Asset Sale, Patent Acquisition Sharply Focuses MOSAID as an Intellectual Property Company
Fiscal 2007 third quarter revenues were $18.7 million, up 13% from $16.5 million in the fiscal 2006 third quarter. Third quarter revenues were higher primarily due to the previously announced patent licenses with Infineon Technologies AG and Qimonda AG. Net income for the third quarter was $4.3 million or $0.38 per diluted share, up from $3.6 million or $0.31 per diluted share in the third quarter of fiscal 2006. Third quarter net income was reduced by unusual expenses of $840,000 related to the Company's strategic alternatives initiative. There were no such expenses in the comparative period for fiscal 2006.
For the first nine months of fiscal 2007, revenues were $61.3 million, up 30% from $47.0 million for the comparable period in fiscal 2006. Net income in the first nine months of the current fiscal year was $15.7 million or $1.38 per diluted share, up 28% from $12.3 million or $1.07 per diluted share in the first nine months of fiscal 2006. Costs related to the strategic alternative initiative totaled $2.0 million in the first nine months of fiscal 2007. There were no such costs in the comparative period last year.
MOSAID today executed on two elements of its strategic alternatives initiative, announcing a Systems Division asset sale and business wind-down, and a major acquisition of wireless patents. (See the two press releases at www.mosaid.com.) The Company announced the sale of the principal assets of its automatic test equipment (ATE) business to Teradyne, Inc. for $20 million in cash, and the orderly wind-down of this business. MOSAID anticipates that this transaction will result in a pre-tax gain, including the impact of discontinued operations, of approximately $13 million, reportable in the fourth quarter, ending April 30, 2007. In addition, MOSAID announced the purchase of a valuable portfolio of essential patents related to WiFi and WiMAX technology from Agere Systems. The Company believes that the licensing revenue from this portfolio of 23 issued and pending patents has the potential to surpass the revenues that MOSAID has earned to date from its DRAM memory patents.
"The asset sale and patent acquisition are important steps in MOSAID's strategic alternatives initiative, resulting in a Company that is sharply focused on developing and licensing intellectual property," said George Cwynar, President and Chief Executive Officer, MOSAID. "As we continue to pursue the strategic alternatives initiative, we are also taking steps today to rationalize our Semiconductor Intellectual Property products portfolio."
"In the third quarter, we continued to demonstrate steady financial performance while engaged in the strategic alternatives initiative, and we remain on track to deliver the best financial results in the Company's history," said Richard Boadway, Executive Vice President and Chief Financial Officer, MOSAID. "In the Intellectual Property (IP) Division, the Patent Licensing program delivered excellent results but the Semiconductor IP products group again performed below expectations. It is our view that the DDR memory controller and PLL timing product portfolios are competitive in the marketplace. However, our Mobilize product family has not met with market acceptance, so we are stopping further development and reducing our cost structure accordingly, which will require a restructuring charge of $6 million to $6.5 million. MOSAID's patents on the low-power circuit techniques of Mobilize may yield an attractive future patent licensing opportunity."
The wind-down of the Systems Division on April 30 and staff reductions in the Semiconductor IP and corporate groups will result in a staff reduction of 57 employees from the current base of 116 employees.
At the end of the fiscal 2007 third quarter, the Company had cash and marketable securities of $63.6 million, compared with $67.2 million at the end of the second quarter. Working capital declined marginally in the quarter. MOSAID expects net cash proceeds from the sale of Systems Division assets to be $16 million, with cash costs of the announced Semiconductor IP restructuring actions to be approximately $1 million, resulting in a net cash gain of approximately $15 million.
Operating Highlights
--------------------
The Intellectual Property Division recorded another highly profitable quarter, with third quarter revenue of $14.8 million and segment profit of $6.5 million or 44% of segment revenues. During the quarter, MOSAID acquired a portfolio of nine patents related to Pseudo-Static Random Access Memory (PSRAM) technology.
MOSAID also announced general availability of the industry's first complete Double Data Rate (DDR) Synchronous Dynamic Random Access Memory (SDRAM) controller and interface IP, as well as Phase Locked Loop (PLL) IP product, in leading 65nm process technology. These new products position MOSAID well in their respective semiconductor IP market segments.
As anticipated, results for the Systems Division improved in the third quarter. A segment profit of $50,000 on revenues of $3,960,000 compared favourably to a segment loss of $717,000 on revenues of $3.1 million for the fiscal 2007 second quarter. MOSAID anticipates that the Systems Division will make a positive contribution of $1 million to $2 million in the fourth quarter, as it is wound down and reported as a discontinued operation.
On February 5, 2007, in the United States District Court for the Northern District of California, San Jose Division, Judge Fogel issued an order denying MOSAID's and Infineon's joint motion to vacate Judge Martini's summary judgment and Markman orders. Judge Fogel's order leaves the matter of collateral estoppel with regard to these rulings to be decided by the court in the Eastern District of Texas.
At the end of the third quarter, MOSAID's patent portfolio grew to 720 patents issued or pending, up from 687 at the end of the second quarter. Approximately 40% of MOSAID's issued or pending patents relate to memory technology and 60% to other technology areas.
MOSAID had 15 companies on notice for patent infringement and was in litigation with four of these companies at the end of the third quarter.
Guidance
--------
Guidance for MOSAID's revenues in the fourth quarter of fiscal 2007 is $13.5 million to $14.0 million and for net earnings is $5.5 million to $6.5 million. These figures do not include a provision for depreciation of the newly acquired patent portfolio. Fiscal 2007 revenues are forecast to range between $64.7 million and $65.2 million, compared with earlier guidance of $80 million to $85 million, of which Systems Division revenues would have been $15 million to $16 million. Net earnings are expected to range from $21 million to $22 million, compared with earlier guidance of $18 million to $20 million, as a result of the sale of Systems Division assets and the Semiconductor IP restructuring expense. Because the accounting for the Systems Division's results necessitates a reclassification of these results as discontinued operations, represented as one line on the income statement, revenues will be reduced, both for the fourth quarter and the full fiscal year.
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Conference Call and Webcast
Management will hold a conference call and webcast on Thursday, February
22, 2007 at 5:00 p.m. (ET). Participants wishing to access the conference
call should dial 1-800-591-7539. The webcast will be live at
www.mosaid.com and
www.newswire.ca, and subsequently archived on MOSAID's
web site. A replay of the conference call will be available until
midnight on Thursday, March 1, 2007. To access the replay, please dial
1-877-289-8525 and enter passcode 21219466#.
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About MOSAID
------------
MOSAID Technologies Incorporated makes semiconductors better through the development and licensing of intellectual property. MOSAID counts many of the world's largest semiconductor companies among its customers. Founded in 1975, MOSAID is based in Ottawa, Ontario, with offices in Santa Clara, California. For more information, visit www.mosaid.com.
Forward Looking Information
This document and certain other public documents incorporated by reference in this document, contain forward-looking statements to the extent they relate to MOSAID or its management, including those identified by the expressions "anticipate," "believe," "foresee," "estimate," "expect," "intend," "could," "may,", "plan," "will," "would" and similar expressions. Similarly, statements in this document that describe MOSAID's business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements. These forward-looking statements are not historical facts, but rather reflect MOSAID's current expectations regarding future events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results, performance or achievements to differ materially from those in such forward-looking statements. Assumptions made in preparing forward-looking statements and financial guidance include, but are not limited to, the following: MOSAID's continued expansion of its patent portfolio and of its opportunities for future patent licensing revenue as a result of MOSAID's acquisition of patents from third parties and from development of new inventions; DRAM manufacturers continuing to infringe MOSAID's patents; the timing and amount of MOSAID's litigation expenses; MOSAID's ability to sign new patent licensees; the value proposition associated with MOSAID's products relative to its competition in the market; the timing and amount of MOSAID's Research & Development expenses; the timing of MOSAID's new product introductions; MOSAID's ability to develop, manufacture, and market innovative products in a rapidly changing technological environment; and MOSAID's ability to maintain and enhance existing customer relationships.
Factors that could cause actual results to differ materially from expected results include, but are not limited to, the following: declines or unexpected variations in market growth rates for MOSAID's products; the extent of embedded DRAM proliferation in the System-on-a-Chip markets; variability in customer deployment schedules from quarter to quarter; shifts in the mix of MOSAID products sold; unfavorable legal rulings in MOSAID's patent litigations; economic, social, and political conditions in the countries in which MOSAID, its customers, suppliers, or patent licensees operate, including security risks, health conditions, possible disruptions in transportation networks and fluctuations in foreign currency exchange rates; non-payment or delays in payment by customers/licensees; failure to maintain and enforce MOSAID's existing patent portfolio, or failure to obtain valuable patents as a result of research and development activities, or failure to acquire valuable patents from third parties; MOSAID's ability to recruit and retain skilled personnel; change in MOSAID's financial position; obsolescence of products or inappropriate targeting to markets that fail to materialize; inability to transition to new technologies to meet customer demand; variations in average sales cycles; key component supply restrictions and/or cost increases; critical industry transitions; consolidation of MOSAID's customers and/or licensees; natural events, such as severe weather and earthquakes in the locations in which MOSAID, its customers, suppliers, or patent licensees operate; and changes in the tax rate applicable to MOSAID as the result of changes in the tax law in the jurisdictions in which profits are determined to be earned and taxed, the outcome of tax audits and the ability to realize deferred tax assets.
MOSAID assumes no obligation to update or revise any forward-looking statements. Additional information identifying risks and uncertainties affecting MOSAID's business and other factors that could cause MOSAID's financial results to fluctuate are contained in MOSAID's Annual Information Form, under the section entitled "Risk Factors," and in MOSAID's other public filings available online at www.sedar.com.
FINANCIAL STATEMENTS AND NOTES TO FOLLOW
MOSAID TECHNOLOGIES INCORPORATED
(Subject to the Canadian Business Corporations Act)
CONSOLIDATED BALANCE SHEET
(In thousands of Canadian Dollars)
As at As at
January 31, April 30,
2007 2006
(unaudited) (audited)
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Current Assets
Cash and cash equivalents $ 11,471 $ 15,542
Marketable securities 52,096 55,788
Accounts receivable 7,642 7,113
Income taxes receivable - 381
Inventories 1,292 1,779
Prepaid expenses 1,770 1,700
Future income taxes recoverable 11,910 11,910
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86,181 94,213
Capital assets 8,840 9,328
Acquired intangibles 20,629 5,385
Goodwill 1,786 1,786
Future income taxes 23,310 27,439
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$140,746 $138,151
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Current Liabilities
Accounts payable and accrued liabilities $ 8,007 $ 7,653
Income taxes payable - 381
Deferred revenue 2,111 10,545
Mortgage payable 259 244
Current portion of other
long-term liabilities (Note 2) 2,224 -
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12,601 18,823
Mortgage payable 4,149 4,346
Other long-term liabilities (Note 2) 9,454 -
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26,204 23,169
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Shareholders' Equity
Share capital 100,231 102,476
Contributed surplus 3,696 2,630
Retained earnings 10,615 9,876
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114,542 114,982
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$140,746 $138,151
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See accompanying Notes to the Consolidated Financial Statements
MOSAID TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(In thousands of Canadian Dollars, except per share amounts)
(unaudited)
Nine Nine
Quarter Quarter months months
ended ended ended ended
January 31, January 31, January 31, January 31,
2007 2006 2007 2006
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Revenues $ 18,735 $ 16,541 $ 61,308 $ 47,027
Expenses
Labour and materials 1,271 2,026 3,665 5,608
Research and development 5,537 4,822 16,175 9,718
Selling and marketing 3,473 3,482 9,770 8,865
General and
administration 1,866 1,542 5,691 4,694
Bad debts - (446) 83 (386)
Special committee 840 - 1,964 -
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12,987 11,426 37,348 28,499
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Income from operations 5,748 5,115 23,960 18,528
Net interest
income (Note 3) 580 397 1,840 1,001
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Income before income
tax expense 6,328 5,512 25,800 19,529
Income tax expense 2,034 1,889 10,134 7,181
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Net income 4,294 3,623 15,666 12,348
Dividends 2,748 2,309 8,345 5,183
Normal course issuer bid - 2,941 6,582 2,941
Retained earnings,
beginning of period 9,069 14,014 9,876 8,163
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Retained earnings,
end of period $ 10,615 $ 12,387 $ 10,615 $ 12,387
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Earnings per share
(Note 4)
Basic $ 0.39 $ 0.32 $ 1.41 $ 1.08
Diluted $ 0.38 $ 0.31 $ 1.38 $ 1.07
Weighted average
number of shares
Basic 10,992,524 11,461,391 11,113,973 11,482,501
Diluted 11,204,923 11,593,845 11,329,671 11,573,864
See accompanying Notes to the Consolidated Financial Statements
MOSAID TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of Canadian Dollars)
(unaudited)
Nine Nine
Quarter Quarter months months
ended ended ended ended
January 31, January 31, January 31, January 31,
2007 2006 2007 2006
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Operating
Net income $ 4,294 $ 3,623 $ 15,666 $ 12,348
Items not affecting
cash:
Amortization 1,185 696 3,085 1,654
Stock option expense 387 340 1,066 951
Loss on disposal of
capital assets 142 24 142 24
Future income tax
recoverable (512) 187 4,129 2,034
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5,496 4,870 24,088 17,011
Change in non-cash
working capital items (2,390) 3,454 (8,192) (180)
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3,106 8,324 15,896 16,831
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Investing
Acquisition of capital
assets and acquired
intangibles (3,761) (468) (17,983) (1,159)
Acquisition of
marketable securities (31,832) (58,197) (77,982) (172,414)
Acquisition of shares
in Virtual Silicon
Technology Inc. - (24) - (6,388)
Proceeds on disposal/
maturity of marketable
securities 18,925 57,764 81,674 171,977
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(16,668) (925) (14,291) (7,984)
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Financing
Repayment of mortgage (62) (57) (182) (168)
Long-term due to Infineon (555) - 11,678 -
Repurchase of shares - (4,966) (9,997) (4,966)
Dividends (2,748) (2,309) (8,345) (5,183)
Issue of common shares 379 1,112 1,170 1,366
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(2,986) (6,220) (5,676) (8,951)
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Net cash (outflow) inflow
- continuing operations (16,548) 1,179 (4,071) (104)
Net cash (outflow)
- discontinued
operations - - - (62)
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Net cash (outflow) inflow (16,548) 1,179 (4,071) (166)
Cash and cash equivalents,
beginning of period 28,019 5,738 15,542 7,083
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Cash and cash
equivalents, end of
period $ 11,471 $ 6,917 $ 11,471 $ 6,917
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See accompanying Notes to the Consolidated Financial Statements
MOSAID TECHNOLOGIES INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Quarter ended January 31, 2007
(tabular dollar amounts in thousands of Canadian Dollars, except per
share amounts)
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance with Canadian generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for annual financial statements.
In the opinion of management, all adjustments consisting of normal recurring adjustments, considered necessary for a fair presentation of the Company's financial position, results of operations and cash flows have been included. Operating results for the interim period presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the full fiscal year ending April 30, 2007.
The accounting policies used in preparing these interim financial statements are consistent with those used in preparing the annual financial statements.
2. Other long-term liabilities
During Q1 fiscal 2007 the Company settled its patent litigations with Infineon Technologies AG (Infineon) and announced that both Infineon and its memory products spin-off, Qimonda AG (Qimonda), licensed the Company's patent portfolio.
Under the settlement terms, Infineon and Qimonda each receive a six-year license to the Company's entire patent portfolio. In addition, Infineon and Qimonda received a 'lives of the patents' license to the Company's patent families in dispute. Payments will be spread over the six-year term of the licenses. Under the terms of the settlement, financial details will be kept confidential.
The Company also purchased 50 patents from Infineon and Qimonda, ranked as one of the world's largest DRAM companies. The portfolio includes patents related to a range of technologies including DRAM memory, power management ICs, semiconductor process technology and digital radio applications. Payments by the Company for these patents will be spread over six years.
The amount on the Consolidated Balance Sheets represents amounts due by the Company as a result of the patents purchased by the Company, net of any current amounts due by Infineon and Qimonda as a result of the patent license arrangement with the Company.
3. Net Interest Income
Net interest income comprises the following:
Nine Nine
Quarter Quarter months months
ended ended ended ended
January 31, January 31, October 31, January 31,
2007 2006 2007 2006
-----------------------------------------------------
Interest income $ 670 $ 492 $ 2,113 $ 1,289
Interest expense 90 95 273 288
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$ 580 $ 397 $ 1,840 $ 1,001
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4. Earnings per Share
The following is a reconciliation of the numerator and denominator of the
basic and diluted per share computations:
Nine Nine
Quarter Quarter months months
ended ended ended ended
January 31, January 31, January 31, January 31,
2007 2006 2007 2006
-----------------------------------------------------
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Net income $ 4,294 $ 3,623 $ 15,666 $ 12,348
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Weighted average
number of common
shares outstanding 10,992,524 11,461,391 11,113,973 11,482,501
Net effect of stock
dilutions 212,399 132,454 215,698 91,363
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Weighted average
diluted number
of common shares
outstanding 11,204,923 11,593,845 11,329,671 11,573,864
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Earnings per share
Basic $ 0.39 $ 0.32 $ 1.41 $ 1.08
Diluted $ 0.38 $ 0.31 $ 1.38 $ 1.07
For the quarter and nine months ended January 31, 2007, 11,000 and 19,000 options respectively were excluded from the calculation of diluted earnings per share as the exercise price of these options exceeded the average market price of the Company's common stock during this period and were therefore anti-dilutive.
For the quarter and nine months ended January 31, 2006, 76,400 and 211,324 options respectively were excluded from the calculation of diluted earnings per share as the exercise price of these options exceeded the average market price of the Company's common stock during this period and were therefore anti-dilutive.
There were 620,673 and 810,091 options issued and outstanding as at January 31, 2007 and January 31, 2006 respectively.
5. Stock-based Compensation
The Company has an Employee Stock Purchase Plan (ESPP) whereby employees may elect to designate up to 5% of their annual salary to purchase common shares of the Company (Shares). For two six month periods commencing on the second business day after the Company's second quarter or fiscal year end financial results are publicly announced (each an "Offering Period"), eligible employees are given an opportunity to request that a percentage of their salary be deducted each pay period for the purpose of acquiring Shares. The purchase price under the ESPP is the lesser of 90% of the fair market value of the Shares, as determined by calculating the weighted average sale price for board lots as posted on the TSX the ten trading days immediately preceding (i) the first day of the Offering Period in which the purchase date falls or (ii) the purchase date. The Shares are not considered to be issued by the Company until the end of the six month period.
Also, the Company has an Employee and Director Stock Option Plan. The exercise price is no lower than the market price on the date of grant. Options granted under the Plan expire within a period of six years of granting, with vesting periods determined by the Human Resource Committee.
The Company employs a fair value method of accounting for all options issued to employees or directors on or after April 27, 2002. The fair value of options issued in the quarter was calculated using the Black-Scholes option pricing model and the following assumptions:
Quarter Quarter
ended ended
January 31, January 31,
2007 2006
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Risk free interest rate 4.05 % 3.41 %
Expected life in years 5.5 5.5
Expected dividend yield 3.6 % 3.4 %
Volatility 60.48 % 76.05 %
6. Business Segment Information
Based upon the Company's internal reporting structure, the following
operating segments have been assigned:
Intellectual Property (IP): A developer and licensor of semiconductor
intellectual property.
Systems: A supplier of engineering memory test and
analysis systems.
The significant accounting policies of the above segments are the same as those described in Note 1. Intersegment sales are recorded at cost. General and administrative costs are allocated to the operating segments based upon estimates of usage. The Company has not included net interest income, foreign exchange gains or losses, unusual items, gains or losses of long-term assets or income tax expense in the determination of operating segment profit.
Segment information
(in thousands of Canadian Dollars)
Unallo-
Nine months ended IP Systems cated
January 31, 2007 Division Division amounts Totals
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Revenues from external
customers $ 51,245 $ 10,063 $ - $ 61,308
Segment profit (loss) $ 27,569 $ (1,775) $(10,128) $ 15,666
Segment assets (x) $ 21,057 $ 1,930 $ 6,482 $ 29,469
Expenditure on segment
assets (x) $ 17,149 $ 619 $ 215 $ 17,983
Amortization and
write-down of segment
assets (x) $ 1,935 $ 795 $ 497 $ 3,227
Goodwill $ 1,786 $ - $ - $ 1,786
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Unallo-
Nine months ended IP Systems cated
January 31, 2006 Division Division amounts Totals
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Revenues from external
customers $ 30,678 $ 16,349 $ - $ 47,027
Segment profit (loss) $ 16,834 $ 1,966 $ (6,452) $ 12,348
Segment assets (x) $ 6,029 $ 1,951 $ 6,951 $ 14,931
Expenditure on segment
assets (x) $ 6,157 $ 863 $ 171 $ 7,191
Amortization and
write-down of segment
assets (x) $ 569 $ 663 $ 422 $ 1,654
Goodwill $ 1,791 $ - $ - $ 1,791
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Unallo-
Quarter ended IP Systems cated
January 31, 2007 Division Division amounts Totals
-------------------------------------------------------------------------
Revenues from external
customers $ 14,775 $ 3,960 $ - $ 18,735
Segment profit (loss) $ 6,503 $ 50 $ (2,259) $ 4,294
Segment assets (x) $ 21,057 $ 1,930 $ 6,482 $ 29,469
Expenditure on segment
assets (x) $ 3,658 $ 79 $ 24 $ 3,761
Amortization and
write-down of segment
assets (x) $ 798 $ 295 $ 234 $ 1,327
Goodwill $ 1,786 $ - $ - $ 1,786
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Unallo-
Quarter ended IP Systems cated
January 31, 2006 Division Division amounts Totals
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Revenues from external
customers $ 10,991 $ 5,550 $ - $ 16,541
Segment profit (loss) $ 4,842 $ 328 $ (1,547) $ 3,623
Segment assets (x) $ 6,029 $ 1,951 $ 6,951 $ 14,931
Expenditure on segment
assets (x) $ 72 $ 363 $ 133 $ 568
Amortization and
write-down of segment
assets (x) $ 347 $ 204 $ 145 $ 696
Goodwill $ 1,791 $ - $ - $ 1,791
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(x) Segment assets includes acquired intangibles but not goodwill