10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 12, 2008
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,
2008
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 5, 2008 was 77,307,704.
EMCORE
Corporation
FORM
10-Q
For
the Quarterly Period Ended March 31, 2008
TABLE
OF CONTENTS
PAGE
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57
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58
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EMCORE
CORPORATION
Condensed
Consolidated Statements of Operations
For
the three and six months ended March 31, 2008 and 2007
(in
thousands, except per share data)
(unaudited)
Three
Months Ended
March
31,
|
Six
Months Ended
March
31,
|
|||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
Product
revenue
|
$ | 48,260 | $ | 33,716 | $ | 92,761 | $ | 69,342 | ||||||||
Service
revenue
|
8,019 | 5,882 | 10,405 | 8,852 | ||||||||||||
Total
revenue
|
56,279 | 39,598 | 103,166 | 78,194 | ||||||||||||
Cost
of product revenue
|
42,133 | 28,170 | 77,445 | 59,111 | ||||||||||||
Cost
of service revenue
|
7,498 | 4,459 | 8,970 | 6,618 | ||||||||||||
Total
cost of revenue
|
49,631 | 32,629 | 86,415 | 65,729 | ||||||||||||
Gross
profit
|
6,648 | 6,969 | 16,751 | 12,465 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Selling,
general, and administrative
|
10,263 | 13,143 | 22,126 | 25,682 | ||||||||||||
Research
and development
|
9,330 | 7,528 | 16,750 | 14,139 | ||||||||||||
Total
operating expenses
|
19,593 | 20,671 | 38,876 | 39,821 | ||||||||||||
Operating
loss
|
(12,945 | ) | (13,702 | ) | (22,125 | ) | (27,356 | ) | ||||||||
Other
expense (income):
|
||||||||||||||||
Interest
income
|
(227 | ) | (1,169 | ) | (654 | ) | (2,820 | ) | ||||||||
Interest
expense
|
375 | 1,260 | 1,580 | 2,522 | ||||||||||||
Loss
from conversion of subordinated notes
|
4,658 | - | 4,658 | - | ||||||||||||
Stock–based
compensation expense from tolled options (income from expired tolled
options)
|
(58 | ) | - | 4,316 | - | |||||||||||
Gain
from insurance proceeds
|
- | (357 | ) | - | (357 | ) | ||||||||||
Loss
on disposal of equipment
|
- | - | 86 | - | ||||||||||||
Foreign
exchange gain
|
(186 | ) | - | (198 | ) | - | ||||||||||
Total
other expense (income)
|
4,562 | (266 | ) | 9,788 | (655 | ) | ||||||||||
Net
loss
|
$ | (17,507 | ) | $ | (13,436 | ) | $ | (31,913 | ) | $ | (26,701 | ) | ||||
Per
share data:
|
||||||||||||||||
Basic
and diluted per share data:
|
||||||||||||||||
Net
loss
|
$ | (0.27 | ) | $ | (0.26 | ) | $ | (0.55 | ) | $ | (0.52 | ) | ||||
Weighted-average
number of basic and diluted shares
Outstanding
|
64,560 | 50,947 | 57,975 | 50,911 | ||||||||||||
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
EMCORE
CORPORATION
Condensed
Consolidated Balance Sheets
As
of March 31, 2008 and September 30, 2007
(In
thousands)
(unaudited)
As
of
March
31,
2008
|
As
of
September
30, 2007
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 22,734 | $ | 12,151 | ||||
Restricted
cash
|
2,148 | 1,538 | ||||||
Short-term
investments
|
988 | 29,075 | ||||||
Accounts
receivable, net of allowance of $820 and $802,
respectively
|
52,801 | 38,151 | ||||||
Receivables,
related party
|
287 | 332 | ||||||
Income
tax receivable
|
130 | - | ||||||
Inventory,
net
|
43,521 | 29,205 | ||||||
Prepaid
expenses and other current assets
|
4,948 | 4,350 | ||||||
Total
current assets
|
127,557 | 114,802 | ||||||
Property,
plant, and equipment, net
|
74,165 | 57,257 | ||||||
Goodwill
|
89,739 | 40,990 | ||||||
Other
intangible assets, net
|
12,753 | 5,275 | ||||||
Investments
in unconsolidated affiliates
|
14,917 | 14,872 | ||||||
Long-term
investments and restricted cash
|
4,655 | - | ||||||
Other
non-current assets, net
|
533 | 1,540 | ||||||
Total
assets
|
$ | 324,319 | $ | 234,736 | ||||
LIABILITIES
and SHAREHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 27,943 | $ | 22,685 | ||||
Accrued
expenses and other current liabilities
|
26,430 | 28,776 | ||||||
Income
tax payable
|
594 | 137 | ||||||
Total
current liabilities
|
54,967 | 51,598 | ||||||
Convertible
senior subordinated notes
|
- | 84,981 | ||||||
Total
liabilities
|
54,967 | 136,579 | ||||||
Commitments
and contingencies (Note 12)
|
||||||||
Shareholders’
equity:
|
||||||||
Preferred
stock, $0.0001 par, 5,882 shares authorized, no shares
outstanding
|
- | - | ||||||
Common
stock, no par value, 100,000 shares authorized, 73,735 shares issued
and
73,576
outstanding at March 31, 2008; 51,208 shares issued and 51,049
shares
outstanding
at September 30, 2007
|
647,346 | 443,835 | ||||||
Accumulated
deficit
|
(375,817 | ) | (343,578 | ) | ||||
Accumulated
other comprehensive loss
|
(94 | ) | (17 | ) | ||||
Treasury
stock, at cost; 159 shares
|
(2,083 | ) | (2,083 | ) | ||||
Total
shareholders’ equity
|
269,352 | 98,157 | ||||||
Total
liabilities and shareholders’ equity
|
$ | 324,319 | $ | 234,736 |
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, 2008 and 2007
(in
thousands)
(unaudited)
Six
Months Ended
March
31,
|
||||||||
Cash
flows from operating activities:
|
2008
|
2007
|
||||||
Net
loss
|
$
|
(31,913
|
)
|
$
|
(26,701
|
)
|
||
Adjustments
to reconcile net loss to net cash used for operating
activities:
|
||||||||
Stock-based
compensation expense
|
6,964
|
3,670
|
||||||
Depreciation
and amortization expense
|
4,842
|
4,880
|
||||||
Accretion
of loss from convertible senior subordinated notes exchange
offer
|
41
|
98
|
||||||
Provision
for doubtful accounts
|
101
|
266
|
||||||
Compensatory
stock issuances
|
545
|
412
|
||||||
Loss
from disposal of property, plant and equipment
|
86
|
-
|
||||||
Loss
from conversion of convertible senior subordinated notes
|
1,169
|
-
|
||||||
Forgiveness
of shareholders’ note receivable
|
-
|
82
|
||||||
Reduction
of note receivable due for services received
|
260
|
261
|
||||||
Total
non-cash adjustments
|
14,008
|
9,669
|
||||||
Changes
in operating assets and liabilities, net of effect of
acquisitions:
|
||||||||
Accounts
receivable
|
(14,714
|
)
|
(9,323
|
)
|
||||
Inventory
|
3,624
|
(3,992
|
)
|
|||||
Prepaid
expenses and other current assets
|
(590
|
)
|
241
|
|||||
Other
assets
|
(678
|
)
|
(281
|
)
|
||||
Accounts
payable
|
5,258
|
(1,090
|
)
|
|||||
Accrued
expenses and other current liabilities
|
(4,004
|
)
|
(644
|
)
|
||||
Total
change in operating assets and liabilities
|
(11,104
|
)
|
(15,089
|
)
|
||||
Net
cash used for operating activities
|
(29,009
|
)
|
(32,121
|
)
|
||||
Cash
flows from investing activities:
|
||||||||
Purchase
of plant and equipment
|
(9,624
|
)
|
(2,731
|
)
|
||||
Proceeds
from insurance recovery
|
1,189
|
362
|
||||||
Investment
in unconsolidated affiliate
|
(45
|
)
|
(13,873
|
)
|
||||
Proceeds
from employee notes receivable
|
-
|
121
|
||||||
Purchase
of Intel’s Optical Platform Division
|
(75,546
|
)
|
-
|
|||||
Proceeds
from notes receivable
|
-
|
1,500
|
||||||
Funding
of restricted cash
|
(1,153
|
)
|
(420
|
)
|
||||
Purchase
of short and long term investments
|
(7,000
|
)
|
(22,150
|
)
|
||||
Sale
of short and long term investments
|
30,800
|
75,100
|
||||||
Net
cash (used for) provided by investing activities
|
(61,379
|
)
|
37,909
|
|||||
Cash
flows from financing activities:
|
||||||||
Payments
on capital lease obligations
|
(10
|
)
|
(32
|
) | ||||
Proceeds
from exercise of stock options
|
6,800
|
274
|
||||||
Proceeds
from employee stock purchase plan
|
485
|
202
|
||||||
Proceeds
from private placement transaction
|
93,773
|
-
|
||||||
Net
cash provided by financing activities
|
101,048
|
444
|
||||||
Effect
of foreign currency
|
(77
|
)
|
-
|
|||||
Net
increase (decrease) in cash and cash equivalents
|
10,583
|
6,232
|
||||||
Cash
and cash equivalents, beginning of period
|
12,151
|
22,592
|
||||||
Cash
and cash equivalents, end of period
|
$
|
22,734
|
$
|
28,824
|
||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
||||||||
Cash
paid during the period for interest
|
$
|
3,314
|
$
|
2,421
|
||||
Cash
paid for income taxes
|
$
|
-
|
$
|
2,351
|
||||
NON-CASH
DISCLOSURE
|
||||||||
Issuance
of common stock for purchase of Intel Optical Platform
Division
|
$
|
10,000
|
$
|
-
|
||||
Issuance
of common stock for conversion of convertible senior 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, 2007 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, 2007.
The
preparation of the consolidated financial statements in conformity with U.S.
GAAP requires management of the Company to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period.
Management develops estimates based on historical experience and on various
assumptions about the future that are believed to be reasonable based on the
best information available. The Company’s reported financial position or results
of operations may be materially different under changed conditions or when using
different estimates and assumptions. In the event that estimates or assumptions
prove to differ from actual results, adjustments are made in subsequent periods
to reflect more current information.
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.
|
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.
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.
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
|
%
|
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
|
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.
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
|
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.
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.
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.
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
|
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 |
_______________
(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.
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
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 meant the Company was unable to sell its investments. At March
31, 2008, the Company had invested approximately $5.3 million in auction rate
securities, of which the underlyings for $4.0 million are currently AAA rated,
the highest rating by a rating agency. The remaining $1.3 million of
investments are securities whose underlying assets are primarily student loans
which are substantially backed by the federal government.
As of
March 31, 2008, approximately $1.0 million of the Company’s auction rate
securities are classified as a current asset since the underlying securities are
expected to be redeemed at par value within several months. The
remaining $4.3 million of securities are classified as non-current
assets. The Company also recorded a temporary unrealized loss of
approximately $0.2 million to accumulated other comprehensive loss, a component
of shareholders’ equity, primarily due to these liquidity
factors. Based on expected operating cash flows, and our other
sources of cash, the Company does not anticipate the potential lack of liquidity
on these investments will affect its ability to execute on its current business
plan.
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.
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”).
Both the
Federal Court Action and the State Court Actions alleged, using essentially
identical contentions that the Individual Defendants engaged in improprieties
and violations of law in connection with the Company’s historical issuances of
stock options. Each of the actions seeks the same relief on behalf of
the Company, including, among other things, damages, equitable relief, corporate
governance reforms, an accounting, rescission, restitution and costs and
disbursements of the lawsuit. On July 10, 2007, the State Court
Actions were removed to the U.S. District Court for the District of New
Jersey.
On
September 26, 2007, the plaintiff in the Federal Court Action signed an
agreement in principle with the Individual Defendants and the Company to settle
that litigation in accordance with the Memorandum of Understanding (the “MOU”)
filed as Exhibit 10.10 to the Annual Report on Form 10-K for the year ended
September 30, 2006. That same day, the plaintiffs in the State Court
Actions advised the Federal Court that the settlement embodied in the MOU would
also constitute the settlement of the State Court Actions.
The MOU
provides that the Company will adhere to certain policies and procedures
relating to the issuance of stock options, stock trading by directors, officers
and employees, the composition of its Board of Directors, and the functioning of
the Board’s Audit and Compensation Committees. The MOU also provides
for the payment of $700,000 relating to plaintiff’s attorneys’ fees, costs and
expenses, which the Company’s insurance carrier has committed to pay on behalf
of the Company.
On
November 28, 2007, a Stipulation of Compromise and Settlement (the
“Stipulation”) substantially embodying the terms previously contained in the MOU
was fully executed by the Company and the other defendants and the plaintiffs in
the Federal Court Action and the State Court Actions. The Stipulation was filed
as Exhibit 10.19 to the Annual Report on Form 10-K for the year ended September
30, 2007.
The
Stipulation provides that the Company will adhere to certain policies and
procedures relating to the issuance of stock options, stock trading by
directors, officers and employees, the composition of its Board of Directors,
and the functioning of the Board’s Audit and Compensation
Committees. The Stipulation also provides for the payment of $700,000
relating to plaintiffs’ attorneys’ fees, costs and expenses, which the Company’s
insurance carrier has committed to pay on behalf of the Company. A
motion to approve the settlement reflected in the Stipulation 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.
SEC
Investigation
On
February 27, 2008, the Company received a letter from the SEC’s Division of
Enforcement stating that the staff had completed its informal investigation of
EMCORE Corporation regarding the Company’s historical stock option granting
practices. The letter further advised the Company that the
staff of the Division of Enforcement did not intend to recommend any enforcement
action against the Company.
Indemnification
Obligations
Subject
to certain limitations, we are obligated to indemnify our current and former
directors, officers and employees in connection with the Special Committee’s
investigation of our historical stock option practices, the related SEC
non-public investigation and shareholder litigation. These obligations arise
under the terms of our restated certificate of incorporation, our bylaws,
applicable contracts, and New Jersey law. The obligation to indemnify generally
means that we are required to pay or reimburse the individuals’ reasonable legal
expenses and possibly damages and other liabilities incurred in connection with
these matters. We are currently paying or reimbursing legal expenses being
incurred in connection with these matters by a number of our current and former
directors, officers and employees. The maximum potential amount of future
payments the Company could be required to make under these indemnification
agreements is unlimited; however, the Company has a director and officer
liability insurance policies that limits its exposure and enables it to recover
a portion of any future amounts paid.
Intellectual
Property Lawsuits
We
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 is
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 (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 January 30, 2008, the Company
and JDSU moved to dismiss the declaratory judgment action, and the parties are
presently awaiting a ruling from the Court on that motion to
dismiss.
NOTE
13. Segment Data and Related Information
The
Company has four operating segments: (1) EMCORE Fiber Optics and (2) EMCORE
Broadband, which are aggregated as a separate reporting segment, Fiber Optics,
and (3) EMCORE Photovoltaics and (4) EMCORE Solar Power, which are aggregated as
a separate reporting segment, Photovoltaics. The Company's Fiber
Optics revenue is derived primarily from sales of optical components and
subsystems for cable television (“CATV”), fiber to the premise (“FTTP”),
enterprise routers and switches, telecom grooming switches, core routers, high
performance servers, supercomputers, and satellite communications data
links. The Company's Photovoltaics revenue is derived primarily from
the sales of solar power conversion products, including solar cells, covered
interconnect solar cells, and solar panels. The Company
evaluates its reportable segments in accordance with SFAS 131, Disclosures About Segments of an
Enterprise and Related Information. The Company’s Chief Executive Officer
is the Company’s Chief Operating Decision Maker pursuant to SFAS 131, and he
allocates resources to segments based on their business prospects, competitive
factors, net revenue, operating results and other non-GAAP financial
ratios. The Company’s recent acquisition of assets from Intel will
reside in the Company’s Fiber Optics reporting segment.
The
following table sets forth the revenue and percentage of total revenue
attributable to each of the Company's reporting segments for the three and six
months ended March 31, 2008 and 2007.
(in
thousands)
Segment
Revenue
|
Three
Months Ended
March
31, 2008
|
Three
Months Ended
March 31,
2007
|
||||||||||||||
Revenue
|
%
of Revenue
|
Revenue
|
%
of Revenue
|
|||||||||||||
Fiber
Optics
|
$ | 37,630 | 67 | % | $ | 26,237 | 66 | % | ||||||||
Photovoltaics
|
18,649 | 33 | 13,361 | 34 | ||||||||||||
Total
revenue
|
$ | 56,279 | 100 | % | $ | 39,598 | 100 | % |
(in
thousands)
Segment
Revenue
|
Six
Months Ended
March
31, 2008
|
Six
Months Ended
March 31,
2007
|
||||||||||||||
Revenue
|
%
of Revenue
|
Revenue
|
%
of Revenue
|
|||||||||||||
Fiber
Optics
|
$ | 71,590 | 69 | % | $ | 51,560 | 66 | % | ||||||||
Photovoltaics
|
31,576 | 31 | 26,634 | 34 | ||||||||||||
Total
revenue
|
$ | 103,166 | 100 | % | $ | 78,194 | 100 | % |
The
following table sets forth the Company's consolidated revenues by geographic
region for the three and six months ended March 31, 2008 and
2007. Revenue was assigned to geographic regions based on the
customers’ or contract manufacturers’ billing address.
(in
thousands)
Geographic
Revenue
|
Three
Months Ended
March
31, 2008
|
Three
Months Ended
March 31,
2007
|
||||||||||||||
Revenue
|
%
of Revenue
|
Revenue
|
%
of Revenue
|
|||||||||||||
North
America
|
$ | 40,246 | 72 | % | $ | 28,522 | 72 | % | ||||||||
Asia
and South America
|
8,123 | 14 | 8,267 | 21 | ||||||||||||
Europe
|
7,732 | 14 | 2,809 | 7 | ||||||||||||
Other
|
178 | - | - | - | ||||||||||||
Total
revenue
|
$ | 56,279 | 100 | % | $ | 39,598 | 100 | % |
(in
thousands)
Geographic
Revenue
|
Six
Months Ended
March
31, 2008
|
Six
Months Ended
March 31,
2007
|
||||||||||||||
Revenue
|
%
of Revenue
|
Revenue
|
%
of Revenue
|
|||||||||||||
North
America
|
$ | 67,069 | 65 | % | $ | 54,268 | 69 | % | ||||||||
Asia
and South America
|
23,464 | 23 | 19,303 | 25 | ||||||||||||
Europe
|
12,318 | 12 | 4,623 | 6 | ||||||||||||
Other
|
315 | - | - | - | ||||||||||||
Total
revenue
|
$ | 103,166 | 100 | % | $ | 78,194 | 100 | % |
The
following table sets forth operating losses attributable to each of the
Company’s reporting segments and corporate for the three and six months ended
March 31, 2008 and 2007.
(in
thousands)
Statement
of Operations Data
|
Three
Months Ended
March
31,
|
Six
Months Ended
March
31,
|
||||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
Operating
loss by segment and corporate:
|
||||||||||||||||
Fiber
Optics
|
$ | (3,974 | ) | $ | (6,409 | ) | $ | (7,501 | ) | $ | (12,614 | ) | ||||
Photovoltaics
|
(9,787 | ) | (2,381 | ) | (13,338 | ) | (6,376 | ) | ||||||||
Corporate
income (loss)
|
816 | (4,912 | ) | (1,286 | ) | (8,366 | ) | |||||||||
Operating
loss
|
$ | (12,945 | ) | $ | (13,702 | ) | $ | (22,125 | ) | $ | (27,356 | ) | ||||
Long-lived
assets (consisting of property, plant and equipment, goodwill and intangible
assets) for each reporting segment are as follows:
(in
thousands)
Long-lived
Assets
|
As
of
March
31, 2008
|
As
of
September
30, 2007
|
||||||
Fiber
Optics
|
$ | 124,612 | $ | 56,816 | ||||
Photovoltaics
|
52,045 | 46,706 | ||||||
Total
|
$ | 176,657 | $ | 103,522 |
NOTE
14. Income Taxes
Effective
October 1, 2007, the Company adopted Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income
Taxes, an interpretation of FASB 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 quarter ended March 31, 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.
The
Company’s historical accounting policy with respect to interest and penalties
related to tax uncertainties has been to classify these amounts as income taxes,
and the Company continued this classification upon the adoption of FIN 48.
At March 31, 2008, the Company had approximately $117,000 of interest and
penalties accrued as tax liabilities in the Condensed Consolidated 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 2004
through 2006 remain open to examination by U.S. federal, state and local tax
authorities.
NOTE
15. Subsequent Event
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. The assets acquired include inventory,
fixed assets, intellectual property, and technology relating to optical
transceivers for enterprise and storage customers, as well as optical cable
interconnects for high-performance computing clusters.
As
consideration for the purchase of assets, the Company issued 3.7 million
restricted shares of the Company’s common stock to Intel. In
addition, the Company may be required to make an additional payment to Intel
based on the Company’s stock price twelve months after the closing of the
transaction. In the event that the Company is required to make an
additional payment, it has the option to make that payment in cash, common stock
or both (but not to exceed the equivalent value of 1.3 million
shares).
Intel and
the Company also entered into a transition services agreement under which Intel
will provide selected services to the Company for a limited period after
closing. The parties have also entered into an intellectual property
agreement under which Intel will license, subject to certain conditions,
certain related intellectual property to the Company in connection with the
Company’s use and development of the assets being transferred to
it.
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
|
This
Quarterly Report on Form 10-Q includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Exchange Act of 1934. These forward-looking statements are based largely on our
current expectations and projections about future events and financial trends
affecting the financial condition of our business. These forward-looking
statements may be identified by the use of terms and phrases such as "expects,"
"anticipates,” "intends," "plans," believes," "estimates," “targets,” “can,”
“may,” “could,” “will” and variations of these terms and similar phrases.
Management cautions that these forward-looking statements are subject to
business, economic, and other risks and uncertainties, both known and unknown,
that may cause actual results to be materially different from those discussed in
these forward-looking statements. The cautionary statements made in this Report
should be read as being applicable to all forward-looking statements wherever
they appear in this Report. This discussion should be read in conjunction with
the consolidated financial statements, including the related notes.
These
forward-looking statements include, without limitation, any and all statements
or implications regarding:
·
|
The
ability of EMCORE Corporation (the “Company,” “we” or “EMCORE”) to remain
competitive and a leader in its industry and the future growth of the
company, the industry, and the economy in
general;
|
· Difficulties
in integrating recent or future acquisitions into our operations;
·
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The
expected level and timing of benefits to the Company from on-going cost
reduction efforts, including (i) expected cost reductions and their impact
on our financial performance, (ii) our continued leadership in technology
and manufacturing in its markets, and (iii) our belief that the cost
reduction efforts will not impact product development or manufacturing
execution;
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· Expected
improvements in our product and technology development programs;
·
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Whether
our products will (i) be successfully introduced or marketed, (ii) be
qualified and purchased by our customers, or (iii) perform to any
particular specifications or performance or reliability standards;
and/or
|
·
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Guidance
provided by the Company regarding our expected financial performance in
current or future periods, including, without limitation, with respect to
anticipated revenues, income, or cash flows for any period in fiscal 2008
and subsequent periods.
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These
forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from those projected, including without
limitation, the following:
·
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The
Company’s cost reduction efforts may not be successful in achieving their
expected benefits, or may negatively impact our
operations;
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·
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The
failure of our products (i) to perform as expected without material
defects, (ii) to be manufactured at acceptable volumes, yields, and cost,
(iii) to be qualified and accepted by our customers, and (iv) to
successfully compete with products offered by our competitors;
and/or
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·
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Other
risks and uncertainties described in the Company’s filings with the
Securities and Exchange Commission (“SEC”) such as: cancellations,
rescheduling, or delays in product shipments; manufacturing capacity
constraints; lengthy sales and qualification cycles; difficulties in the
production process; changes in semiconductor industry growth; increased
competition; delays in developing and commercializing new products; and
other factors.
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Forward-looking
statements are made only as of the date of this Report and subsequent facts or
circumstances may contradict, obviate, undermine, or otherwise fail to support
or substantiate such statements. We assume no obligation to update the matters
discussed in this Quarterly Report on Form 10-Q to conform such statements to
actual results or to changes in our expectations, except as required by
applicable law or regulation.
Business
Overview
EMCORE is
a leading provider of compound semiconductor-based components and subsystems for
the broadband, fiber optic, satellite and terrestrial solar power
markets. We have two reporting segments: Fiber Optics and
Photovoltaics. The Company's 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. The Company's Photovoltaics segment provides solar products
for satellite and terrestrial applications. For satellite applications, the
Company offers high-efficiency compound semiconductor-based gallium arsenide
(“GaAs”) solar cells, covered interconnect cells (“CICs”) and fully integrated
solar panels. For terrestrial applications, the Company offers its
high-efficiency GaAs solar cells and integrated PV components for use in solar
power concentrator systems. For specific information about our
company, our products or the markets we serve, please visit our website at
http://www.emcore.com. The information on our website is not
incorporated into this Quarterly Report on Form 10-Q. We were
established in 1984 as a New Jersey corporation.
Our
principal objective is to maximize shareholder value by leveraging our expertise
in advanced compound semiconductor technologies to be a leading provider of
high-performance, cost-effective product solutions in each of the markets we
serve.
We target
market opportunities that we believe have large potential growth and where the
favorable performance characteristics of our products and high volume production
efficiencies may give us a competitive advantage over our
competitors. We believe that as compound semiconductor production
costs continue to be reduced, existing and new customers will be compelled to
increase their use of these products because of their attractive performance
characteristics and superior value.
On April
4, 2008, the Company announced that its Board of Directors had authorized
management of the Company to prepare a comprehensive operational and strategic
plan for the separation of the Company's Fiber Optics and Photovoltaic
businesses into separate corporations.
Quarterly
Highlights
·
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January
23, 2008 – EMCORE announced that it will supply its solar CPV components
and systems to the Spanish market through several
agreements.
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• EMCORE
was awarded a 300–kilowatt (kW) CPV system contract by Spain's Institute of
Concentrator Photovoltaics Systems (ISFOC). EMCORE expects to have its CPV
systems installed in Castilla–La Mancha, Spain by December 2008.
• EMCORE
reached an agreement to construct an 850–kW solar power park in Extremadura,
Spain. EMCORE will be utilizing its CPV solar power system and provide a
turn–key solution with a scope of work including engineering, procurement, and
construction. This project is expected to be completed before July 2008 in order
to take advantage of the current high feed–in tariff.
• EMCORE
received a purchase order for one million CPV components from a prominent CPV
system integrator. This order is expected to be completed by March 2009 with CPV
products being deployed in projects within the Spanish market.
·
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January
31, 2008 – EMCORE announced that it has signed a memorandum of
understanding for the supply of between 200 megawatts (MW) and 700 MW of
solar power systems that are scheduled for deployment in utility scale
solar power projects under development in the southwestern region of the
United States. EMCORE will supply and install turn–key solar power systems
utilizing EMCORE's CPV systems developed at its Albuquerque, NM facility.
The project developer, SunPeak Solar, is securing land and grid access
throughout 2008 and project construction is expected to begin in early
2009. This agreement is not expected to contribute revenues until 2009 and
is dependant on the renewal of the federal investment tax credit (ITC)
extending into 2009 and beyond.
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·
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February
15, 2008 – EMCORE entered into a securities purchase agreement for the
sale of $100 million of restricted common stock and
warrants. Under this agreement, 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. The
warrants are immediately exercisable and remain exercisable for a period
of 5 years from the closing date. In addition, EMCORE 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. Total agent fees incurred were 5.75% of the gross
proceeds, or $5.8 million. EMCORE used the net proceeds to
acquire the telecom assets of Intel's Optical Platform Division and for
working capital requirements.
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·
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February
22, 2008 – EMCORE announced completion of the acquisition of the
telecom-related portion of Intel's Optical Platform Division. The telecom
assets EMCORE acquired include intellectual property, assets and
technology comprised of tunable lasers, tunable transponders, 300-pin
transponders, and integrated tunable laser assemblies. The acquisition
agreement was signed and announced on December 18, 2007. 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, or
722,688 shares. This acquisition enhances EMCORE's
presence in the telecommunications market segment and expands its fiber
optics product portfolio. The acquired assets will be integrated into
EMCORE's Digital Products Division
(EDP).
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·
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February
26, 2008 – EMCORE announced new features to its 1550nm broadband
transmitter and optical amplifier product lines. In order to support the
requirements for extended bandwidth CATV systems and RF overlay for PON
networks, these new products offer 1GHz RF performance, dual hot swappable
power supplies and SNMP management
capabilities.
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·
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February
27, 2008 – EMCORE announced the introduction of a new line of un-cooled
coaxial DFB lasers. EMCORE's 1933 DFB laser family offers a low cost
solution for 1310nm linear fiber optic links. With an innovative design,
the 1933 series requires no additional cooling since it can maintain
performance even with case temperatures ranging from -40°C to +80°C. The
1933 also features exceptionally high slope efficiency and linearity even
with optical output powers up to
12dBm.
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·
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April
2, 2008 – EMCORE announced that it had been awarded a $4.6 million
follow-on production order for solar cell receiver assemblies from
Concentration Solar la Mancha of Manzanares (Ciudad Real), Spain. The
receivers will be incorporated into CS la Mancha's 500X concentrator
photovoltaic (CPV) system and will be deployed throughout Spain and other
locations in fully licensed and funded projects. Shipments are scheduled
to commence in the September quarter and complete in early 2009. CS la
Mancha, part of Renovalia Energy, a renewable energy company in Spain, has
been developing the CPV system for nearly two years, and has recently
started production and volume
deployment.
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·
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April
10, 2008 – EMCORE announced that it agreed to supply CPV systems to XinAo
Group in China. XinAo Group is one of China's largest energy companies and
is well known for its clean-energy technologies. The program will start
with the delivery of a 50 kilowatt (kW) concentrator photovoltaic (CPV)
system to be installed in Langfang, China. This system will be used for
test and evaluation purposes. Once the expected reliability and
performance metrics have been demonstrated, XinAo plans to install CPV
systems to provide electric power for its innovative coal gasification
project, which is estimated to have a requirement of 60 megawatts (MW) of
power. XinAo believes that EMCORE's CPV technology will provide a
cost-effective solution for its energy needs. In addition, XinAo intends
to build a manufacturing plant in China, jointly owned by EMCORE, to
manufacture CPV systems designed and certified by EMCORE for the Chinese
market.
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·
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April
21, 2008 – EMCORE announced completion of the acquisition of the
enterprise and storage assets of Intel’s Optical Platform Division (OPD)
and the Intel Connects Cable (ICC) business for high-performance computing
under the terms signed and announced previously. The assets include
intellectual property, inventory, fixed assets and technology relating to
XENPAK, X2, SFP, and SFP+ optical transceivers for enterprise and storage
customers, as well as the Intel Connects Cables (ICC) active cable
interconnects for high-performance computing clusters. This acquisition
will further enhance EMCORE’s presence in the local area and storage area
network market segments. These assets, along with the Telecom assets
acquired in February 2008 from Intel OPD, make EMCORE one of the major
companies in the world with the most comprehensive product portfolio,
vertically-integrated capability and infrastructure, and strong commitment
to Telecom, Datacom, and Broadband fiber optics businesses. The acquired
assets will be integrated into the EMCORE Digital Products (EDP)
division.
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With
several strategic acquisitions and divestures in the past year, the Company has
developed a strong business focus and comprehensive product portfolios in two
main sectors: Fiber Optics and Photovoltaics.
Fiber
Optics
Our fiber
optics products enable information that is encoded on light signals to be
transmitted, routed (switched) and received in communication systems and
networks. Our fiber optics products provide our customers with
increased capacity to offer more services, at increased data transmission
distance, speed and bandwidth with lower noise video receive and lower power
consumption. Our Fiber Optics segment primarily targets the following
markets:
·
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Cable Television (CATV)
Networks - We are a market leader in providing radio frequency (RF)
over fiber products for the CATV industry. Our products are
used in hybrid fiber coaxial (HFC) networks that enable cable service
operators to offer multiple advanced services to meet the expanding demand
for high-speed Internet, on-demand and interactive video and other
advanced services, such as high-definition television (HDTV) and voice
over IP (VoIP).
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·
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Fiber-to-the-Premises (FTTP)
Networks - Telecommunications companies are increasingly extending
their optical infrastructure to the customer’s location in order to
deliver higher bandwidth services. We have developed and maintain customer
qualified FTTP components and subsystem products to support plans by
telephone companies to offer voice, video and data services through the
deployment of new fiber-based access
networks.
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·
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Data Communications
Networks - We provide leading-edge optical components and modules
for data applications that enable switch-to-switch, router-to-router and
server-to-server backbone connections at aggregate speeds of 10 gigabits
per second (G) and above.
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·
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Telecommunications
Networks - Our leading-edge optical components and modules enable
high-speed (up to an aggregate 40G) optical interconnections that drive
advanced architectures in next-generation carrier class switching and
routing networks. Our products are used in equipment in the
network core and key metro optical nodes of voice telephony and Internet
infrastructures.
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·
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Satellite Communications
(Satcom) Networks - We are a leading provider of optical components
and systems for use in equipment that provides high-performance optical
data links for the terrestrial portion of satellite communications
networks.
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·
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Storage Area Networks -
Our high performance optical components are also used in high-end data
storage solutions to improve the performance of the storage
infrastructure.
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·
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Video Transport - Our
video transport product line offers solutions for broadcasting,
transportation, IP television (IPTV), mobile video and security &
surveillance applications over private and public networks. the Company’s
video, audio, data and RF transmission systems serve both analog and
digital requirements, providing cost-effective, flexible solutions geared
for network reconstruction and
expansion.
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·
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Defense and Homeland
Security - Leveraging our expertise in RF module design and
high-speed parallel optics, we provide a suite of ruggedized products that
meet the reliability and durability requirements of the U.S. Government
and defense markets. Our specialty defense products include
fiber optic gyro components used in precision guided munitions, ruggedized
parallel optic transmitters and receivers, high-frequency RF fiber optic
link components for towed decoy systems, optical delay lines for radar
systems, EDFAs, terahertz spectroscopy systems and other
products.
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·
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Consumer Products - We
intend to extend our optical technology into the consumer market by
integrating our Vertical Cavity Surface-Emitting Lasers (“VCSELs”) into
optical computer mice and ultra short data links. We are in
production with customers on several products and currently qualifying our
products with additional customers. An optical computer mouse
with laser illumination is superior to LED-based illumination in that it
reveals surface structures that a LED light source cannot uncover. VCSELs
enable computer mice to track with greater accuracy, on more surfaces and
with greater responsiveness than existing LED-based
solutions.
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Photovoltaics
We
believe our high-efficiency compound semiconductor-based multi-junction solar
cell products provide our customers with compelling cost and performance
advantages over traditional silicon-based solutions. These include
higher solar cell efficiency allowing for greater conversion of light into
electricity, an increased ability to benefit from use in solar concentrator
systems, ability to withstand high heat environments and reduced overall
footprint. Our Photovoltaics segment primarily targets the following
markets:
·
|
Satellite Solar Power
Generation. We are a leader in providing solar power
generation solutions to the global communications satellite industry and
U.S. Government space programs. A satellite’s operational
success and corresponding revenue depend on its available power and its
capacity to transmit data. We manufacture advanced compound
semiconductor-based solar cell and solar panel products, which are more
resistant to radiation levels in space and generate substantially more
power from sunlight than silicon-based solutions. Space power
systems using our multi-junction solar cells weigh less per unit of power
than traditional silicon-based solar cells. These performance
characteristics increase satellite useful life, increase satellites’
transmission capacity and reduce launch costs. Our products
provide our customers with higher sunlight to electrical power conversion
efficiency for reduced size and launch costs; higher radiation tolerance;
and longer lifetime in harsh space environments. We design and
manufacture multi-junction compound semiconductor-based solar cells for
both commercial and military satellite applications. We currently
manufacture and sell one of the most efficient and reliable, radiation
resistant advanced triple-junction solar cells in the world, with an
average "beginning of life" efficiency of 28.5%. In May 2007,
the Company announced that it has attained solar conversion efficiency of
31% for an entirely new class of advanced multi-junction solar cells
optimized for space applications. The Company is also the only
manufacturer to supply true monolithic bypass diodes for shadow
protection, utilizing several the Company patented methods. The Company
also provides covered interconnect cells (CICs) and solar panel lay-down
services, giving us the capability to manufacture complete solar panels.
We can provide satellite manufacturers with proven integrated satellite
power solutions that considerably improve satellite economics. Satellite
manufacturers and solar array integrators rely on the Company to meet
their satellite power needs with our proven flight
heritage.
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·
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Terrestrial Solar Power
Generation. Solar power generation systems use
photovoltaic cells to convert sunlight to electricity and have been used
in space programs and, to a lesser extent, in terrestrial applications for
several decades. The market for terrestrial solar power
generation solutions has grown significantly as solar power generation
technologies improve in efficiency, as global prices for non-renewable
energy sources (i.e., fossil fuels) continue to rise, and as concern has
increased regarding the effect of carbon emissions on global warming.
Terrestrial solar power generation has emerged as one of the most rapidly
expanding renewable energy sources due to certain advantages solar power
holds over other energy sources, including reduced environmental impact,
elimination of fuel price risk, installation flexibility, scalability,
distributed power generation (i.e., electric power is generated at the
point of use rather than transmitted from a central station to the user),
and reliability. The rapid increase in demand for solar power has created
a growing need for highly efficient, reliable and cost-effective solar
power concentrator systems.
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The
Company has adapted its high-efficiency compound semiconductor-based
multi-junction solar cell products for terrestrial applications, which ar