit is unable to achieve its projected cash flows, management may be required to perform additional impairment tests of its remaining goodwill.  The outcome of these additional tests may result in the Company recording additional goodwill impairment charges.



 
 
 

Intangible Assets

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

(in thousands) 
  
March 31, 2009 
  
September 30, 2008 
  
     
 Gross
Assets 
    
Accumulated
Amortization
    
Net
Assets
    
Gross Assets
    
Accumulated
Amortization
    
Net
Assets
  
                                       
Fiber Optics
  
 $
36,074
  
$
(12,514
)
$
23,560
  
$
35,991
  
$ 
(8,502
)
$ 
27,489
  
Photovoltaics
    
1,246
    
(516
)
  
730
    
956
    
(412
)
  
544
  
                                       
Total
  
$
37,320
  
$
(13,030
)
$
24,290
  
$
36,947
  
$
(8,914
)
$
28,033
  

Valuation of Long-lived Assets and Other Intangible Assets.  Long-lived assets consist primarily of our property, plant, and equipment.  Our intangible assets consist primarily of intellectual property that has been internally developed or purchased.  Purchased intangible assets include existing and core technology, trademarks and trade names, and customer contracts.  Intangible assets are amortized using the straight-line method over estimated useful lives ranging from one to fifteen years.  Because all of the Company’s intangible assets are subject to amortization, the Company reviews these intangible assets for impairment in accordance with the provisions of FASB Statement No. 144, Accounting for the Impairment of Long-Lived Assets and Long-Lived  Assets to be Disposed Of.  As part of internal control procedures, the Company reviews long-lived assets and other intangible assets for impairment on an annual basis or whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.  Our impairment testing of intangible assets consists of determining whether the carrying amount of the long-lived asset (asset group) is recoverable.  That is, whether the sum of the future undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group) exceeds its carrying amount.   In making this determination, the Company uses certain assumptions, including estimates of future cash flows expected to be generated by these assets, which are based on additional assumptions such as asset utilization, the length of service that assets will be used in our operations, and estimated salvage values.

·  
As disclosed in the Company’s Annual Report on Form 10-K, as a result of reductions to our internal revenue forecasts, changes to our internal operating forecasts and a significant reduction in our market capitalization since the completion of the Intel Acquisitions, the Company tested for impairment of its long-lived assets and other intangible assets.  The sum of future undiscounted cash flows exceeded the carrying value for each of the reporting units’ long-lived and other intangible assets.  Accordingly, no impairment existed under SFAS 144 at September 30, 2008.  As the long-lived asset (asset group) met the recoverability test, no further testing was required or performed under SFAS 144.

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

As of December 31, 2008, due to further changes in estimates of future operating performance and cash flows that occurred during the quarter, the Company tested for impairment of its long-lived assets and other intangible assets and based on that analysis, determined that no impairment existed.   Based upon revised operational and cash flow forecasts, total future undiscounted cash flows exceeded carrying value by over 50%, therefore the Company believes the carrying amount of its intangible assets is recoverable.  However, if there is further erosion of the Company’s market capitalization or the Company is unable to achieve its projected cash flows, management may be required to perform additional impairment tests of its remaining intangible assets.  The outcome of these additional tests may result in the Company recording additional impairment charges.

Amortization expense related to intangible assets is generally included in SG&A on the statements of operations. Amortization expense was $1.1 million and $2.2 million for the three and six months ended March 31, 2009, respectively.  Amortization expense was $0.4 million and $1.0 million for the three and six months ended March 31, 2008, respectively.


 
 
 

Based on the carrying amount of the intangible assets as of March 31, 2009, the estimated future amortization expense is as follows:

(in thousands)
 
  
Estimated Future Amortization Expense
         
Nine-months ended September 30, 2009
  
$
2,171
  
Fiscal year ended September 30, 2010
    
4,240
  
Fiscal year ended September 30, 2011
    
3,853
  
Fiscal year ended September 30, 2012
    
3,568
  
Fiscal year ended September 30, 2013
    
3,143
  
Thereafter
    
7,315
  
         
Total future amortization expense
  
$
24,290
  


NOTE 9.  Accrued Expenses and Other Current Liabilities

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

(in thousands)
 
  
March 31, 2009
  
September 30, 2008
Compensation-related
  
$
5,900
    
$
6,640
  
Warranty
    
5,128
      
4,640
  
Professional fees
    
2,444
      
2,099
  
Royalty
    
1,701
      
1,414
  
Self insurance
    
1,195
      
1,044
  
Deferred revenue and customer deposits
    
1,429
      
1,422
  
Taxes
    
654
      
3,555
  
Inventory obligation
    
-
      
982
  
Accrued program loss
    
233
      
843
  
Restructuring accrual
    
141
      
331
  
Other
    
1,014
      
320
  
                 
Total accrued expenses and other current liabilities
  
$
19,839
    
$
23,290
  


NOTE 10.  Restructuring Charges
 
In accordance with SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities, SG&A expenses recognized as restructuring charges include costs associated with the integration of business acquisitions and overall cost-reduction efforts.

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

(in thousands)
 
  
Three Months Ended
March 31,
  
Six Months Ended
March 31,
  
     
2009
    
2008
    
2009
    
2008
  
Employee severance-related expense
  
$
294
  
$
52 
  
$
911 
  
$
309 
  
Other restructuring-related expense
    
-
    
-
    
-
    
93
  
                           
Total restructuring charges
  
$
294
  
$
52
  
$
911
  
$
402
  



 
 
 

The following table sets forth changes in the severance and restructuring-related accrual accounts as of March 31, 2009:

(in thousands)
 
 
  
Severance-related
 Accrual
  
Restructuring-related
Accrual
  
Total
  
                           
Balance as of September 30, 2008
  
$
152
    
$
331
    
$
483
    
                           
Additional accruals
    
911
      
-
      
911
    
Cash payments or otherwise settled
    
(1,063
)
    
(190
)
    
(1,253
)
  
                           
Balance as of March 31, 2009
  
$
-
    
$
141
    
$
141
    


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


NOTE 11.  Debt

Line of Credit

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

As of March 31, 2009, under the borrowing base formula, the Company had the ability to borrow up to $9.1 million against this credit facility and had a $6.2 million prime rate loan outstanding, with an interest rate of 5.25%, and approximately $1.1 million in standby letters of credit outstanding.

The facility is also subject to certain financial covenants.  For the three months ended December 31, 2008, the Company did not meet the requirements under the EBITDA financial covenant and for the three months ended March 31, 2009, the Company did not meet the requirements under the Fixed Charge Coverage Ratio and EBITDA financial covenants.  Over the last several months, the Company has entered into multiple amendments to the credit facility with Bank of America which has, among other things: (i) increased the amount of eligible accounts receivable under the borrowing base formula, (ii) waived certain events of default of financial covenants by the Company, (iii) decreased the total maximum loan availability amount to $14 million, (iv) increased applicable interest rates with respect to loans and letters of credit, and (v) adjusted certain financial covenants.   The adjustments to the borrowing base formula and the calculation of eligible accounts receivable are intended to provide the Company with access to more liquidity for working capital purposes.


Long-term Debt

In December 2008, the Company borrowed $0.9 million from UBS that is collateralized with $1.4 million of auction rate securities.  The average interest rate on the loan is approximately 1.3% and the term of the loan is dependant upon the timing of the settlement of the auction rate securities with UBS which is expected to occur by June 2010 at 100% par value.


NOTE 12.  Commitments and Contingencies

The Company leases certain land, facilities, and equipment under non-cancelable operating leases. The leases typically provide for rental adjustments for increases in base rent (up to specific limits), property taxes, insurance and general property maintenance that would be recorded as rent expense. Net facility and equipment rent expense under such leases totaled approximately $0.7 million and $1.3 million for the three and six months ended March 31, 2009, respectively and approximately $0.4 million and $0.7 million for the three and six months ended March 31, 2008, respectively.
 
 
 
Estimated future minimum rental payments under the Company's non-cancelable operating leases with an initial or remaining term of one year or more as of March 31, 2009 are as follows:

(in thousands)
 
  
Estimated Future Minimum Lease Payments
Six months ended September 30, 2009
  
$
1,007
  
Fiscal year ended September 30, 2010
    
1,953
  
Fiscal year ended September 30, 2011
    
1,809
  
Fiscal year ended September 30, 2012
    
1,063
  
Fiscal year ended September 30, 2013
    
791
  
Thereafter
    
2,774
  
         
Total minimum lease payments
  
$
9,397
  
 

As of March 31, 2009, the Company had eight standby letters of credit issued and outstanding which totaled approximately $2.0 million, of which $1.1 million was issued against the Company’s credit facility.  The remaining balance of $0.9 million is collateralized with financial institutions and listed on the Company’s balance sheet as restricted cash.


Credit Market Conditions

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


Legal Proceedings

The Company is subject to various legal proceedings and claims that are discussed below. The Company is also subject to certain other legal proceedings and claims that have arisen in the ordinary course of business and which have not been fully adjudicated.  The Company does not believe it has a potential liability related to current legal proceedings and claims that could individually, or in the aggregate, have a material adverse effect on its financial condition, liquidity or results of operations. However, the results of legal proceedings cannot be predicted with certainty. Should the Company fail to prevail in any legal matters or should several legal matters be resolved against the Company in the same reporting period, the operating results of a particular reporting period could be materially adversely affected.  During fiscal 2008, the Company settled certain matters that did not individually, or in the aggregate, have a material impact on the Company’s results of operations.


a) 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 U.S. 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”).

A motion to approve an agreement among the parties to settle the matter, reflected in a stipulation of compromise and settlement, was filed with the U.S. District Court for the District of New Jersey on December 3, 2007.   The Court granted the motion for preliminary approval of the settlement on January 3, 2008, and, at a hearing held on March 28, 2008, the Court issued an order giving final approval to the settlement.   The settlement has become final and effective upon the expiration of the appeal period on April 30, 2008.  Thus, the settlement is now binding on all parties and represents a final settlement of both the Federal Court Action and the State Court Actions.  For additional information regarding this matter, please see EMCORE’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008.


b) Intellectual Property Lawsuits

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

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

On December 20, 2007, the Company was served with a complaint in another declaratory relief action which Optium had filed in the Federal District Court for the Western District of Pennsylvania.  This action seeks to have U.S. patents 6,282,003 and 6,490,071 declared invalid or unenforceable because of certain conduct alleged to have occurred in connection with the grant of these patents.  These allegations are substantially the same as those brought by Optium by motion in the Company’s own case against Optium, which motion had been denied by the Court.  On August 11, 2008, both actions pending in the Western District of Pennsylvania were consolidated before a single judge, and a trial date of October 19, 2009 was set.  On February 18, 2009, the Company’s motion for a summary judgment dismissing Optium’s declaratory relief action was granted, and on March 11, 2009, the Company was notified that Optium intended to file an appeal of this order.

 
 
c) Avago-related Litigation

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

On December 5, 2008, EMCORE was also served with a complaint by Avago Technologies filed in the United States District Court for the Northern District of California, San Jose Division alleging infringement of two patents by the Company’s VCSEL products. (Avago Technologies Singapore et al., Emcore Corporation, et al., Case No.:  C08-5394 EMC)

On March 5, 2009, the Company was notified that, based on a complaint filed by Avago alleging the same patent infringement that formed the basis of the complaint previously filed in the Northern District of California, the U.S. International Trade Commission had determined to begin an investigation titled “In the Matter of Certain Optoelectronic Devices, Components Thereof and Products Containing the Same”, Inv. No. 337-TA-669.

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

 
d) Green and Gold related litigation

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

On February 12, 2009, the Company became aware of a second stockholder class action filed in the United States District Court for the District of New Mexico against the same defendants named in the Prissert Class Action, based on the substantially the  same facts and circumstances, containing substantially the same allegations and seeking substantially the same relief.

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

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

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

e) Securities Matters

·  
SEC Communications.  On or about August 15, 2008, the Company received a letter from the Denver office of the Enforcement Division of the Securities and Exchange Commission wherein it sought EMCORE's voluntary production of documents relating to, among other things, the Company's business relationship with Green and Gold Energy, Inc., its licensees, and the photovoltaic backlog the Company reported to the public.  Since that time, the Company has provided documents to the staff of the SEC and met with the staff on December 12, 2008 to address this matter.

·  
NASDAQ Communication.  On or about November 13, 2008, the Company received a letter from the NASDAQ Listings Qualifications group (“NASDAQ”) concerning the Company's removal of $79 million in backlog attributable to GGE which the Company announced on August 8, 2008 and the remaining backlog exclusive of GGE. The Company advised NASDAQ that it would cooperate with its inquiry, and has complied with the NASDAQ request for information.  On February 11, 2009, the Company received a letter requesting additional information, with which the Company has complied, and on April 28, 2009, the Company received a third letter requesting further additional information, with which the Company intends to comply.


NOTE 13.  Income Taxes

On October 1, 2007, the Company adopted Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109.  As a result of the adoption of FIN 48, the Company recorded an increase in accumulated deficit and an increase in the liability for unrecognized state tax benefits of approximately $326,000 (net of the federal benefit for state tax liabilities).  All of this amount, if recognized, would reduce future income tax provisions and favorably impact effective tax rates.  During the three and six months ended March 31, 2009 and 2008, there were no material increases or decreases in unrecognized tax benefits.  Management expects that over the next twelve months the liability for unrecognized state tax benefits will substantially decrease and does not anticipate any material increases over the next twelve months.  As of March 31, 2009, the Company had approximately $0.6 million of interest and penalties accrued as tax liabilities on the balance sheet.

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



 
 
 

NOTE 14.  Segment Data and Related Information

The Company has two reporting segments: Fiber Optics and Photovoltaics.  Our Fiber Optics segment offers optical components, subsystems and systems that enable the transmission of video, voice and data over high-capacity fiber optic cables for high-speed data and telecommunications, cable television (“CATV”) and fiber-to-the-premises (“FTTP”) networks.  Our Photovoltaics segment provides solar products for satellite and terrestrial applications. For satellite applications, we offer high-efficiency compound semiconductor-based multi-junction solar cells, covered interconnect cells (“CICs”) and fully integrated solar panels.  For terrestrial applications, we offer concentrating photovoltaic (“CPV”) systems for utility scale solar applications as well as high-efficiency multi-junction solar cells and CPV components for use in solar power concentrator systems.  We periodically evaluate our reportable segments in accordance with SFAS 131, Disclosures about Segments of an Enterprise and Related Information. The Company’s Chief Executive Officer is the Chief Operating Decision Maker pursuant to SFAS 131, and he allocates resources to segments based on their business prospects, competitive factors, revenue, operating results and other non-GAAP financial ratios.

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

Segment Revenue
(in thousands)
  
 
Three Months Ended March 31,
   
2009
  
2008
   
 
Revenue
  
 
% of Revenue
  
 
Revenue
  
 
% of Revenue
                                 
Fiber Optics
  
$
28,414
      
66
%
  
$
37,630
      
67
%
Photovoltaics
    
14,870
      
34
      
18,649
      
33
  
                                 
Total revenue
  
$
43,284
      
100
%
  
$
56,279
      
100
%


Segment Revenue
(in thousands)
  
 
Six Months Ended March 31,
   
2009
  
2008
   
 
Revenue
  
 
% of Revenue
  
 
Revenue
  
 
% of Revenue
                                 
Fiber Optics
  
$
67,579
      
69
%
  
$
71,590
      
69
%
Photovoltaics
    
29,761
      
31
      
31,576
      
31
  
                                 
Total revenue
  
$
97,340
      
100
%
  
$
103,166
      
100
%


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

Geographic Revenue
(in thousands)
  
 
Three Months Ended March 31,
   
2009
  
2008
   
 
Revenue
  
 
% of Revenue
  
 
Revenue
  
 
% of Revenue
                                 
United States
  
$
25,382
      
59
%
  
$
40,246
      
72
%
Asia
    
12,837
      
30
      
8,123
      
14
  
Europe
    
2,376
      
5
      
7,732
      
14
  
Other
    
2,689
      
6
      
178
      
--
  
                                 
Total revenue
  
$
43,284
      
100
%
  
$
56,279
      
100
%
 

Geographic Revenue
(in thousands)
  
 
Six Months Ended March 31,
   
2009
  
2008
   
 
Revenue
  
 
% of Revenue
  
 
Revenue
  
 
% of Revenue
                                 
United States
  
$
57,096
      
59
%
  
$
67,069
      
65
%
Asia
    
32,046
      
33
      
23,464
      
23
  
Europe
    
5,173
      
5
      
12,318
      
12
  
Other
    
3,025
      
3
      
315
      
--
  
                                 
Total revenue
  
$
97,340
      
100
%
  
$
103,166
      
100
%


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

Significant Customers
As a percentage of total consolidated revenue
Three Months Ended
March 31,
  
Six Months Ended
March 31,
   
2009
  
2008
      
2009
  
2008
  
Fiber Optics-related customer:
                              
Jabil Circuit
    
-
    
-
      
11%
    
-
    
 
Photovoltaics – related customer:
                              
Space Systems / Loral
    
15%
    
-
      
15%
    
-
    


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

Operating Loss by Segment
 (in thousands)
Three Months Ended
March 31,
  
Six Months Ended
March 31,
  
   
2009
    
2008
    
2009
    
2008
  
                         
Fiber Optics
$
(16,775
)
$
(3,974
)
$
(65,197
)
$
(7,501
)
Photovoltaics
  
(9,087
)
  
(9,787
)
  
(13,123
)
  
(13,338
)
Corporate
  
-
    
816
    
(2
)