10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 17, 2009
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO
SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended: June 30,
2009
Commission
File Number: 0-22175
EMCORE
Corporation
(Exact
name of Registrant as specified in its charter)
New
Jersey
(State
or other jurisdiction of incorporation or organization)
22-2746503
(IRS
Employer Identification No.)
10420 Research Road SE,
Albuquerque, NM 87123
(Address
of principal executive offices) (Zip Code)
(505)
332-5000
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No
[ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
[
] Large accelerated
filer [X] Accelerated
filer [
] Non-accelerated filer [ ]
Smaller reporting company
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [
] No
[X]
The
number of shares outstanding of the registrant’s no par value common stock as of
August 11, 2009 was 80,704,650.
EMCORE
Corporation
FORM
10-Q
For
the Quarterly Period Ended June 30, 2009
TABLE
OF CONTENTS
PAGE
|
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3
|
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33
|
|||
54
|
|||
55
|
|||
56
|
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58
|
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58
|
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58
|
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59
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59
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60
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61
|
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EMCORE
CORPORATION
Condensed
Consolidated Statements of Operations and Comprehensive Loss
For
the three and nine months ended June 30, 2009 and 2008
(in
thousands, except loss per share)
(unaudited)
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
||||||||||||
2009
|
2008
|
2009
|
2008
|
||||||||||
Product
revenue
|
$
|
37,190
|
$
|
72,027
|
$
|
129,076
|
$
|
169,713
|
|||||
Service
revenue
|
1,299
|
3,475
|
6,753
|
8,955
|
|||||||||
Total
revenue
|
38,489
|
75,502
|
135,829
|
178,668
|
|||||||||
Cost
of product revenue
|
39,880
|
60,727
|
138,666
|
143,439
|
|||||||||
Cost
of service revenue
|
1,037
|
1,129
|
5,007
|
4,832
|
|||||||||
Total
cost of revenue
|
40,917
|
61,856
|
143,673
|
148,271
|
|||||||||
Gross
(loss) profit
|
(2,428
|
)
|
13,646
|
(7,844
|
)
|
30,397
|
|||||||
Operating
expenses:
|
|||||||||||||
Selling,
general, and administrative
|
10,914
|
13,906
|
35,039
|
36,032
|
|||||||||
Research
and development
|
5,654
|
11,382
|
20,655
|
28,132
|
|||||||||
Impairments
|
27,000
|
-
|
60,781
|
-
|
|||||||||
Total
operating expenses
|
43,568
|
25,288
|
116,475
|
64,164
|
|||||||||
Operating
loss
|
(45,996
|
)
|
(11,642
|
)
|
(124,319
|
)
|
(33,767
|
)
|
|||||
Other
(income) expense:
|
|||||||||||||
Interest
income
|
(3
|
)
|
(124
|
)
|
(83
|
)
|
(778
|
)
|
|||||
Interest
expense
|
105
|
-
|
443
|
1,580
|
|||||||||
Impairment
of investment
|
-
|
-
|
366
|
-
|
|||||||||
Loss
from conversion of subordinated notes
|
-
|
-
|
-
|
4,658
|
|||||||||
Stock–based
expense from tolled options
|
-
|
-
|
-
|
4,316
|
|||||||||
Gain
from sale of investments
|
-
|
(3,692
|
)
|
(3,144
|
)
|
(3,692
|
)
|
||||||
Loss
on disposal of equipment
|
-
|
-
|
-
|
86
|
|||||||||
Foreign
exchange (gain) loss
|
(745
|
)
|
(104
|
)
|
635
|
(302
|
)
|
||||||
Total
other (income) expense
|
(643
|
)
|
(3,920
|
)
|
(1,783
|
)
|
5,868
|
||||||
Net
loss
|
$
|
(45,353
|
)
|
$
|
(7,722
|
)
|
$
|
(122,536
|
)
|
$
|
(39,635
|
)
|
|
Foreign
exchange translation adjustment
|
(131
|
)
|
82
|
353
|
(5
|
)
|
|||||||
Comprehensive
loss
|
$
|
(45,484
|
)
|
$
|
(7,640
|
)
|
$
|
(122,183
|
)
|
$
|
(39,640
|
)
|
|
Per
share data:
|
|||||||||||||
Basic
and diluted per share data:
|
|||||||||||||
Net
loss
|
$
|
(0.57
|
)
|
$
|
(0.10
|
)
|
$
|
(1.56
|
)
|
$
|
(0.62
|
)
|
|
Weighted-average
number of basic and diluted shares outstanding
|
79,700
|
76,582
|
78,632
|
64,155
|
|||||||||
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
EMCORE
CORPORATION
Condensed
Consolidated Balance Sheets
As
of June 30, 2009 and September 30, 2008
(In
thousands)
(unaudited)
June
30, 2009
|
September
30, 2008
|
||||||
ASSETS
|
|||||||
Current
assets:
|
|||||||
Cash
and cash equivalents
|
$
|
9,386
|
$
|
18,227
|
|||
Restricted
cash
|
366
|
1,854
|
|||||
Available-for-sale
securities
|
1,400
|
2,679
|
|||||
Accounts
receivable, net of allowance of $7,320 and $2,377,
respectively
|
41,892
|
60,313
|
|||||
Inventory,
net
|
39,503
|
64,617
|
|||||
Prepaid
expenses and other current assets
|
4,424
|
7,100
|
|||||
Total
current assets
|
96,971
|
154,790
|
|||||
Property,
plant, and equipment, net
|
57,695
|
83,278
|
|||||
Goodwill
|
20,384
|
52,227
|
|||||
Other
intangible assets, net
|
13,539
|
28,033
|
|||||
Investments
in unconsolidated affiliates
|
-
|
8,240
|
|||||
Available-for-sale
securities, non-current
|
-
|
1,400
|
|||||
Long-term
restricted cash
|
163
|
569
|
|||||
Other
non-current assets, net
|
802
|
741
|
|||||
Total
assets
|
$
|
189,554
|
$
|
329,278
|
|||
LIABILITIES
and SHAREHOLDERS’ EQUITY
|
|||||||
Current
liabilities:
|
|||||||
Line
of credit
|
$
|
4,984
|
$
|
-
|
|||
Short-term
debt
|
889
|
-
|
|||||
Accounts
payable
|
21,861
|
52,266
|
|||||
Accrued
expenses and other current liabilities
|
23,909
|
23,290
|
|||||
Total
liabilities
|
51,643
|
75,556
|
|||||
Commitments
and contingencies (Note 13)
|
|||||||
Shareholders’
equity:
|
|||||||
Preferred
stock, $0.0001 par, 5,882 shares authorized, no shares
outstanding
|
-
|
-
|
|||||
Common
stock, no par value, 200,000 shares authorized, 80,647 shares issued and
80,488 outstanding at June 30, 2009; 77,920 shares issued and 77,761
shares outstanding at September 30, 2008
|
686,392
|
680,020
|
|||||
Accumulated
deficit
|
(547,300
|
)
|
(424,764
|
)
|
|||
Accumulated
other comprehensive income
|
902
|
549
|
|||||
Treasury
stock, at cost; 159 shares as of June 30, 2009 and September 30,
2008
|
(2,083
|
)
|
(2,083
|
)
|
|||
Total
shareholders’ equity
|
137,911
|
253,722
|
|||||
Total
liabilities and shareholders’ equity
|
$
|
189,554
|
$
|
329,278
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
EMCORE
CORPORATION
Condensed
Consolidated Statements of Cash Flows
For
the nine months ended June 30, 2009 and 2008
(in
thousands)
(unaudited)
Nine
Months Ended June 30,
|
|||||||
2009
|
2008
|
||||||
Cash
flows from operating activities:
|
|||||||
Net
loss
|
$
|
(122,536
|
)
|
$
|
(39,635
|
)
|
|
Adjustments
to reconcile net loss to net cash used for operating
activities:
|
|||||||
Impairments
|
60,781
|
-
|
|||||
Stock-based
compensation expense
|
4,975
|
8,705
|
|||||
Depreciation
and amortization expense
|
12,862
|
8,992
|
|||||
Provision
for obsolete and excess inventory
|
14,934
|
2,427
|
|||||
Provision
for doubtful accounts
|
4,818
|
167
|
|||||
Provision
for losses on firm commitments
|
6,524
|
-
|
|||||
Impairment
of investment
|
366
|
-
|
|||||
Loss
on disposal of equipment
|
152
|
86
|
|||||
Compensatory
stock issuances
|
438
|
1,648
|
|||||
Gain
from sale of investments
|
(3,144
|
)
|
(3,692
|
)
|
|||
Reduction
of note receivable due for services received
|
-
|
390
|
|||||
Accretion
of loss from convertible subordinated notes
|
-
|
41
|
|||||
Loss
from convertible subordinated notes
|
-
|
1,169
|
|||||
Total
non-cash adjustments
|
102,706
|
19,933
|
|||||
Changes
in operating assets and liabilities, net of effect of
acquisitions:
|
|||||||
Accounts
receivable
|
13,472
|
(30,135
|
)
|
||||
Inventory
|
10,201
|
8,132
|
|||||
Prepaid
expenses and other current assets
|
2,577
|
(1,674
|
)
|
||||
Other
assets
|
(684
|
)
|
(542
|
)
|
|||
Accounts
payable
|
(30,494
|
)
|
14,066
|
||||
Accrued
expenses and other current liabilities
|
(5,761
|
)
|
(6,004
|
)
|
|||
Total
change in operating assets and liabilities
|
(10,689
|
)
|
(16,157
|
)
|
|||
Net
cash used in operating activities
|
(30,519
|
)
|
(35,859
|
)
|
|||
Cash
flows from investing activities:
|
|||||||
Purchase
of plant and equipment
|
(1,182
|
)
|
(15,028
|
)
|
|||
Proceeds
from insurance recovery on equipment
|
-
|
1,189
|
|||||
Proceeds
from sale of unconsolidated affiliates
|
11,017
|
6,540
|
|||||
Investment
in unconsolidated affiliates
|
-
|
(1,503
|
)
|
||||
Purchase
of business
|
-
|
(75,779
|
)
|
||||
Proceeds
from (funding of) restricted cash
|
1,893
|
(874
|
)
|
||||
Purchase
of available-for-sale securities
|
-
|
(7,000
|
)
|
||||
Sale
of available-for-sale securities
|
2,679
|
32,806
|
|||||
Net
cash provided by (used in) investing activities
|
14,407
|
(59,649
|
)
|
||||
EMCORE
CORPORATION
Condensed
Consolidated Statements of Cash Flows - continued
For
the nine months ended June 30, 2009 and 2008
(in
thousands)
(unaudited)
Nine
Months Ended June 30,
|
|||||||
2009
|
2008
|
||||||
Cash
flows from financing activities:
|
|||||||
Proceeds
from borrowings from credit facility
|
$
|
88,771
|
$
|
-
|
|||
Payments
on borrowings from credit facility
|
(83,787
|
)
|
-
|
||||
Proceeds
from borrowing - long-term and short-term debt
|
911
|
-
|
|||||
Payments
on borrowings - long-term and short-term debt
|
(22
|
)
|
-
|
||||
Proceeds
from private placement of common stock and warrants,
net
of issuance costs
|
-
|
93,692
|
|||||
Payments
on capital lease obligations
|
-
|
(11
|
)
|
||||
Proceeds
from exercise of stock options
|
32
|
6,960
|
|||||
Proceeds
from employee stock purchase plan
|
894
|
723
|
|||||
Net
cash provided by financing activities
|
6,799
|
101,364
|
|||||
Effect
of foreign currency
|
472
|
176
|
|||||
Net
(decrease) increase in cash and cash equivalents
|
(8,841
|
)
|
6,032
|
||||
Cash
and cash equivalents, beginning of period
|
18,227
|
12,151
|
|||||
Cash
and cash equivalents, end of period
|
$
|
9,386
|
$
|
18,183
|
|||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|||||||
Cash
paid during the period for interest
|
$
|
511
|
$
|
3,314
|
|||
Cash
paid for income taxes
|
$
|
-
|
$
|
-
|
|||
NON-CASH
DISCLOSURE
|
|||||||
Issuance
of common stock for purchase of business
|
1,183
|
36,085
|
|||||
Issuance
of common stock for conversion of subordinated notes
|
-
|
85,428
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
EMCORE
Corporation
Notes
to Condensed Consolidated Financial Statements
(unaudited)
NOTE
1. Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements include the
accounts of EMCORE Corporation and its subsidiaries (the “Company” or “EMCORE”).
All intercompany accounts and transactions have been eliminated in
consolidation.
These
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”) for interim information,
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the
Securities and Exchange Commission (“SEC”). Accordingly, they do not include all
of the information and footnotes required by U.S. GAAP for annual financial
statements. In the opinion of management, the interim financial statements
reflect all normal adjustments that are necessary to provide a fair presentation
of the financial results for the interim periods presented. Operating
results for interim periods are not necessarily indicative of results that may
be expected for an entire fiscal year. The condensed consolidated balance sheet
as of September 30, 2008 has been derived from the audited consolidated
financial statements as of such date. For a more complete understanding of the
Company’s financial position, operating results, risk factors and other matters,
please refer to the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 2008.
We have
evaluated subsequent events, as defined by Statement of Financial Accounting
Standards (SFAS) No. 165, Subsequent Events, through
the date that the financial statements were issued on August 17,
2009.
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with U.S.
GAAP requires management of the Company to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities, as of the date of the financial
statements, and the reported amounts of revenue and expenses during the reported
period. The accounting estimates that require our most
significant, difficult, and subjective judgments include the valuation of
inventory, goodwill, intangible assets, and stock-based compensation and the
assessment of recovery of long-lived assets.
Management
develops estimates based on historical experience and on various assumptions
about the future that are believed to be reasonable based on the best
information available. The Company’s reported financial position or results of
operations may be materially different under changed conditions or when using
different estimates and assumptions, particularly with respect to significant
accounting policies. In the event that estimates or assumptions prove
to differ from actual results, adjustments are made in subsequent periods to
reflect more current information.
Earnings
(Loss) Per Share
Earnings
(loss) per share (“EPS”) are calculated by dividing net earnings (loss)
applicable to common stock by the weighted average number of common stock shares
outstanding for the period. For the three and nine months ended June
30, 2009, stock options representing 8,005,209 and 7,757,597 shares of common
stock, respectively, and 1,400,003 warrants for both periods were excluded from
the computation of diluted earnings per share since the Company incurred a net
loss for these periods and any effect would have been
anti-dilutive. For the three and nine months ended June 30, 2008,
stock options representing 3,800,327 and 5,134,376 shares of common stock,
respectively, and 1,400,003 warrants for both periods were excluded from the
computation of diluted earnings per share since the Company incurred a net loss
for these periods and any effect would have been anti-dilutive.
Impairment
of Long-lived Assets
During
the three months ended June 30, 2009, the Company performed an evaluation of its
Fiber Optics segment assets for impairment. The impairment test was
triggered by a determination that it was more likely than not that certain
assets would be sold or otherwise disposed of before the end of their previously
estimated useful lives. As a result of the evaluation, it was
determined that an impairment existed, and a charge of $27.0 million was
recorded to write down the long-lived assets to estimated fair value, which was
determined based on a combination of guideline public company comparisons and
discounted estimated future cash flows.
The
current adverse economic conditions had a significant negative effect on the
Company’s assessment of the fair value of the Fiber Optics segment
assets. The impairment charge primarily resulted from the combined
effect of the current slowdown in product orders and lower pricing exacerbated
by currently high discount rates used in estimating fair values and the effects
of recent declines in market values of debt and equity securities of comparable
public companies. This impairment charge in combination with other non-cash
charges will not cause the Company to be in default under any of its financial
covenants associated with its credit facility nor will it have a material
adverse impact on the Company’s liquidity position or cash flows.
See Note
9, Goodwill and Intangible Assets, for more information on the impairment
charges recorded by the Company in response to unfavorable macroeconomic
conditions.
Liquidity
Matters
The
Company incurred a net loss of $122.5 million for the nine months ended June 30,
2009, which included a non-cash impairment charge of $60.8 million related to
the write-down of fixed assets, goodwill and intangible assets associated with
the Company’s Fiber Optics segment. The Company’s operating results
for future periods are subject to numerous uncertainties and it is uncertain if
the Company will be able to reduce or eliminate its net losses for the
foreseeable future. Although total revenue has increased sequentially
over the past several years, the Company has not been able to sustain historical
revenue growth rates in 2009 due to material adverse changes in market and
economic conditions. If management is not able to increase revenue
and/or manage operating expenses in line with revenue forecasts, the Company may
not be able to achieve profitability.
As of
June 30, 2009, cash, cash equivalents, and restricted cash totaled approximately
$9.9 million and working capital totaled $45.3 million. Historically,
the Company has consumed cash from operations. During the nine months
ended June 30, 2009, it consumed approximately $30.5 million in cash from
operations.
These
matters raise substantial doubt about the Company’s ability to continue as a
going concern.
Management Actions and
Plans
Historically,
management has addressed liquidity requirements through a series of cost
reduction initiatives, capital markets transactions and the sale of
assets. Management anticipates that the recession in the United
States and internationally may continue to impose formidable challenges for the
Company’s businesses in the near term. Recently, the Company amended the terms
of its asset-backed revolving credit facility with Bank of America that included
the granting of waivers for prior covenant violations. Although the
total amount of available credit under the credit facility has been reduced from
$25 million at September 30, 2008 to $14 million, the amendments addressed a
modification of the borrowing base calculation which generally has resulted in
higher borrowing capacity against any given schedule of accounts
receivable. The Company has also continued to take steps to lower
costs and to conserve and generate cash. Over the past year,
management has implemented a series of measures and continues to evaluate
opportunities intended to align the Company’s cost structure with its current
revenue forecasts which has included several workforce reductions, salary
reductions, the elimination of executive and employee merit increases, and the
elimination or reduction of certain discretionary expenses.
With
respect to measures taken to generate cash, the Company sold its minority
ownership positions in Entech Solar, Inc. and Lightron Corporation earlier in
the fiscal year. The Company has also significantly lowered its
quarterly capital expenditures and improved the management of its working
capital. During the third fiscal quarter, the Company lowered its net
inventory by approximately 17% and achieved positive operating income within the
Company’s space solar business.
In
addition, the Company continues to pursue and evaluate a number of capital
raising alternatives including debt and/or equity financings, product
joint-venture opportunities and the potential sale of certain
assets.
Conclusion
These
initiatives are intended to conserve or generate cash in response to the
deterioration in the global economy so that we can be assured of adequate
liquidity through the next twelve months. However, the full effect of
many of these actions may not be realized until late in calendar year 2009, even
if they are successfully implemented. We are committed to exploring all of
the initiatives discussed above but there is no assurance that capital market
conditions will improve within that time frame. Our ability to continue as a
going concern is substantially dependent on the successful execution of many of
the actions referred to above. The accompanying condensed consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Since
cash generated from operations and cash on hand are not sufficient to satisfy
the Company’s liquidity requirements, we will seek to raise additional cash
through equity financing, additional debt, asset sales or a combination
thereof. Due to the unpredictable nature of the capital markets,
additional funding may not be available when needed, or on terms acceptable to
us. If adequate funds are not available or not available on
acceptable terms, our ability to continue to fund expansion, develop and enhance
products and services, or otherwise respond to competitive pressures may be
severely limited. Such a limitation could have a material adverse effect
on the Company’s business, financial condition, results of operations, and cash
flow.
Restatements
The
Company identified an error in the classification of service and product
revenues and related costs of revenue in the condensed consolidated statements
of operations for the quarters ended in fiscal 2008. The following
table reflects the effects of the restatement on the condensed consolidated
statements of operations for the quarter and nine-month period ended June 30,
2008. These misclassifications did not have an impact on the Company’s
consolidated gross profit, operating loss, or net loss.
(in
thousands)
|
Three
Months Ended June 30, 2008
|
Nine
Months Ended June 30, 2008
|
|||||||||||||||||
As
previously
reported
|
Adjustment
|
As
restated
|
As
previously reported
|
Adjustment
|
As
restated
|
||||||||||||||
Product
revenue
|
$
|
71,934
|
$
|
93
|
$
|
72,027
|
$
|
164,695
|
$
|
5,018
|
$
|
169,713
|
|||||||
Service
revenue
|
3,568
|
(93
|
)
|
3,475
|
13,973
|
(5,018
|
)
|
8,955
|
|||||||||||
Total
revenue
|
75,502
|
-
|
75,502
|
178,668
|
-
|
178,668
|
|||||||||||||
Cost
of product revenue
|
61,767
|
(1,040
|
)
|
60,727
|
139,212
|
4,227
|
143,439
|
||||||||||||
Cost
of service revenue
|
89
|
1,040
|
1,129
|
9,059
|
(4,227
|
)
|
4,832
|
||||||||||||
Total
cost of revenue
|
61,856
|
-
|
61,856
|
148,271
|
-
|
148,271
|
|||||||||||||
Gross
profit
|
$
|
13,646
|
$
|
-
|
$
|
13,646
|
$
|
30,397
|
$
|
-
|
$
|
30,397
|
The
Company also identified errors in the condensed consolidated statements of cash
flows for the quarters ended in fiscal 2008. In particular, provision for
obsolete and excess inventory was not appropriately classified as a reconciling
item to reconcile net loss to net cash used for operating
activities. In addition, certain other assets and accounts receivable
were improperly classified as reconciling items to reconcile net loss to net
cash used for operating activities. The following table reflects the effects of
the restatement on the condensed consolidated statements of cash flows for the
nine-month period ended June 30, 2008. These misclassifications did not have an
impact on net cash used in operating activities.
June
30, 2008
|
|||||||||||||
As
previously reported
|
Adjustment
|
As
restated
|
|||||||||||
Adjustments
to reconcile net loss to net cash used for operating
activities:
|
|||||||||||||
Depreciation
and amortization expense
|
$
|
9,509
|
$
|
(517
|
)
|
$
|
8,992
|
||||||
Provision
for obsolete and excess inventory
|
-
|
2,427
|
2,427
|
||||||||||
Provision
for doubtful accounts
|
204
|
(37
|
)
|
167
|
|||||||||
Total
non-cash adjustments
|
18,061
|
1,873
|
19,933
|
||||||||||
Changes
in operating assets and liabilities, net of effect of
acquisitions:
|
|||||||||||||
Accounts
receivable
|
(30,172
|
)
|
37
|
(30,135
|
)
|
||||||||
Inventory
|
10,559
|
(2,427
|
)
|
8,132
|
|||||||||
Other
assets
|
(1,059
|
)
|
517
|
(542
|
)
|
||||||||
Total
change in operating assets and liabilities
|
(14,284
|
)
|
(1,873
|
)
|
(16,157
|
)
|
|||||||
Net
cash used in operating activities
|
(35,859
|
)
|
-
|
(35,859
|
)
|
NOTE
2. Recent Accounting Pronouncements
SFAS 141(R) -
In December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard (“SFAS”) 141(R), Business Combinations.
This statement replaces SFAS 141, Business Combinations,
and requires an acquirer to recognize the assets acquired, the liabilities
assumed, including those arising from contractual contingencies, any
contingent consideration, and any noncontrolling interest in the acquiree
at the acquisition date, measured at their fair values as of that date,
with limited exceptions specified in the statement. SFAS 141(R) also
requires the acquirer in a business combination achieved in stages
(sometimes referred to as a step acquisition) to recognize the
identifiable assets and liabilities, as well as the noncontrolling
interest in the acquiree, at the full amounts of their fair values (or
other amounts determined in accordance with SFAS 141(R)). In addition,
SFAS 141(R)'s requirement to measure the noncontrolling interest in the
acquiree at fair value will result in recognizing the goodwill
attributable to the noncontrolling interest in addition to that
attributable to the acquirer. SFAS 141(R) amends SFAS No. 109, Accounting for Income
Taxes, to require the acquirer to recognize changes in the amount
of its deferred tax benefits that are recognizable because of a business
combination either in income from continuing operations in the period of
the combination or directly in contributed capital, depending on the
circumstances. It also amends SFAS 142, Goodwill and Other Intangible
Assets, to, among other things, provide guidance on the impairment
testing of acquired research and development intangible assets and assets
that the acquirer intends not to use. SFAS 141(R) applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after
December 15, 2008. Management is currently assessing the potential impact
that the adoption of SFAS 141(R) could have on the Company’s financial
statements in fiscal 2010.
|
SFAS 160 - In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements. SFAS 160 amends Accounting Research
Bulletin 51, Consolidated
Financial Statements, to establish accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is
an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements. SFAS 160 also changes the way
the consolidated income statement is presented by requiring consolidated net
income to be reported at amounts that include the amounts attributable to both
the parent and the noncontrolling interest. It also requires disclosure, on the
face of the consolidated statement of income, of the amounts of consolidated net
income attributable to the parent and to the noncontrolling interest. SFAS 160
requires that a parent recognize a gain or loss in net income when a subsidiary
is deconsolidated and requires expanded disclosures in the consolidated
financial statements that clearly identify and distinguish between the interests
of the parent owners and the interests of the noncontrolling owners of a
subsidiary. SFAS 160 is effective for fiscal periods, and interim periods within
those fiscal years, beginning on or after December 15, 2008. Management is
currently assessing the potential impact that the adoption of SFAS 160 could
have on the Company’s financial statements in fiscal 2010.
SFAS 168 - In June
2009, the FASB issued SFAS 168, FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles, which replaces SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS 168 establishes the FASB Accounting Standards
Codification as the sole source of authoritative accounting principles
recognized by the FASB to be applied by all nongovernmental entities in the
preparation of financial statements in conformity with GAAP. SFAS 168 is
prospectively effective for financial statements for fiscal years ending on or
after September 15, 2009, and interim periods within those fiscal years. The
adoption of SFAS 168 on October 1, 2009 will not impact the Company’s results of
operations or financial condition, but it will affect the reference of
accounting pronouncements in future disclosures.
FSP 142-3 - In April
2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of
Intangible Assets. FSP 142-3 amends the factors an entity
should consider in developing renewal or extension assumptions used in
determining the useful life of recognized intangible assets under FASB Statement
No. 142, Goodwill and Other
Intangible Assets and the period of expected cash flows used to measure
the fair value of intangible assets under FASB Statement No. 141, Business
Combinations. FSP 142-3 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. Management is currently assessing the
potential impact that the adoption of FSP 142-3 could have on the Company’s
financial statements in fiscal 2010.
FSP APB 14-1 - In May
2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement). FSP APB 14-1 requires the proceeds from the issuance of such
convertible debt instruments to be allocated between a liability component
(issued at a discount) and an equity component. The resulting debt discount is
amortized over the period the convertible debt is expected to be outstanding as
additional non-cash interest expense. The change in accounting treatment is
effective for the Company beginning in fiscal 2010, and will be applied
retrospectively to prior periods. Management is currently assessing the
potential impact that the adoption of FSP APB 14-1 could have on the Company’s
financial statements in fiscal 2010.
Recently Adopted Accounting
Pronouncement:
SFAS 165 - In June
2009, the FASB issued SFAS 165, Subsequent Events, to
establish general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
available to be issued. In particular, SFAS 165 sets forth: (1) the
period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements; (2) the circumstances
under which an entity should recognize events or transactions occurring after
the balance sheet date in its financial statements; and (3) the disclosures that
an entity should make about events or transactions that occurred after the
balance sheet date. SFAS 165 is prospectively effective for financial statements
issued for interim or annual periods ending after June 15, 2009. The adoption of
SFAS 165 on June 30, 2009 did not impact the Company’s results of operations or
financial condition. See Note 1, Basis of Presentation, for related
footnote disclosure.
NOTE
3. Equity
Stock
Options
The Company provides long-term incentives to
eligible officers, directors, and employees in the form of
stock options. Most of the stock options vest and become exercisable over
four to five years and have a contractual life of ten years. The Company
maintains two stock option plans: the 1995 Incentive and Non-Statutory Stock
Option Plan (“1995 Plan”) and the 2000 Stock Option Plan
(“2000 Plan” and, together with the
1995 Plan, the “Option Plans”).
The 1995 Plan authorizes the grant of options up to 2,744,118 shares of
the
Company's common
stock. On April
30, 2009, the Company’s shareholders approved an increase in the number of
shares reserved for issuance under the 2000 Plan from 12,850,000 to
15,850,000 shares of the Company’s common stock. As of June 30, 2009, no options were available
for issuance under the 1995 Plan and 4,100,776 options were available for
issuance under the 2000 Plan. Certain options under the
Option Plans are intended to qualify as incentive stock options pursuant to
Section 422A of the Internal Revenue Code. The Company issues new
shares of common stock to satisfy the issuance of shares under this stock-based
compensation plan.
The following table
summarizes the activity under the Option Plans for the nine months ended June 30, 2009:
Number
of Shares
|
Weighted
Average Exercise Price
|
Weighted
Average
Remaining
Contractual Life
(in
years)
|
|||||||||||
Outstanding
as of September 30, 2008
|
8,929,453
|
$
|
6.57
|
8.22
|
|||||||||
Granted
|
615,439
|
1.25
|
|||||||||||
Exercised
|
(10,675
|
)
|
3.02
|
||||||||||
Forfeited
|
(902,539
|
)
|
7.19
|
||||||||||
Cancelled
|
(526,673
|
)
|
4.51
|
||||||||||
Outstanding
as of June 30, 2009
|
8,105,005
|
$
|
6.28
|
7.53
|
|||||||||
Exercisable
as of June 30, 2009
|
3,747,079
|
$
|
5.81
|
6.26
|
As of
June 30, 2009 there was approximately $9.0 million of total unrecognized
compensation expense related to non-vested stock-based compensation arrangements
granted under the Option Plans. This expense is expected to be recognized over
an estimated weighted average life of 2.9 years.
Intrinsic
value for stock options represents the “in-the-money” portion or the positive
variance between a stock option’s exercise price and the underlying stock
price. There were no stock options exercised during the three months
ended June 30, 2009. The total intrinsic value related to stock
options exercised during the nine months ended June 30, 2009 was approximately
$10,000. The total intrinsic value related to stock options exercised
during the three and nine months ended June 30, 2008 was approximately $0.3
million and $11.5 million, respectively. There was no intrinsic value
related to fully vested and expected to vest stock options as of June 30, 2009
and no intrinsic value related to exercisable stock options as of June 30,
2009.
Number
of Stock Options Outstanding
|
Options
Exercisable
|
||||||||||||||||||||||||||
Exercise
Price of Stock Options
|
Number
Outstanding
|
Weighted
Average Remaining Contractual Life (years)
|
Weighted-
Average Exercise Price
|
Number
Exercisable
|
Weighted-
Average Exercise Price
|
||||||||||||||||||||||
>=$1.00
to <$5.00
|
2,326,974
|
6.21
|
$
|
2.89
|
1,625,748
|
$
|
2.96
|
||||||||||||||||||||
>=$5.00
to <$10.00
|
5,643,111
|
8.17
|
7.40
|
2,024,211
|
7.41
|
||||||||||||||||||||||
>$10.00
|
134,920
|
3.71
|
17.74
|
97,120
|
20.18
|
||||||||||||||||||||||
TOTAL
|
8,105,005
|
7.53
|
$
|
6.28
|
3,747,079
|
$
|
5.81
|
Stock-based
compensation expense is measured at the stock option grant date, based on the
fair value of the award, over the requisite service period. As
required by SFAS 123(R),
Share-Based Payment (revised 2004), management has made an estimate of
expected forfeitures and is recognizing compensation expense only for those
equity awards expected to vest.
The
effect of recording stock-based compensation expense during the three and nine
months ended June 30, 2009 and 2008 was as follows:
(in
thousands, except per share data)
|
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
|||||||||||
2009
|
2008
|
2009
|
2008
|
||||||||||
Stock-based
compensation expense by award type:
|
|||||||||||||
Employee
stock options
|
$
|
1,072
|
$
|
1,555
|
$
|
4,413
|
$
|
4,035
|
|||||
Employee
stock purchase plan
|
206
|
186
|
562
|
354
|
|||||||||
Former
employee stock options tolled
|
-
|
-
|
-
|
4,316
|
|||||||||
Total
stock-based compensation expense
|
$
|
1,278
|
$
|
1,741
|
$
|
4,975
|
$
|
8,705
|
|||||
Net
effect on net loss per basic and diluted share
|
$
|
(0.02
|
)
|
$
|
(0.02
|
)
|
$
|
(0.06
|
)
|
$
|
(0.14
|
)
|
Tolled Stock
Options
Under the
terms of the Company’s stock option agreements issued under the Option Plans, employees that
have vested and exercisable stock options have 90 days subsequent to the date of
their termination to exercise their stock options. In November 2006,
the Company announced that it was suspending its reliance on previously issued
financial statements, which in turn caused the Company’s Form S-8 registration
statements for shares of common stock issuable under the Option Plans not to be
available. Therefore, employees and terminated employees were
precluded from exercising stock options until the Company became compliant with
its SEC filings and the registration of the stock option shares was once again
effective (the “Blackout Period”). In April 2007, the Company’s Board
of Directors approved a stock option grant “modification” for terminated
employees by extending the normal 90-day exercise period after date of
termination to a date after which the Blackout Period was lifted. The
Company communicated the terms of the stock option grant modification with its
terminated employees in November 2007. The Company’s Board of
Directors approved an extension of the stock option expiration date equal to the
number of calendar days during the Blackout Period before such stock option
would have otherwise expired (the “Tolling Period”). Terminated
employees were able to exercise their vested stock options beginning on the
first day after the lifting of the Blackout Period for a period equal to the
Tolling Period. Approximately 50 terminated employees were impacted
by this modification. All tolled stock options were either exercised
or expired by January 29, 2008.
To
account for a stock option grant modification, when the rights conveyed by a
stock-based compensation award are no longer dependent on the holder being an
employee, the award ceases to be accounted for under SFAS 123(R) and becomes
subject to the recognition and measurement requirements of EITF 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock, which results in liability classification and measurement of the
award. On the date of modification, stock options that receive
extended exercise terms are initially measured at fair value and expensed as if
the stock options awards were new grants. Subsequent changes in
fair value are reported in earnings and disclosed in the financial statements as
long as the stock options remain classified as liabilities.
During
the three months ended December 31, 2007, the Company incurred a non-cash
expense of $4.4 million associated with the modification of stock options issued
to terminated employees which was calculated using the Black-Scholes option
valuation model. The modified stock options were 100% vested at the
time of grant with an estimated life of no greater than 90 days. When
the stock options classified as liabilities were ultimately settled in stock,
any gains or losses on those stock options were included in additional paid-in
capital. For unexercised stock options that ultimately expired, the
liability was relieved with an offset to income included in current earnings,
which totaled approximately $58,000 in January 2008.
Since
these modified stock options were issued to terminated employees of the Company,
and therefore no services were required to receive this grant and no contractual
obligation existed at the Company to issue these modified stock options, the
Company concluded it was more appropriate to classify this non-cash expense
within “other income and expense” in the Company’s statement of
operations.
Tender
Offer
As a
result of the Company's previously announced voluntary inquiry into its
historical stock option granting practices, which was concluded in 2007, the
Company determined that an incorrect grant date was used in the granting of
certain stock options. As a result, certain stock options were determined to be
granted at an exercise price below the fair market value of the Company's common
stock as of the correct measurement grant date. Consequently, employees holding
these stock options faced a potential tax liability under Section 409A of the
Internal Revenue Code and similar sections of certain state tax codes, unless
remedial action was taken to adjust the exercise price of these stock options
prior to December 31, 2008.
In
November 2008, the Company announced that it had commenced a tender offer for
164,088 stock options outstanding under its 2000 Plan which was held by 91 of
its then current non-officer employees. Under the terms of the tender
offer, employees holding such stock options were given the opportunity to amend
these options to increase the exercise price to a higher price that is equal to
the fair market value on the date which has been determined to be the correct
date of issuance for these stock options in return for a cash payment for each
tendered stock option equal to the difference between the original exercise
price and the new exercise price. The tender offer remained open
until 11:59 p.m. Mountain Time on December 17, 2008. As a result of
the tender offer, a total of 163,838 stock options were tendered, approximately
$44,000 in cash payments were paid in January 2009, and the non-cash stock-based
SFAS 123(R) expense due to the modification of stock options was determined to
be immaterial. Further details regarding the tender can be obtained
from the filing on Schedule TO which the Company filed on December 18, 2008 with
the SEC.
Valuation
Assumptions
The fair
value of each stock option grant is estimated on the date of grant using the
Black-Scholes option valuation model and the straight-line attribution approach
using the following weighted-average assumptions. The option-pricing
model requires the input of highly subjective assumptions, including the
option’s expected life and the price volatility of the underlying
stock. The weighted-average grant date fair value of stock options
granted during the three and nine months ended June 30, 2009 was $1.30 and
$1.25, respectively. The weighted-average grant date fair value of
stock options granted during the three and nine months ended June 30, 2008 was
$8.23 and $7.79, respectively.
Black-Scholes
Weighted-Average Assumptions
|
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
|||||||||||
2009
|
2008
|
2009
|
2008
|
||||||||||
Stock
Options:
|
|||||||||||||
Expected
dividend yield
|
-
|
%
|
-
|
%
|
-
|
%
|
-
|
%
|
|||||
Expected
stock price volatility
|
147.7
|
%
|
72.3
|
%
|
187.6
|
%
|
80.8
|
%
|
|||||
Risk-free
interest rate
|
2.4
|
%
|
2.9
|
%
|
2.4
|
%
|
2.9
|
%
|
|||||
Expected
term (in years)
|
6.2
|
6.2
|
5.8
|
5.6
|
|||||||||
Estimated
pre-vesting forfeitures
|
31.9
|
%
|
23.3
|
%
|
31.9
|
%
|
23.3
|
%
|
Jan
1, 2009 –
Jun
30, 2009
|
Jul
1, 2008 –
Dec
31, 2008
|
Jan
1, 2008 –
Jun
30, 2008
|
|||||||||||
Employee
Stock Purchase Plan:
|
|||||||||||||
Expected
dividend yield
|
-
|
%
|
-
|
%
|
-
|
%
|
|||||||
Expected
stock price volatility
|
112.0
|
%
|
74.1
|
%
|
66.4
|
%
|
|||||||
Risk-free
interest rate
|
0.3
|
%
|
2.1
|
%
|
3.3
|
%
|
|||||||
Expected
term
|
6
months
|
6
months
|
6
months
|
Expected Dividend
Yield: The Black-Scholes valuation model calls for a single
expected dividend yield as an input. The Company has not issued any
dividends.
Expected Stock Price
Volatility: The fair values of stock-based payments were
valued using the Black-Scholes valuation method with a volatility factor based
on the Company’s historical stock price.
Risk-Free Interest
Rate: The Company bases the risk-free interest rate used in
the Black-Scholes valuation method on the implied yield that was currently
available on U.S. Treasury zero-coupon notes with an equivalent remaining term.
Where the expected term of stock-based awards do not correspond with the terms
for which interest rates are quoted, the Company performed a straight-line
interpolation to determine the rate from the available maturities.
Expected Term: Expected term
represents the period that the Company’s stock-based awards are expected to be
outstanding and was determined based on historical experience of similar awards,
giving consideration to the contractual terms of the stock-based awards, vesting
schedules and expectations of future employee behavior as influenced by changes
to the terms of its stock-based awards.
Estimated Pre-vesting Forfeitures:
When estimating forfeitures, the Company considers voluntary termination
behavior as well as workforce reduction programs.
Preferred
Stock
The
Company’s Restated Certificate of Incorporation authorizes the Board of
Directors to issue up to 5,882,352 shares of preferred stock upon such terms and
conditions having such rights, privileges, and preferences as the Board of
Directors may determine. As of June 30, 2009 and September 30, 2008,
no shares of preferred stock were issued or outstanding.
Warrants
As of
June 30, 2009 and September 30, 2008, the Company had 1,400,003 warrants
outstanding from the private placement transaction that closed on February 15,
2008. The warrants grant the holder the right to purchase one
share of the Company’s common stock at a price of $15.06 per
share. The warrants are immediately exercisable and remain
exercisable for a period of 5 years from the closing date.
Employee Stock Purchase
Plan
In fiscal
2000, the Company adopted an Employee Stock Purchase Plan (“ESPP”). The ESPP
provides employees of the Company an opportunity to purchase common stock
through payroll deductions. The ESPP is a 6-month duration plan with new
participation periods beginning the first business day of January and July of
each year. The purchase price is set at 85% of the average high and low market
price of the Company's common stock on either the first or last day of the
participation period, whichever is lower, and contributions are limited to the
lower of 10% of an employee's compensation or $25,000. In November
2006 through December 2007, the Company suspended the ESPP due to its review of
historical stock option granting practices. The Company reinstated
the ESPP on January 1, 2008. On April 30, 2009, the
Company’s shareholders approved an increase in the number of
shares reserved for issuance under the ESPP from 2.0 million to 4.5
million shares. The Company issues new shares of common stock
to satisfy the issuance of shares under this stock-based compensation
plan. The amounts of shares issued for the ESPP are as
follows:
Number
of Common Stock Shares
|
Purchase
Price per Share of
Common
Stock
|
|||||||
Amount
of shares reserved for the ESPP
|
4,500,000
|
|||||||
Number
of shares issued for calendar years 2000 through
2006
|
(1,000,000
|
)
|
$1.87
- $40.93
|
|||||
Number
of shares issued for the first half of calendar year
2007
|
(123,857
|
)
|
$6.32
|
|||||
Number
of shares issued for the first half of calendar year
2008
|
(120,791
|
)
|
$5.62
|
|||||
Number
of shares issued for the second half of calendar year
2008
|
(471,798
|
)
|
$0.88
|
|||||
Number
of shares issued for the first half of calendar year
2009
|
(522,924
|
)
|
$0.92
|
|||||
Remaining
shares reserved for the ESPP
|
2,260,630
|
Future
Issuances
As
of June 30, 2009, the Company had reserved a total of 15.9 million shares
of its common stock for future issuances as follows:
Number
of Common Stock Shares Available
|
||||
For
exercise of outstanding common stock options
|
8,105,005
|
|||
For
future issuances to employees under the ESPP
|
2,260,630
|
|||
For
future common stock option awards
|
4,100,776
|
|||
For
future exercise of warrants
|
1,400,003
|
|||
Total
reserved
|
15,866,414
|
Subsequent
event
On July
27, 2009, the Company’s Compensation Committee approved a retention grant for
eligible employees which totaled 3,004,000 stock options. The stock
option exercise price for this grant was $1.25, which was based on the fair
market value of the Company’s common stock on the date of grant.
NOTE
4. Acquisitions
Intel’s Optical Platform
Division
On
February 22, 2008, the Company acquired assets of the telecom portion of Intel
Corporation’s Optical Platform Division (“OPD”). The telecom assets acquired
include inventory, fixed assets, intellectual property, and technology comprised
of tunable lasers, tunable transponders, 300-pin transponders, and integrated
tunable laser assemblies. The purchase price was $75.0 million in
cash and $10.0 million in the Company’s common stock, priced at a
volume-weighted average price of $13.84 per share. Under the terms of
the asset purchase agreement, the purchase price of $85 million was subject to
adjustment based on an inventory true-up, plus specifically assumed
liabilities. Direct transaction costs totaled approximately $0.8
million. This acquisition was financed through proceeds received from
the $100 million private placement of common stock and warrants that closed on
February 15, 2008.
On April
20, 2008, the Company acquired the enterprise and storage assets of Intel
Corporation’s OPD business, as well as Intel’s Connects Cables
business. The assets acquired include inventory, fixed assets,
intellectual property, and technology relating to optical transceivers for
enterprise and storage customers, as well as optical cable interconnects for
high-performance computing clusters. As consideration for the
purchase of assets, the Company issued 3.7 million restricted shares of the
Company’s common stock to Intel.
On April
20, 2009, the Company issued an additional 1.3 million shares of unrestricted
common stock to Intel, valued at $1.2 million using the closing share price of
$0.91, as consideration for the final purchase price adjustment related to this
asset acquisition. This contingency payment was based solely on
performance of the Company’s stock price subsequent to the
transaction. Accordingly, under SFAS 141, Business Combinations,
resolution of a stock price-based contingency does not result in additional
purchase price consideration.
The final
purchase price was allocated as follows:
(in
thousands)
Intel’s
Optical Platform Division
|
||||
Net
purchase price
|
$
|
111,792
|
||
Net
assets acquired
|
(79,444
|
)
|
||
Excess
purchase price allocated to goodwill
|
$
|
32,348
|
Net
assets acquired in the acquisition were as follows:
Inventory
|
$
|
33,287
|
||
Fixed
assets
|
19,878
|
|||
Intangible
assets
|
26,279
|
|||
Net
assets acquired
|
$
|
79,444
|
The $26.3
million of acquired intangible assets have a weighted average life of
approximately eight years. The intangible assets that make up that
amount include customer lists of $7.5 million (8 to 10 year useful life) and
developed and core technology of $18.8 million (6 to 10 year useful
life).
In
connection with this acquisition, Intel and the Company entered into a
Transition Services Agreement (the “TSA”), which facilitated Intel’s ability to
carve-out the business and deliver those assets to the Company. Intel also
provided certain transition services to the Company, including financial
services, supply chain support, data extraction, conversion services, facilities
and site computing support, and office space services. Operating
expenses associated with the TSA were expensed as incurred and the TSA was
substantially completed as of August 2008.
See Note
9, Goodwill and Intangible Assets, for information on impairment charges
recorded by the Company in connection with assets acquired from this
acquisition.
NOTE
5. Investments
Auction Rate
Securities
Historically,
the Company has invested in securities with an auction reset feature (“auction
rate securities”). In February 2008, the auction market failed for
the Company’s auction rate securities, which resulted in the Company being
unable to sell its investments in auction rate securities. As of
September 30, 2008, the Company had approximately $3.1 million invested in
auction rate securities.
During
the three months ended December 31, 2008, the Company entered into agreements
with its investment brokers for the settlement of auction rate securities at
100% par value, of which $1.7 million was settled at 100% par value in November
2008. The remaining $1.4 million of auction rate securities should be
settled by June 2010 and it is classified as a current asset based on its
expected settlement date. In December 2008, the Company borrowed $0.9
million from its investment broker, using its remaining $1.4 million in auction
rate securities as collateral, which is classified as short-term
debt. Since the Company believes that it will receive full value of
its remaining $1.4 million securities, we have not recorded any impairment on
these investments as of June 30, 2009.
Lightron Equity
Securities
In April
2008, the Company invested approximately $1.5 million in Lightron Corporation, a
Korean company that is publicly traded on the Korean Stock
Market. The Company initially accounted for this investment as an
available-for-sale security. Due to the decline in the market value
of this investment and the expectation of non-recovery of this investment beyond
its current market value, the Company recorded a $0.5 million “other than
temporary” impairment loss on this investment as of September 30, 2008 and
another $0.4 million “other than temporary” impairment loss on this investment
as of December 31, 2008. During the quarter ended March 31, 2009, the
Company sold its interest in Lightron Corporation, via several
transactions, for a total of $0.5 million in cash. The Company
recorded a gain on the sale of this investment of approximately $21,000, after
consideration of impairment charges recorded in previous periods, and the
Company also recorded a foreign exchange loss of $0.1 million due to the
conversion from Korean Won to U.S. dollars.
Entech Solar,
Inc. (formerly
named WorldWater and Solar Technologies Corporation)
In
January 2009, the Company announced that it completed the closing of a two step
transaction involving the sale of its remaining interests in Entech Solar, Inc.
The Company sold its remaining shares of Entech Solar Series D Convertible
Preferred Stock and warrants to a significant shareholder of both the Company
and Entech Solar, for approximately $11.6 million, which included additional
consideration of $0.2 million as a result of the termination of certain
operating agreements between the Company and Entech Solar. During the
three months ended March 31, 2009, the Company recognized a gain on the sale of
this investment of approximately $3.1 million.
In June
2008, the Company sold one million shares of Series D Preferred Stock and
100,000 warrants of Entech Solar and recognized a gain on the sale of this
investment of approximately $3.7 million.
NOTE
6. Accounts Receivable
The
components of accounts receivable consisted of the following:
(in
thousands)
|
June
30,
2009
|
September
30, 2008
|
|||||
Accounts
receivable
|
$
|
44,724
|
$
|
57,703
|
|||
Accounts
receivable – unbilled
|
4,488
|
4,987
|
|||||
Accounts
receivable, gross
|
49,212
|
62,690
|
|||||
Allowance
for doubtful accounts
|
(7,320
|
)
|
(2,377
|
)
|
|||
Total
accounts receivable, net
|
$
|
41,892
|
$
|
60,313
|
The
Company regularly evaluates the collectibility of its accounts receivable and
accordingly maintains allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to meet their financial
obligations to us. The allowance is based on the age of receivables and a
specific identification of receivables considered at risk. The Company
classifies charges associated with the allowance for doubtful accounts as
SG&A expense. If the financial condition of our customers were to
deteriorate, impacting their ability to pay us, additional allowances may be
required.
§
|
During
the three months ended June 30, 2009, the Company recorded $2.2 million in
bad debt expense, of which $(0.1) million related to the Fiber Optics
segment and $2.3 million related to the Photovoltaics
segment.
|
§
|
During
the nine months ended June 30, 2009, the Company recorded $4.8 million in
bad debt expense, of which $0.4 million related to the Fiber Optics
segment and $4.4 million related to the Photovoltaics
segment.
|
NOTE
7. Inventory
Inventory
is stated at the lower of cost or market, with cost being determined using the
standard cost method that includes material, labor, and manufacturing overhead
costs. The components of inventory consisted of the
following:
(in
thousands)
|
June
30,
2009
|
September
30, 2008
|
|||||
Raw
materials
|
$
|
29,983
|
$
|
38,304
|
|||
Work-in-process
|
8,144
|
7,293
|
|||||
Finished
goods
|
15,030
|
32,010
|
|||||
Inventory,
gross
|
53,157
|
77,607
|
|||||
Less:
allowance for excess and obsolescence
|
(13,654
|
)
|
(12,990
|
)
|
|||
Total
inventory, net
|
$
|
39,503
|
$
|
64,617
|
§
|
During
the three months ended June 30, 2009, the Company recorded $2.1 million in
inventory write-downs, of which $1.9 million related to the Fiber Optics
segment and $0.2 million related to the Photovoltaics
segment.
|
§
|
During
the nine months ended June 30, 2009, the Company recorded $14.9 million in
inventory write-downs, of which $9.1 million related to the Fiber Optics
segment and $5.8 million related to the Photovoltaics
segment.
|
We have
incurred, and may in the future incur charges to write-down our
inventory.
NOTE
8. Property, Plant, and Equipment
The
components of property, plant, and equipment consisted of the
following:
(in
thousands)
|
June
30,
2009
|
September
30, 2008
|
|||||
Land
|
$
|
1,502
|
$
|
1,502
|
|||
Building
and improvements
|
34,922
|
44,607
|
|||||
Equipment
|
99,599
|
106,536
|
|||||
Furniture
and fixtures
|
3,065
|
3,127
|
|||||
Computer
hardware and software
|
2,665
|
2,687
|
|||||
Leasehold
improvements
|
1,126
|
478
|
|||||
Construction
in progress
|
2,946
|
4,395
|
|||||
Property,
plant and equipment, gross
|
145,825
|
163,332
|
|||||
Less:
accumulated depreciation and amortization
|
(88,130
|
)
|
(80,054
|
)
|
|||
Total
property, plant and equipment, net
|
$
|
57,695
|
$
|
83,278
|
The
Company reclassified $2,687 as of September 30, 2008 to computer hardware and
software from furniture and fixtures and equipment to conform to the current
period presentation.
As of
June 30, 2009 and September 30, 2008, the Company did not have any significant
capital lease agreements.
During
the nine months ended June 30, 2009, the Company wrote-off approximately $1.2
million of fully amortized fixed assets, related to the Company’s Photovoltaics
segment, that were no longer in use.
Depreciation
expense was $3.2 million and $9.6 million for the three and nine months ended
June 30, 2009, respectively. Depreciation expense was $2.9 million and $6.7
million for the three and nine months ended June 30, 2008,
respectively.
See Note
9, Goodwill and Intangible Assets, for information on impairment charges
recorded by the Company in connection with plant and equipment related to the
Fiber Optics segment.
NOTE
9. Goodwill and Intangible Assets
Goodwill
The
following table sets forth changes in the carrying value of goodwill by
reporting segment:
(in
thousands)
|
Fiber
Optics
|
Photovoltaics
|
Total
|
|||||||||
Balance
at September 30, 2008
|
31,843
|
20,384
|
52,227
|
|||||||||
Goodwill
impairment
|
(31,843
|
)
|
-
|
(31,843
|
)
|
|||||||
Balance
at June 30, 2009
|
$
|
-
|
$
|
20,384
|
$
|
20,384
|
Valuation of
Goodwill. Goodwill represents the excess of the purchase price
of an acquired business over the fair value of the identifiable assets acquired
and liabilities assumed. As required by SFAS 142, Goodwill and Other Intangible
Assets, the Company evaluates its goodwill for impairment on an annual
basis, or whenever events or changes in circumstances indicate that the carrying
value of a reporting unit may exceed its fair value. Management has
elected December 31st as the
annual assessment date. Circumstances that could trigger an interim
impairment test include but are not limited to: a significant adverse change in
the market value of the Company’s common stock, the business climate or legal
factors; an adverse action or assessment by a regulator; unanticipated
competition; loss of key personnel; the likelihood that a reporting unit or
significant portion of a reporting unit will be sold or otherwise disposed;
results of testing for recoverability of a significant asset group within a
reporting unit; and recognition of a goodwill impairment loss in the financial
statements of a subsidiary that is a component of a reporting unit.
In
performing goodwill impairment testing, the Company determines the fair value of
each reporting unit using a weighted combination of a market-based approach and
a discounted cash flow (“DCF”) approach. The market-based approach
relies on values based on market multiples derived from comparable public
companies. In applying the DCF approach, management forecasts cash flows over a
five year period using assumptions of current economic conditions and future
expectations of earnings. This analysis requires the exercise of
significant judgment, including judgments about appropriate discount rates based
on the assessment of risks inherent in the amount and timing of projected future
cash flows. The derived discount rate may fluctuate from period to
period as it is based on external market conditions.
All of
these assumptions are critical to the estimate and can change from period to
period. Updates to these assumptions in future periods, particularly
changes in discount rates, could result in different results of goodwill
impairment tests.
§
|
As
disclosed in the Company’s Annual Report on Form 10-K, as a result of the
unfavorable macroeconomic environment and a significant reduction in our
market capitalization since the completion of the asset acquisitions from
Intel Corporation (the “Intel Acquisitions”), the Company reduced its
internal revenue and profitability forecasts and revised its operating
plans to reflect a general decline in demand and average selling prices,
especially for the Company’s recently acquired telecom-related fiber
optics component products. The Company also performed an
interim test as of September 30, 2008 to determine whether there was
impairment of its goodwill. The fair value of each of the
Company’s reporting units was determined by using a weighted average of
the Guideline Public Company, Guideline Merged and Acquired Company, and
the DCF methods. Due to uncertainty in the Company’s business
outlook arising from the ongoing financial liquidity crisis and the
current economic recession, management believed the most appropriate
approach would be an equally weighted approach, amongst the three methods,
to arrive at an indicated value for each of the reporting
units. The indicated fair value of each of the reporting units
was then compared with the reporting unit’s carrying value to determine
whether there was an indication of impairment of goodwill under SFAS
142. As a result, the Company determined that the goodwill
related to one of its Fiber Optics reporting units may be
impaired. Since the second step of the Company’s goodwill
impairment test was not completed before the fiscal year-end financial
statements were issued and a goodwill impairment loss was probable and
could be reasonably estimated, management recorded a non-cash goodwill
impairment charge of $22.0 million, as a best estimate, during the three
months ended September 30, 2008.
|
§
|
During
the three months ended December 31, 2008, there was further deterioration
of the Company’s market capitalization, significant adverse changes in the
business climate primarily related to product pricing and profit margins,
and an increase in the discount rate. The Company performed its
annual goodwill impairment test as of December 31, 2008 and management
weighted the market-based approach heavier than the DCF method using
information that was available at the
time.
|
§
|
Based
on this analysis, the Company determined that goodwill related to its
Fiber Optics reporting units was fully impaired. As a result,
the Company recorded a non-cash impairment charge of $31.8 million and the
Company’s balance sheet no longer reflects any goodwill associated with
its Fiber Optics reporting units.
|
§
|
The
Company’s annual impairment test as of December 31, 2008, indicated that
there was no impairment of goodwill for the Photovoltaics reporting
unit. Based upon revised operational and cash flow forecasts,
the Photovoltaics reporting unit’s fair value exceeded carrying value by
over 15%.
|
§
|
The
Company continues to report goodwill related to its Photovoltaics
reporting unit and the Company believes the remaining carrying amount of
goodwill is recoverable. However, if there is further erosion
of the Company’s market capitalization or the Photovoltaics reporting unit
is unable to achieve its projected cash flows, management may be required
to perform additional impairment tests of its remaining
goodwill. The outcome of these additional tests may result in
the Company recording additional goodwill impairment
charges.
|
Intangible
Assets
The
following table sets forth changes in the carrying value of intangible assets by
reporting segment:
(in
thousands)
|
June 30,
2009
|
September 30,
2008
|
|||||||||||||||||
Gross
Assets
|
Accumulated
Amortization
|
Net
Assets
|
Gross
Assets
|
Accumulated
Amortization
|
Net
Assets
|
||||||||||||||
Fiber
Optics
|
$
|
24,419
|
$
|
(11,679
|
)
|
$
|
12,740
|
$
|
35,991
|
$
|
(8,502
|
)
|
$
|
27,489
|
|||||
Photovoltaics
|
1,370
|
(571
|
)
|
799
|
956
|
(412
|
)
|
544
|
|||||||||||
Total
|
$
|
25,789
|
$
|
(12,250
|
)
|
$
|
13,539
|
$
|
36,947
|
$
|
(8,914
|
)
|
$
|
28,033
|
Valuation of Long-lived
Assets and Other Intangible Assets. Long-lived assets consist
primarily of our property, plant, and equipment. Our intangible
assets consist primarily of intellectual property that has been internally
developed or purchased. Purchased intangible assets include existing
and core technology, trademarks and trade names, and customer
contracts. Intangible assets are amortized using the straight-line
method over estimated useful lives ranging from one to fifteen
years. Because all of the Company’s intangible assets are subject to
amortization, the Company reviews these intangible assets for impairment in
accordance with the provisions of FASB Statement No. 144, Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed
Of. As part of internal control procedures, the Company
reviews long-lived assets and other intangible assets for impairment on an
annual basis or whenever events or changes in circumstances indicate that its
carrying amount may not be recoverable. Our impairment testing of
intangible assets consists of determining whether the carrying amount of the
long-lived asset (asset group) is recoverable, in other words, whether the sum
of the future undiscounted cash flows expected to result from the use and
eventual disposition of the asset (asset group) exceeds its carrying
amount. The determination of the existence of impairment
involves judgments that are subjective in nature and may require the use of
estimates in forecasting future results and cash flows related to an asset or
group of assets. In making this determination, the Company uses
certain assumptions, including estimates of future cash flows expected to be
generated by these assets, which are based on additional assumptions such as
asset utilization, the length of service that assets will be used in our
operations, and estimated salvage values.
§
|
As
disclosed in the Company’s Annual Report on Form 10-K, as a result of
reductions to our internal revenue and profitability forecasts, changes to
our internal operating forecasts and a significant reduction in our market
capitalization since the completion of the Intel Acquisitions, the Company
tested for impairment of its long-lived assets and other intangible
assets. The sum of future undiscounted cash flows exceeded the
carrying value for each of the reporting units’ long-lived and other
intangible assets. Accordingly, no impairment existed under
SFAS 144 at September 30, 2008. As the long-lived asset (asset
group) met the recoverability test, no further testing was required or
performed under SFAS 144.
|
§
|
During
the three months ended December 31, 2008, the Company recorded a non-cash
impairment charge totaling $1.9 million related to certain intangible
assets that were acquired from the Intel Acquisitions that were
subsequently abandoned.
|
As of
December 31, 2008, due to further changes in estimates of future operating
performance and cash flows that occurred during the quarter, the Company tested
for impairment of its long-lived assets and other intangible assets and based on
that analysis, determined that no impairment existed.
§
|
During
the three months ended June 30, 2009, the Company performed an evaluation
of its Fiber Optics segment assets for impairment. The
impairment test was triggered by a determination that it was more likely
than not that certain assets would be sold or otherwise disposed of before
the end of their previously estimated useful lives. As a result
of the evaluation, it was determined that an impairment existed, and a
charge of $27.0 million was recorded to write down the long-lived assets
to estimated fair value, which was determined based on a combination of
guideline public company comparisons and discounted estimated future cash
flows. Of the total impairment charge, $17.2 million related to
plant and equipment and $9.8 million related to intangible
assets.
|
The
current adverse economic conditions had a significant negative effect on the
Company’s assessment of the fair value of the Fiber Optics segment
assets. The impairment charge primarily resulted from the combined
effect of the current slowdown in product orders and lower pricing exacerbated
by currently high discount rates used in estimating fair values and the effects
of recent declines in market values of debt and equity securities of comparable
public companies. This impairment charge in combination with other non-cash
charges will not cause the Company to be in default under any of its financial
covenants associated with its credit facility nor will it have a material
adverse impact on the Company’s liquidity position or cash flows.
The
determination of enterprise value involved a number of assumptions and
estimates. The Company uses a combination of two fair value inputs to estimate
enterprise value of its reporting units: internal discounted cash flow analyses
(income approach) and comparable company equity values. Recent
pending and/or completed relevant transactions method was not used due to lack
of recent transactions. The income approach involved estimates of future
performance that reflected assumptions regarding, among other things, sales
volumes and expected margins. Another key variable in the income approach was
the discount rate, or weighted average cost of capital. The determination of the
discount rate takes into consideration the capital structure, debt ratings and
current debt yields of comparable companies as well as an estimate of return on
equity that reflects historical market returns and current market volatility for
the industry. Enterprise value estimates based on comparable company equity
values involve using trading multiples of revenue of those selected companies to
derive appropriate multiples to apply to the revenue of the reporting units.
This approach requires an estimate, using historical acquisition data, of an
appropriate control premium to apply to the reporting unit values calculated
from such multiples. Critical judgments include the selection of comparable
companies and the weighting of the two value inputs in developing the best
estimate of enterprise value.
§
|
The
Company believes the carrying amount of its long-lived assets and
intangible assets at June 30, 2009 is recoverable. However, if
there is further erosion of the Company’s market capitalization or the
Company is unable to achieve its projected cash flows, management may be
required to perform additional impairment tests of its remaining
long-lived assets and intangible assets. The outcome of these
additional tests may result in the Company recording additional impairment
charges.
|
Amortization
expense related to intangible assets is generally included in SG&A on the
statements of operations. Amortization expense was $1.2 million and
$3.3 million for the three and nine months ended June 30, 2009,
respectively. Amortization expense was $1.2 million and
$2.3 million for the three and nine months ended June 30, 2008,
respectively.
Based on
the carrying amount of the intangible assets as of June 30, 2009, the estimated
future amortization expense is as follows:
(in
thousands)
|
Estimated
Future Amortization
Expense
|
|||
Three-months
ended September 30, 2009
|
$
|
715
|
||
Fiscal
year ended September 30, 2010
|
2,788
|
|||
Fiscal
year ended September 30, 2011
|
2,400
|
|||
Fiscal
year ended September 30, 2012
|
2,076
|
|||
Fiscal
year ended September 30, 2013
|
1,740
|
|||
Thereafter
|
3,820
|
|||
Total
future amortization expense
|
$
|
13,539
|
NOTE
10. Accrued Expenses and Other Current Liabilities
The
components of accrued expenses and other current liabilities consisted of the
following:
(in
thousands)
|
June
30, 2009
|
September
30, 2008
|
||||||
Compensation-related
|
$
|
5,565
|
$
|
6,640
|
||||
Loss
on firm commitments
|
6,524
|
-
|
||||||
Warranty
|
4,333
|
4,640
|
||||||
Professional
fees
|
1,913
|
2,099
|
||||||
Royalty
|
1,792
|
1,414
|
||||||
Self
insurance
|
1,251
|
1,044
|
||||||
Deferred
revenue and customer deposits
|
1,031
|
1,422
|
||||||
Income
and other taxes
|
506
|
3,555
|
||||||
Inventory
obligation
|
-
|
982
|
||||||
Accrued
program loss
|
180
|
843
|
||||||
Restructuring
accrual
|
89
|
331
|
||||||
Other
|
725
|
320
|
||||||
Total
accrued expenses and other current liabilities
|
$
|
23,909
|
$
|
23,290
|
See Note
13, Commitments and Contingencies, for information regarding the loss on firm
commitments recorded by the Company.
During
the three months ended March 31, 2009, the Company recorded $1.1 million in
product warranty reserves in its Photovoltaics segment, which was primarily
related to new CPV-related product launches.
NOTE
11. Restructuring Charges
In
accordance with SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities, SG&A expenses recognized as
restructuring charges include costs associated with the integration of business
acquisitions and overall cost-reduction efforts.
The
Company has undertaken several cost cutting initiatives intended to conserve
cash including recent reductions in force, employee furloughs, temporary
reduction of salaries, the elimination of fiscal 2009 merit increases, a
significant reduction in discretionary expenses and capital expenditures and a
greater emphasis on improving its working capital management. These
initiatives are intended to conserve or generate cash in response to the
uncertainties associated with the recent deterioration in the global
economy. Restructuring charges consisted of the
following:
(in
thousands)
|
Three
Months Ended
June
30,
|
Nine
Months Ended
June
30,
|
|||||||||||
2009
|
2008
|
2009
|
2008
|
||||||||||
Employee
severance-related expense
|
$
|
57
|
$
|
4
|
$
|
968
|
$
|
313
|
|||||
Other
restructuring-related expense
|
-
|
8
|
-
|
101
|
|||||||||
Total
restructuring charges
|
$
|
57
|
$
|
12
|
$
|
968
|
$
|
414
|
The
following table sets forth changes in the severance and restructuring-related
accrual accounts as of June 30, 2009:
(in
thousands)
|
Severance-related
Accrual
|
Restructuring-related
Accrual
|
Total
|
||||||||||
Balance
as of September 30, 2008
|
$
|
152
|
$
|
331
|
$
|
483
|
|||||||
Additional
accruals
|
911
|
-
|
911
|
||||||||||
Cash
payments or otherwise settled
|
(1,063
|
)
|
(242
|
)
|
(1,305
|
)
|
|||||||
Balance
as of June 30, 2009
|
$
|
-
|
$
|
89
|
$
|
89
|
The
severance-related and restructuring–related accruals are recorded as accrued
expenses within current liabilities since they are expected to be settled with
the next twelve months. We may incur additional restructuring charges
in the future for employee severance, facility-related or other exit
activities.
NOTE
12. Debt
Line of
Credit
In
September 2008, the Company closed a $25 million asset-backed revolving credit
facility with Bank of America which can be used for working capital, letters of
credit and other general corporate purposes. Subsequently, the credit
facility was amended resulting in a reduction in the total loan availability to
$14 million. The credit facility matures in September 2011 and is
secured by virtually all of the Company’s assets. The credit facility
is subject to a borrowing base formula based on eligible accounts receivable and
provides for prime-based borrowings.
As of
June 30, 2009, the Company had a $5.0 million prime rate loan outstanding, with
an interest rate of 8.25%, and approximately $2.8 million in outstanding standby
letters of credit under this credit facility.
The
facility is also subject to certain financial covenants which management
believes the Company is in compliance with for the three months ended June 30,
2009.
For the
three months ended December 31, 2008, the Company did not meet the requirements
under the EBITDA financial covenant and for the three months ended March 31,
2009, the Company did not meet the requirements under the Fixed Charge Coverage
Ratio and EBITDA financial covenants. Over the last several months,
the Company has entered into several amendments to the credit facility with Bank
of America which has, among other things: (i) increased the amount of eligible
accounts receivable under the borrowing base formula, (ii) waived certain events
of default of financial covenants by the Company, (iii) decreased the
total maximum loan availability amount to $14 million, (iv) increased applicable
interest rates with respect to loans and letters of credit, and (v) adjusted
certain financial covenants. Adjustments were also made to the borrowing
base formula and the calculation of eligible accounts receivable which ,
generally resulted in greater loan availability against accounts receivable
subject to the $14 million overall loan limit.
Short-term
Debt
In
December 2008, the Company borrowed $0.9 million from UBS that is collateralized
with $1.4 million of auction rate securities. The average interest
rate on the loan is approximately 1.4% and the term of the loan is dependent
upon the timing of the settlement of the auction rate securities with UBS which
is expected to occur by June 2010 at 100% par value.
NOTE
13. Commitments and Contingencies
The
Company leases certain land, facilities, and equipment under non-cancelable
operating leases. The leases typically provide for rental adjustments for
increases in base rent (up to specific limits), property taxes, insurance and
general property maintenance that would be recorded as rent expense. Net
facility and equipment rent expense under such leases totaled approximately $0.6
million and $1.9 million for the three and nine months ended June 30, 2009,
respectively and approximately $0.5 million and $1.1 million for the three and
nine months ended June 30, 2008, respectively.
Estimated
future minimum rental payments under the Company's non-cancelable operating
leases with an initial or remaining term of one year or more as of June 30, 2009
are as follows:
(in
thousands)
|
Estimated
Future Minimum Lease Payments
|
|||
Three
months ended September 30, 2009
|
$
|
506
|
||
Fiscal
year ended September 30, 2010
|
1,958
|
|||
Fiscal
year ended September 30, 2011
|
1,814
|
|||
Fiscal
year ended September 30, 2012
|
1,068
|
|||
Fiscal
year ended September 30, 2013
|
796
|
|||
Thereafter
|
2,774
|
|||
Total
minimum lease payments
|
$
|
8,916
|
As of
June 30, 2009, the Company had eleven standby letters of credit issued and
outstanding which totaled approximately $3.3 million, of which $2.8 million was
issued against the Company’s credit facility with Bank of America and the
remaining $0.5 million in standby letters of credit are collateralized with
other financial institutions and are listed on the Company’s balance sheet as
restricted cash.
Loss on firm
commitments
Recently,
the Company has been challenged with higher than expected inventory positions of
product in its Fiber Optics segment as quarterly sales were lower than internal
projections of many of our customers, which has had a significant adverse effect
on results of operations in fiscal 2009. Management performed an
analysis of the Company’s inventory position, including a review of open
purchase and sales commitments, and determined that certain inventory was
impaired which resulted in a $6.5 million loss on purchase and sales commitments
specifically related to inventory. These impairment charges were
recognized in cost of revenues.
Legal
Proceedings
The
Company is subject to various legal proceedings and claims that are discussed
below. The Company is also subject to certain other legal proceedings and claims
that have arisen in the ordinary course of business and which have not been
fully adjudicated. The Company does not believe it has a potential
liability related to current legal proceedings and claims that could
individually, or in the aggregate, have a material adverse effect on its
financial condition, liquidity or results of operations. However, the results of
legal proceedings cannot be predicted with certainty. Should the Company fail to
prevail in any legal matters or should several legal matters be resolved against
the Company in the same reporting period, then the operating results of that
particular reporting period could be materially adversely
affected. During fiscal 2008, the Company settled certain matters
that did not individually, or in the aggregate, have a material impact on the
Company’s results of operations.
a)
Intellectual Property Lawsuits
We
protect our proprietary technology by applying for patents where appropriate
and, in other cases, by preserving the technology, related know-how and
information as trade secrets. The success and competitive position of our
product lines are significantly impacted by our ability to obtain intellectual
property protection for our R&D efforts.
We have,
from time to time, exchanged correspondence with third parties regarding the
assertion of patent or other intellectual property rights in connection with
certain of our products and processes. Additionally, on September 11, 2006, we
filed a lawsuit against Optium Corporation, currently part of Finisar
Corporation (Optium) in the U.S. District Court for the Western District of
Pennsylvania for patent infringement of certain patents associated with our
Fiber Optics segment. In the suit, the Company and JDS Uniphase Corporation
(JDSU) allege that Optium is infringing on U.S. patents 6,282,003 and 6,490,071
with its Prisma II 1550nm transmitters. On March 14, 2007, following denial of a
motion to add additional claims to its existing lawsuit, the Company and JDSU
filed a second patent suit in the same court against Optium alleging
infringement of JDSU's patent 6,519,374 ("the '374 patent"). On March
15, 2007, Optium filed a declaratory judgment action against the Company and
JDSU. Optium sought in this litigation a declaration that certain products of
Optium do not infringe the '374 patent and that the patent is invalid, but the
District Court dismissed the action on January 3, 2008 without addressing the
merits. The '374 patent is assigned to JDSU and licensed to the
Company.
On
December 20, 2007, the Company was served with a complaint in another
declaratory relief action which Optium had filed in the Federal District Court
for the Western District of Pennsylvania. This action seeks to have
U.S. patents 6,282,003 and 6,490,071 declared invalid or unenforceable because
of certain conduct alleged to have occurred in connection with the grant of
these patents. These allegations are substantially the same as those
brought by Optium by motion in the Company’s own case against Optium, which
motion had been denied by the Court. On August 11, 2008, both actions
pending in the Western District of Pennsylvania were consolidated before a
single judge, and a trial date of October 19, 2009 was set. On
February 18, 2009, the Company’s motion for a summary judgment dismissing
Optium’s declaratory relief action was granted, and on March 11, 2009, the
Company was notified that Optium intended to file an appeal of this
order.
b)
Avago-related Litigation
On July
15, 2008, the Company was served with a complaint filed by Avago Technologies
and what appear to be affiliates thereof in the United States District Court for
the Northern District of California, San Jose Division (Avago Technologies U.S.,
Inc., et al., Emcore
Corporation, et al.,
Case No.: C08-3248 JW). In this complaint, Avago asserts
claims for breach of contract and breach of express warranty against Venture
Corporation Limited (one of the Company’s customers) and asserts a tort claim
for negligent interference with prospective economic advantage against the
Company
On
December 5, 2008, EMCORE was also served with a complaint by Avago Technologies
filed in the United States District Court for the Northern District of
California, San Jose Division alleging infringement of two patents by the
Company’s VCSEL products. (Avago Technologies Singapore et al., Emcore Corporation,
et al., Case
No.: C08-5394 EMC). This matter has been stayed pending
resolution of the International Trade Commission matter described
immediately below.
On March
5, 2009, the Company was notified that, based on a complaint filed by Avago
alleging the same patent infringement that formed the basis of the complaint
previously filed in the Northern District of California, the U.S. International
Trade Commission had determined to begin an investigation titled “In the Matter
of Certain Optoelectronic Devices, Components Thereof and Products Containing
the Same”, Inv. No. 337-TA-669.
The
Company intends to vigorously defend against the allegations of all of the Avago
complaints.
c)
Green and Gold related litigation
On
December 23, 2008, Plaintiffs Maurice Prissert and Claude Prissert filed a
purported stockholder class action (the “Prissert Class Action”) pursuant to
Federal Rule of Civil Procedure 23 allegedly on behalf of a class of Company
shareholders against the Company and certain of its present and former directors
and officers (the “Individual Defendants”) in the United States District Court
for the District of New Mexico captioned, Maurice Prissert and Claude Prissert
v. EMCORE Corporation, Adam Gushard, Hong Q. Hou, Reuben F. Richards, Jr., David
Danzilio and Thomas Werthan, Case No. 1:08cv1190 (D.N.M.). The
Complaint alleges that Company and the Individual Defendants violated certain
provisions of the federal securities laws, including Section 10(b) of the
Securities Exchange Act of 1934, arising out of the Company’s disclosure
regarding its customer Green and Gold Energy (“GGE”) and the associated backlog
of GGE orders with the Company’s Photovoltaics business segment. The
Complaint in the Class Action seeks, among other things, an unspecified amount
of compensatory damages and other costs and expenses associated with the
maintenance of the Action.
On or
about February 12, 2009, a second purported stockholder class action (Mueller v. EMCORE Corporation et
al., Case No. 1:09cv 133 (D.N.M.)) was filed in the United States
District Court for the District of New Mexico against the same defendants named
in the Prissert Class Action, based on the substantially the same facts and
circumstances, containing substantially the same allegations and seeking
substantially the same relief. Plaintiffs in both class actions have
moved to consolidate the matters into a single action, and several alleged
EMCORE shareholders have moved to be appointed lead class plaintiff of the to-be
consolidated action. The Court has not yet consolidated the two class
actions or selected the lead plaintiff for these class actions
On
January 23, 2009, Plaintiff James E. Stearns filed a purported stockholder
derivative action (the “Stearns Derivative Action”) on behalf of the Company
against certain of its present and former directors and officers (the
“Individual Defendants”), as well as the Company as nominal defendant in the
Superior Court of New Jersey, Atlantic County, Chancery Division (James E. Stearns, derivatively on
behalf of EMCORE Corporation v. Thomas J. Russell, Robert Bogomolny,
Charles Scott, John Gillen, Reuben F. Richards, Jr., Hong Q. Hou, Adam Gushard,
David Danzilio and Thomas Werthan, Case No. Atl-C-10-09). This
action is based on essentially the same factual contentions as the Class Action,
and alleges that the Individual Defendants engaged in improprieties and
violations of law in connection with the reporting of the GGE
backlog. The Derivative Action seeks several forms of relief,
allegedly on behalf of the Company, including, among other things, damages,
equitable relief, corporate governance reforms, an accounting of, rescission of,
restitution of, and costs and disbursements of the lawsuit.
On March
11, 2009, Plaintiff Gary Thomas filed a second purported shareholder derivative
action (the “Thomas Derivative Action”; together with the Stearns Derivative
Action, the “Derivative Actions”) in the U.S. District Court for the District of
New Mexico against the Company and certain of the Individual
Defendants (Gary Thomas, derivatively on behalf
of EMCORE Corporation v. Thomas J. Russell, Robert Bogomolny, Charles
Scott, John Gillen, Reuben F. Richards, Jr., Hong Q. Hou, and EMCORE
Corporation, Case No. 1.09-cv-00236, (D.N.M.)). The Thomas
Derivative Action makes the same allegations as the Stearns Derivative Action
and seeks essentially the same relief.
The
Stearns Derivative Action has recently been transferred to Somerset County, New
Jersey. The plaintiff in the Thomas Derivative Action has recently
voluntarily dismissed the action in U.S. District Court for the District of New
Mexico. The parties have stipulated that the statute of limitations
in the Thomas Derivative Action will be tolled until December 31,
2009. Plaintiff’s counsel has indicated that if the Thomas Derivative
Action is re-filed, it would be filed in New Jersey state court in the County of
Somerset, New Jersey, so that both derivative actions can be consolidated before
a single judge.
The
Company intends to vigorously defend against the allegations of both the Class
Actions and the Derivative Action.
d)
Securities Matters