UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended:  March 31, 2006
 
Commission File Number:  0-22175
 

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

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

22-2746503
(IRS Employer Identification No.)

145 Belmont Drive, Somerset, NJ  08873
(Address of principal executive offices)

(732) 271-9090
(Registrant's telephone number)

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

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

The number of shares outstanding of the registrant’s no par value common stock as of May 5, 2006 was 50,397,418.
 

 
TABLE OF CONTENTS
 
PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
ITEM 4. CONTROLS AND PROCEDURES.
 
PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
ITEM 5. OTHER INFORMATION.
ITEM 6. EXHIBITS.
 
SIGNATURES
 
EXHIBIT INDEX
 

 
PART I.  FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS.
 
EMCORE CORPORATION
Condensed Consolidated Statements of Operations
For the three and six months ended March 31, 2006 and 2005
(in thousands, except per share data)
(unaudited)
 
   
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
     
2006
   
2005
   
2006
   
2005
 
 
                   
Revenue
 
$
41,162
 
$
30,430
 
$
81,053
 
$
57,394
 
Cost of revenue
   
32,473
   
24,901
   
65,528
   
49,790
 
Gross profit
   
8,689
   
5,529
   
15,525
   
7,604
 
 
                         
Operating expenses:
                         
Selling, general and administrative
   
11,001
   
5,127
   
18,264
   
10,687
 
Research and development
   
4,964
   
4,069
   
9,398
   
9,128
 
Total operating expenses
   
15,965
   
9,196
   
27,662
   
19,815
 
Operating loss
   
(7,276
)
 
(3,667
)
 
(12,137
)
 
(12,211
)
 
                         
Other (income) expenses:
                         
Interest income
   
(246
)
 
(249
)
 
(576
)
 
(482
)
Interest expense
   
1,359
   
1,202
   
2,656
   
2,404
 
Loss from convertible subordinated notes exchange offer
   
-
   
-
   
1,078
   
-
 
Equity in net loss of Velox investment
   
150
   
-
   
332
   
-
 
Equity in net loss (income) of GELcore investment
   
397
   
297
   
(150
)
 
(75
)
Total other expenses
   
1,660
   
1,250
   
3,340
   
1,847
 
Loss from continuing operations
   
(8,936
)
 
(4,917
)
 
(15,477
)
 
(14,058
)
 
                         
Discontinued operations:
                         
Gain on disposal of discontinued operations
   
2,012
   
12,476
   
2,012
   
12,476
 
Income from discontinued operations
   
2,012
   
12,476
   
2,012
   
12,476
 
 
                         
Net (loss) income
 
$
(6,924
)
$
7,559
 
$
(13,465
)
$
(1,582
)
 
                         
Per share data:
                         
Basic and diluted per share data:
                         
Loss from continuing operations
 
$
(0.18
)
$
(0.10
)
$
(0.32
)
$
(0.30
)
Income from discontinued operations
   
0.04
   
0.26
   
0.04
   
0.27
 
 
                         
Net (loss) income
 
$
(0.14
)
$
0.16
 
$
(0.28
)
$
(0.03
)
 
                         
Weighted average number of shares outstanding
used in basic and diluted per share calculations
   
49,410
   
47,265
   
48,789
   
47,128
 
                           
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 

 
EMCORE CORPORATION
Condensed Consolidated Balance Sheets
As of March 31, 2006 and September 30, 2005
(in thousands)
(unaudited)

 
   
As of
March 31,
2006
   
As of
September 30,
2005
 
ASSETS
             
Current assets:
             
Cash and cash equivalents
 
$
23,048
 
$
19,525
 
Restricted cash
   
698
   
547
 
Marketable securities
   
10,150
   
20,650
 
Accounts receivable, net
   
24,707
   
22,633
 
Receivables, related parties
   
276
   
4,197
 
Inventory, net
   
22,166
   
18,348
 
Prepaid expenses and other current assets
   
3,145
   
3,638
 
Total current assets
   
84,190
   
89,538
 
 
             
Property, plant and equipment, net
   
57,378
   
56,957
 
Goodwill
   
40,424
   
34,643
 
Intangible assets, net
   
7,741
   
5,347
 
Investments in unconsolidated affiliates
   
12,517
   
12,698
 
Receivables, related parties
   
169
   
169
 
Other assets, net
   
5,364
   
6,935
 
 
           
Total assets
 
$
207,783
 
$
206,287
 
 
           
LIABILITIES and SHAREHOLDERS’ EQUITY
           
Current liabilities:
           
Accounts payable
 
$
16,492
 
$
15,587
 
Accrued expenses and other current liabilities
   
17,333
   
19,078
 
Notes payable, current portion
   
407
   
-
 
Convertible subordinated notes, current portion
   
1,350
   
1,350
 
Total current liabilities
   
35,582
   
36,015
 
 
             
Notes payable, long-term
   
394
   
-
 
Convertible subordinated notes, long-term
   
95,846
   
94,709
 
Total liabilities
   
131,822
   
130,724
 
 
           
Commitments and contingencies
             
 
           
Shareholders’ equity:
           
Preferred stock, $0.0001 par, 5,882 shares authorized, no shares outstanding
   
-
   
-
 
Common stock, no par value, 100,000 shares authorized,
50,453 shares issued and 50,294 shares outstanding at March 31, 2006;
48,023 shares issued and 48,003 shares outstanding at September 30, 2005
   
407,480
   
392,466
 
Accumulated deficit
   
(329,436
)
 
(315,971
)
Treasury stock, at cost
159 shares at March 31, 2006; 20 shares at September 30, 2005
   
(2,083
)
 
(932
)
Total shareholders’ equity
   
75,961
   
75,563
 
 
             
Total liabilities and shareholders’ equity
 
$
207,783
 
$
206,287
 
               
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 

 
EMCORE CORPORATION
Condensed Consolidated Statements of Cash Flows
For the six months ended March 31, 2006 and 2005
(in thousands)
(unaudited)
 
 
 
Six Months Ended March 31, 
 
   
2006
   
2005
 
               
Cash flows from operating activities:
             
Net loss
 
$
(13,465
)
$
(1,582
)
Adjustments to reconcile net loss to net cash used for operating activities:
             
Gain on disposal of discontinued operations
   
(2,012
)
 
(12,476
)
Stock-based compensation expense
   
2,063
   
-
 
Depreciation and amortization expense
   
6,810
   
7,275
 
Accretion of loss from convertible subordinated notes exchange offer
   
67
   
-
 
Loss on convertible subordinated notes exchange offer
   
1,078
   
-
 
Provision for doubtful accounts
   
3
   
(170
)
Equity in net loss (income) of equity method investments
   
182
   
(75
)
Compensatory stock issuances
   
369
   
361
 
Forgiveness of shareholders’ notes receivable
   
2,613
   
34
 
Reduction of note receivable due for services received
   
260
   
260
 
Total non-cash adjustments
   
11,433
   
(4,791
)
Changes in operating assets and liabilities:
             
Accounts receivable
   
(1,401
)
 
(3,961
)
Receivables, related parties
   
157
   
(67
)
Inventory
   
(3,157
)
 
(1,560
)
Prepaid expenses and other current assets
   
532
   
135
 
Other assets
   
(461
)
 
(204
)
Accounts payable
   
(210
)
 
(2,406
)
Accrued expenses and other current liabilities
   
(4,177
)
 
(1,711
)
Total change in operating assets and liabilities
   
(8,717
)
 
(9,774
)
Net cash used for operating activities
   
(10,749
)
 
(16,147
)
 
             
Cash flows from investing activities:
             
Purchase of plant and equipment
   
(2,755
)
 
(2,442
)
Proceeds from (investment in) K2 Optronics
   
500
   
(1,000
)
Cash purchase of businesses, net of cash acquired
   
610
   
(1,283
)
Purchase of marketable securities
   
(350
)
 
(8,325
)
Funding of restricted cash
   
(98
)
 
-
 
Sale of marketable securities
   
10,850
   
20,025
 
Net cash provided by investing activities
   
8,757
   
20,172
 
 
             
Cash flows from financing activities:
             
Payments on debt obligations
   
(82
)
 
(25
)
Proceeds from exercise of stock options
   
5,385
   
133
 
Proceeds from employee stock purchase plan
   
326
   
494
 
Convertible debt/equity issuance costs
   
(114
)
 
-
 
Net cash provided by financing activities
   
5,515
   
602
 
 
             
Net increase in cash and cash equivalents
   
3,523
   
4,627
 
Cash and cash equivalents, beginning of period
   
19,525
   
19,422
 
               
Cash and cash equivalents, end of period
 
$
23,048
 
$
24,049
 
 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
           
Cash paid during the period for interest
 
$
2,580
 
$
2,404
 
               
Issuance of common stock in conjunction with acquisitions
 
$
6,460
 
$
-
 
 
         
NON-CASH INVESTING AND FINANCING ACTIVITIES
         
Acquisition of property and equipment under capital leases
 
$
126
 
$
-
 
               
Manufacturing equipment received in lieu of earn-out proceeds from disposition of discontinued operations
  2,012   -  
               
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 

 
EMCORE Corporation
Notes to Condensed Consolidated Financial Statements
As of March 31, 2006 and September 30, 2005 and
For the three and six months ended March 31, 2006 and 2005
(unaudited)
 
 
NOTE 1.  Basis of Presentation.

The accompanying unaudited condensed consolidated financial statements include the accounts of EMCORE Corporation and its subsidiaries (EMCORE). All intercompany accounts and transactions have been eliminated. Certain amounts in prior period financial statements have been reclassified to conform to the current year presentation. These reclassifications had no effect on previously reported shareholders’ equity. 

These statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US 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 US GAAP for annual financial statements. In the opinion of management, all information considered necessary for a fair presentation of the financial statements have been included. Operating results for interim periods are not necessarily indicative of results that may be expected for an entire fiscal year. The condensed consolidated balance sheet as of September 30, 2005 has been derived from the audited financial statements as of such date. For a more complete understanding of EMCORE’s financial position, operating results, risk factors and other matters, please refer to EMCORE's Annual Report on Form 10-K for the fiscal year ended September 30, 2005.

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Management bases estimates on historical experience and on various assumptions about the future that are believed to be reasonable based on available information. EMCORE’s reported financial position or results of operations may be materially different under changed conditions or when using different estimates and assumptions. In the event that estimates or assumptions prove to differ from actual results, adjustments are made in subsequent periods to reflect more current information.
 
 
NOTE 2.  Recent Accounting Pronouncements.

SFAS No. 123(R) - Effective October 1, 2005, EMCORE adopted Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment (Revised 2004), on a modified prospective basis. As a result, EMCORE included stock-based compensation expense in its results of operations for all periods presented in fiscal 2006, as more fully described in Note 3 to EMCORE’s condensed consolidated financial statements.

SFAS No. 151 - Effective October 1, 2005, EMCORE adopted SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal". In addition, it requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The adoption of this pronouncement did not have a material impact on EMCORE’s financial statements.
 
SFAS No. 154 - Effective October 1, 2005, EMCORE adopted SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and Financial Accounting Standards Board (FASB) Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. The Statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. SFAS 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. SFAS 154 requires that a change in method of depreciation, amortization, or depletion for long-lived, non-financial assets be accounted for as a change in accounting estimate that is affected by a change in accounting principle. Opinion 20 previously required that such a change be reported as a change in accounting principle. The adoption of this pronouncement did not have a material impact on EMCORE’s financial statements.

Interpretation No. 47 - Effective October 1, 2005, EMCORE adopted FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143. This interpretation clarifies the timing of liability recognition for legal obligations associated with the retirement of tangible long-lived assets when the timing and/or method of settlement of the obligations are conditional on a future event and where an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The adoption of this pronouncement did not have a material impact on EMCORE’s financial statements.

FSP 115-1 - In November 2005, FASB issued Staff Position (FSP) 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, which provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and on measuring such impairment loss. FSP 115-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosure about unrealized losses that have not been recognized as other-than-temporary impairments. FSP 115-1 is effective for annual reporting periods beginning after December 15, 2005. EMCORE does not believe the adoption of FSP 115-1 on October 1, 2006 will have a material impact on its financial statements.


NOTE 3.  Stock-based Compensation.

Stock Options

EMCORE has stock option plans to provide incentives to eligible employees, officers, and directors in the form of stock options.  Most of the stock options vest and become exercisable over three to five years and have ten-year terms. EMCORE maintains two incentive stock option plans: the 2000 Stock Option Plan (2000 Plan), and the 1995 Incentive and Non-Statutory Stock Option Plan (1995 Plan and, together with the 2000 Plan, the Option Plans). The 1995 Plan authorizes the grant of options to purchase up to 2,744,118 shares of EMCORE's common stock. As of March 31, 2006, no options were available for issuance under the 1995 Plan. The 2000 Plan, which was recently amended, authorizes the grant of options to purchase up to 9,350,000 shares of EMCORE's common stock. The amendment that occurred in February 2006 increased the number of shares of common stock available for issuance by 2,500,000 from the previous amount of 6,850,000 shares. As of March 31, 2006, 1,536,239 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.
 
During the three months ended March 31, 2006, 1,249,450 options were granted pursuant to the 2000 Plan. These options were issued at the closing market price on the date of grant, which ranged from $7.22 to $10.49 per share. These options are subject to a five-year vesting period for new-hire grants and a four-year vesting period for retention grants, and have a contractual life of ten years. The weighted average grant date fair value for the options issued during the three months ended March 31, 2006 was $6.43. No executive officers received any stock grants during the three months ended March 31, 2006.  As of March 31, 2006, 2,198,568 options were exercisable. EMCORE issues new shares of common stock upon exercise of stock options.
 
The following table summarizes the activity under the Option Plans:

 
   
Shares
   
Weighted Average
Exercise Price
   
Weighted Average
Remaining Contractual Life
(in years)
 
 
Aggregate Intrinsic Value
(in thousands)
 
                           
Outstanding as of September 30, 2005
   
6,166,226
 
$
4.16
         
Granted
   
1,528,957
   
7.68
         
Exercised
   
(1,319,597
)
 
4.08
         
Cancelled
   
(113,024
)
 
3.20
         
 
                 
Outstanding as of March 31, 2006
   
6,262,562
 
$
5.05
   
7.58
 
$
34,921
 
                           
Exercisable as of March 31, 2006
   
2,198,568
 
$
5.80
   
5.09
 
$
12,371
 
                           
Non-vested as of March 31, 2006
   
4,063,994
 
$
4.65
   
8.92
 
$
22,550
 
 
 
As of March 31, 2006 there was $5.8 million of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the Option Plans. This expense is expected to be recognized over a weighted average life of 3.27 years. The total intrinsic value of options exercised during the three months ended March 31, 2006 was $5.2 million. The total fair value of shares vested during the three months ended March 31, 2006 was $1.1 million. EMCORE received $4.9 million in cash from the exercise of stock options during the three months ended March 31, 2006.

At March 31, 2006, stock options outstanding were as follows:

Exercise Price
 
 
Options Outstanding
 
 
Weighted Average Remaining
Contractual Life (in years)
 
 
Weighted Average
Exercise Price
 
 
 
 
 
 
 
 
 
 
 
 
<$1
 
 
1,920
 
 
1.68
 
$
0.23
 
>$1 to <$5
 
 
3,827,889
 
 
7.60
 
 
2.69
 
>$5 to <$10
 
 
2,204,413
 
 
7.92
 
 
7.41
 
>$10
 
 
228,340
 
 
4.09
 
 
21.97
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6,262,562
 
 
7.58
 
$
5.05
 
  
 
At March 31, 2006, stock options exercisable were as follows:

Exercise Price
 
 
Options Exercisable
 
 
Weighted Average Remaining
Contractual Life (in years)
 
 
Weighted Average
Exercise Price
 
 
 
 
 
 
 
 
 
 
 
 
<$1
 
 
1,920
   
1.68
 
$
0.23
 
>$1 to <$5
 
 
1,246,815
   
5.95
 
 
2.16
 
>$5 to <$10
 
 
723,493
   
3.95
 
 
6.98
 
>$10
 
 
226,340
   
4.04
 
 
22.07
 
 
 
 
       
 
 
 
 
 
 
 
2,198,568
   
5.09
 
$
5.80
 

 
Employee Stock Purchase Plan

EMCORE adopted an Employee Stock Purchase Plan (ESPP) in fiscal 2000. In February 2006, this plan was amended to increase the number of shares of common stock available for issuance under the ESPP by 1,000,000, to a total of 2,000,000 shares. 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 ESPP provides employees of EMCORE with an opportunity to purchase common stock through payroll deductions. The purchase price is set at 85% of the market price for EMCORE's common stock on either the first or last day of the participation period, whichever is lower. Contributions are limited to 10% of an employee's compensation. The remaining amount of shares reserved for the ESPP is as follows:

 
   
Number of Shares
 
 
       
Amount of shares reserved for the ESPP
   
2,000,000
 
 
       
Number of shares issued in December 2000 for calendar year 2000
   
(16,534
)
Number of shares issued in December 2001 for calendar year 2001
   
(48,279
)
Number of shares issued in December 2002 for calendar year 2002
   
(89,180
)
Number of shares issued in December 2003 for calendar year 2003
   
(244,166
)
Number of shares issued in June 2004 for first half of calendar year 2004
   
(166,507
)
Number of shares issued in December 2004 for second half of calendar year 2004
   
(167,546
)
Number of shares issued in June 2005 for first half of calendar year 2005
   
(174,169
)
Number of shares issued in December 2005 for second half of calendar year 2005
   
(93,619
)
 
       
Remaining shares reserved for the ESPP as of March 31, 2006
   
1,000,000
 

 
Future Issuances 
 
As of March 31, 2006, EMCORE has reserved a total of 21,170,772 shares of its common stock for future issuances as follows:

 
   
Number of Shares
 
 
       
For exercise of outstanding warrants to purchase common stock
   
31,535
 
For exercise of outstanding common stock options
   
6,262,562
 
For conversion of subordinated notes
   
12,340,436
 
For future issuances to employees under the ESPP plan
   
1,000,000
 
For future common stock option awards
   
1,536,239
 
 
       
Total reserved
   
21,170,772
 
         


Valuation of Stock-Based Compensation

Effective October 1, 2005, EMCORE adopted SFAS 123(R), using the modified prospective application transition method, which establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation expense is measured at grant date, based on the fair value of the award, over the requisite service period. EMCORE previously applied Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by SFAS No. 123, Accounting for Stock-Based Compensation.
 
Periods prior to the adoption of SFAS 123(R) - Prior to the adoption of SFAS 123(R), EMCORE provided the disclosures required under SFAS No. 123 as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosures. EMCORE did not recognize stock-based compensation expense in its statement of operations for periods prior to the adoption of SFAS 123(R) since options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net loss and net loss per share as if EMCORE had applied the fair value recognition provisions of SFAS 123(R) to options granted under EMCORE’s stock-based compensation plans prior to the adoption. For purposes of this pro forma disclosure, the value of the options was estimated using a Black-Scholes option pricing formula and amortized on a straight-line basis over the respective vesting periods of the awards. Disclosures for the three months and six months ended March 31, 2006 are not presented because stock-based compensation was accounted for under SFAS 123(R)’s fair-value method during this period.

(in thousands, except per share amounts)
   
Three Months Ended
March 31, 2005
   
Six Months
Ended
March 31, 2005
 
 
         
Reported net income (loss)
 
$
7,559
 
$
(1,582
)
Less:
             
Pro forma stock-based compensation expense determined under the fair value based method, net of tax
   
(721
)
 
(1,344
)
 
             
Pro forma net income (loss)
 
$
6,838
 
$
(2,926
)
               
Reported net income (loss) per basic and diluted share
 
$
0.16
 
$
(0.03
)
               
Pro forma net income (loss) loss per basic and diluted share
 
$
0.14
 
$
(0.06
)
               
 
 
Adoption of SFAS 123(R) - During the three months ended March 31, 2006, EMCORE recorded stock-based compensation expense totaling $0.9 million. This incremental stock-based compensation expense caused net income to decrease by $0.9 million and basic and diluted loss per share to decrease by $0.02 per share. As required by SFAS 123(R), management has made an estimate of expected forfeitures and is recognizing compensation expense only for those equity awards expected to vest. The effect of recording stock-based compensation expense for the three and six months ended March 31, 2006 was as follows:
 
(in thousands, except per share amounts
   
Three Months Ended
March 31, 2006
   
Six Months
Ended
March 31, 2006
 
 
         
Stock-based compensation expense by award type:
             
Employee stock options
 
$
(645
)
$
(1,653
)
Employee stock purchase plan
   
(288
)
 
(410
)
               
Total stock-based compensation expense
 
$
(933
)
$
(2,063
)
               
Net effect on net loss per basic and diluted share
 
$
(0.02
)
$
(0.04
)
               

 
The stock-based compensation expense for the three and six months ended March 31, 2006 was distributed as follows:
 
Stock-Based Compensation Expense by Segment
For the three months ended March 31, 2006
(in thousands)
   
COGS
   
SG&A
   
R&D
   
Total
 
 
                 
Fiber Optics
 
$
86
 
$
431
 
$
177
 
$
694
 
Photovoltaics
   
9
   
167
   
17
   
193
 
Electronic Materials and Devices
   
(24
)
 
54
   
16
   
46
 
Total stock-based compensation expense
 
$
71
 
$
652
 
$
210
 
$
933
 
  
 
Stock-Based Compensation Expense by Segment
For the six months ended March 31, 2006
(in thousands)
   
COGS
   
SG&A
   
R&D
   
Total
 
 
                 
Fiber Optics
 
$
292
 
$
757
 
$
422
 
$
1,471
 
Photovoltaics
   
73
   
292
   
45
   
410
 
Electronic Materials and Devices
   
51
   
87
   
44
   
182
 
Total stock-based compensation expense
 
$
416
 
$
1,136
 
$
511
 
$
2,063
 

 
Valuation Assumptions
  
EMCORE estimated the fair value of stock options using a Black-Scholes model. The fair value of each 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:
 
   
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
Stock Option Plans 
   
2006
   
2005
   
2006
   
2005
 
 
                   
Expected dividend yield
   
0
%
 
0
%
 
0
%
 
0
%
Expected stock price volatility
   
97-98
%
 
107
%
 
97-99
%
 
107
%
Risk-free interest rate 
   
4.74
%
 
3.89
%
 
4.67
%
 
3.69
%
Expected term (in years)
   
5
   
5
   
5
   
5
 
 
 
Expected Dividend Yield: The Black-Scholes valuation model calls for a single expected dividend yield as an input. EMCORE 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 EMCORE’s historical stock prices.

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

Expected Term: EMCORE’s expected term represents the period that EMCORE’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, EMCORE considers voluntary termination behavior as well as future workforce reduction programs.
 

NOTE 4.  Investments.

In January 1999, General Electric Lighting and EMCORE formed GELcore, a joint venture to address the solid-state lighting market with high-brightness light-emitting diode-based (HB-LED) lighting systems. General Electric Lighting and EMCORE have agreed that this joint venture will be the exclusive vehicle for each party's participation in solid-state lighting. EMCORE has a 49% non-controlling interest in the GELcore venture, and accounts for this investment using the equity method of accounting. As of March 31, 2006, EMCORE's net investment in this joint venture amounted to approximately $11.5 million.

In April 2005, EMCORE divested product technology focused on gallium nitride (GaN)-based power electronic devices for the power device industry.  The new company, Velox Semiconductor Corporation (Velox), raised $6.0 million from various venture capital partnerships.  Five EMCORE employees transferred to Velox as full-time personnel and EMCORE contributed intellectual property and equipment receiving a 19.2% stake in Velox.  During fiscal 2006, EMCORE reduced its voting percentage, relinquished its Velox Board seat, and its right to a Velox Board seat.  As a result of these changes, in EMCORE's next quarterly report on Form 10-Q, EMCORE will report its investment in Velox under the cost method of accounting rather than the equity method of accounting. Due to a three-month lag in the availability of financial statements for Velox, EMCORE reports Velox's performance on a three-month lag basis. Therefore, in this quarterly report, EMCORE recorded an investment loss for the three months ended March 31, 2006 that was based on the operating results of Velox for the three months ended December 31, 2005.  For the three and six months ended March 31, 2006, EMCORE recognized a loss of $0.2 million and $0.3 million related to Velox, which was recorded as a component of other income and expenses.  As of March 31, 2006, EMCORE's net investment in Velox amounted to approximately $1.0 million.  Under the cost method of accounting, the Velox investment will be carried at cost and adjusted only for other-than-temporary declines in fair value, distribution of earnings and additional investments.
 
 
NOTE 5.  Acquisition.

On January 12, 2006, EMCORE entered into an Agreement and Plan of Merger (Merger Agreement) with K2 Optronics, Inc. (K2), a privately held company located in Sunnyvale, CA and EMCORE Optoelectronics Acquisition Corporation, a wholly owned subsidiary of EMCORE (Merger Sub).  Pursuant to the Merger Agreement, EMCORE acquired K2 in a transaction in which Merger Sub merged with and into K2, with K2 becoming a wholly owned subsidiary of EMCORE.  EMCORE, an investor in K2, paid approximately $4.1 million in EMCORE common stock, and paid approximately $0.7 million in transaction-related expenses, to acquire the remaining part of K2 that EMCORE did not already own. Prior to the transaction EMCORE owned a 13.6% equity interest in K2 as a result of a $1.0 million investment that EMCORE made in K2 in October 2004. In addition, K2 was a supplier to EMCORE of analog external cavity lasers for CATV applications. In connection with the merger, EMCORE issued a total of 548,688 shares of EMCORE common stock, no par value, (based on a 20-trading day weighted average price), to K2’s shareholders.  EMCORE has agreed to file a shelf registration statement with respect to the resale of the EMCORE shares by no later than June 8, 2006. Including EMCORE’s initial $1.0 million investment in K2, the purchase price, on a preliminary basis, was allocated as follows: $1.1 million in cash, $0.1 million in other current assets, $0.8 million in fixed assets, $1.5 million in intellectual property, $2.4 million in accounts payable and accrued liabilities, $0.8 million in debt and $4.8 million in residual goodwill.

Furthermore, in connection with this K2 acquisition, EMCORE and JDS Uniphase (JDSU) amended their May 2005 Purchase Agreement relating to EMCORE’s acquisition of JDSU’s analog CATV and RF over fiber specialty businesses.  As a result, JDSU retained its K2 investment (on a pre-merger basis), and repaid $0.5 million to EMCORE.

This transaction was accounted for as a purchase in accordance with SFAS No. 141, Business Combinations; therefore, the tangible assets acquired were recorded at fair value on the acquisition date. This acquisition was not significant on a pro-forma basis, and therefore, pro-forma financial statements were not and are not provided. The operating results of the business acquired are included in the accompanying consolidated statement of operations from the date of acquisition. The primary areas of the purchase price allocations that are not yet finalized relate to the valuation of accrued liabilities, intellectual property, and residual goodwill. The acquired business is part of EMCORE's Fiber Optics operating segment.
 
 
NOTE 6.  Discontinued Operations.

In November 2003, EMCORE sold its TurboDisc capital equipment business in an asset sale to a subsidiary of Veeco Instruments Inc. (Veeco). The selling price was $60.0 million in cash at closing, with a potential additional earn-out up to $20.0 million over the next two years, calculated based on the net sales of TurboDisc products. In March 2005, EMCORE received $13.2 million of earn-out payment from Veeco in connection with its first year of net sales of TurboDisc products. After offsetting this receipt against expenses related to the discontinued operation, EMCORE recorded a net gain from the disposal of discontinued operations of $12.5 million. In March 2006, EMCORE earned $2.0 million as a final earn-out payment from Veeco in connection with Veeco’s second year of net sales of TurboDisc products.  The cumulative additional earn-out totaled $15.2 million or 76% of the maximum available payout of $20.0 million.
 

NOTE 7.  Receivables.

Accounts receivable consisted of the following:

Accounts Receivable, net
(in thousands)
   
As of
March 31,
2006
   
As of
September 30,
2005
 
 
             
Accounts receivable
 
$
23,003
 
$
21,721
 
Accounts receivable - unbilled
   
2,042
   
1,240
 
Subtotal
   
25,045
   
22,961
 
Allowance for doubtful accounts
   
(338
)
 
(328
)
 
             
Total
 
$
24,707
 
$
22,633
 
 
 
In September 2005, EMCORE entered into a non-recourse receivables purchase agreement (AR Agreement) with Silicon Valley Bank (SVBank).  Under the terms of the AR Agreement, EMCORE from time to time may sell, without recourse, certain accounts receivables to SVBank up to a maximum aggregate outstanding amount of $20.0 million.  The AR Agreement expires on December 31, 2006, unless the term is extended by mutual agreement by all parties. In March 2006 and September 2005, EMCORE sold approximately $6.2 million and $2.2 million of accounts receivable to SVBank, respectively.

Receivables from related parties consisted of the following: 

Receivables, Related Parties
(in thousands)
   
As of
March 31,
2006
   
As of
September 30,
2005
 
 
             
Current assets:
             
GELcore-related
 
$
190
 
$
185
 
Velox-related
   
86
   
249
 
Employee loans
   
-
   
3,000
 
Employee loans - interest portion
   
-
   
763
 
Subtotal
   
276
   
4,197
 
 
         
Long-term assets:
           
Employee loans
   
169
   
169
 
               
Total
 
$
445
 
$
4,366
 
               
 
 
Employee Loans

From time to time, prior to July 2002, EMCORE loaned money to certain of its executive officers and directors. Pursuant to due authorization from EMCORE's Board of Directors, EMCORE loaned $3.0 million to Mr. Reuben Richards, the Chief Executive Officer in February 2001 (Note). The Note matured on February 22, 2006 and with interest (compounded annually) at a rate of (a) 5.18% per annum through May 23, 2002 and (b) 4.99% from May 24, 2002 through maturity. All interest was payable at maturity. On February 13, 2006, Mr. Richards tendered 139,485 shares of EMCORE common stock in partial payment of the Note. Principal plus accrued interest on the Note totaled approximately $3.83 million.  The Compensation Committee of EMCORE’s Board of Directors specifically approved the tender of shares, as permitted by the Note, at the price of $8.25 per share, which was the closing price of EMCORE common stock on February 13, 2006. On February 28, 2006, the Compensation Committee resolved to forgive the remaining balance of the Note (approximately $2.7 million), effective as of March 10, 2006.  Mr. Richards’ tender of common stock on February 13, 2006 was accepted as full payment and satisfaction of the Note, including principal and accrued interest.  Additionally, the Compensation Committee resolved to accelerate and vest the final tranche of each of the incentive stock option grants made in fiscal 2004 and 2005 to Mr. Richards, which constitute a combined accelerated vesting of 111,250 shares. In considering this matter, the Compensation Committee carefully considered Mr. Richards’ past performance, including the recent appreciation in the stock price and EMCORE’s improved financial performance, the facts and circumstances surrounding the loan, Mr. Richards’ current compensation, Mr. Richards’ willingness to repay a portion of the Note and all resulting taxes, and the desire to retain Mr. Richards’ continued service to EMCORE. EMCORE recorded a one-time, non-cash charge of approximately $2.7 million in March 2006 for the partial forgiveness of the Note, plus a non-cash charge of approximately $0.3 million in stock-based compensation expense under SFAS 123(R) relating to the accelerated ISO grants.
 
In addition, pursuant to due authorization of EMCORE's Board of Directors, EMCORE also loaned $82,000 to the Chief Financial Officer (CFO) of EMCORE in December 1995. This loan does not bear interest and provides for offset of the loan via bonuses payable to the CFO over a period of up to 25 years. The remaining related party receivable balance of $87,260 relates to multiple loans from EMCORE to an officer (who is not an executive officer) that were made during 1997 through 2000 and are payable on demand.
 
During fiscal 2005, pursuant to due authorization of EMCORE’s Compensation Committee, EMCORE wrote-off $34,000 of notes receivable that were issued in 1994 to certain EMCORE employees.
 

NOTE 8.  Inventory, net.

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

Inventory, net
(in thousands)
   
As of
March 31,
2006
   
As of
September 30,
2005
 
 
             
Raw materials
 
$
16,732
 
$
15,482
 
Work-in-process
   
4,069
   
5,101
 
Finished goods
   
7,928
   
5,911
 
Subtotal
   
28,729
   
26,494
 
 
           
Less: reserves
   
(6,563
)
 
(8,146
)
               
Total
 
$
22,166
 
$
18,348
 


NOTE 9.  Property, Plant and Equipment, net.

Property, plant and equipment consisted of the following:

Property, Plant and Equipment, net
(in thousands)
   
As of
March 31,
2006
   
As of
September 30,
2005
 
 
             
Land
 
$
1,502
 
$
1,502
 
Building and improvements
   
39,977
   
37,944
 
Equipment
   
70,153
   
71,854
 
Furniture and fixtures
   
5,481
   
5,002
 
Leasehold improvements
   
2,756
   
2,935
 
Construction in progress
   
7,745
   
3,390
 
Property and equipment under capital lease
   
932
   
466
 
Subtotal
   
128,546
   
123,093
 
               
Less: accumulated depreciation and amortization
   
(71,168
)
 
(66,136
)
               
Total
 
$
57,378
 
$
56,957
 

 
NOTE 10.  Goodwill and Intangible Assets, net.

The following table sets forth changes in the carrying value of goodwill by reportable segment:
 
(in thousands)
   
Fiber Optics
   
Photovoltaics
   
Total
 
 
                   
Balance as of September 30, 2005
 
$
14,259
 
$
20,384
 
$
34,643
 
Acquisition - Force Inc.
   
800
   
-
   
800
 
Acquisition - K2 Optronics
   
4,750
   
-
   
4,750
 
Acquisition - Earn out payments
   
231
   
-
   
231
 
                     
Balance as of March 31, 2006
 
$
20,040
 
$
20,384
 
$
40,424
 
 

The following table sets forth changes in the carrying value of intangible assets by reportable segment:
 
(in thousands) 
 
As of March 31, 2006 
As of September 30, 2005 
 
 
   
Gross
Assets
   
Accumulated
Amortization
   
Net
Assets
   
Gross Assets
   
Accumulated
Amortization
   
Net
Assets
 
 
                                     
Fiber Optics:
                                     
Patents
 
$
456
 
$
(168
)
$
288
 
$
368
 
$
(136
)
$
232
 
Ortel acquired IP
   
3,274
   
(2,070
)
 
1,204
   
3,274
   
(1,746
)
 
1,528
 
JDSU acquired IP
   
1,650
   
(275
)
 
1,375
   
1,650
   
(110
)
 
1,540
 
Alvesta acquired IP
   
193
   
(129
)
 
64
   
193
   
(107
)
 
86
 
Molex acquired IP
   
558
   
(279
)
 
279
   
558
   
(223
)
 
335
 
Corona acquired IP
   
1000
   
(367
)
 
633
   
1,000
   
(267
)
 
733
 
Phasebridge acquired IP
   
700
   
(65
)
 
635
   
-
   
-
   
-
 
Force acquired IP
   
1,200
   
(86
)
 
1,114
   
-
   
-
   
-
 
K2 Optronics acquired IP
   
1,500
   
(66
)
 
1,434
   
-
   
-
   
-
 
Subtotal
   
10,531
   
(3,505
)
 
7,026
   
7,043
   
(2,589
)
 
4,454
 
 
                                     
Photovoltaics:
                                     
Patents
   
326
   
(127
)
 
199
   
271
   
(101
)
 
170
 
Tecstar acquired IP
   
1,900
   
(1,566
)
 
334
   
1,900
   
(1,350
)
 
550
 
Subtotal
   
2,226
   
(1,693
)
 
533
   
2,171
   
(1,451
)
 
720
 
 
                                     
Electronic Materials & Devices:
                                     
Patents
   
424
   
(242
)
 
182
   
390
   
(217
)
 
173
 
Total
 
$
13,181
 
$
(5,440
)
$
7,741
 
$
9,604
 
$
(4,257
)
$
5,347
 
   
 
Based on the carrying amount of the intangible assets, the estimated future amortization expense is as follows:

Amortization Expense
(in thousands)
       
 
       
Period ending:
       
6-month period ended September 30, 2006
 
$
1,343
 
Year ended September 30, 2007
   
2,288
 
Year ended September 30, 2008
   
1,620
 
Year ended September 30, 2009
   
1,219
 
Year ended September 30, 2010
   
1,010
 
Thereafter
   
261
 
Total future amortization expense
 
$
7,741
 


NOTE 11.  Accrued Expenses and Other Current Liabilities.

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

Accrued Expenses and Other Current Liabilities
(in thousands)
   
As of
March 31,
2006
   
As of
September 30,
2005
 
 
             
Compensation-related
 
$
5,490
 
$
4,974
 
Interest
   
1,865
   
1,814
 
Warranty
   
1,441
   
1,268
 
Deferred revenue and customer deposits
   
2,286
   
1,539
 
Professional fees
   
616
   
1,082
 
Royalty
   
408
   
551
 
Acquisition-related
   
3,465
   
5,006
 
Self insurance
   
825
   
646
 
Other
   
937
   
2,198
 
Total
 
$
17,333
 
$
19,078
 

 
Product Warranty Reserves. EMCORE provides its customers with limited rights of return for non-conforming shipments and warranty claims for certain products. In accordance with FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, EMCORE makes estimates 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 failures. 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. The following table sets forth changes in the product warranty accrual account:
    
Warranty Reserve
(in thousands)
       
 
     
Balance as of October 1, 2005
 
$
1,268
 
Accruals for warranty expense
   
369
 
Reversals due to use or expiration of liability
   
(196
)
Balance as of March 31, 2006
 
$
1,441
 
 
 
NOTE 12.  Commitments and Contingencies.

EMCORE is involved in lawsuits and proceedings that arise in the ordinary course of business. There are no matters pending that we expect to be material in relation to our business, consolidated financial condition, results of operations, or cash flows.

EMCORE guarantees 49% of any amounts borrowed under GELcore’s revolving credit line. As of March 31, 2006, GELcore’s outstanding borrowings were $8.1 million. The maximum borrowing currently permitted under the credit line is approximately $10.0 million. 
 
As of March 31, 2006, EMCORE had three standby letters of credit totaling $0.7 million.
 

NOTE 13.  Segment Data and Related Information.

EMCORE has three operating segments: Fiber Optics, Photovoltaics, and Electronic Materials and Devices: 
 
·  EMCORE's Fiber Optics revenues are derived primarily from sales of optical components and subsystems for cable television (CATV), fiber to the premise (FTTP), enterprise routers and switches, telecom grooming switches, core routers, high performance servers, supercomputers, and satellite communications data links.

·  EMCORE's Photovoltaics revenues are derived primarily from the sales of solar power conversion products, including solar cells, covered interconnect solar cells, and solar panels.

·  EMCORE's Electronic Materials and Devices revenues are derived primarily from sales of wireless components, such as radio frequency (RF) materials including hetero-junction bipolar transistors and enhancement-mode pseudomorphic high electron mobility transistors, GaN materials for wireless base stations, and process development technology.

EMCORE evaluates its reportable segments in accordance with SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. EMCORE’s Chief Executive Officer is EMCORE’s Chief Operating Decision Maker pursuant to SFAS 131, and he allocates resources to segments based on their business prospects, competitive factors, net revenue, operating results and other non-GAAP financial ratios.

The following tables set forth the revenues and percentage of total revenues attributable to each of EMCORE's operating segments for the three and six months ended March 31, 2006 and 2005.
 
Revenues by Segment
(in thousands)
 
Three months ended
March 31, 2006
Three months ended
March 31, 2005
 
   
Revenue
   
% of Revenue
   
Revenue
   
% of Revenue
 
 
                 
Fiber Optics
 
$
25,852
   
62.8
%
$
19,030
   
62.6
%
Photovoltaics
   
10,263
   
24.9
   
7,829
   
25.7
 
Electronic Materials and Devices
   
5,047
   
12.3
   
3,571
   
11.7
 
Total revenues
 
$
41,162
   
100.0
%
$
30,430
   
100.0
%
 

 
Revenues by Segment
(in thousands)
 
Six months ended
March 31, 2006
Six months ended
March 31, 2005
 
   
Revenue
   
% of Revenue
   
Revenue
   
% of Revenue
 
 
                 
Fiber Optics
 
$
50,858
   
62.7
%
$
36,719
   
64.0
%
Photovoltaics
   
20,987
   
25.9
   
15,277
   
26.6
 
Electronic Materials and Devices
   
9,208
   
11.4
   
5,398
   
9.4
 
Total revenues
 
$
81,053
   
100.0
%
$
57,394
   
100.0
%
 

The following tables set forth EMCORE's consolidated revenues by geographic region. Revenue was assigned to geographic regions based on the customers’ or contract manufacturers’ shipment locations.
 
Geographic Revenues
(in thousands)
 
Three months ended
March 31, 2006
Three months ended
March 31, 2005
 
   
Revenue
   
% of Revenue
   
Revenue
   
% of Revenue
 
 
                 
North America
 
$
34,133
   
82.9
%
$
25,013
   
82.2
%
South America and Asia
   
5,570
   
13.5
   
3,696
   
12.1
 
Europe
   
1,459
   
3.6
   
1,721
   
5.7
 
Total revenues
 
$
41,162
   
100.0
%
$
30,430
   
100.0
%
 
 
Geographic Revenues
(in thousands)
 
Six months ended
March 31, 2006
Six months ended
March 31, 2005
 
   
Revenue
   
% of Revenue
   
Revenue
   
% of Revenue
 
 
                 
North America
 
$
68,071
   
84.0
%
$
45,712
   
79.6
%
South America and Asia
   
10,938
   
13.5
   
8,022
   
14.0
 
Europe
   
2,044
   
2.5
   
3,660
   
6.4
 
Total revenues
 
$
81,053
   
100.0
%
$
57,394
   
100.0
%

 
For the three months ended March 31, 2006 and 2005, Cisco Systems, Inc. (Cisco) accounted for 17% and 20% of our total revenue, respectively. For the six months ended March 31, 2006 and 2005, Cisco accounted for 17% and 22% of our total revenue, respectively.
 
The following table sets forth operating losses attributable to each EMCORE operating segment.

Operating Loss by Segment
(in thousands
 
Three Months Ended
March 31,
 
Six Months Ended
March 31,
 
 
   
2006
   
2005
   
2006
   
2005
 
 
                   
Operating loss (income) by segment:
                         
Fiber Optics
 
$
4,728
 
$
3,282
 
$
7,434
 
$
8,518
 
Photovoltaics
   
1,837
   
(6
)
 
3,448
   
1,052
 
Electronic Materials and Devices
   
711
   
391
   
1,255
   
2,641
 
Operating loss
   
7,276
   
3,667
   
12,137
   
12,211
 
                           
Other (income) expenses:
                         
Interest expense
   
1,113
   
953
   
2,080
   
1,922
 
Loss from convertible subordinated notes
exchange offer
   
-
   
-
   
1,078
   
-
 
Equity in net loss of Velox investment
   
150
   
-
   
332
   
-
 
Equity in net loss (income) of GELcore investment
   
397
   
297
   
(150
)
 
(75
)
Total other expenses
   
1,660
   
1,250
   
3,340
   
1,847
 
 
                         
Loss from continuing operations
 
$
8,936
 
$
4,917
 
$
15,477
 
$
14,058
 

 
On October 1, 2005, EMCORE adopted SFAS No. 123(R) and incurred stock-based compensation expense as more fully described in Note 3 to EMCORE’s condensed consolidated financial statements. For the three and six months ended March 31, 2006, operating loss includes the effect of $0.9 million and $2.1 million, respectively, of stock-based compensation expense related to employee stock options and employee stock purchases under SFAS 123(R). There was no stock-based compensation expense in fiscal 2005.

Operating loss also includes a $2.7 million charge related to a related party loan forgiveness. This charge was allocated to each segment based upon fiscal 2006 forecasted annual revenues.

Long-lived assets (consisting of property, plant and equipment, goodwill and intangible assets) for each operating segment are as follows:
 
Long-Lived Assets
(in thousands)
   
As of
March 31,
2006
   
As of
September 30,
2005
 
 
             
Fiber Optics
 
$
62,525
 
$
56,261
 
Photovoltaics
   
39,001
   
37,861
 
Electronic Materials and Devices
   
4,017
   
2,825
 
Total
 
$
105,543
 
$
96,947
 
 
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934. These forward-looking statements are based largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. These forward-looking statements may be identified by the use of terms and phrases such as "expects", "anticipates", "intends", "plans", “believes", "estimates", “targets”, “can”, “may”, “could”, “will”, and variations of these terms and similar phrases. Management cautions that these forward-looking statements are subject to business, economic, and other risks and uncertainties, both known and unknown, that may cause actual results to be materially different from those discussed in these forward-looking statements. The cautionary statements made in this Report should be read as being applicable to all forward-looking statements wherever they appear in this Report. This discussion should be read in conjunction with the consolidated financial statements, including the related notes.

These forward-looking statements include, without limitation, any and all statements or implications regarding:

·  The ability of EMCORE Corporation (EMCORE) to remain competitive and a leader in its industry and the future growth of the company, the industry, and the economy in general;

·  Difficulties in integrating recent or future acquisitions into our operations;

·  The expected level and timing of benefits to EMCORE from on-going cost reduction efforts, including (i) expected cost reductions and their impact on our financial performance, (ii) our continued leadership in technology and manufacturing in our markets, and (iii) our belief that the cost reduction efforts will not impact product development or manufacturing execution;

·  Expected improvements in our product and technology development programs;

·  Whether our products will (i) be successfully introduced or marketed, (ii) be qualified and purchased by our customers, or (iii) perform to any particular specifications or performance or reliability standards; and/or

·  Guidance provided by EMCORE regarding our expected financial performance in current or future periods, including, without limitation, with respect to anticipated revenues, income, or cash flows for any period in fiscal 2006 and subsequent periods.

These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected, including without limitation, the following:

·  EMCORE’s cost reduction efforts may not be successful in achieving their expected benefits, or may negatively impact our operations;

·  EMCORE may incur increased costs due to difficulties in integrating recent acquisitions;

·  The failure of our products (i) to perform as expected without material defects, (ii) to be manufactured at acceptable volumes, yields, and cost, (iii) to be qualified and accepted by our customers, and (iv) to successfully compete with products offered by our competitors; and/or

·  Other risks and uncertainties described in EMCORE’s filings with the Securities and Exchange Commission (SEC) such as: cancellations, rescheduling, or delays in product shipments; manufacturing capacity constraints; lengthy sales and qualification cycles; difficulties in the production process; changes in semiconductor industry growth; increased competition; delays in developing and commercializing new products; and other factors.
 
Neither management nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. Forward-looking statements are made only as of the date of this Report and subsequent facts or circumstances may contradict, obviate, undermine, or otherwise fail to support or substantiate such statements. We assume no obligation to update the matters discussed in this Quarterly Report on Form 10-Q to conform such statements to actual results or to changes in our expectations, except as required by applicable law or regulation.

 Company Overview

EMCORE, a New Jersey corporation established in 1984, offers a broad portfolio of compound semiconductor-based components and subsystems for the broadband, fiber optic, satellite, solar and wireless communications markets. EMCORE has three operating segments: Fiber Optics, Photovoltaics, and Electronic Materials and Devices. Our integrated solutions philosophy embodies state-of-the-art technology, material science expertise, and a shared vision of our customer's goals and objectives to be leaders in the transport of video, voice and data over copper, hybrid fiber/coax (HFC), fiber, satellite, and wireless networks.
 
EMCORE’s solutions include: optical components and subsystems for fiber-to-the-premise (FTTP), cable television (CATV), and high speed data and telecommunications networks; solar cells, solar panels, and fiber optic ground station links for global satellite communications; and radio frequency (RF) transistor materials for high bandwidth wireless communications systems, such as WiMAX and Wi-Fi Internet access and 3G mobile handsets and PDA devices.  
 
Through its joint venture participation in GELcore, LLC, EMCORE plays a vital role in developing and commercializing next-generation high-brightness LED technology for use in the general and specialty illumination markets.
 
Management Summary

We are an industry-leading company in the development and manufacture of optoelectronic and high-frequency products.  By leveraging our broad compound semiconductor expertise to provide cost-effective components, subsystems, and systems, we are focused on several key markets:

·  Terrestrial solar power for industrial power markets;

·  High-speed fiber optics for telephony, Internet core and metro networks;

·  High-speed fiber optics for large enterprise data communications, super computing, and storage area networks;
 
·  Next-generation CATV and FTTP “triple play” networks;
 
·  Satellite communications, in space and on the ground;

·  Advanced transistors and amplifiers used in high-bandwidth wireless communications systems, such as WiMAX and Wi-Fi Internet access and 3G mobile handsets and PDA devices; and

·  Solid state lighting for specialty and commercial illumination.
 
EMCORE has been supplying high-efficiency gallium arsenide (GaAs) solar cells to the satellite industry since 1999. Recently, with the increase in traditional energy costs, we have been involved in migrating our GaAs high-efficiency solar cells for terrestrial applications. EMCORE has developed a 35% high-efficiency terrestrial based solar cell and has made initial shipments of these cells to 5 solar concentrator companies, including the 2 major system manufacturers in Europe and Asia.  Additionally, over the past several months, EMCORE has bid on approximately 40 megawatts of solar installations.
 
In the first half of fiscal 2006, demand for EMCORE's products continued to be driven principally by increased communications bandwidth requirements and by expanded competition between telecommunications carriers, CATV MSOs, and wireless network providers for the delivery of video, voice and data.  We also continued our leadership of the 10G Ethernet space, commenced volume production of a next-generation FTTP triplexer product, won numerous major satellite programs, and increased sales of our 3G wireless and base station materials. In fiscal 2006 to date, revenues have increased by more than 40% over the prior period. We are continuing our efforts to streamline operations and focus on bottom-line profitability. As a result, we have improved gross margins from the prior period.
 
We are operationally focused on driving profitable revenue growth based on our existing product lines, developing or acquiring next-generation technologies and high-margin products for our strategic markets, and continuing our business optimization efforts to manage costs and enhance productivity. While targeting 20-30% annual top-line growth, we intend to continue to improve annual gross margins through material cost reductions, overseas contract manufacturing labor, yield improvements and product design improvements.

Recent Acquisition

On January 12, 2006, EMCORE acquired K2 Optronics, Inc. (K2), a privately held company located in Sunnyvale, California.  EMCORE anticipates continuing design and production operations in K2’s Sunnyvale facility for a six-month transition period, and, thereafter, the engineering design team and prototype production team will be integrated with EMCORE’s Silicon Valley Design Center in Santa Clara, CA. Volume manufacturing is already outsourced to the same overseas contract manufacturer used by EMCORE. Founded in 2000, K2 specializes in designing, developing, and manufacturing analog and digital transmission lasers for the CATV, telecommunications, sensing, and test and measurement industries. K2’s products are used in the following applications:

·  CATV: Direct modulated analog transmitters for broadcasting transmission over HFC networks;
·  FTTP: Broadcast video overlay for advanced video services;
·  Telecommunications: Access, metro edge, metro transport, long haul, or ultra long haul direct modulated transmitters at speeds of 2.5 Gb/s to 10 Gb/s;
·  Storage Area Networks: Quad rate (4.25 Gb/s) Fibre Channel applications 

Furthermore, in connection with this K2 acquisition, EMCORE and JDSU amended their May 2005 Purchase Agreement relating to EMCORE’s acquisition of JDSU’s analog CATV and RF over fiber specialty businesses.  As a result, JDSU retained its K2 investment (on a pre-merger basis), and repaid $0.5 million to EMCORE.

Business Segments, Geographic Revenues and Customers

EMCORE has three operating segments: Fiber Optics, Photovoltaics, and Electronic Materials and Devices:
 
·  EMCORE's Fiber Optics revenues are derived primarily from sales of optical components and subsystems for CATV, FTTP, enterprise routers and switches, telecom grooming switches, core routers, high performance servers, supercomputers and satellite communications data links.

·  EMCORE's Photovoltaics revenues are derived primarily from the sales of solar power conversion products, including solar cells, covered interconnect solar cells, and solar panels.

·  EMCORE's Electronic Materials and Devices revenues are derived primarily from sales of wireless components, such as RF materials including hetero-junction bipolar transistors and enhancement-mode pseudomorphic high electron mobility transistors, BiFET power amplifiers for 3G, GSM, and high bandwidth wireless communications, GaN materials for wireless base stations and high frequency applications, and process development technology.
 
The following tables set forth the revenues and percentage of total revenues attributable to each of EMCORE's operating segments for the three and six months ended March 31, 2006 and 2005.
 
Revenues by Segment
(in thousands)
 
Three months ended
March 31, 2006
Three months ended
March 31, 2005
 
   
Revenue
   
% of Revenue
   
Revenue
   
% of Revenue
 
 
                 
Fiber Optics
 
$
25,852
   
62.8
%
$
19,030
   
62.6
%
Photovoltaics
   
10,263
   
24.9
   
7,829
   
25.7
 
Electronic Materials and Devices
   
5,047
   
12.3
   
3,571
   
11.7
 
Total revenues
 
$
41,162
   
100.0
%
$
30,430
   
100.0
%
 
 
Revenues by Segment
(in thousands)
 
Six months ended
March 31, 2006
Six months ended
March 31, 2005
 
   
Revenue
   
% of Revenue
   
Revenue
   
% of Revenue
 
 
                 
Fiber Optics
 
$