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News & Events > 2003 News Releases > November 20 |
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2003 News Releases "FOR IMMEDIATE RELEASE" MOSAID Announces Second Quarter Results for Fiscal Year 2004 OTTAWA, Ontario, Canada – November 20, 2003 – MOSAID Technologies Incorporated (TSX:MSD) today announced financial results for the second quarter of fiscal year 2004 ended October 24, 2003. As a result of exiting the fabless semiconductor business and discontinuing operations of the Semiconductor Division, the Company has revised certain previously disclosed results of operations and amended its financial statement presentation, in accordance with Canadian generally accepted accounting principles. Revenues for the second quarter of fiscal year 2004 were $7,351,000 compared to $7,873,000 in the second quarter of fiscal year 2003. Net loss for the quarter was $6,149,000 or $0.60 per diluted share, compared to a net loss of $3,438,000 or $0.33 per diluted share a year ago. The net loss for the quarter includes a restructuring expense of $4,828,000, which is the principal contributor to the loss from discontinued operations of $5,912,000, and is related to the discontinuation of the Company’s Semiconductor Division. The net loss for the quarter before discontinued operations was $237,000 compared with a profit of $797,000 a year ago. Revenues for the year to date were $12,801,000 compared to revenues of $15,524,000 reported for the same period last year. Net loss for the first six months of fiscal 2004 was $9,826,000 or $0.96 per diluted share, compared to a net loss of $8,805,000 or $0.86 per diluted share reported in the first half of fiscal 2003. The year to date loss for fiscal 2004 before discontinued operations was $1,744,000 or $0.17 per diluted share compared to a net loss before discontinued operations of $837,000 or $0.08 a year ago. The Company’s cash balance and short-term marketable securities at the end of the second quarter were $37.5 million compared to $40.1 million at the end of the first quarter of fiscal 2004. "We are leaving the first half of the fiscal year as a stronger company, financially," said George Cwynar, President and Chief Executive Officer of MOSAID. "With the closure of the Semiconductor Division, we have restructured our operations, addressed our cash burn rate, and are focused on the major licensing opportunities in our IP Division and capitalizing on the improving market conditions for our Systems Division." "We believe recovery of the memory market has begun. Our Systems’ customers are increasing their tester purchases and our backlog has grown," said Cwynar. "The improving DRAM market and our improved financial strength are both conducive to positive licensing negotiations in the IP Division. Our new design licensing initiative, focussed on specialty and embedded memory applications appears timely in meeting evolving customer requirements, and is a source for renewal of our IP portfolio." Operating Highlights · Consolidated Markman Hearing Scheduled in New Jersey On September 15, 2003, the U.S. Judicial Panel on Multidistrict Litigation (MDL Panel) issued its formal order transferring the Infineon Technologies case from the Northern District of California to the District Court of New Jersey for consolidated or coordinated pretrial proceedings with the Samsung Electronics action. Also on September 15th, New Jersey District Court Judge Martini scheduled a joint claims construction hearing – known as the Markman hearing – for January 27 - 28, 2004. Following the close of the quarter, MOSAID announced the addition of two new patents to its claims in the actions against both Infineon and Samsung – Foss Patent No. 6,580,654, issued June 17, 2003, and Lines Patent 6,603,703, issued August 5, 2003. The U.S. Patent Office granted these new patents after considering allegations of prior invention documented by Samsung during the current litigation. MOSAID believes the addition of these two new patents has strengthened its ongoing cases against both Samsung and Infineon. Three more companies were placed on notice for patent infringement during the quarter, bringing the total number on notice to 14. MOSAID is in active licensing discussions with several of these companies. At the end of the second quarter, MOSAID had 525 issued or pending patents, representing an increase of 13 over the first quarter of fiscal 2004. · Discontinued Semiconductor Division and Formed Design Licensing Business On September 16, 2003, MOSAID announced the closure of its fabless semiconductor operation and the creation of a design licensing group in its Intellectual Property Division. A core group of design engineers were transferred from the content addressable memory (CAM) business initiative into the IP Division. The new design licensing business is focused on addressing the design and licensing of embedded DRAM, specialized memories and high speed I/O applications, and is positioning itself to offer custom chip solutions and IP blocks for customers. This new business builds on MOSAID’s long history in the design of DRAM and memory intensive systems on a chip. · Increase in Memory Test Systems Shipments and Backlog During the second quarter, the Systems Division increased shipments of its MS4205 test systems, and built a significant backlog. Customer demand is increasing for testers that have the ability to analyze the latest high-speed flash and DRAM memories. Conference Call and Webcast About MOSAID
Founded in 1975, MOSAID is based in Ottawa, Ontario, Canada, with offices in Santa Clara, California; Newcastle upon Tyne, U.K; and Tokyo, Japan. For more information, visit the Company’s web site at www.mosaid.com. Forward Looking Information For more information, please contact:
MANAGEMENT’S DISCUSSION AND ANALYSIS, FINANCIAL STATEMENTS AND NOTES FOLLOW MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION The following discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements of MOSAID Technologies Incorporated ("MOSAID" or "the Company") for the period ended October 24, 2003 appearing elsewhere in this report and with the audited annual Consolidated Financial Statements and the Management’s Discussion and Analysis (MD&A) included in the Company’s most recent Annual Report for the fiscal year ended April 25, 2003. All dollar amounts are in Canadian dollars, except where otherwise indicated. Overview On September 16, 2003, the Company announced the closure of its fabless semiconductor operation, which was the business of the Semiconductor Division, whose mission was the development and sale of networking chips. As a result, the financial statements, notes and this report reflect Discontinued Operations in the current quarter and all other financial periods, in order to present comparable data, and to be consistent with the Canadian generally accepted accounting principles. The Company reported revenues of $7.4 million for the 13 weeks ended October 24, 2003 ("Q2 fiscal 2004"), representing a decrease of 7% from revenues of $7.9 million for the 13 weeks ended October 25, 2002 ("Q2 fiscal 2003"). The net loss for Q2 fiscal 2004 was $6.1 million or $0.60 per diluted share, compared to a net loss of $3.4 million or $0.33 per diluted share for Q2 fiscal 2003. The net loss before discontinued operations for Q2 fiscal 2004 was $237,000 or $0.02 per diluted share, compared to a net profit before discontinued operations of $797,000 or $0.08 per diluted share for Q2 fiscal 2003. Revenues of $12.8 million for the 26 weeks ended October 24, 2003 represent a decrease of 18% from revenues of $15.5 million for the same period a year ago. The net loss for the 26 weeks ended October 24, 2003 was $9.8 million or $0.96 per diluted share, compared to a net loss of $8.8 million or $0.86 per diluted share for the same period a year ago. The net loss before discontinued operations for the 26 weeks ended October 24, 2003 was $1.7 million, or $0.17 per diluted share, compared to a net loss before discontinued operations of $837,000 or $0.08 per diluted share for the 26 weeks ended October 25, 2002. Results of Operations The following table shows the percentage of revenues represented by certain items in the Company's consolidated statement of earnings for the fiscal periods indicated.
With the discontinuation of the Semiconductor Division, the Company’s segmented report on the two remaining Divisions – the Intellectual Property (IP) Division and the Systems Division. The financial results of these two Divisions for the current and previous financial periods reported incorporate a re-allocation of all General and Administrative expenses, reflecting the Semiconductor Division’s discontinuation. The results of the discontinued operations are detailed in Note 2 to the Consolidated Financial Statements ("Restructuring and Discontinued Operations"), as well as in the Discontinued Operations provided in the "Business Segment Information" provided in Note 5 to the Consolidated Financial Statements. The Intellectual Property ("IP") Division’s segment profit of $350,000 for Q2 fiscal 2004 compares to a $4.5 million segment profit for the same quarter in the previous year. The segment loss of $241,000 for the 26 weeks ended October 24, 2003 compares with the segment profit of $7.5 million for the same period last year. The decline in profitability is mainly due to the decrease in license revenues in fiscal 2004 versus fiscal 2003, combined with an increase in litigation costs. A segment loss of $374,000 for the Systems Division for the 13 weeks ended October 24, 2003 compares to a segment loss of $2.8 million for the same period last year. The improvement is the result of increased revenues, higher margins and reduced R&D and Sales and Marketing expenses. For the 26 weeks ended October 24, 2003, the segment loss was $1.5 million, compared to a segment loss of $7.8 million for the same period a year ago.
Revenues
In the IP Division, patent licensing revenues decreased $1.8 million in Q2 fiscal 2004 from Q2 fiscal 2003. In the 26 weeks ended October 24, 2003 patent licensing revenues decreased $3.9 million to $6.2 million, from $10.1 million in the same period last year. Revenues from the IP Division can vary significantly from period to period depending on licensing fees and contracted payment schedules. Systems Division revenues for Q2 fiscal 2004 were 51% higher than revenues for the same quarter in the previous year. Revenues for the 26 weeks ended October 24, 2003 were 25% higher than revenues for the same period last year. This is mainly due to a greater number of units shipped and a higher average selling price per unit.
The change in the revenue split, with proportionately more revenues coming from the Systems Division, reflects the increased revenues from Systems as well as the decline in revenues from the IP Division as payments from existing licensees decrease. Interest income in Q2 fiscal 2004 is roughly equal to the interest income in Q2 fiscal 2003, primarily as a result of slightly improved interest rates secured on treasury investments, on somewhat reduced cash balances. Interest income in the first half of fiscal 2004 decreased 6%, compared to interest income for the same period last year. The approximate geographic breakdown of revenues from operations is as follows:
The Company markets its products and services globally. The percentage decrease in the Japanese market is due to the decrease in patent licensing revenues. The increase in the percentage of sales from Taiwan and Korea results primarily from the increase in revenues from the Systems Division. Labour and Materials
This category comprises the labour, materials and subcontracting costs to assemble, integrate, test and service the memory test systems. Labour and materials have decreased in Q2 fiscal 2004 as a percentage of Systems Division revenues and increased as a percentage of total revenues as compared to the same period last year. The decrease as a percentage of Systems Division revenues is due to improved gross margins stemming from higher priced testers’ increased contribution in the revenue mix, improved efficiency of tester assembly, continued cost containment practices and reduced fixed costs relative to total costs. The increase as a percentage of total revenues is due to the increase in revenues from the Systems Division, and as a decrease in revenues from the IP Division, partially offset by improved margins on testers. For the 26 weeks ended October 24, 2003, labour and materials have decreased as a percentage of Systems Division revenues and of total revenues. This is due to overall higher margins on the MS4205 product line, the improvement in the market for test equipment, and a provision for obsolete inventory taken in Q1 fiscal 2003. The increase in labour and materials in absolute amounts, from Q2 fiscal 2003 to Q2 fiscal 2004, is mainly due to the increase in the number of test systems sold. Labour and materials for the first half of fiscal 2004 decreased from the level in fiscal 2003, as a result of improved cost of manufacture and the inventory provision taken in Q1 fiscal 2003. Research and Development
The decrease in research and development expenditures in absolute amounts, for the current quarter and for the first half of fiscal 2003 as compared to the same periods last year, is mainly due to the reduction in the number of Systems employees and projects since the restructuring that was undertaken in Q1 fiscal 2003. The launch of the design licensing business within the IP Division, resulted in R&D costs being recorded from the time of closure of the Semiconductor Division. For Q2 fiscal 2004, research and development, as a percentage of total revenues, decreased from Q2 fiscal 2003. This is again due to the reduced number of employees and projects since the Systems Division restructuring. For the 26 weeks ended October 24, 2003, research and development decreased as a percentage of total revenues as compared to the same period last year, mainly as a result of reduced level of R&D expense. In fiscal 2004, investment tax credits are not being recorded as an offset to R&D expense, whereas they represented an offset of $500,000 in Q2 fiscal 2003 and $923,000 for the first two quarters of fiscal 2003. S ales and Marketing
The increase in S&M expenses in absolute terms for the current quarter and for the first half of fiscal 2004 as compared to the same periods last year, is primarily related to the litigation expense in the IP Division. Further, a reversal of commissions previously accrued, and reversed in the 13 weeks ending October 25, 2002, biased the sales and marketing expense down for that period. The increase in S&M expenses as a percentage of revenues is due to increased costs of the litigation relative to reduced revenues. Further, during the 13 weeks ending October 25, 2002 a reversal of accrued commissions biased the sales and marketing expense down for that period. General and Administration
The decrease in G&A expenses in absolute amounts is driven by decreases in professional fees and subcontract expenses as the Company continues to make efforts to contain costs. The Company has reduced G&A labour costs as a result of the restructuring in September 2003, but their impact in the quarter was modest. G&A expenses generally maintained the same percentage of revenues throughout the period. During the current quarter, the Company recorded a foreign exchange gain of $125,000 and $311,000 for the year to date. In the prior year the foreign exchange gain was $2,000 for the 13 weeks ended October 25, 2002 and $128,000 for the 26 weeks ended October 25, 2002. Loss on disposal of long-term investment During Q2 fiscal 2004, the Company sold its investment in Chrysalis-ITS Incorporated to Rainbow Technologies, Inc. for net proceeds of $620,000. A loss of $162,000 resulted from the disposal of the investment, which had a book value of $782,000. The loss includes an estimate by management of escrowed funds that will not be utilized. A further loss of $82,000 was recorded in conjunction with the final resolution of escrow matters related to the disposition of Atmos Corporation in Q2 fiscal 2003. Income Taxes Income tax expense of $352,000 for Q2 fiscal 2004 and $650,000 for the 26 weeks ended October 24, 2003 was recorded to reflect the withholding tax on international royalty income. The Company has not recorded the future income benefit related to current year losses and earned ITC’s. Income tax expense of $155,000 for Q2 fiscal 2003 and $291,000 for the 26 weeks ended October 25, 2002, represented an effective tax rate of approximately 32%, applied to the ITC’s recorded in the quarter. Discontinued Operations The Discontinued Operations expense, related to the closure of the Semiconductor Division in the current quarter and the documentation of the direct revenues and expenses associated with that discontinued division in all earlier quarters are detailed in Note 2 to the Consolidated Financial Statements.
The Discontinued Operations expense for Q2 fiscal 2004 reflect operations of the Semiconductor Division until the restructuring, in addition to the restructuring expense of $4.8 million incurred at that time. The results for Q2 fiscal 2003 reflect the loss of $4.2 million, representing the costs of operation for the entire quarter. For the 26 weeks ended October 24, 2003, the loss of $8.1 million approximates the loss for the 26 weeks ended October 25, 2003, notwithstanding the restructuring charge in the former period. Liquidity and Capital Resources During the 26 weeks ended October 24, 2003, the Company generated a negative cashflow of $5.0 million from operations, as compared to a net cash outflow from operations of $5.3 million in the same period last year. Cash and short term marketable securities As of October 24, 2003, the Company had cash and short-term marketable securities of $37.5 million, compared to $42.3 million as of the end of fiscal 2003. Working capital decreased to $35.6 million at the end of Q2 fiscal 2004 from $41.0 million at the end of fiscal 2003. The decrease, mainly due to the use of cash and reduced accounts receivable during the quarter, is somewhat offset by increased accounts payable and accrued liabilities. Management believes that the Company is well capitalized with sufficient working capital to fund ongoing operations. A $10,000,000 bank credit facility is available to cover the fluctuations in cash requirements but was not used during the quarter. The available operating line is calculated using a formula based on accounts receivable. Accounts receivable Accounts receivable decreased to $4.7 million at the end of Q2 fiscal 2004, from $7.6 million at the end of fiscal 2003, due to a reduction in revenues between the first half of fiscal 2004 and the last half of fiscal 2003 as well as due to timing of collections. The Company employs financial instruments (principally forward exchange contracts) in the management of its foreign currency exposures, and has committed to sell, by April 20, 2004, US $3,000,000 at an average rate of 1.44. Inventory Inventory levels decreased to $3.2 million at the end of Q2 fiscal 2004, from $3.5 million at the end of fiscal 2003, due to routine drawdowns of stock. Capital assets During the first half of fiscal 2004, the Company’s capital assets decreased by $3.5 millions as a result of minimal capital additions, net of amortization of $1.8 million and writedown of assets of $2.2 million. The capital purchases were primarily for the Systems Division. Future income taxes recoverable The October 24, 2003 balance for Future Income Taxes Recoverable is $12.7 million, compared with $12.7 million at April 24, 2003. The Company’s view that this amount is more likely than not to be realized through its operations. The Company does not currently record investment tax credits earned as an offset to R&D expense, and any withholding taxes on international royalty income are record as income tax expense. Accounts payable and accrued liabilities Accounts payable and accrued liabilities decreased to $9.4 million at October 24, 2003, from $12.4 million at April 25, 2003, primarily due to the reduction in the accrual related to the April 25, 2003 restructuring and the timing of trade payables. Mortgage payable A mortgage of $6,000,000, at a fixed rate of 8.24% per annum and for a ten-year term, has been put in place to finance the Company’s principal physical facility, which went into service in December 1997. The remaining principal amount at the end of Q2 fiscal 2004 was $5.1 million, of which $199,000 is due within 12 months. The cost of the land and building was $7.9 million, less amortization of $1.6 million at the end of the quarter.
Risks and Uncertainties The Company expects that its future operating results may be subject to quarterly and annual fluctuations resulting from a variety of factors, including market conditions, changes in customer and geographic distribution, potential schedule slippages, and the possibility that its patents might be declared invalid. Sales to a relatively small number of customers account for a substantial portion of the Company’s total revenues. In the IP Division, revenues are primarily derived from a small number of large contracts, principally related to patent licensing agreements, each with finite payment terms. In the Systems Division, a portion of revenues in any fiscal quarter may result from customer orders received in the same quarter. Delays in booking patent licensing agreements or Systems orders may lead to significant volatility in financial performance, particularly in terms of quarterly results. The semiconductor industry is characterized by rapid technological change and evolving industry and customer requirements, specifications and standards. The Company’s success will depend on its ability to enhance its existing designs, create new intellectual property and test systems and to develop new designs, patent licensing agreements, and test systems on a timely and cost-effective basis. The Company’s current orientation to the semiconductor memory and networking equipment markets exposes its quarterly operating results to the influence of the business cycles in these markets. Furthermore, the Company is in litigation with two companies related to their alleged infringement of MOSAID’s intellectual property, and the quarterly legal costs of these actions may lead to significant volatility in quarterly results.
MOSAID TECHNOLOGIES INCORPORATED
See accompanying Notes to the Consolidated Financial Statements.
MOSAID TECHNOLOGIES INCORPORATED
See accompanying Notes to the Consolidated Financial Statements.
MOSAID TECHNOLOGIES INCORPORATED
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