CORRESP: A correspondence can be sent as a document with another submission type or can be sent as a separate submission.
Published on March 13, 2009
Via
EDGAR and Federal Express
March 13,
2009
Brian R.
Cascio
Accounting
Branch Chief
United
States Securities and Exchange Commission
100 F
Street, N.E.
Washington,
D.C. 20549
RE:
EMCORE Corporation
Form
10-K for the fiscal year ended September 30, 2008
Filed
December 30, 2008
File
No. 000-22175
Dear Mr.
Cascio:
EMCORE
Corporation (the “Company”) respectively submits the following responses to the
comment letter dated January 30, 2009 that we received from the Staff of
the United States Securities and Exchange Commission (the “Staff”) regarding the
Company’s Form 10-K for the fiscal year ended September 30, 2008 (the “Form
10-K”). The Company’s responses below correspond to the captions and
numbers of those comments (which are reproduced below in italics). Unless
otherwise indicated, capitalized terms used below have the meanings assigned to
them in the Form 10-K.
Item
1A. Risk Factors
If
we fail to remediate deficiencies in our current system…page 24
1) Please
tell us the nature of the “deficiencies in [y]our internal controls over
financial reporting “that were identified by you in fiscal 2007 and
2008. Additionally, describe the impact these deficiencies have had
on financial reporting and the control environment, and describe what plans, if
any, are currently in place to remediate the deficiencies.
RESPONSE: No
material weaknesses were identified by the Company to be reported in fiscal 2007
or 2008. However, management identified several deficiencies in
fiscal 2007 and 2008 that either individually or when aggregated with other
deficiencies identified represented significant deficiencies under standards
established by the PCAOB. The nature of the deficiencies principally
relate to insufficient documentation of processes, as summarized
below:
Fiscal
2007:
The
Company identified six significant deficiencies, two of which were related to
entity-level controls and four of which were related to process-level
controls.
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Entity-level
controls – The Company identified numerous deficiencies in design
and operating effectiveness in most process cycles, many of which were
deficiencies from the prior year which remained unremediated, which
resulted in an overall significant deficiency in the Company’s control
environment. Also, although the Company performed comprehensive
reviews of its operational and financial performance, the Company had not
developed a formal anti-fraud program or documented an integrated fraud
control policy to help ensure that fraud was addressed in a comprehensive
and integrated manner.
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Process-level
controls – The Company did not have effectively designed controls
related to revenue recognition, purchase requisitions, and granting of
stock options including the related recording and disclosure of
share-based compensation expense. In fiscal 2008, the Company
strengthened controls relating to these three areas which remediated these
significant deficiencies.
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The
Company also did not have effectively designed controls related to access and
maintenance of its payroll, customer, and vendor master
files. In fiscal 2008, the Company strengthened controls
relating to payroll controls and remediated this deficiency.
Fiscal
2008:
The
Company identified eight significant deficiencies, three of which were related
to entity-level controls, one related to general computer controls, and four of
which were related to process-level controls.
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Entity-level
controls – In addition to the two significant deficiencies
identified in fiscal 2007, the Company had not developed and documented
its process regarding the submission and review of its risk and fraud risk
assessments by the Audit Committee. However, the Company does
review internal controls as well as its operational and financial
performance with the Audit Committee on at least a quarterly
basis.
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General computer
controls – The Company failed to maintain appropriate segregation
of duties within one of its financial accounting
systems.
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Process-level
controls – In addition to the fiscal 2007 significant deficiency
related to controls over customer and vendor master files, the Company did
not maintain effective controls over the financial close and reporting
process primarily due to a lack of personnel within the Finance
Department. The Company also did not maintain effective
controls over the disposal of fixed assets and certain inventory
accounts.
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In both
fiscal 2007 and 2008, management determined that the Company’s internal control
over financial reporting was effective as of the reporting
date. Management was able to reach this conclusion, despite the
significant deficiencies discussed above, as the Company believes that
appropriate mitigating controls were in place and operating
effectively. As a result and as noted above, no material weaknesses
were identified by the Company to be reported in fiscal 2007 or
2008.
Remediation
Plan:
The
Company and the Audit Committee are in the process of developing a remediation
plan for outstanding significant deficiencies identified in fiscal 2007 and 2008
in order to maintain effective controls for complete and accurate financial
reporting. The Company acknowledges that liquidity, aging
accounting systems, and manpower concerns being faced in fiscal 2009 are
potential hindrances in terms of remediation of significant
deficiencies.
Item
5. Market for Registrant’s Common Equity…
Sales
of Unregistered Securities, page 32
2) We
note the private placement transaction was completed on February 20,
2008. Please expand your disclosure to identify the
following: the class of persons to whom the securities were sold;
which exemption from registration was claimed; and the facts you relied upon
when claiming this exemption. Please refer to Item 701 of Regulation
S-K
RESPONSE: In
response to your comment and in our future filings, the Company will expand the
disclosure of its private placement transaction, pursuant to the requirements of
Item 701 of Regulation S-K, to read similar as follows:
On
February 20, 2008, the Company completed the sale of $100.0 million of
restricted common stock and warrants to investors deemed to be “accredited
investors” as defined in Rule 501(a) under the Securities Act or “qualified
institutional buyers” as defined in Rule 144A(a) under the Securities Act,
through a private placement transaction exempt from the SEC’s registration
requirements pursuant to Section 4(2) of the Securities Act of 1933, and Rule
506 of Regulation D. In this transaction, investors purchased 8
million shares of our common stock, no par value, and warrants to purchase an
additional 1.4 million shares of our common stock. The purchase price
was $12.50 per share, priced at the 20-day volume-weighted average
price. The warrants grant the holder the right to purchase one share
of our common stock at a price of $15.06 per share, representing a 20.48%
premium over the purchase price. The warrants are immediately
exercisable and remain exercisable until February 20, 2013. Beginning
two years after their issuance, the warrants may be called by the Company for a
price of $0.01 per underlying share if the closing price of its common stock has
exceeded 150% of the exercise price for at least 20 trading days within a period
of any 30 consecutive trading days and other certain conditions are
met. In addition, in the 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. In addition, the Company entered into a registration
rights agreement with the investors to register for resale the shares of common
stock issued in this transaction and the shares of common stock to be issued
upon exercise of the warrants. As part of the sale documentation each
investor provided representations and warranties in the securities purchase
agreement, upon which the Company relied, with respect to such investor’s status
as an “accredited investor” or “qualified institutional buyer”. No
party acted as underwriter for this transaction. Total agent
fees incurred were 5.75% of the gross proceeds, or $5.8 million. The
Company used the proceeds from this private placement transaction to acquire the
telecom-related assets of Intel Corporation's Optical Platform Division in
2008.
Item
7. Management’s Discussion and Analysis…
Significant
Customers, page 44
3) We
note your tabular disclosure on page 44. Please provide the
disclosure required by Item 101(c)(1)(vii) of Regulation S-K and advise us of
the basis upon which you concluded that you are not required to file as exhibits
to your Form 10-K the agreements with any customers upon whom you are
substantially dependent. See Item 601(b)(10)(ii)(B) of Regulation
S-K. Refer also to the risk factor on page 18, which highlights the
risks associated with losing customers that you are substantially dependant
upon.
RESPONSE: In
response to your comment, we enhanced our disclosure of significant customers as
required by Item 101(c)(1)(vii) of Regulation S-K in our quarterly report on
Form 10-Q for the quarter ended December 31, 2008. The Company
disclosed the names of its significant customers, by reportable segment, with
significant customers being defined as customers that represent greater than 10%
of total consolidated revenue.
At
September 30, 2008, the Company reviewed all significant contracts including
those related to significant customers listed within our Form 10-K and
determined that no contracts were required to be filed as
exhibits. Our Fiber Optics reporting segment generally does not have
long-term supply contracts with its customers. Typically, our fiber
optics products are sold pursuant to purchase orders with short lead
times. This was the case for the two significant Fiber Optics-related
customers disclosed in the Form 10-K. In contrast, in our
Photovoltaics reporting segment, we generally enter into long-term firm
fixed-price contracts. In fiscal 2008, the Company did not have any
customers within its Photovoltaics reporting segment that exceeded 10% of total
consolidated revenue.
The
Company acknowledges that as a result of reductions to its internal revenue
forecasts, the Company will need to continue to review contracts with its
customers to determine if there are any that exist that may need to be filed in
future filings as exhibits to the extent that they are required to be disclosed
as required by Item 601(b)(10)(ii)(B) of Regulation S-K.
Item
8. Financial Statements
Statements
of Operations, page 58
4) We
see that Other Expense (Income) includes the following items:
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Stock-based
compensation expense from tolled
options,
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Gains
from insurance proceeds,
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Impairment
of investment, and
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Loss
on disposal of property, plant, and
equipment.
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Tell
us why these items are not included in Operating Loss. Refer to
paragraph 25 of SFAS 144, Question 2 of SAB Topic 5:P, and SAB Topic
14:F.
RESPONSE: In
response to your comment, we reviewed the accounting guidance referenced above,
as well as Statement of Financial Accounting Concept No. 6, paragraph 86, which
states “Gains and losses may also be described or classified as “operating” or
“nonoperating,” depending on their relation to an entity’s major ongoing or
central operations” and have addressed the following items:
Stock-based compensation
expense from tolled options
In
response to your comment and in our future filings, the Company will expand the
disclosure of its stock-based compensation expense from tolled options to read
similar as follows:
Under the
terms of stock option agreements issued under the Company’s Stock Option Plans, former
employees who 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
Company’s Stock Option Plans not to be available. Therefore, former
employees were precluded from exercising their stock options during the
remaining contractual term (the “Blackout Period”). To address this
issue, the Company’s Board of Directors agreed in April 2007 to approve a stock
option grant “modification” for these individuals by extending the normal 90-day
exercise period after the termination date to a date after which the Company
became compliant with its SEC filings and the registration of the stock option
shares was once again effective. The Company communicated the terms
of the tolling agreement with its former employees in November
2007. The Company’s Board of Directors approved an extension of the
stock option expiration date equal to the number of calendar days during the
Blackout Period before such stock option would have otherwise expired (the
“Tolling Period”). Former employees were able to exercise their
vested stock options beginning on the first day after the lifting of the
Blackout Period for a period equal to the Tolling
Period. Approximately 50 former employees were impacted by this
modification. All tolled stock options were either exercised or
expired by January 29, 2008.
To
account for this 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, which results in
liability classification and measurement of the award. On the date of
modification, the stock options with the extended exercise terms were initially
measured at fair value and compensation cost for the fair value was recognized
as expense as if the awards were new grants. Subsequent changes
in fair value were reported in earnings and disclosed in the financial
statements as long as the stock options remained 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 former 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 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 stock options that ultimately expired unexercised, the
liability was relieved with an offset to a gain included in current earnings,
which totaled approximately $0.1 million in January 2008.
Since
these modified stock options were issued to non-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” on our statement of operations.
Gains from insurance
proceeds
During
the three months ended March 31, 2007, the Company recognized a gain of $0.4
million related to insurance proceeds. In future filings, the Company
will include gains from insurance proceeds within operating income
(loss). The Company does not plan to revise its prior filings to
report the $0.4 million as a component of operating loss since management
considers this amount immaterial to the fiscal 2007 financial
statements.
Impairment of
investment
The
Company has recently incurred the following impairment charges related to its
non-operating investments:
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In
April 2008, the Company invested approximately $1.5 million in Lightron
Corporation, a Korean Company 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.
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In
September 2008, the Company recorded impairment against its $1.0 million
investment in Velox Corporation due to the company’s current financial and
operational condition.
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In
accordance with Regulation S-X, Rule 5-03, paragraph 9, these impairment charges
have been separately stated within the income statement clearly indicating the
nature of the transactions as non-operating. Consistent with
the Company’s policy for reporting similar transactions, the Company has
classified impairment charges relating to non-operating investments as "other
income and expense" on its statement of operations.
Loss on disposal of
property, plant, and equipment
During
fiscal 2006, 2007, and 2008, the Company recognized a loss on the disposal of
property, plant, and equipment of approximately $0.4 million, $0.2 million, and
$1.1 million, respectively. In future filings, the Company will
include loss or gains on disposal of property, plant, and equipment within
operating income (loss). The Company does not plan to revise its
prior filings to report the prior period amounts as a component of operating
loss since management considers these amounts to be immaterial, individually and when
aggregated, to the consolidated financial statements.
Note
1. Management’s Actions and Plans, page 63
5) We
note that your business will need significant additional cash to continue
operations as a going concern. In future filings please enhance your
disclosure to provide a substantive description of management’s viable plans to
raise additional capital to continue the business. In this regard,
please address when you believe additional financing will be required and give
an estimate of the amount. Please also expand your discussion of
liquidity and capital resources within MD&A to specifically discuss your
plans to generate sufficient liquidity, financing needs, and expected sources of
this financing. Refer to Item 303 of Regulation S-K and FRC
607.02.
RESPONSE: In
response to your comment, we enhanced our footnote and MD&A disclosure of
management’s viable plans to raise additional capital in our quarterly report on
Form 10-Q for the quarter ended December 31, 2008, as follows:
Management Actions and
Plans
Recently,
we have revised the assumptions underlying our operating plans and recognized
that additional actions were necessary to position our operations to minimize
cash usage. Accordingly, we undertook a number of initiatives aimed
at conserving or generating cash on an incremental basis through the next twelve
months. These initiatives included:
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A
reduction in personnel of approximately 160 people, or 17% of the total
workforce, which should result in annualized cost savings of approximately
$9.0 million;
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A
significant reduction of our fiscal 2008 employee incentive bonus plan
payout and the elimination of fiscal 2009 employee merit
increases;
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A
significant reduction of capital expenditures when compared to the prior
year;
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The
potential sale of certain assets;
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A
greater emphasis on managing our working capital, specifically
receivables, inventory, and accounts payables;
and,
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Further
restrictions on employee travel and other discretionary
expenditures.
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During
the first quarter, the Company freed up $2.6 million in cash that was previously
tied up in auction rate securities and borrowed $15.4 million under the
Company’s $25 million secured line of credit with Bank of America (see Note 11
–Debt). Shortly after the close of the first quarter, the Company
sold its remaining interest in Entech Solar, Inc. (formerly named WorldWater and
Solar Technologies Corporation) for $11.4 million in cash which was not
reflected in the quarter-end cash balance.
As
previously disclosed, the Company has received indications of interest from
several investors regarding a minority equity investment directly into the
Company’s wholly-owned Photovoltaics subsidiary which would serve as an initial
step towards a potential spin off of that business. The Company’s
management is aggressively pursuing these opportunities. Within the
next couple of months, management expects to announce more definitive plans
regarding the Company’s efforts to raise additional capital as well as providing
an estimate for the amount of financing being considered.
Conclusion
These
initiatives are intended to conserve or generate cash in response to the
deterioration in the global economy so that we can preserve adequate liquidity
through the next twelve months. However, the full effect of many of
these actions will not be realized until later in 2009, even if they are
successfully implemented. We are committed to exploring all of the
initiatives discussed above and there is no assurance that capital markets
conditions will improve within that time frame. Our ability to
continue as a going concern is substantially dependent on the successful
execution of many of the actions referred to above.
Since
cash generated from operations and cash on hand are not sufficient to satisfy
the Company’s liquidity, we will seek to obtain additional equity or debt
financing within the next few months. Due to the unpredictable nature
of the capital markets, additional funding may not be available when needed, or
on terms acceptable to us. If adequate funds are not available or not
available on acceptable terms, our ability to continue to fund expansion,
develop and enhance products and services, or otherwise respond to competitive
pressures may be severely limited. Such a limitation could have a
material adverse effect on the Company’s business, financial condition, results
of operations, and cash flow.
Note
2. Valuation of Goodwill, Long-lived Assets, and Other Intangible
Assets, page 66
Note
11. Goodwill and Intangible Assets, Net, page 81
6) Please
tell us and revise future filings to disclose the business and operational facts
and circumstances leading to the impairment of goodwill as of September 30,
2008. Your discussion should focus on the business reasons that
estimates of future operating results and cash flows changed from those
estimates developed at the time of the completion of the
acquisition. Refer to the requirements of paragraph 47 of SFAS
142.
RESPONSE: In
response to your comment and in our future filings, the Company will expand and
clarify the footnotes and MD&A disclosures relating to its goodwill to read
similar as follows:
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 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.
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As
of December 31, 2007, the Company performed its annual test for impairment
of goodwill and based on that analysis, it was determined that the
carrying amount of the reporting units did not exceed their fair value,
and therefore, no impairment was
recognized.
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As
disclosed in the Company’s Annual Report on Form 10-K, as a result of the
unfavorable macroeconomic environment and a drastic reduction in our
market capitalization since the completion of the Intel Acquisitions, the
Company reduced its internal revenue forecasts and revised its operating
plans to reflect a general decline in demand and average selling prices,
especially for the Company’s recently acquired telecom-related fiber
optics component products. The Company also performed an
interim test at September 30, 2008 to determine whether there was
impairment of its goodwill. The fair value of each of the
Company’s reporting units was determined by using a weighted average of
the Guideline Public Company, Guideline Merged and Acquired Company, and
the DCF methods. Due to uncertainty from the ongoing financial
liquidity crisis and the current economic recession, management believed
the most appropriate approach would be an equally weighted approach,
amongst the three methods, to arrive at an indicated value for each of the
reporting units. The indicated fair value of each of the
reporting units was then compared with the reporting unit’s carrying value
to determine whether there was an indication of impairment of goodwill
under SFAS 142. As a result, the Company determined that the
goodwill related to one of its Fiber Optics reporting units may be
impaired. Since the second step of the Company’s goodwill
impairment test was not completed before the 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.
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During
the three months ended December 31, 2008, management noted further
significant deterioration of the Company’s market capitalization, coupled
with 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
at December 31, 2008 and management weighted the market-based approach
heavier against the DCF method due to observable available
information. Based on this analysis, the Company determined
that goodwill related to its Fiber Optics reporting units was fully
impaired. 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.
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The
Company continues to report goodwill related to its Photovoltaics
reporting unit. The Company’s annual impairment test at
December 31, 2008, indicated that there was no impairment of goodwill for
the Photovoltaics reporting unit. Based upon revised
operational and cash flow forecasts, fair value exceeded carrying value of
the stand alone Photovoltaics reporting unit by over 15%, therefore 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 Company 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.
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7) With
respect to goodwill, please tell us and in future filings disclose how you
determined the fair value of your reporting units for goodwill impairment
testing purposes. In that regard, please describe your methods,
models, and significant assumptions and explain to us why you believe your
impairment estimate is in accordance with GAAP. If you applied more
than one model, please clarify how you applied, evaluated, and weighted the
models.
RESPONSE: In
response to your comment and in our future filings, the Company will expand and
clarify the disclosures relating to its goodwill and impairment
charges. Please see our response to comment #6 which includes
our revised disclosure and our response to comment #8 which explains why the
Company believes the goodwill impairment estimate was in accordance with
GAAP.
We
determined the fair value of each of the reporting units by using a weighted
average of the Guideline Public Company, Guideline Merged and Acquired Company,
and the Discounted Cash Flow methods. 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.
We
believe these methods were applied in accordance with the AICPA Valuation Guide
and GAAP as paragraph 25 of SFAS 142 states, “In estimating the fair value of a
reporting unit, a valuation technique based on multiples of earnings or revenue
or a similar performance measure may be used if that technique is consistent
with the objective of measuring fair value.” In addition, paragraph
45 of SFAS 142 makes reference to using a present value technique.
The
following paragraphs provide an overview of the three valuation techniques that
we used to determine the fair value of the reporting units.
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Guideline Public
Company Method
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We
identified guideline companies for each of the reporting units. We
compared the historical performance and financial results of each of the
reporting units to its set of guideline companies to determine the proper
multiple to apply to the reporting units’ financial data. The
selected multiples were applied to each of the reporting unit’s forecasted next
twelve months financial data to generate implied total enterprise value
(“TEV”)for the reporting units. A control premium of 15% was then
added to this value resulting in a net indicated equity value on a controlling
marketable basis.
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Guideline Merged &
Acquired Method
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We
identified transactions involving companies similar to each of the reporting
units. We compared the historical performance of each of the
reporting units to each acquired company to determine the proper multiple to
apply to the reporting unit’s financial data. Also, we considered the
decline in the market prices and multiples of companies within recent
months. As a result of the recent decline in market conditions, we
relied solely on transactions that closed during 2008. The selected
multiples were applied to each of the reporting unit’s forecasted next twelve
months financial data to generate implied TEVs for the reporting
units.
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Discounted Cash Flow
Method
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To
determine the indicated equity value of the reporting units under the discounted
cash flow method, the projected stream of equity cash flows through September
30, 2013 was converted to present value by using an estimated discount
rate. In addition, we calculated the terminal value of cash flows
after September 30, 2013. The present value of the stream of equity
cash flows through September 30, 2013 was added to the present value of the
terminal value to determine an indicated equity value of each of the reporting
units. The capitalization rate was determined based on the cost of
equity of comparable companies and the risks inherent in the individual
reporting units.
Due to
uncertainty from the ongoing financial liquidity crisis and the current economic
recession, management believed the most appropriate approach would be an equally
weighted approach, amongst the three methods, to arrive at an indicated value
for each of the reporting units at September 30, 2008. 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.
8) To
help us better understand the goodwill impairment, please tell us:
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How
you developed your estimate of impairment since you did not complete the
step 2 analysis.
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The
status of your completion of step 2 and whether you will have material
adjustments, including how they were
derived.
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The
complexities which led to the inability to complete the analysis and why
you were unable to complete step 2.
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How
your accounting is in compliance with paragraphs 22 and 47c of SFAS
142.
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How
you considered the need to disclose this information in your
MD&A.
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RESPONSE:
In
response to your comment and in our future filings, the Company will expand and
clarify the disclosures relating to its goodwill and impairment
charges. Please see our response to comment #6 which includes
our revised disclosure.
At
September 30, 2008, the Company performed step one tests for each of its three
reporting units with goodwill. 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 two Fiber Optics reporting units may be
impaired. At September 30, 2008, there was no indication of
impairment of goodwill for the Company’s other Fiber Optics and Photovoltaics
reporting units.
How we developed our
estimate of impairment:
We
determined our estimate of goodwill impairment for our Fiber Optics reporting
unit using the following calculation:
|
(in
millions)
|
||||
|
Book
value of goodwill of the reporting unit
|
$
|
39.7
|
||
|
Indicated
fair value of the reporting unit
|
115.6
|
|||
|
Current
assets less current liabilities
|
(27.0
|
)
|
||
|
Net
property, plant, and equipment
|
(41.3
|
)
|
||
|
Intangible
assets
|
(29.2
|
)
|
||
|
Amount
available to allocate to goodwill
|
18.1
|
|||
|
Estimate
of impairment loss
|
$
|
21.6
|
||
The
indicated fair value of the Fiber Optics reporting unit was determined to be
$115.6 million under SFAS 142 step one. We estimated that the fair
value of working capital was equal to its book value of $27.0
million. Since we did not have enough time to obtain an
appraisal of our property, plant, and equipment or enough time to determine the
fair value of our intangible assets, we assumed book value to be at least equal
to the low end of possible fair value ranges. It was not expected
that the fair value of the Company’s assets or liabilities, most of which were
classified as current or recently acquired through acquisitions, would
significantly differ from the book value. In addition, the
Company did not have any debt at September 30, 2008. Comparing the
book value of goodwill to the amount available to allocate to goodwill resulted
in an estimated implied impairment loss of $21.6 million, which would not be
less than the calculated amount.
Since the
second step of the goodwill impairment test was not completed before the
financial statements were issued and a goodwill impairment loss was probable and
could be reasonably estimated, management recorded its best estimate of goodwill
impairment which totaled $22.0 million during the three months ended September
30, 2008.
The status of the completion
of step 2 and whether we had material adjustments
The
impairment test performed at September 30, 2008 was an interim impairment
test.
During
the three months ended December 31, 2008, management noted further significant
deterioration of the Company’s market capitalization, coupled with 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 at December 31, 2008 and
management weighted the market-based approach heavier against the DCF method due
to observable available information. Based on this analysis, both of
the Company’s Fiber Optics reporting units failed step one and the Company
determined that goodwill related to both of its Fiber Optics reporting units was
fully impaired. 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
completion of the September 30, 2008 step two impairment analysis was not deemed
necessary since the December 31, 2008 impairment analysis resulted in a complete
impairment of goodwill in the Company’s Fiber Optics reporting
units.
The complexities which led
to our inability to complete the analysis
The
complexities which led to our inability to complete the analysis and thus unable
to complete step two included but were not limited to:
• Valuing
property, plant, and equipment in a timely basis;
• Identifying
and valuing intangible assets in a timely basis; and,
• Identifying
and valuing unrecorded assets and liabilities in a timely basis.
These
issues were further complicated by the inherent difficulty of valuing assets in
a rapidly declining economy.
How our accounting is in
compliance with paragraphs 22 and 47c of SFAS 142
Paragraph
22 of SFAS 142 states “If the second step of the goodwill impairment test is not
complete before the financial statements are issued and a goodwill impairment
loss is probable and can be reasonably estimated, the best estimate of that loss
shall be recognized in those financial statements. Paragraph 47(c)
requires disclosure of the fact that the measurement of the impairment loss is
an estimate. Any adjustment to that estimated loss based on the
completion of the measurement of the impairment loss shall be recognized in the
subsequent reporting period”.
Our
accounting and financial reporting was in compliance with paragraph 22 of SFAS
142 for the following reasons:
|
|
•
|
The
second step of the goodwill impairment test was not complete by our filing
of our Annual Report on Form 10-K on December 30,
2008.
|
|
|
•
|
A
goodwill impairment loss was probable and could reasonably be
estimated. The Company recognizes that there could be a range
of estimated impairments. Management recorded a non-cash
goodwill impairment charge of $22.0 million, as a best estimate, during
the three months ended September 30,
2008.
|
• We
disclosed that the goodwill impairment loss recognized was an
estimate.
|
|
•
|
An
adjustment to the estimated loss based on the completion of the
measurement of the impairment loss was recognized in the subsequent
financial reporting period. The magnitude of the adjustment was
due to further changes in estimates of future operating and cash flow
results and discount rates that occurred in the subsequent
period. The Company found no benefit to separate the adjustment
from the estimated impairment charge reported in the prior
period.
|
Paragraph
47(c) of SFAS 142 states “For each goodwill impairment loss recognized, the
following information shall be disclosed in the notes to the financial
statements that include the period in which the impairment loss is recognized:
If a recognized impairment loss is an estimate that has not yet been finalized
(refer to paragraph 22), that fact and the reasons therefore and, in subsequent
periods, the nature and amount of any significant adjustments made to the
initial estimate of the impairment loss.”
Our
accounting and financial reporting was in compliance with paragraph 47c of SFAS
142 for the following reasons:
|
|
•
|
We
disclosed that the goodwill impairment analysis was not finalized and that
the loss recognized was an
estimate.
|
|
|
•
|
We
disclosed that the goodwill impairment analysis was not finalized due to
the complexities involved in determining the implied fair value of the
goodwill.
|
How we considered the need
to disclose this information in our MD&A
In our
MD&A we disclosed that based on our goodwill impairment analysis, we
determined that an impairment loss of $22 million existed at September 30,
2008. In addition, we stated that an impairment test would also be
performed at December 31, 2008 and further impairment was likely to
result. We stated in our footnotes that we had not completed the step
two analyses, and therefore, the impairment loss was management’s best
estimate. At the time, we did not feel a need to repeat this in our
MD&A as this was adequately disclosed in our notes to the financial
statements.
The
Company acknowledges that trends (reasonably likely trends and their reasonably
likely impacts) are required to be disclosed in MD&A. In future
filings, the Company will enhance its disclosure of goodwill impairment in the
MD&A section similar to our response to comment #6.
9) We
note your disclosure on page 66 that you performed impairment testing on
intangible assets as of September 30, 2008 and determined that there was no
impairment. In light of your recurring losses, decreasing stock
price, cash flow deficits and the economic downturn, please tell us how you
determined that there was no impairment of amortizing intangible
assets. In that regard, tell us how you determined the fair value of
the intangible assets and explain why you believe your methods, models, and
assumptions are appropriate in GAAP. If you applied more than one
model, please clarify how you applied, evaluated, and weighted the
models.
RESPONSE: Our
impairment testing of intangible assets under SFAS 144 consists of determining
whether the carrying amount of the long-lived asset (asset group) is
recoverable. That is, whether the sum of the future undiscounted cash
flows expected to result from the use and eventual disposition of the asset
(asset group) exceeds its carrying amount.
The
following paragraphs describe our methods and significant
assumptions.
We
prepared forecasted income statements through September 30, 2013 for each of the
reporting units. Our reporting units are the lowest level for which
identifiable cash flows are largely independent of the cash flows of other
assets and liabilities. These forecasted income statements were used
to derive forecasts of future cash flows, which were consistent to the models
used in SFAS 142 goodwill impairment testing. To arrive at future
cash flows as defined in SFAS 144, the following adjustments were made to
forecasted income:
|
|
•
|
Non-cash
depreciation and amortization expenses, as estimated by GAAP standards, on
existing assets were added;
|
•
Non-cash expenses related to stock option issuances were
added; and,
|
|
•
|
Estimated
increases in the working capital were subtracted from adjusted net income,
while declines in working capital were added to adjusted net
income.
|
No
adjustments were made for future capital expenditures in accordance with
paragraph 19 of SFAS 144. Cash flows were forecasted through
September 30, 2013 in accordance with the five year useful life of the primary
asset (machinery and equipment). As the primary asset is not the
asset of the group with the longest remaining life, estimates of future cash
flows assumed the sale of the group at the end of the remaining useful life of
the primary asset (SFAS 144 paragraph 18). Thus, the Capitalization
of Earnings method was applied to the cash flow for the trailing twelve months
at the end of the useful life of the primary asset to estimate the sale value of
the group. The sum of the undiscounted future cash flows through
September 30, 2013 and the undiscounted terminal value was then calculated to
determine the total future cash flows from the asset group. The sum
of future undiscounted cash flows exceeded the carrying value for each of the
reporting units. Accordingly, no impairment of long-lived assets
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.
In
response to your comment and in our future filings, the Company will expand and
clarify the disclosures relating to its intangible
assets. Please see our response to comment #10 which includes
our revised disclosure.
Although
we have had recurring losses, a decreasing stock price, a cash flow deficit and
the fact that we were operating in an economic downturn, impairment of our long
lived assets under SFAS 144 at September 30, 2008 was not
warranted. Management is aware of these challenges and recognizes its
obligation to record any impairment on a timely basis. Management
performs SFAS 144 testing prior to SFAS 142 testing. Due to the
inherent differences in methodology between SFAS 142 and SFAS 144, it does not
seem unusual to have impairment on a value basis model but not on a cost
recovery model.
10) We
reference your recurring losses each period. Please tell us and
revise future filings to disclose in MD&A why you believe the remaining
carrying amounts of goodwill and intangible assets are
recoverable. Please provide reasonably specific disclosure about the
accounting, cash flow, business and operational factors that form the basis for
your conclusion.
RESPONSE: In
response to your comment and in our future filings, please see our responses to
your comments #6 through #9. The Company will expand and clarify
disclosures relating to goodwill (see our response to comment #6 regarding
goodwill disclosures) and intangible assets to read similar as
follows:
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 intangible assets are subject to amortization,
the Company reviews these intangible assets for impairment in accordance with
the provisions of FASB Statement No. 144, Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed
Of. As part of internal control procedures, the Company
reviews long-lived assets and other intangible assets for impairment on an
annual basis or whenever events or changes in circumstances indicate that its
carrying amount may not be recoverable. Our impairment testing of
intangible assets consists of determining whether the carrying amount of the
long-lived asset (asset group) is recoverable. That is, whether the
sum of the future undiscounted cash flows expected to result from the use and
eventual disposition of the asset (asset group) exceeds its carrying
amount. In making this determination, the Company uses certain
assumptions, including estimates of future cash flows expected to be generated
by these assets, which are based on additional assumptions such as asset
utilization, length of service that assets will be used in our operations, and
estimated salvage values.
|
·
|
At
December 31, 2007, the Company tested for impairment of long-lived assets
and other intangible assets and based on that analysis, it was determined
that no impairment existed.
|
|
·
|
As
disclosed in the Company’s Annual Report on Form 10-K, as a result of
reductions to our internal revenue forecasts, changes to our internal
operating forecasts and a drastic reduction in our market capitalization
since the completion of the Intel Acquisitions, the Company tested for
impairment of 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
preformed 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 acquired from the February 2008 acquisition of telecom-related
assets of Intel Corporation’s Optical Platform
Division. Subsequent to the acquisition, the Company
abandoned certain lines of technology
development.
|
|
·
|
At December 31, 2008, due to further changes in estimates of future operating and cash flow results that occurred during the quarter, the Company tested for impairment of its long-lived assets and other intangible assets and based on that analysis, no impairment existed. Based upon revised operational and cash flow forecasts, total future undiscounted cash flows exceeded carrying value by over 50%, therefore the Company believes the carrying amount of its intangible assets is recoverable. However, if there is further erosion of the Company’s market capitalization or the Company is unable to achieve its projected cash flows, management may be required to perform additional impairment tests of its remaining intangible assets. The outcome of these additional tests may result in the Company recording additional impairment charges. |
Note
4. Equity – Former Employee Stock Options Tolled, page
72
11)
Please tell us and disclose in future filings how you valued the modified stock
options. Please disclose the methods, models, and assumptions under
SFAS 123(R).
RESPONSE: In
response to your comment and in future filings, the Company will expand the
disclosure of stock-based compensation expense from tolled
options. Please see our response in comment #4 which includes
our revised disclosure.
Note
5. Acquisitions, page 75
12) Please
tell us whether you have filed the agreements for your significant acquisitions
in February 2008 and in April 2008.
RESPONSE: In
response to your comment, please note that the Company has filed these
agreements. The first asset purchase agreement, dated December 17,
2007, between the Company and Intel Corporation, was filed as exhibit 2.1 to the
Company’s quarterly report on Form 10-Q filed with the SEC on February 11,
2008. The second asset purchase agreement, dated April 9, 2008,
between the Company and Intel Corporation, was filed as exhibit 2.1 to the
Company’s quarterly report on Form 10-Q filed with the SEC on May 12,
2008.
13) Please
tell us and in future filings disclose how you determined the fair value of the
assets acquired. Specifically address each identifiable intangible
asset recognized. In addition, disclose the nature of the developed
and core technology acquired.
RESPONSE: In
response to your comment and in our future filings, the Company will expand
disclosures relating to assets acquired to read similar as follows:
Acquired
Assets
The
acquired inventory included raw materials and finished goods. The raw
materials were valued based on replacement cost, and considered reserve
adjustments associated with components not expected to be used. The
finished goods were valued utilizing the comparative sales and income
methods. Based on these methods, the expected selling prices of the
finished goods to customers in the ordinary course of business were used as a
starting point. Adjustments were then applied for other factors,
including:
|
·
|
The
time that would be required to dispose of the
inventory;
|
|
·
|
The
expenses that would be expected to be incurred in the disposition and sale
of the inventory; and
|
|
·
|
A
profit commensurate with the amount of investment in the assets and the
degree of risk.
|
The
Company determined the fair value of the acquired fixed assets utilizing the
cost approach, which is based on measuring the benefits related to an asset by
the cost to reconstruct or replace it with another of like
utility. The fixed asset valuation considered:
|
·
|
Estimation
of the current replacement cost of the assets by indexing historical
capitalized costs based on asset type and acquisition date;
and
|
|
·
|
Physical
depreciation and certain obsolescence
adjustments.
|
The
acquired intangible assets included core and developed technologies and customer
relationships. The core and developed technologies considered the
underlying technologies associated with the various products associated with the
acquired businesses, including optical transceivers and optical cable
connects. Developed technology related to product-specific aspects
for product versions released or technologically feasible at the acquisition
date. Core technology considered non-product specific technology and
designs which are incorporated in a variety of products. The core and
developed technologies and customer relationships were valued utilizing an
“excess earnings” income approach, which estimates value based on the net
present value of expected future after-tax cash earnings, after charges for
required contributory assets.
14) Please
tell us and in future filings disclose how the 3.7 million restricted shares
were valued.
RESPONSE: In
response to your comment and in our future filings, the Company will expand our
disclosure to read similar as follows:
On April
20, 2008, the Company acquired the enterprise, storage, and connects
cable-related assets of Intel Corporation’s Optical Platform
Division. The assets acquired include inventory, fixed assets, and
intellectual property. As consideration for the purchase of assets,
the Company issued 3.7 million restricted shares of the Company’s common stock
valued at $26.1 million. These shares were valued based on the
closing price of the Company’s common stock on Friday, April 18, 2008 of $7.05
per share. Any discount due to restrictions was deemed to be
immaterial to the consolidated financial statements.
15) Please
tell us about and in future filings disclose any significant changes in the
purchase allocation from what was reported in the Form 8-K/A dated February 22,
2008, including the reasons for those changes. In that regard, we see
that the amounts allocated to goodwill and intangible assets are significantly
different from the amount reported in the pro forma balance sheet included in
the Form 8-K/A.
RESPONSE: As
disclosed in the Form 8-K/A, “The allocation to identifiable intangibles is
based on an estimation of approximately 10% of the purchase
price. The preliminary valuations of the tangible and identifiable
intangible assets are subject to final valuations and further review by
management, which may result in material adjustments. The Company is also
currently in the process of engaging a third party valuation specialist to
perform an independent valuation. Adjustments to these estimates will
be included in the final allocation of the purchase price of OPD.”
In
response to your comment and in our future filings, the Company will expand our
disclosure to read similar as follows:
On May 7,
2008, the Company filed a Current Report on Form 8-K/A which included a
preliminary purchase price allocation based on management’s best estimate using
observable available information. A significant variance
between the preliminary purchase price and the final purchase price allocation
relates to the valuation of acquired intangible assets offset primarily by a
corresponding variance in goodwill. Initially, the Company estimated
that the fair value of the intangible assets would approximate 10% of the total
purchase price. Subsequent to the filing of the Form 8-K/A, the
Company completed its review of the purchase price allocation which resulted in
approximately $14 million of additional intangible asset value.
Note
7. Restructuring Charges, page 79
16)
Please tell us how the restructuring charges included in the summary table at
the top of page 79 agree with the amounts presented in the roll-forward
appearing directly below that summary.
RESPONSE: The
‘Amount Incurred in Period’ and the “Accrual as of September 30, 2008’ in the
summary table agree with the amounts listed in the roll-forward appearing
directly below that summary.
In
response to your comment and in our future filings, we have revised our
disclosure regarding restructuring charges in our quarterly report on Form 10-Q
for the quarter ended December 31, 2008, as follows:
Restructuring
Charges
In
accordance with SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities, SG&A expenses recognized as
restructuring charges include costs associated with the integration of business
acquisitions and overall cost-reduction efforts.
The
Company has undertaken several cost cutting initiatives intended to conserve
cash including recent reductions in force, the elimination of fiscal 2009 merit
increases, a significant reduction in capital expenditures and a greater
emphasis on improving its working capital management. These
initiatives are intended to conserve or generate cash in response to the
uncertainties associated with the recent deterioration in the global
economy.
Restructuring
charges consisted of the following:
|
(in
thousands)
|
Three
Months Ended December 31,
|
|||||||
|
2008
|
2007
|
|||||||
|
Employee
severance-related expense
|
$
|
617
|
$
|
362
|
||||
|
Other
restructuring-related expense
|
-
|
93
|
||||||
|
Total
restructuring charges
|
$
|
617
|
$
|
455
|
||||
The
following table sets forth changes in the severance and restructuring-related
accrual accounts for the three months ended December 31, 2008:
|
(in
thousands)
|
Severance-related
Accrual
|
Restructuring-related
Accrual
|
Total
|
|||||||||
|
Balance
as of September 30, 2008
|
$
|
152
|
$
|
330
|
$
|
482
|
||||||
|
Additional
accruals
|
617
|
-
|
617
|
|||||||||
|
Cash
payments or otherwise settled
|
(536
|
)
|
(96
|
)
|
(632
|
)
|
||||||
|
Balance
as of December 31, 2008
|
$
|
233
|
$
|
234
|
$
|
467
|
||||||
The
severance-related and restructuring –related accruals are recorded as accrued
expenses within current liabilities since they are expected to be settled with
the next twelve months. We may incur additional restructuring charges
in the future for employee severance, facility-related or other exit
activities.
Note
13. Debt – Convertible Subordinated Notes, page 82
17)
Please tell us and clarify in future filings how you computed the loss on
conversion of the subordinated notes.
RESPONSE: In response to
your comment, we reviewed SFAS 84, Induced Conversions of Convertible
Debt—an amendment of APB Opinion No. 26, and in our future filings, we
will expand our disclosure regarding the loss on conversion of subordinated
notes to read similar as follows:
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.
Note
18. Related Party Transactions, page 89
18) Please
tell us how you evaluated the requirements of EITF 02-14, including that the
investment in WWAT does not qualify as “in-substance” common stock and that the
equity method of accounting is not appropriate. In that regard, tell
us how you evaluated the liquidation preference of the investment in arriving at
your conclusion.
RESPONSE: On
November 29, 2006, the Company invested $13.5 million, and incurred $0.4 million
in transaction costs, in a company formerly named WorldWater & Solar
Technologies Corporation (“WWAT”), now named Entech Solar, Inc. At
September 30, 2007, the Company held an approximately 21% equity ownership in
WWAT. In connection with the investment, the Company received two
seats on WWAT's Board of Directors. EITF 02-14, Whether an Investor Should Apply the
Equity Method of Accounting to Investments Other Than Common Stock,
provides guidance on whether an investor should apply the equity method of
accounting to investments other than common stock. In accordance with
EITF 02-14, although the investment in WWAT provided the Company the ability to
exercise significant influence over the operating and financial policies of
WWAT, the investment did not qualify as in-substance common
stock. In-substance common stock is an investment in an entity that
has risk and reward characteristics that are substantially similar to the
entity’s common stock. The risk and reward characteristics of the
Company’s investment was not substantially similar to WWAT’s common
stock. WWAT had adequate subordinated equity from a fair value
perspective, based upon the amount of outstanding shares and the closing price
of WWAT common stock on the date of investment, in which case the liquidation
preference is considered substantive and the preferred stock investment is not
in-substance common stock. Therefore, the Company accounted for the
investment in WWAT under the cost method of accounting and has evaluated it for
other-than-temporary impairment each reporting period.
In June
2008, the Company agreed to sell two million shares of Series D Preferred Stock
of WWAT, together with 200,000 warrants to a significant shareholder of both the
Company and WWAT at a price equal to $6.54 per share. The sale took
place through two closings, one for one million shares and 100,000 warrants,
which closed in June 2008, and one for an equal number of shares and warrants
which closed in July 2008. Total proceeds from the sale were approximately $13.1
million. In the three months ended June 30, 2008, the Company
recognized a gain of $3.7 million on the first sale of stock that occurred in
June 2008. In the fourth quarter of fiscal 2008, the Company
recognized an additional gain of $3.7 million related to the second closing in
July 2008. As of September 30, 2008, the Company had approximately
$8.2 million invested in WWAT which approximates a 16%
ownership.
In
January 2009, the Company announced that it completed the closing of a two step
transaction involving the sale of its remaining interests in
WWAT. The Company sold its remaining shares of WWAT and warrants to a
significant shareholder of both the Company and WWAT, for approximately $11.6
million, which included additional consideration as a result of the termination
of certain operating agreements with WWAT. In the quarter ended March
31, 2009, the Company will recognize a gain of $3.4 million as a result of this
transaction.
Item
10. Directors and Executive Officers of the Registrant
Section
16(a) Beneficial Ownership Reporting Compliance, page 7
19) We
note your disclosure that “administrative errors” caused three instances of
noncompliance with the beneficial ownership reporting requirements of Section
16(a) of the Exchange Act. We note further your disclosure that delinquent Forms
3 and 4 were filed on January 20, 2009 and January 8, 2009,
respectively. However, we note that only one Form 4 was recently
filed on the date of January 5, 2009. Please advise or revise.
RESPONSE: In
response to your comment, we note that the referenced Section 16 reports were
filed on January 8, 2009 and January 20, 2009, as indicated.
Item
11. Executive Compensation
Compensation
of Directors, page 7
20) It
is not clear why you are reporting the amounts set forth in column (c) as “All
Other Compensation” pursuant to Item 402(k)(2)(vii) of Regulation S-K. Given
that it appears as though this form of compensation is payable pursuant to the
2007 Stock Award Plan, please advise us as to why you are not reporting these
amounts under Item 402(k)(2)(iii) of Regulation S-K.
RESPONSE: In future
filings, we will report the amounts that were set forth under the “All Other
Compensation” column of the Directors Compensation Table under the “Stock
Awards” column pursuant to the disclosure requirements of Item 402(k)(2)(iii) of
Regulation S-K.
Compensation
Discussion and Analysis, page 9
21) We note your
disclosure that one factor you consider in executive compensation decisions is
“the compensation paid by companies within [your] peer group.” We
also note your disclosure on page 10 that your goal for base salaries is “a
level that approximates the median salaries of individuals in comparable
positions and markets.” Since you appear to benchmark compensation, please
discuss how each element of compensation relates to the data you analyzed from
the peer companies and include an analysis of where actual payments actually
fell within the targeted parameters. If any of your named executive officers are
compensated at levels that are materially different from the targeted levels of
compensation, please also provide discussion and analysis as to why. Refer to
Item 402(b)(2)(xiv) of Regulation S-K.
RESPONSE: In
response to your comment, in future filings we will expand our disclosure to
discuss how the base salaries of our named executive officers relate to the data
we analyzed from peer companies and where payments fell within the targeted
parameters. In addition, if any of our named executive officers are
compensated at levels that are materially different from the targeted levels of
base salary we will include a discussion and analysis as to why.
22) Notwithstanding
the identification of the “peer group” companies on page 9, it appears that you
rely to some extent upon “market surveys and other data” when implementing your
compensation programs. Please identify the surveys you used and their
components, including component companies, the elements of compensation that are
benchmarked and how you determine such benchmarks.
RESPONSE: In
response to your comment, in future filings we will identify the surveys we use
and their components, including component companies, the elements of
compensation that are benchmarked, and how we determine such
benchmarks.
Base
Salary, page 10
23)
We note your disclosure that annual salaries are set “based upon job
responsibilities, level of experience, [and] individual performance . . .”
Please describe specifically how the compensation committee considered these
factors when determining specific payouts. If compensation decisions
instead were based on the subjective discretion of the committee, please
describe the various factors that the committee took into consideration in
determining whether to make an upward or downward adjustment to
compensation.
RESPONSE: In
response to your comment, in future filings we will expand our disclosure to
describe in the manner you requested the Compensation Committee’s consideration
of factors in determining compensation levels.
24) We
note your disclosure that with respect to executive compensation, your executive
chairman “reviews the performance of the Chief Executive Officer and the other
executive officers and recommends salary increases for these individuals to the
Compensation Committee,” which “reviews, adjust . . . and approves the salary
increases . . .” Please expand your disclosure to provide a detailed explanation
of the executive chairman’s role in determining executive compensation. See Item
402(b)(2)(xv) of Regulation S-K.
RESPONSE: In
response to your comment, in future filings we will expand our disclosure to
provide a more detailed explanation of our Executive Chairman’s role in
determining executive compensation.
Annual
Cash Incentives, page 10
25) You
provide little discussion and analysis of the effect of individual performance
on incentive compensation, despite suggesting it is a significant
factor. Please provide additional disclosure and analysis of how
individual performance contributed to actual compensation for the named
executive officers. For example, disclose the elements of individual
performance, both quantitative and qualitative, specific contributions the
compensation committee considered in its evaluation, and if applicable, how they
were weighted and factored into specific compensation
decisions. Refer to Item 402(b)(2)(vii) of Regulation
S-K. Please also expand your disclosure to provide discussion and
analysis of those factors the committee considered in establishing personal
objectives for Messrs. Richards and Hou.
RESPONSE: In
response to your comment, in future filings we will enhance our disclosure of
how individual performance contributed to actual compensation for our named
executive officers, including discussion and analysis of those factors the
Compensation Committee considered in establishing personal objectives for
Messrs. Richards and Hou.
Long-Term
Stock-Based Incentives, page 11
26) We
note that you do not state how you determined the amounts of stock options to be
granted to your named executive officers. In future filings, please
describe the elements of corporate and individual performance that are taken
into account in granting these options and why the compensation committee
determined that the specific equity allocation was appropriate in light of the
factors considered. Your revised disclosure also should clarify the
reasons for the differences in the relative size of the grants among
officers.
RESPONSE: In
response to your comment, in future filings we will expand our disclosure by
describing the elements of corporate and individual performance that are taken
into account in granting stock options to our named executive officers and why
the Compensation Committee determined that the specific equity allocation was
appropriate in light of the factors considered. We will also enhance
our disclosure to clarify the reasons for differences in the relative size of
stock option grants among our named executive officers.
Item
13. Certain Relationships and Related Transactions
Transactions
with Related Persons, page 25
27) Please
expand your disclosure to describe your policies for the review and approval of
related party transactions, and include a discussion of the standards to be
applied pursuant to such policies. See Item 404(b)(1) of Regulation
S-K.
RESPONSE: We
believe our disclosure sufficiently describes our policy for the review and
approval of related person transactions as required under Item 404(b)(1) of
Regulation S-K. As explained on page 25 of our Form 10-K under the
heading “Transactions With Related Persons”, the types of transactions that are
covered by our policy are “any financial or other transaction, arrangement or
relationship (including any indebtedness or guarantee of indebtedness) or any
series of similar transactions, arrangements or relationships in which the
Company (or a subsidiary) would be a participant and the amount involved would
exceed $120,000, and in which any related person would have a direct or indirect
material interest.” We explain that the Compensation Committee is
responsible for administering the policy, that the policy is a written policy
and the standards applied by the Compensation Committee when reviewing a
transaction under the policy (e.g., when considering the
appropriate action to be taken regarding a related person transaction, the
Compensation Committee will “consider the best interests of the Company, whether
the transaction is comparable to what would be obtainable in an arms-length
transaction, is fair to the Company and serves a compelling business
reason, and any
other factors as it deems relevant.”)
Item
15. Exhibits and Financial Statement Schedules
Exhibits,
page 98
28) Please
file as an exhibit the “non-binding Memorandum of Understanding” referenced on
page 9. Please refer to Item 601(b)(10) of Regulation S-K. Also, please tell us
what you mean when you state that you have agreed to “cooperate with respect to
bidding on CPV and other photovoltaic projects in North America, Europe and
Middle East.”
RESPONSE: In
response to your comment, we respectfully submit that the non-binding memorandum
of understanding to which reference is made is not a material agreement that
would be required to be filed as an exhibit pursuant to Item
601(b)(10).
Item 601(b)(10)
of Regulation S-K generally requires a registrant to file every contract not
made in the ordinary course of business which is material to the registrant. In
addition, registrants are required to file ordinary course contracts upon which
the registrant’s business is substantially dependent. The memorandum of
understanding was a non-binding document that was similar in nature to other
non-binding memoranda the Company considers from time to time in the ordinary
course of business. Moreover, we do not believe that we are
substantially dependent in any way on the non-binding memorandum.
In
response to the second question posed in your comment, terrestrial CPV project
customers often request proposals from prospective suppliers through a
competitive request for proposal (“RFP”) process. As we disclosed in
our Annual Report on Form 10-K, the non-binding memorandum of understanding
outlines certain terms of understanding that include jointly
responding to such requests, but it does not represent any definitive agreement
to do so.
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In
connection with responding to your comments and with this submission, we hereby
acknowledge that the Company is responsible for the adequacy and accuracy of the
disclosure in the filings; staff comments or changes to disclosure in response
to staff comments do not foreclose the Commission from taking any action with
respect to the filings; and the Company may not assert staff comments as a
defense in any proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
We
believe the responses above fully address the comments contained in your
letter. Please call me at (626) 293-3715 if you have any questions
regarding the above responses.
Very
truly yours,
/s/ John M.
Markovich
John M.
Markovich
Chief
Financial Officer
EMCORE
Corporation