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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the period ending March 31, 2001
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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 (IRS Employer Identification No.)
incorporation or organization)
46501 LANDING PARKWAY
FREMONT, CALIFORNIA 94538
(Address of principal executive offices)
(510) 360-8000
(Registrant's telephone number, including area code)
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 [ ]
As of April 30, 2001 there were 19,954,879 shares of the Registrant's Common
Stock outstanding.
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VIRAGE LOGIC CORPORATION
FORM 10-Q
INDEX
Page
PART I -- Financial Information
ITEM 1 -- Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2001
and September 30, 2000.............................................. 3
Condensed Consolidated Statements of Operations for the
three and six months ended March 31, 2001 and 2000.................. 4
Condensed Consolidated Statements of Cash Flows for the
six months ended March 31, 2001 and 2000 ........................... 5
Notes to Condensed Consolidated Financial Statements .................. 6
ITEM 2 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 9
ITEM 3 -- Quantitative and Qualitative Disclosures about Market Risk........ 15
PART II -- Other Information
ITEM 1 -- Legal Proceedings................................................. 16
ITEM 2 -- Changes in Securities and Use of Proceeds......................... 16
ITEM 3 -- Defaults upon Senior Securities................................... 16
ITEM 4 -- Submission of Matters to a Vote of Security Holders............... 16
ITEM 5 -- Other Information................................................. 17
ITEM 6 -- Exhibits and Reports on Form 8-K.................................. 17
Signatures.................................................................. 18
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VIRAGE LOGIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
ASSETS
MARCH 31, SEPTEMBER 30,
2001 2000 (1)
-------- --------
(UNAUDITED)
Current assets:
Cash and cash equivalents ..................................... $ 35,259 $ 58,596
Investments ................................................... 24,095 --
Accounts receivable, net ...................................... 9,033 6,123
Costs in excess of related billings on uncompleted contracts .. 588 264
Prepaid expenses and other .................................... 1,269 936
Taxes receivable .............................................. 292 292
-------- --------
Total current assets ....................................... 70,536 66,211
Property, equipment and leasehold improvements, net ........... 5,405 4,163
Intangible assets, net of amortization ........................ 378 486
Deferred tax assets ........................................... 846 846
Other long term assets ........................................ 313 415
-------- --------
Total assets ............................................... $ 77,478 $ 72,121
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................. $ 1,007 $ 424
Accrued payroll and related expenses .......................... 1,436 1,204
Accrued expenses .............................................. 1,584 1,210
Current portion of capital lease obligations .................. 219 283
Deferred revenue .............................................. 2,946 1,805
Income taxes payable .......................................... 285 --
-------- --------
Total current liabilities ................................. 7,477 4,926
Long-term portion of capital lease obligations .................. 163 273
-------- --------
Total liabilities ......................................... 7,640 5,199
Stockholders' equity:
Common stock, $.001 par value:
Authorized shares -- 150,000,000 at March 31, 2001
and September 30, 2000,
Issued and outstanding shares -- 19,954,369 and
19,909,501 at March 31, 2001 and September 30,
2000, respectively ......................................... 20 20
Additional paid-in capital .................................... 95,974 95,703
Unrealized gains on investments ............................... 42 --
Notes receivable from stockholders ............................ (1,151) (1,600)
Deferred stock-based compensation ............................. (5,891) (10,030)
Accumulated deficit ........................................... (19,156) (17,171)
-------- --------
Total stockholders' equity ................................ 69,838 66,922
-------- --------
Total liabilities and stockholders' equity ................ $ 77,478 $ 72,121
======== ========
(1) Derived from audited financial statements
See notes to condensed consolidated financial statements.
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VIRAGE LOGIC CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenue:
License ................................................... $ 7,179 $ 4,619 $ 13,498 $ 8,806
Royalties ................................................. 422 -- 697 --
-------- -------- -------- --------
Total revenues ..................................... 7,601 4,619 14,195 8,806
Cost of revenues (exclusive of amortization of
deferred stock compensation of $345 and $341 for the
three months ended, and $864 and $450 for the six
months ended March 31, 2001 and 2000, respectively) ....... 1,402 1,210 2,890 2,281
-------- -------- -------- --------
Gross profit ....................................... 6,199 3,409 11,305 6,525
Operating expenses:
Research and development (exclusive of amortization of
deferred stock compensation of $563 and $535 for the
three months ended, and $1,345 and $841 for the six
months ended March 31, 2001 and 2000, respectively) ....... 2,287 1,596 4,529 3,033
Sales and marketing (exclusive of amortization
of deferred stock compensation of $492 and $377 for
the three months ended, and $1,001 and $609 for the
six months ended March 31, 2001 and 2000, respectively) ... 1,996 1,131 3,455 2,103
General and administrative (exclusive of
amortization of deferred stock compensation of
$299 and $236 for the three months ended, and
$623 and $335 for the six months ended
March 31, 2001 and 2000, respectively) .................... 1,212 474 2,141 1,146
Stock-based compensation .................................... 1,699 1,489 3,833 2,235
-------- -------- -------- --------
Total operating expenses ........................... 7,194 4,690 13,958 8,517
-------- -------- -------- --------
Operating loss .............................................. (995) (1,281) (2,653) (1,992)
Interest income ............................................. 828 94 1,841 115
Interest expense ............................................ (26) (84) (50) (158)
-------- -------- -------- --------
Loss before taxes ........................................... (193) (1,271) (862) (2,035)
Income tax provision ........................................ 508 83 1,123 113
-------- -------- -------- --------
Net loss .................................................... (701) (1,354) (1,985) (2,148)
Deemed dividend on Series C redeemable convertible
preferred stock ............................................. -- -- -- (10,104)
-------- -------- -------- --------
Net loss applicable to common stockholders .................. $ (701) $ (1,354) $ (1,985) $(12,252)
======== ======== ======== ========
Basic and diluted net loss per share applicable to
common stockholders.......................................... $ (0.04) $ (0.24) $ (0.11) $ (2.22)
======== ======== ======== ========
See notes to condensed consolidated financial statements.
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VIRAGE LOGIC CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
(In thousands)
(unaudited)
SIX MONTHS ENDED
MARCH 31,
-----------------------
2001 2000
-------- --------
OPERATING ACTIVITIES
Net loss ................................................................ $ (1,985) $ (2,148)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization ......................................... 1,183 613
Amortization of intangible asset ...................................... 108 54
Issuance of warrants for services ..................................... -- 286
Amortization of stock-based compensation .............................. 3,833 2,235
Changes in operating assets and liabilities:
Accounts receivable, net ......................................... (2,911) (809)
Costs in excess of related billings on uncompleted contracts ..... (324) (11)
Prepaid expenses ................................................. (333) (583)
Other assets ..................................................... 102 --
Deferred tax assets .............................................. -- (412)
Accounts payable ................................................. 583 314
Accrued payroll and related expenses ............................. 231 390
Accrued expenses ................................................. 374 552
Deferred revenue ................................................. 1,140 (680)
Income taxes payable ............................................. 285 (324)
-------- --------
Net cash provided by (used in) operating activities ..................... 2,286 (523)
INVESTING ACTIVITIES
Purchase of property, plant and equipment ............................... (2,425) (2,065)
Purchase of short-term investments ...................................... (24,051) --
-------- --------
Net cash used in investing activities ................................... (26,476) (2,065)
FINANCING ACTIVITIES
Proceeds from issuance of redeemable convertible preferred stock ........ -- 9,819
Net proceeds from issuance of preferred and common stock ................ 392 345
Stock issuance costs .................................................... 186 --
Repayment under line of credit .......................................... -- (1,000)
Repayment from stockholders ............................................. 449 --
Principal payments on capital lease obligations ......................... (174) (164)
-------- --------
Net cash provided by financing activities ............................... 853 9,000
Net increase (decrease) in cash and cash equivalents ...................... (23,337) 6,412
Cash and cash equivalents at beginning of the period ...................... 58,596 1,513
-------- --------
Cash and cash equivalents at end of the period ............................ $ 35,259 $ 7,925
======== ========
Supplemental disclosures of cash flow information
Cash paid for interest .................................................. $ 45 $ 108
Cash paid for income taxes .............................................. $ 826 $ 1,333
Supplemental schedules of noncash investing and financing activities
Capital lease obligations incurred for the purchase of equipment ........ $ -- $ 197
Warrants issued for services ............................................ $ -- $ 286
See notes to condensed consolidated financial statements.
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VIRAGE LOGIC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month and six month periods ended
March 31, 2001 are not necessarily indicative of the results that may be
expected for the year ending September 30, 2001. For further information refer
to the "Management's Discussion and Analysis of Financial Condition and Results
of Operations" under Item 2 below.
The accompanying unaudited condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial statements of Virage
Logic Corporation (the "Company") for the year ended September 30, 2000, which
is included in the Company's Form 10-K filed with the Securities and Exchange
Commission, Registration No. 000-31089.
The unaudited condensed consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiary, Virage Logic International.
Intercompany balances and transactions have been eliminated.
NOTE 2. SEGMENT INFORMATION
The Company operates in one business segment, the sale of semiconductor
intellectual property for the memory elements of systems-on-a-chip, which it
sells to fabless semiconductor companies as well as integrated device
manufacturers.
The 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. The CODM does not receive discrete financial
information about the individual components.
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Revenues by geographic region were as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------ ------------------------
2001 2000 2001 2000
------- ------- ------- -------
Revenues:
United States ...... $ 5,002 $ 1,706 $ 8,737 $ 4,056
Japan .............. 441 694 1,863 1,581
Taiwan ............. 742 109 1,516 440
Canada ............. 36 1,058 467 1,493
Europe ............. 487 425 1,039 609
Other .............. 893 627 573 627
------- ------- ------- -------
Total ............ $ 7,601 $ 4,619 $14,195 $ 8,806
======= ======= ======= =======
NOTE 3. COMPREHENSIVE INCOME (LOSS)
In June 1997, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130). SFAS 130 established standards for the reporting and display of
comprehensive income (loss) and its components. Total comprehensive losses were
not materially different from net losses incurred for the three and six month
periods ended March 31, 2001.
NOTE 4. NET LOSS PER SHARE
Basic and diluted net loss per share is presented in conformity with Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128).
Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No.
98, common stock and convertible preferred stock issued or granted for nominal
consideration prior to the effective date of the Company's initial public
offering must be included in the calculation of basic and diluted net loss per
common share as if they had been outstanding for all periods presented.
In accordance with SFAS 128, 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.
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The following table presents the computation of basic and diluted net loss per
share applicable to common stockholders (in thousands, except per share
amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net loss applicable to common stockholders ....... $ (701) $ (1,354) $ (1,985) $(12,252)
======== ======== ======== ========
Basic and diluted:
Weighted average shares of common stock
outstanding ................................... 19,906 6,531 19,922 6,097
Less weighted average shares subject to
repurchase .................................... (1,132) (773) (1,121) (571)
-------- -------- -------- --------
Shares used in computing basic and
diluted net loss per share applicable to
common Stockholders ........................... 18,774 5,758 18,801 5,526
======== ======== ======== ========
Basic and diluted net loss per share applicable
to common stockholders ........................ $ (0.04) $ (0.24) $ (0.11) $ (2.22)
======== ======== ======== ========
NOTE 5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." (SFAS No. 133). SFAS No. 133 establishes a new model
for accounting for derivatives and hedging activities and supersedes and amends
a number of existing accounting standards. SFAS No. 133 requires that all
derivatives be recognized on the balance sheet at their fair market value, and
the corresponding derivative gains or losses be either reported in the statement
of operations or as a deferred item depending on the type of hedge relationship
that exists with respect to such derivative. SFAS No. 133, as amended by SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities --
Deferral of Effective Date of FASB Statement No. 133," is effective for all
fiscal years beginning after June 15, 2000. We do not currently have forward
exchange contracts to hedge exposures denominated in foreign currencies or any
other derivative financial instruments for trading or speculative purposes, but
it is possible we may enter into such contracts in the future as our
international sales or operations expand.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are forward-looking statements that involve
risks and uncertainties. These statements relate to future events or our future
financial performance. 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. These
statements involve a number of risks and uncertainties that could cause actual
events or results to differ materially from any forward-looking statement. These
forward-looking statements speak only as of the date hereof, we expressly
disclaim any obligation or undertaking to release publicly any updates or
revisions to any forward-looking statements contained herein. The following
information should be read in conjunction with the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 15-21 and
"Risk Factors" on pages 21-26 of the Company's Form 10-K filed with the
Securities and Exchange Commission for the year ended September 30, 2000.
OVERVIEW
Virage Logic provides semiconductor intellectual property for the memory
elements of systems-on-a-chip. These chips are used in communications equipment
and many electronic devices, such as cellular and digital phones, pagers,
digital cameras, DVD players, switches and modems. Our memories are optimized
for our customers' manufacturing processes and are pre-tested through actual
manufacture of silicon chips at third-party foundries.
Revenues consist of license fees for our memories, standard and custom
memory compilers and software development tools and royalties from certain
third-party semiconductor foundries on their sales of silicon chips manufactured
for our fabless customers. Licensing of our intellectual property involves a
sales cycle of three to six months. Our memories and compilers can be customized
for our customers' specific manufacturing processes and requirements. A custom
contract would typically call for milestone payments that are defined in the
statement of work and program schedule that accompanies a master license
agreement. Milestone deliveries generally occur over three to six months.
License revenues are recognized when persuasive evidence of an agreement
exists, delivery of the product has occurred, we have no significant remaining
obligations to perform, the fee is fixed or determinable, and collectibility is
probable. License revenues for certain software development tools are recorded
ratably over the maintenance term as vendor-specific objective evidence of fair
value for the maintenance portion of the revenues does not exist. License
revenues on custom memory compilers are recognized using contract accounting
over the period that services are performed under the
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percentage-of-completion method. For such licenses, we determine our
progress-to-completion using input measures based on labor hours incurred. A
provision for estimated losses on engagements is made in the period in which the
loss becomes probable and can be reasonably estimated. To date, no such loss
provision has been necessary.
Support revenues related to standard and custom memory compilers are not
deferred over the life of the license agreement but rather an estimated cost of
support is accrued at the time license revenues are recognized. Our experience
to date indicates that the level of resource commitment for support is not
significant. The support is provided over a period of one year or less, and
upgrades or modifications are rare. In the event that support is anticipated to
become a significant cost, our revenue recognition policy would be modified to
reflect the change.
Currently, license fees represent a substantial portion of our revenues. We
have agreements with certain third-party semiconductor foundries to pay
royalties on their sales of silicon chips manufactured for our fabless
customers. Royalty revenues for the three months ended March 31, 2001 totaled
$422,000 as compared to $275,000 in the first quarter of fiscal 2001. The time
delays for receiving royalty revenues are due to the typical length of time
required for the customer to implement our embedded memories into their design
and manufacture and bring to market a product incorporating our memories.
For the three months ended March 31, 2001, Level One, Philips, TSMC, and
Vitesse each generated between 5 percent and 39 percent of our revenues.
Collectively, these companies represented 57 percent of total revenues for the
period.
Sales to customers located outside the United States accounted for 34% and
38% of our revenues for the three and six months ended March 31, 2001,
respectively. In Japan and the rest of Asia, we use both indirect sales through
distributors, as well as direct sales through sales representatives. We are
increasing our direct sales force in the United States and Europe. All revenues
to date have been denominated in U.S. dollars.
Since our inception in November 1995, cost of revenues and other expense
categories have progressively increased as we added personnel and increased the
level of our business activities. We intend to continue making significant
expenditures associated with research and development, sales and marketing and
general and administrative activities, and expect that costs of revenues and
these expenses will continue to be a significant percentage of revenues in
future periods.
We have incurred, and will continue to incur, substantial amortization of
stock-based compensation, which represents non-cash charges incurred as a result
of the issuance of stock options to employees. These charges are recorded based
on the difference between the deemed fair value of the common stock and the
exercise price of such options at the date of grant. The aggregate deferred
stock-based compensation at March 31, 2001 was $5.9 million. This amount is
presented as a reduction of stockholders' equity and is being amortized using
the graded-vesting method over the vesting period of the applicable options,
generally four years. Amortization of deferred stock-based compensation for the
three months ended March 31, 2001, net of cancellations, was approximately $1.7
million. We anticipate that the amortization of stock-based compensation for
options granted
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through March 31, 2001 will equal approximately $4.1 million in the last six
months of 2001 and $1.8 million in 2002.
RESULTS OF OPERATIONS
The following table lists the percentage of revenues for certain items in
our consolidated statements of operations for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ------------------
2001 2000 2001 2000
----- ----- ----- -----
Revenue:
License ......................... 94.4% 100.0% 95.1% 100.0%
Royalties ....................... 5.6 0.0 4.9 0.0
----- ----- ----- -----
Revenues ........................... 100.0 100.0 100.0 100.0
Cost of revenues ................... 18.4 26.2 20.4 25.9
----- ----- ----- -----
Gross profit ....................... 81.6 73.8 79.6 74.1
Operating expenses:
Research and development ......... 30.1 34.6 31.9 34.4
Sales and marketing .............. 26.3 24.5 24.3 23.9
General and administrative ....... 15.8 10.3 15.1 13.0
Stock-based compensation ......... 22.4 32.2 27.0 25.4
----- ----- ----- -----
Total operating expenses .... 94.6 101.6 98.3 96.7
----- ----- ----- -----
Operating loss ..................... (13.0) (27.8) (18.7) (22.6)
Interest income .................... 10.9 2.0 13.0 1.3
Interest expense ................... (0.3) (1.8) (0.4) (1.8)
Income tax provision ............... (6.8) (1.8) (7.9) (1.3)
----- ----- ----- -----
Net loss ........................... (9.2)% (29.4)% (14.0)% (24.4)%
===== ===== ===== =====
THREE AND SIX MONTHS ENDED MARCH 31, 2001 AND 2000
Revenues. Revenues increased 65% to $7.6 million from $4.6 million for the
three months ended March 31, 2001 and 2000, respectively. Revenues increased 61%
to $14.2 million from $8.8 million for the six months ended March 31, 2001 and
2000, respectively. The increase in revenues is primarily attributable to an
expanding customer base and license fees from existing customers of our 0.13
micron and 0.18 micron embedded memory technologies. In addition, the Company
received royalty revenues from a third party foundry totaling $422,000 for the
second quarter of fiscal 2001 and $697,000 for the first six months of fiscal
2001. No royalty revenues were received during the first six months of fiscal
year 2000.
Gross Profit. Gross profit is revenues less cost of revenues. Cost of
revenues consists primarily of personnel expenses and the allocated portion of
facilities and equipment expenses. Gross profit increased 82% to $6.2 million
from $3.4 million for the three months ended March 31, 2001 and 2000,
respectively. Gross profit increased 73% to $11.3 million from $6.5 million for
the six months ended March 31, 2001 and 2000, respectively. These increases were
attributable to increased licensing to fabless
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semiconductor companies of higher margin embedded memory technologies
that required no additional customization.
Research and Development Expense. Research and development expense includes
personnel and other costs associated with the development of successive
generations of embedded memory technologies and of new technologies. Research
and development expense increased 43% to $2.3 million for the three months ended
March 31, 2001 from $1.6 million for the same period last fiscal year. Research
and development expense increased 49% to $4.5 million for the six months ended
March 31, 2001 from $3.0 million for the same period last fiscal year. The
increase in research and development expense was primarily due to the ongoing
development of our 0.13 micron embedded memory technologies, as well as new
products such as our Custom-Touch CAM, Custom-Touch STAR and Custom-Touch
1T-SRAM. These efforts required hiring additional personnel.
Sales and Marketing Expense. Sales and marketing expense consists primarily
of personnel, commissions, advertising, promotion and other associated costs.
Sales and marketing expense increased 76% to $2.0 million for the three months
March 31, 2001 from $1.1 million for the same period last fiscal year. Sales and
marketing expense increased 64% to $3.5 million for the six months March 31,
2001 from $2.1 million for the same period last fiscal year. The increase in
sales and marketing expense was due to hiring additional personnel, increased
salaries and benefits and expanded sales and marketing activities. We anticipate
that sales and marketing expense will continue to increase as we expand our
sales force and target new customers for our technologies.
General and Administrative Expense. General and administrative expense
consists primarily of personnel and other costs associated with the management
of our business. General and administrative expense increased 156% to $1.2
million for the three months ended March 31, 2001 from $474,000 for the same
period last fiscal year. General and administrative expense increased 87% to
$2.1 million for the six months ended March 31, 2001 from $1.1 million for the
same period last fiscal year. General and administrative expense increased due
to the increase in the general allowance for bad debt and the professional
services and fees related to the costs of being a publicly traded company.
Stock-Based Compensation. With respect to the grant of stock options to
employees, the Company has deferred aggregate stock-based compensation of
approximately $5.9 million for the period ended March 31, 2001 and $10.0 million
for the period ended September 30, 2000. The amount of deferred stock-based
compensation is presented as a reduction of stockholders' equity and is being
amortized using the graded-vesting method over the vesting period of the
applicable options, generally four years. The Company amortized, net of
cancellations, $1.7 million and $1.5 million during the three months ended March
31, 2001 and 2000, respectively, and amortized $3.8 million and $2.2 million
during the six months ended March 31, 2001 and 2000, respectively.
Interest Income. Interest income increased to $828,000 for the three months
ended March 31, 2001 from $94,000 for the same period last fiscal year. Interest
income increased to $1.8 million for the six months ended March 31, 2001 from
$115,000 for the same period last fiscal year. This increase was principally due
to higher average cash balances resulting from the net proceeds of the initial
public offering. Interest income for
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the three months ended March 31, 2001 was lower than in the first quarter of
fiscal 2001 due to lower interest rates.
Interest Expense. Interest expense decreased to $26,000 for the three
months ended March 31, 2001 from $84,000 for the same period last fiscal year.
Interest expense decreased to $50,000 for the six months ended March 31, 2001
from $158,000 for the same period last fiscal year. This decrease was the result
of the repayment of the outstanding balance under a credit line.
Income Tax Provision. The provision for income taxes was $508,000 and
$83,000 for the three months ended March 31, 2001 and 2000, respectively. The
provision for income taxes was $1.1 million and $113,000 for the six months
ended March 31, 2001 and 2000, respectively. Our effective tax rates were
negative and differed from the combined federal and state statutory rates due
primarily to stock-based compensation related charges that were non-deductible
for tax purposes and foreign taxes.
Deemed Dividend. In connection with the sale of Series C redeemable
convertible preferred stock in December 1999, we recorded a non-cash charge of
$10.1 million for the six months ended March 31, 2000 to accrete the value of
the Series C redeemable convertible preferred stock to its deemed fair value
under applicable accounting rules. This non-cash charge was recorded as an
increase in accumulated deficit with a corresponding credit to additional
paid-in capital and was recognized at the date of issuance, which was the period
in which the shares became eligible for conversion.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations from inception to March 31, 2001
from license revenue, through the issuance of notes and preferred stock,
borrowing under capital leases and the Company's initial public offering. Net
loss for the six months ended March 31, 2001 was $2.0 million, which was
attributable primarily to a non-cash stock-based compensation charge of $3.8
million during that period. At March 31, 2001, the Company had $35.3 million in
cash and cash equivalents, a decrease of $23.3 million from cash held at the end
of last fiscal year. The decrease in cash balances at March 31, 2001 was due to
investment in short-term government and mortgage-backed securities with maturity
dates of less than one year. Operations were funded from revenues received.
The Company has outstanding obligations under a capital lease line, which
are due over a three-year period. At March 31, 2001, $382,000 is outstanding
under this line. The interest rate on these borrowings is variable and dependent
upon market conditions at the time a new lease obligation is executed. There is
no remaining availability under this capital lease line.
Net cash provided by operating activities was $2.3 million for the first
six months of fiscal 2001. Net cash provided by operating activities was due to
the increase in deferred revenues and accounts payable, offset by increases in
accounts receivable.
Net cash used in investing activities was $26.5 million for the first six
months of fiscal 2001. Net cash used for investing activities was due to
investment in short-term
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government and mortgage-backed securities with maturity dates of less than one
year and acquisitions of property and equipment, primarily computer software and
hardware. We intend to purchase approximately $1.9 million of additional capital
assets, primarily computer equipment and software, during the remainder of
fiscal 2001.
Net cash provided by financing activities was $853,000 for the first six
months of fiscal 2001. Net cash provided by financing activities in the first
six months of fiscal 2001 reflects proceeds from the exercise of stock options
and repayment of borrowings by stockholders.
On August 4, 2000 we closed our initial public offering of 3,750,000 shares
of common stock at a public offering price of $12.00 per share and a
simultaneous private placement of 403,226 shares of common stock at a price of
$11.16 per share. On August 28, 2000, we sold an additional 562,500 shares of
common stock upon the underwriters' exercise of their over-allotment option.
Through the public offering and simultaneous private placement, we received
proceeds of approximately $50.7 million after deducting underwriting discounts
and commissions and other offering expenses. Effective with the closing of the
initial public offering on August 4, 2000, all of the outstanding preferred
stock automatically converted into 7,196,275 shares of common stock.
Our future capital requirements will depend on many factors, including the
rate of sales growth, market acceptance of our existing and new technologies,
amount and timing of research and development expenditures, timing of the
introduction of new technologies, expansion of sales and marketing efforts,
potential acquisitions and changes to our working capital structure primarily
related to accounts receivable.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our core business, the sale of semiconductor intellectual property for the
memory elements of systems-on-a-chip, has limited 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 our license agreements provide for payment in U.S. dollars.
We maintain an investment portfolio of various issuers, types and
maturities. These securities are generally 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 and mortgage-backed securities and commercial
paper. Our investments balance of $24.1 million at March 31, 2001 consists of
instruments with original maturities of 90 days to one year. Due to the
short-term nature of our investment portfolio and our intent to hold these
investments to maturity, we do not believe our investment balance is materially
exposed to interest rate risk. The interest income derived from the Company's
relatively large cash and cash equivalents and investments balances represents a
significant component of net income. Due to the short-term nature of these
investments, the amount of income may vary materially from period to period.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
USE OF PROCEEDS FROM REGISTERED SECURITIES
Our registration statement (No. 333-36108) under the Securities Act for our
initial public offering of common stock became effective on July 31, 2000. We
sold a total of 4,312,500 shares of common stock to an underwriting syndicate
for an aggregate offering price to the public of $51,750,000. The managing
underwriters were Lehman Brothers Inc., FleetBoston Robertson Stephens Inc. and
SG Cowen Securities Corporation. 3,750,000 of these shares were sold in an
offering that commenced on July 31, 2000 and was completed on August 4, 2000. An
additional 562,500 shares of common stock were sold upon the underwriters'
exercise of their over-allotment option on August 28, 2000. In connection with
this offering, we incurred total expenses of approximately $5.4 million,
consisting of $3,622,500 for underwriting discounts and commissions and
approximately $1,785,000 million of other expenses. None of these expenses were
paid directly or indirectly to any of our directors, officers, or their
associates, persons owning 10% or more of any class of the our securities, or
affiliates of Virage Logic. Offering proceeds, net of aggregate expenses were
approximately $46.3 million. We have applied all of the proceeds to temporary
investments in a commercial money market investment account and short-term
government and mortgage-backed securities.
None of the net offering proceeds were paid directly or indirectly to any
of our directors, officers, or their associates, persons owning 10% or more of
any class of our securities, or affiliates of Virage Logic.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our Annual Meeting of Stockholders on March 2, 2001. A total of
15,658,786 shares were represented at the Annual Meeting. The stockholders
approved the following proposals:
(a) Election of Sang Wang as a Class 1 director. There were 15,657,886
votes for Dr. Sang's election and 900 votes withheld;
(b) Amend the Virage Logic Corporation 1997 Equity Incentive Plan to: (i)
increase the number of shares of common stock issuable under the plan
by an additional 1,000,000 shares; (ii) have the plan administered,
with respect to certain participants, by a committee of Board of
Directors comprised of Board members who are "outside directors"
within the meaning of Section 162(m) of the Internal
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Revenue Code; and (iii) set a limit of 500,000 on the number of shares
of common stock that can be covered by awards under the plan to any
one participant in any calendar year. There were 12,676,339 votes in
favor, 2,051,962 votes against, 1,070 abstentions and 929,415 broker
non-votes; and
(c) Ratify the appointment of Ernst & Young LLP as independent auditors of
the Company for the fiscal year ending September 30, 2001. There were
15,658,136 votes in favor, 300 votes against and 350 abstentions.
Effective as of the Annual Meeting, Yervant Zorian completed his
service as a member of our board of directors. Dr. Zorian continues to
serve as a member of our management team.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Virage Logic Corporation 1997 Equity Incentive Plan, as amended
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 4, 2001 VIRAGE LOGIC CORPORATION
/s/ Adam A. Kablanian
----------------------------------------
ADAM A. KABLANIAN
President, Chief Executive Officer
and Chairman of the Board
/s/ James R. Pekarsky
----------------------------------------
JAMES R. PEKARSKY
Vice President, Finance and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.1 Virage Logic Corporation 1997 Equity Incentive Plan, as amended
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