UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO(Mark One)
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended:ended June 30,December 31, 2009
or

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___

Commission File Number:Number 0-22175

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

New Jersey
(State or other jurisdiction of incorporation or organization)
22-2746503
(I.R.S. Employer Identification No.)
10420 Research Road, SE, Albuquerque, New Mexico
(Address of principal executive offices)
87123
(Zip Code)

22-2746503
(IRS Employer Identification No.)

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

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


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.   x Yes    [X]  ¨No  [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ¨ Yes   ¨ 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 definitionsthe definition of “large accelerated filer,”filer”, “accelerated filer,”filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):     

[  ] ¨ Large accelerated filer     [X] 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   [  ]    xNo [X]

The number of shares outstanding of the registrant’s no par value common stock as of August 11, 2009February 4, 2010 was 80,704,650.81,741,138.


 
 
 
 

EMCORE CorporationCAUTIONARY STATEMENT
FORM 10-Q FOR PURPOSES OF “SAFE HARBOR PROVISIONS”
For the Quarterly Period Ended June 30, 2009
TABLE OF CONTENTSTHE PRIVATE SECURITIES LITIGATION ACT OF 1995


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 largely based on our current expectations and projections about future events and financial trends affecting the financial condition of our business.  Such forward-looking statements include, in particular, projections about our future results included in our Exchange Act reports, statements about our plans, strategies, business prospects, changes and trends in our business and the markets in which we operate.  These forward-looking statements may be identified by the use of terms and phrases such as “anticipates”, “believes”, “can”, “could”, “estimates”, “expects”, “forecasts”, “intends”, “may”, “plans”, “projects”, “targets”, “will”, and similar expressions or variations of these terms and similar phrases.  Additionally, statements concerning future matters such as the development of new products, enhancements or technologies, sales levels, expense levels and other statements regarding matters that are not historical are forward-looking statements. Management cautions that these forward-looking statements relate to future events or our future financial performance and are subject to business, economic, and other risks and uncertainties, both known and unknown, that may cause actual results, levels of activity, performance or achievements of our business or our industry to be materially different from those expressed or implied by any forward-looking statements.  Factors that could cause or contribute to such differences in results and outcomes include without limitation those discussed under Item 1A - Risk Factors in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009.  The cautionary statements should be read as being applicable to all forward-looking statements wherever they appear in this Quarterly Report and they should also be read in conjunction with the consolidated financial statements, including the related footnotes.

PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
33
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
54
ITEM 4. CONTROLS AND PROCEDURES
55
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
56
ITEM 1A. RISK FACTORS
58
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
58
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
58
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
59
ITEM 5. OTHER INFORMATION
59
ITEM 6. EXHIBITS
60
SIGNATURES
61
Neither management nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements.  All forward-looking statements in this Quarterly Report are made as of the date hereof, based on information available to us as of the date hereof, and subsequent facts or circumstances may contradict, obviate, undermine, or otherwise fail to support or substantiate such statements.  We caution you not to rely on these statements without also considering the risks and uncertainties associated with these statements and our business that are addressed in our Annual Report.  Certain information included in this Quarterly Report may supersede or supplement forward-looking statements in our other Exchange Act reports filed with the Securities and Exchange Commission.  We assume no obligation to update any forward-looking statement to conform such statements to actual results or to changes in our expectations, except as required by applicable law or regulation.

 
 
 

PART I.  FINANCIAL INFORMATION
EMCORE Corporation
FORM 10-Q
For The Quarterly Period Ended December 31, 2009

TABLE OF CONTENTS


PAGE
Part I
Financial Information
Item 1.Financial Statements4
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations29
Item 3.Quantitative and Qualitative Disclosures About Market Risk37
Item 4.Controls and Procedures38
Part II
Other Information
Item 1.Legal Proceedings39
Item 1A.Risk Factors41
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds42
Item 3.Defaults Upon Senior Securities42
Item 4.Submission of Matters to a Vote of Security Holders42
Item 5.Other Information42
Item 6.Exhibits43
SIGNATURES44
 

ITEM 1. FINANCIAL STATEMENTS 

PART I.FINANCIAL INFORMATION
ITEM I.Financial Statements


EMCORE CORPORATION
Condensed Consolidated Statements of Operations and Comprehensive Loss
For the three and nine months ended June 30,December 31, 2009 and 2008
(in thousands, except loss per share)
(unaudited)


 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
  
For the Three Months
Ended December 31,
  2009 2008  2009  2008  2009 2008
                  
Product revenue
 
$
37,190
 
$
72,027
 
$
129,076
 
$
169,713
  
$
40,939
  
$
51,554
 
Service revenue
  
1,299
  
3,475
  
6,753
  
8,955
   
1,462
   
2,502
 
Total revenue
  
38,489
 
75,502
 
135,829
  
178,668
   
42,401
  
54,056
 
                  
Cost of product revenue
  
39,880
 
60,727
 
138,666
  
143,439
   
33,229
  
50,772
 
Cost of service revenue
  
1,037
  
1,129
  
5,007
  
4,832
   
1,168
   
1,695
 
Total cost of revenue
  
40,917
  
61,856
  
143,673
  
148,271
   
34,397
  
52,467
 
                  
Gross (loss) profit
  
(2,428
)
 
13,646
 
(7,844
)
 
30,397
 
Gross profit
  
8,004
  
1,589
 
                  
Operating expenses:
                  
Selling, general, and administrative
  
10,914
 
13,906
 
35,039
  
36,032
   
12,423
  
12,159
 
Research and development
  
5,654
 
11,382
 
20,655
  
28,132
   
7,513
  
8,110
 
Impairments
  
27,000
  
-
  
60,781
  
-
   
-
   
33,781
 
Total operating expenses
  
43,568
  
25,288
  
116,475
  
64,164
   
19,936
   
54,050
 
                  
Operating loss
  
(45,996
)
 
(11,642
)
 
(124,319
)
 
(33,767
)
  
(11,932
)
 
(52,461
)
                  
Other (income) expense:
                  
Interest income
  
(3
)
 
(124
)
 
(83
)
 
(778
)
  
(2
)
 
(50
)
Interest expense
  
105
 
-
 
443
  
1,580
   
116
  
195
 
Foreign exchange loss
  
232
  
472
 
Loss from financing derivative instrument
  
1,360
  
-
 
Impairment of investment
  
-
 
-
 
366
  
-
   
-
   
367
 
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
 
       
Total other expense
  
1,706
   
984
 
                  
Net loss
 
$
(45,353
)
 $
(7,722
)
 $
(122,536
)
$
(39,635
)
 
$
(13,638
)
 
$
(53,445
)
                  
Foreign exchange translation adjustment
  
(131
)
 
82
  
353
  
(5
)
  
79
   
108
 
                  
Comprehensive loss
 
$
(45,484
)
$
(7,640
)
$
(122,183
)
$
(39,640
)
 
$
(13,559
)
 
$
(53,337
)
                  
                  
Per share data:
                  
Basic and diluted per share data:
           
Net loss
 
$
(0.57
)
$
(0.10
)
$
(1.56
)
$
(0.62
)
Net loss per basic and diluted share
 
$
(0.17
)
 
$
(0.69
)
                  
Weighted-average number of basic and diluted shares outstanding
  
79,700
  
76,582
  
78,632
  
64,155
   
81,113
   
77,816
 
           

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


 
 
 


EMCORE CORPORATION
Condensed Consolidated Balance Sheets
As of June 30,December 31, 2009 and September 30, 20082009
(Inin thousands)
(unaudited)

  June 30, 2009  September 30, 2008  
As of
December 31,
2009
 
As of
September 30,
2009
ASSETS             
       
Current assets:             
Cash and cash equivalents $9,386 $18,227  $15,138  $14,028 
Restricted cash  366  1,854   4  1,521 
Available-for-sale securities  1,400  2,679   1,350  1,350 
Accounts receivable, net of allowance of $7,320 and $2,377, respectively  41,892  60,313 
Accounts receivable, net of allowance of $6,640 and $7,125, respectively  40,726  39,417 
Inventory, net  39,503  64,617   31,454  34,221 
Prepaid expenses and other current assets  4,424  7,100   4,550   4,712 
              
Total current assets  96,971  154,790   93,222  95,249 
              
Property, plant, and equipment, net  57,695  83,278 
Property, plant and equipment, net  52,719  55,028 
Goodwill  20,384  52,227   20,384  20,384 
Other intangible assets, net  13,539  28,033   12,424  12,982 
Investments in unconsolidated affiliates  -  8,240 
Available-for-sale securities, non-current  - 1,400 
Long-term restricted cash  163 569   163  163 
Other non-current assets, net  802  741   720   753 
              
Total assets $189,554 $329,278  $179,632  $184,559 
              
       
LIABILITIES and SHAREHOLDERS’ EQUITY              
       
Current liabilities:              
Line of credit $4,984 $- 
Borrowings from credit facility $10,678  $10,332 
Short-term debt  889 -   843  842 
Accounts payable  21,861 52,266   28,632  24,931 
Accrued expenses and other current liabilities  23,909  23,290   21,042   21,687 
              
Total current liabilities  61,195  57,792 
       
Warrant liability  1,132  - 
Other long-term liabilities  103   104 
       
Total liabilities  51,643  75,556   62,430  57,896 
              
Commitments and contingencies (Note 13)      
Commitments and contingencies       
              
Shareholders’ equity:              
Preferred stock, $0.0001 par, 5,882 shares authorized, no shares outstanding  -  - 
Common stock, no par value, 200,000 shares authorized, 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 
Preferred stock, $0.0001 par, 5,882 shares authorized; no shares outstanding  -  - 
Common stock, no par value, 200,000 shares authorized;
81,900 shares issued and 81,741 shares outstanding as of December 31, 2009;
80,982 shares issued and 80,823 shares outstanding as of September 30, 2009
  692,942  688,844 
Accumulated deficit  (547,300) (424,764)  (574,471) (560,833)
Accumulated other comprehensive income  902 549   814  735 
Treasury stock, at cost; 159 shares as of June 30, 2009 and September 30, 2008  (2,083) (2,083)
      
Treasury stock, at cost; 159 shares as of December 31, 2009 and September 30, 2009  (2,083)  (2,083)
Total shareholders’ equity  137,911  253,722   117,202   126,663 
             
Total liabilities and shareholders’ equity $189,554 $329,278  $179,632  $184,559 

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


 
 
 

EMCORE CORPORATION
Condensed Consolidated Statements of Cash Flows
For the ninethree months ended June 30,December 31, 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(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 
  For the Three Months Ended December 31, 
  2009 2008 
Cash flows from operating activities:         
          
Net loss $(13,638) $(53,445) 
Adjustments to reconcile net loss to net cash used in operating activities:         
Impairments  -   33,781  
Stock-based compensation expense  3,186   2,150  
Depreciation and amortization expense  3,117   4,293  
Provision for inventory  (378)  4,362  
Provision for doubtful accounts  (434)  922  
Provision for product warranty  340   -  
Impairment of investment  -   366  
Loss on disposal of equipment  -   97  
Compensatory stock issuances  200   18  
Loss from financing derivative instrument  1,360   -  
Total non-cash adjustments  7,391   45,989  
          
Changes in operating assets and liabilities:         
Accounts receivable  (1,004)  (1,938) 
Inventory  3,143   (4,337) 
Other assets  173   225  
Accounts payable  3,682   (6,806) 
Accrued expenses and other current liabilities  (987)  (832) 
Total change in operating assets and liabilities  5,007   (13,688) 
          
Net cash used in operating activities  (1,240)  (21,144) 
          
          
Cash flows from investing activities:         
          
Purchase of plant and equipment  (87)  (597) 
Investments in patents  (158)  -  
Sale of available-for-sale securities  -   1,700  
Release of restricted cash  1,517   27  
          
Net cash provided by investing activities $1,272  $1,130  
          

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


 
 
 


EMCORE CORPORATION
Condensed Consolidated Statements of Cash Flows
For the three months ended December 31, 2009 and 2008
(in thousands)
(unaudited)


(Continued from previous page)
 
 For the Three Months Ended December 31, 
  2009 2008 
Cash flows from financing activities:         
          
Proceeds from borrowings from credit facility $58,227  $15,443  
Payments on borrowings from credit facility  (57,881)  -  
Proceeds from borrowings on short-term debt  3   910  
Payments on borrowings on short-term debt  (2)  -  
Proceeds from exercise of stock options  -   32  
Proceeds from employee stock purchase plan  505   613  
Payments on capital lease obligations  (2)  -  
          
Net cash provided by financing activities  850   16,998  
          
Effect of foreign currency  228   107  
          
Net increase (decrease) in cash and cash equivalents  1,110   (2,909) 
          
Cash and cash equivalents at beginning of period  14,028   18,227  
          
Cash and cash equivalents at end of period $15,138  $15,318  
          
          
          
          
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION         
          
Cash paid during the period for interest $76  $132  
          
Cash paid during the period for income taxes $-  $-  
          
          
          
NON-CASH INVESTING AND FINANCING ACTIVITIES         
          
Acquisition of equipment under capital lease $-  $-  
          
Issuance of common stock under financing derivative instrument $228  $-  
          

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, 20082009 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, 2008.2009.

We have evaluated subsequent events as defined by Statement of Financial Accounting Standards (SFAS) No. 165, Subsequent Events,from December 31, 2009 through February 9, 2010, the date that thethese financial statements were issued on August 17, 2009.issued.


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.include:

-  valuation of inventory, goodwill, intangible assets, warrants, and stock-based compensation;
-  assessment of recovery of long-lived assets;
-  revenue recognition associated with the percentage of completion method; and,
-  allowance for doubtful accounts and warranty accruals.

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) PerLoss per Share

Earnings (loss). The Company’s loss per share (“EPS”) arewas calculated by dividing net earnings (loss)loss applicable to common stock by the weighted average number of common stock shares outstanding for the period.period and it is presented in the accompanying consolidated statements of operations.  For the three and nine months ended June 30,December 31, 2009, and 2008, all 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 Mattersand Capital Resources
As of December 31, 2009, cash, cash equivalents, available-for-sale securities and current restricted cash totaled approximately $16.5 million.

The Company incurred a net loss of $122.5$13.6 million for the ninethree 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.December 31, 2009.  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 hasexperienced year-over-year revenue growth in most years, in fiscal 2009, the Company had not been able to sustain historical revenue growth rates in 2009 due to material adverse changes in market and economic conditions.  If

In the event that 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 ninethree months ended June 30,December 31, 2009, itthe Company consumed cash from operations of approximately $30.5$1.2 million and, over the last three quarters, has only consumed $0.2 million in cash from operations.operations due primarily to improved working capital management.

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 current recession in the United States and internationally may continue to impose formidable challenges for the Company’s businesses in the near term. Recently,

Due to significant differences in operating strategy between the Company’s Fiber Optics and Photovoltaics businesses, the Company’s management and board of directors believes that they would provide greater value to shareholders if they were operated as two separate business entities.

In furtherance of this strategy, on February 3, 2010, the Company amendedentered into a share purchase agreement to create a joint venture with Tangshan Caofeidian Investment Corporation (“TCIC”), a Chinese investment company located in the termsCaofeidian Industry Zone, Tangshan City, Hebei Province of China.  The agreement provides for TCIC to purchase a sixty percent (60%) interest in the Company’s Fiber Optics business (excluding its asset-backed revolving credit facility with Bank of America thatsatellite communications and specialty photonics fiber optics product lines), which will be operated as a joint venture once the transaction is closed.  The Fiber Optics businesses included in this transaction are 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.Company’s telecom, enterprise, cable television (CATV), fiber-to-the-premises (FTTP), and video transport product lines. The Company has also continuedwill retain the satellite communications and specialty photonics fiber optics product lines as well as the satellite and terrestrial solar businesses.  See Footnote 17 – Subsequent Event for additional information related to take steps to lower costs and to conserve and generate cash.  Over the past year,this new joint venture.

During fiscal 2009, 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 hasforecasts.  Such measures included several workforce reductions, temporary salary reductions, the elimination of executive and employee merit increases and bonuses for fiscal 2009, 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 quarterlyspending on capital expenditures and improvedfocused on improving the management of its working capital.  During the third fiscal quarter,last twelve months ended December 31, 2009, the Company loweredmonetized approximately $25.5 million of inventory, generated $16.9 million in cash from lowering its net inventory by approximately 17%accounts receivable balances and achieved positive operating income withincash flow from operations during the Company’s space solar business.quarters ended June 30, 2009 and September 30, 2009.

In addition,fiscal 2010, the Company continues to pursue and evaluateremain focused on maximizing cash flow from operations while developing additional sources of liquidity.

On October 1, 2009, the Company entered into an equity line of credit arrangement with Commerce Court Small Cap Value Fund, Ltd. (“Commerce Court”).  Upon issuance of a draw-down request by the Company, Commerce Court has committed to purchasing up to $25 million worth of shares of the Company’s common stock over the 24-month term of the purchase agreement, provided that the number of capital raising alternatives including debt and/shares the Company may sell under the facility is limited to no more than 15,971,169 shares of common stock or equity financings, product joint-venture opportunitiesthat would result in the beneficial ownership of more than 9.9% of the then issued and outstanding shares of the potential sale of certain assets.Company’s common stock.


Conclusion

These initiatives are intended
We believe that our existing balances of cash, cash equivalents, and available-for-sale securities, together with the cash expected 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, amounts expected to be available under our revolving credit facility with Bank of America and the equity line of credit agreement with Commerce Court will provide us with sufficient financial resources to meet our cash on hand are not sufficient to satisfyrequirements for operations, working capital, and capital expenditures for the Company’s liquidity requirements,next 12 months.  However, in the event of unforeseen circumstances, or unfavorable market or economic developments, we will seekmay have to raise additional cash through equity financing, additional debt, asset salesfunds by any one or a combination thereof.  Due to the unpredictable nature of the capital markets,following: issuing equity, debt or convertible debt, or selling certain product lines and/or portions of our business. There can be no guarantee that we will be able to raise additional funding may not be available when needed, orfunds on terms acceptable to us.us, or at all. A significant contraction in the capital markets, particularly in the technology sector, may make it difficult for us to raise additional capital if or when it is required, especially if we experience disappointing operating results.  If adequate funds arecapital is not available to us as required, or is not available on acceptablefavorable 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 and results of operations and cash flow.may be adversely affected.


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

ASC 105 – Generally Accepted Accounting Principles.  On October 1, 2009, the Company adopted new authoritative guidance within ASC 105 which establishes the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 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.  The adoption of this new guidance did not impact the Company’s results of operations or financial condition, but it revised the reference of accounting pronouncements within this Quarterly Report.



ASC 350 – Intangibles – Goodwill and Other.  On October 1, 2009, the Company adopted new authoritative guidance within ASC 350 which amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets and the period of expected cash flows used to measure the fair value of intangible assets under ASC 805, Business Combinations.  The adoption of this new guidance did not have any impact on the Company’s results of operations or financial condition.

ASC 470 – Debt. On October 1, 2009, the Company adopted new authoritative guidance within ASC 470 that requires the proceeds from the issuance of certain 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 it is required to be applied retrospectively to prior periods.  Management is currently assessing the potential impact upon adoption of this new guidance and expects it will have an effect on the Company’s fiscal 2008 statement of operations, but it should not have any effect on the fiscal 2008 ending equity account balances or the fiscal 2009 financial statements.

ASC 605 – Revenue Recognition.   In October 2009, the FASB issued new authoritative guidance on revenue recognition related to arrangements with multiple deliverables that will become effective in fiscal 2011, with earlier adoption permitted.  Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement can not be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition.  Management is currently assessing the potential impact that the adoption of this new guidance could have on the Company’s financial statements.
 
SFAS 141(R)ASC 805 – - 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, andOn October 1, 2009, the Company adopted new authoritative guidance within ASC 805 which 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)It 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))this accounting principle).  In addition, SFAS 141(R)'sthe accounting principle’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 requireASC 805 also requires 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, provideprovides guidance on the impairment testing of acquired research and development intangible assets and assets that the acquirer intends not to use.  SFAS 141(R)ASC 805 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 thatOctober 1, 2009, therefore, the adoption of SFAS 141(R) couldASC 805 did not have any impact on the Company’s historical financial statements in fiscal 2010.statements.

SFAS 160ASC 810 – Consolidation. - In December 2007,– On October 1, 2009, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements. SFAS 160 amends Accounting Research Bulletin 51, Consolidated Financial Statements, to establishCompany adopted new authoritative guidance within ASC 810 which establishes 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 160ASC 810 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 160ASC 810 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 168this new guidance did not have any impact 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 stock 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 theThe 2000 Plan from 12,850,000authorizes the grant of stock options up to 15,850,000 shares of the Company’sCompany's common stock.  As of June 30,December 31, 2009, no stock options were available for issuance under the 1995 Plan and 4,100,7762,252,014 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 Company issues new shares of common stock to satisfy the issuance of shares under this stock-based compensation plan.the Option Plans.



The following table summarizes the activity under the Option Plans for the nine months ended June 30, 2009:Plans:
 
 
 
 
 
 
Number of Shares
 
Weighted Average Exercise Price
 
Weighted Average
Remaining Contractual Life
(in years)
    
 
Outstanding as of September 30, 2009
  
10,788,174
  
$
4.85
         
               
Granted
  
24,000
   
1.02
         
Exercised
  
-
   
-
         
Forfeited
  
(95,913
)
  
3.37
         
Cancelled
  
(762,494
)
  
5.57
         
                 
Outstanding as of December 31, 2009
  
9,953,767
  
$
4.78
   
7.78
     
                 
Exercisable as of December 31, 2009
  
3,625,721
  
$
5.92
   
5.92
     
                 
Vested and expected to vest as of December 31, 2009
  
5,883,866
  
$
5.05
   
7.10
     

  
 
 
 
 
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,December 31, 2009, there was approximately $9.0$5.5 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 2.92.8 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,December 31, 2009.  The total intrinsic value related to stock options exercised during the ninethree months ended June 30, 2009 wasDecember 31, 2008 totaled 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,December 31, 2009 totaled approximately $11,000 and there was no intrinsic value related to exercisable stock options as of June 30,December 31, 2009.
 

  Number of Stock Options Outstanding 
Options Exercisable
 
Exercise Price of Stock Options Number Outstanding Weighted Average Remaining Contractual Life (years) Weighted- Average Exercise Price Number Exercisable Weighted- Average Exercise Price
<$5.00 5,104,908 8.02 $1.90 1,496,845 $2.98
>=$5.00 to <$10.00 4,729,939 7.66 7.55 2,035,056 7.41
>$10.00 118,920 2.64 18.53 93,820 20.47
             TOTAL
 9,953,767 7.78 $4.78 3,625,721 $5.92


  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, and is recorded to cost of sales; sales, general, & administrative; and research and development expense based on individual employee’s responsibility and function over the requisite service period.  As required by SFAS 123(R), Share-Based Payment (revised 2004), managementManagement 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)
 
 
For The Three Months
Ended December 31,
  2009 2008
Stock-based compensation expense by award type:
        
Employee stock options
 
$
3,006
  
$
1,995
 
Employee stock purchase plan
  
180
   
155
 
         
Total stock-based compensation expense
 
$
3,186
  
$
2,150
 
         
Net effect on net loss per basic and diluted share
 
$
(0.04
)
 
$
(0.02
)
(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)


TolledSurrender of Stock Options

Under the terms ofOn November 20, 2009, Mr. Markovich, the Company’s stock option agreements issued under the Option Plans, employees that have vested and exercisableChief Financial Officer, voluntarily surrendered 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 forexercisable into 475,000 shares of common stock issuable under the Option Plans not to be available.  Therefore, employees and terminated employees were precluded from exercisingstock.  These stock options untilhad an exercise price of $5.57 and were granted to Mr. Markovich on August 18, 2008.  Mr. Markovich received no consideration in exchange for the Company became compliant with its SEC filings and the registrationsurrender of thethese stock option shares was once again effective (the “Blackout Period”).  In April 2007, the Company’s Boardoptions.  The surrender 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 vestedhis non-vested stock options beginning on the first day after the liftingresulted in an immediate non-cash charge 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$1.3 million which was recorded 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.

DuringSG&A during the three months ended December 31, 2007, the Company incurred a non-cash2009.  The 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 modificationacceleration of all unrecognized stock-based compensation expense associated with that specific 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.option grant.


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,December 31, 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$1.02 and $7.79,$2.95, respectively.

 



Black-Scholes Weighted-Average Assumptions
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
Black-Scholes Weighted-Average Assumptions
Stock Options
 
 
For the Three Months
Ended December 31,
 
  2009  2008  2009  2008  
 
2009
 
2008
 
Stock Options:             
Expected dividend yield  -% -% -% -% 
-
%
 
-
%
 
Expected stock price volatility  147.7% 72.3% 187.6% 80.8% 
96.4
%
 
92.4
%
 
Risk-free interest rate   2.4% 2.9% 2.4% 2.9% 
2.5
%
 
3.5
%
 
Expected term (in years)  6.2  6.2  5.8  5.6  
3.8
 
6.1
 
Estimated pre-vesting forfeitures  31.9% 23.3% 31.9% 23.3% 
32.6
%
 
25.1
%
 

      
   
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.


Common Stock

The Company’s Board of Directors has authorized a total of 200 million shares of common stock available for issuance.


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,December 31, 2009 and September 30, 2008,2009, no shares of preferred stock were issued or outstanding.


Warrants

As of June 30,December 31, 2009, the Company had 3,000,003 warrants outstanding.

In October 2009, the Company entered into an equity line of credit arrangement and September 30,issued three warrants representing the right to purchase up to an aggregate of 1,600,000 shares of the Company’s common stock.  See Footnote 4 - Equity Facility, for additional information regarding this credit arrangement and warrants issued.

In February 2008, the Company hadalso issued 1,400,003 warrants outstanding from thein conjunction with a private placement transaction that closed on February 15, 2008.transaction.  The warrants grant the holder the right to purchase one share of the Company’sour common stock at a price of $15.06 per share.  The warrants are immediately exercisable and remain exercisable until February 20, 2013.  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 5 years fromany 30 consecutive trading days and other certain conditions are met.  In addition, in the closing date.event of certain fundamental transactions, principally the purchase of the Company’s outstanding common stock for cash, the holders of the warrants may demand that the Company purchase the unexercised portions of their warrants for a price equal to the Black-Scholes Value of such unexercised portions as of the time of the fundamental transaction.  Warrants issued to the investors were accounted for as an equity transaction with a value of $9.8 million recorded to common stock.




Employee Stock Purchase Plan

In fiscal 2000, theThe Company adoptedmaintains an Employee Stock Purchase Plan (“ESPP”). The ESPP that 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
     
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 2007
(1,123,857
)
$1.87 - $40.93
Number of shares issued for calendar year 2008
(592,589
)
$0.88 - $  5.62
Number of shares issued for calendar year 2009
(1,073,405
)
$0.88 - $  0.92
Remaining shares reserved for the ESPP
1,710,149


Future Issuances
 
As of June 30,December 31, 2009, the Company had reserved a total of 15.916.9 million shares of its common stock for future issuances as follows:

  Number of Common Stock Shares Available
     
For exercise of outstanding common stock options
  
8,105,0059,953,767
 
For future issuances to employees under the ESPP
  
2,260,6301,710,149
 
For future common stock option awards
  
4,100,7762,252,014
 
For future exercise of warrants
  
1,400,0033,000,003
 
     
Total reserved
  
15,866,41416,915,933
 


Subsequent event

NOTE 4.  Equity Facility

On July 27,October 1, 2009, the Company’s Compensation Committee approvedCompany entered into a retention grant for eligible employees which totaled 3,004,000common stock options.purchase agreement (the “Purchase Agreement”) with Commerce Court Small Cap Value Fund, Ltd. (“Commerce Court”).  The stock option exercise price for this grant was $1.25, which was based onPurchase Agreement provides that upon certain terms and conditions, and the fair market valueissuance of a draw-down request by the Company, Commerce Court has committed to purchasing up to $25 million worth of shares of the Company’s common stock over the 24-month term of the Purchase Agreement; provided, however, in no event may the Company sell more than 15,971,169 shares of common stock under the Purchase Agreement, which is equal to one share less than twenty percent of the Company’s outstanding shares of common stock as of the closing date of the Purchase Agreement, less the number of shares of common stock the Company issued to Commerce Court on the closing date in partial payment of grant.its commitment fee, or more shares that would result in the beneficial ownership or more than 9.9% of the then issued and outstanding shares of our common stock by Commerce Court.  
As payment of a portion of Commerce Court’s fees in connection with the Purchase Agreement, the Company agreed to issue to Commerce Court upon the execution of the Purchase Agreement, 185,185 shares of common stock and three warrants representing the right to purchase up to an aggregate of 1,600,000 shares of common stock, as follows: 

-  a warrant, pursuant to which Commerce Court may purchase up to 666,667 shares of common stock at an exercise price of $1.69, which is equal to 125% of the average of the volume weighted average price of common stock for the three trading days immediately preceding the execution date of the Purchase Agreement,

-  a warrant, pursuant to which Commerce Court may purchase from up to 666,667 shares of common stock at an exercise price of $2.02, which is equal to 150% of the average of the volume weighted average price of common stock for the three trading days immediately preceding the execution date of the Purchase Agreement, and

-  a warrant, pursuant to which Commerce Court may purchase up to 266,666 shares of common stock at an exercise price of $2.36, which is equal to 175% of the average of the volume weighted average price of common stock for the three trading days immediately preceding the execution date of the Purchase Agreement.

The warrants may be exercised at any time or from time to time between April 1, 2010 and April 1, 2015.  The warrants may not be offered for sale, sold, transferred or assigned without our consent, in whole or in part, to any person other than an affiliate of Commerce Court.  If after April 1, 2010, the Company’s common stock trades at a price greater than 140% of the exercise price of any warrant for a period of 10 consecutive trading days and the Company meets certain equity conditions, then the Company has the right to effect a mandatory exercise of such warrant.
From time to time over the term of the Purchase Agreement, and at the Company’s sole discretion, the Company may present Commerce Court with draw down notices to purchase common stock over a ten consecutive trading day period or such other period mutually agreed upon by the Company and Commerce Court (the “draw down period”) with each draw down subject to limitations based on the price of the Company’s common stock and a limit of the amount in the applicable fixed amount request, or 2.5% of the Company’s market capitalization at the time of such draw down, whichever is less.

The Company has the right to present Commerce Court with up to 24 draw down notices during the term of the Purchase Agreement, with only one such draw down notice allowed per draw down period with a minimum of five trading days required between each draw down period.
Once presented with a draw down notice, Commerce Court is required to purchase a pro rata portion of the shares on each trading day during the trading period on which the daily volume weighted average price for the common stock exceeds a threshold price determined by the Company for such draw down. The per share purchase price for these shares will equal the daily volume weighted average price of the common stock on each date during the draw down period on which shares are purchased, less a discount of 5%. If the daily volume weighted average price of the common stock falls below the threshold price on any trading day during a draw down period, the Purchase Agreement provides that Commerce Court will not be required to purchase the pro-rata portion of shares of common stock allocated to that day. However, at its election, Commerce Court may buy the pro-rata portion of shares allocated to that day at the threshold price less the discount described above.
The Purchase Agreement also provides that, from time to time and at the Company’s sole discretion, the Company may grant Commerce Court the right to exercise one or more options to purchase additional shares of common stock during each draw down period for an amount of shares specified by the Company based on the trading price of the common stock. Upon Commerce Court’s exercise of such an option, the Company would sell to Commerce Court the shares of common stock subject to the option at a price equal to the greater of the daily volume weighted average price of the common stock on the day Commerce Court notifies the Company of its election to exercise its option or the threshold price for the option determined by the Company, less a discount calculated in the same manner as it is calculated in the draw down notice.
In addition to the issuance of shares of common stock to Commerce Court pursuant to the Purchase Agreement, a supplement to the Company’s shelf registration statement filed with the SEC also covers the sale of those shares from time to time by Commerce Court to the public.
The Company paid $45,000 of Commerce Court’s attorneys’ fees and expenses incurred by Commerce Court in connection with the preparation, negotiation, execution and delivery of the Purchase Agreement and related transaction documentation.  The Company has also agreed to pay up to $5,000 in certain fees and expenses incurred by Commerce Court in connection with any amendments, modifications or waivers of the Purchase Agreement, ongoing due diligence of our company and other transaction expenses associated with fixed requests made by the Company from time to time during the term of the Purchase Agreement, provided that the Company shall not be required to pay any reimbursement for any such expenses in any calendar quarter in which the Company provides a fixed request notice.

If the Company issues a draw down notice and fails to deliver the shares to Commerce Court on the applicable settlement date, and such failure continues for ten trading days, the Company has agreed to pay Commerce Court, at Commerce Court’s option, liquidated damages in cash or restricted shares of common stock.
Upon each sale of common stock to Commerce Court under the Purchase Agreement, the Company has also agreed to pay Reedland Capital Partners, an Institutional Division of Financial West Group, a placement fee equal to 1% of the aggregate dollar amount of common stock purchased by Commerce Court.


Financial Impact

The Purchase Agreement meets all of the criteria of a financial derivative instrument in accordance with the accounting literature in ASC 815, Derivatives and Hedging.  Derivative instruments should be measured initially at fair value; however, because the Purchase Agreement is based on the prevailing market price at a possible future transaction date, this variable-priced contract would not be expected to have a fair value other than zero.  The warrants issued by the Company were classified as a liability since the warrants met the classification requirements for liability accounting in accordance with ASC 815.

Costs incurred to enter into this derivative instrument were expensed as incurred.  During the three months ended December 31, 2009, the Company expensed the fair value of the common stock and warrants issued as a non-operating expense from a financing derivative instrument within the condensed consolidated statement of operations.

The fair value of the 185,185 shares of common stock issued was based on the closing price of $1.23 per share on October 1, 2009, or $0.2 million.  The fair value of each warrant was estimated using the Black-Scholes option valuation model using the weighted-average assumptions set forth below.  The option-pricing model requires the input of highly subjective assumptions, including the warrant’s expected life and the price volatility of the underlying stock, as outlined below:

Black-Scholes Assumptions
As of October 1, 2009
 
 
Warrant 1
 
Warrant 2
 
Warrant 3
 
   TOTAL
Grant date10/1/0910/1/0910/1/09 
Stock price$1.23$1.23$1.23 
Exercise price$1.69$2.02$2.36 
Expected term5.5 years5.5 years5.5 years 
Dividend yield0%0%0% 
Volatility95%95%95% 
Risk-free interest rate2.2%2.2%2.2% 
Black-Scholes value$0.87$0.84$0.81 
     
Number of warrants issued666,667666,667266,6661,600,000
 
Value of warrants
 
$580,000
 
$560,000
 
$216,000
 
$1,356,000


On October 1, 2009, the Company recorded $1.4 million in non-operating expense related to the issuance of these warrants.  The Company expects an impact to the consolidated statement of operations when it records an adjustment to fair value of the warrants at the end of each quarterly reporting period going forward.


 
 
 

NOTE 4.  Acquisitions

Intel’s Optical Platform Division

On February 22, 2008,As of December 31, 2009, the Company acquired assetsfair value of the telecom portion of Intel Corporation’s Optical Platform Division (“OPD”). The telecom assets acquired include inventory, fixed assets, intellectual property,warrants was estimated to be $1.1 million 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 resulton the change in fair value of the terminationwarrants since October 1, 2009.  The fair value of certain operating agreements betweeneach warrant was estimated using 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. following weighted-average assumptions:

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.
Black-Scholes calculation
As of December 31, 2009
 
 
Warrant 1
 
Warrant 2
 
Warrant 3
 
   TOTAL
Grant date10/1/0910/1/0910/1/09 
Stock price$1.07$1.07$1.07 
Exercise price$1.69$2.02$2.36 
Expected term5.25 years5.25 years5.25 years 
Dividend yield0%0%0% 
Volatility95%95%95% 
Risk-free interest rate2.7%2.7%2.7% 
Black-Scholes value$0.73$0.70$0.67 
     
Number of warrants issued666,667666,667266,6661,600,000
 
Value of warrants
 
$486,667
 
$466,667
 
$178,666
 
$1,132,000



NOTE 6.  Accounts Receivable5.  Receivables

The components of accounts receivable consisted of the following:

(in thousands)
  
June 30,
2009
  September 30, 2008   
As of
December 31, 2009
  
As of
September 30, 2009
 
            
Accounts receivable $44,724 $57,703  $42,168 $40,474 
Accounts receivable – unbilled  4,488  4,987   5,198  6,068 
            
Accounts receivable, gross  49,212  62,690   47,366  46,542 
            
Allowance for doubtful accounts  (7,320) (2,377)  (6,640) (7,125)
              
Total accounts receivable, net $41,892 $60,313  $40,726 $39,417 




The Company regularly evaluatesrecords receivables from certain solar panel and solar power systems contracts using the collectibilitypercentage-of-completion method.  The term of itsthe contracts associated with this type of receivable usually exceed a period of one year.  As of December 31, 2009, the Company had recorded $13.0 million of accounts receivable using the percentage of completion method.  Of this amount, $8.5 million was invoiced and accordingly maintains allowances$4.5 million was unbilled as of December 31, 2009.  Unbilled accounts receivable represents revenue recognized but not yet billed or accounts billed after the period ended.  Billings on contracts using the percentage-of-completion method usually occurs upon completion of predetermined contract milestones or other contract terms, such as customer approval.  The allowance for doubtful accounts for estimated losses resulting fromspecifically related to receivables recorded using the inabilitypercentage-of-completion method totaled $2.5 million as of our customers to meet their financial obligations to us.December 31, 2009.  The allowance is based on the age of receivables and a specific identification of receivables considered at risk. risk of collection.

All of the Company’s accounts receivable as of December 31, 2009 is expected to be collected within the next twelve months.

The Company classifies charges associated withfollowing table summarizes the changes in 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.accounts:

§  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.
(in thousands)
 
 
For the Three Months Ended December 31,
 
  
2009
 
2008
 
          
Balance at beginning of period
 
$
7,125
  
$
2,377
  
Provision adjustment – (recovery) expense
  
(434
)
  
922
  
Write-offs - deductions against receivables
  
(51
)
  
-
  
          
Balance at end of period
 
$
6,640
  
$
3,299
  



NOTE 7.6.  Inventory

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

(in thousands)
 
  
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.
(in thousands)
 
 
  
As of
December 31,2009
  
As of
September 30, 2009
 
        
Raw materials $28,237 $27,607 
Work-in-process  7,057  6,496 
Finished goods  7,374  9,998 
        
Inventory, gross  42,668  44,101 
        
Less: valuation allowance  (11,214) (9,880)
        
Total inventory, net $31,454 $34,221 



The following table summarizes the changes in the valuation allowance accounts:

(in thousands)
 
 
For the Three Months
Ended December 31,
 
  
2009
 
2008
 
          
Balance at beginning of period
 
$
9,880
  
$
12,625
  
Provision adjustment – (recovery) expense
  
(378
)
  
5,507
  
Adjustments against inventory or provisions
  
1,712
   
(780
)
 
          
Balance at end of period
 
$
11,214
  
$
17,352
  




NOTE 8.7.  Property, Plant, and Equipment

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

(in thousands)
  
June 30,
 2009
  September 30, 2008   
As of
December 31, 2009
  
As of
September 30, 2009
 
              
Land $1,502 $1,502  $1,502 $1,502 
Building and improvements  34,922  44,607   34,922  34,922 
Equipment  99,599  106,536   98,711  98,693 
Furniture and fixtures  3,065  3,127   3,065  3,065 
Computer hardware and software  2,665  2,687   2,655  2,660 
Leasehold improvements  1,126  478   1,055  1,094 
Construction in progress  2,946  4,395   3,144  3,031 
              
Property, plant and equipment, gross  145,825  163,332   145,054  144,967 
              
Less: accumulated depreciation and amortization  (88,130) (80,054)  (92,335) (89,939)
              
Total property, plant and equipment, net $57,695 $83,278  $52,719 $55,028 


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,December 31, 2009 and September 30, 2008,2009, 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$2.4 million and $9.6$3.1 million for the three and nine months ended June 30,December 31, 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

8.  Goodwill

As of September 30, 2009, the Company performed an impairment test on its goodwill based on revised operational and cash flow forecasts.  The following table sets forth changesimpairment testing indicated that no impairment existed and that fair value exceeded carrying value by approximately 40%.  As of December 31, 2009, the Company performed an annual impairment test on its goodwill of $20.4 million related to its Photovoltaics reporting unit and the Company believes the carrying amount of the goodwill is not impaired.  There were no events or change in circumstances that would more likely than not reduce the fair value of the Photovoltaics reporting unit below its carrying amount.  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 carrying value ofCompany recording 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
 
impairment charges.



 
 
 

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.



NOTE 9.  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   As of December 31, 2009 As of September 30, 2009 
  
 Gross
Assets 
  
Accumulated
Amortization
  
Net
Assets
  Gross Assets  
Accumulated
Amortization
  
Net
Assets
   
 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   $24,522 $(12,993)$11,529 $24,494 $(12,341)$12,153 
Photovoltaics  1,370  (571) 799  956  (412) 544   1,589  (694) 895  1,459  (630) 829 
                            
Total $25,789 $(12,250)$13,539 $36,947 $(8,914)$28,033  $26,111 $(13,687)$12,424 $25,953 $(12,971)$12,982 


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, theThe 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 whetherbelieves 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 evaluationas of December 31, 2009 are recoverable.  However, if there is further erosion 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 assessmentmarket capitalization or the Company is unable to achieve its projected cash flows, management may be required to perform impairment tests of the fair value of the Fiber Optics segmentits remaining long-lived assets and intangible assets.  The impairment charge primarily resulted from the combined effectoutcome of the current slowdownthese tests may result 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 consolidated statements of operations.  Amortization expense was $1.2$0.7 million and $3.3$1.1 million for the three and nine months ended June 30,December 31, 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,December 31, 2009, the estimated future amortization expense is as follows:

 
(in thousands)
 Estimated Future Amortization Expense
     
Nine months ended September 30, 2010
 
$
2,133
 
Fiscal year ended September 30, 2011
  
2,463
 
Fiscal year ended September 30, 2012
  
2,139
 
Fiscal year ended September 30, 2013
  
1,804
 
Fiscal year ended September 30, 2014
  
1,269
 
Thereafter
  
2,616
 
     
Total future amortization expense
 
$
12,424
 
(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 
As of
December 31, 2009
 
As of
September 30, 2009
      
Compensation-related
 
$
5,565
  
$
6,640
  
$
4,521
  
$
5,861
 
Warranty
 
4,417
  
4,287
 
Loss on firm commitments
 
6,524
  
-
  
-
  
3,821
 
Warranty
 
4,333
  
4,640
 
Professional fees
 
1,913
  
2,099
  
2,046
  
1,839
 
Royalty
 
1,792
  
1,414
  
2,113
  
1,937
 
Self insurance
 
1,251
  
1,044
  
1,431
  
1,272
 
Deferred revenue and customer deposits
 
1,031
  
1,422
  
3,858
  
886
 
Income and other taxes
 
506
  
3,555
  
685
  
625
 
Inventory obligation
 
-
  
982
 
Accrued program loss
 
180
  
843
  
15
  
51
 
Restructuring accrual
 
89
  
331
  
342
  
395
 
Other
  
725
   
320
   
1,614
   
713
 
            
Total accrued expenses and other current liabilities
 
$
23,909
  
$
23,290
  
$
21,042
  
$
21,687
 

See Note 13, Commitments and Contingencies, for information regarding
The following table summarizes the loss on firm commitments recorded bychanges in the Company.product warranty accrual accounts:

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.
(in thousands)
 
 
For the Three Months
Ended December 31,
 
  
2009
 
2008
 
          
Balance at beginning of period
 
$
4,287
  
$
4,640
  
Provision adjustment – expense (recovery)
  
340
   
(133
)
 
Utilization of warranty accrual
  
(210
)
  
(395
)
 
          
Balance at end of period
 
$
4,417
  
$
4,112
  



NOTE 11.  Restructuring Charges

In accordance with SFAS 146,ASC 420, Accounting for Costs Associated with Exit or Disposal ActivitiesCost Obligations,, SG&A expenses recognized as restructuring charges include costs associated with the integration of business acquisitions and overall cost-reduction efforts.efforts, all of which are generally included in SG&A on the consolidated statements of operations.

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)
 
 
For the Three Months
Ended December 31,
 
  
2009
 
2008
 
          
Employee severance-related expense
 
$
8
  
$
617
  
Other restructuring-related expense
  
-
   
-
  
          
Total restructuring charges
 
$
8
  
$
617
  
(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:accounts:

(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.
(in thousands)
 
 
Severance-related
 Accrual
 
Restructuring-related
Accrual
 
Total
Balance as of September 30, 2009
 
$
226
  
$
395
  
$
621
 
             
Additional accruals
  
8
   
-
   
8
 
Cash payments or otherwise settled
  
(223
)
  
(53
)
  
(276
)
             
Balance as of December 31, 2009
 
$
11
  
$
342
  
$
353
 



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,December 31, 2009, the Company had a $5.0$10.7 million prime rate loan outstanding, with an interest rate of 8.25%, and approximately $2.8$2.9 million in outstanding standby letters of credit under this credit facility.

The facility is also subject to certain financial covenants which management believescovenants.  On February 8, 2010, the Company isand Bank of America entered into a Sixth Amendment to the Company’s revolving asset-backed credit facility, which (a) permits the Company to enter into foreign exchange hedging transactions pursuant to a separate facility with the bank, provided that available amounts under such facility shall be deducted from the maximum revolving loan limit under this facility; and (b) resets the EDITDA financial covenant for the first quarter of fiscal 2010 to place the Company 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.that covenant.


Short-term Debt

In December 2008, the Company borrowed $0.9 million from UBS Securities that is collateralized with $1.4 million of auction rate preferred 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 Securities which is expected to occur by June 2010 at 100% par value.


Letters of credit


As of December 31, 2009, the Company had 8 standby letters of credit issued and outstanding which totaled approximately $3.1 million, of which $2.9 million was issued against the Company’s credit facility with Bank of America and the remaining $0.2 million in standby letters of credit are collateralized with other financial institutions and are listed on the Company’s balance sheet as restricted cash.




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$0.7 million and $1.9$0.6 million for the three and nine months ended June 30,December 31, 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,December 31, 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.
(in thousands)
 
 
 Estimated Future Minimum Lease Payments
     
Nine months ended September 30, 2010
 
$
1,444
 
Fiscal year ended September 30, 2011
  
1,814
 
Fiscal year ended September 30, 2012
  
1,072
 
Fiscal year ended September 30, 2013
  
799
 
Fiscal year ended September 30, 2014
  
76
 
Thereafter
  
2,699
 
     
Total minimum lease payments
 
$
7,904
 


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,In the past, 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. In October 2009 the consolidated matters were tried before a jury, which found that all patents asserted against Optium were valid, that all claims asserted were infringed, and that such infringement by Optium was willful where willfulness was asserted.  The jury awarded EMCORE and JDSU monetary damages totaling approximately $3.4 million.



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 CompanyCompany.

On December 5, 2008, EMCOREthe Company 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.  This matter was tried before an administrative law judge of the International Trade Commission from November 16-20, 2009, and final briefings have been completed but no decision has yet been rendered.

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.)) (the “Mueller Class Action”) 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 theSelection of a lead plaintiff for these class actionsin this matter is currently pending before the Court.

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 Prissert 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 inand 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 bebeen consolidated before a single judge.judge in Somerset County, New Jersey, and have been stayed pending the Prissert and Mueller Class Actions.

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


d) Securities Matters

§-  SEC Communications.  On or about August 15, 2008, the Company received a letter from the Denver office of the Enforcement Division of the Securities and Exchange Commission wherein it sought EMCORE'sthe Company's voluntary production of documents relating to, among other things, the Company's business relationship with Green and Gold Energy, Inc., its licensees, and the Photovoltaics segment backlog the Company reported to the public.  Since that time, the Company has provided documents to the staff of the SEC and met with the staff on December 12, 2008 to address this matter.  On June 10, 2009, the SEC staff requested that the Company voluntarily provide documentary backup for certain information presented at the December 2008 meeting, which was provided on July 17, 2009, and arrange for a telephone interview with one former employee, which has not yet been scheduled.completed.  On August 24, 2009, in a telephone call with the Company’s counsel, the staff posed certain questions relating to the material provided on July 17, 2009, which were answered via the production of additional information and documentation on October 9, 2009.

§-  NASDAQ Communication.  On or about November 13, 2008, the Company received a letter from the NASDAQ Listings Qualifications group (“NASDAQ”) concerning the Company's removal of $79 million in backlog attributable to GGE which the Company announced on August 8, 2008 and the remaining backlog exclusive of GGE. The Company advised NASDAQ that it would cooperate with its inquiry.  To date, the Company has received three additional requests for information from NASDAQ (the latter 2 of which requested updates on the SEC matter).  The Company has complied with each of NASDAQ’s requests.  In early November 2009 the NASDAQ orally requested to be advised of developments in the SEC matter.

As of December 31, 2009 and the filing date of this Quarterly Report on Form 10-Q, no amounts have been accrued for any litigation item discussed above since no estimate of loss can be made at this time.


See Footnote 17 – Subsequent Event for additional commitments and contingencies related to the Tangshan agreements announced on February 3, 2010.




NOTE 14.  Income Taxes

On October 1, 2007, the Company adopted Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109.  As a result of the adoption of FIN 48, the Company recorded an increase in accumulated deficit and an increase in the liability for unrecognized state tax benefits of approximately $326,000 (net of the federal benefit for state tax liabilities).  All of this amount, if recognized, would reduce future income tax provisions and favorably impact effective tax rates.  During the three and nine months ended June 30,December 31, 2009 and 2008, there were no material increases or decreases in unrecognized tax benefits.  Management expects that over the next twelve months, the liability for unrecognized state tax benefits will substantially decrease and management does not anticipate any material increases or decreases in the amounts of unrecognized tax benefits over the next twelve months.  As of June 30,December 31, 2009, the Company had approximately $139,000$0.2 million of interest and penalties accrued as tax liabilities on the balance sheet.

A reconciliation of the beginning and ending amount of unrecognized gross tax benefits is as follows:

(in thousands)
 
  
Balance as of September 30, 2009
 
$
374
 
     
Subtractions based on tax positions related to the current year
  
(17
)
Subtractions for tax positions of prior years
  
(19
)
     
Balance as of December 31, 2009
 
$
338
 


The Company files income tax returns in the U.S. federal, state, and local jurisdictions and, currently, no federal, state, and local income tax returns are under examination.  Certain incomeThe following tax returns for fiscal years 2006 through 2008 remain open to income tax examination byfor each of the more significant jurisdictions where the Company is subject to income taxes: after fiscal year 2006 for U.S. federal,federal; after fiscal year 2005 for the state of California and local tax authorities.after fiscal year 2006 for the state of New Mexico.



NOTE 15.  Segment Data and Related Information

The Company has twofive operating segments: (1) EMCORE Digital Fiber Optics Products, (2) EMCORE Broadband Fiber Optics Products, and (3) EMCORE Hong Kong, which are aggregated as a separate reporting segments:segment, Fiber Optics, and (4) EMCORE Photovoltaics and (5) EMCORE Solar Power, which are aggregated as a separate reporting segment, Photovoltaics.  Our  Fiber Optics segment offersrevenue is derived primarily from sales of optical components and subsystems for CATV, FTTP, enterprise routers and systems that enableswitches, telecom grooming switches, core routers, high performance servers, supercomputers, and satellite communications data links.   Photovoltaics revenue is derived primarily from the transmissionsales of video, voice and data over high-capacity fiber optic cables for high-speed data and telecommunications, cable television (“CATV”) and fiber-to-the-premises (“FTTP”) networks.  Our Photovoltaics segment provides solar power conversion products for satellitethe space and terrestrial applications. For satellite applications, we offer high-efficiency compound semiconductor-based multi-junctionmarkets, including solar cells, covered interconnectcoverglass interconnected solar cells, (“CICs”)satellite solar panels, concentrator solar cells and fully integrated solar panels.  For terrestrial applications, we offer concentrating photovoltaic (“CPV”) systems for utility scale solar applications as well as high-efficiency multi-junction solar cellsreceiver assemblies and CPV components for use in solar power concentrator systems.  We periodically evaluate ourThe Company evaluates its reportable segments in accordance with SFAS 131,ASC 280, Disclosures about Segments of an Enterprise and Related Information.Segment Reporting. The Company’s Chief Executive Officer is the Chief Operating Decision Maker pursuant to SFAS 131,ASC 280, and he allocates resources to segments based on their business prospects, competitive factors, net revenue, operating results and other non-GAAP financial ratios.  Operating income or expense that is not specifically related to an operating segment is charged to a separate unallocated corporate division.

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

Segment Revenue
(in thousands)
 
 
Three Months Ended June 30,
 
For the Three Months Ended
December 31,
 
 
2009
 
2008
 
 
Revenue
 
 
% of Revenue
 
 
Revenue
 
 
% of Revenue
 2009 2008 
             Revenue % of Revenue Revenue % of Revenue 
Fiber Optics
 
$
22,399
 
58
%
 
$
53,589
 
71
%
 
$
25,608
 
60
%
 
$
39,166
 
72
%
 
Photovoltaics
  
16,090
 
42
   
21,913
 
29
   
16,793
   
40
   
14,890
   
28
  
            
Total revenue
 
$
38,489
 
100
%
 
$
75,502
 
100
%
 
$
42,401
   
100
%
 
$
54,056
   
100
%
 


Segment Revenue
(in thousands)
 
 
Nine Months Ended June 30,
  
2009
 
2008
  
 
Revenue
 
 
% of Revenue
 
 
Revenue
 
 
% of Revenue
                 
Fiber Optics
 
$
89,979
   
66
%
 
$
125,179
   
70
%
Photovoltaics
  
45,850
   
34
   
53,489
   
30
 
                 
Total revenue
 
$
135,829
   
100
%
 
$
178,668
   
100
%




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

Geographic Revenue
(in thousands)
 
 
Three Months Ended June 30,
  
2009
 
2008
  
 
Revenue
 
 
% of Revenue
 
 
Revenue
 
 
% of Revenue
                 
United States
 
$
23,466
   
61
%
 
$
47,586
   
63
%
Asia
  
9,427
   
24
   
19,359
   
26
 
Europe
  
1,733
   
5
   
8,306
   
11
 
Other
  
3,863
   
10
   
251
   
-
 
                 
Total revenue
 
$
38,489
   
100
%
 
$
75,502
   
100
%

Geographic Revenue
(in thousands)
 
 
Nine Months Ended June 30,
 
For the Three Months Ended
December 31,
 
 
2009
 
2008
 
 
Revenue
 
 
% of Revenue
 
 
Revenue
 
 
% of Revenue
 2009 2008 
               Revenue % of Revenue Revenue % of Revenue 
United States
 
$
80,562
  
59
%
 
$
114,656
  
64
%
 
$
34,361
  
81
%
 
$
31,715
  
58
%
 
Asia
  
41,473
  
31
   
42,823
  
24
   
6,196
  
15
   
19,208
  
36
  
Europe
  
6,906
  
5
   
20,624
  
12
   
1,277
  
3
   
2,797
  
5
  
Other
  
6,888
  
5
   
565
  
-
   
567
   
1
   
336
   
1
  
              
Total revenue
 
$
135,829
  
100
%
 
$
178,668
  
100
%
 
$
42,401
   
100
%
 
$
54,056
   
100
%
 


The following table sets forth our significant market sectors, defined as product line sales that represented greater than 10% of total consolidated revenue, by reporting segment.

Significant Market Sectors
As a percentage of total consolidated revenue
 
For the Three Months Ended December 31,
 
  
2009
 
2008
 
Fiber Optics – related:
         
Cable Television Products
  
21
%
  
14
%
 
Parallel Optical Transceiver / Cable Products
  
10
%
  
-
  
Enterprise Products
  
-
   
15
%
 
Telecom Optical Products
  
-
   
14
%
 
 
Photovoltaics – related:
         
Satellite Solar Power Generation
  
38
%
  
26
%
 




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

Significant Customer
As a percentage of total consolidated revenue
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
  2009 2008   2009 2008 
 
Photovoltaics – related customer:
               
Space Systems / Loral  12%  -   14%  -  

Significant Customers
As a percentage of total consolidated revenue
 
For the Three Months Ended December 31,
 
  
2009
 
2008
 
Fiber Optics – related customer:
         
Cisco Systems, Inc.
  
14
%
  
17
%
 
 
Photovoltaics – related customer:
         
Loral Space & Communications
  
15
%
  
14
%
 


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

Operating Loss by Segment
 (in thousands)
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
  2009  2008  2009  2008 
             
Fiber Optics
$
(45,380
)
$
(4,234
)
$
(110,578
)
$
(11,735
)
Photovoltaics 
(616
)
 
(7,213
)
 
(13,739
)
 
(20,549
)
Corporate 
-
  
(195
)
 
(2)
  
(1,483
)
             
Operating loss
$
(45,996
)
$
(11,642
)
$
(124,319
)
$
(33,767
)
Statement of Operations Data
(in thousands)
 
 For the Three Months Ended December 31, 
  2009 2008 
Operating loss:         
Fiber Optics segment
 
$
(8,407
)
 
$
(48,423
)
 
Photovoltaics segment
  
(3,525
)
  
(4,035
)
 
Corporate division
  
-
   
(3
)
 
Operating loss
 
$
(11,932
)
 
$
(52,461
)
 




The following table sets forth the depreciation and amortization attributable to each of the Company’s reporting segments.segments and Corporate division.

Segment Depreciation and Amortization
 (in thousands)
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
  2009  2008  2009  2008 
             
Fiber Optics
$
2,859
 
$
2,920
 
$
8,475
 
$
5,917
 
Photovoltaics 
1,494
  
1,230
  
4,387
  
2,998
 
Corporate 
1
  
-
  
-
  
77
 
             
Total depreciation and amortization
$
4,354
 
$
4,150
 
$
12,862
 
$
8,992
 
Segment Depreciation and Amortization
(in thousands)
 
 For the Three Months Ended December 31, 
  2009 2008 
Fiber Optics segment
 
$
1,764
  
$
2,852
  
Photovoltaics segment
  
1,353
   
1,441
  
Total depreciation and amortization
 
$
3,117
  
$
4,293
  


Long-lived assets consist primarily of property, plant, and equipment and also goodwill and intangible assets.  The following table sets forth long-lived assets (consisting of property, plant and equipment, goodwill and intangible assets) for each of the Company’s reporting segments.segments and Corporate division.

Long-lived Assets
(in thousands)
 
  
As of
June 30,  2009
  
As of
September 30, 2008
 
        
Fiber Optics $39,270 $107,684 
Photovoltaics  51,520  55,232 
Corporate  828  622 
        
Total long-lived assets $91,618 $163,538 
Long-lived Assets
(in thousands)
 
 As of December 31, 2009 
As of
September 30, 2009
         
Fiber Optics segment
 
$
35,676
  
$
37,399
 
Photovoltaics segment
  
49,027
   
50,169
 
Corporate division
  
824
   
826
 
Total long-lived assets
 
$
85,527
  
$
88,394
 





NOTE 16.  Fair Value Accounting
Accounting Pronouncements

In September 2006, the FASB issued SFAS 157,ASC 820, 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 accounting pronouncements that require fair value measurements and it does not require any new fair value measurements.  The statement provides that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  SFAS 157 defines fair value based upon an exit price model and it is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years.  Management adopted SFAS 157 on October 1, 2008 and it did not have a material impact on the Company’s financial statements.
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 and provides that unrealized gains and losses on the items on which it has elected the fair value option will be reported in its earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007.  The Company adopted SFAS 159 on October 1, 2008.  The Company evaluated its existing financial instruments and elected not to adopt the fair value option to account for its financial instruments.  As a result, SFAS 159 did not have any impact on the Company’s financial condition or results of operations.  However, because the SFAS 159 election is based on an instrument-by-instrument election at the time the Company first recognizes an eligible item or enters into an eligible firm commitment, the Company may decide to elect the fair value option on new items should business reasons support doing so in the future.
In February 2008, the FASB issued FASB Staff Positions (“FSP”) No. 157-1 and 157-2.  FSP 157-1 amends SFAS 157 to exclude SFAS No. 13, Accounting for Leases, and its related interpretive accounting pronouncements that address leasing transactions, while FSP 157-2 delays the effective date of the application of SFAS 157 to fiscal years beginning after November 15, 2008 for all non-financial assets and non-financial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. Non-recurring non-financial assets and non-financial liabilities for which the Company has not applied the provisions of SFAS 157 include those measured at fair value in goodwill impairment testing, intangible assets measured at fair value for impairment testing, asset retirement obligations initially measured at fair value, and those initially measured at fair value in a business combination.


In October 2008, the FASB issued FSP SFAS No. 157-3, Determining the Fair Value of a Financial Asset When The Market for That Asset Is Not Active, to clarify the application of the provisions of SFAS 157 in an inactive market and how an entity would determine fair value in an inactive market. FSP 157-3 was effective upon issuance and the application of the provisions of FSP 157-3 did not materially affect our results of operations or financial condition.
In April 2009, the FASB issued Staff Position SFAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. FSP 157-4 provides guidance on how to determine the fair value of assets and liabilities when the volume and level of activity for the asset/liability has significantly decreased. FSP 157-4 also provides guidance on identifying circumstances that indicate a transaction is not orderly. In addition, FSP 157-4 requires disclosure in interim and annual periods of the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques. FSP 157-4 was effective for interim reporting period ended June 15, 2009 and the application of the provisions of FSP 157-4 did not materially affect our results of operations or financial condition.

In April 2009, the FASB issued Staff Position SFAS No. 107-1 and Accounting Principles Board (“APB”) Opinion No. 28-1, Interim Disclosures, about Fair Value of Financial Instruments. SFAS No. 107-1 and APB No. 28-1 amend FASB Statement No. 107, Disclosures about Fair Values of Financial Instruments, to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. SFAS No. 107-1 and APB No. 28-1 also amend APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in all interim financial statements.  SFAS No. 107-1 and APB No. 28-1 are effective for interim periods ending after June 15, 2009.  SFAS 107-1 was effective for interim reporting period ended June 15, 2009 and the application of the provisions of SFAS 107-1 did not materially affect our results of operations or financial condition.


Fair Value Disclosure

SFAS 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. Valuation techniques used to measure fair value under SFAS 157ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

·-  Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

·-  Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.

·-  Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following table provides the Company’s financial assets and liabilities, consisting of the following types of instruments, measured at fair value on a recurring basis as of June 30, 2009:basis:

(in thousands)
 
June 30, 2009
 
As of December 31, 2009
 
 
Quoted Prices in Active Markets for Identical Assets
 
[Level 1]
 
 
Significant Other Observable Remaining Inputs
 
[Level 2]
 
 
 
Significant Unobservable Inputs
 
[Level 3]
 
 
 
 
 
Total
 
 
 
Quoted Prices in Active Markets for Identical Assets
 
[Level 1]
 
 
Significant Other Observable Remaining Inputs
 
[Level 2]
 
 
 
 
Significant Unobservable Inputs
 
[Level 3]
 
 
 
 
 
 
Total
Assets
                              
Money market fund deposits
 
$
9,386
 
$
-
  
$
-
  
$
9,386
  
$
15,138
 
$
-
  
$
-
  
$
15,138
 
Restricted fund deposits
  
529
  
-
   
-
   
529
   
167
  
-
   
-
   
167
 
Asset-backed auction rate securities
  
-
   
1,400
   
-
   
1,400
   
-
  
1,350
   
-
   
1,350
 
                              
Total assets measured at fair value
 
$
9,915
 
$
1,400
  
$
-
  
$
11,315
  
$
15,305
 
$
1,350
  
$
-
  
$
16,655
 
               
Liabilities
               
               
Warrants
 
$
-
 
$
1,132
  
$
-
  
$
1,132
 




The following table provides the Company’s financial assets and liabilities, measured and recorded at fair value on a recurring basis, as presented on our condensed consolidated balance sheet as of June 30, 2009:Condensed Consolidated Balance Sheet:

(in thousands)
 
June 30, 2009
 
As of December 31, 2009
 
 
Quoted Prices in Active Markets for Identical Assets
 
[Level 1]
 
 
Significant Other Observable Remaining Inputs
 
[Level 2]
 
 
Significant Unobservable Inputs
 
[Level 3]
 
 
 
 
 
Total
 
 
 
Quoted Prices in Active Markets for Identical Assets
 
[Level 1]
 
 
Significant Other Observable Remaining Inputs
 
[Level 2]
 
 
 
 
Significant Unobservable Inputs
 
[Level 3]
 
 
 
 
 
 
Total
Assets
                              
Cash and cash equivalents
 
$
9,386
 
$
-
  
$
-
  
$
9,386
  
$
15,138
 
$
-
  
$
-
  
$
15,138
 
Restricted cash
  
366
  
-
   
-
   
366
   
4
  
-
   
-
   
4
 
Available-for-sale securities, non current
  
-
  
1,400
   
-
   
1,400
   
-
  
1,350
   
-
   
1,350
 
Long-term restricted cash
  
163
   
-
   
-
   
163
   
163
  
-
   
-
   
163
 
                              
Total assets measured at fair value
 
$
9,915
  
$
1,400
  
$
-
  
$
11,315
  
$
15,305
 
$
1,350
  
$
-
  
$
16,655
 
               
Liabilities
               
               
Warrant liability
 
$
-
 
$
1,132
  
$
-
  
$
1,132
 


The Company classifies investments within Level 1 if quoted prices are available in active markets.  Level 1 assets include instruments valued based on quoted market prices in active markets which generally could include money market funds, corporate publicly traded equity securities on major exchanges and U.S. Treasury notes with quoted prices on active markets.

The Company classifies items in Level 2 if the investments are valued using observable inputs to quoted market prices, benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. These investments could include: government agencies, corporate bonds, commercial paper, and auction rate securities.

The Company did not hold financial assets and liabilities which were valued using unobservable inputs as of June 30,December 31, 2009.

The carrying amounts of accounts receivable, short-term debt including borrowings under the Company’s credit facility, accounts payable, accrued expenses and other current liabilities approximate fair value because of the short maturity of these instruments.

In February 2008, the FASB issued authoritative guidance, which delayed the effective date of ASC 820 for all non-financial assets and non-financial liabilities that are not re-measured at fair value on a recurring basis (at least annually). The guidance was effective for the Company beginning October 1, 2009 and it did not have an impact on our consolidated financial position, results of operations or cash flows in the three months ended December 31, 2009.



NOTE 17.  Subsequent Event

On February 3, 2010, the Company entered into a share purchase agreement to create a joint venture with Tangshan Caofeidian Investment Corporation (“TCIC”), a Chinese investment company located in the Caofeidian Industry Zone, Tangshan City, Hebei Province of China.

The agreement provides for TCIC to purchase a sixty percent (60%) interest in the Company’s Fiber Optics business (excluding its satellite communications and specialty photonics fiber optics product lines), which will be operated as a joint venture once the transaction is closed.  The Fiber Optics businesses included in this transaction are the Company’s telecom, enterprise, cable television (CATV), fiber-to-the-premises (FTTP), and video transport product lines. The Company will retain the satellite communications and specialty photonics fiber optics product lines as well as the satellite and terrestrial solar businesses.

The new joint venture entity will be named EMCORE Fiber Optics, Limited (“EFO”), and will be a newly formed corporation organized in Hong Kong. The agreement provides for TCIC to pay the Company $27.75 million in cash, subject to adjustment based on the net asset value of the business as of the closing date, and also to provide $27 million of additional debt financing to EFO subsequent to the closing, with $18 million to be funded within 90 days of closing and $9 million to be funded within 90 days of the first anniversary of the closing.  The Company will be providing 50% of its equity interest in EFO as collateral for this indebtedness.  In addition, the agreement provides for the Company to provide $3 million of additional debt financing to EFO after the closing, with $2 million to be funded within 5 business days of the closing and $1 million to be funded within 90 days of the first anniversary of the closing.

The agreement is subject to the approval of both the Company’s board of directors and the board of directors of TCIC, and the closing of the transaction is subject to material conditions, including regulatory and governmental approvals in the U.S. and China.  If US regulatory approvals are not obtained, the Company will be obligated to pay a termination fee of $2,775,000 to TCIC.

The parties also executed a Shareholders Agreement to provide for operation of EFO following closing.  The terms of the Shareholders Agreement provide that TCIC shall have the right to elect three of EFO’s five directors of EFO, as well as to designate the Chairman of the Board and the Chief Financial Officer.  The Company will have the right to elect the remaining two directors and to nominate the Chief Executive Officer.  The Company also has the right to approve certain key corporate matters (including modifications of EFO’s governing documents, changes in equity and corporate structure, mergers, acquisitions and dispositions, the incurring of indebtedness, and the annual business plan and budget) through supermajority voting requirements on the Board (subject to certain deadlock provisions).  The Shareholders’ Agreement also imposes certain restrictions on the parties’ abilities to transfer their interest in EFO.

It is expected that the Company’s Executive Chairman and Chairman of the Board, Mr. Reuben F. Richards, Jr. will resign his position as the Company’s Executive Chairman effective as of the closing of the transaction to assume the role of CEO for EFO.  In addition, the agreement provides for certain other Company senior executives and the employees currently working for the transferred product lines to be offered positions with EFO. The agreement further contemplates that the Company’s President and CEO, Dr. Hong Q. Hou, will also serve as a director of EFO, providing strategic and operational oversight to the joint venture.

Tangshan Caofeidian Investment Corporation has nominated Dr. Yi Li as Chairman of the Board for EFO and TCIC will name a CFO to EFO subsequent to the closing.


 
 
 

Over the next several years, the joint venture is expected to focus on developing a high volume, low cost manufacturing infrastructure and a local customer support organization to better serve the expanding customer base in China and worldwide. TCIC has committed to providing additional funding support for the JV's future strategic growth through acquisitions.

In conjunction with the establishment of the joint venture, the Company and TCIC also entered into a supplemental agreement pursuant to which the Company agreed to establish its China terrestrial concentrator photovoltaics (CPV) manufacturing and operations base in the Caofeidian Industry Zone. The agreement includes a commitment by TCIC to provide the Company with the equivalent of $3.3 million in RMB denominated loans, tax and rent incentives and assistance in developing the Company’s solar power business in China.


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 meaningManagement’s Discussion and Analysis of Section 27AFinancial Condition and Results 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.  Such forward-looking statements include, in particular, projections about our future results included in our Exchange Act reports, statements about our plans, strategies, business prospects, changes and trends in our business and the markets in which we operate.  These forward-looking statements may be identified by the use of terms and phrases such as “expects”, “anticipates”, “projects”, “forecasts”, “intends”, “plans”, believes”, “estimates”, “targets”, “can”, “may”, “could”, “will”, and variations of these terms and similar phrases.  Management cautions that these forward-looking statements relate to future events or our future financial performance and are subject to business, economic, and other risks and uncertainties, both known and unknown, that may cause actual results, levels of activity, performance or achievements of our business or our industry to be materially different from those expressed or implied by any forward-looking statements.  The cautionary statements should be read as being applicable to all forward-looking statements wherever they appear in this Quarterly Report. This discussion should also be read in conjunction with the condensed consolidated financial statements, including the related notes.
These forward-looking statements include, without limitation, any and all statements or implications regarding:Operations

§  The ability of EMCORE Corporation (the “Company”, “we”, “our”, or “EMCORE”) to obtain financing or sell assets and achieve levels of revenue and cost reductions that are adequate to support our capital and operating requirements in order to continue as a going concern.

§  Our ability to remain competitive within our industry and the future growth of the Company, and our industry, and the recovery of financial markets, the markets for our products, and economic conditions in general;

§  Our ability to achieve structural and material cost reductions without impacting product development or manufacturing execution;

§  Expected improvements in our product and technology development programs;

§  Our ability to successfully develop, introduce, market and qualify new products, including our concentrating photovoltaic (CPV) terrestrial solar products;

§  Our ability to identify and acquire suitable acquisition targets and difficulties in integrating recent or future acquisitions into our operations; and,

§  Other risks and uncertainties described in our filings with the Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K for the fiscal year ended September 30, 2008, 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.

Neither management nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements.  All forward-looking statements in this Quarterly Report are made as of the date hereof, based on information available to us as of the date hereof, and subsequent facts or circumstances may contradict, obviate, undermine, or otherwise fail to support or substantiate such statements.  We caution you not to rely on these statements without also considering the risks and uncertainties associated with these statements and our business that are addressed in this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2008.  Certain information included in this Quarterly Report may supersede or supplement forward-looking statements in our other Exchange Act reports filed with the SEC.  We assume no obligation to update any forward-looking statement to conform such statements to actual results or to changes in our expectations, except as required by applicable law or regulation.


Business Overview

EMCORE Corporation (the “Company”, “we”, “our”, or “EMCORE”) is a provider of compound semiconductor-based components and subsystems for the fiber opticoptics and solar power markets.  We were established in 1984 as a New Jersey corporation and have two reporting segments: Fiber Optics and Photovoltaics.  Our Fiber Optics segment offers optical components, subsystems and systems that enable the transmission of video, voice and data over high-capacity fiber optic cables for high-speed data and telecommunications, cable television (“CATV”) and fiber-to-the-premises (“FTTP”) networks.  Our Photovoltaics segment provides solar products for satellite and terrestrial applications. For satellite applications, we offer high-efficiency compound semiconductor-based multi-junction solar cells, covered interconnectinterconnected cells (“CICs”) and fully integrated solar panels.  For terrestrial applications, we offer concentrating photovoltaic (“CPV”) power systems for commercial and utility scale solar applications as well as high-efficiency multi-junction solar cells and integrated CPV components for use in other solar power concentrator systems.  Our headquarters and principal executive offices are located at 10420 Research Road, SE, Albuquerque, New Mexico, 87123, and our main telephone number is (505) 332-5000.  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.


StrategyManagement Summary

The Company’s management has believed for some time that, dueDue to much dissimilaritysignificant differences in operating strategy between the businesses of the Company’s Fiber Optics and Photovoltaics businesses, the Company’s management and board of directors believes that they would provide the greatestgreater value to shareholders if they were operated as two separate business entities.  Over the past two years,

In furtherance of this strategy, on February 3, 2010, the Company entered into several acquisitionsa share purchase agreement to strengthen one or bothcreate a joint venture with Tangshan Caofeidian Investment Corporation (“TCIC”), a Chinese investment company located in the Caofeidian Industry Zone, Tangshan City, Hebei Province of these businesses withChina.  The agreement provides for TCIC to purchase a view toward their eventual separation. On April 4, 2008, the Company announced that its Board of Directors had formally authorized management to prepare a comprehensive operational and strategic plan for the separation of these businesses into separate corporations.  Management began assessing alternative methods for achieving this goal; however, the subsequent onset of the world-wide economic and financial crisis has had a significant adverse impact on these plans.  A dramatic reductionsixty percent (60%) interest in customer demand for many of the Company’s Fiber Optics products has significantly lowered revenuebusiness (excluding its satellite communications and cash flowspecialty photonics fiber optics product lines), which will be operated as a joint venture once the transaction is closed.  The Fiber Optics businesses included in that business unit, while a shortage of debt and equity capital, a decline in the price of conventional energy sources, and a generally cautious and conservative attitude in all segments of the government and business sectors has delayed the opportunities for expanded deployment ofthis transaction are the Company’s terrestrial photovoltaic productstelecom, enterprise, cable television (CATV), fiber-to-the-premises (FTTP), and systems.

As a result, the Company has instituted a series of initiatives aimed at conserving and generating cash over the next twelve months, as described above under “Liquidity Matters - Management Actions and Plans”.  The Company’s strategy over the short term will be focused on the successful implementation of these initiatives.video transport product lines. The Company also continues to investigate a wide variety of strategic options forwill retain the purpose of maximizing shareholder value.  No determination has yet been made regarding which options will be pursued.

Pending implementation of any such strategic option, the Company will continue to pursue its existing strategy of 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 that we serve.  Key elements of our strategy include:


Drive Business Growth, Reduce Cost,satellite communications and Deliver Profitability.

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.  With our enhanced product portfolio, expanded customer base, and established vertically-integrated, low-cost manufacturing infrastructure in ourspecialty photonics fiber optics business, we are better positioned to leverage our resources and infrastructure to grow our revenue through new product introductions and gain market share.  We expect several initiatives for cost reduction to come to fruition during the remainder of 2009, which we believe will eventually improve our gross profit and margins.  We are committed to achieving profitability by increasing revenue through the introduction of new products, reducing our cost structure and lowering the breakeven points of our product lines.  We have significantly streamlined our manufacturing operations by focusing on core competencies to identify cost efficiencies. Where appropriate, we transferred the manufacturing of certain product lines to low-cost contract manufacturers when we can lower costs while maintaining quality and reliability. Our restructuring programs are designed to further reduce the number of headcount, manufacturing facilities, in addition to the divesture or exit from selected businesses and product lines that are not strategic and/or are not capable of achieving desired revenue or profitability goals.  Our results of operations and financial condition have and will likely continue to be significantly affected by severance, restructuring charges, impairment of long-lived assets and idle facility expenses incurred.  We have also significantly reduced capital expenditures and have placed a greater emphasis on improving our working capital management.


Focus Our R&D Effort on Cost Reduction and Market Share Gain.

We have invested substantially in research and development and product engineering over the past years. We have developed a clear path towards business growth and are recognized as a technology leader in both our Fiber Optics and Photovoltaics segments.  Throughout the rest of 2009, we will continue to be focusing our R&D and product engineering efforts on product cost reduction and market share gain through more complete product solutions for our customers.  In this challenging economic environment, we have to be very selective in allocating our R&D resources to develop competitive technologies and productswell as a means to leapfrog our  competitors.


Grow Our Terrestrial Solar Power Business by a Focus on Our Core Competencies.

For our CPV component business, we intend to continue to secure and expand our leadership position by providing high-performance, reliable, and cost-effective products and excellent customer service.  We expect our Gen-III CPV terrestrial solar power system to provide a competitive levelized cost of energy for commercial and utility scale projects in certain regions. In August 2009, we announced to our employees a restructuring of our solar business, combining the satellite and terrestrial solar businesses within a single business unit.  We alsobusinesses.  In the Notes to the Condensed Consolidated Financial Statements, see Footnote 17 – Subsequent Event for additional information related to this new joint venture.

During fiscal 2009, management implemented a new marketing strategy which will focusseries of measures and continues to evaluate opportunities intended to align the Company’s cost structure with its revenue forecasts.  Such measures included several workforce reductions, temporary salary reductions, the elimination of executive and employee merit increases and bonuses for fiscal 2009, and the elimination or reduction of certain discretionary expenses.  The Company has also significantly lowered its spending on EMCORE’s traditional competenciescapital expenditures and focused on improving the management of its working capital.  During the last twelve months ended December 31, 2009, the Company monetized approximately $25.5 million of inventory, generated $16.9 million in technological innovation, systems designcash from lowering its accounts receivable balances and engineeringachieved positive cash flow from operations during the quarters ended June 30, 2009 and September 30, 2009.

In fiscal 2010, the Company continues to remain focused on maximizing cash flow from operations while retaining our unique competitive advantage as the only vertically integrated competitor in the CPV market.  We will continue to develop and expand partnerships and other ventures with major companies, both domestically and internationally, to drive the deploymentdeveloping additional sources of terrestrial CPV components and systems.liquidity.


Quarter Highlights

Long Term Supply AgreementOn October 1, 2009, the Company entered into an equity line of credit arrangement with Space Systems LoralCommerce Court Small Cap Value Fund, Ltd. (“Commerce Court”).  Upon issuance of a draw-down request by the Company, Commerce Court has committed to purchasing up to $25 million worth of shares of the Company’s common stock over the 24-month term of the purchase agreement, provided that the number of shares the Company may sell under the facility is limited to no more than 15,971,169 shares of common stock or that would result in the beneficial ownership of more than 9.9% of the then issued and outstanding shares of the Company’s common stock.

On May 20,November 12, 2009, the Company announced that Space Systems Loral, a subsidiary of Loral Space & Communications, hasit was awarded a long term supply agreement contract by Dutch Space of Leiden, The Netherlands to manufacture, test, and deliver solar panels to power the Cygnus™ spacecraft being developed by Orbital Sciences Corporation (NYSE: ORB) for NASA's Commercial Resupply Service (CRS) project. With all options exercised the total value of the contract would be in excess of $15 million.  Under the CRS project, Orbital will carry out eight pressurized space cargo missions beginning in early 2011 and running through 2015 to provide a U.S.-produced and-operated automated cargo delivery service to the Company's Photovoltaics segmentInternational Space Station.  An initial demonstration flight will be carried out as part of NASA's Commercial Orbital Transportation Services (COTS) project, which provided NASA incentives for developing the commercial launch services industry.  The solar panels to manufacture and deliver high-efficiency,be delivered to Dutch Space will use EMCORE's ZTJ solar cells. With a sunlight-to-electricity conversion efficiency of 30%, the ZTJ solar cell is one of the highest performance space qualified multi-junction solar cells for Space Systems Loral's spacecraft programs. The periodcell available in the world today.  Production of performance for the contract is 2009 through 2014 and the solar cellspanels will be producedtake place at the Company’s state-of-the-art manufacturing facilities located in Albuquerque, New Mexico, USA.Mexico.

Christopher M. Larocca Named Chief Operating Officer
On June 4,December 23, 2009, the Company announced that Christopher M. LaroccaSherman McCorkle was elected to join its Board of Directors as a Class B independent director.  Sherman McCorkle is a native New Mexican and has been named Chief Operating Officerdeeply involved in the New Mexico business community for most of the Company.  Mr. Larocca reports to the Company’shis career. He is President and Chief Executive Officer Dr. Hong Q. Hou.

Solar Panel Manufacturing Contract for NASA's Global Precipitation Measurement Mission
On June 16, 2009,of Technology Ventures Corporation (TVC), an Albuquerque-based organization that assists start up companies in developing and commercializing technologies from research universities and the Company announcednational laboratories. Prior to joining TVC as President & CEO in 1993, Mr. McCorkle served as CEO & President of Sunwest Credit Services Corporation Commencing in 1988. In 1977, he co-founded and was Charter Director of Plus Systems Incorporated, the original platform that it was awardedenabled national and international electronic banking and ATM systems. In addition, Mr. McCorkle is a contract to manufacture, test,co-founder and deliver solar panels for NASA's Global Precipitation Measurement spacecraft. The contract, valued at approximately $5 million, will be managed by MEI Technologies, Inc. for the NASA Goddard Space Flight Center (GSFC).   The Global Precipitation Measurement (GPM) mission is one of the satellite-based science missions studying global precipitation, including rain, snow, and ice. The launch of the spacecraft is presently scheduled for the summer of 2013. The GPM spacecraft solar arrays will be powered by the Company’s latest generation, 30% efficiency class ZTJ multi-junction solar cells.

Contract from Air Force Research Laboratory
On June 22, 2009, the Company announced it was awarded a $5.7 million cost-plus fixed-fee contract from the Air Force Research Laboratory, located at the Kirtland Air Force Base, for the development of high-efficiency photovoltaic solar cells.  The two-year contract calls for the Company to demonstrate high efficiency solar cells for space applications, as well as investigate advanced photovoltaic devices based on inverted metamorphic (IMM) structures. The contract also includes a provision for an additional twelve-month award of $3.4 million for advanced IMM development once the base contract has been completed. Funding for the entire contract has been appropriated.

Solar Power Agreement with PNM
On June 23, 2009, the Company announced a formal agreement with PNMCharter Director of New Mexico to participate in PNM's large distributed generation (DG) solar power program. This 20-year agreement with EMCORE consists of 114 kilowatts of solar power produced onsite at the Company's corporate headquarters in Albuquerque, N.M.  The power is generated by EMCORE's GEN-IIBank and GEN-III CPV terrestrial solar power systems.

Reclassification of the Company’s Space Solar Cells for Export Control
On July 20, 2009, the Company became aware that, as a result of a commodity jurisdiction request submitted by one of its customers, the Directorate of Defense Trade Controls of the United States Department of State had determined that future shipments of the Company’s current-generation family of triple junction solar cells would no longer be subject to regulation under the International Traffic in Arms Regulations (“ITAR”) regulations administered by that Directorate of Defense Trade Controls (which require an export license for all non-U.S. sales).  Rather, the cells would subject to the Export Administration Regulations (“EAR”) administered by the Department of Commerce’s Bureau of IndustryTrust and Security, and would be classified as ECCN 3A001.e.4.  Under this classification, the requirement for a license will depend on the end use of the product, the final destination and the identity of the end user.  The Company believes that this reclassification will remove what had been a significant barrier to international sales of its space solar cells.

Solar Contract Awarded  from Boeing
On July 30, 2009, the Company announced an industry team led by The Boeing Company has received a contract from the Defense Advanced Research Projects Agency (DARPA) for work on Phase 2 of the Fast Access Spacecraft Testbed (FAST) program. The $15.5 million cost-plus-fixed-fee contract is currently funded to $13.8 million.  DARPA's FAST program aims to develop a new, ultra-lightweight High Power Generation System (HPGS) that can generate up to 175 kilowatts -- more power than is currently available to the International Space Station. When combined with electric propulsion, FAST will form the foundation for future self-deployed, high-mobility spacecraft to perform ultra-high-power communications, space radar, satellite transfer and servicing missions.


Impairment

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.First Community Bank.


Order Backlog

As of June 30,December 31, 2009, the Company had a consolidated order backlog of approximately $49.6$61.2 million, comprised of $36.2a $1.4 million, inor 2%, decrease from a $62.6 million order backlog related to ourreported as of the end of the preceding quarter.  On a segment basis, the quarter-end Photovoltaics segment and $13.4 million in order backlog relatedtotaled $42.3 million, a $5.4 million, or 11%, decrease from $47.7 million reported as of the end of the preceding quarter with the decrease due primarily to ourthe rescheduling of a portion of a major customer’s backlog beyond the twelve month backlog reporting horizon.  The quarter-end Fiber Optics segment.order backlog totaled $18.9 million, a $3.9 million, or 26% increase from $14.9 million reported as of the end of the preceding quarter.   Order backlog is defined as purchase orders or supply agreements accepted by the Company with expected product delivery and / or services to be performed within the next twelve months.

DueFrom time to unfavorable credit market conditionstime, our customers may request that we delay shipment of certain orders and other factorsour backlog could also be adversely affectingaffected if customers unexpectedly cancel purchase orders that we’ve previously accepted.  A majority of our fiber optics products typically ship within the CPV business insame quarter as when the purchase order is received; therefore, our Photovoltaics segment, a numberbacklog at any particular date is not necessarily indicative of agreements and other arrangements previously announced by the Company in press releases have not resulted inactual revenue or the level of sales that were earlier anticipated, nor does the Company believe that they are likely to do so in the near future.  These include several memoranda of understanding regarding the supply of solar power systems and several purchase orders for CPV components.any succeeding period.


Our Markets

Collectively, our products serve the telecommunications, datacom, cable television, fiber-to-the-premises, high-performance computing, defense and homeland security, and satellite and terrestrial solar power markets.



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 segment primarily offers the following product lines:

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Telecom Optical Products – We believe we are a leading supplier of 10 gigabit per second (Gb/s) fully C-band and L-band tunable dense wavelength division multiplexed (DWDM) transponders for telecommunications transport systems. We are one of the few suppliers who offer vertically-integrated products, including external-cavity laser modules, integrated tunable laser assemblies (ITLAs) and 300-pin transponders. Our internally developed laser technology is highly suited for applications of 10, 40, and 100 Gb/s due to the superior narrow linewidth and low noise characteristics. All DWDM products are fully Telcordia® qualified and comply with industry multi-source agreements (MSAs). We are currently sampling customers with our tunable XFP (TXFP) product, and MSA which will rapidly replace 300-pin based transponders over the next few years, enabling a higher density transport solution required by carriers.  EMCORE’s  TXFP leverages our unique external cavity laser technology to offer identical performance to currently deployed network specifications, without the need for any specification compromise.

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Enterprise Products – We believe we provide leading-edge optical components and transceiver modules for data applications that enable switch-to-switch, router-to-router and server-to-server backbone connections at aggregate speeds of 10 Gb/s and above. We offer the broadest range of products with XENPAK form factor which comply with 10 Gb/s Ethernet (10-GE) IEEE802.3ae standard. Our 10-GE products include short-reach (SR), long-reach (LR), extended-reach (ER), coarse WDM LX4 optical transceivers to connect between the photonic physical layer and the electrical section layer and CX4 transceivers.  In addition to the 10-GE products, we offer traditional MSA small form factor (SFF) and small form factor pluggable (SFP) optical transceivers for use in Gigabit Ethernet and Fibre Channel local-area and storage-area networks..  These transceivers provide integrated duplex data links for bi-directional communication over both single-mode and multimode optical fibers at data rates of  1.25Gbps and 4 Gbps, respectively.

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Laser/photodetector Component Products - We believe we are a leading provider of optical components including lasers, photodetectors and various forms of packaged subassemblies. Products include bare die (chip), TO, and TOSA forms of high-speed 850nm vertical cavity surface emitting lasers (VCSELs), distributed feedback (DFB) lasers, positive-intrinsic-negative (pin) and avalanche photodiode (APD) components for 2G, 8G and 10G Fibre Channel, 1G and 10G Ethernet, FTTP, and Telecom applications.  While we provide component products to the entire industry, we also leverage the benefits of vertically-integrated infrastructure through a low-cost and early availability of new product introduction.

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Parallel Optical Transceiver and Cable Products – We have been the technology and product leader of optical transmitter and receiver products utilizing arrays of optical emitting or detection devices, e.g., vertical-cavity surface-emitting lasers (VCSELs) and photodetectors (PDs). These optical transmitter, receiver, and transceiver products are used for back-plane interconnects, switching/routing between telecom racks and high-performance computing clusters. Our products include 12-lane SNAP-12 MSA transmitter and receivers with single and double data rates. Based on the core competency of 4-lane parallel optical transceivers, we offer optical fiber ribbon cables (ECC - EMCORE Connects Cables) with parallel-optical transceivers embedded within the connectors.  These products, with aggregated bandwidths of up to 40 Gb/s, are ideally suited for high-performance computing clusters. Our products provide our customers with increased network capacity; increased data transmission distance and speeds; increased bandwidth; lower power consumption; improved cable management over copper interconnects (less weight and bulk); and lower cost optical interconnections for massively parallel multi-processor  installations.

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Fiber Channel Transceiver Products – We offer tri-rate SFF and SFP optical transceivers for storage area networks. The MSA transceiver module is designed for high-speed Fibre Channel data links supporting up to 4.25 Gb/s (4X Fibre Channel rate). The products provide integrated duplex data links for bi-directional communication over Multimode optical fiber.



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Cable Television (CATV) Products - 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).  Our CATV products include forward and return-path analog and digital lasers, photodetectors and subassembly components, broadcast analog and digital fiber-optic transmitters and quadrature amplitude modulation (QAM) transmitters and receivers.  Our products provide our customers with increased capacity to offer more cable services; increased data transmission distance, speed and bandwidth; lower noise video receive; and lower power consumption.

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Fiber-To-The-Premises (FTTP) Products - Telecommunications companies are increasingly extending their optical infrastructure to their customers’ location in order to deliver higher bandwidth services. We have developed 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 optics-based access networks.  Our FTTP products include passive optical network (PON) transceivers, analog fiber optic transmitters for video overlay and high-power erbium-doped fiber amplifiers (EDFA), analog and digital lasers, photodetectors and subassembly components, analog video receivers and multi-dwelling unit (MDU) video receivers.  Our products provide our customers with higher performance for analog and digital characteristics; integrated infrastructure to support competitive costs; and additional support for multiple standards.

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Satellite Communications (Satcom) Products - We believe 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. Our products include transmitters, receivers, subsystems and systems that transport wideband radio frequency and microwave signals between satellite hub equipment and antenna dishes.  Our products provide our customers with increased bandwidth and lower power consumption.

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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. Our 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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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.  Our products provide our customers with high frequency and dynamic range; compact form-factor; and extreme temperature, shock and vibration tolerance.

Major customers for our Fiber Optics segment include: Alcatel-Lucent, Aurora Networks, BUPT-GUOAN Broadband, Arris/C-Cor Electronics, Ciena, Cisco, Fujitsu, Hewlett-Packard, Huawei, IBM, Intel, Jabil, JDSU, Merge Optics, Motorola, Network Appliance, Sycamore Networks, Inc., Tellabs, and ZTE.


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 advantages include higher solar cell efficiency allowing for greater conversion of light into electricity as well as a superior ability to withstand extreme heat and radiation environments. These advantages enable a reduction in a customer’s solar product footprint by providing more power output with less solar cells, which is an enhanced benefit when our product is used in concentrating photovoltaic (CPV) systems.  Our Photovoltaics segment primarily targets the following markets:

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Satellite Solar Power Generation - We believe 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 depends on its available power and its capacity to transmit data. We provide advanced compound semiconductor-based solar cells 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. Our products provide our customers with higher conversion efficiency for reduced solar array 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%.  We are in the final stages of qualifying the next generation high efficiency multi-junction solar cell platform for space applications which will have an average conversion efficiency of 30%, providing our customers with expanded capability.

Additionally, we are developing an entirely new class of advanced multi-junction solar cells with even higher conversion efficiency.  This new architecture, called inverted metamorphic (IMM), is being developed in conjunction with the National Renewable Energy Laboratory and the US Air Force Research Laboratory and to date has demonstrated conversion efficiency exceeding 33% on an R&D scale.  We believe we are the only manufacturer to supply true monolithic bypass diodes for shadow protection by utilizing several EMCORE patented methods.

We also provide offer interconnect cells (CICs) and solar panel lay-down services, providing us the capability to manufacture fully integrated solar panels for space applications. We can provide satellite manufacturers with proven, integrated, satellite power solutions that significantly improve satellite economics. Satellite manufacturers and solar array integrators rely on us to meet their satellite power needs with our proven flight heritage.


§  
Terrestrial Solar Power Generation - Solar power generation systems utilize 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 fossil fuel-based 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 has when compared to 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 concentrating solar power systems.

We have adapted our high-efficiency compound semiconductor-based multi-junction solar cell products for terrestrial applications, which are intended for use with CPV power systems in utility-scale installations.  We have attained 39% peak conversion efficiency under 1000x illumination with our terrestrial concentrating solar cell products in volume production. This compares favorably to average efficiency of 15-21% of silicon-based solar cells and approximately 35% for competing multi-junction cells. We believe that solar concentrator systems assembled using our compound semiconductor-based solar cells will be competitive with silicon-based solar power generation systems, in certain geographic regions, because they are more efficient, and when combined with the advantages of concentration, will result in a lower cost of power generated.  Our multi-junction solar cell technology is not subject to silicon shortages which, in the past, have led to increasing prices in the raw materials required for silicon-based solar cells.  We currently serve the terrestrial solar market with two levels of CPV products: components (including solar cells and solar cell receivers) and CPV terrestrial solar power systems.

While the terrestrial power generation market is still developing, we have shipped production orders of CPV components to several solar concentrator companies, and have provided samples to others, including major system manufacturers in the United States, Europe, and Asia.  We have finished installations of a total of approximately 1 megawatt (MW) of CPV systems in Spain, China, and the US with our own Gen-II CPV power system design.  We have recently responded to several RFPs from public utility companies in the US using our Gen-III design. The Gen-III product, with enhanced performance (including a module efficiency of approximately 30%) and much improved cost structure, is scheduled to be in volume production in the first half of calendar 2010.


Major customers for the Photovoltaics segment include: ATK, Indian Space Research Organization (“ISRO”), NASA-JPL, Lockheed Martin, Menova Energy, Northrop Grumman, Space Systems/Loral, Maxima Energies Renovables Ibahernando, and ISFOC.



Critical Accounting Policies

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“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 revenuesrevenue 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;
-  assessment of recovery of long-lived assets;
-  revenue recognition associated with the percentage of completion method; and
-  the allowance for doubtful accounts and warranty accruals.

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, which are discussed below.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. The Company's most significant estimates relate to accounts receivable, inventory, goodwill, intangibles, other long-lived assets, warranty accruals, revenue recognition,

A listing and valuationdescription of stock-based compensation.the Company’s critical accounting policies includes:

Valuation of Accounts Receivable. 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.risk of collection. 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.


Valuation of Inventory.  Inventory is stated at the lower of cost or market, with cost being determined using the standard cost method. The Company reserves against inventory once it has been determined that conditions exist that may not allow the inventory to be sold for its intended purpose or the inventory is determined to be excess or obsolete based on the Company’s forecasted future revenue.  The charge related to inventory reserves is recorded as a cost of revenue. The majority of the inventory write-downs are related to estimated allowances for inventory whose carrying value is in excess of net realizable value and on excess raw material components resulting from finished product obsolescence. In most cases where the Company sells previously written down inventory, it is typically sold as a component part of a finished product. The finished product is sold at market price at the time resulting in higher average gross margin on such revenue. The Company does not track the selling price of individual raw material components that have been previously written down or written off, since such raw material components usually are only a portion of the resultant finished products and related sales price. The Company evaluates inventory levels at least quarterly against sales forecasts on a significant part-by-part basis, in addition to determining its overall inventory risk.  We have incurred, and may in the future incur charges to write-down our inventory.

§  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.

While we believe, based on current information, that the amount recorded for inventory is properly reflected on our balance sheet, if market conditions are less favorable than our forecasts, our future sales mix differs from our forecasted sales mix, or actual demand from our customers is lower than our estimates, we may be required to record additional inventory write-downs.



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,ASC 350, Intangibles - 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 periodthe remaining useful life of its primary asset 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’s 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.


Valuation of Long-lived Assets and Other Intangible Assets.   Long-lived assets consist primarily of our property, plant, and equipment.  Ourequipment and 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.assets.  Because allmost of the Company’s intangiblelong-lived assets are subject to amortization, the Company reviews these intangible assets for impairment in accordance with the provisions of FASB Statement No. 144,ASC 360, Accounting for the Impairment of Long-Lived AssetsProperty, Plant, and Long-Lived Assets to be Disposed Of.Equipment.  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 intangiblelong-lived 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.


Product Warranty Reserves. The Company provides its customers with limited rights of return for non-conforming shipments and warranty claims for certain products. In accordance with SFAS 5,ASC 450, Accounting for Contingencies, the Company makes estimates of product warranty expense using historical experience rates as a percentage of revenue and accrues estimated warranty expense as a cost of revenue. We estimate the costs of our warranty obligations based on our historical experience of known product failure rates, use of materials to repair or replace defective products and service delivery costs incurred in correcting product issues. In addition, from time to time, specific warranty accruals may be made if unforeseen technical problems arise. Should our actual experience relative to these factors differ from our estimates, we may be required to record additional warranty reserves. Alternatively, if we provide more reserves than we need, we may reverse a portion of such provisions in future periods.

§  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.


Revenue Recognition. Revenue is recognized upon shipment, provided persuasive evidence of a contract exists, (such as when a purchase order or contract is received from a customer), the price is fixed, the product meets its specifications, title and ownership have transferred to the customer, and there is reasonable assurance of collection of the sales proceeds. In those few instances where a given sale involves post shipment obligations, formal customer acceptance documents, or subjective rights of return, revenue is not recognized until all post-shipment conditions have been satisfied and there is reasonable assurance of collection of the sales proceeds. The majority of our products have shipping terms that are free on board (“FOB”) or free carrier alongside (“FCA”) shipping point, which means that the Company fulfills its delivery obligation when the goods are handed over to the freight carrier at our shipping dock. This means the buyer bears all costs and risks of loss or damage to the goods from that point. In certain cases, the Company ships its products cost insurance and freight (“CIF”). Under this arrangement, revenue is recognized under FCA shipping point terms, but the Company pays (and bills the customer) for the cost of shipping and insurance to the customer's designated location. The Company accounts for shipping and related transportation costs by recording the charges that are invoiced to customers as revenue, with the corresponding cost recorded as cost of revenue. In those instances where inventory is maintained at a consigned location, revenue is recognized only when our customer pulls product for its use and title and ownership have transferred to the customer. Revenue from time and material contracts is recognized at the contractual rates as labor hours and direct expenses are incurred.  The Company also generates service revenue from hardware repairs and calibrations that is recognized as revenue upon completion of the service.  Any cost of warranties and remaining obligations that are inconsequential or perfunctory are accrued when the corresponding revenue is recognized.



§-  
Distributors - The Company uses a number of distributors around the world. In accordance with Staff Accounting Bulletin No. 104, Revenue Recognition, the Companyworld and recognizes revenue upon shipment of product to these distributors. Title and risk of loss pass to the distributors upon shipment, and our distributors are contractually obligated to pay the Company on standard commercial terms, just like our other direct customers.  The Company does not sell to its distributors on consignment and, except in the event of product discontinuance, does not give distributors a right of return.

§-  
Solar Panel and Solar Power Systems Contracts - The Company records revenues from certain solar panel and solar power systems contracts using the percentage-of-completion method in accordance with AICPA Statement of Position 81-1 ("SOP 81-1"), Accounting for Performance of Construction-Type and Certain Production-Type Contracts.method.  Revenue is recognized in proportion to actual costs incurred compared to total anticipated costs expected to be incurred for each contract. If estimates of costs to complete long-term contracts indicate a loss, a provision is made for the total loss anticipated.  As of June 30, 2009, the Company had accrued $0.2 million related to estimated contract losses on certain CPV system-related orders.  Such contracts require estimates to determine the appropriate cost and revenue recognition. The Company uses all available information in determining dependable estimates of the extent of progress towards completion, contract revenues, and contract costs.  Estimates are revised as additional information becomes available.  DueIf estimates of costs to complete long-term contracts indicate a loss, a provision is made for the fact that the Company accounts for these contracts under the percentage-of-completion method, unbilled accounts receivable represent revenue recognized but not yet billed pursuant to contract terms or accounts billed after the period end.total loss anticipated.

§-  
Government R&D Contracts - R&D contract revenue represents reimbursement by various U.S. government entities, or their contractors, to aid in the development of new technology. The applicable contracts generally provide that the Company may elect to retain ownership of inventions made in performing the work, subject to a non-exclusive license retained by the U.S. government to practice the inventions for governmental purposes. The R&D contract funding may be based on a cost-plus, cost reimbursement, or a firm fixed price arrangement. The amount of funding under each R&D contract is determined based on cost estimates that include both direct and indirect costs. Cost-plus funding is determined based on actual costs plus a set margin. As we incur costs under cost reimbursement type contracts, we record revenue. Contract costs include material, labor, special tooling and test equipment, subcontracting costs, as well as an allocation of indirect costs. An R&D contract is considered complete when all significant costs have been incurred, milestones have been reached, and any reporting obligations to the customer have been met.  Government contract revenue is primarily recognized as service revenue.

The Company also has certain cost-sharing R&D arrangements.  Under such arrangements in which the actual costs of performance are dividedsplit between the U.S. government and the Company on a best efforts basis, no revenue is recorded and the Company’s R&D expense is reduced for the amount of the cost-sharing receipts.

The U.S. government may terminate any of our government contracts at their convenience as well as for default based on our failure to meet specified performance measurements. If any of our government contracts were to be terminated for convenience, we generally would be entitled to receive payment for work completed and allowable termination or cancellation costs. If any of our government contracts were to be terminated for default, generally the U.S. government would pay only for the work that has been accepted and can require us to pay the difference between the original contract price and the cost to re-procure the contract items, net of the work accepted from the original contract. The U.S. government can also hold us liable for damages resulting from the default.


Stock-Based Compensation. The Company uses the Black-Scholes option-pricing model and the straight-line attribution approach to determine the fair-value of stock-based awards under SFAS 123(R),in accordance with ASC 718, Share-Based Payment (revised 2004).Compensation. The Company elected to use the modified prospective transition method as permitted by SFAS 123(R) and accordingly prior periods were not restated to reflect the impact of SFAS 123(R). The modified prospective transition method requires that stock-based compensation expense be recorded for all new and unvested stock options and employee stock purchase plan shares that are ultimately expected to vest as the requisite service is rendered beginning on October 1, 2005, the first day of the Company’s fiscal year 2006.  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 Company’s expected term represents the period that stock-based awards are expected to be outstanding and is 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. The expected stock price volatility is based on the Company’s historical stock prices.
***



The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP.  There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result.  For a complete discussion of our accounting policies, recently adopted accounting pronouncements, and other required U.S. GAAP disclosures, we refer you to the accompanying footnotes to the Company’s consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2008.2009.


Results of Operations

The following table sets forth the Company’s condensed consolidated statements of operations data expressed as a percentage of total revenue.

STATEMENT OF OPERATIONS DATA
 
 For the Three Months Ended December 31, 
  2009 2008 
          
Revenue
  
100.0
%
  
100.0
%
 
Cost of revenue
  
81.1
   
97.1
  
          
Gross profit
  
18.9
   
2.9
  
          
Operating expenses:
         
Selling, general, and administrative
  
29.3
   
22.5
  
Research and development
  
17.7
   
15.0
  
Impairments
  
-
   
62.5
  
Total operating expenses
  
47.0
   
100.0
  
          
Operating loss
  
(28.1
)
  
(97.1
)
 
          
Other (income) expense:
         
Interest income
  
-
   
(0.1
)
 
Interest expense
  
0.3
   
0.4
  
Foreign exchange loss
  
0.5
   
0.9
  
Loss from financing derivative instrument
  
3.2
   
-
  
Impairment of investment
  
-
   
0.6
  
Total other expense
  
4.0
   
1.8
  
Net loss
  
(32.2
 
)%
  
(98.9
 
)%
 
Statement of Operations Data
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
  2009  2008  2009  2008 
Product revenue 
96.6
%
 
95.4
%
 
95.0
%
 
95.0
%
Service revenue 
3.4
  
4.6
  
5.0
  
5.0
 
Total revenue 
100.0
  
100.0
  
100.0
  
100.0
 
             
Cost of product revenue 
103.6
  
80.4
  
102.1
  
80.3
 
Cost of service revenue 
2.7
  
1.5
  
3.7
  
2.7
 
Total cost of revenue 
106.3
  
81.9
  
105.8
  
83.0
 
             
Gross (loss) profit 
(6.3
)
 
18.1
  
(5.8
)
 
17.0
 
             
Operating expenses:            
Selling, general, and administrative 
28.3
  
18.4
  
25.8
  
20.2
 
Research and development 
14.7
  
15.1
  
15.2
  
15.7
 
Impairment 
70.1
  
-
  
44.7
  
-
 
Total operating expenses 
113.1
  
33.5
  
85.7
  
35.9
 
             
Operating loss 
(119.4
)
 
(15.4
)
 
(91.5
)
 
(18.9
)
             
Other (income) expense:            
       Interest income
 
-
  
(0.2
)
 
(0.1
)
 
(0.4
)
       Interest expense
 
0.3
  
-
  
0.3
  
0.9
 
Impairment of investment
 
-
  
-
  
0.3
  
-
 
Loss from conversion of subordinated notes
 
-
  
-
  
-
  
2.6
 
Stock–based expense from tolled options
 
-
  
-
  
-
  
2.4
 
Gain from sale of investment
 
-
  
(4.9
)
 
(2.3
)
 
(2.0
)
Loss on disposal of equipment
 
-
  
-
  
-
  
-
 
       Foreign exchange gain
 
(1.9
)
 
(0.1
)
 
0.5
  
(0.2
)
Total other (income) expense 
(1.6
)
 
(5.2
)
 
(1.3
)
 
3.3
 
             
Net loss 
(117.8
)%
 
(10.2
)%
 
(90.2
)%
 
(22.2
)%


Quarterly Results:Comparison of the Three Months Ended December 31, 2009 and 2008

Revenue:
Revenue for the third quarter of fiscalthree months ended December 31, 2009 was $38.5$42.4 million, a decrease of $37.0 million, or 49%, from $75.5 million reported in the same period last year and a decrease of $4.8 million, or 11%, from $43.3 million reported in the immediately preceding second fiscal quarter.



On a segment basis, third quarter revenue for the Fiber Optics segment was $22.4 million, a $31.2 million, or 58%, decrease from $53.6 million reported in the same period last year and a decrease of $6.0 million, or 21%, from $28.4 million reported in the immediately preceding quarter.  On a year-over-year basis, and when compared to the preceding quarter, the decrease in Fiber Optics revenue was primarily due to extremely unfavorable conditions in the fiber optics industry, which has been adversely affected by current financial environment (especially in the debt and equity markets) than the general economy as a whole.  For the third quarter, the Fiber Optics segment represented 58% of the Company's consolidated revenue compared to 71% in the same period last year.

Third quarter revenue for the Photovoltaics segment was $16.1 million, a $5.8 million, or 27%, decrease from $21.9 million reported in the same period last year and an increase of $1.2 million, or 8%, from $14.9 million reported in the immediately preceding quarter.  On a year-over-year basis, revenue for our satellite solar power product lines increased while revenue for our terrestrial concentrator photovoltaics (“CPV”) product lines and government service contracts declined.  On a sequential quarterly basis, the increase in Photovoltaics revenue was attributable to increased sales of satellite solar power products.  For the third quarter, the Photovoltaics segment represented 42% of the Company's consolidated revenue compared to 29% in the same period last year.

Gross Profit / (Loss):
The consolidated gross loss for the third quarter of fiscal 2009 was $2.4 million, a decrease of $16.0 million from a $13.6 million gross profit reported in the same period last year and an improvement of $4.6 million from a $7.0 million gross loss reported in the preceding quarter.  The consolidated gross margin for the third quarter was negative 6.3% compared to a gross margin of 18.1% reported in the same period last year and a negative 16.2% gross margin reported in the preceding quarter.  During the quarter, the Company recorded approximately $6.4 million in losses on firm inventory purchase commitments related to the Fiber Optics segment and $2.1 million in additional provision for excess and obsolete inventory, both of which adversely impacted gross profit and margins.

Fiber Optics gross margin for the third quarter was negative 35.2%, a decrease from a 26.9% gross margin reported in the same period last year and a decrease from a negative 11.7% gross margin reported in the preceding quarter.  On a year-over-year basis, and when compared to the preceding quarter, the decrease in Fiber Optics gross margin was primarily due to losses recorded on firm inventory  purchase commitments, unabsorbed overhead expenses due to declining revenues, and inventory valuation write-downs.  In addition, the loss was also increased by our efforts to monetize older-generation product inventory as we transition to newer lower cost and more competitive design platforms.

Photovoltaics gross margin for the third quarter was 33.9%, an improvement from a negative 3.5% gross margin reported in the same period last year and an improvement from a negative 24.7% gross margin reported in the preceding quarter.  The significant increase in Photovoltaics gross margin was primarily due to increased sales of higher margin satellite solar power products along with improved manufacturing yields on certain satellite solar panel contracts.

Operating Expenses:
Sales, general, and administrative expenses for the third quarter totaled $10.9 million, a decrease of $3.0$11.6 million, or 22%, from $13.9 million reported in the same period last year and a decrease of $1.1 million, or 9%, from $12.0 million reported in the preceding quarter.  The decrease in year-over-year SG&A expenses was primarily due to the implementation of a series of measures designed to realign our cost structure with lower revenues including several reductions in workforce, the furloughing of employees, salary reductions, the elimination of executive and employee merit increases, and the reduction or elimination of certain discretionary expenses.  In the prior year period, the Company incurred approximately $1.3 million in non-recurring SG&A expenses related to transitional services being provided by Intel Corporation associated with acquisitions completed in that year.  As a percentage of revenue, quarterly SG&A expenses were 28.4%, an increase from 18.4% in the same period last year, and a slight increase from 27.6% in the preceding quarter.

Research and development expenses for the third quarter totaled $5.7 million, a decrease of $5.7 million, or 50%, from $11.4 million reported in the same period last year and a decrease of $1.2 million, or 18%, from $6.9 million reported in the preceding quarter.  In the prior year period, the Company incurred approximately $1.6 million in non-recurring R&D expenses related to transitional services being provided by Intel Corporation.  As part of the ongoing effort to reduce expenses, many of the Company’s long-term projects have been placed on hold in order to focus on research and product development efforts on projects that we expect to generate returns within one year, such as the Company’s Gen III CPV terrestrial solar power systems.  As a percentage of revenue, quarterly R&D expenses were 14.7%, a decrease from 15.1% in the same period last year and a decrease from 15.9% in the preceding quarter.




Impairment:
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 and 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.


Third quarter operating expenses totaled $43.6 million, an increase of $18.3 million from $25.3 million reported in the same period last year and an increase of $24.7 million from $18.9 million incurred in the preceding quarter.

Operating and Net Loss:
The third quarter consolidated operating loss was $46.0 million, an increase of $34.4 million from an operating loss of $11.6 million reported in the same period last year and an increase of $20.1 million from an operating loss of $25.9 million reported in the preceding quarter.

During the quarter, the Company recognized a net gain on foreign currency exchange of approximately $0.7 million associated with the Company’s international operations.

The consolidated net loss for the third quarter was $45.3 million, an increase of $37.6 million from $7.7 million reported in the same period last year and an increase of $21.6 million from $23.7 million reported in the preceding quarter.

The third quarter net loss per share was $0.57, an increase of $0.47 per share from a net loss of $0.10 per share reported in the same period last year and an increase of $0.27 per share from a net loss of $0.30 per share reported in the preceding quarter.


Nine-Month Results:

Revenue:
Revenue for the nine months ended June 30, 2009 was $135.8 million, a decrease of $42.9 million, or 24%, from $178.7$54.0 million reported in the same period last year.

On a segment basis, nine month revenue for the Fiber Optics segment was $90.0$25.6 million, a decrease of $35.2$13.6 million, or 28%35%, from $125.2$39.2 million reported in the same period last year.  The decrease in Fiber Optics revenue was primarily due to a significant drop in demand from our customers due to the very unfavorable macroeconomic environment as well as continued pressure on selling prices as we compete to maintain or increase our market share positions.   For the first ninethree months of the fiscal year,ended December 31, 2009, the Fiber Optics segment represented 66%60% of the Company's consolidated revenue compared to 70%72% in the same period last year.

Revenue for the Photovoltaics segment was $16.8 million, an increase of $1.9 million, or 13%, from $14.9 million reported in the same period last year.  In the first quarter of fiscal 2010, the Photovoltaics segment experienced a 30% increase in revenue from satellite solar power products offset by a decrease in revenue from terrestrial concentrated photovoltaic (CPV) products.  For the three months ended December 31, 2009, the Photovoltaics segment represented 40% of the Company's consolidated revenue compared to 28% in the same period last year.

Nine month revenue for
Gross Profit:
For the Photovoltaics segment three months ended December 31, 2009, the consolidated gross profit was $45.8$8.0 million, a decrease of $7.6 million, or 14%, from $53.5 million reported in the same period last year.  On a year-over-year basis, our satellite solar power product lines experienced an increase in revenue while our CPV terrestrial solar power product lines and government service contracts experienced a decrease in revenue. For the first nine months of the fiscal year, the Photovoltaics segment represented 34% of the Company's consolidated revenue compared to 30% in the same period last year.

Gross Profit / (Loss):
The nine month consolidated gross loss was $7.8 million, a decrease of $38.26.4 million from $30.4$1.6 million in gross profit reported in the same period last year.  The nine monthFor the three months ended December 31, 2009, the consolidated gross margin was negative 5.8%18.9% compared to a positive 17.0%2.9% gross margin reported in the same period last year.  This represents the Company’s best gross profit performance since the quarter ended June 30, 2008.



Fiber Optics gross margin for the ninethree months ended June 30,December 31, 2009 was negative 13.0%16.7%, a decreasean increase from a 25.1%negative 1.1% gross margin reported in the same period last year.  The decreaseimprovement in Fiber Optics gross margin was due primarily due to losseshigher gross margins in the Company’s CATV product lines, as well as, lower inventory excess and obsolescence charges when compared to the prior year.  As indicated in our prior year filings, the Company recorded on firm$5.3 million of inventory purchase commitments, unabsorbed overhead expenses due to declining revenues, and inventory valuation write-downs.  In addition, the decrease was also increased by our efforts to monetize older-generation product inventory as we transition to newer lower cost and more competitive design platforms.warranty expense which adversely affected gross margin.

Photovoltaics gross margin for the ninethree months ended June 30,December 31, 2009 was 8.3%22.1%, an increase from a negative 1.9%13.6% gross margin reported in the same period last year.  The significant increase in Photovoltaics gross margin was primarily due to increased sales of higher margin satellite solar power products along with improved manufacturing yields on certain satellite solar panel contracts.


Operating Expenses:
Sales, general, and administrative expenses for the ninethree months ended June 30,December 31, 2009 totaled $35.0$12.4 million, a $1.0$0.3 million deincrease from $36.0$12.1 million reported in the same period last year.  The overall reductionDuring the quarter, the Company incurred $1.3 million of non-cash stock-based compensation expense from the forfeiture of stock options.  Also, the Company incurred legal expense of approximately $4.2 million related to patent litigation and other corporate legal charges.  Last year, SG&A expenses wasincluded $0.8 million of additional provision for bad debt in the Photovoltaics segment, primarily duerelated to receivables from the implementationsale of a seriesterrestrial solar power products, $0.6 million related to severance and restructuring charges, and $0.6 million of measures intended to realign our cost structure with lower revenues including several reductions in workforce, the furloughing of employees, salary reductions, the elimination of executivepatent litigation and employee merit increases, and the reduction or elimination of certain discretionary expenses.other corporate-related legal expense.  As a percentage of revenue, nine month SG&A expenses were 25.8%29.3%, an increase from 20.2%22.5% in the same period last year.

Nine month researchResearch and development expenses for the three months ended December 31, 2009 totaled $20.7$7.5 million, a decrease of $7.4$0.6 million, or 27%7%, from $28.1$8.1 million reported in the same period last year.  Throughout fiscal 2009, the Company has sequentially lowered its R&D expenses each quarter.  As part of the Company’s ongoing effort to reduce expenses, many long-term projects have been placed on hold in order to focus on research and product development efforts on projects that we expect to generate returns within one year.  As a percentage of revenue, nine month R&D expenses were 15.2%17.7%, a decreasean increase from 15.7%15.0% in the same period last year.


Impairment:Impairments:
As disclosed in the first fiscal quarter of 2009,last year, the Company performed its annual goodwill impairment test atas of December 31, 2008 and, based on that analysis, determined that goodwill related to its Fiber Optics segment was fully impaired.  As a result, the Company recorded a non-cash impairment charge of $31.8 million in the first quarter of fiscal 2009 and the Company’s balance sheet no longer reflects any goodwill associated with its Fiber Optics segment.   During the first fiscal quarter of 2009, the Company also recorded a $2.0$1.9 million non-cash impairment charge related to certain intangible assets acquired from Intel Corporation that were subsequently abandoned.

During
Consolidated operating expenses for the three months ended June 30,December 31, 2009 the Company performed an evaluationtotaled $19.9 million, a decrease 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 nine month operating expenses totaled $116.5 million, an increase of $52.3$34.1 million from $64.2$54.0 million reported in the same period last year.year, with the variance primarily due to the impairment charge discussed above.

Operating and Net Loss:loss:
The nine monthFor the three months ended December 31, 2009, the consolidated operating loss was $124.3$11.9 million, an increasea decrease of $90.5$40.5 million from an operating loss of $33.8$52.4 million reported in the same period last year.

Non-operating expenses recognized inyear, with the nine monthsvariance primarily due to the impairment charge discussed above.   This represents the Company’s best operating performance since the quarter ended June 30, 2008.


Loss from financing derivative instrument.
On October 1, 2009, included $0.6 millionthe Company entered into an equity line of net expense related to foreign currency exchange losses associatedcredit arrangement that met all the criteria of a financial derivative instrument in accordance with the Company’s international operationsaccounting literature in ASC 815, Derivatives and $3.1Hedging.  Costs incurred to enter into this derivative instrument were expensed as incurred.  During the three months ended December 31, 2009, the Company expensed the fair value of the common stock and warrants issued of approximately $1.4 million as a non-operating expense from a financing derivative instrument.  In the Notes to the Condensed Consolidated Financial Statements, see Footnote 4 for a description of incomethe terms and details related to the salefinancial impact of the Company’s investment in Entech Solar, Inc. (formerly named WorldWater and Solar Technologies Corporation). 

The nine month consolidated net loss was $122.5 million, an increase of $82.9 million from $39.6 million reported in the same period last year.

The nine month net loss per share was $1.56, an increase of $0.94 per share, from a net loss of $0.62 per share reported in the same period last year.




Other Income & Expensesequity facility.

Impairment of investment.
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 $0.1million due to the conversion tofrom Korean Won to U.S. dollars.

Loss from Conversion of Subordinated Notes.  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 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 per share, 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 (the “Incentive Payment”), 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 related to the Incentive Payment and $1.2 million related to the accelerated write-off of capitalized finance charges associated with the convertible notes.

Stock-based expense from tolled 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.

Gain from sale of investment.

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. (formerly named WorldWater and Solar Technologies Corporation).  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 with 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.

Foreign exchange.
The Company recognizes gains and losses on foreign currency exchange primarily due to the Company’s operations in Spain, the Netherlands and China.

Net Loss:
For the three months ended December 31, 2009, the consolidated net loss was $13.6 million, a decrease of $39.8 million from $53.4 million reported in the same period last year, with the variance primarily due to the impairment charge discussed above.   The net loss per share for the three months ended December 31, 2009 was $0.17, a decrease of $0.52 per share, from a net loss of $0.69 per share reported in the same period last year.



Balance Sheet Highlights:

-  As of June 30, 2009, cash, cash equivalents, and restricted cash totaled approximately $9.9 million and working capital totaled $45.3 million.
-  During the third quarter, the Photovoltaics segment generated positive cash flow from operations and positive free cash flow, net of capital expenditures.
-  Over the last two quarters, the Company generated $15.9 million from the reduction in inventory levels and $15.4 million from the collection of accounts receivable while, at the same time, lowering its accounts payable obligations by $23.6 million.
-  Over the last two quarters, the Company has reduced the amount of debt outstanding under its line of credit with Bank of America by $10.5 million, to $5.0 million at the end of the third quarter, and is in full compliance with its bank financial covenants.

Liquidity and Capital Resources

As of December 31, 2009, cash, cash equivalents, available-for-sale securities and current restricted cash totaled approximately $16.5 million.

The Company incurred a net loss of $122.5$13.6 million for the ninethree 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.December 31, 2009.  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 hasexperienced year-over-year revenue growth in most years, in fiscal 2009, the Company had 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 ninethree months ended June 30,December 31, 2009, itthe Company consumed cash from operations of approximately $30.5$1.2 million and, over the last three quarters, has only consumed $0.2 million in cash from operations.operations due primarily to improved working capital management.

These matters raise substantial doubt aboutWe believe that our existing balances of cash, cash equivalents, and available-for-sale securities, together with the Company’s abilitycash expected 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 continuebe generated from operations, amounts expected to impose formidable challenges for the Company’s businesses in the near term. Recently, the Company amended the terms of its asset-backedbe available under our 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 reductionequity line of certain discretionary expenses.

With respectcredit agreement with Commerce Court will provide us with sufficient financial resources to measures taken to generatemeet our cash the Company sold its minority ownership positions in Entech Solar, Inc.requirements for operations, working capital, and Lightron Corporation earlier in the fiscal year.  The Company has also significantly lowered its quarterly capital expenditures and improvedfor 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.next 12 months.

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


Conclusion

These initiatives are intended to conserveunfavorable market or generate cash in response to the deterioration in the global economy so thateconomic developments, 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 seekhave to raise additional cash through equity financing, additional debt, asset salesfunds by any one or a combination thereof.  Due to the unpredictable nature of the capital markets,following: issuing equity, debt or convertible debt, or selling certain product lines and/or portions of our business. There can be no guarantee that we will be able to raise additional funding may not be available when needed, orfunds on terms acceptable to us.us, or at all. A significant contraction in the capital markets, particularly in the technology sector, may make it difficult for us to raise additional capital if or when it is required, especially if we experience disappointing operating results.  If adequate funds arecapital is not available to us as required, or is not available on acceptablefavorable 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 and results of operations and cash flow.may be adversely affected.



Cash Flow

Cash Used for Operations

For the ninethree months ended June 30,December 31, 2009, net cash used by operating activities totaled approximately $30.5$1.2 million, which represents a decrease of $5.4$19.9 million from $35.9$21.1 million in cash used by operating activities for the ninethree months ended June 30,December 31, 2008.

For the ninethree months ended June 30,December 31, 2009, the $30.5$1.2 million cash usage was primarily due to the Company’s net loss of $122.5$13.6 million andoffset by a net increasedecrease in certain components of working capital of approximately $10.7 million.capital.  The net increasedecrease in certain components of working capital was primarily due to a $30.5$3.7 million increase in accounts payable, and a $5.8 million increase in accrued expenses and other liabilities offset by a $13.5 million decrease in accounts receivable, a $10.2$3.1 million decrease in inventory, and a $2.6$0.2 million decrease in prepaidother assets offset by a $1.0 million increase in accounts receivable and a decrease of $1.0 million in accrued expenses and other current assets. Non-cashliabilities.  Significant non-cash adjustments used to reconcile net loss to net cash used in operating activities included $60.8$3.2 million in impairment of goodwill and intangible assets, $12.9related to stock-based compensation expense, $3.1 million related to depreciation and amortization expense, $14.9 million related to inventory reserve adjustments, $5.0 million related to stock-based compensation expense, $4.8 million related to an increase in the provision for doubtful accounts, $6.5 related to a provision for losses on firm inventory commitments, and $3.1$1.4 million related to a gain on the sale of investments.loss from a financing derivative instrument.

For the ninethree months ended June 30,December 31, 2008, the $35.9$21.1 million cash usage was primarily due to the Company’s net loss of $39.6$53.4 million and a net increase in certain components of working capital of approximately $16.2$13.7 million.  The net increase in certain components of working capital was primarily due to a $30.1$6.8 million decrease in accounts payable, a $4.3 million increase in inventory, a $1.9 million increase in accounts receivable, and a $6.0$0.8 million decrease in accrued expenses and other current liabilities, and a $1.7 million increase in prepaid expenses and other current assets offset by a $14.0 million increase in accounts payable and a $8.1 million decrease in inventory.  Non-cashliabilities.  Significant non-cash adjustments used to reconcile net loss to net cash used in operating activities included $8.7$33.8 million in impairment of goodwill within the Fiber Optics segment, $4.4 million related to stock-based compensation expense, $9.0an increase in inventory provisions, $4.3 million related to depreciation and amortization expense, $1.6$2.1 related to stock-based compensation expense, and $0.9 million related to compensatory stock issuances, $1.2 million related to a loss from convertible subordinated notes, and a $3.7 million related to a gain onan increase in the sale of an investment.provision for doubtful accounts.



 
 
 

Net Cash Used forProvided by Investing Activities
 
For the ninethree months ended June 30,December 31, 2009, net cash provided by investing activities totaled $14.4$1.3 million, which represents an increase of $74.0$0.2 million from $59.6$1.1 million in cash used forprovided by investing activities for the ninethree months ended June 30,December 31, 2008.

For the ninethree months ended June 30,December 31, 2009, the $14.4$1.3 million in net cash provided by investing activities was primarily due to $11.0 million received from the salerelease of restricted cash of $1.5 million offset by $0.2 million in capital expenditures and patent investments.

For the Company’s investmentthree months ended December 31, 2008, the $1.1 million in Entech Solar, Inc., $2.7net cash provided by investing activities was primarily due to $1.7 million received from the sale of available-for-sale securities and $1.9 million of proceeds from restricted cash offset by $1.2$0.6 million in capital expenditures.

For the nine months ended June 30, 2008, the $59.6 million in net cash usage from investing activities was primarily due to $75.8 million paid to Intel Corporation for the purchase of certain fiber optics-related assets, $15.0 million in capital expenditures and $7.0 million for the purchase of available-for-sale securities offset by $32.8 million received from the sale of available-for-sale securities, $6.5 million received from the sale of unconsolidated affiliates and $1.2 million received from an insurance recovery.


Net Cash Provided by Financing Activities

For the ninethree months ended June 30,December 31, 2009, net cash provided by financing activities totaled $6.8$0.9 million, which represents a decrease of $94.6$16.1 million from $101.4$17.0 million in cash provided by financing activities for the ninethree months ended June 30,December 31, 2008.

For the ninethree months ended June 30,December 31, 2009, the $6.8$0.9 million in net cash provided by financing activities consisted of $88.8$0.3 million in net borrowings under the Company’s credit facility with Bank of America and $0.5 million in proceeds from the Company’s employee stock purchase plan.

For the three months ended December 31, 2008, the $17.0 million in net cash provided by financing activities consisted of $15.4 million in net borrowings under the Company’s credit facility with Bank of America, $0.9 million in other borrowingsnet borrowing with UBS, and $0.9 in proceeds from the Company’s employee stock purchase plan offset by $83.8$0.6 million in repayment of borrowings under the Company’s credit facility with Bank of America.

For the nine months ended June 30, 2008, the $101.4 million in net cash provided by financing activities consisted of $93.7 million received from the sale of common stock and warrants, $7.0 million received from the exercise of employee stock options and $0.7 in proceeds from the Company’s employee stock purchase plan.



Contractual Obligations and Commitments

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

(in thousands)     For the Fiscal Years Ended September 30, 
   Total  2010  
 
2011 to 2012
  2013 to 2014  
 
2015
and later
 
                 
Operating lease obligations
 
$
7,904
 
$
1,444
 
$
2,886
 
$
875
 
$
2,699
 
Line of credit
  
10,678
  
10,678
  
-
  
-
  
-
 
Short-term debt
  
843
  
843
  
-
  
-
  
-
 
Purchase obligations
  
23,480
  
23,420
  
60
  
-
  
-
 
 
Total contractual obligations
and  commitments
 
$
42,905
 
$
36,385
 
$
2,946
 
$
875
 
$
2,699
 
      Fiscal Years 
As of June 30, 2009
(in thousands)
 
  Total  2009  
 
 
2010 to 2011
  
 
2012 to 2013
  
 
 
2014
and later
 
                 
Operating lease obligations
 
$
8,916
 
$
506
 
$
3,772
 
$
1,864
 
$
2,774
 
Line of credit
  
4,984
  
4,984
  
-
  
-
  
-
 
Short-term debt
  
889
  
-
  
889
  
-
  
-
 
Purchase obligations
  
32,671
  
27,524
  
142
  
5,005
  
-
 
 
Total contractual obligations and  commitments
 
$
47,460
 
$
33,014
 
$
4,803
 
$
6,869
 
$
2,774
 


Interest expense is not included in the contractual obligations and commitments table above since it is insignificant to the Company’s financial statements.


Operating leases

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


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.


Line of creditCredit

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,December 31, 2009, the Company had a $5.0$10.7 million prime rate loan outstanding, with an interest rate of 8.25%, and approximately $2.8$2.9 million in outstanding standby letters of credit under this credit facility.

The facility is also subject to certain financial covenants which management believescovenants.  On February 8, 2010, the Company isand Bank of America entered into a Sixth Amendment to the Company’s revolving asset-backed credit facility, which (a) permits the Company to enter into foreign exchange hedging transactions pursuant to a separate facility with the bank, provided that available amounts under such facility shall be deducted from the maximum revolving loan limit under this facility; and (b) resets the EDITDA financial covenant for the first quarter of fiscal 2010 to place the Company 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.that covenant.


Short-term debtDebt

In December 2008, the Company borrowed $0.9 million from UBS Securities that is collateralized with $1.4 million of auction rate preferred 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 Securities which is expected to occur by June 2010 at 100% par value.


Letters of credit

As of June 30,December 31, 2009, the Company had eleven8 standby letters of credit issued and outstanding which totaled approximately $3.3$3.1 million, of which $2.8$2.9 million was issued against the Company’s credit facility with Bank of America and the remaining $0.5$0.2 million in standby letters of credit are collateralized with other financial institutions and are listed on the Company’s balance sheet as restricted cash.



Other

In February 2010, the Company’s 2000 Stock Option Plan is scheduled to expire.  Management is currently developing a new 10-year equity compensation plan, which may include both stock options and other forms of equity compensation.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Segment Data and Related Information

In the Notes to the Condensed Consolidated Financial Statements, see Footnote 15 for disclosures related to business segment revenue, geographic revenue, significant customers, and operating loss by business segment.


Recent Accounting Pronouncements

In the Notes to the Condensed Consolidated Financial Statements, see Footnote 2 for disclosures related to recent accounting pronouncements.



ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk

We are exposed to financial market risks, including changes in currency exchange rates and interest rates.  We do not use derivative financial instruments for speculative purposes.

Currency Exchange Rates. The United States dollar is the functional currency for the Company’s consolidated financials. The functional currency of the Company’s Spanish subsidiary is the Euro and for the China subsidiary it is the Yuan Renminbi. The financial statements of these entities are translated to United States dollars using period end rates for assets and liabilities, and the weighted average rate for the period for all revenue and expenses. During the normal course of business, the Company is exposed to market risks associated with fluctuations in foreign currency exchange rates, primarily the Euro. To reduce the impact of these risks on the Company’s earnings and to increase the predictability of cash flows, the Company uses natural offsets in receipts and disbursements within the applicable currency as the primary means of reducing the risk. Some of our foreign suppliers may adjust their prices (in $US) from time to time to reflect currency exchange fluctuations, and such price changes could impact our future financial condition or results of operations.  The Company does not currently hedge its foreign currency exposure.

Interest Rates. We maintain an investment portfolio in a variety of high-grade, short-term debtexposure and money market instruments that includes auction-rate securities. As a result, our future investment income may be less than expected because of changes in interest rates, or we may suffer losses in principal if forced to sell securities that have experienced a decline in market value because of changes in interest rates.  The Company does not currently hedge its interest rate exposure.believe that fluctuations of currency exchange rates will have a material impact to the Company’s financial statements.




Credit Market Conditions

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




ITEM 4. CONTROLS AND PROCEDURES
ITEM 4.Controls and Procedures
 

Evaluation of Disclosure Controls and Procedures
 

The Company maintains disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 (the “Act”) is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to management, including its Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Accounting Officer), as appropriate, to allow timely decisions regarding required disclosure.
 
Management, under the supervision and with the participation of its Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Accounting Officer), evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Act), as of the end of the period covered by this report. Based on that evaluation, management concluded that, as of that date, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

Attached as exhibits to this Quarterly Report on Form 10-Q are certifications of the Company’s Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), which are required in accordance with Rule 13a-14 of the Act. This Disclosure Controls and Procedures section includes information concerning management’s evaluation of disclosure controls and procedures referred to in those certifications and, as such, should be read in conjunction with the certifications of the Company’s Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer).


Changes in Internal Control over Financial Reporting
 

There were no changes in the Company’s internal control over financial reporting during the three months ended June 30,December 31, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 
Limitations on the Effectiveness of Controls
 
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.  Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.  The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.




 
 
 

PART II.                      OTHER INFORMATION

ITEM 1.                      LEGAL PROCEEDINGSLegal 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,In the past, 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.

In October 2009 the consolidated matters were tried before a jury, which found that all patents asserted against Optium were valid, that all claims asserted were infringed, and that such infringement by Optium was willful where willfulness was asserted.  The jury awarded EMCORE and JDSU monetary damages totaling approximately $3.4 million.

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 CompanyCompany.

On December 5, 2008, EMCOREthe Company 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.  This matter was tried before an administrative law judge of the International Trade Commission from November 16-20, 2009, and final briefings have been completed but no decision has yet been rendered.

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.)) (the “Mueller Class Action”) 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 theSelection of a lead plaintiff for these class actionsin this matter is currently pending before the Court.

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 Prissert 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 inand 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 bebeen consolidated before a single judge.judge in Somerset County, New Jersey, and have been stayed pending the Prissert and Mueller Class Actions.

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



d) Securities Matters

§-  SEC Communications.  On or about August 15, 2008, the Company received a letter from the Denver office of the Enforcement Division of the Securities and Exchange Commission wherein it sought EMCORE'sthe Company's voluntary production of documents relating to, among other things, the Company's business relationship with Green and Gold Energy, Inc., its licensees, and the Photovoltaics segment backlog the Company reported to the public.  Since that time, the Company has provided documents to the staff of the SEC and met with the staff on December 12, 2008 to address this matter.  On June 10, 2009, the SEC staff requested that the Company voluntarily provide documentary backup for certain information presented at the December 2008 meeting, which was provided on July 17, 2009, and arrange for a telephone interview with one former employee, which has not yet been scheduled.completed.  On August 24, 2009, in a telephone call with the Company’s counsel, the staff posed certain questions relating to the material provided on July 17, 2009, which were answered via the production of additional information and documentation on October 9, 2009.

§-  NASDAQ Communication.  On or about November 13, 2008, the Company received a letter from the NASDAQ Listings Qualifications group (“NASDAQ”) concerning the Company's removal of $79 million in backlog attributable to GGE which the Company announced on August 8, 2008 and the remaining backlog exclusive of GGE. The Company advised NASDAQ that it would cooperate with its inquiry.  To date, the Company has received three additional requests for information from NASDAQ (the latter 2 of which requested updates on the SEC matter).  The Company has complied with each of NASDAQ’s requests.  In early November 2009 the NASDAQ orally requested to be advised of developments in the SEC matter.



As of December 31, 2009 and the filing date of this Quarterly Report on Form 10-Q, no amounts have been accrued for any litigation item discussed above since no estimate of loss can be made at this time.



ITEM 1A.                      RISK FACTORSRisk Factors

In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2008,2009, which could materially affect our business, financial condition or future results.  The risks described in our Annual Report on Form 10-K are not the only risks facing our Company.  Additional risks and uncertainties not currently known to us also may materially adversely affect our business, financial condition and/or operating results.


Our agreement for the sale of a majority of our fiber optics assets and the creation of a joint venture in China is subject to the satisfaction of material conditions.  A failure of the transaction to close would likely have material adverse effect on the Company.

Our agreement with TCIC for the sale of a majority interest in our telecom, enterprise, CATV, FTTP and video transport product lines is subject to the approval of our and TCIC’s boards of directors, which means that, until these approvals are obtained, the agreement would not be enforceable by either party against the other.  In addition, the closing of the transaction is subject to the satisfaction of material conditions, including regulatory and government approvals in the U.S. and China.  In the event these conditions are not satisfied, we may be unable to consummate the transaction, and, if U.S. regulatory approvals are not obtained, the Company will be liable for the payment of a $2,775,000 termination fee to TCIC.

The Company has also agreed to relocate its China CPV manufacturing and operations base to the Caofeidian Industry Zone.  It is uncertain whether this operation can be successfully relocated, and failure to successfully do so may have an adverse impact on these operations as well as other aspects of the Company’s CPV business, which may be dependent on these operations.

A failure to close the joint venture transaction for any reason may have a material adverse effect on the Company.  Our relationships or credibility with customers could suffer if transition arrangements for the joint venture transactions are planned but not implemented due to a failure to close.  In addition, we would not realize the expected benefits under the terms of the joint venture arrangement, and, because we are restricted by the stock purchase agreement from conducting the business of the joint venture assets in ways other than the ordinary course during the pendency of the closing, we would not have had the opportunity to pursue other strategic transactions involving those assets.


If the joint venture transaction is consummated, the successful implementation of the joint venture will be subject to additional risks and uncertainties that may have an adverse material effect on the joint venture’s performance.  If the joint venture is not successful, the Company may suffer losses under its obligation to provide debt financing to the joint venture.

If the transaction is closed, the implementation of the joint venture transaction will also be subject to additional risks and uncertainties.  The assets included in the transaction will need to be transitioned to the joint venture, and in some cases will be relocated geographically to the Caofeidian Industry Zone in China, which may lead to unexpected cost and could result in business interruptions or other adverse consequences to the business.  A failure by the joint venture to retain key employees may also have an adverse material effect on the business and performance of the joint venture.  Because we will share ownership and management of the joint venture, the management of these risks will not be entirely within our control.

In addition, the Company has agreed to make $3.0 million in additional debt financing available to the joint venture following the closing, and to pledge 50% of its interest in the joint venture as collateral for the $27.0 million in working capital loans to the joint venture to be arranged by TCIC   The Company will likely suffer losses of these amounts if the joint venture is unable to repay its debts.





ITEM 2.                        UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSUnregistered Sales of Equity Securities and Use of Proceeds

 (a)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.  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, on April 20, 2009, the Company issued 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.

(b)  Not Applicable

(b) Not Applicable
(c) Not Applicable



ITEM 3.                      DEFAULTS UPON SENIOR SECURITIESDefaults upon Senior Securities

Not Applicable




ITEM 4.                      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company held its 2009 Annual MeetingSubmission of Shareholders on April 30, 2009.Matters to a Vote of Security Holders

§  The Company’s shareholders reelected Mr. John Gillen to the Board of Directors for a term of three years (expiring in 2012). The total shares voted for the election of Mr. Gillen was 52,060,308 and the total shares withheld totaled 4,288,285.

§  The Company’s shareholders ratified the appointment of Deloitte & Touche LLP as the independent registered public accounting firm of the Company as follows:

For:                         55,157,675 shares
Against:                 958,617 shares
Abstain:                 232,301 shares

§  The Company’s shareholders approved an increase in the number of shares reserved for issuance under the Company’s 2000 Employee Stock Purchase Plan

For:                         31,991,930 shares
Against:                 1,232,162 shares
Abstain:                 141,037 shares

Broker non-votes totaled 22,983,464 shares.

§  The Company’s shareholders approved an increase in the number of shares reserved for issuance under the Company’s 2000 Stock Option Plan

For:                         28,263,264 shares
Against:                 4,954,685 shares
Abstain:                 147,179 shares

Broker non-votes totaled 22,983,465 shares.No matters were submitted to a vote of security holders during the three months ended December 31, 2009.



ITEM 5.                      OTHER INFORMATIONOther Information


Tangshan Agreements

On April 30, 2009,February 3, 2010, the Company entered into an amendmenta share purchase agreement to create a joint venture with BankTangshan Caofeidian Investment Corporation (“TCIC”), a Chinese investment company located in the Caofeidian Industry Zone, Tangshan City, Hebei Province of America that provided a waiver of events of default through March 31, 2009.  This amendment was included as an exhibit to a Current Report on Form 8-K that was filed with the SEC on May 6, 2009.China.

The agreement provides for TCIC to purchase a sixty percent (60%) interest in the Company’s Fiber Optics business (excluding its satellite communications and specialty photonics fiber optics product lines), which will be operated as a joint venture once the transaction is closed.  The Fiber Optics businesses included in this transaction are the Company’s telecom, enterprise, cable television (CATV), fiber-to-the-premises (FTTP), and video transport product lines. The Company will retain the satellite communications and specialty photonics fiber optics product lines as well as the satellite and terrestrial solar businesses.

The new joint venture entity will be named EMCORE Fiber Optics, Limited (“EFO”), and will be a newly formed corporation organized in Hong Kong. The agreement provides for TCIC to pay the Company $27.75 million in cash, subject to adjustment based on the net asset value of the business as of the closing date, and also to provide $27 million of additional debt financing to EFO subsequent to the closing, with $18 million to be funded within 90 days of closing and $9 million to be funded within 90 days of the first anniversary of the closing.  The Company will be providing 50% of its equity interest in EFO as collateral for this indebtedness.  In addition, the agreement provides for the Company to provide $3 million of additional debt financing to EFO after the closing, with $2 million to be funded within 5 business days of the closing and $1 million to be funded within 90 days of the first anniversary of the closing.

The agreement is subject to the approval of both the Company’s board of directors and the board of directors of TCIC, and the closing of the transaction is subject to material conditions, including regulatory and governmental approvals in the U.S. and China.  If US regulatory approvals are not obtained, the Company will be obligated to pay a termination fee of $2,775,000 to TCIC.

The parties also executed a Shareholders Agreement to provide for operation of EFO following closing.  The terms of the Shareholders Agreement provide that TCIC shall have the right to elect three of EFO’s five directors of EFO, as well as to designate the Chairman of the Board and the Chief Financial Officer.  The Company will have the right to elect the remaining two directors and to nominate the Chief Executive Officer.  The Company also has the right to approve certain key corporate matters (including modifications of EFO’s governing documents, changes in equity and corporate structure, mergers, acquisitions and dispositions, the incurring of indebtedness, and the annual business plan and budget) through supermajority voting requirements on the Board (subject to certain deadlock provisions).  The Shareholders’ Agreement also imposes certain restrictions on the parties’ abilities to transfer their interest in EFO.

It is expected that the Company’s Executive Chairman and Chairman of the Board, Mr. Reuben F. Richards, Jr. will resign his position as the Company’s Executive Chairman effective as of the closing of the transaction to assume the role of CEO for EFO.  In addition, the agreement provides for certain other Company senior executives and the employees currently working for the transferred product lines to be offered positions with EFO. The agreement further contemplates that the Company’s President and CEO, Dr. Hong Q. Hou, will also serve as a director of EFO, providing strategic and operational oversight to the joint venture.


 
 
 

Tangshan Caofeidian Investment Corporation has nominated Dr. Yi Li as Chairman of the Board for EFO and TCIC will name a CFO to EFO subsequent to the closing.

Over the next several years, the joint venture is expected to focus on developing a high volume, low cost manufacturing infrastructure and a local customer support organization to better serve the expanding customer base in China and worldwide. TCIC has committed to providing additional funding support for the JV's future strategic growth through acquisitions.

In conjunction with the establishment of the joint venture, the Company and TCIC also entered into a supplemental agreement pursuant to which the Company agreed to establish its China terrestrial concentrator photovoltaics (CPV) manufacturing and operations base in the Caofeidian Industry Zone. The agreement includes a commitment by TCIC to provide the Company with the equivalent of $3.3 million in RMB denominated loans, tax and rent incentives and assistance in developing the Company’s solar power business in China.

Line of Credit
On February 8, 2010, the Company and Bank of America entered into a Sixth Amendment to the Company’s revolving asset-backed credit facility,  which (a) permits the Company to enter into foreign exchange hedging transactions pursuant to a separate facility with the bank, provided that available amounts under such facility shall be deducted from the maximum revolving loan limit under this facility; and (b) resets the EDITDA financial covenant for the first quarter of fiscal 2010 to place the Company in compliance with that covenant.


ITEM 6.                       EXHIBITSExhibits
 

Exhibit No. Number
Description
10.1*Share Purchase Agreement, dated February 3, 2010, by and among Tangshan Caofeidian Investment Corporation and EMCORE Corporation.
  
10.110.2*
Shareholders Agreement, dated February 3, 2010, by and among Tangshan Caofeidian Investment Corporation and EMCORE Corporation 2000 Stock Option Plan, as amended and restated on April 30, 2009 (incorporated by reference to Exhibit 10.1 to Company’s Current Report on Form 8-K filed on May 6, 2009).
Corporation.
10.2
EMCORE Corporation 2000 Employee Stock Purchase Plan, as amended and restated on April 30, 2009 (incorporated by reference to Exhibit 10.2 to Company’s Current Report on Form 8-K filed on May 6, 2009).
10.310.3*
ThirdSupplemental Agreement, dated February 3, 2010, by and among Tangshan Caofeidian Investment Corporation and EMCORE Corporation.
10.4*Sixth Amendment to the Loan and Security Agreement with Bank of America, N.A., dated April 30, 2009 (incorporated by reference to Exhibit 10.3 to Company’s Current Report on Form 8-K filed on May 6, 2009).
February 8, 2010.
10.4 *
Fourth Amendment to the Loan and Security Agreement with Bank of America, N.A., dated May 8, 2009
31.1*
Certification byCertificate of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuantPursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
2002, dated February 9, 2010.
31.2*
Certification byCertificate of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuantPursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
2002, dated February 9, 2010.
32.1*
Certification byCertificate of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuantPursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
2002, dated February 9, 2010.
32.2*Certification byCertificate of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuantPursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 2002, dated February 9, 2010.
__________
_________
*    Filed herewith


 
 
 



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 EMCORE CORPORATION
  
Date:  August 17, 2009February 9, 2010
By: /s/ Hong Q. Hou
        Hong Q. Hou, Ph.D.
 
 
       Chief Executive Officer
       (Principal Executive Officer) 
  
  
Date:   August 17, 2009February 9, 2010
By: /s/ John M, Markovich
        John M. Markovich
 
 
       Chief Financial Officer
       (Principal Financial and Accounting Officer)