UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the fiscal year ended September 30, 2007
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to .
Commission file number 000-31089
Virage Logic Corporation
(Exact name of registrant as specified in its charter)
| | |
| Delaware | | 77-0416232 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
47100 Bayside Parkway, Fremont, California 94538
(Address of principal executive offices)
Registrants’ telephone number, including area code:
(510) 360-8000
Securities registered pursuant to Section 12(b) of the Act:
Common stock, $0.001 par value
(Title of class)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or non-accelerated filer (as defined in Exchange Act Rule 12b-2).
| | | | |
Large accelerated filer ¨ | | Accelerated filer x | | Non-accelerated filer ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of the registrant’s common stock held by non-affiliates of the Registrant as of March 31, 2007 was approximately $57 million based upon the closing price reported for such date on the Nasdaq Global Market. For purposes of this disclosure, shares of common stock held by persons who hold more than 5% of the outstanding shares of common stock and shares held by officers and directors of the Registrant have been excluded because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
The number of shares of the registrant’s Common Stock outstanding as of November 30, 2007 was 23,470,470.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement for its 2008 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.
VIRAGE LOGIC CORPORATION
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED SEPTEMBER 30, 2007
TABLE OF CONTENTS
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PART I
With the exception of statements of historical fact, all statements made in this report on Form 10-K, including in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, are forward-looking statements that involve risks and uncertainties. These forward-looking statements include statements relating to strategy, products, customers, business prospects, relationships and trends. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” “potential,” or “continue,” the negative of these terms or other comparable terminology. Forward-looking statements are subject to a number of known and unknown risks and uncertainties which might cause actual results to differ materially from those expressed or implied by such statements. These risks include an ability to forecast our business, including our revenue, income and order flow outlook, to meet financial expectations, to deliver products that meet customer specifications, to deliver our customized products in the time-frame demanded by our customers, to execute on our strategy of being a leading provider of semiconductor IP platforms, to continue to develop new products and maintain and develop new relationships with pure-play foundries and integrated device manufacturers, to overcome the challenges associated with establishing licensing relationships with semiconductor companies, to obtain royalty revenues from customers in addition to license fees, to receive accurate information necessary for calculation of royalty revenues and to collect royalty revenues from customers, business and economic conditions generally and in the semiconductor industry in particular, pace of adoption of new technologies by our customers, competition in the market for semiconductor IP platform, and other risks and uncertainties including those set forth below under “Risk Factors”. These forward-looking statements speak only as of the date hereof; we do not intend, and undertake no obligation to release publicly any updates or revisions to any forward-looking statements contained herein. The discussion of our financial condition and results of operations in this report on Form 10-K should be read together with the consolidated financial statements and the notes thereto included elsewhere in this filing.
Item 1. Business
General
Founded in 1995, Virage Logic Corporation (Virage Logic or the Company) provides semiconductor intellectual property (IP) to more than 300 semiconductor companies worldwide. Historically we were primarily engaged in the development and marketing of embedded memory products. After the acquisition of In-Chip Systems, Inc. in May 2002, we expanded our physical IP product offering to also include logic and input/output interface components products. In August 2007, we acquired Ingot Systems, Inc. (Ingot), a privately held provider of functional, or application specific IP (ASIP), including Double Data Rate (DDR) memory controllers, Physical Interfaces (PHYs), and Delay Locked Loops (DLLs). The expansion of our product offerings positions us to be even more attractive to our customers’ semiconductor design efforts by providing high value IP across a broad spectrum of the functional elements of the chip.
These various forms of IP are utilized by our customers to design and manufacture System-on-Chip (SoC) integrated circuits that are forming the foundation of today’s consumer, communications and networking, hand-held and portable devices, computer and graphics, automotive, and defense applications. Our semiconductor IP offering consists of (1) embedded memories, (2) compilers that allow chip designers to configure our memories into different sizes and shapes on a single silicon chip, (3) IP and development infrastructure for embedded test and repair of on-chip memory instances, (4) software development tools used to design memory compilers, (5) embedded non-volatile memory instances, (6) logic cell libraries, (7) I/Os, and (8) DDR memory controller components. We also provide custom design services to the semiconductor industry.
Our customers include leading fabless semiconductor companies such as Agilent Technologies, Inc. (Agilent), Altera Corporation (Altera), Broadcom Corporation (Broadcom), Conexant Systems, Inc. (Conexant), Ikanos Communications Inc. (Ikanos), Intel Corporation (Intel), Kawasaki Microelectronics (K-Micro), LSI
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Corporation (formerly LSI Logic and Agere), Marvell Technology Group, Ltd (Marvell), PMC-Sierra, Inc. (PMC-Sierra), SigmaTel, Inc. (SigmaTel), TranSwitch Corporation (TranSwitch), Thomson Silicon Components (Thomson), and Via Technologies, Inc. (Via Technologies) as well as leading integrated device manufacturers (IDMs) such as, Avago Technologies (Avago), AMI Semiconductor, Inc. (AMI Semiconductor), Analog Devices, Inc. (Analog Devices), Atmel Corporation (Atmel), Freescale Semiconductor, Inc. (Freescale), Infineon Technologies, Inc. (Infineon), NEC Corporation (NEC), NXP (formerly Philips Semiconductor B.V.), Sharp Electronics Corporation (Sharp), Sony Corporation (Sony), STMicroelectronics (STMicro), Texas Instruments (TI), and Toshiba Corporation (Toshiba). Finally, we have strategic commercial relationships with semiconductor foundries such as Taiwan Semiconductor Manufacturing Company (TSMC), Chartered Semiconductor Manufacturing (Chartered), Dongbu HiTek Ltd. (Dongbu HiTek), Grace Semiconductor (Grace), HeJian, IBM Corporation (IBM), MagnaChip, SilTerra Malaysia Sdn. Dhd. (SilTerra), Silicon Manufacturing International Corporation (SMIC), Tower Semiconductor, Ltd. (Tower) and United Microelectronics Company (UMC).
We develop our embedded memory, logic, I/O, DDR, PHY and DLL products to comply with the silicon manufacturing processes used for our customers’ products. For our integrated device manufacturer customers, we develop our products to comply with the processes used by their internal manufacturing facilities. For our fabless semiconductor customers, we develop our products to comply with the processes of the pure-play semiconductor manufacturing facilities or foundries, which these companies rely on to manufacture the integrated circuits (ICs) for their products. We also pre-test certain products before their release to the market by designing and manufacturing specialty ICs containing our semiconductor IP targeted for specific processes, so that we can provide our customers with silicon data and help ensure that ICs designed with our semiconductor IP will be manufacturable, while providing desired production yields. Our products are certified for production by several of the established pure-play foundries such as Chartered, IBM, TSMC, and UMC, as well as some of the emerging pure-play foundries such as Dongbu HiTek, Grace, HeJian, MagnaChip, SilTerra, SMIC, and Tower that are used by fabless semiconductor companies. Because we ensure that certain products are silicon-proven and production ready, our customers can proceed with confidence and benefit from shorter design times for new product development and reduced design and manufacturing costs.
Corporate Information
We incorporated in California on November 27, 1995. We reincorporated in Delaware on July 25, 2000. Our principal executive offices are located at 47100 Bayside Parkway, Fremont, California 94538. Our telephone number is (510) 360-8000. Our website address is www.viragelogic.com. Information on our website, and websites linked to it, is not intended to be part of this report. We make available free of charge on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or otherwise furnish it to, the Securities and Exchange Commission, or the SEC.
The public may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Rooms by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The SEC’s Internet website is located at http://www.sec.gov.
Industry Background
The proliferation of consumer and wireless products, the growth of the Internet, and the development of higher speed computers and more robust visual communication systems is creating demand for electronic devices that offer higher complexity and higher performance while consuming less power in order to meet complex functional requirements. The designers of these products are seeking semiconductor process technologies that will enable them to minimize the power, decrease the size, reduce the manufacturing costs and enhance the
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performance of their products. In response to this demand, semiconductor companies have developed technologies that permit entire electronic systems, including the microprocessor, communications, custom function logic, graphics and memory elements, to be contained on a single silicon chip, called System-on-Chip (SoC), rather than on a circuit board.
Successful SoC design depends upon the reliable integration of the various components of the chip. Each component must comply with the manufacturing standards, or design rules, of the manufacturing facility that will produce the chip. Since different technical expertise and IP is required for each component of a SoC, it is excessively expensive for many companies to internally develop all of the various IP needed for these components. In addition, the designers of products that use SoCs are facing increased market pressure to rapidly introduce new products, which shorten the time available for research and development involved in the design of a SoC and to reduce development costs. In order to meet the continuously increasing technical expertise requirements for the design of a SoC and the time constraints involved in such design, many semiconductor companies are focusing on their core competencies, or value-add, and are increasingly relying on external sources for the technical expertise and IP for various components of their SoC designs. The use of silicon-proven third party IP components helps enable semiconductor companies to meet market pressures while allowing them to continue to focus on the components of the SoC that constitute their core competencies.
The increasing demand for a broad range of consumer electronics, high-performance computing and communications applications and the availability of increased bandwidth for Internet applications has made memory an increasingly critical element of the overall operation of SoCs used for these applications. Historically, integrated circuit designs were dominated by the logic function, while memory storage was typically provided in external devices. However, the market demand for increased system operating speed and increasingly smaller consumer devices results in increased integration of the memory storage elements inside the SoCs, resulting in smaller, faster and more power efficient products. This trend of embedding memory also resulted in the requirement for more specialized memory elements. The need for this proximity, as well as advances in semiconductor technology and the ability to customize the size and configuration of memory functions within a SoC, is creating increased demand for embedded memory components. It is now common for SoCs to contain many memories with different functions configured in different sizes and shapes to optimize the area and functionality of the chip. The Semiconductor Industry Association (SIA) forecasts that the amount of area dedicated to memory in a typical SoC will grow to more than 80 percent by 2010.
Semiconductor companies face significant challenges in designing low power, high-performance and area efficient memories that can be easily integrated with other components for their SoC devices. Due to continuing advancements in the semiconductor manufacturing lithography processes, new circuit design elements have generally been required every few years. The internal design teams of semiconductor companies typically lack the dedicated resources necessary to keep pace with rapidly evolving memory design technology advancements. These factors have created a market need for third-party providers of highly reliable, low power, high-performance and area efficient IP components as memory, logic and I/O IP, as well as a variety of functional IP components such as high-speed interfaces, including highly complex memory controllers.
The Virage Logic Strategy
Our objective is to be the premier supplier of semiconductor IP solutions to the global semiconductor industry and our mission is to serve as the semiconductor industry’s trusted IP partner. With this in mind, the Company has identified four key goals that provide the foundation for building a scalable, profitable business.
Build Virage Logic into the Company that is Truly the Semiconductor Industry’s Trusted IP Partner
As the semiconductor industry continues to streamline and specialize in order to maximize differentiation and ultimately competitiveness and profitability, leading semiconductor companies are looking for reliable suppliers that can become a virtual extension of their internal research and
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development (R&D) groups. As such, we see great opportunity for Virage Logic to serve as the semiconductor industry’s trusted IP partner. Over the last decade, we have become a highly specialized, and therefore highly efficient developer of semiconductor IP, and today more than 300 customers look to Virage Logic to provide much of the core building blocks of their SoC designs.
We intend to be a preferred IP supplier and trusted IP partner to the leading fabless semiconductor companies. Most fabless semiconductor companies, or semiconductor companies that do not internally manufacture their own silicon chips, spend substantial sums of money purchasing memory, logic and I/O elements to incorporate in their chips because these elements may be outside of their core competencies. The leading fabless companies need access to physical IP very early in the life of a new process technology. In addition, leading foundries need reliable physical IP in order to offer manufacturing capabilities to their early adopters. Time-to-market pressure does not allow early adopters to wait for physical IP to be developed. For that reason, there is a need for tight partnership and concurrent development of manufacturing processes, physical IP and SoC designs. The concurrent nature of development does not allow for the traditional supplier-user relationship. It requires joint planning, collaboration and execution during the development process. For that reason, partnerships between foundries, fabless companies and physical IP providers are a necessary condition for the successful introduction of advanced SoCs on advanced process nodes. In addition, early mainstream customers often need customization of standard physical IP in order to accommodate advanced product specifications. This customization requires a reliable IP partner that can respond in a timely fashion with predictable quality in order to achieve first time silicon success. As a result, Virage Logic has established itself as a trusted IP partner and has licensed its IP to many leading semiconductor companies and pure-play foundries.
The four key qualifications that enable us to serve as the semiconductor industry’s trusted IP partner are the following:
| | • | | Technology Leadership—Engineering and R&D comprise more than 75 percent of our company’s headcount, which has enabled Virage Logic to establish a long history of being first to market with innovative, leading IP solutions. We have a proven track record of being first to market with products at the advanced manufacturing process technologies such as 90-nanometer, 65-nanometer, and now 45-nanometer. We were the first IP company with silicon-proven IP for TSMC’s 65-nanometer process and at 45-nanometer, TSMC named Virage Logic as their Early Development Partner. In addition to technology leadership, we have a proven record of technology innovation. Examples include the STAR™ Memory System, the industry’s first commercially available embedded self-test and repair memory system and NOVeA®, the industry’s first commercially available non-volatile Flash memory on a standard CMOS logic process. |
| | • | | Proven Execution—In early 2007 we made the decision to separate our R&D efforts from our Engineering activities and we established an Advanced Development group that is focused on building next generation standard products. Dr. Alex Shubat, the Company’s co-founder and CTO, leads the Advanced Technology group and in January 2007, Sherif Sweha, a 20+ year Intel engineering executive, joined Virage Logic to run the Engineering group. The two groups have worked to improve quality and delivery performance; and improve our overall productivity to aid in the fundamental scalability of the organization. They created a new suite of advanced memory compilers and logic libraries to allow us to be first to market with the advanced nodes, as well as allow us to now offer standard products as opposed to solely custom solutions which again is aiding in the fundamental scalability of the Company. The focus in these areas has been significant and reinforces the Company’s proven execution reputation. |
| | • | | An Integral Part of the SoC Design and Manufacturing Ecosystem—as a provider of third-party semiconductor IP, we work closely with our partners–including Design Services, Electronic Design Automation (EDA) and Test, IP and Foundry companies–to help increase interoperability and provide access to complete solutions that enable mutual customers to reduce their design time and improve manufacturability of their electronics products. |
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We work with all of the established pure-play foundries to qualify our semiconductor IP for high-volume production in their manufacturing processes. In this manner, we are in a position to provide embedded memories, logic and I/O elements that are silicon-proven for a specific foundry’s manufacturing process, directly to that foundry’s customer base. Our close associations with these foundries also gives us early access to information for advanced processes, thereby enabling us to be among the first to market products on smaller process geometries.
| | • | | Portfolio of Business and Engagement Models—We offer a variety of business and engagement models that offer fabless, integrated device manufacturer (IDM) and Foundry customers the flexibility to engage with us to a level that is most beneficial for their business objectives. From a single instance or project based engagement to a multi-year, multi-product engagement, we offer engagement models that suite the broad range of end-customer requirements. |
Another example of our broad range of engagement models was developed in direct response to the emerging pure-play foundries’ desire to strengthen their competitive position by introducing an expanded distribution model. The “Foundry Pays” model was developed to enable emerging foundries to license Virage Logic’s IPrima® Foundation IP platform and make it available free-of-charge to their end customers. Customers benefit with free access to Virage Logic’s advanced IP and have the option to tap into Virage Logic’s superior customer support services offering. When this was first introduced in 2005, Dongbu HiTek, SilTerra, SMIC and Tower took advantage of the new Foundry Pays distribution model. Today, this model has been expanded and is being used in a targeted way at TSMC, UMC, and Chartered. We believe the expansion of our business model, from a customer-paid licensing and wafer-based royalty-bearing model to include an option for foundries to license and provide IPrima Foundation IP free-of-charge, underscores the growing demand for our advanced process technology IP solutions and enables our foundry partners to better meet the needs of their global customers.
Make Virage Logic the Company that is Always First to Market.
As semiconductor manufacturers develop advanced manufacturing processes that enable increasing density and speed as well as lower power consumption, we intend to lead the market for semiconductor IP components. We have assembled a global team of engineers to design and develop first to market semiconductor IP products for advanced manufacturing processes and we believe executing on this strategy should enable us to gain market share among early adopters of advanced processes. In addition we have demonstrated the ability to be first to market in supporting new industry standards such as the DDR3 protocol.
Broaden Virage Logic’s Product Portfolio
We have a two pronged strategy that calls for the expansion of our product portfolio through both organic and inorganic growth. Our Advanced Development group is leading the organic or internal product development efforts while the recent acquisition of Ingot Systems and their Double Data Rate IP business is an example of how we have expanded, and intend to continue to expand our product portfolio with complementary IP product offerings.
Build a Strong Demand Creation Capability
In FY2007, we analyzed sales productivity in all regions and made personnel and structural changes to improve overall efficiency and strengthen our global demand creation capability. As a result of these changes, our license pipeline has grown throughout the year.
We also intend to expand our existing distribution channels by continuing to selectively hire direct sales force members to serve key markets worldwide. In addition to our sales subsidiary in Japan and distributors in Taiwan, China and Korea, we expanded our reach in Asia by adding another well-established, independent distributor in China, and forged new distributor relationships in Malaysia and Singapore. We also intend to continue developing partnerships with value-added-resellers and other distributors of IP through our Virage Logic Intellectual Property Partner (VIP) Program to leverage their extensive United States and international sales organizations.
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In summary, we believe that by focusing the Company on the four key objectives outlined above, we will be able to firmly establish Virage Logic as the semiconductor industry’s trusted IP partner.
The Virage Logic Overview
Founded in 1995, Virage Logic rapidly established itself as a technology and market leader in providing advanced embedded memory intellectual property (IP) for the design of complex integrated circuits. In May 2002, the Company acquired In-Chip Systems and added logic libraries and I/Os to its growing product portfolio.
In 2005, to help SoC designers address the complex predictability and manufacturability challenges at advanced process nodes, Virage Logic pioneered a new class of semiconductor IP called Silicon Aware IP™. The Company's Silicon Aware IP offering (embedded memories, logic libraries and I/Os) incorporates silicon behavior knowledge for increased predictability and manufacturability. This intelligence includes hardware implementations for optimal yield in the design phase and extends to include test, repair, and diagnostics for manufacturability. Because Silicon Aware IP understands the behavior of silicon and is able to address post-silicon issues, it is key in helping designers maximize yield, increase test quality, increase reliability, speed time-to-volume, and improve overall manufacturability.
Most recently, through its acquisition of Ingot Systems in August 2007, Virage Logic further expanded its product offering to include Application Specific IP solutions such as Double Data Rate memory controllers and design services.
As the semiconductor industry's trusted IP partner, Virage Logic has focused its efforts on developing a highly differentiated product portfolio that provides higher performance, lower power, higher density and optimal yield to foundries, integrated device manufacturers and fabless customers. Our customers develop products for the consumer, communications and networking, hand-held and portable, computer and graphics, automotive and defense markets.
The company makes its products available for the manufacturing processes of both the established and emerging pure-play semiconductor foundries in order to provide customers with flexibility in manufacturing choices. Further, the Company uses its FirstPass-Silicon Characterization Lab™ for certain products to help ensure high quality, reliable IP across a wide range of foundries and process technologies. Finally, the company prides itself on providing superior customer support and was named the 2006 Customer Service Leader of the Year in the Semiconductor IP Market by Frost & Sullivan.
Key benefits of Virage Logic’s solution include the following:
| | • | | Single Source Supplier. By integrating and tuning embedded memories, logic and I/Os and providing them as an integrated semiconductor IP platform, we are able to save our customers time and costs in product development. In addition, with our new Application Specific IP product portfolio, we are able to expand our position as a single source supplier for the global SoC design community. |
| | • | | Memory Design Expertise. Our memory design expertise allows us to provide our customers with leading-edge memory technologies for advanced manufacturing processes. We have assembled a global team of engineers focused exclusively on memory design. This team includes senior level engineers with significant expertise in various types of memory design, including SRAM, DRAM and non-volatile. |
| | • | | Logic Design Expertise. Our Logic cell libraries are developed based on patented technology that addresses the key challenges of advanced manufacturing processes. We have a dedicated design team of engineers focused exclusively on logic cell library research, development and design. |
| | • | | Memory Controller Design Expertise.Through the acquisition of Ingot Systems in August 2007, we gained an engineering team specialized in the specification and design of highly efficient DDR memory controllers, a critical component for efficient utilization of on-board dynamic memory devices. |
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| | • | | Broad Product Line. We offer multiple types of memory compilers, logic libraries, I/Os, DDRs, PHYs and DLLs for advanced 0.15 micron, 0.13 micron, 90-nanometer, 65-nanometer and 45-nanometer (nm) processes, along with the older 0.25 micron and 0.18 micron processes. Our compilers allow our customers to generate the exact configuration of embedded memory needed for their SoC designs. The increasingly smaller process geometries provide designers the opportunity for greater chip functionality as well as lower cost chips. |
| | • | | Silicon Verified Solutions. Many of our physical IP products are verified and tested at a particular manufacturing process using specialized ICs (commonly referred to as silicon-proven), before being delivered to a customer. This verification substantially reduces the risk that the physical IP element will be incompatible with the host manufacturing process and thereby reduces costly development and manufacturing delays which our customers might experience from using IP that has not been silicon-proven. Our physical IP alone has been purchased by over 300 customers for manufacture at leading pure-play foundries and internal manufacturing processes. |
Virage Logic’s Semiconductor IP Product Portfolio
We offer a wide range of semiconductor IP including the following:
| | • | | Semiconductor IP platforms |
| | • | | Embedded memory, logic and I/O elements; |
| | • | | IP and development infrastructure for embedded test and repair of on-chip memory instances; |
| | • | | Software development tools used to build memory compilers; and |
| | • | | DDR memory controllers, PHYs and DLLs. |
Our Semiconductor IP Platforms. We provide semiconductor IP platforms called IPrima® Foundation. These platforms, comprising the ASAP™ Memory High-Density (HD) Memories, ASAP™ Logic HD Standard Cells and Base I/O Libraries are technology optimized, meaning they are tuned to a particular foundry and process and are built to satisfy a wide range of design requirements. IPrima® Foundation users also have optional access to Virage Logic’s rich portfolio of highly differentiated IP, including the industry’s first commercially available integrated embedded self-test and repair memory, the STAR™ Memory System, as well as the ASAP Memory High-Speed (HS) and Ultra-Low Power (ULP) product lines, the patented ASAP Logic Ultra-High-Density (UHD), High-Density (HD), and High-Speed (HS) Standard Cell Libraries and the patented ASAP Logic HD and HS Metal Programmable Cell Libraries. The IPrima Foundation platforms meet the critical requirements of reducing SoC costs, boosting performance and ensuring reliability, while satisfying shrinking development budgets and improving time-to-profitability.
Our Embedded Memory Semiconductor IP. We provide embedded memory semiconductor IP in predetermined shapes, sizes and types that can be incorporated by semiconductor designers into their SoC designs. We deliver our memory semiconductor IP to our customers through downloads from secure servers or on computer disks in a form that can be integrated directly into the design of the SoC.
Our Embedded Memory Compilers. A compiler is a software program that allows semiconductor designers to configure memories to the desired specifications for their SoC designs. Our compiler products include:
| | • | | SiWare™ Memory.The SiWare Memory product line of silicon aware compilers provides what we believe to be the world’s most power-optimized memories for advanced processes at 65-nanometer and 45-nanometer. These high performance memory compilers minimize both static and dynamic power consumption and provide optimal yields. SiWare Memory high-density compilers are optimized to generate memories with the absolute minimum area. SiWare Memory high-speed compilers are designed to help designers achieve the most aggressive critical path requirements. |
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| | • | | ASAP™ Memory. These compilers are optimized for high-density, high-performance and low power consumption and can generate memories up to 512 kilobits in size. The ASAP Memory product line is available in many different memory types including single- or dual-port register file, single- or dual-port SRAM, synchronous or asynchronous SRAM and ROM. |
| | • | | STAR Memory System. Our STAR Memory System provides what we believe to be the most integrated solution for the cost effective embedding, on-chip testing and repairing of multi-megabit memories. SiWare Memories, High-Speed, High-Density and Ultra-Low-Power STAR and ASAP memories can be incorporated into a STAR Memory System to address a broad range of SoC design requirements. The STAR Memory System consists of a complete solution allowing users to select and automatically integrate all of the pieces associated with the system. The STAR Shared Fuse Processor allows users to reduce routing complexity and drastically reduce fuse area while the STAR Builder automated integration tool enables users to better meet aggressive time-to-market requirements. With some customers experiencing yield improvements of up to 250 percent, the STAR Memory System can potentially save millions of dollars in recovered silicon, substantially reduce test costs, and achieve shorter time-to-volume. |
| | • | | STAR™ Yield Accelerator.The new STAR Yield Accelerator product is offered as an add-on to the STAR Memory System. It delivers a complete solution for automated silicon verification, vector generation, silicon analysis, and yield ramping of embedded memories. Integrated with the industry leading STAR Memory System embedded test and repair solution, STAR Yield Accelerator dramatically reduces silicon time-to-test, time-to-product bring-up, and time-to-volume production. |
| | • | | NOVeA®. This innovative non-volatile electrically alterable embedded memory can be manufactured using standard logic processes. NOVeA can retain its data at power-off while allowing data to be reprogrammed and erased during normal operation. NOVeA provides on-chip storage of calibration data, passwords, critical access information, etc. It also helps the designer reduce overall system size, achieve lower power operation and increase system performance. |
Our Logic Semiconductor IP. We provide logic libraries through our SiWare™ Logic and ASAP™ Logic product lines. These products are designed to improve logic block area utilization and SoC performance while decreasing the price and power consumption of the overall chip. We deliver our logic semiconductor IP to our customers through the same manner as our embedded memory semiconductor IP.
| | • | | SiWare Logic. The SiWare Logic product line includes yield-optimized standard cells for a wide variety of design applications at 65-nanometer and 45-nanometer with multiple threshold process variants. SiWare logic libraries are offered using three separate architectures to optimize circuits for Ultra-High-Density, High-Speed, or general use. SiWare Ultra-Low-Power extension libraries provide designers with the most advanced power management capabilities. |
| | • | | ASAP Logic High-Speed (HS) and High-Density (HD) Metal Programmable Cell Libraries. These cell libraries provide significant non-recurring engineering (NRE) cost savings during SoC design revisions since only a few mask layers need to be changed to modify the chip functionality. |
| | • | | ASAP Logic Ultra-High-Density (UHD), High-Density (HD), and High-Speed (HS) Standard Cell Libraries. The architecture used in these cell libraries provides significantly increased pin accessibility, which along with other features results in logic block area savings. This equates to an overall reduction in chip size and lower fabrication costs independent of the performance requirements that the customer may have. |
Our Base I/O Library. Our Base Input/Output (I/O) Library contains all necessary elements to complete an I/O ring, a key element for the SoC’s communication with external electrical components.
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Our Software Development Tools. Our memory development environment, Embed-It!® allows semiconductor design companies to develop their own memory compilers with re-characterization capabilities. In addition, we also provide an end-user development tool, Embed-It! Integrator, used to create unique memory instances from a compiler database.
Our Application Specific IP Product Portfolio.Our Application Specific IP (ASIP) products are designed to meet the highest quality and performance standards for functional IP. Virage Logic ASIP products contain application specific functional IP targeted to a variety of market requirements. ASIP products are commonly based on Virage Logic’s proprietary and patented logic libraries, memory, routing methodology, and cell architecture.
| | • | | Intelli™ DDR—the Intelli DDR memory product family offers what we believe to be the highest performance, lowest latency intelligent memory controllers for DDR1, DDR2, and DDR3, the lowest power, highest bandwidth Mobile SDR/Mobile DDR memory controllers, full featured Graphics DDR (GDDR) memory controllers, high-speed, full digital DDR SDRAM PHY+DLL solutions and memory models for popular DRAM parts. |
| | • | | Intelli™ PHY+DLL—the Intelli PHY+DLL companion for the Intelli DDR memory product is a full-digital DDR SDRAM PHY+DLL hard macro (GDSII) solution optimized for high frequency operation, as well as small die size. |
| | • | | Intelli™ Models—the Intelli Models provide flexible, easy to use, vendor independent simulation models for popular DRAM devices that enable designers to verify the functionality of an entire memory sub-system. |
During fiscal year 2007, our license revenue for 0.18 micron technology accounted for 10 percent of our total license revenues, license revenue for 0.13 micron technology was 28 percent of total license revenue, license revenue for 90-nanometer technology was 36 percent of total license revenue, license revenue for 65-nanometer technology was 23 percent of total license revenue and license revenue from the sale of other products was 3 percent of total license revenue. Included within the 3 percent other products category are our products on the older process nodes, 0.25 and 0.35 micron technology. We expect royalty revenue from these products to be declining and license revenue to be insignificant in future periods. In fiscal year 2006, our license revenue for 0.18 micron technology accounted for 12 percent of our total license revenue, license revenue for 0.13 micron technology was 33 percent of total license revenue, license revenue for 90-nanometer technology was 43 percent of total license revenue, license revenue for 65-nanometer technology was 10 percent of total license revenue and license revenue from the sale of other products was 2 percent of total license revenue. Included within the 2 percent other products category are our products on the older process nodes of 0.25 and 0.35 micron technology.
ASAP Memory, ASAP Logic, SiWare Memory, SiWare Logic, Silicon Aware IP, STAR Memory System, Intelli DDR, Intelli PHY and Intelli DLL are trademarks of Virage Logic Corporation. Embed-It!, NOVeA and IPrima are registered trademarks of Virage Logic Corporation in the United States. IPrima and Silicon Aware IP are registered trademarks of Virage Logic Corporation in Europe and Japan.
Markets and Applications
We focus on markets and companies that utilize SoC technologies with high-performance, low power architectures and high-density requirements where we believe our semiconductor IP offering provides customers with significant time-to-market, design, and manufacturing cost advantages. Examples of the markets and applications in which our IP is implemented include the following:
| | • | | Consumer Products. Digital appliances increasingly require more functionality, Internet connectivity and low power consumption. Our IP can be found in video game players, cellular phones, MP3 players, PDAs, digital cameras, high-definition televisions, cable set-top boxes and DVD players. |
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| | • | | Communications and Networking Products. Communications and networking SoCs are used throughout the Internet, including in routers, switches, DSL modems, gigabit ethernet equipment, and high-bandwidth set-top boxes. |
| | • | | Computers and Graphics Products. Computation and graphics equipment such as personal computers, workstations and servers require more complex chip sets and embedded memory to achieve new features, such as advanced 3D graphics and digital signal processing, or DSP. |
| | • | | Security, Digital Rights Management (DRM), and Radio Frequency Identification (RFID) Products. With our NOVeA product, we are able to address customers’ needs for small amounts of embedded, multiple time programmable memories to enable DRM for such applications as wired and wireless network cards, secure memory cards, video games, DVD players and recorders, set-top boxes, PDAs, cellular phones, bridges and routers, DSL and cable modems, and Bluetooth enabled devices. Radio Frequency Identification applications require ultra-low-power and a small footprint. We believe that NOVeA provides the most cost-effective way to meet these requirements because it is available on standard CMOS logic processes. |
| | • | | Automotive Products.By 2010, market forecasters predict that vehicles will be expected to have data connectivity while in motion and drivers will require ever increasing interaction with information such as infotainment, navigation, and traffic monitoring as well as assistance in complex or dangerous traffic situations such as with an automated emergency braking system. As the automotive industry looks to SoCs to provide this ever increasing set of functionalities, while reducing overall costs and handling the complexity of in-car electronic systems, our semiconductor IP is well suited to help them meet these SoC design requirements. |
| | • | | Defense Products.Development of next generation of military, aerospace, security devices and special communications devices sponsored by government agencies, also known as high reliability devices, are increasingly based on complex SoCs due to the increased functionality requirements. Recently, we have experienced increased interest and business opportunities in this market segment. |
Research and Development
We believe that our future success will depend in large part on our ability to continue developing new products and expanding our existing products for advanced manufacturing processes. To this end, we have assembled a team of engineers with significant experience in the design and development of semiconductor IP. Currently, we are focusing our research and development efforts on semiconductor IP products that support the latest manufacturing processes such as 65-nanometer, 45-nanometer and 32-nanometer.
We have entered into agreements with Chartered, Dongbu HiTek, Grace, IBM, SilTerra, SMIC, Tower, TSMC, and UMC for the development and licensing of various semiconductor IP products that are targeted to these foundries’ design rules. Leveraging our relationship with these foundries, we are able to shape the focus of our research and development activities. Under our agreement with each foundry, Virage Logic owns its own IP and the foundry owns its own IP, however, both Virage Logic and the foundry jointly own any IP that is co-developed by the parties during the term of the agreement. Following any such development, we license the developed IP to third-parties that manufacture their silicon chips at the foundry. As consideration for our development efforts, the foundries pay us licensing fees, as well as royalties based on silicon chips manufactured at the foundries using our semiconductor IP. In addition, both parties agree to provide technical, marketing and sales support as appropriate.
As of October 31, 2007, we had 331 employees focused in the engineering-related activities within research, development and operations. We expect to identify and hire additional technical personnel in fiscal year 2008 to fulfill anticipated future needs in our research and development activities, and we expect that these personnel related costs will increase in the future in order to maintain a lead position as a third-party provider of silicon infrastructure in the form of semiconductor IP.
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Sales and Marketing
We are primarily engaged in direct sales in North America, Europe and Asia. In Asia, and more recently in Europe, we also derive indirect sales through distributors or representatives.
Direct Sales. We maintain a network of direct sales representatives and field application engineers serving the United States, Asia, and Europe. Substantially all of our direct sales representatives and field application engineers are located in North America, Europe and Japan and serve our customers in those regions. The sales force is distributed throughout North America with employees in the following locations: Austin, Texas; Londonderry, NH; Fremont and Irvine, CA; and West Palm Beach, FL. To serve our European customers, we have a direct sales organization based in the United Kingdom with additional sales personnel in Germany and Israel. We also have direct sales personnel in Japan. Our sales force’s primary responsibility is to secure and maintain direct account relationships with fabless semiconductor companies and integrated device manufacturers for the license of our products. Developing a customer relationship typically involves weeks or months and can extend well beyond this timeframe.
Indirect Sales.In addition to our direct sales force, we also sell our technologies through distributors in China, Korea, Malaysia, Singapore, and Taiwan, and through representatives in Europe. These indirect sales organizations have expertise in selling semiconductor IP and software design tools. None of these relationships are exclusive.
We enter into license agreements with our customers for a range of embedded memory, logic, I/O and memory controller technologies. For our ASAP Memory, ASAP Logic, SiWare Memory, SiWare Logic, STAR Memory and Base I/O products, in addition to collecting license and consulting fees from the customers, we receive royalties from pure-play foundries that manufacture chips for our fabless customers. For our STAR Memory System and NOVeA products, we receive both license and royalty fees directly from our customers, as well as royalties from the pure-play foundries that manufacture their chips.
We have developed relationships through the Virage Logic IP (VIP) Partner Program with the following types of companies:
| | • | | Pure-Play Foundries. We have entered into marketing and technology relationships with several pure-play foundries, including Chartered, Dongbu HiTek, Grace, HeJian, IBM, MagnaChip, SilTerra, SMIC, Tower, TSMC, and UMC. These relationships provide us with early access to new process technologies and endorsements from their direct sales force to our mutual customer base. |
| | • | | EDA and Test Vendors. We have entered into joint marketing relationships with a number of electronic design automation (EDA) and test vendors, including Cadence Design Systems, Inc. (Cadence), Magma Design Automation, Inc. (Magma), Mentor Graphics Corporation (Mentor Graphics) and Synopsys, Inc. (Synopsys). These relationships allow us to validate our interoperability with these EDA vendors’ software design tools. |
| | • | | Design Services. We have developed technology alliances with several design service companies, including Alchip Technologies, eSilicon and OpenSilicon, who have experience with Virage Logic semiconductor IP. This allows our customers to augment their design teams or outsource their chip designs to these design service companies. |
| | • | | IP Providers. We have established technology and joint marketing relationships with numerous IP providers including ARC International plc (ARC), MIPS Technologies (MIPS), QualCore Logic (QualCore) and Tensilica, Inc. (Tensilica), and in some cases offer Virage Logic Core Optimized IP Kits that complement the microprocessor IP products these vendors provide. By working in partnership with other leading IP suppliers to test silicon and provide reference designs, we help customers access the functionality of the IP prior to committing it to their design. |
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Customers
Our customers are semiconductor companies that use our semiconductor IP to design complex SoCs. Purchasers of our semiconductor IP products include fabless semiconductor companies, integrated device manufacturers and pure-play foundries. For fabless semiconductor and integrated device manufacturer customers, we license our semiconductor IP on either a single or multiple-project basis. The following chart provides a representative list of our major customers by customer type.
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| Fabless Semiconductor Companies | | Agilent, Altera, Broadcom, Conexant, Ikanos*, Intel, K-Micro, LSI Logic, Marvell, PMC-Sierra*, Sandisk, Sigmatel, TranSwitch, Thomson , Via Technologies |
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| Integrated Device Manufacturers | | AMI Semiconductor*, Analog Devices, Atmel, Freescale*, Infineon*, NEC, NXP, Sharp*, Sony, STMicro, Toshiba |
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| Pure-Play Foundries | | Chartered*, Dongbu HiTek, Grace, HeJian, IBM, MagnaChip, SilTerra, SMIC*, Tower*, TSMC*, UMC* |
| * | Indicates the eleven customers that generated the highest level of revenues for us in fiscal year 2007. |
We expect a small number of companies to collectively represent between 20% and 40% of our revenues for the next few years. In fiscal year 2007, 2006, and 2005, TSMC represented 11%, 17%, and 10% of our revenues, respectively. As our customer base grows and the number of fabless semiconductor companies increases, we expect our dependence on any one customer for revenues to decline. We expect that our sales to fabless semiconductor companies will grow, and as a result we will become more dependent on the availability of new manufacturing process technologies and capacity from pure-play foundries to manufacture our customers’ products.
Proprietary and Intellectual Property
We rely on a combination of nondisclosure agreements and other contractual provisions, as well as patent, trademark, trade secret and copyright law to protect our proprietary rights. Our general policy has been to seek patent protection for those inventions and improvements likely to be incorporated in our technologies or otherwise expected to be of value. We have an active program to protect our proprietary technology through the filing of patents.
As of October 31, 2007, we had 68 U.S. patents issued and 34 U.S. patent applications on file with the U.S. Patent and Trademark Office (USPTO). Our patents expire at various dates between 2019 and 2026, and we expect that once granted, the duration of patents covered by patent applications will be 20 years from the filing of the application. These patents will allow us to prevent others from infringing on some of our core technologies in the United States. We intend to continue to file patent applications as appropriate in the future. We cannot be sure, however, that our pending patent applications will be allowed, that any issued patents will protect our IP or will not be challenged by third parties, or that the patents of others will not seriously harm our ability to do business. In addition, others may independently develop similar or competing technology or design around any of our patents. We also have not secured patent protection in foreign countries, and we cannot be certain that the steps we have taken to protect our IP abroad will be effective.
In addition to patent protection, as of September 30, 2007, we had five U.S. trademarks registered and seven pending U.S. trademark applications on file with the USPTO. If the applications mature to registrations, these registrations would allow us to prevent others from using other similar marks on similar goods and services in the United States. We cannot be sure, however, that the USPTO will issue trademark registrations for any of our pending applications. Further, any trademark rights we hold or may hold in the future may be challenged or may
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not be of sufficient scope to provide meaningful protection. In addition, we had four foreign trademarks registered: two in the European Community and two in Japan. We also had two foreign trademark applications pending in China. The foreign applications are subject to the same conditions as the U.S. trademark applications with respect to their applicable jurisdictions.
We protect the source code of our technologies as both trade secrets and unpublished copyrighted works. We license the object code to our customers for limited uses and maintain contractual controls over the use of our software, but we may not have the resources to enforce such controls, and further such contractual controls may be declared invalid or unenforceable. Wide dissemination of our software makes protection of our proprietary rights difficult, particularly outside the United States, and we may not be able to assert equivalent rights with respect to source code developed by our employees in the Republic of Armenia (Armenia) and India as we could if it were developed in the United States.
We protect our trade secrets and other proprietary information through NDAs with our employees and customers and other security measures, although others may still gain access to our trade secrets or discover them independently.
Although we believe that our technologies do not infringe any patent, copyright or other intellectual proprietary rights of third parties, from time to time, third parties, which may include our competitors, may assert claims of infringement of patent, copyright or other intellectual property rights to technologies that are important to us. There is no such claim to date.
Competition
The semiconductor IP industry is very competitive and is characterized by constant technological change, rapid rates of technology obsolescence and the emergence of new suppliers. Our primary competition comes from the internal development groups of large integrated device manufacturers (IDMs) that develop semiconductor IP for their own use. In addition, we face competition from other third-party providers of semiconductor IP, such as ARM Ltd.’s Physical IP Division (formerly Artisan Components which was acquired by ARM in December 2004), Dolphin Technologies (Dolphin), and certain DRAM IP providers, such as MoSys Inc. (MoSys). Additionally, electronic design automation companies such as Cadence Design Systems, Mentor Graphics, Magma Design Automation and Synopsys, Inc., could play a more significant role in the IP marketplace as they elect to either acquire third-party IP providers or develop their own IP product offerings. An example of this would be Synopsys’ acquisition of MOSAID Technologies, Inc., a provider of double data rate memory controller, PHY and DLL semiconductor IP products. This product offering is competitive to the DDR, PHY and DLL product line that Virage Logic acquired through Ingot Systems, Inc.
Finally, pure-play foundries may decide to distribute embedded memories, logic and I/O components themselves, in addition to manufacturing chips containing third-party IP. TSMC, one of our pure-play foundry customers, has historically produced intellectual property components for use by third-parties in designs to be manufactured at TSMC’s foundry. These components are designed to serve the same purpose as components produced by Virage Logic. The intellectual property components developed by TSMC compete, and are expected to continue to compete with our products. We believe that TSMC is more aggressively developing and distributing these products to encourage its customers to use TSMC to manufacture their current and future designs. TSMC has substantially greater financial, manufacturing and other resources, name recognition and market presence than we do, and the internal design group at TSMC has greater access to technical information about TSMC’s manufacturing processes. If TSMC is successful in supplying its own intellectual property components to third-parties, either directly or through distribution arrangements with other companies, our revenue from TSMC, our revenue from other customers and our operating results could be negatively affected.
We believe that important competitive factors in our market include performance and functionality of products, the ability to customize products for customer requirements, length of development cycle, price,
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compatibility with prevailing design methodologies, interoperability with other devices or subsystems, reputation for successful designs and installed base, overall product quality and reliability, and the level of technical service and support provided.
Employees
As of October 31, 2007, we had 417 employees, including 60 in sales and marketing, 286 in engineering, 45 in operations and 26 in general and administrative functions. A total of 237 of our employees are located outside of the United States. We believe that our future success will depend in part on our continued ability to attract, hire and retain qualified personnel. None of our employees are represented by a labor union, and we believe our employee relations are good.
Executive Officers
The names and ages of our executive officers as of November 30, 2007 are set forth below:
| | | | |
Name | | Age | | Position(s) |
J. Daniel McCranie | | 64 | | President and Chief Executive Officer |
Christine Russell | | 58 | | Vice President of Finance and Chief Financial Officer |
Alexander Shubat | | 45 | | Vice President of Research and Development, Chief Technical Officer and Director |
Pete Rodriguez | | 46 | | Chief Marketing Officer |
Ehsan Rashid | | 42 | | Vice President of Operations |
J. Daniel McCraniehas served as our Chief Executive Officer since January 2007. Previously, Mr. McCranie was our Chairman of the Board of Directors, from August 2003 to December 2006. Prior to this, Mr. McCranie was Vice President of Sales and Marketing for Cypress Semiconductor, from September 1993 to February 2001. Mr. McCranie was Chairman, Chief Executive Officer and President of SEEQ Technology, from February 1984 to September 1993. Mr. McCranie serves as Chairman of the Board of Directors of ON Semiconductor Corp. and also as a member of the Board of Directors of Actel Company and a member of the Board of Directors of Cypress Semiconductor. Mr. McCranie holds a B.S. in Electrical Engineering from Virginia Polytechnic Institute.
Christine Russelljoined Virage Logic as our Vice President of Finance and Chief Financial Officer in June 2006. Ms. Russell has served as a financial executive in Silicon Valley for over twenty years with experience in both emerging and larger companies. Before joining Virage Logic, Ms. Russell served as Chief Financial Officer of OuterBay Technologies, Inc., a database archiving company, from May 2005 to June 2006. Previously, Ms. Russell served as Chief Financial Officer of Ceva, Inc., a digital signal processing IP company, from October 2003 to May 2005, and as Chief Financial Officer of Persistence Software, Inc., a software company, from October 1997 to October 2003. She also held Chief Financial or senior financial positions at Cygnus Solutions, Valence Technology, Inc., Covalent Systems, Stellar Systems, Inc. and Xerox Corporation, from the period May 1978 to October 1997. Ms. Russell serves as a member of the board and chairperson of the audit committee for Peak International Limited, and as a member of the board and chairperson of the audit committee for QuickLogic Corporation. Ms. Russell holds bachelors and masters of business administration degrees in Finance from Santa Clara University.
Alexander Shubatco-founded Virage Logic and has served as our Vice President of Research and Development and Chief Technical Officer and a member of the Board of Directors since January 1996. Before co-founding Virage Logic, Mr. Shubat was a Director of Engineering at Waferscale Integration from November 1985 to December 1995, where he managed various groups, including design, application-specific integrated circuit and high-speed memory. He holds fourteen patents and has contributed to more than 25 publications. Mr. Shubat holds a B.S. and a M.S. in Electrical Engineering from the University of Toronto, Canada and a Ph.D. in Electrical Engineering from Santa Clara University.
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Pete Rodriguezjoined Virage Logic as our Chief Marketing Officer in June 2007. From May 2000 to August 2006, Mr. Rodriguez served as Chief Executive Officer and President of Xpedion Design Systems, Inc., a private venture-funded developer of electronic design automation solutions for wireless communication which was acquired by Agilent Technologies in 2006. Mr. Rodriguez stayed at Agilent Technologies until February 2007 in a post acquisition transitional role. Prior to Xpedion, Mr. Rodriguez held senior management positions in sales and marketing at Escalade Corporation, a provider of software for chip design acquired by Mentor Graphics. Mr. Rodriguez also held senior sales management positions at LSI Logic, as well as product management and process engineering positions at Aerojet Electronics, Teledyne Microwave and Siliconix. Mr. Rodriguez currently serves as a director for EXAR, a manufacturer of mixed signal ICs. Mr. Rodriguez holds a B.S. in Chemical Engineering from California Institute of Technology, and M.S. in Electrical Engineering from California Polytechnic University and an MBA from Pepperdine University.
Ehsan Rashidhas been our Vice President of Operations since October 2004 and prior to that served as our Senior Director of Operations from April 2003. Before joining Virage Logic, Mr. Rashid served as Senior Vice President and General Manager, Access Product Division, at Com21, Inc., from January 2000 to April 2003. Previously, Mr. Rashid served as Senior Director at Philips Semiconductor after it acquired VLSI Technology from May 1999 to January 2000. Mr. Rashid served as Senior Director of Hardware and Software Engineering, and System Applications in the Consumer Digital Entertainment Division of VLSI Technology, from December 1997 to May 1999, and as Director of Engineering at Hitachi Micro Systems, Inc. Mr. Rashid holds a B.S. in Electrical Engineering from the University of California, Berkeley.
Item 1A. Risk Factors
Risk Related to Our Business
Inability or delayed execution on our strategy to be a leading provider of semiconductor IP could adversely affect our revenues and profitability.
From inception to May 2002, most of our revenues derived from the license of our embedded memory products. In May 2002, we expanded our product offering to also include logic products. In 2003, we added I/Os to our product offering to enable us to offer semiconductor IP platforms. During fiscal 2007, we acquired Ingot Systems, Inc., a provider of memory controller products and design services. If our strategy to be a provider of semiconductor IP platforms is not broadly accepted by potential customers or acceptance is delayed for any reason, our revenues and profitability could be adversely affected. In addition, our profitability could also be adversely affected due to investment of resources directed to the development and/or acquisition of logic and I/O products and due to lower than anticipated revenues from the sale of such products. Factors that could prevent us from gaining market acceptance of our semiconductor IP products include the following:
| | • | | difficulties in convincing customers of our memory products to purchase other products from us; |
| | • | | difficulties and delays in expanding our logic and I/O product offerings; and |
| | • | | hurdles we may encounter in building and expanding customer relationships. |
We may have difficulty sustaining profitability and may experience additional losses in the future.
We recorded a net loss of $4.6 million for the fiscal year ended September 30, 2007 and a net loss of $0.9 million for fiscal 2006. In order to improve our profitability, we will need to continue to generate new sales while controlling our costs. As we plan on continuing the growth of our business while implementing cost control measures, we may not be able to successfully generate enough revenues to return to profitability with this growth. Any failure to increase our revenues and control costs as we pursue our planned growth would harm our profitability and would likely negatively affect the market price of our stock. In addition, if we incurred losses for a sustained period we may be prevented from being able to fully utilize our deferred tax assets which would result in the need for a valuation allowance to be recorded.
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If we are unable to continue establishing relationships on favorable contractual terms with semiconductor companies to license our IP, our business will be harmed.
We rely on license fees from the sale of perpetual and term licenses to generate a large portion of our revenues. These licenses produce streams of revenue in the periods in which the license fees are recognized, but are not necessarily indicative of a commensurate level of revenue from the same customers in future periods. In addition, our agreements with our customers do not obligate them to license new or future generations of our IP. As a result, the growth of our business depends significantly on our ability to expand our business with existing customers and attract new customers.
We face numerous challenges in entering into license agreements with semiconductor companies on terms beneficial to our business, including the following:
| | • | | the lengthy and expensive process of building a relationship with potential customers; |
| | • | | competition with the customers’ internal design teams and other providers of semiconductor IP as our customers may evaluate these alternatives for each design; and |
| | • | | the need to persuade semiconductor companies to rely on us for critical technology. |
These factors may make it difficult for us to maintain our current relationships or establish new relationships with additional customers. Further, there are a finite number of fabless semiconductor companies and integrated device manufacturers to which we can license our IP. If we are unable to establish and maintain these relationships, we will be unable to generate license fees, and our revenues will decrease.
If we are unable to maintain existing relationships and/or develop new relationships with pure-play semiconductor manufacturers or foundries, we will be unable to verify our technologies on their processes and license our IP to them or their customers and our business will be harmed.
Our ability to verify our technologies for new manufacturing processes depends on entering into development agreements with pure-play foundries to provide us with access to these processes. In addition, we rely on pure-play foundries to manufacture our silicon test chips, to provide referrals to their customer base and to help define the focus of our research and development activities. We currently have foundry agreements with Chartered, Dongbu HiTek, SilTerra, SMIC, Tower, TSMC, and UMC. If we are unable to maintain our existing relationships with these foundries or enter into new agreements with other foundries, we will be unable to verify our technologies for their manufacturing processes and our ability to develop products for emerging technologies will be hampered. As of consequence, we would be unable to license our IP to fabless semiconductor companies that use these foundries to manufacture their silicon chips, which is a significant source of our revenues.
We must appropriately manage our relationships with foundries and other strategic partners in order to effectively execute on our business strategy.
In relying on pure-play manufacturing relationships and/our other strategic alliances, we face the following risks:
| | • | | reduced control over delivery schedules and product costs; |
| | • | | manufacturing costs that may be higher than anticipated; |
| | • | | inability of our manufacturing partners to develop manufacturing methods appropriate for our products and their unwillingness to devote adequate capacity to produce our products; |
| | • | | decline in product reliability; |
| | • | | inability to maintain continuing relationships with our pure-play manufacturers due to competition or market consolidation; and |
| | • | | restricted ability to meet customer demand when faced with product shortages. |
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If any of these risks are realized, we could experience an interruption in our supply chain or an increase in costs, which could delay or decrease our revenue or adversely affect our business, financial condition and results of operations.
If we are unsuccessful in increasing our royalty revenues, our revenues and profitability may not grow as desired.
We have agreements with pure-play semiconductor foundries to pay us royalties on their sales of silicon chips they manufacture for our fabless customers. Beginning with our STAR™Memory System and more recently with the introduction of our NOVeA® technology, in addition to collecting royalties from pure-play semiconductor foundries, we intend to increase our royalty base by collecting royalties directly from our integrated device manufacturer and fabless customers. However, we may not be successful in convincing all customers to agree to pay us royalties. For fiscal 2007 and 2006, we recorded royalty revenues of approximately $12.1 million and $16.1 million, respectively. The growth of our revenues depends in part on increasing our royalty revenues, but we may not be successful in increasing our royalty revenues as expected and we face difficulties in forecasting our royalty revenues because of many factors beyond our control, such as fluctuating sales volumes of products that incorporate our IP, short or unpredictable product life cycles for some customer products containing our IP, potential slow down for manufacturing of certain newer process technology, foundry rate adjustments, the cyclical nature of the semiconductor industry that affects the number of designs, commercial acceptance of these products, accuracy of revenue reports received from our customers and difficulties in the royalty collection process. In addition, occasionally we have completed agreements whereby significant upfront license fees are reduced or limited in exchange for higher royalty rates, which should result in future royalty revenues, but these royalty arrangements may not provide us with the anticipated benefits as sales of products incorporating our IP may not offset lower license fees.
It is difficult for us to verify royalty amounts owed to us under our licensing arrangements.
The standard terms of our license agreements require our customers to document the manufacture and sale of products that incorporate our technology and report this data to us on a quarterly basis. While standard license terms give us the right to audit the books and records of our customers to verify this information, audits can be expensive, time consuming and potentially detrimental to our ongoing business relationship with our customers. Our inability to audit all of our customers’ books and records may result in us receiving more or less royalty revenue than we are entitled to under the terms of our license agreements. The results of such audits could also result in an increase, as a result of a customers’ underpayment, or decrease, as a result of a customers’ overpayment, to royalty revenues. Such adjustments, as a result of the audit, are recorded in the period they are determined. Any adverse material adjustments resulting from royalty audits may cause our revenues and operating results to be below market expectations, which could cause our stock price to decline. The royalty audit may also trigger disagreements over contractual terms with our customers and such disagreements could adversely affect customer relationship, divert the efforts and attention of our management from normal operations and impact our business operations.
We may be unable to deliver our customized memory, logic and I/O products in the time-frame demanded by our customers, which could damage our reputation and future sales.
A portion of our agreements require us to provide customized products to our customers within a specified delivery timetable. While we have experienced delays in delivering products to our customers, the durations of these delays have typically been short in length so as to not materially damage our relationship with our customers. However, these delays could adversely impact our operations and our financial performance. Future failures to meet significant customer milestones could damage our reputation in our industry and harm our ability to attract new customers.
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We have a long and unpredictable sales cycle, which can result in uncertainty and delays in generating additional revenues.
It can take a significant amount of time and effort to negotiate a sale. Typically, it generally takes at least three to nine months after our first contact with a prospective customer before we start licensing our IP to that customer. In addition, purchase of our products is usually made in connection with new design starts, the timing of which is out of our control. Accordingly, we may be unable to predict accurately the timing of any significant future sales of our products. We may also spend substantial time and management attention on potential license agreements that are not consummated, thereby foregoing other opportunities.
Winning business is subject to a competitive selection process that can be lengthy and requires us to incur significant expense, and we may not be selected.
Our primary focus is on winning competitive bid selection processes, known as “design wins,” to develop products for use in our customers’ equipment. These selection processes can be lengthy and can require us to incur significant design and development expenditures. We may not win the competitive selection process and may never generate any revenue despite incurring significant design and development expenditures. Because we typically focus on only a few customers in a product area, the loss of a design win can sometimes result in our failure to offer a generation of a product. This can result in lost sales and could hurt our position in future competitive selection processes because we may be perceived as not being a technology leader.
After winning a product design for one of our customers, we may still experience delays in generating revenue from our products as a result of the lengthy development and design cycle. In addition, a delay or cancellation of a customer’s plans could significantly adversely affect our financial results, as we may have incurred significant expense and generated no revenue. Finally, if our customers fail to successfully market and sell their equipment it could materially adversely affect our business, financial condition and results of operations as the demand for our products falls.
Products that do not meet customer specifications or contain material defects could damage our reputation and cause us to lose customers and revenue.
The complexity and ongoing development of our products could lead to design or manufacturing problems. Our semiconductor IP products may fail to meet our customers’ design or technical requirements, or may contain defects, which may cause our customers to fail to complete the design and manufacturing of their products in a timely manner. Any of these problems may harm our customers’ businesses. If any of our products fail to meet specifications or have reliability or quality problems, our reputation could be damaged significantly and customers might be reluctant to buy our products, which could result in a decline in revenue, an increase in product returns and the loss of existing customers or failure to attract new customers. These problems may adversely affect customer relationships, as well as our business, financial condition and results of operations.
As advanced process nodes become more complex we may have difficulty in delivering product specifications in similar timeframes and at comparable costs to older process nodes.
The increasing complexity of our products at advanced nodes requires different customer engagements and validation strategies. Such changes require the acceptance of different business terms and schedules by our customers. They also may require an increase of test silicon for purposes of validating performance parameters. Such changes may impact our ability to acquire new customers and could increase our operating expenses.
Our international operations may be adversely affected by instability in the countries in which we operate.
We currently have subsidiaries or branches in the Republic of Armenia, India, the United Kingdom, Israel, Germany and Japan. In addition, a significant portion of our IP is being developed in development centers
located in the Republic of Armenia and India. Israel continues to face an increased level of violence and terror.
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India is experiencing rising costs and in certain industries, intense competition for highly qualified personnel. Armenia has in recent years suffered significant political and economic instability. Accordingly, conditions in areas of the world in which we operate may adversely affect our business in a number of ways, including the following:
| | • | | changes in the political or economic conditions in Armenia and changes in the economic conditions in India and the surrounding region, such as fluctuations in exchange rates, changes in laws protecting IP, the imposition of currency transfer restrictions or limitations, or the adoption of burdensome trade or tax policies, procedures, rules, regulations or tariffs, changes in the demand for technical personnel could adversely affect our ability to develop new products, to take advantage of the cost savings associated with operations in Armenia and India, and to otherwise conduct business effectively in Armenia and India; |
| | • | | our ability to continue conducting business in Israel and other countries in the normal course may be adversely affected by increased risk of social and political instability; and |
| | • | | our Israeli customers’ demand for our products may be adversely affected because of negative economic consequences associated with reduced levels of safety and security in Israel. |
Problems associated with international business operations could affect our ability to license our IP.
Sales to customers located outside North America accounted for 54% and 60% of our revenues for fiscal years ended September 30, 2007 and 2006, respectively. We anticipate that sales to customers located outside North America will increase and will continue to represent a significant portion of our total revenues in future periods. In addition, most of our customers that do not own their own fabrication plants rely on pure-play foundries located outside of North America. Accordingly, our operations and revenues are subject to a number of risks associated with doing business in international markets, including the following:
| | • | | managing distributors and sales partners outside the U.S.; |
| | • | | staffing and managing non-U.S. branch offices and subsidiaries; |
| | • | | political and economic instability; |
| | • | | greater difficulty in collecting account receivables resulting in longer collection periods; |
| | • | | foreign currency exchange fluctuations; |
| | • | | changes in tax laws and tariffs or the interpretation of such laws and tariffs; |
| | • | | trade protection measures that may be adopted by other countries; |
| | • | | compliance with, and unexpected changes in, a wide variety of foreign laws and regulatory environments with which we are not familiar; |
| | • | | timing and availability of export licenses; |
| | • | | inadequate protection of IP rights in some countries; |
| | • | | different labor standards; and |
| | • | | United States government licensing requirements for exports, which may lengthen the sales cycle or restrict or prohibit the sale or licensing of certain products. |
If these risks actually materialize, our international operations may be adversely affected and sales to international customers, as well as those domestic customers that use foreign fabrication plants, may decrease.
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We rely on a small number of customers for a substantial portion of our revenues and our accounts receivables are concentrated among a small number of customers.
We have been dependent on a limited number of customers for a substantial portion of our annual revenues in each fiscal year, although the customers comprising this group have changed from time to time. We have one customer that generated 10% or more of our revenue for fiscal 2007. The license agreements we enter into with our customers do not obligate them to license future generations of our IP and, as a result, we cannot predict if and when they will purchase additional products from us. As a result of this customer concentration, we could experience a significant reduction in our revenues if we lose one or more of our significant customers and are unable to replace them. In addition, since our accounts receivable are concentrated in a relatively small number of customers, a significant change in the liquidity, financial position, or issues regarding timing of payments of any one of these customers could have a material adverse impact on the collectibility of our accounts receivable, revenues recorded and our future operating results.
Our quarterly operating results may fluctuate significantly and the failure to meet financial expectations for any fiscal quarter may cause our stock price to decline.
Our quarterly operating results are likely to fluctuate in the future from quarter to quarter and on an annual basis due to a variety of factors, many of which are outside of Virage Logic’s control. Factors that could cause our revenues and operating results to vary materially from quarter to quarter include the following:
| | • | | large orders unevenly spaced over time, or the cancellation or delay of orders; |
| | • | | pace of adoption of new technologies by customers; |
| | • | | timing of introduction of new products and technologies and technology enhancements by us and our competitors; |
| | • | | our lengthy sales cycle and fluctuations in the demand for our products and products that incorporate our IP; |
| | • | | constrained or deferred spending decisions by customers; |
| | • | | delays in new process qualification or verification; |
| | • | | capacity constraints at the facilities of our foundries; |
| | • | | inability to collect or delay in collection of receivables; |
| | • | | the timing and completion of milestones under customer agreements; |
| | • | | the impact of competition on license revenues or royalty rates; |
| | • | | the cyclical nature of the semiconductor industry and the general economic environment; |
| | • | | consolidation, merger and acquisition activity of our customer base may cause delays or loss of sales; |
| | • | | the amount and timing of royalty payments; |
| | • | | changes in development schedules; and |
| | • | | research and development expenditures. |
As a result, we believe that quarter-to-quarter comparisons of our results of operations are not necessarily meaningful and may not be reliable as indicators of future performance. These factors make it difficult for us to accurately predict our revenues and operating results and may cause them to be below market analysts’ expectations in some quarters, which could cause the market price of our stock to decline.
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If we are unable to effectively manage our growth, our business may be harmed.
Our future success depends on our ability to successfully manage our growth. Our ability to manage our business successfully in a rapidly evolving market requires an effective planning and management process. Our customers rely heavily on our technological expertise in designing and testing our products. Relationships with new customers may require significant engineering resources. As a result, any increase in the demand for our products will increase the requirements on our personnel, particularly our engineers.
Our historical growth, international expansion, and our strategy of being the semiconductor industry’s trusted IP partner, have placed, and are expected to continue to place, a significant challenge on our managerial and financial resources as well as our financial and management controls, reporting systems and procedures. Although some new controls, systems and procedures have been implemented, our future growth, if any, will depend on our ability to continue to implement and improve operational, financial and management information and control systems on a timely basis, together with maintaining effective cost controls. Our inability to manage any future growth effectively would be harmful to our revenues and profitability.
We have recently acquired a small company, and we intend to engage in acquisitions, joint ventures and other transactions that may complement or expand our business. We may not be able to complete such transactions and such transactions, if executed, pose significant risks and could have a negative effect on our operations.
In August 2007 we acquired Ingot Systems, Inc., a provider of memory controller products and design services. Together with its subsidiary in India, Ingot consisted of approximately 30 employees. Achievement of our business goals may be dependent on opportunities to buy other businesses or technologies that could complement, enhance or expand our current business or products or that might otherwise offer us growth opportunities. We may not be able to complete such transactions for a variety of reasons, including our inability to structure appropriate financing for larger transactions. Any transactions that we are able to identify and complete may involve a number of risks, including the following:
| | • | | the diversion of our management’s attention from our existing business to integrate the operations and personnel of the acquired or combined business or technology; |
| | • | | possible adverse effects on our operating results during the integration process; and |
| | • | | our possible inability to achieve the intended objectives of the transaction. |
In addition, we may not be able to successfully or profitably integrate, operate, maintain and manage our newly acquired operations or employees. We may not be able to maintain uniform standards, controls, procedures and policies, and this may lead to operational inefficiencies. Moreover, successful acquisitions in the semiconductor industry may be more difficult to accomplish than in other industries because such acquisitions require, among other things, integration of product offerings, manufacturing relationships and coordination of sales and marketing and research and development efforts. The difficulties of such integration may be increased by the need to coordinate geographically separated organizations and the complexity of the technologies being integrated. Furthermore, products acquired in connection with acquisitions may not gain acceptance in our markets, and we may not achieve the anticipated or desired benefits of such transactions. The inability of management to successfully integrate any future acquisition could harm our business.
We have received assessment orders from the Government of India, Income Tax Department, Office of the Director of Income Tax (Indian Tax Authorities) proposing a tax deficiency in certain of our tax returns, and the outcome of the assessment or any future assessment involving similar claims may have an adverse effect on our consolidated statements of operations.
The Indian Tax Authorities completed its assessment of our tax returns for the tax years 2000 through 2005 and issued assessment orders in which the Indian Tax Authorities proposes to assess an aggregate tax deficiency
23
for the three year period of approximately $1.0 million, plus interest, which interest will accrue until the matter is resolved. The assessment orders are not final notices of deficiency, and we have immediately filed appeals to the appellate tax authorities. We believe that the assessments are inconsistent with the applicable tax laws and that we have meritorious defense to the assessments. However, the ultimate outcome cannot be predicted with certainty, including the amount payable or the timing of any such payments upon resolution of the matter. Should the Indian Tax Authorities assess additional taxes as a result of a current or a future assessment, we may be required to record charges to operations in future periods that could have an adverse effect on our consolidated statements of operations.
We may be unable to attract and retain key personnel who are critical to the success of our business.
We believe our future success depends on our ability to attract and retain engineers and other highly skilled personnel and senior managers. In addition, in order to grow our business we must increase our sales force, both domestic and international, with qualified employees. Hiring qualified technical, sales and management personnel is difficult due to a limited number of qualified professionals and competition in our industry for these types of employees. We have in the past experienced delays and difficulties in recruiting and retaining qualified technical and sales personnel and believe that at times our employees are recruited aggressively by our competitors and start-up companies. Our employees are “at will” and may leave our employment at any time, and under certain circumstances, start-up companies can offer more attractive equity incentives than we offer. As a result, we may experience significant employee turnover. Failure to attract and retain personnel, particularly sales and technical personnel would make it difficult for us to develop and market our technologies.
We may need additional capital that may not be available to us and, if raised, may dilute our stockholders’ ownership interest in us.
We may need to raise additional funds to fund growth of our business and any acquisitions we may pursue, to respond to competitive pressures or to acquire complementary products or technologies. Additional equity or debt financing may not be available on terms that are acceptable to us. If we raise additional funds through the issuance of equity or convertible debt securities, the ownership of our stockholders would be diluted and these securities might have rights, preferences and privileges senior to those of our current stockholders. If adequate funds are not available on acceptable terms, our ability to fund our expansion, take advantage of unanticipated opportunities, develop or enhance our products or services, or otherwise respond to competitive pressures would be significantly limited.
Risk Related to Our Industry
We operate in the highly cyclical semiconductor industry, which is subject to significant downturns.
The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life-cycles and wide fluctuations in product supply and demand. The industry has experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles of both semiconductor companies’ and their customers’ products and declines in general economic conditions. These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated erosion of average selling prices. We have experienced these conditions in our business in the past and may experience such downturns in the future. We may not be able to manage these downturns. Any future downturns of this nature could have a material adverse effect on our business, financial condition and results of operations.
If demand for products incorporating complex semiconductors and semiconductor IP does not increase, our business may be harmed.
Our business and the adoption and continued use of our IP by semiconductor companies depends on continued demand for products requiring complex semiconductors, embedded memories and logic elements, such
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as cellular and digital phones, pagers, PDAs, digital cameras, DVD players, switches and modems. The demand for such products is uncertain and difficult to predict, and it depends on factors beyond our control such as the competition faced by each customer, market acceptance of products that incorporate our IP and the financial and other resources of each customer. A reduction in the demand for products incorporating complex semiconductors and semiconductor IP or a decline in the general economic environment which results in the cutback of research and development budgets or capital expenditures would likely result in a reduction in demand for our products and could harm our business. In addition, with increasing complexity in each successive generation of semiconductors, we face the risk that the rate of adoption of smaller technology processes may slow down.
In addition, the semiconductor industry is highly cyclical. Significant economic downturns characterized by diminished demand, erosion of average selling prices, production overcapacity and production capacity constraints are other factors affecting the semiconductor industry. As a result, we may face a reduced number of design starts, tightening of customers’ operating budgets, extensions of the approval process for new orders and projects and consolidation among our customers, all of which may adversely affect the demand for our products and may cause us to experience substantial period-to-period fluctuations in our operating results.
The market for semiconductor IP can be highly competitive and dynamic. We may experience loss in market share to larger competitors with greater resources and/or our customer base may choose to develop semiconductor IP using their own internal design teams.
We face competition from both existing suppliers of third-party semiconductor IP, as well as new suppliers that may enter the market. We also compete with the internal design teams of large, integrated device manufacturers. Many of these internal design teams have substantial programming and design resources and are part of larger organizations with substantial financial and marketing resources. These internal teams may develop technologies that compete directly with our technologies or may actively seek to license their own technologies to third parties, which could negatively affect our revenue and operating results. In addition, our existing customers may choose to develop their own technology solutions internally.
Many of our existing competitors have longer operating histories, greater brand recognition and larger customer bases, as well as greater financial and marketing resources, than we do. This may allow them to respond more quickly than we can to new or emerging technologies and changes in customer requirements. It may also allow them to devote greater resources than we can to the development and promotion of their products. In addition, the intense competition in the market for semiconductor IP could result in pricing pressures, reduced license revenues, reduced margins or lost market share, any of which could harm our operating results and cause our stock price to decline.
The technology used in the semiconductor industry is rapidly changing and if we are unable to develop new technologies and adapt our existing IP to new processes, we will be unable to attract or retain customers.
The semiconductor industry has been characterized by an increasingly rapid rate of development of new technologies and manufacturing processes, rapid changes in customer requirements, frequent product introductions and ongoing demands for greater speed and functionality. Our future success depends on our ability to develop new technologies and introduce new products to the marketplace in a timely manner, and to adapt our existing IP to satisfy the requirements of new processes and our customers. If our development efforts are not successful or are significantly delayed, or if the enhancements or new generations of our products do not achieve market acceptance, we may be unable to attract or retain customers and our operating results could be harmed.
Our ability to continue developing technical innovations involves several risks, including the following:
| | • | | our ability to anticipate and respond in a timely manner to changes in the requirements of semiconductor companies; |
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| | • | | the emergence of new semiconductor manufacturing processes and our ability to enter into strategic relationships with pure-play semiconductor foundries to develop and test technologies for these new processes and provide customer referrals; |
| | • | | the significant research and development investment that we may be required to make before market acceptance, if any, of a particular technology; |
| | • | | the possibility that the industry may not accept a new technology or may delay use of a new technology after we have invested a significant amount of resources to develop it; and |
| | • | | new technologies introduced by our competitors. |
If we are unable to adequately address these risks, our IP will become obsolete and we will be unable to sell our products. Further, as new technologies or manufacturing processes are announced, customers may defer licensing our IP until those new technologies become available or our IP has been adopted for that manufacturing process.
In addition, research and development requires a significant expense and resource commitment. We may not have the financial and other resources necessary to develop the technologies demanded in the future and may be unable to attract or retain customers.
General economic conditions and future terrorist attacks may reduce our revenues and harm our business.
As our business has grown, we have become increasingly subject to the risks arising from adverse changes in domestic and global economic conditions. Continued unrest in Israel and the Middle East may negatively impact the investments that our worldwide customers make in these geographic regions. If businesses or consumers defer or cancel purchases of new products that contain complex semiconductors, purchases by fabless semiconductor companies, integrated device manufacturers and production levels by semiconductor manufacturers could decline. This could adversely affect our revenues which in turn would have an adverse effect on our results of operations and financial condition.
Risk Related to Our Intellectual Property Rights
We rely on our proprietary technologies and we cannot assure you that the precautions taken to protect our rights will be adequate or that we will continue to be able to adequately secure such proprietary technologies from third parties.
We rely on a combination of patent, trademark, copyright, mask work and trade secret laws to protect our proprietary rights in our technologies. We cannot be sure that the United States Patent and Trademark Office will issue patents or trademarks for any of our pending applications. Further, any patents or trademark rights that we hold or may hold in the future may be challenged, invalidated or circumvented or may not be of sufficient scope or strength to provide meaningful protection or any commercial advantage to us Furthermore, the laws of some foreign countries may not adequately protect our IP to the same extent as applicable laws protect our IP in the United States. For instance, some portion of our IP developed outside of the United States may not receive the same copyright protection that it would receive if it was developed in the United States. As we increase our international presence, we expect that it will become more difficult to monitor the development of competing technologies that may infringe on our rights as well as unauthorized use of our technologies.
We use license agreements, confidentiality agreements and employee nondisclosure and assignment agreements to limit access to and distribution of our proprietary information and to obtain ownership of technology prepared on a work-for-hire basis. We cannot be sure that we have taken adequate steps to protect our IP rights and deter misappropriation of these rights or that we will be able to detect unauthorized uses and take effective steps to enforce our rights. Since we also rely on unpatented trade secrets to protect some of our proprietary technology, we cannot be certain that others will not independently develop and patent the same
26
technologies or otherwise acquire the same or substantially equivalent technologies or otherwise gain access to our proprietary technology or disclose that technology. We also cannot be sure that we can ultimately protect our rights to and improperly disclose our proprietary technologies to others.
Third parties may claim we are infringing or assisting others to infringe their IP rights, and we could suffer significant litigation or licensing expenses or be prevented from licensing our technology.
We believe that our technologies do not infringe the IP rights of third parties to date. However, there are numerous patents in the semiconductor industry and new patents are being issued at a rapid rate. It is not always practicable to determine in advance whether our technologies infringe the patent right of others. As a result, we may be compelled to respond to infringement claims by third parties to protect our rights or defend our customers’ rights. These infringement claims, regardless of merit, could be costly and time-consuming, and divert our management and key personnel from our business operations. In settling these claims, we may be required to pay significant damages and may be prevented from licensing some of our technologies unless we enter into a royalty or license agreement. In addition, if challenging a claim is not feasible, we might be required to enter into royalty or license agreements. If available, the royalty or license agreement may include terms which require us to obtain a license from the third-party to sell or use the relevant technology which may result in significant expenses to the Company or to redesign the technology which would be time consuming and costly to the Company. In the event that we are not be able to obtain such royalty or license agreements on terms acceptable to us, we may be prevented from licensing or developing our technology.
Risk Related to Our Stock
Our stock price may be volatile and could decline substantially.
The market price of our common stock has fluctuated significantly in the past, will likely continue to fluctuate in the future and may decline. Fluctuations or a decline in our stock price may occur regardless of our performance. Among the factors that could affect our stock price, in addition to our performance, are the following:
| | • | | variations between our operating results and the published expectations of securities analysts; |
| | • | | changes in financial estimates or investment recommendations by securities analysts who follow our business; |
| | • | | announcements by us or our competitors of significant contracts, new products or services, acquisitions, or other significant transactions; |
| | • | | the inclusion or exclusion of our stock in various indices or investment categories, especially as compared to the investment profiles of our stockholders at a given time; |
| | • | | changes in economic and capital market conditions; |
| | • | | changes in business regulatory conditions; and |
| | • | | the trading volume of our common stock. |
A sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.
Sales of a substantial number of shares of our common stock in the public market could adversely affect the market price of our common stock. Adam Kablanian, Chairman of the Board of Directors, and Alexander Shubat, Vice President of Research and Development, Chief Technology Officer and a member of the Board of Directors, each hold a large block of our common stock. Each of Messrs. Kablanian and Shubat has established sales plans, or other sales accounts, to sell shares of our common stock and diversify their holdings. Significant sales by insiders, or the perception that large sales could occur, could adversely impact the public market for our
27
stock. Sales transactions are also subject to the restrictions and filing requirements mandated by Securities and Exchange Commission Rule 144. Our officers, directors and principal stockholders controlled as of September 30, 2007 approximately 54% of our common stock. As a result, this significant concentration of share ownership may adversely affect the trading price of our common stock because investors often perceive disadvantages to owning stock in companies with significant block stockholders.
Our certificate of incorporation and bylaws as well as Delaware law contain provisions that could discourage transactions resulting in a change in control, which may negatively affect the market price of our common stock.
Our certificate of incorporation, our bylaws and Delaware law contain provisions that make it more difficult for another company to acquire control of our Company. In addition, these provisions could limit the price that investors would be willing to pay in the future for shares of our common stock. These provisions include:
| | • | | our Board of Directors is authorized, without prior stockholder approval, to create and issue preferred stock, commonly referred to as “blank check” preferred stock, with rights senior to those of common stock; |
| | • | | our Board of Directors is staggered into three classes, only one of which is elected at each annual meeting; |
| | • | | stockholder action by written consent is prohibited; |
| | • | | nominations for election to our Board of Directors and the submission of matters to be acted upon by stockholders at a meeting are subject to advance notice requirements; |
| | • | | certain provisions in our bylaws and certificate may only be amended with the approval of stockholders holding 80% of our outstanding voting stock; |
| | • | | the ability of our stockholders to call special meetings of stockholders is prohibited; and |
| | • | | our Board of Directors is expressly authorized to make, alter or repeal our bylaws. |
We are also subject to Section 203 of the Delaware General Corporation Law, which provides, subject to enumerated exceptions, that if a person acquires 15% or more of our outstanding voting stock, the person is an “interested stockholder” and may not engage in any “business combination” with us for a period of three years from the time the person acquired 15% or more of our outstanding voting stock. In addition, in February 2007, we executed change in control agreements with our executive officers, which provide severance benefits following a termination without cause, or for good reason, following a change in control. The existence of these agreements and potential pay-outs could act as a deterrent to a potential acquirer.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Facilities
Our principal administrative, sales, marketing and research and development facility is in Fremont, California, and occupies approximately 61,500 square feet. This facility is leased through June 2008. We also lease an office space in Clinton, New Jersey, that is occupied mainly by research and development and engineering personnel. The Clinton office, which occupies approximately 10,900 square feet, is leased through November 2010. In addition, we have development centers in Armenia and India. In September 2003, our development center in Armenia moved into a building owned by us. The office space is approximately 40,000 square feet and the total cost of the building was approximately $2.3 million. We have a development
28
center in India located in Noida, near Delhi, which occupies approximately 26,000 square feet in a building leased with a lease term under which the Company has the right, but not the obligation, to occupy the facility through July 2009. Our other development center in India is located in Pune, and occupies approximately 2,010 square feet in a building leased with a short-term lease through August 2008. Our Seattle, Washington lease was terminated in the fourth quarter of 2007.
Item 3. Legal Proceedings
The Company is not a party to any material legal proceeding which would have a material adverse effect on our consolidated financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Price and Dividends on Virage Logic Common Stock
Our common stock is traded on the NASDAQ Global Market under the symbol VIRL. The following table sets forth, for the periods indicated, the high and low closing sales prices for the common stock as reported on the NASDAQ Global Market.
| | | | | | | | | | | | |
| | | Fiscal Year 2007 | | Fiscal Year 2006 |
| | | High | | Low | | High | | Low |
First Quarter | | $ | 9.96 | | $ | 8.65 | | $ | 10.93 | | $ | 7.40 |
Second Quarter | | | 9.04 | | | 7.25 | | | 11.41 | | | 10.05 |
Third Quarter | | | 7.92 | | | 6.79 | | | 12.50 | | | 8.85 |
Fourth Quarter | | | 7.78 | | | 6.69 | | | 9.84 | | | 7.82 |
As of November 30, 2007, there were approximately 63 stockholders of record of our common stock.
The Company has never paid or declared any cash dividends on our common stock or other securities and does not anticipate paying cash dividends in the foreseeable future.
During the year ended September 30, 2007, we did not issue and sell any shares of common stock, or securities exercisable for or exchangeable into common stock, or any other securities that were not registered under the Securities Act of 1933.
There were no purchases of common stock of the Company made by the Company or any “affiliated purchaser” of the Company as defined in Rule 10b-18(a)(3) under the Exchange Act during the year ended September 30, 2007.
Equity Compensation Plan Information
The equity compensation plan information required to be provided in this Annual Report on Form 10-K is incorporated by reference to the Company’s proxy statement for the 2008 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended September 30, 2007.
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Performance Measurement Comparison of Shareholder Return
The graph below compares the cumulative 5-year total return of our common stock with the cumulative total returns of the NASDAQ composite index and the Philadelphia Semiconductor index. The graph tracks the performance of a $100 investment in our common stock, a peer, and the NASDAQ index (with the reinvestment of all dividends) from September 30, 2002 to September 30, 2007.
| | | | | | | | | | | | |
| | | Fiscal 2002 | | Fiscal 2003 | | Fiscal 2004 | | Fiscal 2005 | | Fiscal 2006 | | Fiscal 2007 |
Virage Logic Corporation | | 100.00 | | 80.59 | | 130.75 | | 82.18 | | 96.61 | | 78.69 |
NASDAQ Composite | | 100.00 | | 150.59 | | 162.89 | | 185.48 | | 196.37 | | 236.60 |
Philadelphia Semiconductor | | 100.00 | | 186.79 | | 153.97 | | 193.70 | | 185.07 | | 210.02 |
Item 6. Selected Consolidated Financial Data
The selected consolidated financial data set forth below should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes thereto included elsewhere in this filing. The consolidated statements of operations data for each of the fiscal years ended September 30, 2007, 2006 and 2005 and the consolidated balance sheet data as of September 30, 2007 and 2006 have been derived from our audited consolidated financial statements included elsewhere in this filing. The consolidated statements of operations data for the fiscal years ended September 30, 2004 and 2003 and the consolidated balance sheet data as of September 30, 2005, 2004, and 2003 have been derived from our audited consolidated financial statements not included in this filing. The historical financial information may not be an accurate indicator of our future performance.
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SELECTED CONSOLIDATED CONDENSED FINANCIAL DATA
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended September 30, | |
| | | 2007 | | | 2006 | | | 2005 | | | 2004 | | | 2003 | |
| | | (In thousands, except per share data) | |
Consolidated Statements of Operations Data: | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 46,527 | | | $ | 59,303 | | | $ | 53,389 | | | $ | 53,003 | | | $ | 40,657 | |
Cost and expenses: | | | | | | | | | | | | | | | | | | | | |
Cost of revenues | | | 12,938 | | | | 14,803 | | | | 13,035 | | | | 11,244 | | | | 9,511 | |
Research and development | | | 20,346 | | | | 21,407 | | | | 19,841 | | | | 18,476 | | | | 19,177 | |
Sales and marketing | | | 15,464 | | | | 16,858 | | | | 15,608 | | | | 14,652 | | | | 13,103 | |
General and administrative | | | 8,891 | | | | 10,319 | | | | 9,083 | | | | 6,618 | | | | 4,987 | |
Restructuring | | | 580 | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total cost and expenses | | | 58,219 | | | | 63,387 | | | | 57,567 | | | | 50,990 | | | | 46,778 | |
| | | | | | | | | | | | | | | | | | | | |
Operating income (loss) | | | (11,692 | ) | | | (4,084 | ) | | | (4,178 | ) | | | 2,013 | | | | (6,121 | ) |
Interest income | | | 4,002 | | | | 3,055 | | | | 1,740 | | | | 719 | | | | 812 | |
Other income (expenses), net | | | (157 | ) | | | 270 | | | | (37 | ) | | | 37 | | | | (73 | ) |
| | | | | | | | | | | | | | | | | | | | |
Income (loss) before taxes | | | (7,847 | ) | | | (759 | ) | | | (2,475 | ) | | | 2,769 | | | | (5,382 | ) |
Income tax provision (benefit) | | | (3,242 | ) | | | 120 | | | | (2,160 | ) | | | 859 | | | | (1,532 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (4,605 | ) | | $ | (879 | ) | | $ | (315 | ) | | $ | 1,910 | | | $ | (3,850 | ) |
| | | | | | | | | | | | | | | | | | | | |
Basic and diluted net income (loss) per share | | $ | (0.20 | ) | | $ | (0.04 | ) | | $ | (0.01 | ) | | $ | 0.09 | | | $ | (0.19 | ) |
| | | | | | | | | | | | | | | | | | | | |
Shares used in computing basic net income (loss) per share | | | 23,111 | | | | 22,812 | | | | 22,187 | | | | 21,391 | | | | 20,750 | |
| | | | | | | | | | | | | | | | | | | | |
Shares used in computing diluted net income (loss) per share | | | 23,111 | | | | 22,812 | | | | 22,187 | | | | 22,139 | | | | 20,750 | |
| | | | | | | | | | | | | | | | | | | | |
| |
| | | September 30, | |
| | 2007 | | | 2006 | | | 2005 | | | 2004 | | | 2003 | |
| | | (In thousands) | |
Consolidated Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 14,820 | | | $ | 20,815 | | | $ | 26,841 | | | $ | 28,746 | | | $ | 38,930 | |
Marketable securities | | | 60,368 | | | | 56,786 | | | | 40,997 | | | | 34,366 | | | | 20,180 | |
Working capital | | | 62,315 | | | | 76,501 | | | | 67,084 | | | | 63,055 | | | | 62,453 | |
Total assets | | | 128,871 | | | | 126,275 | | | | 114,494 | | | | 109,188 | | | | 96,562 | |
Accumulated deficit | | | (26,739 | ) | | | (22,134 | ) | | | (21,255 | ) | | | (20,940 | ) | | | (22,850 | ) |
Total stockholders’ equity | | | 110,219 | | | | 108,818 | | | | 99,368 | | | | 91,511 | | | | 87,373 | |
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read together with the consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K . This discussion contains forward-looking statements, which involve risk and uncertainties. Our actual results could differ materially from those anticipated in the forward looking statements as a result of certain factors, including but not limited to those discussed in “Risk Factors” and in other documents we file from time to time with the Securities and Exchange Commission. See “Forward Looking Statements” in Part I of this Annual Report on Form 10-K.
Overview
Business Environment
Virage Logic provides semiconductor intellectual property (IP) to the global semiconductor industry. Our semiconductor IP offering consists of (1) embedded memories, (2) compilers that allow chip designers to configure our memories into different sizes and shapes on a single silicon chip, (3) IP and development infrastructure for embedded test and repair of on-chip memory instances, (4) software development tools used to design memory compilers, (5) embedded non-volatile memory instances, (6) logic cell libraries, (7) I/Os, and (8) DDR memory controller components. These various forms of IP are utilized by our customers to design and manufacture System-on-Chip (SoC) integrated circuits that are forming the foundation of today’s consumer, communications and networking, hand-held and portable devices, computer and graphics, automotive, and defense applications. We also provide custom design services to the semiconductor industry.
Our customers include fabless semiconductor companies, integrated device manufacturers and foundries. As semiconductor companies face increasing pressures to bring products to market faster and semiconductors have shorter product cycles, we focus on providing our customers a broad product offering as a means to satisfy a larger portion of our customers’ semiconductor IP needs, while positioning ourselves to offer advanced products as the semiconductor industry migrates to smaller geometries.
The timing of customer purchases of our products is typically related to new design starts by fabless companies and migration to new manufacturing processes by integrated device manufacturers and foundries. Because of the high costs involved in new design starts and migration to new manufacturing processes, our customers’ decision regarding these matters is heavily dependent on their long-term business outlook. As a result, our business, and specifically our license revenues, is likely to grow at times of positive outlook for the semiconductor industry.
In fiscal year 2007, we derived 59% of our license revenue from the more advanced processes, 90-nanometer and 65-nanometer technologies and 41% from the older process nodes, predominantly 0.13, 0.18, 0.25 and 0.35 micron technologies. The Company expects the 90-nanometer, 65-nanometer and 45-nanometer technologies to drive revenue growth in the foreseeable future while license revenues from the older process nodes decline. Our royalty revenue to date has been from production on the older process nodes, and we expect future growth in royalty revenues to be driven by the advanced processes, 45-nanometer, 65-nanometer and 90-nanometer technologies, in addition to continued production on the 0.13 and 0.18 micron technologies.
We sell our product early in the design process, and there are time delays of 24 to 36 months between the sale of our products and the time we expect to receive royalty revenues. These time delays are due to the length of time required for our customers to implement our semiconductor IP into their designs, and then to manufacture, market and sell a product incorporating our products. As a result, we expect our royalty revenues to increase in periods in which manufacturing volumes of semiconductors are growing. Future growth of our royalty revenue is dependent on our ability to increase the number of designs incorporating our products and on such designs achieving substantial manufacturing volumes.
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Sources of Revenues
Our revenues are derived principally from licenses of our semiconductor IP products, which include:
| | • | | semiconductor IP platforms; |
| | • | | embedded memory, logic and I/O elements; |
| | • | | standard and custom memory compilers; |
| | • | | memory test processor and fuse box components for embedded test and repair of defective memory cells; and |
| | • | | Double Date Rate memory controllers, Physical Interfaces, and Delay Locked Loops. |
We also derive revenues from royalties, custom design services, maintenance services and library development and consulting services related to the license of logic components. Our revenues are reported in two separate categories: license revenues and royalty revenues. License revenues are derived from license fees, maintenance fees, fees for custom design services, library design services and consulting services. Royalty revenues are derived from fees paid by a customer or a third-party foundry based on production volumes of wafers containing chips utilizing our semiconductor IP technologies.
The license of our semiconductor IP typically covers a range of platform, embedded memory, logic, I/O, DDR memory controller, PHY and DLL products. Licenses of our semiconductor IP products can be either perpetual or term-based. In addition, maintenance can be purchased for both types of licenses.
We derive our royalty revenues from pure-play foundries that manufacture chips incorporating our Area, Speed and Power (ASAP) Memory, ASP Logic, SiWare Memory, SiWare Logic and STAR Memory products for our fabless customers, and from integrated device manufacturers and fabless customers that utilize our STAR Memory Systemtm and NOVeA®technologies. Royalty payments are in addition to the license fees we collect from our customers, and are calculated based on production volumes of wafers containing chips utilizing our semiconductor IP technologies based on a rate per-chip or rate per-wafer depending on the terms of the respective license agreement. Royalty revenues are generally determined and recognized one quarter in arrears, when a production volume report is received from the customer or foundry.
Royalty revenues for the years ended September 30, 2007, 2006, and 2005 were $12.1 million, $16.1 million, and $11.0 million, respectively.
We have been dependent on a limited number of customers for a substantial portion of our annual revenues, although that dependency continues to decrease. Customers comprising our top 10 customer group have changed from time to time. In each of fiscal year 2007, 2006, and 2005 one customer, TSMC, generated 10% or more of our revenues.
Sales to customers located outside North America accounted for 54%, 60% and 63% of our revenues in fiscal years 2007, 2006 and 2005, respectively. Substantially all of our direct sales representatives and field application engineers are located in North America and Europe and serve those regions. In Japan and the rest of Asia, we use both indirect sales through distributors and direct sales through sales representatives. All revenues to date have been denominated in U.S. dollars.
Significant Events in Fiscal Year 2007
| | • | | We completed the acquisition of Ingot Systems, Inc. a leading provider of application specific IP solutions and design services to the semiconductor industry. The acquisition expands our ability to serve the Company's chosen markets by adding new products and services required in the rapid development of System-on-Chip integrated circuits to our current family of physical IP products including memory compilers, logic libraries and related development tools. |
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| | • | | We signed a total of 33 agreements for our 90-nanometer product offerings, 17 agreements on 65-nanometer, and 3 agreements on 45-nanometer. For direct royalty bearing agreements, we have signed 6 NOVeA non-volatile embedded memory product and 16 STAR Memory System products. During the fiscal year 2007, we signed agreements with a total of 39 new customers. |
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with generally accepted accounting principles in the United States requires that we make estimates and judgments, which affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We continually evaluate our estimates, including those related to percentage-of-completion, allowance for doubtful accounts, investments, intangible assets, income taxes, and contingencies such as litigation. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
We have identified the following as critical accounting policies to our Company:
| | • | | valuation of accounts receivable; |
| | • | | valuation of purchased intangibles, including goodwill; |
| | • | | valuation of long-lived assets; |
| | • | | stock-based compensation; and |
| | • | | accounting for income taxes. |
Revenue Recognition
The Company’s revenue recognition policy is based on the American Institute of Certified Public Accountants Statement of Position 97-2,“Software Revenue Recognition”, as amended by Statement of Position 98-4 and Statement of Position 98-9. Additionally, revenue is recognized on some of our products, according to Statement of Position 81-1,“Accounting for Performance of Construction-Type and Certain Production-Type Contracts.”
Revenues from perpetual licenses for the semiconductor IP products are generally recognized when persuasive evidence of an arrangement exists, delivery of the product has occurred, the fee is fixed or determinable, and collectibility is reasonably assured. If any of these criteria are not met, revenue recognition is deferred until such time as all criteria are met. Revenues from term-based licenses are recognized ratably over the term of the license, which are generally between twelve to thirty-six months in duration, provided the criteria mentioned above are met.
License of custom memory compilers and logic libraries may involve customization to the functionality of the software; therefore revenues from such licenses are recognized in accordance with Statement of Position 81-1 over the period that services are performed. Revenue derived from library development services are recognized using a percentage-of-completion method, and revenues from technical consulting services are recognized as the services are performed. For all license and service agreements accounted for using the percentage-of-completion method, the Company determines progress-to-completion based on labor hours incurred in comparison to the estimated total service hours required to complete the development or service or on the value of contract milestones completed. The Company believes that it is able to reasonably and reliably estimate the costs to complete projects accounted for using the percentage-of-completion method based on historical experience of similar project requirements. If the Company cannot reasonably and reliably estimate the costs to complete a project, the completed contract method of accounting is used, such that costs are deferred until the project is completed, at which time revenues and related costs are recognized. A provision for estimated losses on any project is made in the period in which the loss becomes probable and can be reasonably estimated. Costs incurred
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in advance of revenue recognition are recorded as costs in excess of related revenue on uncompleted contracts. If customer acceptance is required for completion of specified milestones, the related revenue is deferred until the acceptance criteria are met. If a portion of the value of a contract is contingent based on meeting a specified criteria, then the contingent value of the contract is deferred until the contingency has been satisfied or removed.
For agreements that include multiple elements, the Company recognizes revenues attributable to delivered or completed elements when such elements are completed or delivered. The amount of such revenues is determined by applying the residual method of accounting by deducting the aggregate fair value of the undelivered or uncompleted elements, which the Company determines by each such element’s vendor-specific objective evidence of fair value, from the total revenues recognizable under such agreement. Vendor-specific objective evidence of fair value of each element of an arrangement is based upon the higher of the normal pricing for such licensed product and service when sold separately or the actual price stated in the contract, and for maintenance, it is determined based on 20% of the net selling price of the license for new agreements starting in fiscal 2007 or the higher of the actual price stated in the contract or the stated renewal rate in each contract for all contracts entered prior to fiscal 2007. Revenues are recognized once the Company delivers the element identified as having vendor-specific objective evidence or once the provision of the services is completed. Maintenance revenues are recognized ratably over the remaining contractual term of the maintenance period from the date of delivery of the licensed materials receiving maintenance, which is generally twelve months.
The Company assesses whether the fee associated with each transaction is fixed or determinable and collection is reasonably assured and evaluates the payment terms. If a portion of the fee is due beyond normal payment terms, the Company recognizes the revenues on the payment due date, as long as collection is reasonably assured. The Company assesses collectibility based on a number of factors, including past transaction history and the overall credit-worthiness of the customer. If collection is not reasonably assured, revenue is deferred and recognized at the time collection becomes reasonably assured, which is generally upon receipt of the payment.
Amounts invoiced to customers in excess of recognized revenues are recorded as deferred revenues. Amounts recognized as revenue in advance of invoicing the customer are recorded as unbilled accounts receivable. The timing and amounts invoiced to customers can vary significantly depending on specific contract terms and can therefore have a significant impact on deferred revenues and unbilled accounts receivable in any given period. All of the criteria under SOP 97-2 or SOP 81-1, as applicable, have been met, prior to the recognition of any revenue that would create an unbilled accounts receivable balance.
Royalty revenues are generally determined and recognized one quarter in arrears based on SOP 97-2, when a production volume report is received from the customer or foundry, and are calculated based on actual production volumes of wafers containing chips utilizing our semiconductor IP technologies based on a rate per-chip or rate per-wafer depending on the terms of the respective license agreement. Prepaid royalties are recognized as revenue upon either the receipt of a corresponding royalty report or after all related license deliverables have been made.
Valuation of Accounts Receivable
We monitor collections and payments from our customers and maintain an allowance for estimated credit losses based upon specific customer collection risks that we have identified. While such credit losses have historically been within our expectations and the allowance we have established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Since our accounts receivable are concentrated in a relatively small number of customers, a significant change in the liquidity or financial position of any one of these customers could have a material adverse impact on the quality of our accounts receivables and our future operating results.
Valuation of Purchased Intangibles, Including Goodwill
We periodically evaluate purchased intangibles, including goodwill, for impairment at least annually. An assessment of goodwill is subjective by nature, and significant management judgment is required to forecast
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future operating results, projected cash flows and current period market capitalization levels. If our estimates or related assumptions change in the future, these changes in conditions could require material write-downs of net intangible assets, including impairment charges for goodwill. The valuation of intangible assets was based on management’s estimates. Intangible assets with finite useful lives are amortized over the estimated life of each asset. As of September 30, 2007, management believes no impairment of intangible assets has occurred. The carrying value of purchased intangibles, including goodwill, is $14.1 million and $11.8 million as of September 30, 2007 and 2006, respectively. If the asset is deemed impaired, the maximum amount of impairment would be the full carrying value of the asset.
Valuation of Long-Lived Assets
We review the carrying value of our long-lived assets whenever events or changes in business circumstances or our planned use of assets indicate that their carrying amounts may not be fully recoverable or that their useful lives are no longer appropriate. This review is based upon our projections of anticipated future cash flows from such assets. While we believe that our estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect our evaluations, which could result in an impairment charge. As of September 30, 2007 the Company had an intangible asset of $2.5 million related to technology and other intangibles acquired through the acquisitions of In-Chip Systems, Inc. and Ingot Systems, Inc.
Stock-based compensation
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Shared-Based Payments” (SFAS 123R), which requires the measurement of all employee share-based payments to employees, including grants of employee stock options and other equity based awards, using a fair-value based method and the recording of such expense in our consolidated statements of operations. The accounting provisions of SFAS 123R are effective for fiscal periods beginning after June 15, 2005.
As of October 1, 2005, we adopted SFAS 123R. We now use the fair value method to apply the provisions of SFAS 123R with a modified prospective application which provides for certain changes to the method for valuing stock-based compensation. The valuation provisions of SFAS 123R apply to new awards and to unvested awards that were outstanding on the effective date. Under the modified prospective application, prior periods are not revised for comparative purposes. Total SFAS 123R compensation expense recognized for fiscal years ended September 30, 2007 and 2006 was $4.3 million and $6.7 million, respectively. As of September 30, 2007, total unrecognized estimated compensation expense net of forfeitures related to non-vested equity awards granted prior to that date was $8.0 million and will be amortized over the average of 2.6 years.
Prior to October 1, 2005, we accounted for stock-based awards under the intrinsic value method, which followed the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB Opinion No. 25), and related interpretations. The intrinsic value method of accounting resulted in compensation expense for restricted stock and restricted stock units at fair value on date of grant based on the number of shares granted and the quoted price of our common stock, and for stock options to the extent option exercise prices were set below market prices on the date of grant. Also, to the extent stock awards were subject to an exchange offer, other modifications, or performance criteria, such awards were subject to variable accounting treatment. To the extent stock awards were forfeited prior to vesting, the corresponding previously recognized expense was reversed as an offset to operating expenses.
We value our stock-based awards on the date of grant using the Black-Scholes model. Prior to the adoption of SFAS 123R, the value of each stock-based award was estimated on the date of grant using the Black-Scholes option-pricing model (Black-Scholes model) for the pro forma information required to be disclosed under Statement of Financial Accounting Standards No. 123 (SFAS 123). The determination of the fair value of stock-based payment awards on the date of grant using a pricing model is affected by our stock price as well as
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assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, actual and projected employee equity awards exercise behaviors, risk-free interest rate and expected dividends.
For purposes of estimating the fair value of equity awards granted during the fiscal year ended September 30, 2007 and 2006 using the Black-Scholes model, we have made an estimate regarding our stock price volatility using the historical volatility in our stock price for the expected volatility assumption input to the model. This approach is consistent with the guidance in SFAS 123R and the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107 (SAB 107).
The risk-free interest rate is based on the implied yield currently available on United States Treasury zero-coupon issues with a remaining term equal to the expected term of the awards on the grant date.
Furthermore, as required under SFAS 123R, we estimate forfeitures for equity awards granted which are not expected to vest. We calculate the pre-vesting forfeiture rate by using our historical equity grants cancellation information.
If factors change and we employ different assumptions in the application of SFAS 123R in future periods, the compensation expense that we record under SFAS 123R may differ significantly from what we have recorded in the current period. Therefore, we believe it is important for investors to be aware of the high degree of subjectivity involved when using pricing models to estimate stock-based compensation under SFAS 123R. There is a risk that our estimates of the fair values of our stock-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, expiration, early termination or forfeiture of those stock-based payments in the future. Certain stock-based payments may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our consolidated financial statements. Alternatively, value may be realized from these instruments that are significantly in excess of the fair values originally estimated on the grant date and reported in our consolidated financial statements. There is currently no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values. Although the fair value of employee stock-based awards is determined in accordance with SFAS 123R and SAB 107 using a pricing model, such value may not be indicative of the fair value observed in a willing buyer /willing seller market transaction.
Accounting for Income Taxes
We calculate our income taxes based on an estimated annual effective tax rate in compliance with SFAS No. 109 “Accounting for Income Taxes.” Under SFAS No. 109, income tax expense (benefit) is recognized for the amount of taxes payable or refundable for the current year, and for deferred tax assets and liabilities for the tax consequences of events that have been recognized in an entity’s financial statements or tax returns. However, as required by FASB Interpretation No. 18, “Accounting for Income Taxes in Interim Periods” (FIN 18), the impact of items of tax expense (or benefit) that do not relate to “ordinary income” in the current year generally should be accounted for discretely in the period in which it occurs and be excluded from the effective tax rate calculation. As a result the Company reported a discrete tax benefit of approximately $331,000 relating primarily to research and development credit claimed due to the re-enactment of the research and development credit and disqualifying dispositions of incentive stock options which had previously been expensed for generally accepted accounting principles purposes. Significant components affecting the tax rate include an increase from stock-based compensation relating to non-deductible incentive stock options and the composite state tax rate.
For financial statement purposes, we make certain estimates and judgments in determining income tax expense. These estimates and judgments occur in the calculation of tax credits, tax benefits, deductions and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. If actual results differ from our estimates, future income tax expense could be materially affected.
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We record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance sheets. These differences resulted in deferred tax assets of $15.1 million and deferred tax liabilities of $1.0 million as of September 30, 2007. We assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not more likely than not, we increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. We believe that substantially all of the deferred tax assets recorded on our balance sheet will ultimately be recovered. However, should there be a change in our ability to recover our deferred tax assets, our tax provision would increase in the period in which we determined that the recovery was not more likely than not.
In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of whether, and the extent to which, additional tax payments are probable. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is less than we expect the ultimate assessment to be. Taxes payable were $3.0 million and $2.6 million as of September 30, 2007 and 2006, respectively.
Results of Operations
Comparison of the Years Ended September 30, 2007 and 2006
Revenues
The table below sets forth the changes in revenues from fiscal year 2006 to fiscal year 2007 (in thousands, except percentage data):
| | | | | | | | | | | | | | | | | | | |
| | | Year Ended
September 30, 2007 | | | Year Ended
September 30, 2006 | | | | |
| | | Amount | | % of Total Revenues | | | Amount | | % of Total Revenues | | | Year-Over-Year Change | |
Revenues: | | | | | | | | | | | | | | | | | | | |
License | | $ | 34,379 | | 73.9 | % | | $ | 43,214 | | 72.9 | % | | $ | (8,835 | ) | | (20.4 | )% |
Royalties | | | 12,148 | | 26.1 | % | | | 16,089 | | 27.1 | % | | | (3,941 | ) | | (24.5 | )% |
| | | | | | | | | | | | | | | | | | | |
Total revenues | | $ | 46,527 | | 100.0 | % | | $ | 59,303 | | 100.0 | % | | $ | (12,776 | ) | | (21.5 | )% |
| | | | | | | | | | | | | | | | | | | |
Revenues decreased $12.8 million or 21.5% from fiscal year 2006 to fiscal year 2007. The decrease resulted from an $8.8 million decrease in license revenue and a $3.9 million decrease in royalty revenue.
The following table lists the percentage of license revenues by process node for the years ended September 30, 2007 and 2006.
| | | | | | |
| | | Year Ended September 30, | |
| | | 2007 | | | 2006 | |
Total License Revenues by Process Node: | | | | | | |
65-nanometer technology | | 23 | % | | 10 | % |
90-nanometer technology | | 36 | | | 43 | |
0.13 micron technology | | 28 | | | 33 | |
0.18 micron technology | | 10 | | | 12 | |
Other | | 3 | | | 2 | |
License revenues for the year ended September 30, 2007 were $34.4 million, representing a decrease of $8.8 million or 20.4% as compared to $43.2 million for fiscal year 2006. License revenue decreased in fiscal year
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2007 mainly attributable to decreases of $6.4 million on our 90-nanometer technology, $6.5 million on our 0.13 micron and 0.18 micron technologies, partially offset by increases of $4.1 million on our 65-nanometer and older technologies. From a product perspective, 90-nanometer technology contributed sales of 36% of total in fiscal year 2007 down from 43% in fiscal year 2006, while 65-nanometer technology license revenue grew from 10% in fiscal year 2006 to 23% of total license revenue in fiscal year 2007. These sales were derived from all categories of our customers: integrated device manufacturers, fabless and foundry semiconductor customers.
Royalties decreased $3.9 million from fiscal year 2006 to fiscal year 2007. The fiscal year 2007 decrease was primarily attributed to a decline in royalties associated with our 90-nanometer technology processes. In fiscal 2007, we received our first royalties from our 65-nanometer technology. We expect 65-nanometer royalties to grow in fiscal year 2008.
For the years ended September 30, 2007 and 2006, total revenues by geographic area are as follows:
| | | | | | | | | | |
| | | Year Ended September 30, | | Increase
(Decrease) | |
| | | 2007 | | 2006 | |
Total Revenues by Geographic Area: | | | | | | | | | | |
United States | | $ | 19,862 | | $ | 20,387 | | $ | (525 | ) |
Taiwan | | | 9,446 | | | 15,734 | | | (6,288 | ) |
Europe, Middle East and Africa (EMEA) | | | 9,200 | | | 9,105 | | | 95 | |
Japan | | | 2,358 | | | 3,244 | | | (886 | ) |
Canada | | | 1,492 | | | 3,091 | | | (1,599 | ) |
Other Asia | | | 4,169 | | | 7,742 | | | (3,573 | ) |
| | | | | | | | | | |
Total | | $ | 46,527 | | $ | 59,303 | | $ | (12,776 | ) |
| | | | | | | | | | |
From a geographic perspective, the decrease in fiscal year 2007 revenues resulted from significant sales decreases due to a decline in license agreements with certain existing customers using our memory systems substantially in Taiwan of $6.3 million and in North America and Other Asia of $5.7 million.
Cost and Expenses
The table below sets forth the changes in cost and expenses from fiscal year 2006 to fiscal year 2007 (in thousands, except percentage data):
| | | | | | | | | | | | | | | | |
| | | Year Ended
September 30, 2007 | | Year Ended
September 30, 2006 | | Year-Over-Year Change |
| | | Amount | | % of Total Revenues | | Amount | | % of Total Revenues | |
Cost and expenses: | | | | | | | | | | | | | | | | |
Cost of revenues | | $ | 12,938 | | 27.8% | | $ | 14,803 | | 25.0% | | $ | (1,865 | ) | | (12.6)% |
Research and development | | | 20,346 | | 43.7% | | | 21,407 | | 36.1% | | | (1,061 | ) | | (5.0)% |
Sales and marketing | | | 15,464 | | 33.2% | | | 16,858 | | 28.4% | | | (1,394 | ) | | (8.3)% |
General and administrative | | | 8,891 | | 19.1% | | | 10,319 | | 17.4% | | | (1,428 | ) | | (13.8)% |
Restructuring charges | | | 580 | | 1.2% | | | — | | — | | | 580 | | | — |
| | | | | | | | | | | | | | | | |
Total cost and expenses | | $ | 58,219 | | 125.0% | | $ | 63,387 | | 106.9% | | $ | (5,168 | ) | | (8.2)% |
| | | | | | | | | | | | | | | | |
Cost of Revenues
Cost of revenues is determined principally based on allocation of costs associated with custom contracts and maintenance contracts, which consist primarily of personnel expenses, allocation of facilities costs, and depreciation expenses of acquired software and capital equipment. Cost of revenues in fiscal year 2007 totaled
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$12.9 million, representing a decrease of $1.9 million or 12.6% compared to $14.8 million in fiscal year 2006. The decreases from fiscal year 2006 to fiscal year 2007 was primarily attributable to a decrease of $0.9 million of cost allocation driven by lower engineering consulting fees and software maintenance contracts expenses, a decrease of $0.7 million in deferred contract expenses associated with custom projects, and a decrease of $0.3 million in stock-based compensation expense related to SFAS 123R. We believe that cost of revenues will continue to fluctuate in the future, both in absolute dollars and as a percentage of revenues, based on the impact on SFAS 123R and the level of license revenues.
Research and Development
Research and development expenses primarily include personnel expense, software license and maintenance fees, as well as capital equipment depreciation expenses. Research and development expense for the year ended September 30, 2007 was $20.3 million, representing a decrease of $1.1 million or 5.0%, from $21.4 million for the year ended September 30, 2006. Research and development expense as a percentage of total revenue for the year ended September 30, 2007 increased to 43.7% from 36.1% for fiscal year 2006. The decreases in research and development expense from fiscal year 2006 to fiscal year 2007 was primarily due to a decrease of $0.9 million in facilities and other support costs, a decrease of $0.7 million in consulting fees, and a decrease of $0.5 million in stock-based compensation related to SFAS 123R, partially offset by an increase of $1.0 million in personnel related expenses. In addition, research and development expense included $123,000 of in-process research and development and amortization of intangibles in fiscal year 2007 related to our acquisition of Ingot Systems, Inc.
Sales and Marketing
Sales and marketing expense consists mainly of personnel expenses, commissions, advertising and promotion-related costs. Sales and marketing expense for the year ended September 30, 2007 was $15.5 million, representing a decrease of $1.4 million or 8.3% over $16.9 million for the same period in fiscal year 2006. For the year ended September 30, 2007, sales and marketing expense as a percentage of revenue was 33.2%, compared to 28.4% for the same period in fiscal year 2006. The decrease in sales and marketing expense in fiscal year 2007 was primarily due to a decrease of $0.5 million expense in stock-based compensation related to SFAS 123R and a decrease of $0.9 million in personnel related expenses.
General and Administrative
General and administrative expense consists primarily of personnel, corporate governance and other costs associated with the management of our business. General and administrative expense for the year ended September 30, 2007 was $8.9 million, representing a decrease of $1.4 million or 13.8% over $10.3 million for the year ended September 30, 2006. General and administrative expense as a percentage of total revenue was 19.1% for the year ended September 30, 2007, compared to 17.4% for the same period in fiscal year 2006. The decrease in general and administrative expense from fiscal year 2006 to fiscal year 2007 was primarily due to a decrease of $1.0 million expense in stock-based compensation related to SFAS 123R, a decrease of $0.3 million in consulting fees, and a decrease of $1.2 million of professional fees related to accounting and auditing expenses, partially offset by decreases of $0.7 million related to recoveries of previously written-off bad debt and $0.4 million of personnel related expenses.
Restructuring Charges
Restructuring charges consist primarily of severance payments, severance-related benefits, lease costs associated with a vacated facility, and charges for assets written off as a result of the restructuring plan. During 2007, the Company initiated a plan of restructuring in an effort to reduce operating expenses and improve operating margins and cash flows. The restructuring plan was intended to decrease costs through workforce reductions and facility and resource consolidation, in order to improve our cost structure. For the fiscal year
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ended 2007, restructuring expense totaled $0.6 million of which $0.4 million were personnel related costs due to severance payments and severance related benefits and $0.2 million were related to facility closure costs including asset write-off costs.
Interest Income and Other Income (Expenses), net
The table below sets forth the changes in interest income and other income (expenses), net from fiscal year 2006 to fiscal year 2007 (in thousands, except percentage data):
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended
September 30, 2007 | | | Year Ended
September 30, 2006 | | | Year-Over-Year Change | |
| | | Amount | | | % of Total
Revenues | | | Amount | | % of Total
Revenues | | |
Interest income and other income (expenses), net: | | | | | | | | | | | | | | | | | | | | |
Interest income | | $ | 4,002 | | | 8.6 | % | | $ | 3,055 | | 5.1 | % | | $ | 947 | | | 31.0 | % |
Other income (expenses), net | | | (157 | ) | | (0.3 | )% | | | 270 | | 0.5 | % | | | (427 | ) | | (158.1 | )% |
| | | | | | | | | | | | | | | | | | | | |
Total interest income and other income (expenses), net | | $ | 3,845 | | | 8.3 | % | | $ | 3,325 | | 5.6 | % | | $ | 520 | | | 15.6 | % |
| | | | | | | | | | | | | | | | | | | | |
Interest Income
Interest income was $4.0 million and $3.1 million for the years ended September 30, 2007 and 2006, respectively. Interest income increased from fiscal year 2006 to fiscal year 2007 due to increased average balances of our investment holdings and higher interest rates received on our portfolio of marketable securities.
Other Income (Expenses), net
Other income (expenses), net resulted in a net other expense of $157,000 in the year ended September 30, 2007 and net other income of $270,000 for the year ended September 30, 2006. The net other expense in fiscal year 2007 and net other income in fiscal year 2006 were primarily due to foreign exchange gains (losses) on transactions denominated in foreign currencies.
Income Tax Provision (Benefit)
The table below sets forth the changes in income tax provision (benefit) from fiscal year 2006 to fiscal year 2007 (in thousands, except percentage data):
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended
September 30, 2007 | | | Year Ended
September 30, 2006 | | | Year-Over-Year Change | |
| | | Amount | | | % of Total
Revenues | | | Amount | | % of Total Revenues | | |
Income tax provision (benefit) | | $ | (3,242 | ) | | (7.0 | )% | | $ | 120 | | 0.2 | % | | $ | (3,362 | ) | | (2,802 | )% |
| | | | | | | | | | | | | | | | | | | | |
For fiscal year 2007, we recorded a tax benefit of $3.2 million on a pre-tax loss of $7.8 million, yielding an effective tax rate of 41%. For fiscal year 2006, we recorded a tax provision of $0.1 million on a pre-tax loss of $0.8 million, yielding an effective tax rate of (16%). The change in the effective tax rate from fiscal year 2006 to fiscal year 2007 was primarily due to the change in the Company’s pre-tax position, research credits, stock-based compensation related to the non-deductibility of incentive stock options and recovery of tax deductions for stock-based compensation.
The Indian Tax Authorities completed its assessment of our tax returns for the tax years 2000 through 2005 and issued assessment orders in which the Indian Tax Authorities proposes to assess an aggregate tax deficiency
42
for the five year period of approximately $1.0 million, plus interest, which interest will accrue until the matter is resolved. The Indian Tax Authorities may also make similar claims for years subsequent to 2005 in future assessment. The assessment orders are not final notices of deficiency, and we have immediately filed appeals. We believe that the assessments are inconsistent with applicable tax laws and that we have meritorious defense to the assessments.
In fiscal year 2005, we made a deposit in local currency equivalent to approximately $260,000 U.S. dollars with the Indian Tax Authorities, as required. The ultimate outcome of the tax assessment cannot be predicted with certainty, including the amount payable or the timing of any such payments upon resolution of the matter. Should the Indian Tax Authorities assess additional taxes as a result of a current or a future assessment, we may be required to record charges to operations that could have an adverse effect on our consolidated statements of operations.
Comparison of the Years Ended September 30, 2006 and 2005
Revenues
The table below sets forth the changes in revenues from fiscal year 2005 to fiscal year 2006 (in thousands, except percentage data):
| | | | | | | | | | | | | | | | | | |
| | | Year Ended
September 30, 2006 | | | Year Ended
September 30, 2005 | | | Year-Over-Year
Change | |
| | | Amount | | % of Total Revenues | | | Amount | | % of Total Revenues | | |
Revenues: | | | | | | | | | | | | | | | | | | |
License | | $ | 43,214 | | 72.9 | % | | $ | 42,425 | | 79.5 | % | | $ | 789 | | 1.9 | % |
Royalties | | | 16,089 | | 27.1 | % | | | 10,964 | | 20.5 | % | | | 5,125 | | 46.7 | % |
| | | | | | | | | | | | | | | | | | |
Total revenues | | $ | 59,303 | | 100.0 | % | | $ | 53,389 | | 100.0 | % | | $ | 5,914 | | 11.1 | % |
| | | | | | | | | | | | | | | | | | |
Revenues increased $5.9 million or 11.1% from fiscal year 2005 to fiscal year 2006. The fiscal year 2006 increase in revenue was primarily due to increase in royalty revenue of $5.1 million.
The following table lists the percentage of license revenues by process node for the years ended September 30, 2006 and 2005.
| | | | | | |
| | | Year Ended September 30, | |
| | | 2006 | | | 2005 | |
Total License Revenues by Process Node: | | | | | | |
65-nanometer technology | | 10 | % | | 6 | % |
90-nanometer technology | | 43 | | | 36 | |
0.13 micron technology | | 33 | | | 40 | |
0.18 micron technology | | 12 | | | 12 | |
Other | | 2 | | | 6 | |
License revenues for the year ended September 30, 2006 were $43.2 million, representing an increase of $0.8 million or 1.9% as compared to $42.4 million for fiscal year 2005. License revenue increased in fiscal year 2006 mainly attributable to increases of $3.5 million on our 90-nanometer technology and $1.6 million on our 65-nanometer, partially offset by decreases of $2.4 million on the 0.13 micron and $1.9 million on the older technologies. From a product perspective, 90-nanometer technology contributed sales of 43% of total in fiscal year 2006 up from 36% in fiscal year 2005, while 65-nanometer technology license revenue grew from 6% in fiscal year 2005 to 10% of total license revenue in fiscal year 2006. These sales were derived from all categories of our customers: integrated device manufacturers, fabless and foundry semiconductor customers.
Royalties increased $5.1 million from fiscal year 2005 to fiscal year 2006. The fiscal year 2006 increase was primarily attributed to the growth in royalties associated with our 90-nanometer technology processes.
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For the years ended September 30, 2006 and 2005, total revenues by geographic area are as follows:
| | | | | | | | | | |
| | | Year Ended
September 30, | | Increase
(Decrease) | |
| | | 2006 | | 2005 | |
Total Revenues by Geographic Area: | | | | | | | | | | |
United States | | $ | 20,387 | | $ | 18,306 | | $ | 2,081 | |
Taiwan | | | 15,734 | | | 11,919 | | | 3,815 | |
Europe, Middle East and Africa (EMEA) | | | 9,105 | | | 9,239 | | | (134 | ) |
Japan | | | 3,244 | | | 4,490 | | | (1,246 | ) |
Canada | | | 3,091 | | | 1,378 | | | 1,713 | |
Other Asia | | | 7,742 | | | 8,057 | | | (315 | ) |
| | | | | | | | | | |
Total | | $ | 59,303 | | $ | 53,389 | | $ | 5,914 | |
| | | | | | | | | | |
From a geographic perspective, the fiscal year 2006 increase was a result from significant sales increases due to new license agreements with customers using our memory systems primarily in Taiwan of $3.8 million and in North America of $3.8 million, partially offset by declining volumes in Japan of $1.2 million.
Cost and Expenses
The table below sets forth the changes in cost and expenses from fiscal year 2005 to fiscal year 2006 (in thousands, except percentage data):
| | | | | | | | | | | | | | | | | | |
| | | Year Ended
September 30, 2006 | | | Year Ended
September 30, 2005 | | | Year-Over-Year
Change | |
| | | Amount | | % of Total
Revenues | | | Amount | | % of Total
Revenues | | |
Cost and expenses: | | | | | | | | | | | | | | | | | | |
Cost of revenues | | $ | 14,803 | | 25.0 | % | | $ | 13,035 | | 24.4 | % | | $ | 1,768 | | 13.6 | % |
Research and development | | | 21,407 | | 36.1 | % | | | 19,841 | | 37.2 | % | | | 1,566 | | 7.9 | % |
Sales and marketing | | | 16,858 | | 28.4 | % | | | 15,608 | | 29.2 | % | | | 1,250 | | 8.0 | % |
General and administrative | | | 10,319 | | 17.4 | % | | | 9,083 | | 17.0 | % | | | 1,236 | | 13.6 | % |
| | | | | | | | | | | | | | | | | | |
Total cost and expenses | | $ | 63,387 | | 106.9 | % | | $ | 57,567 | | 107.8 | % | | $ | 5,820 | | 10.1 | % |
| | | | | | | | | | | | | | | | | | |
Cost of Revenues
Cost of revenues is determined principally based on allocation of costs associated with custom contracts and maintenance contracts, which consist primarily of personnel expenses, allocation of facilities costs, and depreciation expenses of acquired software and capital equipment. Cost of revenues in fiscal year 2006 totaled $14.8 million, representing an increase of $1.8 million or 13.6% compared to $13.0 million in fiscal year 2005. The increase from fiscal year 2005 to fiscal year 2006 was primarily attributable to $1.0 million of stock-based compensation expense related to the adoption of SFAS 123R and $0.4 million related to previously deferred contract expenses associated with custom projects.
Research and Development
Research and development expenses primarily include personnel expense, software license and maintenance fees, as well as capital equipment depreciation expenses. Research and development expense for the year ended September 30, 2006 was $21.4 million, representing an increase of $1.6 million or 7.9%, from $19.8 million for the year ended September 30, 2005. Research and development expense as a percentage of total revenue for the year ended September 30, 2006 decreased to 36.1% from 37.2% for the same period in fiscal year 2005. The
44
increase in research and development expense from fiscal year 2005 to fiscal year 2006 was primarily due to $1.6 million expense in stock-based compensation related to the adoption of SFAS 123R and an increase of $0.6 million in software license and maintenance fees, partially offset by decreases of $0.3 million in depreciation and $0.3 million of bonus expenses.
Sales and Marketing
Sales and marketing expense consists mainly of personnel expenses, commissions, advertising and promotion-related costs. Sales and marketing expense for the year ended September 30, 2006 was $16.9 million, representing an increase of $1.3 million or 8.0% over $15.6 million for the same period in fiscal year 2005. For the year ended September 30, 2006, sales and marketing expense as a percentage of revenue was 28.4%, compared to 29.2% for the same period in fiscal year 2005. The increase in sales and marketing expense in fiscal year 2006 was primarily due to $1.7 million expense in stock-based compensation related to the adoption of SFAS 123R and an increase of $1.0 million in personnel related expenses mainly in commissions for internal sales reps, partially offset by decreases in marketing programs of $0.8 million related to tradeshow and advertising expenses and travel expenses of $0.3 million due to cost reduction. In addition, the increase was partially offset by stock-based compensation expense under APB Opinion No. 25 of $0.3 million in fiscal year 2005 related to the accelerated vesting of certain stock options.
General and Administrative
General and administrative expense consists primarily of personnel, corporate governance and other costs associated with the management of our business. General and administrative expense for the year ended September 30, 2006 was $10.3 million, representing an increase of $1.2 million or 13.6% over $9.1 million for the year ended September 30, 2005. General and administrative expense as a percentage of total revenue was 17.4% for the year ended September 30, 2006, compared to 17.0% for the same period in fiscal year 2005. The increase in general and administrative expense from fiscal year 2005 to fiscal year 2006 was primarily due to $2.4 million expense in stock-based compensation related to the adoption of SFAS 123R and an increase of $0.3 million of personnel related expenses due to increase in headcount, partially offset by decreases in bad debt expenses of $1.1 million primarily related to the collection of previously reserved accounts receivable and professional fees of $0.4 million primarily related to accounting fees and insurance.
Interest Income and Other Income (Expenses), net
The table below sets forth the changes in interest income and other income (expenses), net from fiscal year 2005 to fiscal year 2006 (in thousands, except percentage data):
| | | | | | | | | | | | | | | | | | | |
| | | Year Ended
September 30, 2006 | | | Year Ended
September 30, 2005 | | | Year-Over-Year
Change | |
| | | Amount | | % of Total
Revenues | | | Amount | | | % of Total Revenues | | |
Interest income and other income (expenses), net: | | | | | | | | | | | | | | | | | | | |
Interest income | | $ | 3,055 | | 5.1 | % | | $ | 1,740 | | | 3.3 | % | | $ | 1,315 | | 75.6 | % |
Other income (expenses), net | | | 270 | | 0.5 | % | | | (37 | ) | | (0.1 | )% | | | 307 | | 829.7 | % |
| | | | | | | | | | | | | | | | | | | |
Total interest income and other income (expenses), net | | $ | 3,325 | | 5.6 | % | | $ | 1,703 | | | 3.2 | % | | $ | 1,622 | | 95.2 | % |
| | | | | | | | | | | | | | | | | | | |
Interest Income
Interest income was $3.1 million and $1.7 million for the years ended September 30, 2006 and 2005, respectively. Interest income increased from fiscal year 2005 to fiscal year 2006 due to increased average balances of our investment holdings and higher interest rates received on our portfolio of marketable securities.
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Other Income (Expenses), net
Other income (expenses), net resulted in a net other income of $270,000 in the year ended September 30, 2006 and net other expense of $37,000 for the year ended September 30, 2005. The net other income in fiscal year 2006 and net other expense in fiscal year 2005 were primarily due to foreign exchange gain (loss) on foreign currencies.
Income Tax Provision (Benefit)
The table below sets forth the changes in income tax provision (benefit) from fiscal year 2005 to fiscal year 2006 (in thousands, except percentage data):
| | | | | | | | | | | | | | | | | | | |
| | | Year Ended
September 30, 2006 | | | Year Ended
September 30, 2005 | | | Year-Over-Year
Change | |
| | | Amount | | % of Total
Revenues | | | Amount | | | % of Total
Revenues | | |
Income tax provision (benefit) | | $ | 120 | | 0.2 | % | | $ | (2,160 | ) | | (4.0 | )% | | $ | 2,280 | | 105.6 | % |
| | | | | | | | | | | | | | | | | | | |
For fiscal year 2006, we recorded a tax provision of $0.1 million on a pre-tax loss of $0.8 million, yielding an effective tax rate of (16%). For fiscal year 2005, we recorded a tax benefit of $2.2 million on a pre-tax loss of $2.5 million, yielding an effective benefit tax rate of 87%. The fiscal year 2005 effective tax rate differs from the United States statutory tax rate primarily due to benefits related to current year research credits, recovery of tax deductions related to stock-based compensation and other immaterial items. The change in the effective tax rate from fiscal year 2005 to fiscal year 2006 was primarily due to the change in the Company’s pre-tax position, research credits, stock-based compensation related to the non-deductibility of incentive stock options and recovery of tax deductions for stock-based compensation.
Liquidity and Capital Resources
| | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2007 | | | Change from
2006 | | | September 30,
2006 | | | Change from
2005 | | | September 30,
2005 | |
| | | (In thousands, except percentage data) | |
Cash and cash equivalents | | $ | 14,820 | | | $ | (5,995 | ) | | $ | 20,815 | | | $ | (6,026 | ) | | $ | 26,841 | |
Short-term and long-term investments | | | 60,368 | | | | 3,582 | | | | 56,786 | | | | 15,789 | | | | 40,997 | |
| | | | | | | | | | | | | | | | | | | | |
Total cash, cash equivalents and investments | | $ | 75,188 | | | $ | (2,413 | ) | | $ | 77,601 | | | $ | 9,763 | | | $ | 67,838 | |
| | | | | | | | | | | | | | | | | | | | |
Percentage of total assets | | | 58.3 | % | | | | | | | 61.5 | % | | | | | | | 59.3 | % |
Cash provided by (used in) operating activities | | $ | (598 | ) | | $ | (9,085 | ) | | $ | 8,487 | | | $ | 5,992 | | | $ | 2,495 | |
Cash used in investing activities | | | (6,541 | ) | | | 10,454 | | | | (16,995 | ) | | | (6,520 | ) | | | (10,475 | ) |
Cash provided by financing activities | | | 906 | | | | (1,856 | ) | | | 2,762 | | | | (3,288 | ) | | | 6,050 | |
Effect of exchange rates on cash | | | 238 | | | | 518 | | | | (280 | ) | | | (305 | ) | | | 25 | |
| | | | | | | | | | | | | | | | | | | | |
Net decrease in cash and cash equivalents | | $ | (5,995 | ) | | $ | 31 | | | $ | (6,026 | ) | | $ | (4,121 | ) | | $ | (1,905 | ) |
| | | | | | | | | | | | | | | | | | | | |
As of September 30, 2007, cash, cash equivalents and investments were $75.2 million compared to $77.6 million as of September 30, 2006, and $67.8 million as of September 30, 2005. We had a decrease of $2.4 million in cash, cash equivalents and investments from fiscal year 2006 to fiscal year 2007 and an increase of $9.8 million from fiscal year 2005 to fiscal year 2006. In fiscal years 2007, 2006 and 2005, operations were funded primarily from cash collections from customers for accounts receivable.
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Net cash provided by (used in) operating activities was ($0.6) million, $8.5 million and $2.5 million for fiscal years 2007, 2006 and 2005, respectively. Net cash used in operating activities was $0.6 million for the year ended September 30, 2007 representing a decrease of $9.1 million over net cash provided by operating activities of $8.5 million for the year ended September 30, 2006. The decreases in cash provided by operating activities was attributable to changes in operating assets and liabilities of $3.2 million primarily related to decreases in deferred tax assets and prepaid expenses related to software license contracts partially offset by changes in accounts receivable due to more billings at the end of fiscal year 2007. In addition, the decrease in cash provided in operating activities was due to an increase in net loss of $3.7 million and decrease in adjustments for non-cash charges of $2.2 million primarily associated with stock based compensation.
Net cash provided by operating activities was $8.5 million for the year ended September 30, 2006, representing an increase of $6.0 million over net cash provided in operating activities of $2.5 million for the year ended September 30, 2005. The increase in cash provided by operating activities was due to an increase of $3.6 million in non-cash items primarily associated with stock-based compensation expense due to the adoption of SFAS 123R, partially offset by a decrease in provision for (recovery of) doubtful accounts, lower cash generated from tax benefit on employee stock plans and less depreciation and amortization due to more fully depreciated assets during the current fiscal year compared to the same period in prior year. In addition, we had a change in operating assets and liabilities that resulted in cash increases of $3.0 million primarily related to increases in income taxes payable, accrued expenses, deferred tax assets and prepaid expenses related to software license contracts partially offset by changes in accounts receivable due to more billings at the end of fiscal year 2006 and in taxes receivable. These increases were partially offset by an increase in net loss of $0.6 million.
Net cash used in investing activities was $6.5 million, $17.0 million and $10.5 million for fiscal years 2007, 2006 and 2005, respectively. The decrease of $10.5 million in net cash used in investing activities in fiscal year 2007 from fiscal year 2006 was due to higher proceeds from the maturity of investments, partially offset by higher purchases of investments related to short-term treasury investing activities. The increase of $6.5 million in net cash used in investing activities in fiscal year 2006 from fiscal year 2005 was primarily due to lower proceeds from the maturity of investments reinvested.
Net cash provided by financing activities was $0.9 million, $2.8 million and $6.1 million for fiscal years 2007, 2006 and 2005, respectively. Net cash provided by financing activities in fiscal 2007, fiscal 2006 and fiscal 2005 reflects proceeds from the issuance of common stock of $0.9 million, $2.8 million and $6.1 million, respectively, associated with our employee stock options and employee stock purchase plans during the respective periods. The decrease in fiscal year 2007 and fiscal year 2006 was due to lower employee stock purchase plan purchases during those years as compared to fiscal year 2005.
The Company has no off-balance-sheet financing arrangements other than operating leases.
Our future capital requirements will depend on many factors, including the rate of sales growth, market acceptance of our existing and new technologies, the amount and timing of research and development expenditures, the timing of the introduction of new technologies, expansion of sales and marketing efforts, potential acquisitions, and levels of working capital, primarily accounts receivable. There can be no assurance that additional equity or debt financing, if required, will be available on satisfactory terms. We believe that our current capital resources and cash generated from operations will be sufficient to meet our needs for at least the next twelve months, although we may seek to raise additional capital during that period and there can be no assurance that we will not require additional financing beyond this time frame.
47
The following table summarizes our contractual obligations (in thousands):
| | | | | | | | | | | | | | | |
Contractual Obligations | | Total | | Less than
1 Year | | 1-3
Years | | 4-5
Years | | After
5 Years |
Operating lease obligations | | $ | 1,655 | | $ | 906 | | $ | 709 | | $ | 40 | | $ | — |
Purchase obligations(1) | | | 9,043 | | | 3,650 | | | 5,140 | | | 253 | | | — |
| | | | | | | | | | | | | | | |
Total operating lease and purchase obligations | | $ | 10,698 | | $ | 4,556 | | $ | 5,849 | | $ | 293 | | $ | — |
| | | | | | | | | | | | | | | |
| (1) | Reflects amounts payable under contracts for product development software licenses and maintenance. |
Recent Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” or FIN 48. FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact of adopting FIN 48 on our financial statements.
In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements,” or SFAS 157. The standard provides guidance for using fair value to measure assets and liabilities. The standard also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. SFAS 157 must be adopted prospectively as of the beginning of the year it is initially applied. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are still evaluating the impact of this standard on our financial position or results of operations.
In February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” or SFAS 159. SFAS 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS 159 is effective for the Company beginning in the first quarter of fiscal year 2009, although earlier adoption is permitted. We are currently evaluating what impact this standard will have on our financial position or results of operations.
48
Quarterly Results of Operations
The following tables contain unaudited consolidated statement of operations data for our eight most recent quarters. The first table contains revenue and expense data expressed in dollars, while the second table contains the same data expressed as a percentage of our revenues for the periods indicated. This data has been derived from unaudited consolidated financial statements that, in our opinion, include all adjustments necessary, consisting only normal recurring adjustments, for a fair statement of the information. Our quarterly results have been in the past, and in the future may be, subject to fluctuations. As a result, we believe that results of operations for the interim periods may not be an accurate indicator of results for any future period.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Quarter Ended | |
| | | Sept. 30,
2007 | | | June 30,
2007 | | | March 31,
2007 | | | Dec. 31,
2006 | | | Sept. 30,
2006 | | | June 30,
2006 | | | March 31,
2006 | | | Dec. 31,
2005 | |
| | | (Unaudited) | |
| | | (In thousands, except per share data) | |
Consolidated Statements of Operations Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 13,149 | | | $ | 11,286 | | | $ | 10,567 | | | $ | 11,525 | | | $ | 15,036 | | | $ | 15,346 | | | $ | 15,196 | | | $ | 13,725 | |
Cost and expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of revenues | | | 2,966 | | | | 2,869 | | | | 3,376 | | | | 3,727 | | | | 3,437 | | | | 4,151 | | | | 3,500 | | | | 3,715 | |
Research and development | | | 5,146 | | | | 5,301 | | | | 4,823 | | | | 5,076 | | | | 4,978 | | | | 5,473 | | | | 5,328 | | | | 5,628 | |
Sales and marketing | | | 3,997 | | | | 4,050 | | | | 3,763 | | | | 3,654 | | | | 4,272 | | | | 4,027 | | | | 4,299 | | | | 4,260 | |
General and administrative | | | 2,020 | | | | 1,789 | | | | 2,418 | | | | 2,664 | | | | 2,704 | | | | 2,150 | | | | 2,709 | | | | 2,756 | |
Restructuring charges | | | — | | | | 580 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total cost and expenses | | | 14,129 | | | | 14,589 | | | | 14,380 | | | | 15,121 | | | | 15,391 | | | | 15,801 | | | | 15,836 | | | | 16,359 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating income (loss) | | | (980 | ) | | | (3,303 | ) | | | (3,813 | ) | | | (3,596 | ) | | | (355 | ) | | | (455 | ) | | | (640 | ) | | | (2,634 | ) |
Interest income | | | 998 | | | | 1,014 | | | | 1,003 | | | | 987 | | | | 988 | | | | 776 | | | | 668 | | | | 623 | |
Other income (expenses), net | | | (31 | ) | | | (53 | ) | | | (29 | ) | | | (44 | ) | | | 129 | | | | 148 | | | | (3 | ) | | | (4 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) before taxes | | | (13 | ) | | | (2,342 | ) | | | (2,839 | ) | | | (2,653 | ) | | | 762 | | | | 469 | | | | 25 | | | | (2,015 | ) |
Income tax provision (benefit) | | | 363 | | | | (1,106 | ) | | | (1,062 | ) | | | (1,437 | ) | | | (15 | ) | | | 2,059 | | | | (151 | ) | | | (1,773 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (376 | ) | | $ | (1,236 | ) | | $ | (1,777 | ) | | $ | (1,216 | ) | | $ | 777 | | | $ | (1,590 | ) | | $ | 176 | | | $ | (242 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic net income (loss) per share | | $ | (0.02 | ) | | $ | (0.05 | ) | | $ | (0.08 | ) | | $ | (0.05 | ) | | $ | 0.03 | | | $ | (0.07 | ) | | $ | 0.01 | | | $ | (0.01 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Diluted net income (loss) per share | | $ | (0.02 | ) | | $ | (0.05 | ) | | $ | (0.08 | ) | | $ | (0.05 | ) | | $ | 0.03 | | | $ | (0.07 | ) | | $ | 0.01 | | | $ | (0.01 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As a Percentage of Revenue: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
Cost and expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of revenues | | | 22.5 | | | | 25.4 | | | | 32.0 | | | | 32.4 | | | | 22.9 | | | | 27.0 | | | | 23.0 | | | | 27.1 | |
Research and development | | | 39.1 | | | | 47.0 | | | | 45.6 | | | | 44.0 | | | | 33.1 | | | | 35.7 | | | | 35.1 | | | | 41.0 | |
Sales and marketing | | | 30.4 | | | | 35.9 | | | | 35.6 | | | | 31.7 | | | | 28.4 | | | | 26.3 | | | | 28.3 | | | | 31.0 | |
General and administrative | | | 15.4 | | | | 15.9 | | | | 22.9 | | | | 23.1 | | | | 18.0 | | | | 14.0 | | | | 17.8 | | | | 20.1 | |
Restructuring charges | | | — | | | | 5.1 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total cost and expenses | | | 107.4 | | | | 129.3 | | | | 136.1 | | | | 131.2 | | | | 102.4 | | | | 103.0 | | | | 104.2 | | | | 119.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating income (loss) | | | (7.4 | ) | | | (29.3 | ) | | | (36.1 | ) | | | (31.2 | ) | | | (2.4 | ) | | | (3.0 | ) | | | (4.2 | ) | | | (19.2 | ) |
Interest income | | | 7.4 | | | | 8.5 | | | | 9.2 | | | | 8.2 | | | | 6.6 | | | | 5.0 | | | | 4.4 | | | | 4.5 | |
Other income (expenses), net | | | (0.0 | ) | | | (0.0 | ) | | | (0.0 | ) | | | (0.0 | ) | | | 0.9 | | | | 1.0 | | | | (0.0 | ) | | | (0.0 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) before taxes | | | (0.0 | ) | | | (20.8 | ) | | | (26.9 | ) | | | (23.0 | ) | | | 5.1 | | | | 3.0 | | | | 0.2 | | | | (14.7 | ) |
Income tax provision (benefit) | | | 2.9 | | | | (9.8 | ) | | | (10.1 | ) | | | (12.4 | ) | | | (0.1 | ) | | | 13.4 | | | | (1.0 | ) | | | (12.9 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | | (2.9 | )% | | | (11.0 | )% | | | (16.8 | )% | | | (10.6 | )% | | | 5.2 | % | | | (10.4 | )% | | | 1.2 | % | | | (1.8 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
49
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Our core business, the sale of semiconductor IP for the design and manufacture of system-on-a-chip integrated circuits, has exposure to financial market risks, including changes in foreign currency exchange rates and interest rates. A significant portion of our customers are located in Asia, Canada and Europe. However, to date, our exposure to foreign currency exchange fluctuations has been minimal because all of our license agreements provide for payment in U.S. dollars.
Our international business is subject to risks typical of an international business, including, but not limited to differing economic conditions, changes in political climate, differing tax environments, other regulations and restrictions and foreign exchange rate volatility. Our foreign subsidiaries incur most of their expenses in the local currency. To date these expenses have not been significant, therefore, we do not anticipate our future results to be materially adversely impacted by changes in factors affecting international operations.
We are exposed to the impact of interest rate changes and changes in the market values of our investments. We maintain an investment portfolio of various issuers, types and maturities. These securities are classified as available-for-sale and, consequently, are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of stockholders’ equity. Our investments primarily consist of short-term money market mutual funds, United States government obligations, mortgage-backed securities, corporate bonds, and commercial paper. Our short term investments balance of $42.8 million at September 30, 2007 consists of instruments with original maturities of less than one year. We also hold approximately $17.5 million in U.S. government obligation with maturities greater than one year. The estimated fair value of our investment portfolio as of September 30, 2007, assuming a 100 basis point increase in market interest rates, would decrease by approximately $0.4 million, which would not materially affect our operations. We have the ability to generally hold our fixed income investments until maturity and therefore we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our securities portfolio. If necessary, we may sell short-term investments prior to maturity to meet our liquidity needs.
The table below presents the carrying values and related weighted average interest rates for our cash, cash equivalents and investments. The carrying values approximate fair values as of September 30, 2007 and 2006.
| | | | | | | | | | | | |
Cash, Cash Equivalents and Investments: | | Carrying Value at September 30, 2007 | | Annualized Rate of Return at September 30, 2007 | | | Carrying Value at September 30, 2006 | | Annualized Rate of Return at September 30, 2006 | |
| | | (In thousands) | | (Annualized) | | | (In thousands) | | (Annualized) | |
Cash and cash equivalents—fixed rate | | $ | 14,820 | | 4.3 | % | | $ | 18,166 | | 3.7 | % |
Money market fund—variable rate | | | — | | — | | | | 2,649 | | 5.2 | % |
| | | | | | | | | | | | |
Total cash and cash equivalents | | | 14,820 | | | | | | 20,815 | | | |
Investments—fixed rate | | | 60,368 | | 5.3 | % | | | 56,786 | | 5.0 | % |
| | | | | | | | | | | | |
Total cash, cash equivalents and investments | | $ | 75,188 | | | | | $ | 77,601 | | | |
| | | | | | | | | | | | |
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements required by this Item are set forth on the pages indicated at Item 15(a). The unaudited quarterly results of our operations for our two most recent fiscal years are incorporated herein by reference under Item 7 “Selected Consolidated Financial Data.”
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
50
Item 9A. Controls and Procedures
We conducted an evaluation required by Rule 13a-15 of the Securities Exchange Act of 1934, as amended (the Exchange Act), under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of September 30, 2007.
The evaluation of our disclosure controls and procedures included a review of our processes and implementation and the effect on the information generated for use in this Annual Report on Form 10-K. In the course of this evaluation, we sought to identify any significant deficiencies or material weaknesses in our disclosure controls and procedures, to determine whether we had identified any acts of fraud involving personnel who have a significant role in our disclosure controls and procedures and to confirm that any necessary corrective action, including procedure improvements, was documented. Based on our evaluation as of September 30, 2007, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in our reports filed or submitted under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There was no change in our internal control over financial reporting during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting, as such term is defined in Rule 13(a)-15(f) under the Exchange Act. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time.
Management conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the system of our internal control over financial reporting as of September 30, 2007 based on the framework inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of September 30, 2007.
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and Stockholders
of Virage Logic Corporation
We have audited the internal control over financial reporting of Virage Logic Corporation (the “Company”) as of September 30, 2007, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying management’s report on internal control over financial reporting. Our responsibility is to express an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Virage Logic Corporation maintained, in all material respects, effective internal control over financial reporting as of September 30, 2007, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets of Virage Logic Corporation as of September 30, 2007 and 2006, and the related statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended September 30, 2007, and the related financial statement schedule as of and for the years ended September 30, 2007 and 2006 and our report dated December 14, 2007 expressed an unqualified opinion on those consolidated financial statements and the related financial statement schedule.
/s/ Burr, Pilger & Mayer LLP
San Jose, California
December 14, 2007
52
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item concerning our directors and nominees is incorporated by reference to our definitive Proxy Statement for our 2008 Annual Meeting of Stockholders (the “2008 Proxy Statement”) under the caption “Election of Directors.” Information on our nominating committee process, and on our audit committee members including our audit committee financial experts is incorporated by reference to the headings “Governance Committee” and “Audit Committee” in our 2008 Proxy statement. Information regarding Section 16(a) beneficial ownership reporting compliance is incorporated by reference to the material under the heading “Security Ownership of Certain Beneficial Owners and Management” in our 2008 Proxy Statement. Information relating to our executive officers is contained in Part I of this annual report under the caption “Executive Officers”.
Our Board of Directors has adopted a Code of Ethics applicable to our directors and all of our officers and employees. The Code of Ethics is available, free of charge, through the investor relations section of our website at http://investors.viragelogic.com/governance.cfm. We intend to disclose any amendment to, or waiver from, the Code of Ethics by posting such amendment or waiver, as applicable, on our website.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the 2008 Proxy Statement under the captions “Executive Compensation” and “Director Compensation.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference to the 2008 Proxy Statement under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information.”
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by this item is incorporated by reference to the 2008 Proxy Statement under the captions “Management and Certain Security Holders of Virage Logic—Certain Transactions” and “Director Independence.”
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference to the 2008 Proxy Statement under the caption “Information Regarding Our Independent Registered Public Accounting Firm.”
53
PART IV
Item 15. Exhibits and Financial Statement Schedules
The following documents are being filed as part of this report on Form 10-K:
(a) Index to Consolidated Financial Statements:
Schedules, other than those listed above, have been omitted since they are not required, or the information is included elsewhere herein.
(c) Exhibits:
| | |
Exhibit Number | | Description of Document |
| 3.1 | | Amended and Restated Certificate of Incorporation |
| |
| 3.2 | | Amended and Restated Bylaws(13) |
| |
| 4.1 | | Specimen Common Stock Certificate(1) |
| |
| 10.1 | | 1997 Equity Incentive Plan, as amended(2)* |
| |
| 10.2 | | Form of Option Agreement under 1997 Equity Incentive Plan(3)* |
| |
| 10.3 | | 2000 Employee Stock Purchase Plan, as amended(4)* |
| |
| 10.4 | | 2001 Foreign Subsidiary Employee Stock Purchase Plan(4)* |
| |
| 10.6 | | Development and Licensing Agreement between Taiwan Semiconductor Manufacturing Co. Ltd. and Virage Logic dated as of March 3, 1999(1)# |
| |
| 10.7 | | Memory Compiler Licensing Agreement between United Microelectronics Corporation and Virage Logic dated as of March 21, 2000(1)# |
| |
| 10.8 | | Office Lease between Roshan Polymers Limited and Virage Logic International dated August 1, 2001(5) |
| |
| 10.9 | | Virage Logic Corporation 2002 Equity Incentive Plan, as amended(6)* |
| |
| 10.10 | | Form of Notice of Grant of Stock Options under the Virage Logic Corporation 2002 Equity Incentive Plan(7)* |
| |
| 10.11 | | Amended and Restated In-Chip Systems, Inc. 2001 Incentive And Non-Statutory Stock Option Plan(8)* |
| |
| 10.12 | | Master License Agreement, dated June 8, 2001 and Exhibit No. 2 dated April 1, 2002 between Virage Logic Corporation and STMicroelectronics S.A.(8)# |
| |
| 10.13 | | Sublease between Ciena Corporation and Virage Logic Corporation dated July 11, 2002 and Consent to Sublease between Ciena Corporation, Virage Logic Corporation and Renco Equities IV dated August 11, 2002(9) |
| |
| 10.14 | | Real Estate Purchase-Sale Agreement between Nikolay Khachaturov and Virage Logic Corporation dated October 2, 2002 (English translation)(9) |
54
| | |
Exhibit Number | | Description of Document |
| 10.15 | | Virage Logic Corporation 2007 Profit Sharing Bonus Plan(12)* |
| |
| 10.16 | | Lease between the Neidig Family and Virage Logic Corporation dated October 12, 2006 and First Amendment to Lease dated October 25, 2007 |
| |
| 10.17 | | Agreement and Release dated January 22, 2007 entered into by and between Virage Logic Corporation and Adam A. Kablanian(10) |
| |
| 10.18 | | Agreement and Release dated July 10, 2007 entered into by and between Virage Logic Corporation and James R. Bailey(11) |
| |
| 10.19 | | Virage Logic Corporation 2008 Profit Sharing Bonus Plan* |
| |
| 10.20 | | Virage Logic Corporation 2008 Executive MBO Plan* |
| |
| 21.1 | | Subsidiaries of Registrant |
| |
| 23.1 | | Consent of Burr, Pilger & Mayer LLP, Independent Registered Public Accounting Firm |
| |
| 23.2 | | Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm |
| |
| 31.1 | | Certification Pursuant to Rule 13(a)-14(a) of the Securities Exchange Act of 1934, as amended, as pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
| 31.2 | | Certification Pursuant to Rule 13(a)-14(a) of the Securities Exchange Act of 1934, as amended, as pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
| 32.1 | | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
| 32.2 | | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| (1) | Incorporated by reference to Virage Logic’s Registration Statement on Form S-1, as amended (File No. 333-36108). |
| (2) | Incorporated by reference to Virage Logic’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. |
| (3) | Incorporated by reference Appendix B of Virage Logic’s Proxy Statement filed on January 13, 2005. |
| (4) | Incorporated by reference to Virage Logic’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. |
| (5) | Incorporated by reference to Virage Logic’s Annual Report on Form 10-K for the year ended September 30, 2001. |
| (6) | Incorporated by reference to Appendix A of Virage Logic’s Proxy Statement filed on January 13, 2005. |
| (7) | Incorporated by reference to Virage Logic’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2001. |
| (8) | Incorporated by reference to Virage Logic’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002. |
| (9) | Incorporated by reference to Virage Logic’s Annual Report on Form 10-K for the year ended September 30, 2002. |
| (10) | Incorporated by reference to Virage Logic’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2006. |
| (11) | Incorporated by reference to Virage Logic’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007. |
| (12) | Incorporated by reference to Virage Logic’s Annual Report on Form 10-K/A for the year ended September 30, 2006. |
| (13) | Incorporated by reference to Virage Logic’s Annual Report on Form 10-K for the year ended September 30, 2003. |
| # | Confidential treatment has been granted with respect to portions of the exhibit. A complete copy of the agreement, including the redacted terms, has been separately filed with the Securities and Exchange Commission. |
| * | Management contract or compensatory plan or arrangement. |
55
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Virage Logic Corporation
We have audited the accompanying consolidated balance sheets of Virage Logic Corporation and its subsidiaries (the “Company”) as of September 30, 2007 and 2006 and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended September 30, 2007. Our audits also included the financial statement schedule listed in the Index to this Annual Report on Form 10-K at Part IV Item 15(b) (1), as of and for the years ended September 30, 2007 and 2006. These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Virage Logic Corporation and its subsidiaries as of September 30, 2007 and 2006 and the results of their operations and their cash flows for each of the two years in the period ended September 30, 2007 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule as of and for the years ended September 30, 2007 and 2006, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of September 30, 2007, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 14, 2007 expressed an unqualified opinion on the effective operation of internal control over financial reporting.
/s/ Burr, Pilger & Mayer LLP
San Jose, California
December 14, 2007
56
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Virage Logic Corporation:
In our opinion, the consolidated statements of operations, of stockholders’ equity and of cash flows for the year ended September 30, 2005 (appearing on pages 59 through 61 of Virage Logic Corporation’s 2007 Annual Report on Form 10-K) present fairly, in all material respects, the results of operations and cash flows of Virage Logic Corporation and its subsidiaries for the year ended September 30, 2005, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule for the year in the period ended September 30, 2005 listed in the index appearing under Item 15 (b) (1), present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
December 28, 2005
57
VIRAGE LOGIC CORPORATION
CONSOLIDATED BALANCE SHEETS
| | | | | | | | |
| | | September 30, | |
| | | 2007 | | | 2006 | |
| | | (In thousands, except share and per share amounts) | |
| ASSETS | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 14,820 | | | $ | 20,815 | |
Short-term investments | | | 42,840 | | | | 49,253 | |
Accounts receivable, net | | | 12,170 | | | | 15,935 | |
Costs in excess of related revenue on uncompleted contracts | | | 1,134 | | | | 656 | |
Deferred tax assets—current | | | 1,939 | | | | 1,527 | |
Prepaid expenses and other | | | 4,766 | | | | 3,369 | |
Taxes receivable | | | 2,320 | | | | 1,711 | |
| | | | | | | | |
Total current assets | | | 79,989 | | | | 93,266 | |
Property, plant and equipment, net | | | 3,643 | | | | 4,842 | |
Goodwill | | | 11,355 | | | | 9,782 | |
Other intangible assets, net | | | 2,705 | | | | 1,990 | |
Deferred tax assets—long-term | | | 13,178 | | | | 8,562 | |
Long-term investments | | | 17,528 | | | | 7,533 | |
Other long-term assets | | | 473 | | | | 300 | |
| | | | | | | | |
Total assets | | $ | 128,871 | | | $ | 126,275 | |
| | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 1,027 | | | $ | 446 | |
Accrued expenses | | | 4,659 | | | | 4,797 | |
Deferred revenues | | | 8,996 | | | | 8,896 | |
Income tax payable | | | 2,992 | | | | 2,626 | |
| | | | | | | | |
Total current liabilities | | | 17,674 | | | | 16,765 | |
Deferred tax liability | | | 978 | | | | 692 | |
| | | | | | | | |
Total liabilities | | | 18,652 | | | | 17,457 | |
| | | | | | | | |
Commitments and contingencies (Note 6) | | | | | | | | |
Stockholders’ equity: | | | | | | | | |
Common stock, $0.001 par value: | | | | | | | | |
Authorized shares—150,000,000 as of September 30, 2007 and 2006; Issued and outstanding shares—23,190,857 and 23,027,662 as of September 30, 2007 and 2006, respectively | | | 23 | | | | 23 | |
Additional paid-in capital | | | 135,926 | | | | 130,620 | |
Accumulated other comprehensive income | | | 1,009 | | | | 309 | |
Accumulated deficit | | | (26,739 | ) | | | (22,134 | ) |
| | | | | | | | |
Total stockholders’ equity | | | 110,219 | | | | 108,818 | |
| | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 128,871 | | | $ | 126,275 | |
| | | | | | | | |
See Notes to Consolidated Financial Statements.
58
VIRAGE LOGIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | |
| | | Year Ended September 30, | |
| | | 2007 | | | 2006 | | | 2005 | |
| | | (In thousands, except per share data) | |
Revenues: | | | | | | | | | | | | |
License | | $ | 34,379 | | | $ | 43,214 | | | $ | 42,425 | |
Royalties | | | 12,148 | | | | 16,089 | | | | 10,964 | |
| | | | | | | | | | | | |
Revenues | | | 46,527 | | | | 59,303 | | | | 53,389 | |
| | | | | | | | | | | | |
Cost and expenses: | | | | | | | | | | | | |
Cost of revenues | | | 12,938 | | | | 14,803 | | | | 13,035 | |
Research and development | | | 20,346 | | | | 21,407 | | | | 19,841 | |
Sales and marketing | | | 15,464 | | | | 16,858 | | | | 15,608 | |
General and administrative | | | 8,891 | | | | 10,319 | | | | 9,083 | |
Restructuring | | | 580 | | | | — | | | | — | |
| | | | | | | | | | | | |
Total cost and expenses | | | 58,219 | | | | 63,387 | | | | 57,567 | |
| | | | | | | | | | | | |
Operating loss | | | (11,692 | ) | | | (4,084 | ) | | | (4,178 | ) |
Interest income | | | 4,002 | | | | 3,055 | | | | 1,740 | |
Other income (expenses), net | | | (157 | ) | | | 270 | | | | (37 | ) |
| | | | | | | | | | | | |
Loss before income taxes | | | (7,847 | ) | | | (759 | ) | | | (2,475 | ) |
Income tax provision (benefit) | | | (3,242 | ) | | | 120 | | | | (2,160 | ) |
| | | | | | | | | | | | |
Net loss | | $ | (4,605 | ) | | $ | (879 | ) | | $ | (315 | ) |
| | | | | | | | | | | | |
Basic and diluted net loss per share | | $ | (0.20 | ) | | $ | (0.04 | ) | | $ | (0.01 | ) |
| | | | | | | | | | | | |
Shares used in computing basic net loss per share | | | 23,111 | | | | 22,812 | | | | 22,187 | |
| | | | | | | | | | | | |
Shares used in computing diluted net loss per share | | | 23,111 | | | | 22,812 | | | | 22,187 | |
| | | | | | | | | | | | |
See Notes to Consolidated Financial Statements.
59
VIRAGE LOGIC CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | Additional
Paid-In
Capital | | Accumulated
Other
Comprehensive
Income, net | | | Accumulated
Deficit | | | Total
Stockholders’
Equity | |
| | | Shares | | Amount | | | | |
| | | (In thousands, except share data) | |
Balance as of September 30, 2004 | | 21,580,437 | | | 22 | | | 112,457 | | | (28 | ) | | | (20,940 | ) | | | 91,511 | |
Common stock issued under stock option plan and stock purchase plan, net of repurchases | | 967,067 | | | 1 | | | 6,049 | | | — | | | | — | | | | 6,050 | |
Amortization of stock-based compensation | | — | | | — | | | 339 | | | — | | | | — | | | | 339 | |
Tax benefit from employee stock option plan | | — | | | — | | | 1,703 | | | | | | | — | | | | 1,703 | |
Cumulative foreign exchange translation adjustment | | — | | | — | | | | | | 255 | | | | — | | | | 255 | |
Change in unrealized gain (loss) on investments, net | | — | | | — | | | — | | | (175 | ) | | | — | | | | (175 | ) |
Net loss | | — | | | — | | | — | | | — | | | | (315 | ) | | | (315 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance as of September 30, 2005 | | 22,547,504 | | | 23 | | | 120,548 | | | 52 | | | | (21,255 | ) | | | 99,368 | |
Common stock issued under stock option plan and stock purchase plan, net of repurchases | | 480,158 | | | — | | | 2,762 | | | — | | | | — | | | | 2,762 | |
Stock-based compensation | | — | | | — | | | 6,770 | | | — | | | | — | | | | 6,770 | |
Tax benefit from employee stock option plan | | — | | | — | | | 540 | | | | | | | — | | | | 540 | |
Cumulative foreign exchange translation adjustment | | — | | | — | | | | | | 87 | | | | — | | | | 87 | |
Change in unrealized gain (loss) on investments, net of tax | | — | | | — | | | — | | | 170 | | | | — | | | | 170 | |
Net loss | | — | | | — | | | — | | | — | | | | (879 | ) | | | (879 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance as of September 30, 2006 | | 23,027,662 | | | 23 | | | 130,620 | | | 309 | | | | (22,134 | ) | | | 108,818 | |
Common stock issued under stock option plan and stock purchase plan, net of repurchases | | 163,195 | | | — | | | 906 | | | — | | | | — | | | | 906 | |
Stock-based compensation | | — | | | — | | | 4,400 | | | — | | | | — | | | | 4,400 | |
Cumulative foreign exchange translation adjustment | | — | | | — | | | — | | | 702 | | | | — | | | | 702 | |
Change in unrealized gain (loss) on investments, net of tax | | — | | | — | | | — | | | (2 | ) | | | — | | | | (2 | ) |
Net loss | | — | | | — | | | — | | | — | | | | (4,605 | ) | | | (4,605 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance as of September 30, 2007 | | 23,190,857 | | $ | 23 | | $ | 135,926 | | $ | 1,009 | | | $ | (26,739 | ) | | $ | 110,219 | |
| | | | | | | | | | | | | | | | | | | | |
See Notes to Consolidated Financial Statements.
60
VIRAGE LOGIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | |
| | | Year Ended September 30, | |
| | | 2007 | | | 2006 | | | 2005 | |
| | | (In thousands) | |
Operating activities | | | | | | | | | | | | |
Net loss | | $ | (4,605 | ) | | $ | (879 | ) | | $ | (315 | ) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | | | | | | | | | | | | |
Provision for (recovery of) doubtful accounts | | | — | | | | (724 | ) | | | 417 | |
Depreciation and amortization | | | 1,832 | | | | 1,958 | | | | 2,445 | |
Amortization of intangible assets | | | 385 | | | | 386 | | | | 387 | |
Tax benefit on employee stock plans | | | — | | | | 540 | | | | 1,703 | |
Write off of acquired in-process technology | | | 100 | | | | | | | | | |
Stock-based compensation | | | 4,341 | | | | 6,715 | | | | 339 | |
Loss on disposal of fixed assets | | | 4 | | | | 7 | | | | — | |
Non-cash restructuring charges | | | 31 | | | | — | | | | — | |
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Accounts receivable | | | 3,765 | | | | (1,011 | ) | | | 3,138 | |
Costs in excess of revenue on uncompleted contracts | | | (418 | ) | | | 295 | | | | (226 | ) |
Prepaid expenses and other | | | (1,298 | ) | | | 1,179 | | | | (487 | ) |
Deferred tax assets-current | | | (411 | ) | | | (1,527 | ) | | | — | |
Taxes receivable | | | (609 | ) | | | (1,218 | ) | | | 809 | |
Deferred tax assets | | | (4,614 | ) | | | 43 | | | | (3,379 | ) |
Other long term assets | | | (171 | ) | | | 398 | | | | (285 | ) |
Accounts payable | | | 575 | | | | (323 | ) | | | 264 | |
Accrued expenses | | | (239 | ) | | | 1,173 | | | | (896 | ) |
Deferred revenues | | | 100 | | | | 456 | | | | 892 | |
Income tax payable | | | 348 | | | | 1,179 | | | | (2,128 | ) |
Deferred tax liability | | | 286 | | | | (160 | ) | | | (183 | ) |
| | | | | | | | | | | | |
Net cash provided by (used in) operating activities | | | (598 | ) | | | 8,487 | | | | 2,495 | |
| | | |
Investing activities | | | | | | | | | | | | |
Purchase of property, plant and equipment | | | (285 | ) | | | (1,376 | ) | | | (3,169 | ) |
Purchase of investments | | | (111,535 | ) | | | (52,880 | ) | | | (51,609 | ) |
Proceeds from maturity of investments | | | 108,050 | | | | 37,258 | | | | 44,803 | |
Proceeds from sale of property, plant and equipment | | | 1 | | | | 3 | | | | — | |
Net cash paid for business combination | | | (2,772 | ) | | | — | | | | (500 | ) |
| | | | | | | | | | | | |
Net cash used in investing activities | | | (6,541 | ) | | | (16,995 | ) | | | (10,475 | ) |
| | | |
Financing activities | | | | | | | | | | | | |
Net proceeds from issuance of stock | | | 906 | | | | 2,762 | | | | 6,050 | |
| | | | | | | | | | | | |
Net cash provided by financing activities | | | 906 | | | | 2,762 | | | | 6,050 | |
| | | | | | | | | | | | |
Effect of exchange rates on cash | | | 238 | | | | (280 | ) | | | 25 | |
| | | | | | | | | | | | |
Net decrease in cash and cash equivalents | | | (5,995 | ) | | | (6,026 | ) | | | (1,905 | ) |
| | | | | | | | | | | | |
Cash and cash equivalents at beginning of year | | | 20,815 | | | | 26,841 | | | | 28,746 | |
| | | | | | | | | | | | |
Cash and cash equivalents at end of year | | $ | 14,820 | | | $ | 20,815 | | | $ | 26,841 | |
| | | | | | | | | | | | |
Supplemental disclosures of cash flow information | | | | | | | | | | | | |
Cash paid for income taxes | | $ | (226 | ) | | $ | (510 | ) | | $ | (34 | ) |
See Notes to Consolidated Financial Statements.
61
VIRAGE LOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Summary of Significant Accounting Policies
Description of Business
Virage Logic Corporation, or the Company, was incorporated in California in November 1995 and subsequently reincorporated in Delaware in July 2000. The Company provides semiconductor intellectual property (semiconductor IP) platforms based on memory, logic and I/Os (input/output interface components). These various forms of IP are utilized by the Company’s customers to design and manufacture system-on-a-chip (SoC) integrated circuits that power today’s consumer, communications and networking, handheld and portable, computer and graphics, and automotive applications.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Virage Logic and its wholly-owned subsidiaries conducting business in the Republic of Armenia, Germany, India, Israel, Japan and the United Kingdom. All significant intercompany balances and transactions have been eliminated in consolidation.
Reclassification
Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. Specifically, the Company has reclassified certain prior year amounts relating to short- and long-term deferred tax assets. The effects of these reclassifications are not material to the consolidated financial statements.
Foreign Currency
The financial position and results of operations of the Company’s foreign operations are measured using currencies other than the U.S. dollar as their functional currencies. Accordingly, for these operations all assets and liabilities are translated into U.S. dollars at the current exchange rates as of the respective balance sheet dates. Revenue and expense items are translated using the weighted average exchange rates prevailing during the period. Cumulative gains and losses from the translation of these operations’ financial statements are reported as a separate component of stockholders’ equity, while foreign currency transactions gains or losses, resulting from remeasuring local currency to the U.S. dollar are recorded in the consolidated statements of operations. The net transaction gains and losses recorded in the consolidated statements of operations were not significant for the periods presented.
Use of Estimates
The preparation of consolidated financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
The Company’s revenue recognition policy is based on the American Institute of Certified Public Accountants Statement of Position 97-2,“Software Revenue Recognition”as amended by Statement of Position 98-4 and Statement of Position 98-9. Additionally, revenue is recognized on some of our products, according to Statement of Position 81-1,“Accounting for Performance of Construction-Type and Certain Production-Type Contracts.”
62
VIRAGE LOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Revenues from perpetual licenses for the semiconductor IP products are generally recognized when persuasive evidence of an arrangement exists, delivery of the product has occurred, the fee is fixed or determinable, and collectibility is reasonably assured. If any of these criteria are not met, revenue recognition is deferred until such time as all criteria are met. Revenues from term-based licenses are recognized ratably over the term of the license, which is generally between twelve to thirty-six months in duration, provided the criteria mentioned above are met.
License of custom memory compilers and logic libraries may involve customization to the functionality of the software; therefore revenues from such licenses are recognized in accordance with Statement of Position 81-1 over the period that services are performed. Revenue derived from library development services are recognized using a percentage-of-completion method, and revenues from technical consulting services are recognized as the services are performed. For all license and service agreements accounted for using the percentage-of-completion method, the Company determines progress-to-completion based on labor hours incurred in comparison to the estimated total service hours required to complete the development or service or on the value of contract milestones completed. The Company believes that it is able to reasonably and reliably estimate the costs to complete projects accounted for using the percentage-of-completion method based on historical experience of similar project requirements. If the Company cannot reasonably and reliably estimate the costs to complete a project, the completed contract method of accounting is used, such that costs are deferred until the project is completed, at which time revenues and related costs are recognized. A provision for estimated losses on projects is made in the period in which the loss becomes probable and can be reasonably estimated. Costs incurred in advance of revenue recognition are recorded as costs in excess of related revenue on uncompleted contracts. If customer acceptance is required for completion of specified milestones, the related revenue is deferred until the acceptance criteria are met. If a portion of the value of a contract is contingent based on meeting a specified criteria, then the contingent value of the contract is deferred until the contingency has been satisfied or removed.
For agreements that include multiple elements, the Company recognizes revenues attributable to delivered or completed elements when such elements are completed or delivered. The amount of revenues is determined by applying the residual method of accounting by deducting the aggregate fair value of the undelivered or uncompleted elements, which the Company determines by each such element’s vendor-specific objective evidence of fair value, from the total revenues recognizable under such agreement. Vendor-specific objective evidence of fair value of each element of an arrangement is based upon the higher of the normal pricing for such licensed product and service when sold separately or the actual price stated in the contract, and for maintenance, it is determined based on 20% of the net selling price of the license for new agreements starting in fiscal 2007 or the higher of the actual price stated in the contract or the stated renewal rate in each contract for all contracts entered prior to fiscal 2007. Revenues are recognized once the Company delivers the element identified as having vendor-specific objective evidence or once the provision of the services is completed. Maintenance revenues are recognized ratably over the remaining contractual term of the maintenance period from the date of delivery of the licensed materials receiving maintenance, which is generally twelve months.
The Company assesses whether the fee associated with each transaction is fixed or determinable and collection is reasonably assured and evaluates the payment terms. If a portion of the fee is due beyond normal payment terms, the Company recognizes the revenues on the payment due date, as long as collection is reasonably assured. The Company assesses collectibility based on a number of factors, including past transaction history and the overall credit-worthiness of the customer. If collection is not reasonably assured, revenue is deferred and recognized at the time collection becomes reasonably assured, which is generally upon receipt of the payment.
Amounts invoiced to customers in excess of recognized revenues are recorded as deferred revenues. Amounts recognized as revenue in advance of invoicing the customer are recorded as unbilled accounts
63
VIRAGE LOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
receivable. The timing and amounts invoiced to customers can vary significantly depending on specific contract terms and can therefore have a significant impact on deferred revenues and unbilled accounts receivable in any given period. All of the criteria under SOP 97-2 or SOP 81-1, as applicable, have been met, prior to the recognition of any revenue that would create an unbilled accounts receivable balance.
Royalty revenues are generally determined and recognized one quarter in arrears based on SOP 97-2, when a production volume report is received from the customer or foundry, and are calculated based on actual production volumes of wafers containing chips utilizing our semiconductor IP technologies based on a rate per-chip or rate per-wafer depending on the terms of the respective license agreement. Depending on the contractual terms, prepaid royalties are recognized as revenue upon either the receipt of a corresponding royalty report or after all related license deliverables have been made.
Fair Value of Financial Instruments
The Company’s financial instruments, including cash equivalents, investments, accounts receivable and accounts payable are recorded at cost, which approximates their fair value because of the short-term maturity of these instruments.
Cash and Cash Equivalents, Short-term and Long-term Investments
For purposes of the accompanying consolidated statements of cash flows, the Company considers all highly liquid instruments with an original maturity on the date of purchase of three months or less to be cash equivalents. Cash and cash equivalents as of September 30, 2007 and 2006 consisted of money market funds and commercial paper. The Company determines the appropriate classification of investment securities at the time of purchase. As of September 30, 2007 and 2006, all investment securities are designated as “available-for-sale.” The Company considers all investments that are available-for-sale that have a maturity date longer than three months and less than twelve months to be short-term investments. The Company considers all investments that have a maturity of more than twelve months to be long-term investments. Long-term investments include government and federal agency bonds of $17.5 million and $7.5 million with maturity dates greater than one year for the fiscal years ended September 30, 2007 and 2006, respectively.
The available-for-sale securities are carried at fair value based on quoted market prices, with the unrealized gains (losses) reported as a separate component of stockholders’ equity. The Company periodically reviews the realizable value of its investments in marketable securities. When assessing marketable securities for other-than-temporary declines in value, the Company considers such factors as the length of time and extent to which fair value has been less than the cost basis, the market outlook in general and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. If an other-than-temporary impairment of the investments is deemed to exist, the carrying value of the investment would be written down to its estimated fair value.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost, net of accumulated depreciation and amortization. Depreciation and amortization are provided on a straight-line basis over the useful lives of the assets, generally three years, or the shorter of the lease term or the estimated useful lives of the assets, if applicable. The office building in the Republic of Armenia (Armenia) is being depreciated over a life of twenty years.
64
VIRAGE LOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Accounting for Internal-Use Computer Software
In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” (SOP 98-1). SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use and identifies the characteristics of internal-use software. SOP 98-1 permits the capitalization of certain external and internal costs, including internal payroll costs, incurred in the connection with the development or acquisition of software for internal use. These costs are capitalized beginning when the Company has entered the application development stage and ceases when the software is substantially complete and is ready for its intended use. In accordance with SOP 98-1, the Company purchased and capitalized costs of approximately $42,000 and $0.1 million during the years ended September 30, 2007 and 2006, respectively. Software is amortized using the straight-line method over the estimated useful life of three years.
Goodwill and Intangible Assets
In accordance with Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations”, and SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), goodwill and intangible assets deemed to have indefinite lives are no longer to be amortized, but instead are subject to annual impairment tests. As of September 30, 2007, the Company had an indefinite lived intangible asset balance of $0.2 million related to the acquisition of Mentor Graphics Corporation’s Physical Libraries Business on December 1, 1999, and $9.8 million of goodwill related to the acquisition of In-Chip Systems, Inc. in 2002. In addition, the Company recorded $1.6 million of goodwill related to the acquisition of Ingot Systems, Inc. on August 14, 2007. In accordance with SFAS 142, the Company does not amortize goodwill.
The Company evaluates goodwill and intangible assets deemed to have indefinite lives in accordance with SFAS 142. The Company assesses these assets for impairment on an annual basis. On adoption of SFAS 142, the Company determined its operations represent a single reporting unit. To assess goodwill for impairment, the Company performs the following procedures:
Step 1: The Company will compare the fair value of its reporting unit(s) to the carrying value, including goodwill, of each of those unit(s). The fair value will consider the Company’s market capitalization during the reporting period. If a unit’s fair value exceeds the carrying value, no impairment charge is necessary. For each reporting unit where the carrying value, including goodwill, exceeds the unit’s fair value, the Company will move on to step two as described below.
Step 2: The Company performs an allocation of the fair value of its identifiable tangible and non-goodwill intangible assets and liabilities. This derives an implied fair value for its goodwill. The Company then compares the implied fair value of goodwill with the carrying amount of its goodwill. If the carrying amount of the goodwill is greater than the implied fair value of its goodwill, an impairment loss is recognized for the excess of such amount.
As required by the provisions of SFAS 142, the Company evaluates goodwill for impairment on an annual basis on September 30 or more frequently if impairment indicators arise. A significant impairment could have a material adverse effect on the Company’s financial position and results of operations. No impairment charge or amortization of goodwill was recorded during the years ended September 30, 2007 and 2006.
Impairment of long-lived assets
The Company evaluates the recoverability of long-lived assets with finite lives in accordance with SFAS No. 144, “Accounting for the Impairment of Long-Lived Assets” (SFAS 144). Finite-lived intangible
65
VIRAGE LOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
assets are being amortized on a straight-line basis over their estimated useful lives of four to ten years. SFAS 144 requires recognition of impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment charge is recognized in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. As of September 30, 2007, the Company had an intangible asset of $1.4 million related to technology acquired through the acquisition of In-Chip Systems, Inc. and an intangible asset of $1.1 million related to technology and other intangibles acquired through the acquisition of Ingot Systems, Inc.
Stock-Based Compensation
In December 2004, Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R), that addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123R eliminates the ability to account for stock-based compensation transactions using the intrinsic method and generally requires that such transactions be accounted for using a fair value-based method and recognized as expense in the consolidated statements of operations. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 107 regarding the Staff’s interpretation of SFAS 123R. This interpretation provides the Staff’s views regarding interactions between SFAS 123R and certain Securities and Exchange Commission rules and regulations and provides interpretations of the valuation of stock-based payments for public companies. The interpretive guidance is intended to assist companies in applying the provisions of SFAS 123R and investors and users of the financial statements in analyzing the information provided.
Following the guidance prescribed in SAB 107, on October 1, 2005, the Company adopted SFAS 123R using the modified prospective method, and accordingly, the Company has not restated the consolidated statements of operations from prior fiscal years. Under SFAS 123R, the Company is required to measure compensation cost for all stock-based awards at fair value on date of grant and recognize compensation expense on a straight-line basis over the service period that the awards are expected to vest. Stock options generally vest over a four-year service period. Since our adoption of SFAS 123R, there have been no changes to our equity plans or modifications to outstanding stock-based awards. Total SFAS 123R compensation expense recognized for the years ended September 30, 2007 and 2006 was $4.3 million and $6.7 million, respectively. As of September 30, 2007, total unrecognized estimated compensation expense net of forfeitures related to non-vested equity awards granted prior to that date was $8.0 million and will be amortized over the average period of 2.6 years.
Prior to October 1, 2005, the Company accounted for employee stock-based compensation using the intrinsic method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) as permitted by SFAS 123, “Accounting for Stock-Based Compensation” (SFAS 123), and SFAS 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” (SFAS 148). Under the intrinsic method, the difference between the market price on the date of grant and the exercise price is charged to the results of operations over the vesting period on a straight-line method. For the year ended September 30, 2005 the Company did not have any options that were granted below fair value as of the measurement date. Accordingly, the Company was not required to recognize compensation cost for stock options issued to the Company’s employees or shares issued under the employee stock purchase plan.
The Company accounts for stock options or warrants granted to non-employees, excluding non-employee directors, under SFAS 123 and Emerging Issues Task Force No. 96-18, “Accounting for Equity Instruments with Variable Terms that are Issued for Consideration Other Than Employee Services under SFAS 123,” (EITF 96-18). The Company records the expense of such services based upon the estimated fair value of the
66
VIRAGE LOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
equity instrument using the Black-Scholes pricing model. Assumptions used to value the equity instruments are consistent with equity instruments issued to employees. The Company charges the value of the equity instrument to earnings over the term of the service agreement. There were no stock options grants to non-employees, excluding non-employee directors, and no expenses recorded for stock options granted to non-employees in the years ended September 30, 2007, 2006 and 2005.
For the fiscal year ended September 30, 2005, had the Company accounted for all employee stock-based compensation based on the estimated grant date fair values, as defined by SFAS 123, the Company’s net loss and net loss per share would have been adjusted to the following proforma amounts (in thousands, except per share data):
| | | | |
| | | Year Ended
September 30, 2005 | |
Net loss—as reported | | $ | (315 | ) |
Add: Employee stock-based compensation expense included in reported net loss, net of tax | | | 207 | |
Deduct: Employee stock-based compensation expense determined under fair value based method for all awards, net of tax | | | (4,455 | ) |
| | | | |
Proforma net loss | | $ | (4,563 | ) |
| | | | |
Net loss per share—as reported basic and diluted | | $ | (0.01 | ) |
Net loss per share—Proforma basic and diluted | | $ | (0.21 | ) |
Weighted average shares used in computing net loss per share | | | | |
Basic | | | 22,187 | |
Diluted | | | 22,187 | |
Upon adoption of SFAS 123R, for options vested in fiscal year 2006, the Company recognized the compensation expense associated with awards granted after October 1, 2005, and the unvested portion of previously granted awards that remain outstanding as of October 1, 2005. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as cash flow from financing activities rather than as cash flow from operating activities as previously required under Emerging Issues Task Force (EITF) issue No. 00-15, “Classification in the Statement of Cash Flow of the Income Tax Benefit Received by a Company upon Exercise of a Nonqualified Employee Stock Option.”
The stock-based compensation expense related to the Company’s stock-based awards for the fiscal years ended September 30, 2007 and 2006 were as follows (in thousands, except per share data):
| | | | | | | | |
| | | Year Ended September 30, 2007 | | | Year Ended September 30, 2006 | |
Cost of revenues | | $ | 715 | | | $ | 1,041 | |
Research and development | | | 1,155 | | | | 1,633 | |
Sales and marketing | | | 1,130 | | | | 1,673 | |
General and administrative | | | 1,341 | | | | 2,368 | |
| | | | | | | | |
Stock-based compensation expense | | | 4,341 | | | | 6,715 | |
Related income tax benefits | | | (1,152 | ) | | | (1,443 | ) |
| | | | | | | | |
Stock-based compensation expense, net of tax benefits | | $ | 3,189 | | | $ | 5,272 | |
| | | | | | | | |
Net stock-based compensation expense, per common share: | | | | | | | | |
Basic | | $ | 0.14 | | | $ | 0.23 | |
| | | | | | | | |
Diluted | | $ | 0.14 | | | $ | 0.23 | |
| | | | | | | | |
67
VIRAGE LOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of September 30, 2007 and 2006, the Company capitalized approximately $114,000 and $55,000, respectively, of stock-based compensation expense related to our custom contracts which have not been completed.
Consistent with our valuation method for the disclosure-only provisions of SFAS 123, the Company is using the Black-Scholes option pricing model to value the compensation expense associated with our stock-based awards under SFAS 123R. In addition, the Company estimates forfeitures when recognizing compensation expense, and the Company will adjust our estimate of forfeitures over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through an adjustment in the period of change and will also impact the amount of compensation expense to be recognized in future periods.
The following weighted average assumptions were used in the estimated grant date fair value calculations for equity awards:
| | | | | | | | | |
| | | Year Ended September 30, | |
| | | 2007 | | | 2006 | | | 2005 | |
Volatility | | 51 | % | | 69 | % | | 61 | % |
Risk-free interest rate | | 4.54 | % | | 4.63 | % | | 3.61 | % |
Dividend yield | | 0 | % | | 0 | % | | 0 | % |
Expected life (years) | | 4.3 | | | 4.3 | | | 3.6 | |
The expected stock price volatility rates are based on the historical volatility of our common stock. The risk free interest rates are based on the United States Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. The average expected life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and our historical exercise patterns. The Black-Scholes weighted average fair values of options granted during the fiscal years ended September 30, 2007, 2006 and 2005 were $3.53, $5.22 and $5.11 per share, respectively.
Business Risks and Concentration of Credit Risk
The Company operates in the competitive semiconductor industry, which has been characterized by rapid technological change, short product life cycles and cyclical market patterns. Significant technological changes in the industry could adversely affect operating results.
The Company markets and sells its technology to a broad base of customers, which are primarily located in the United States, Asia, Canada and Europe. The Company performs ongoing credit evaluations of its customers’ financial condition, and generally, no collateral is required.
Customer Concentrations
In fiscal years 2007, 2006, and 2005 only one customer accounted for 10% or more of total revenues.
Advertising Expense
The Company expenses costs of producing advertisements at the time production occurs and expenses promotional advertising in the period during which the promotion is distributed or aired. Advertising costs totaled approximately $640,000, $566,000, and $1,258,000 for the years ended September 30, 2007, 2006, and 2005, respectively.
68
VIRAGE LOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Research and Development
In accordance with SFAS No. 86, “Accounting for Costs of Computer Software to be Sold, Leased or Otherwise Marketed,” costs incurred in the research and development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility has been established. The Company believes its current process for developing software is essentially completed concurrently with the establishment of technological feasibility which is evidenced by a working model; accordingly, costs incurred after the establishment of technological feasibility have not been significant and, therefore, have been expensed. Research and development costs are charged to operations as incurred.
Net Loss Per Share
Basic and diluted net loss per share is presented in conformity with SFAS No. 128, “Earnings Per Share” (SFAS 128). Accordingly, basic and diluted net loss per share have been computed using the weighted average number of shares of common stock outstanding during the period, less weighted average shares outstanding that are subject to repurchase by the Company plus weighted average share equivalents, unless anti-dilutive.
The following table presents the computation of basic and diluted net loss per share applicable to common stockholders:
| | | | | | | | | | | | |
| | | Year Ended September 30, | |
| | | 2007 | | | 2006 | | | 2005 | |
| | | (In thousands, except per share data) | |
Net loss | | $ | (4,605 | ) | | $ | (879 | ) | | $ | (315 | ) |
| | | | | | | | | | | | |
Weighted average shares of common stock outstanding | | | 23,217 | | | | 22,812 | | | | 22,187 | |
Less weighted average unvested restricted stock subject to repurchase | | | (106 | ) | | | — | | | | — | |
| | | | | | | | | | | | |
Shares used in computing basic and diluted net loss per share | | | 23,111 | | | | 22,812 | | | | 22,187 | |
| | | | | | | | | | | | |
Net loss per share: | | | | | | | | | | | | |
Basic and diluted | | $ | (0.20 | ) | | $ | (0.04 | ) | | $ | (0.01 | ) |
| | | | | | | | | | | | |
The Company has excluded all outstanding options and other equity-settled awards from the calculation of diluted net loss per share because these securities are anti-dilutive for the years ended September 30, 2007 and 2006. Options and other awards to purchase approximately 4.8 million, 5.6 million and 5.7 million shares of common stock have been excluded for the years ended September 30, 2007, 2006, and 2005, respectively, as they are anti-dilutive. There were no shares subject to repurchase as of September 30, 2007, 2006 and 2005.
Comprehensive Income (Loss)
In June 1997, the FASB released SFAS No. 130, “Reporting Comprehensive Income” (SFAS 130). SFAS 130 established standards for the reporting and display of comprehensive income (loss). Comprehensive income (loss) includes unrealized gains and losses on investments and foreign currency translation adjustments, and is presented in the statements of stockholders’ equity.
Total comprehensive loss is as follows (in thousands):
| | | | | | | | | | | | |
| | | Year Ended September 30, | |
| | | 2007 | | | 2006 | | | 2005 | |
Net loss | | $ | (4,605 | ) | | $ | (879 | ) | | $ | (315 | ) |
Foreign currency translation adjustment | | | 702 | | | | 87 | | | | 157 | |
Change in net unrealized gain (loss) on investment, net of tax | | | (2 | ) | | | 170 | | | | (105 | ) |
| | | | | | | | | | | | |
Total comprehensive loss, net of tax | | $ | (3,905 | ) | | $ | (622 | ) | | $ | (263 | ) |
| | | | | | | | | | | | |
69
VIRAGE LOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Income Taxes
Income taxes are accounted for using an asset and liability approach, which requires the recognition of deferred tax assets and liabilities for expected future tax events that have been recognized differently in the Company’s consolidated financial statements and tax returns. The measurement of current and deferred tax assets and liabilities are based on provisions of the enacted tax law and the effects of future changes in tax laws or rates. A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized.
Segment Information
In June 1997, the FASB issued SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (SFAS 131), which establishes standards for reporting information about operating segments in annual financial statements. The Company operates only in one segment, the sale of technology-optimized semiconductor IP platforms based on memory, logic and I/Os.
Recent Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact of adopting FIN 48 on our consolidated financial statements.
In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements,” or SFAS 157. The standard provides guidance for using fair value to measure assets and liabilities. The standard also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. SFAS 157 must be adopted prospectively as of the beginning of the year it is initially applied. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are still evaluating the impact of this standard on our financial position or results of operations.
In February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” or SFAS 159. SFAS 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS 159 is effective for the company beginning in the first quarter of fiscal year 2009, although earlier adoption is permitted. We are currently evaluating what impact this standard will have on our financial position or results of operations.
Note 2. Business Segment Information
The Company operates in one industry segment, the sale of semiconductor IP platforms based on memory, logic, and I/Os, and the sale of the individual platform components and has one reportable segment.
Our Company’s Chief Executive Officer has been identified as the Chief Operating Decision Maker (CODM) because he has final authority over resource allocation decisions and performance assessment.
70
VIRAGE LOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Revenues by geographic area are based on the region the customers are located. They are as follows:
| | | | | | | | | |
| | | Year Ended September 30, |
| | | 2007 | | 2006 | | 2005 |
| | | (In thousands) |
Total Revenues by Geographic Area: | | | | | | | | | |
United States | | $ | 19,862 | | $ | 20,387 | | $ | 18,306 |
Taiwan | | | 9,446 | | | 15,734 | | | 11,919 |
Europe, Middle East, and Africa (EMEA) | | | 9,200 | | | 9,105 | | | 9,239 |
Japan | | | 2,358 | | | 3,244 | | | 4,490 |
Canada | | | 1,492 | | | 3,091 | | | 1,378 |
Other Asia | | | 4,169 | | | 7,742 | | | 8,057 |
| | | | | | | | | |
Total | | $ | 46,527 | | $ | 59,303 | | $ | 53,389 |
| | | | | | | | | |
Percentage of license revenues by process node are as follows:
| | | | | | | | | |
| | | Year Ended September 30, | |
| | | 2007 | | | 2006 | | | 2005 | |
Total License Revenues by Process Node: | | | | | | | | | |
65-nanometer technology | | 23 | % | | 10 | % | | 6 | % |
90-nanometer technology | | 36 | | | 43 | | | 36 | |
0.13 micron technology | | 28 | | | 33 | | | 40 | |
0.18 micron technology | | 10 | | | 12 | | | 12 | |
Other | | 3 | | | 2 | | | 6 | |
Long-lived assets are located primarily in the United States, with the exception of a building in the Republic of Armenia, which is owned by the Company. The Armenian building and leasehold improvements are valued at cost less accumulated depreciation and amortization and amounted to approximately $2.3 million and $2.2 million as of September 30, 2007 and 2006, respectively.
The Company has only one product line, and as such disclosure by product groupings is not applicable.
Note 3. Balance Sheet Components
Investments, classified as available-for-sale securities, included the following (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2007 | | September 30, 2006 |
| | | Amortized Cost | | Unrealized Gain (Loss) | | | Fair
Value | | Amortized
Cost | | Unrealized
Gain (Loss) | | | Fair
Value |
Investments: | | | | | | | | | | | | | | | | | | | | |
Government and federal agency bonds | | $ | 6,012 | | $ | 4 | | | $ | 6,016 | | $ | 27,246 | | $ | (39 | ) | | $ | 27,207 |
Commercial paper | | | 30,674 | | | (69 | ) | | | 30,605 | | | 19,407 | | | (27 | ) | | | 19,380 |
Corporate bonds | | | 4,968 | | | (6 | ) | | | 4,962 | | | 2,450 | | | (3 | ) | | | 2,447 |
Certificates of deposits | | | 1,257 | | | — | | | | 1,257 | | | 219 | | | — | | | | 219 |
| | | | | | | | | | | | | | | | | | | | |
Short-term investments | | | 42,911 | | | (71 | ) | | | 42,840 | | | 49,322 | | | (69 | ) | | | 49,253 |
| | | | | | | | | | | | | | | | | | | | |
Long-term government and federal agency bonds | | | 17,501 | | | 27 | | | | 17,528 | | | 7,512 | | | 21 | | | | 7,533 |
| | | | | | | | | | | | | | | | | | | | |
Long-term investments | | | 17,501 | | | 27 | | | | 17,528 | | | 7,512 | | | 21 | | | | 7,533 |
| | | | | | | | | | | | | | | | | | | | |
Total investments | | $ | 60,412 | | $ | (44 | ) | | $ | 60,368 | | $ | 56,834 | | $ | (48 | ) | | $ | 56,786 |
| | | | | | | | | | | | | | | | | | | | |
71
VIRAGE LOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Investments, classified as available-for-sale securities, are reported as:
| | | | | | |
| | | September 30, |
| | | 2007 | | 2006 |
| | | (In thousands) |
Short-term investments | | $ | 42,840 | | $ | 49,253 |
Long-term investments | | | 17,528 | | | 7,533 |
| | | | | | |
Total | | $ | 60,368 | | $ | 56,786 |
| | | | | | |
The contractual maturities of investments are as follows (in thousands):
| | | | | | | | | | | | |
| | | September 30, 2007 | | September 30, 2006 |
| | | Amortized
Cost | | Fair
Value | | Amortized
Cost | | Fair
Value |
Due within one year | | $ | 42,911 | | $ | 42,840 | | $ | 49,322 | | $ | 49,253 |
Due after one year through five years | | | 17,501 | | | 17,528 | | | 7,512 | | | 7,533 |
| | | | | | | | | | | | |
Total | | $ | 60,412 | | $ | 60,368 | | $ | 56,834 | | $ | 56,786 |
| | | | | | | | | | | | |
The following table shows the gross unrealized losses and market value of the Company’s investments with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of September 30, 2007 (in thousands):
| | | | | | | | | | | | | | | | | | |
| | | Less Than 12 Months | | 12 Months or Greater | | Total |
| | | Fair
Value | | Gross
Unrealized
Losses | | Fair
Value | | Gross
Unrealized
Losses | | Fair
Value | | Gross
Unrealized
Losses |
Government and federal agency bonds | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — |
Commercial paper | | | 21,224 | | | 79 | | | — | | | — | | | 21,224 | | | 79 |
Corporate bonds | | | 4,963 | | | 6 | | | — | | | — | | | 4,963 | | | 6 |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 26,187 | | $ | 85 | | $ | — | | $ | — | | $ | 26,187 | | $ | 85 |
| | | | | | | | | | | | | | | | | | |
The unrealized losses are of a temporary nature due to the Company’s intent and ability to hold the investments until maturity or until the par value is realizable. Based on our review of these securities, including the assessment of the duration and severity of the related unrealized losses, we have not recorded any other-than-temporary impairments on these securities.
Accounts receivable are as follows (in thousands):
| | | | | | | | |
| | | September 30, | |
| | | 2007 | | | 2006 | |
| | | (In thousands) | |
Accounts receivable, net: | | | | | | | | |
Accounts receivable | | $ | 12,364 | | | $ | 16,230 | |
Allowance for doubtful accounts | | | (194 | ) | | | (295 | ) |
| | | | | | | | |
Total | | $ | 12,170 | | | $ | 15,935 | |
| | | | | | | | |
72
VIRAGE LOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Write offs totaling $138,000 were recorded for the year ended September 30, 2006. No write-offs were recorded against the allowance for doubtful accounts in the years ended September 30, 2007 and September 30, 2005.
Property, plant and equipment are as follows (in thousands):
| | | | | | | | |
| | | September 30, | |
| | | 2007 | | | 2006 | |
| | | (In thousands) | |
Property, plant and equipment, net: | | | | | | | | |
Building in Armenia | | $ | 3,077 | | | $ | 2,700 | |
Furniture and fixtures | | | 976 | | | | 1,022 | |
Computers and equipment | | | 9,797 | | | | 9,224 | |
Software | | | 10,638 | | | | 10,508 | |
Leasehold improvements | | | 1,090 | | | | 1,102 | |
| | | | | | | | |
| | | 25,578 | | | | 24,556 | |
Less accumulated depreciation and amortization | | | (21,935 | ) | | | (19,714 | ) |
| | | | | | | | |
Total | | $ | 3,643 | | | $ | 4,842 | |
| | | | | | | | |
Depreciation and amortization expense related to property, plant and equipment totaled $1.8 million, $2.0 million and $2.4 million for the years ended September 30, 2007, 2006 and 2005, respectively.
Intangible assets are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2007 | | September 30, 2006 |
| | | Gross Amount | | Accumulated
Amortization | | | Total | | Gross Amount | | Accumulated
Amortization | | | Total |
Amortized intangible assets: | | | | | | | | | | | | | | | | | | | | |
Patents | | $ | 3,500 | | $ | (2,035 | ) | | $ | 1,465 | | $ | 3,500 | | $ | (1,672 | ) | | $ | 1,828 |
Customer lists | | | 300 | | | (5 | ) | | | 295 | | | — | | | — | | | | — |
Technology | | | 800 | | | (17 | ) | | | 783 | | | — | | | — | | | | — |
| | | | | | | | | | | | | | | | | | | | |
| | | 4,600 | | | (2,057 | ) | | | 2,543 | | | 3,500 | | | (1,672 | ) | | | 1,828 |
Unamortized intangible assets: | | | | | | | | | | | | | | | | | | | | |
Workforce | | | 269 | | | (202 | ) | | | 67 | | | 269 | | | (202 | ) | | | 67 |
Customer lists | | | 27 | | | (20 | ) | | | 7 | | | 27 | | | (20 | ) | | | 7 |
Other | | | 353 | | | (265 | ) | | | 88 | | | 353 | | | (265 | ) | | | 88 |
| | | | | | | | | | | | | | | | | | | | |
Total(*) | | $ | 5,249 | | $ | (2,544 | ) | | $ | 2,705 | | $ | 4,149 | | $ | (2,159 | ) | | $ | 1,990 |
| | | | | | | | | | | | | | | | | | | | |
| * | Intangible assets include approximately $162,000 related to assembled workforce and customer lists which are no longer amortized in accordance with SFAS 142. |
The aggregate amortization expense related to acquired intangible assets totaled $0.4 million for the years ended September 30, 2007, 2006 and 2005.
73
VIRAGE LOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Estimated amortization expenses of intangible assets for the next five fiscal years and all years thereafter are as follows (in thousands):
| | | |
Estimated Amortization Expense | | |
2008 | | $ | 589 |
2009 | | | 589 |
2010 | | | 589 |
2011 | | | 566 |
2012 | | | 210 |
Thereafter | | | — |
| | | |
Total | | $ | 2,543 |
| | | |
Accrued expenses are as follows (in thousands):
| | | | | | |
| | | September 30, |
| | | 2007 | | 2006 |
| | | (In thousands) |
Accrued expenses: | | | | | | |
Accrued payroll and related expenses | | $ | 3,034 | | $ | 3,087 |
Other accruals | | | 1,625 | | | 1,710 |
| | | | | | |
Total | | $ | 4,659 | | $ | 4,797 |
| | | | | | |
The balance of accumulated other comprehensive income is as follows (in thousands):
| | | | | | | | |
| | | September 30, | |
| | | 2007 | | | 2006 | |
| | | (In thousands) | |
Accumulated other comprehensive income: | | | | | | | | |
Unrealized loss on investments | | $ | (35 | ) | | $ | (33 | ) |
Cumulative translation adjustment | | | 1,044 | | | | 342 | |
| | | | | | | | |
Total | | $ | 1,009 | | | $ | 309 | |
| | | | | | | | |
Note 4. Acquisition of Ingot Systems, Inc.
On August 14, 2007, the Company acquired Ingot Systems, Inc. (Ingot), a Santa Clara based provider of critical functional IP and design services to the semiconductor industry with global design centers located in the United States and India. The acquisition expands the Company’s ability to serve chosen markets by adding new products and services required in the rapid development of System-on-Chip (SoC) integrated circuits to the Company’s current family of physical IP products including memory compilers, logic libraries and related development tools.
The aggregate up front purchase price was $2.8 million, which included the payment of cash for common stock and the cancellation of options, and acquisition related costs. In addition, the former Ingot shareholders and employees have a potential for a series of earn-out and performance bonus payments totaling up to $8 million through the end of the Company’s fiscal 2009, provided that certain technology and product order milestones are achieved. These earn-outs payments will be treated as additional compensation when met as the milestones are
74
VIRAGE LOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
linked to continued employment. The $1.6 million of goodwill the Company recorded in connection with the acquisition is not expected to be deductible for income tax purposes. The $1.1 million of acquired intangible assets the Company recorded in connection with the acquisition is expected to be amortized using an estimated life of four years. In accordance with SFAS No.141, “Business Combinations,” the Company accounted for this acquisition as a business combination. The results of operations and the estimated fair values of the assets acquired and liabilities assumed has been included in the Company’s consolidated financial statements from the date of acquisition. The financial results of Ingot Systems, Inc. prior to the acquisition are immaterial for purposes of pro forma financial disclosures.
The following tables summarize the components of the total purchase price and the estimated allocation (in thousands):
| | | |
| | | Allocation |
Cash paid for common stock | | $ | 1,754 |
Cash paid for vested options | | | 178 |
Other estimated acquisition related costs | | | 840 |
| | | |
Total estimated purchase price | | $ | 2,772 |
| | | |
The final purchase price allocation will be determined upon finalization of estimates for direct acquisition costs and a comprehensive final evaluation of the fair value of all assets and liabilities. The purchase price allocation, which is subject to change based on the Company’s final analysis, is as follows (in thousands):
| | | | |
| | | Allocation | |
Intangible assets | | $ | 1,100 | |
Net liabilities assumed | | | (1 | ) |
Goodwill | | | 1,573 | |
In-process research and development | | | 100 | |
| | | | |
Total consideration | | $ | 2,772 | |
| | | | |
The net tangible assets acquired and liabilities assumed in the acquisition were recorded at fair value, which approximates the carrying amount as of the acquisition date. The Company determined the valuation of the identifiable intangible assets using future revenue assumptions. The amounts allocated to the identifiable intangible assets were determined through established valuation techniques accepted in the technology industry.
In connection with this acquisition, the Company recorded an expense of $0.1 million in fiscal year 2007 for the write-off of acquired in-process technology. The purchase price allocated to acquired in-process technology was determined through preliminary established valuation techniques. The acquired in-process technology was immediately expensed because technological feasibility had not been established, and no future alternative use existed. The write-off of acquired in-process technology is a component of research and development expense in the Consolidated Statements of Operations.
Note 5. Restructuring Charges
During fiscal 2007, the Company initiated a plan of restructuring in an effort to reduce operating expenses and improve operating margins and cash flows. The restructuring plan was intended to decrease costs through workforce reductions and facility and resource consolidation in order to improve our cost structure. The Company accounted for costs associated with a leased facility in accordance with SFAS No. 146 “Accounting for Costs Associated with
75
VIRAGE LOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Exit or Disposal Activities.” In addition, the Company accounted for the asset-related portions of the restructuring in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
During fiscal 2007, the Company reduced our workforce by approximately 23 employees throughout the Company. Costs resulting from the restructuring plan included severance payments, severance-related benefits, lease costs associated with a vacated facility, and charges for assets written off as a result of the restructuring plan. Facility closure costs included in the restructuring were comprised of payments required under the lease less any applicable estimated sublease income after the property was abandoned. All severance payments and severance-related benefits will be paid by December 31, 2007. Total restructuring costs accrued as of September 30, 2007 were $0.1 million which are recorded in accrued expenses on the consolidated balance sheet.
The following table summarizes restructuring activity for the twelve months ended September 30, 2007 as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | | Severance | | | Asset Related | | | Facility | | | Total | |
Restructuring expense | | $ | 438 | | | $ | 31 | | | $ | 111 | | | $ | 580 | |
Non-cash charges | | | — | | | | (31 | ) | | | — | | | | (31 | ) |
Cash payments | | | (356 | ) | | | — | | | | (119 | ) | | | (475 | ) |
| | | | | | | | | | | | | | | | |
Balance at September 30, 2007 | | $ | 82 | | | $ | — | | | $ | (8 | ) | | $ | 74 | |
| | | | | | | | | | | | | | | | |
Note 6. Commitments and Contingencies
Except for the Armenia building, the Company leases its facilities under operating leases. Rent expense under operating leases was approximately $1.5 million, $2.1 million and $2.1 million for the years ended September 30, 2007, 2006 and 2005, respectively.
The following table summarizes our contractual obligations (dollars in thousands):
| | | | | | | | | | | | | | | |
Contractual Obligations | | Total | | Less than 1 Year | | 1-3 Years | | 4-5 Years | | After 5 Years |
Operating lease obligations | | $ | 1,655 | | $ | 906 | | $ | 709 | | $ | 40 | | $ | — |
Purchase obligations(1) | | | 9,043 | | | 3,650 | | | 5,140 | | | 253 | | | — |
| | | | | | | | | | | | | | | |
Total operating lease and purchase obligations | | $ | 10,698 | | $ | 4,556 | | $ | 5,849 | | $ | 293 | | $ | — |
| | | | | | | | | | | | | | | |
| (1) | Reflects amounts payable under contracts for product development software licenses and maintenance. |
Aggregate future minimum lease payments under operating leases as of September 30, 2007 are as follows (in thousands):
| | | |
| | | Operating Leases |
2008 | | $ | 906 |
2009 | | | 455 |
2010 | | | 254 |
2011 | | | 40 |
Thereafter | | | — |
| | | |
Total minimum lease payments | | $ | 1,655 |
| | | |
76
VIRAGE LOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company had no future capital lease obligations as of September 30, 2007.
Indemnifications. The Company enters into standard license agreements in its ordinary course of business. Pursuant to these agreements, the Company agrees to indemnify its customers for losses suffered or incurred by them as a result of any patent, copyright, or other intellectual property infringement claim by any third party with respect to the Company’s products. These agreements generally have perpetual terms. The maximum amount of indemnification the Company could be required to make under these agreements is generally limited to the license fees received by the Company. The Company estimates the fair value of its indemnification obligation as insignificant, based upon its history of litigation concerning product and patent infringement claims. Accordingly, the Company has no liabilities recorded for indemnification under these agreements as of September 30, 2007 and 2006.
The Company has agreements whereby our officers and directors are indemnified for certain events or occurrences while the officer or director is, or was serving, at our request in such capacity. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, the Company has a directors and officers insurance policy that reduces our exposure and enables us to recover a portion of any future amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal. Agreements entered into prior to December 31, 2002 were grandfathered under the provisions of FIN No. 45. Currently, the Company has no liabilities recorded for these agreements as of September 30, 2007 and 2006.
Warranties. The Company offers its customers a warranty that its software products will substantially conform to their functional specifications. To date, there have been no payments or material costs incurred related to fulfilling these warranty obligations. Accordingly, the Company has no liabilities recorded for these warranties as of September 30, 2007 and 2006. The Company assesses the need for a warranty reserve on a quarterly basis and there can be no guarantee that a warranty reserve will not become necessary in the future.
Note 7. Stockholders’ Equity
Common Stock
As of September 30, 2007, common stock was reserved for issuance as follows:
| | |
Equity Incentive Plans | | 6,895,613 |
Employee Stock Purchase Plans | | 64,957 |
| | |
Total | | 6,960,570 |
| | |
Equity Incentive Plans
In March 2001, the stockholders approved an amendment to the Company’s 1997 Equity Incentive Plan (1997 Plan) and in February 2002, the stockholders approved the adoption of the 2002 Equity Incentive Plan (2002 Plan). In May 2002, in connection with Virage Logic’s acquisition of In-Chip, Virage Logic assumed In-Chip’s 2001 Incentive and Non-statutory Stock Option Plan (2001 Plan), and all options outstanding under the plan. Under the 2001 Plan, the maximum number of options that can be exercised for common stock shares is 585,520. The plans provide for the granting of incentive stock options, nonstatutory stock options and stock awards as determined by the administrators of such plans. Under the terms of the plans, the exercise price of incentive stock options will not be less than 100% of the fair market value of the shares on the date of grant, and the exercise price of nonstatutory stock options will not be less than 85% of the fair market value of the shares on
77
VIRAGE LOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
the date of grant. Under the 1997 Plan, the exercise price of options granted to an employee or a service provider and, under the 2002 Plan, the grant of incentive stock options granted to an employee, who, at the time of grant, owns stock representing more than 10% of the voting power of all classes of the stock of the Company, shall be no less than 110% of the fair market value of the common stock on the date of grant. All option grants may be exercisable within the times or upon the events determined by the Board of Directors. The term of each option grant will be no more than ten years. However, in the case of an incentive stock option issued to an optionee who, at the time of grant, owns stock representing more than 10% of the voting power of all classes of the stock of the Company, the term of the option will be no more than five years. All shares that are issued under these plans are subject to repurchase by the Company at the original exercise price until the underlying options have vested. As of September 30, 2007, there were no shares issued and outstanding under the plans that were subject to repurchase.
Rights to immediately purchase stock may also be granted under these plans with terms, conditions, and restrictions determined by the administrators of the 1997 Plan and the 2002 Plan. Under the 1997 Plan, except for shares purchased by officers, directors and consultants, shares acquired through stock purchase rights vest over a period not to exceed five years with 20% vesting each year. Any unvested shares acquired are subject to repurchase by the Company. As of September 30, 2007, no such shares have been granted. On September 30, 2007, a total of 190,269 shares expired unissued under the 1997 Plan.
In November 2006, the Company began issuing Stock Settled Appreciation Rights (“SSARs”) which provide the holder the right to receive an amount settled in shares of our common stock at the time of the exercise. Under our equity incentive plans, stock options and SSARs generally have a vesting period of four years, are exercisable for a period not to exceed ten years from the date of grant and are generally granted at prices not less than the fair value of our common stock at the time of grant.
Information with respect to the Equity Incentive Plans is summarized as follows:
| | | | | | | | | |
| | | Shares Available For Grant | | | Number of Options/SSARs Outstanding | | | Weighted Average Exercise Price |
Balance as of September 30, 2004 | | 1,374,521 | | | 6,024,291 | | | $ | 9.99 |
Additional options authorized | | 1,000,000 | | | — | | | | — |
Options granted | | (1,159,059 | ) | | 1,159,059 | | | $ | 10.38 |
Options exercised | | — | | | (705,610 | ) | | $ | 6.03 |
Options canceled | | 773,070 | | | (773,070 | ) | | $ | 12.61 |
| | | | | | | | | |
Balance as of September 30, 2005 | | 1,988,532 | | | 5,704,670 | | | $ | 10.12 |
Options granted | | (1,344,659 | ) | | 1,344,659 | | | $ | 9.09 |
Options exercised | | — | | | (455,870 | ) | | $ | 5.57 |
Options canceled | | 962,550 | | | (961,759 | ) | | $ | 10.70 |
| | | | | | | | | |
Balance as of September 30, 2006 | | 1,606,423 | | | 5,631,700 | | | $ | 10.14 |
Options and SSARs granted | | (1,571,150 | ) | | 1,571,150 | | | $ | 7.71 |
RSUs granted | | (195,615 | ) | | — | | | | — |
Options and SSARs exercised | | — | | | (152,241 | ) | | $ | 5.37 |
Options and SSARs canceled | | 1,281,177 | | | (1,281,177 | ) | | $ | 10.90 |
RSUs cancelled | | 40,495 | | | — | | | | — |
Options expired (unissued) | | (190,269 | ) | | — | | | | — |
| | | | | | | | | |
Balance as of September 30, 2007 | | 971,061 | | | 5,769,432 | | | $ | 9.46 |
| | | | | | | | | |
78
VIRAGE LOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes information about stock options and SSARs outstanding and exercisable as of September 30, 2007:
| | | | | | | | | | | | | | | | | | | | | |
| | | Awards Outstanding | | Awards Exercisable |
Range of Exercise Prices | | Number of Shares | | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Number of Shares | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price | | Aggregate Intrinsic Value |
| | | | | | (In years) | | | | (In thousands) | | | | (In years) | | | | (In thousands) |
$ 0.13-$ 5.61 | | 663,130 | | | 4.31 | | $ | 3.71 | | $ | 2,459 | | 662,938 | | 4.31 | | $ | 3.71 | | $ | 2,458 |
$ 5.62-$ 7.08 | | 616,693 | | | 9.92 | | $ | 6.99 | | $ | 261 | | 45,889 | | 5.39 | | $ | 3.61 | | $ | 37 |
$ 7.10-$ 7.76 | | 608,489 | | | 9.71 | | $ | 7.49 | | $ | 27 | | 175,834 | | 8.61 | | $ | 7.64 | | $ | — |
$ 7.78-$ 7.89 | | 721,096 | | | 8.95 | | $ | 7.85 | | $ | — | | 236,215 | | 9.02 | | $ | 7.84 | | $ | — |
$ 8.01-$ 8.87 | | 696,348 | | | 8.30 | | $ | 8.73 | | $ | — | | 294,207 | | 6.96 | | $ | 8.67 | | $ | — |
$ 8.91-$10.11 | | 595,122 | | | 7.12 | | $ | 9.45 | | $ | — | | 430,923 | | 6.66 | | $ | 9.50 | | $ | — |
$10.13-$11.62 | | 599,612 | | | 7.36 | | $ | 10.74 | | $ | — | | 549,467 | | 7.29 | | $ | 10.71 | | $ | — |
$11.64-$16.11 | | 1,027,892 | | | 5.02 | | $ | 14.89 | | $ | — | | 1,011,421 | | 4.97 | | $ | 14.89 | | $ | — |
$16.55-$22.37 | | 240,800 | | | 4.93 | | $ | 17.07 | | $ | — | | 229,817 | | 4.79 | | $ | 17.46 | | $ | — |
$22.81-$22.81 | | 250 | | | 4.78 | | $ | 22.81 | | $ | — | | 250 | | 4.78 | | $ | 22.81 | | $ | — |
| | | | | | | | | | | | | | | | | | | | | |
Total | | 5,769,432 | * | | 7.30 | | $ | 9.46 | | $ | 2,747 | | 3,636,961 | | 5.99 | | $ | 10.30 | | $ | 2,495 |
| | | | | | | | | | | | | | | | | | | | | |
* Table of awards outstanding does not include 155,120 unvested restricted stock units. |
| | | | | | | | |
Vested and expected to vest as of September 30, 2007 | | 5,453,533 | | | 6.11 | | $ | 9.54 | | $ | 2,706 | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $7.42 as of September 30, 2007, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options exercisable as of September 30, 2007 was 0.7 million.
The total fair value of shares vested using the Black-Scholes method during the fiscal year ended September 30, 2007 was $2.4 million. The total intrinsic value of employee stock options exercised during the fiscal years ended September 30, 2007, 2006 and 2005 were $0.4 million, $2.1 million and $5.8 million, respectively. The total cash received from employees as a result of employee stock option exercises during the fiscal years ended September 30, 2007, 2006 and 2005 were $0.9 million, $2.5 million, and $4.3 million, respectively.
79
VIRAGE LOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company issues new shares of common stock upon exercise of stock options. A summary of the status of the Company’s nonvested shares as of September 30, 2007 and changes during the fiscal year ended September 30, 2007 is presented below:
| | | | | | |
| | | Awards |
| | | Number of Shares | | | Weighted- Average Grant- Date Fair Value |
Nonvested as of September 30, 2006 | | 2,417,164 | | | $ | 5.17 |
Awards granted | | 1,571,150 | | | $ | 3.53 |
Awards vested | | (443,188 | ) | | $ | 5.46 |
Awards canceled | | (1,281,177 | ) | | $ | 5.61 |
| | | | | | |
Nonvested as of September 30, 2007 | | 2,263,949 | | | $ | 3.77 |
| | | | | | |
Restricted Stock Units (“RSU”)
During the first quarter of fiscal year 2007, the Company began issuing restricted stock unit awards as an additional form of equity compensation to its employees and officers. Restricted stock units generally vest over a two or four year period and unvested restricted stock units are forfeited and cancelled as of the date that employment terminates. Restricted stock units are settled in shares of the Company’s common stock upon vesting. The cost of restricted stock and restricted stock unit awards is determined using the fair value of the Company’s common stock on the date of the grant, and compensation expense is recognized over the vesting period.
The following table summarizes the activity of the Company’s unvested restricted stock units as of September 30, 2007 and changes during the twelve months ended September 30, 2007, is presented below:
| | | | | | |
| | | Restricted Stock Units |
| | | Number of
shares | | | Weighted- average grant- date fair value |
Nonvested as of September 30, 2006 | | — | | | | — |
RSU granted | | 195,615 | | | $ | 8.37 |
RSU vested | | — | | | | — |
RSU canceled | | (40,495 | ) | | | 8.70 |
| | | | | | |
Nonvested as of September 30, 2007 | | 155,120 | | | $ | 8.29 |
| | | | | | |
Stock-based compensation cost for restricted stock units for the year ended 2007 was $0.5 million. As of September 30, 2007, the total unrecognized compensation cost net of forfeitures relate to unvested awards not yet recognized is $0.9 million and is expected to be amortized over a weighted average period of 1.8 years.
Employee Stock Purchase Plans
In April 2000, the Board of Directors approved the adoption of the 2000 Employee Stock Purchase Plan (2000 Purchase Plan). A total of 491,137 shares of common stock have been reserved for issuance under this plan. In July 2001, the Board of Directors approved the adoption of the 2001 Foreign Subsidiary Employee Stock Purchase Plan (2001 Foreign Plan) as a sub-plan of the 2000 Purchase Plan and allocated 30,000 shares of common stock previously reserved for issuance under the 2000 Purchase Plan for issuance under the 2001
80
VIRAGE LOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Foreign Plan. A total of 70,716 shares have been reserved for issuance under the 2001 Foreign Plan. As of September 30, 2007, a total of 64,957 shares were reserved for issuance under both plans. During fiscal years 2007, 2006 and 2005, there were no transfers from the 2000 Purchase Plan share reserve to the 2001 Foreign Plan reserve. During fiscal year 2004, an additional 716 shares were transferred from the 2000 Purchase Plan share reserve to the 2001 Foreign Plan reserve to meet the requirements of the February 13, 2004 and August 13, 2004 purchases. On each October 1, starting in 2001, the number of shares is automatically increased by the lesser of: 0.75% of the then outstanding shares of common stock, 200,000 shares or a number determined by the Board of Directors. Each offering period will consist of six months. The initial offering period began on October 1, 2000. Offering period end dates were changed from March 31 and September 30 of each year, to February 15 and August 15, starting in fiscal year 2002.
Under the Company’s 2000 Purchase Plan and 2001 Foreign Plan, the employees purchased 10,954, 24,559, and 261,456 shares during the fiscal years ended September 30, 2007, 2006 and 2005, respectively. The employee stock purchase plan was terminated on February 16, 2007.
Common Stock Valuation
In connection with the Company’s initial public offering, the Company reevaluated the fair value of its common stock used to record stock-based compensation for employee stock options and the valuation of the warrants issued for professional services, the purchase of assets and in obtaining a line of credit. In connection with the Company’s acquisition of In-Chip Systems, Inc., the Company included in the purchase price the fair value of common stock and stock options and recorded the intrinsic value of the stock options as deferred stock-based compensation. In connection with all such stock option grants, during the years ended September 30, 2007 and 2006, we recorded stock-based compensation expense under SFAS 123R of $4.4 and $6.7 million, respectively. During the year ended September 30, 2005, the Company recorded a non-cash charge for stock-based compensation under APB 25 of $0.3 million.
Note 8. Related Party Transactions
Cathal Phelan who was appointed as a member of its Board of Directors in March 2006, also serves as Chief Executive Officer at Ubicom, Inc. which is one of our customers. Revenue from Ubicom was approximately $137,000 and $93,000 for the years ended September 30, 2007 and 2006, respectively.
The Company’s promissory note from an executive officer in the principal amount of $200,000 issued in March 2002 was substantially repaid in fiscal year 2005 when the officer left the Company. Approximately $20,000 was not repaid and subsequently written-off.
Note 9. Agreements with Foundries
The Company has entered into agreements with third-party semiconductor foundries in Asia, under which the Company has agreed to develop memory, logic and I/O elements for certain of the foundries’ manufacturing processes and in return the foundries are obligated to pay the Company royalties on sales of silicon chips manufactured by the foundries for the Company’s fabless customers. For the years ended September 30, 2007, 2006 and 2005, total royalty revenues were $12.1 million, $16.1 million and $11.0 million, respectively.
81
VIRAGE LOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 10. Income Taxes
The domestic and foreign components of income (loss) before taxes are as follows:
| | | | | | | | | | | | |
| | | Year Ended September 30, | |
| | | 2007 | | | 2006 | | | 2005 | |
| | | (In thousands) | |
Domestic | | $ | (8,587 | ) | | $ | (883 | ) | | $ | (2,563 | ) |
Foreign | | | 740 | | | | 124 | | | | 88 | |
| | | | | | | | | | | | |
Total | | $ | (7,847 | ) | | $ | (759 | ) | | $ | (2,475 | ) |
| | | | | | | | | | | | |
The income tax provision (benefit) for the years ended September 30, 2007, 2006 and 2005 consists of the following:
| | | | | | | | | | | | |
| | | Year Ended September 30, | |
| | | 2007 | | | 2006 | | | 2005 | |
| | | (In thousands) | |
Current: | | | | | | | | | | | | |
Federal | | $ | — | | | $ | 468 | | | $ | (889 | ) |
State | | | 80 | | | | 358 | | | | (622 | ) |
Foreign | | | 1,314 | | | | 752 | | | | 218 | |
Deferred: | | | | | | | | | | | | |
Federal | | | (4,060 | ) | | | (949 | ) | | | (1,279 | ) |
State | | | (576 | ) | | | (509 | ) | | | 412 | |
Foreign | | | — | | | | — | | | | — | |
| | | | | | | | | | | | |
| | $ | (3,242 | ) | | $ | 120 | | | $ | (2,160 | ) |
| | | | | | | | | | | | |
The income tax provision (benefit) differed from the amounts computed at the US statutory federal income tax rate of 34% in 2007, 2006, and 2005 as a result of the following:
| | | | | | | | | | | | |
| | | Year Ended September 30, | |
| | | 2007 | | | 2006 | | | 2005 | |
| | | (In thousands) | |
Federal tax at statutory rate | | $ | (2,668 | ) | | $ | (258 | ) | | $ | (842 | ) |
State taxes | | | (523 | ) | | | (273 | ) | | | (139 | ) |
Stock-based compensation | | | 649 | | | | 984 | | | | (236 | ) |
Tax exempt interest | | | — | | | | (20 | ) | | | (20 | ) |
Research and development credit | | | (738 | ) | | | (184 | ) | | | (671 | ) |
Foreign taxes, net of credit | | | 25 | | | | 57 | | | | 0 | |
Other | | | 13 | | | | (186 | ) | | | (252 | ) |
| | | | | | | | | | | | |
Total | | $ | (3,242 | ) | | $ | 120 | | | $ | (2,160 | ) |
| | | | | | | | | | | | |
82
VIRAGE LOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Significant components of the Company’s deferred tax assets (liabilities) are as follows:
| | | | | | | | |
| | | Year Ended September 30, | |
| | | 2007 | | | 2006 | |
| | | (In thousands) | |
Deferred tax assets current: | | | | | | | | |
Deferred revenue | | $ | 145 | | | $ | 32 | |
Compensation accrual | | | 593 | | | | 559 | |
Net operating loss carryforwards | | | — | | | | 449 | |
Other accruals/reserves not currently deductible | | | 1,201 | | | | 487 | |
| | | | | | | | |
| | | 1,939 | | | | 1,527 | |
Deferred tax assets non-current: | | | | | | | | |
Net operating loss carryforwards | | | 1,204 | | | | — | |
Stock compensation | | | 2,197 | | | | 1,354 | |
Research and development credits | | | 8,945 | | | | 6,493 | |
Depreciation and amortization | | | 832 | | | | 713 | |
Other accruals/reserves not currently deductible | | | — | | | | 2 | |
| | | | | | | | |
Total deferred tax assets | | | 15,117 | | | | 10,089 | |
Deferred tax liabilities: | | | | | | | | |
Acquired intangibles | | | (978 | ) | | | (692 | ) |
| | | | | | | | |
Net deferred tax assets | | $ | 14,139 | | | $ | 9,397 | |
| | | | | | | | |
The FASB’s SFAS No. 109, “Accounting for Income Taxes”, provides for the recognition of deferred tax assets if realization of such assets is more likely than not. The Company recorded a deferred tax asset as of September 30, 2007 and 2006 based on the expectation of future taxable income. Management believes that it is more likely than not that the deferred tax assets will be realized and has determined that no valuation allowance is considered necessary.
For the year ended September 30, 2007, the Company also has research and development tax credit carryforwards of approximately $4.9 million and $4.1 million for federal and state income tax purposes, respectively. If not utilized, the federal carryforwards will expire in various amounts beginning in 2022. The state tax credits can be carried forward indefinitely.
For the year ended September 30, 2007, the Company has federal net operating loss carryforwards of approximately $3.4 million which expire beginning in the years 2026.
For the year ended September 30, 2007, the Company has foreign tax credit carryforwards of approximately $3.4 million which expire beginning in the year 2014.
83
VIRAGE LOGIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 11. Quarterly Results—Unaudited
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Quarter Ended | |
| | | Sept. 30, 2007 | | | June 30, 2007 | | | March 31, 2007 | | | Dec. 31, 2006 | | | Sept. 30, 2006 | | | June 30, 2006 | | | March 31, 2006 | | | Dec. 31, 2005 | |
| | | (Unaudited) | |
| | | (In thousands, except per share data) | |
Consolidated Statement of Operations Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 13,149 | | | $ | 11,286 | | | $ | 10,567 | | | $ | 11,525 | | | $ | 15,036 | | | $ | 15,346 | | | $ | 15,196 | | | $ | 13,725 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cost and expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of revenues | | | 2,966 | | | | 2,869 | | | | 3,376 | | | | 3,727 | | | | 3,437 | | | | 4,151 | | | | 3,500 | | | | 3,715 | |
Research and development | | | 5,146 | | | | 5,301 | | | | 4,823 | | | | 5,076 | | | | 4,978 | | | | 5,473 | | | | 5,328 | | | | 5,628 | |
Sales and marketing | | | 3,997 | | | | 4,050 | | | | 3,763 | | | | 3,654 | | | | 4,272 | | | | 4,027 | | | | 4,299 | | | | 4,260 | |
General and administrative | | | 2,020 | | | | 1,789 | | | | 2,418 | | | | 2,664 | | | | 2,704 | | | | 2,150 | | | | 2,709 | | | | 2,756 | |
Restructuring charges | | | — | | | | 580 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total cost and expenses | | | 14,129 | | | | 14,589 | | | | 14,380 | | | | 15,121 | | | | 15,391 | | | | 15,801 | | | | 15,836 | | | | 16,359 | |
Operating income (loss) | | | (980 | ) | | | (3,303 | ) | | | (3,813 | ) | | | (3,596 | ) | | | (355 | ) | | | (455 | ) | | | (640 | ) | | | (2,634 | ) |
Interest income | | | 998 | | | | 1,014 | | | | 1,003 | | | | 987 | | | | 988 | | | | 776 | | | | 668 | | | | 623 | |
Other income (expenses), net | | | (31 | ) | | | (53 | ) | | | (29 | ) | | | (44 | ) | | | 129 | | | | 148 | | | | (3 | ) | | | (4 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) before taxes | | | (13 | ) | | | (2,342 | ) | | | (2,839 | ) | | | (2,653 | ) | | | 762 | | | | 469 | | | | 25 | | | | (2,015 | ) |
Income tax provision (benefit) | | | 363 | | | | (1,106 | ) | | | (1,062 | ) | | | (1,437 | ) | | | (15 | ) | | | 2,059 | | | | (151 | ) | | | (1,773 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (376 | ) | | $ | (1,236 | ) | | $ | (1,777 | ) | | $ | (1,216 | ) | | $ | 777 | | | $ | (1,590 | ) | | $ | 176 | | | $ | (242 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic net income (loss) per share | | $ | (0.02 | ) | | $ | (0.05 | ) | | $ | (0.08 | ) | | $ | (0.05 | ) | | $ | 0.03 | | | $ | (0.07 | ) | | $ | 0.01 | | | $ | (0.01 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Diluted net income (loss) per share | | $ | (0.02 | ) | | $ | (0.05 | ) | | $ | (0.08 | ) | | $ | (0.05 | ) | | $ | 0.03 | | | $ | (0.07 | ) | | $ | 0.01 | | | $ | (0.01 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fremont, State of California, on this 14th day of December 2007.
| | |
VIRAGE LOGIC CORPORATION |
| |
| By: | | /s/ J. DANIEL MCCRANIE |
| | J. Daniel McCranie |
| | President and Chief Executive Officer |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints J. Daniel McCranie and Christine Russell, jointly and severally, his attorney-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report of Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | |
Signature | | Title | | Date |
/S/ J. DANIEL MCCRANIE J. Daniel McCranie | | Executive Chairman
(President and Chief Executive Officer) | | December 14, 2007 |
| | |
/S/ CHRISTINE RUSSELL Christine Russell | | Vice President of Finance and Chief Financial Officer (Principal Accounting Officer and Principal Financial Officer) | | December 14, 2007 |
| | |
/S/ DR. ALEXANDER SHUBAT Dr. Alexander Shubat | | Vice President of Research and Development, Chief Technical Officer, Secretary and Director | | December 14, 2007 |
| | |
/S/ MICHAEL HACKWORTH Michael Hackworth | | Director | | December 14, 2007 |
| | |
/S/ ADAM K. KABLANIAN Adam K. Kablanian | | Director | | December 14, 2007 |
| | |
/S/ ROBERT SMITH Robert Smith | | Director | | December 14, 2007 |
| | |
/S/ MICHAEL STARK Michael Stark | | Director | | December 14, 2007 |
| | |
/S/ CATHAL PHELAN Cathal Phelan | | Director | | December 14, 2007 |
85
VIRAGE LOGIC CORPORATION
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
| | | | | | | | | | | | | | | | | |
| | | Balance at Beginning of Period | | Additions Charged to Costs and Expenses | | Deductions Write-Offs | | | Deductions Recoveries | | | Balance at End of Period |
| | | (In thousands) |
Allowance for Doubtful Accounts | | | | | | | | | | | | | | | | | |
Year ended September 30, 2005 | | $ | 738 | | $ | 417 | | $ | — | | | $ | — | | | $ | 1,155 |
Year ended September 30, 2006 | | $ | 1,155 | | $ | 295 | | $ | (138 | ) | | $ | (1,017 | ) | | $ | 295 |
Year ended September 30, 2007 | | $ | 295 | | $ | — | | $ | — | | | $ | (101 | ) | | $ | 194 |
86
EXHIBIT INDEX
| | |
Exhibit Number | | Description of Document |
| 3.1 | | Amended and Restated Certificate of Incorporation |
| |
| 3.2 | | Amended and Restated Bylaws(13) |
| |
| 4.1 | | Specimen Common Stock Certificate(1) |
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| 10.1 | | 1997 Equity Incentive Plan, as amended(2)* |
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| 10.2 | | Form of Option Agreement under 1997 Equity Incentive Plan(3)* |
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| 10.3 | | 2000 Employee Stock Purchase Plan, as amended(4)* |
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| 10.4 | | 2001 Foreign Subsidiary Employee Stock Purchase Plan(4)* |
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| 10.6 | | Development and Licensing Agreement between Taiwan Semiconductor Manufacturing Co. Ltd. and Virage Logic dated as of March 3, 1999(1)# |
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| 10.7 | | Memory Compiler Licensing Agreement between United Microelectronics Corporation and Virage Logic dated as of March 21, 2000(1)# |
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| 10.8 | | Office Lease between Roshan Polymers Limited and Virage Logic International dated August 1, 2001(5) |
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| 10.9 | | Virage Logic Corporation 2002 Equity Incentive Plan, as amended(6)* |
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| 10.10 | | Form of Notice of Grant of Stock Options under the Virage Logic Corporation 2002 Equity Incentive Plan(7)* |
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| 10.11 | | Amended and Restated In-Chip Systems, Inc. 2001 Incentive And Non-Statutory Stock Option Plan(8)* |
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| 10.12 | | Master License Agreement, dated June 8, 2001 and Exhibit No. 2 dated April 1, 2002 between Virage Logic Corporation and STMicroelectronics S.A.(8)# |
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| 10.13 | | Sublease between Ciena Corporation and Virage Logic Corporation dated July 11, 2002 and Consent to Sublease between Ciena Corporation, Virage Logic Corporation and Renco Equities IV dated August 11, 2002(9) |
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| 10.14 | | Real Estate Purchase-Sale Agreement between Nikolay Khachaturov and Virage Logic Corporation dated October 2, 2002 (English translation)(9) |
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| 10.15 | | Virage Logic Corporation 2007 Profit Sharing Bonus Plan(12)* |
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| 10.16 | | Lease between the Neidig Family and Virage Logic Corporation dated October 12, 2006 and First Amendment to Lease dated October 25, 2007 |
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| 10.17 | | Agreement and Release dated January 22, 2007 entered into by and between Virage Logic Corporation and Adam A. Kablanian(10) |
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| 10.18 | | Agreement and Release dated July 10, 2007entered into by and between Virage Logic Corporation and James R. Bailey(11) |
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| 10.19 | | Virage Logic Corporation 2008 Profit Sharing Bonus Plan* |
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| 10.20 | | Virage Logic Corporation 2008 Executive MBO Plan* |
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| 21.1 | | Subsidiaries of Registrant |
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| 23.1 | | Consent of Burr, Pilger & Mayer LLP, Independent Registered Public Accounting Firm |
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| | |
Exhibit Number | | Description of Document |
| 23.2 | | Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm |
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| 31.1 | | Certification Pursuant to Rule 13(a)-14(a) of the Securities Exchange Act of 1934, as amended, as pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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| 31.2 | | Certification Pursuant to Rule 13(a)-14(a) of the Securities Exchange Act of 1934, as amended, as pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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| 32.1 | | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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| 32.2 | | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| (1) | Incorporated by reference to Virage Logic’s Registration Statement on Form S-1, as amended (File No. 333-36108). |
| (2) | Incorporated by reference to Virage Logic’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001. |
| (3) | Incorporated by reference Appendix B of Virage Logic’s Proxy Statement filed on January 13, 2005. |
| (4) | Incorporated by reference to Virage Logic’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. |
| (5) | Incorporated by reference to Virage Logic’s Annual Report on Form 10-K for the year ended September 30, 2001. |
| (6) | Incorporated by reference to Appendix A of Virage Logic’s Proxy Statement filed on January 13, 2005. |
| (7) | Incorporated by reference to Virage Logic’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2001. |
| (8) | Incorporated by reference to Virage Logic’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002. |
| (9) | Incorporated by reference to Virage Logic’s Annual Report on Form 10-K for the year ended September 30, 2002. |
| (10) | Incorporated by reference to Virage Logic’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2006. |
| (11) | Incorporated by reference to Virage Logic’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007. |
| (12) | Incorporated by reference to Virage Logic’s Annual Report on Form 10-K/A for the year ended September 30, 2006. |
| (13) | Incorporated by reference to Virage Logic’s Annual Report on Form 10-K for the year ended September 30, 2003. |
| # | Confidential treatment has been granted with respect to portions of the exhibit. A complete copy of the agreement, including the redacted terms, has been separately filed with the Securities and Exchange Commission. |
| * | Management contract or compensatory plan or arrangement. |
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