Revenues for the second quarter of fiscal 2007 were $19.6 million, up 21% from $16.3 million in the second quarter of fiscal 2006. Revenues for the current quarter were higher primarily due to the signing of patent license arrangements with Infineon Technologies AG and Qimonda AG. Net income for the second quarter was $4.7 million or $0.42 per diluted share, up from $4.3 million or $0.37 per diluted share in the second quarter of fiscal 2006. Second quarter net income was reduced by unusual expenses of approximately $1.1 million related to activities of the Special Committee of the Board, including supervision of the proxy contest prior to the Annual General Meeting and oversight of MOSAID's ongoing review of strategic alternatives.
For the first six months of fiscal 2007, revenues reached $42.6 million, up 40% from $30.5 million for the comparable period in fiscal 2006. Net income in the first six months of the current fiscal year was $11.4 million or $1.00 per diluted share, a gain of 30% from $8.7 million or $0.75 per diluted share in the first half of fiscal 2006.
The Company's cash balance and marketable securities at the end of the second quarter of fiscal 2007 totaled $67.2 million, compared with $68.7 million at the end of the first quarter of fiscal 2007. Working capital at the end of the second quarter was $74.8 million compared with $78.1 million at the end of the first quarter.
"The Company recorded strong financial results in the second quarter and first half of fiscal 2007," said George Cwynar, President and Chief Executive Officer, MOSAID. "This quarter we continued to broaden the reach of our patent portfolio by acquiring the right to license certain patents from Caltech, which followed the purchase of 50 patents from Infineon Technologies in the first quarter. We also strengthened the patent licensing business by hiring John Lindgren, a 20-year veteran of Texas Instruments, as MOSAID's Senior Vice President Patent Licensing, General Counsel and Corporate Secretary. Our Semiconductor IP products gained traction with customers, yielding stronger revenues than in the first quarter and the comparable quarter for last year, yet they remain below our expectations."
"We are on track to achieving the best financial year in MOSAID's 30 year history, and continue to balance reinvestment in the Company with returns to shareholders," said Richard Boadway, Executive Vice President and Chief Financial Officer, MOSAID. "To date in fiscal 2007, we have paid $5.6 million in dividends and repurchased 3.3% of our shares for $10 million. We have met our earnings guidance, despite incurring over $1 million in unusual expenses related to the proxy contest and review of strategic alternatives. Without the Special Committee expenses our net income would have been $5.4 million or $0.48 per diluted share. MOSAID's management and its investment bankers have vigorously pursued the strategic alternatives review and action program, and the level of activity remains high."
Operating Highlights
--------------------
The Intellectual Property Division was very profitable during the fiscal 2007 second quarter, posting revenue of $16.5 million and segment profit of $8.2 million or 50% of segment revenues. During the quarter and year to date, revenues from the licensing of semiconductor intellectual property blocks, while falling short of expectations, more than quadrupled as compared to the same period in fiscal 2006.
Results for the Systems Division in the second quarter of fiscal 2007 were lower than the same period last year due to the sale of fewer test systems, offset partially by a higher average selling price. The segment loss for the Systems Division was $717,000 on revenues of $3.1 million for the fiscal 2007 second quarter, compared to a profit of $852,000 on revenues of $5.9 million for the same quarter last year. MOSAID anticipates a recovery in tester sales during the second half of fiscal 2007 but has reduced revenue expectations for the Division for the year.
The Company also made three senior management appointments in the last three months. John Lindgren was named Senior Vice President Patent Licensing, General Counsel and Corporate Secretary. Mr. Lindgren joins MOSAID from Texas Instruments (TI) in Dallas, Texas, where he served as Vice President and Assistant General Counsel. In this position, Mr. Lindgren headed a team of 28 lawyers who provided legal counsel to TI's US$3.5 billion Application Specific Products group, which includes the company's global Digital Signal Processor business.
In addition, Michael Vladescu, formerly Director, Intellectual Property, was named Vice President, Patents and Joseph Brown, formerly Director, Financial Services and Corporate Controller, was appointed Vice President, Finance.
MOSAID Expands Board, Wins Motion to Dismiss Micron's Complaint for
Declaratory Judgment, Forms Patent Licensing Partnership with Caltech
At the Company's Annual General Meeting on September 22, MOSAID announced that the Board of Directors had been expanded from six to ten members. Carl Schlachte, President and CEO of ARC International, and Emmett Murtha, President and CEO of Fairfield Resources International, bring further intellectual property expertise to the Board, while Gideon King, Executive Vice President of Loeb Partners Corporation, and Eugene Davis, Chairman and CEO of Pirinate Consulting Group, bring additional financial acumen and merger and acquisitions experience.
On October 25, the Company announced that the Northern District of California Court, San Jose Division, had issued an order granting MOSAID's motion to dismiss Micron Technology's Complaint for Declaratory Judgment. The Company's ongoing litigation for patent infringement against Micron, ProMOS Technologies Inc. and Powerchip Semiconductor Corporation is currently proceeding in the Eastern District of Texas, Marshall Division.
During the quarter, MOSAID continued to broaden the reach of its patent program by obtaining exclusive licensing rights to certain patents from the
At the end of the second quarter, MOSAID's portfolio grew to 687 patents issued or pending, up from 654 at the end of the first quarter. Approximately 40% of MOSAID's issued or pending patents relate to memory technology and 60% to other technology areas.
MOSAID currently has 15 companies on notice for patent infringement and is currently in discussions with several of these companies.
Guidance
--------
Guidance for the Company's revenues in the third quarter of fiscal 2007 is $19 million to $20 million and for net earnings is $3.5 million to $4.0 million. Guidance for fiscal 2007 is lowered slightly, as a result of lower than expected Semiconductor IP and Systems Division revenues. Revenues for fiscal 2007 are now forecast to range between $80 million and $85 million, down from the previous guidance of $83 million to $85 million. Net earnings are expected to range from $18 million to $20 million, down from earlier guidance of $21 million to $23 million, as a result of the lower revenues and the now anticipated pre-tax costs of the strategic alternatives initiative of approximately $2.3 million. MOSAID anticipates that approximately 80% of fiscal 2007 revenues will be generated by the Intellectual Property Division.
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Conference Call and Webcast
Management will hold a conference call and webcast on Thursday,
November 30, 2006 at 5:00 p.m. (ET). Participants wishing to access the
conference call should dial 1-800-814-4941. The conference call will be
webcast 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, December 7, 2006. To access the
replay, please dial 1-877-289-8525 and enter passcode
21209267(pound key).
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About MOSAID
------------
MOSAID Technologies Incorporated makes semiconductors better through the development and licensing of intellectual property and the supply of memory test and analysis systems. 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; Newcastle upon Tyne, U.K; and Tokyo, Japan. 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
October 31, April 30,
2006 2006
(unaudited) (audited)
-------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $28,019 $15,542
Marketable securities 39,189 55,788
Accounts receivable 4,087 7,113
Income taxes receivable - 381
Inventories 1,690 1,779
Prepaid expenses 1,973 1,700
Future income taxes recoverable 11,910 11,910
-------------------------------------------------------------------------
86,868 94,213
Capital assets 9,321 9,328
Acquired intangibles 17,714 5,385
Goodwill 1,786 1,786
Future income taxes 22,798 27,439
-------------------------------------------------------------------------
$138,487 $138,151
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Current Liabilities
Accounts payable and accrued liabilities $7,728 $7,653
Income taxes payable 314 381
Deferred revenue 1,512 10,545
Mortgage payable 254 244
Current portion of other long-term liabilities
(Note 2) 2,224 -
-------------------------------------------------------------------------
12,032 18,823
Mortgage payable 4,216 4,346
Other long-term liabilities (Note 2) 10,009 -
-------------------------------------------------------------------------
26,257 23,169
-------------------------------------------------------------------------
Shareholders' Equity
Share capital 99,852 102,476
Contributed surplus 3,309 2,630
Retained earnings 9,069 9,876
-------------------------------------------------------------------------
112,230 114,982
-------------------------------------------------------------------------
$138,487 $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)
Quarter Quarter Six months Six months
ended ended ended ended
October 31, October 31, October 31, October 31,
2006 2005 2006 2005
-------------------------------------------------------------------------
Revenues $19,594 $16,253 $42,573 $30,486
Expenses
Labour and materials 1,171 2,073 2,394 3,582
Research and development 5,710 2,778 10,638 4,896
Selling and marketing 3,294 2,994 6,297 5,383
General and administration 1,679 1,670 3,825 3,152
Bad debts - - 83 60
Special committee 1,124 - 1,124 -
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12,978 9,515 24,361 17,073
-------------------------------------------------------------------------
Income from operations 6,616 6,738 18,212 13,413
Net interest income (Note 3) 674 321 1,260 604
-------------------------------------------------------------------------
Income before income tax
expense 7,290 7,059 19,472 14,017
Income tax expense 2,575 2,767 8,100 5,292
-------------------------------------------------------------------------
Net income 4,715 4,292 11,372 8,725
Dividends 2,766 1,437 5,597 2,874
Normal course issuer bid 5,399 - 6,582 -
Retained earnings, beginning
of period 12,519 11,159 9,876 8,163
-------------------------------------------------------------------------
Retained earnings, end of
period $9,069 $14,014 $9,069 $14,014
-------------------------------------------------------------------------
Earnings per share (Note 4)
Basic - net earnings $0.43 $0.37 $1.02 $0.76
Diluted - net earnings $0.42 $0.37 $1.00 $0.75
Weighted average number
of shares
Basic 11,053,768 11,495,689 11,174,697 11,493,056
Diluted 11,240,281 11,666,039 11,380,477 11,689,531
See accompanying Notes to the Consolidated Financial Statements
MOSAID TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of Canadian Dollars)
(unaudited)
Quarter Quarter Six months Six months
ended ended ended ended
October 31, October 31, October 31, October 31,
2006 2005 2006 2005
-------------------------------------------------------------------------
Operating
Income before discontinued
operations $4,715 $4,292 $11,372 $8,725
Items not affecting cash
Amortization 1,125 506 1,900 958
Stock option expense 343 376 679 611
Future income tax
recoverable 995 896 4,641 1,847
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7,178 6,070 18,592 12,141
Change in non-cash working
capital items (424) (413) (5,802) (3,634)
-------------------------------------------------------------------------
6,754 5,657 12,790 8,507
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Investing
Acquisition of capital
assets and acquired
intangibles (302) (216) (14,222) (691)
Acquisition of marketable
securities (12,081) (63,513) (46,150) (114,217)
Acquisition of shares in
Virtual Silicon
Technology Inc. - (6,364) - (6,364)
Proceeds on disposal/
maturity of short-term
marketable securities 22,885 65,067 62,749 114,213
-------------------------------------------------------------------------
10,502 (5,026) 2,377 (7,059)
-------------------------------------------------------------------------
Financing
Repayment of mortgage (61) (55) (120) (111)
Long-term due to Infineon 2,667 - 12,233 -
Repurchase of shares (8,084) - (9,997) -
Dividends (2,766) (1,437) (5,597) (2,874)
Issue of common shares 327 65 791 254
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(7,917) (1,427) (2,690) (2,731)
-------------------------------------------------------------------------
Net cash inflow (outflow)
- continuing operations 9,339 (796) 12,477 (1,283)
Net cash (outflow) -
discontinued operations - - - (62)
-------------------------------------------------------------------------
Net cash inflow (outflow) 9,339 (796) (12,477) (1,345)
Cash and cash equivalents,
beginning of period 18,680 6,534 15,542 7,083
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Cash and cash equivalents,
end of period $28,019 $5,738 $28,019 $5,738
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements
MOSAID TECHNOLOGIES INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Quarter ended October 31, 2006
(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:
Quarter Quarter Six months Six months
ended ended ended ended
October 31, October 31, October 31, October 31,
2006 2005 2006 2005
------------------------------------------------
Interest income $ 766 $ 417 $ 1,443 $ 797
Interest expense 91 96 183 193
------------------------------------------------
------------------------------------------------
$ 675 $ 321 $ 1,260 $ 604
------------------------------------------------
------------------------------------------------
4. Earnings per Share
The following is a reconciliation of the numerator and denominator of the basic and diluted per share computations:
Quarter Quarter Six months Six months
ended ended ended ended
October 31, October 31, October 31, October 31,
2006 2005 2006 2005
------------------------------------------------
------------------------------------------------
Net income $ 4,715 $ 4,292 $ 11,372 $ 8,725
------------------------------------------------
------------------------------------------------
Weighted average number
of common shares
outstanding 11,053,768 11,495,689 11,174,697 11,493,056
Net effect of stock
dilutions 186,513 170,350 205,780 196,475
------------------------------------------------
Weighted average diluted
number of common shares
outstanding 11,240,281 11,666,039 11,380,477 11,689,531
------------------------------------------------
------------------------------------------------
Earnings per share
Basic $ 0.43 $ 0.37 $ 1.02 $ 0.76
Diluted $ 0.42 $ 0.37 $ 1.00 $ 0.75
For the quarter and six months ended October 31, 2006, 15,000 options 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 six months ended October 31, 2005, 16,000 options 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 647,948 and 810,941 options issued and outstanding as at October 31, 2006 and October 31, 2005 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
October 31, October 31,
2006 2005
------------------------
Risk free interest rate 3.95% 3.41%
Expected life in years 5.5 5.5
Expected dividend yield 3.7% 2.4%
Volatility 59.57% 78.69%
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)
Unal-
Six months ended IP Systems located
October 31, 2006 Division Division amounts Totals
-------------------------------------------------------------------------
Revenues from external
customers $ 36,470 $ 6,103 $ - $ 42,573
Segment profit (loss) $ 21,066 $ (1,825) $ (7,869) $ 11,372
Segment assets (x) $ 18,197 $ 2,146 $ 6,692 $ 27,035
Expenditure on segment
assets (x) $ 13,491 $ 540 $ 191 $ 14,222
Amortization and
write-down of segment
assets (x) $ 1,137 $ 500 $ 263 $ 1,900
Goodwill $ 1,786 $ - $ - $ 1,786
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Unal-
Six months ended IP Systems located
October 31, 2005 Division Division amounts Totals
-------------------------------------------------------------------------
Revenues from external
customers $ 19,687 $ 10,799 $ - $ 30,486
Segment profit (loss) $ 11,992 $ 1,638 $ (4,905) $ 8,725
Segment assets (x) $ 6,303 $ 1,792 $ 7,088 $ 15,183
Expenditure on segment
assets (x) $ 6,085 $ 500 $ 138 $ 6,723
Amortization and
write-down of segment
assets (x) $ 222 $ 459 $ 277 $ 958
Goodwill $ 1,767 $ - $ - $ 1,767
-------------------------------------------------------------------------
Unal-
Quarter ended IP Systems located
October 31, 2006 Division Division amounts Totals
-------------------------------------------------------------------------
Revenues from external
customers $ 16,518 $ 3,076 $ - $ 19,594
Segment profit (loss) $ 8,228 $ (717) $ (2,796) $ 4,715
Segment assets (x) $ 18,197 $ 2,146 $ 6,692 $ 27,035
Expenditure on segment
assets (x) $ 11 $ 273 $ 18 $ 302
Amortization and
write-down of segment
assets (x) $ 736 $ 254 $ 135 $ 1,125
Goodwill $ 1,786 $ - $ - $ 1,786
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Unal-
Quarter ended IP Systems located
October 31, 2005 Division Division amounts Totals
-------------------------------------------------------------------------
Revenues from external
customers $ 10,399 $ 5,854 $ - $ 16,253
Segment profit (loss) $ 6,056 $ 852 $ (2,616) $ 4,292
Segment assets (x) $ 6,303 $ 1,792 $ 7,088 $ 15,183
Expenditure on segment
assets (x) $ 6,032 $ 98 $ 118 $ 6,248
Amortization and
write-down of segment
assets (x) $ 139 $ 227 $ 140 $ 506
Goodwill $ 1,767 $ - $ - $ 1,767
-------------------------------------------------------------------------
(x) Capital assets includes acquired intangibles but not goodwill