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NeoMagic 10-Q 2009 UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D. C. 20549
Form
10-Q
(Mark
One)
For the
quarterly period ended May 3, 2009
OR
For the
transition period from
to
Commission
file number 000-22009
NEOMAGIC
CORPORATION
(Exact
Name of Registrant as Specified in Its Charter)
(408)
428-9725
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 ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “accelerated filer,” “large accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
Accelerated Filer ¨ Accelerated
Filer ¨ Non-
Accelerated Filer ¨ Smaller
Reporting Company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
The
number of shares of the Registrant’s Common Stock, $.001 par value, outstanding
at May 3, 2009 was 12,570,914.
NEOMAGIC CORPORATION
FORM
10-Q
INDEX
Part I. FINANCIAL INFORMATION
NEOMAGIC
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
(Unaudited)
The
accompanying notes are an integral part of these unaudited Condensed Financial
Statements.
NEOMAGIC CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands)
The
accompanying notes are an integral part of these unaudited Condensed Financial
Statements.
NEOMAGIC CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In
thousands)
The
accompanying notes are an integral part of these unaudited Condensed Financial
Statements.
NEOMAGIC CORPORATION
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
accompanying unaudited interim condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission and include the accounts of NeoMagic Corporation and its
wholly owned subsidiaries (collectively “NeoMagic” or the “Company”). Certain
information and footnote disclosures, normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America, have been condensed or omitted pursuant to such rules
and regulations. In the opinion of the Company, the financial statements reflect
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the financial position at May 3, 2009, and the operating
results and cash flows for the three months ended May 3, 2009 and April 27,
2008. These financial statements and notes should be read in conjunction with
the Company’s audited financial statements and notes thereto for the year ended
January 25, 2009, included in the Company’s Form 10-K filed with the Securities
and Exchange Commission.
The
Company does not believe its current cash and cash equivalents and investments
will satisfy its projected cash requirements through the next twelve months and
there exists substantial doubt about the Company’s ability to continue as a
going concern. If the Company experiences a material shortfall versus its plan
for fiscal 2010, it expects to take all appropriate actions to ensure the
continuing operation of its business and to mitigate any negative impact on its
cash position. The Company believes that it can take actions to generate cash by
selling or licensing intellectual property, seeking funding from strategic
partners, and seeking further equity or debt financing from financial sources.
We cannot assure you that additional financing will be available on acceptable
terms or at all. Beyond its first quarter fiscal 2010, the adequacy of the
Company’s resources will depend largely on its ability to complete additional
financing and its success in re-establishing profitable operations and positive
operating cash flows.
On
September 24, 2008, the Company announced a cessation of its efforts to raise
additional capital. As a result, NeoMagic proceeded with efforts to
substantially reduce its operating activities and reduce its on-going
expenditures by terminating employment for substantially all of its operational
and engineering employees in all worldwide locations. Beginning September 19,
2008, management, acting based upon a plan approved by the Board of Directors,
eliminated 52 positions in the Company. On September 23, 2008, the remaining
independent directors of the Company, Brett Moyer, Carl Stork and David
Tomasello, notified the Company that they were resigning as directors of
NeoMagic Corporation, effective September 23, 2008. Effective January
9, 2009, our Chief Financial Officer, Steven Berry, resigned his position with
the Company. There have been no appointments to the Board of Directors or a
replacement for our Chief Financial Officer. In February 2009, the Board of
Directors decided to cease operations in NeoMagic Israel and NeoMagic India.
These two entities no longer had employees.
The
Company’s operations consists primarily of supporting sales orders from its
existing customers, collecting the resulting receivables from such sales orders,
satisfying obligations, and administration of the corporation. Management will
continue to look for funding from strategic partners and will seek further
equity or debt financing from financial sources and other
opportunities.
The
results of operations for the three months ended May 3, 2009 are not necessarily
indicative of the results that may be expected for the year ending
January 31, 2010.
The first
fiscal quarters of 2010 and 2009 ended on May 3, 2009 and April 27, 2008,
respectively. The Company’s quarters generally have 13 weeks. The first quarter
of fiscal 2010 had 14 weeks and the first quarter of fiscal 2009 had 13 weeks.
The Company’s fiscal years generally have 52 weeks. Fiscal 2010 will have 53
weeks and fiscal 2009 had 52 weeks.
At May 3,
2009, the Company had several stock-based employee compensation plans, including
stock option plans and employee stock purchase plans. Stock options may be
issued to directors, officers, employees and consultants (“Service Providers”)
under the Company’s 2003 Stock Option Plan, Amended 1998 Stock Option Plan, and
1993 Stock Option Plan. The stock options generally vest over a four-year
period, have a maturity of ten years from the issuance date, and have an
exercise price equal to the closing price on the NASDAQ of the common stock on
the date of grant. Generally, unvested options are forfeited 30 to 90 days from
the date a Service Provider ceases to be a Service Provider, or in the case of
death or disability, the post-exercise period may extend for a period of up to
12 months. To cover the exercise of vested options, the Company issues new
shares from its authorized but unissued share pool. At May 3, 2009,
approximately 1,941,288, 151,421, and 2,800 shares of the Company’s
registered common stock were reserved for issuance under the 2003 Stock Option
Plan, Amended 1998 Stock Option Plan, and 1993 Stock Option Plan,
respectively.
In
accordance with the 2003 Stock Plan (the “2003 Plan”), the Board of Directors
may grant nonstatutory stock options and stock purchase rights to employees,
consultants and directors. Incentive stock options may be granted only to
employees. The 2003 Plan terminates in 2013. The Board of Directors determines
vesting provisions for stock purchase rights and options granted under the 2003
Plan. Stock options expire no later than ten years from the date of grant.
Generally stock options vest over a period of four years when granted to new
employees. In the event of voluntary or involuntary termination of employment
with the Company for any reason, with or without cause, all unvested options are
forfeited and all vested options must be exercised within a 90-day period, or as
set forth in the option agreement, or they are forfeited. Certain of the options
and stock purchase rights are exercisable immediately upon grant. However,
common shares issued on exercise of options before vesting are subject to
repurchase by the Company. As of May 3, 2009, no shares of common stock were
subject to this repurchase provision. Other options granted under the 2003 Plan
are exercisable during their term in accordance with the vesting schedules set
forth in the option agreement. As of May 3, 2009 there were 582, 908 options
issued and outstanding under the 2003 Plan. The number of shares reserved under
the 2003 Plan is subject to an automatic increase for unexercised forfeited
shares subject to options issued under the 1993 Plan. As of May 3, 2009, the
number of options outstanding under the 1993 Plan was 2,800.
Under the
1998 Nonstatutory Stock Option Plan (the “1998 Plan”), the Board of Directors
may grant nonstatutory stock options to employees, consultants and officers. The
1998 Plan terminated automatically in June 2008. No additional
options may be granted under the 1998 Plan. As of May 3, 2009 there
were 151,421 options issued and outstanding under the 1998 Plan.
On
December 22, 2005, the Company entered into an amendment to the 1998 Plan
to permit holders of certain stock options to voluntarily make irrevocable
advance elections to reduce the exercise period for such stock options. These
advance elections could qualify certain stock options for exemptions from the
potentially unfavorable tax effects imposed by Section 409A of the Internal
Revenue Code, and the proposed regulations issued thereunder (collectively,
“Section 409A”). Specifically, the 1998 Plan was amended to authorize and
provide the framework necessary for the implementation of a short-term deferral
exercise election; that is, certain eligible stock option holders were permitted
to elect to exercise stock options that vest in a given calendar year by no
later than March 15th of the following year. If an option holder made this
election, the stock option agreement underlying the eligible stock options
subject to the election was automatically amended to the extent necessary to
implement the election.
Under the
1993 Stock Plan (the “1993 Plan”), the Board of Directors may grant incentive
stock options to employees and nonstatutory stock options and stock purchase
rights to employees, consultants and directors. The 1993 Plan terminated as to
future grants in September 2003. The Board of Directors determined vesting
provisions for stock purchase rights and options granted under the 1993 Plan.
Stock options expire no later than ten years from the date of grant. Generally
stock options vest over a period of four years when granted to new employees. In
the event of voluntary or involuntary termination of employment with the Company
for any reason, with or without cause, all unvested options are forfeited and
all vested options must be exercised within a 90-day period, or as set forth in
the option agreement, or they are forfeited. Certain of the options and stock
purchase rights are exercisable immediately upon grant. However, common shares
issued on exercise of options before vesting are subject to repurchase by the
Company. As of May 3, 2009, no shares of common stock were subject to this
repurchase provision. Other options granted under the 1993 Plan are exercisable
during their term in accordance with the vesting schedules set forth in the
option agreement. Unexercised forfeited shares are transferable to the 2003 Plan
as provided within the 2003 Plan.
The 2006
Employee Stock Purchase Plan (“ESPP”) permits eligible employees to purchase
common stock through payroll deductions of up to 10% of the employee’s
compensation. The price of common stock to be purchased under ESPP is 85% of the
lower of the fair market value of the common stock at the beginning of the
offering period or at the end of the relevant purchase period. To cover the
exercise of vested options, the Company issues new shares from its authorized
but unissued share pool. At May 3, 2009, approximately 151,699 shares were
available for future purchase under the 2006 Employee Stock Purchase
Plan.
Adoption
of SFAS No. 123(R)
Effective
January 30, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”), which
requires the Company to measure the cost of employee services received in
exchange for all equity awards granted under its stock option plans and employee
stock purchase plans based on the fair market value of the award as of the grant
date. SFAS 123R supersedes Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation and Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”).
The Company has adopted SFAS 123R using the modified prospective application
method of adoption that requires the Company to record compensation cost related
to unvested stock awards as of January 30, 2006 by recognizing the
unamortized grant date fair value of these awards over the remaining service
periods of those awards with no change in historical reported earnings. Awards
granted after January 30, 2006 are valued at fair value in accordance with
provisions of SFAS 123R and recognized on a ratable basis over the service
periods of each award. The Company began using estimated forfeiture rates in the
first quarter of 2007 based on its historical experience.
Prior to
fiscal year 2007, the Company accounted for stock-based compensation in
accordance with APB 25 using the intrinsic value method, which did not require
that compensation cost be recognized for the Company’s stock awards provided the
exercise price was established at greater than or equal to 100% of the common
stock fair market value on the date of grant. Prior to fiscal year 2007, the
Company provided pro forma disclosure amounts in accordance with SFAS
No. 148, “Accounting for Stock-Based Compensation – Transition and
Disclosure” (SFAS No. 148), as if the fair value method defined by SFAS
No. 123 had been applied to its stock-based compensation.
Stock
Compensation Expense
The
following table shows total stock-based compensation expense included in the
accompanying Consolidated Condensed Financial Statements for the three months
ended May 3, 2009 and April 27, 2008.
For the
three months ended May 3, 2009 and April 27, 2008, the total compensation
cost related to unvested stock-based awards granted to employees under the stock
option plans but not yet recognized was approximately $542 thousand and $1.8
million, respectively, after estimated forfeitures. The cost will be recognized
on a straight-line basis over an estimated weighted average period of
approximately 2.11 years and 2.92 years for the three months ended May 3, 2009
and April 27, 2008, respectively, for stock options and will be adjusted if
necessary in subsequent periods if actual forfeitures differ from those
estimates.
There was
no outstanding compensation cost related to options to purchase common shares
under the ESPP for the three months ended May 3, 2009 as the ESPP was suspended
in July 2008. For the three months ended April 27, 2008, the
total compensation cost related to options to purchase common shares under the
ESPP but not yet recognized was approximately $680 thousand. This cost would be
recognized on a straight-line basis over a weighted-average period of
approximately 1.1 years for the three months ended April 27,
2008.
There
were no net cash proceeds from the sales of common stock under employee stock
purchase and stock option plans for the three months ended May 3, 2009 and
April 27, 2008. No income tax benefit was realized from the sales of common
stock under employee stock purchase and stock option plans during the three
months ended May 3, 2009 and April 27, 2008. In accordance with SFAS
123(R), the Company presents excess tax benefits from the exercise of stock
options, if any, as financing cash flows rather than operating cash
flows.
Determining
Fair Value
Valuation
and amortization method – The Company estimates the fair value using a
Black-Scholes option pricing formula and a single option award approach. This
fair value is then amortized ratably over the requisite service periods of the
awards, which is generally the vesting period.
Expected
term – The Company’s expected term represents the period that the Company’s
stock-based awards are expected to be outstanding. The expected term for first
quarter fiscal 2009 is based upon historical review. The Company believes that
this method meets the requirements for SFAS 123(R). There were no options
granted for the quarter ended May 3, 2009.
Expected
Volatility – The Company’s expected volatility for the quarter ended May 3, 2009
is computed based on the Company’s historical stock price volatility. The
Company believes historical volatility to be the best estimate of future
volatility and noted no unusual events that might indicate that historical
volatility would not be representative of future volatility.
Risk-Free
Interest Rate – The risk-free interest rate used in the Black-Scholes option
valuation method is based on the implied yield currently available on U.S.
Treasury zero-coupon issues with a remaining term equal to the expected term of
the option.
Expected
Dividend – The dividend yield reflects that the Company has never paid any cash
dividends and has no intention to pay dividends in the foreseeable
future.
Estimated
Forfeiture – The estimated forfeiture rate was based on an analysis of the
Company’s historical forfeiture rates. The estimated average forfeiture rate for
the quarters ended May 3, 2009 and April 27, 2008 were 93.8% and 33.9%,
respectively, based on historical forfeiture experience.
In the
three months ended May 3, 2009 and April 27, 2008, respectively, the fair
value of each option grant was estimated on the date of grant using the
Black-Scholes option valuation model and the ratable attribution approach using
a dividend yield of 0% and the following weighted average
assumptions: For the quarter ended May 3, 2009 there were no stock
options granted or ESPP shares issued.
Stock
Options and Awards Activities
The
following is a summary of the Company’s stock option activity under the stock
option plans as of May 3, 2009 and related information:
The
aggregate intrinsic value in the table above represents the total pretax
intrinsic value, based on the Company’s closing stock price of $0.01 per share
at May 1, 2009, the last market day of our fiscal quarter ended May 3, 2009,
which would have been received by option holders had all option holders
exercised their options that were in-the-money as of that date. There were no
in-the-money options exercisable as of May 3, 2009 and April 27,
2008.
The
exercise prices for options outstanding and exercisable as of May 3, 2009 and
their weighted average remaining contractual lives were as follows:
The
following data shows the amounts used in computing income (loss) per share and
the effect on the weighted-average number of shares of diluted potential common
stock.
During
the three months ended May 3, 2009 and April 27, 2008, the Company excluded
from the computation of basic and diluted loss per share options and warrants to
purchase 3,424,012 and 5,271,106 shares of common stock, respectively, because
the effect would be anti-dilutive.
All
highly liquid investments purchased with an original maturity of 90 days or less
are considered cash equivalents. Investments with an original maturity of
greater than 90 days, but less than one year, are classified as short-term
investments.
Investments
in debt securities are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost with corresponding premiums or discounts
amortized to interest income over the life of the investment. Securities not
classified as held-to-maturity are classified as available-for-sale and are
reported at fair market value. Unrealized gains or losses on available-for-sale
securities are included, net of tax, in stockholders’ equity until their
disposition. Realized gains and losses and declines in value judged to be other
than temporary on available-for-sale securities are included in interest income
and other. The cost of securities sold is based on the specific identification
method.
All cash
equivalents and short-term investments are classified as available-for-sale and
are recorded at fair market value. All available-for-sale securities have
maturity dates of less than one year from the balance sheet dates. For all
classifications of securities, cost approximates fair market value as of May 3,
2009 and January 25, 2009, and consists of the following (in
thousands):
Fair
Value of Financial Instruments
On
January 28, 2008, the Company adopted Statement of Financial Accounting
Standards No. 157, “Fair Value Measurements” (“SFAS 157”) which defines
fair value, establishes a framework for using fair value to measure assets and
liabilities, and expands disclosures about fair value measurements. SFAS 157
applies whenever other statements require or permit assets or liabilities to be
measured at fair value. SFAS 157 is effective for the Company beginning
January 28, 2008, except for non-financial assets and liabilities that are
recognized or disclosed at fair value in the financial statements on a
nonrecurring basis, for which application has been deferred for one
year.
The
Company utilizes the market approach to measure fair value for its financial
assets and liabilities. The market approach uses prices and other relevant
information generated by market transactions involving identical or comparable
assets or liabilities.
FAS 157
includes a fair value hierarchy that is intended to increase consistency and
comparability in fair value measurements and related disclosures. The fair value
hierarchy is based on inputs to valuation techniques that are used to measure
fair value that are either observable or unobservable. Observable inputs reflect
assumptions market participants would use in pricing an asset or liability based
on market data obtained from independent sources while unobservable inputs
reflect a reporting entity’s pricing based upon their own market assumptions.
The fair value hierarchy consists of the following three levels:
The
following table summarizes the Company’s financial assets measured at fair value
on a recurring basis as of May 3, 2009 and the basis for that measurement (in
thousands):
The
Company’s financial assets and liabilities are valued using market prices on
both active markets (Level 1) and less active markets (Level 2). Level 1
instrument valuations are obtained from real-time quotes for transactions in
active exchange markets involving identical assets. As of May 3, 2009, the
Company did not have any assets with valuations obtained from readily-available
pricing sources for comparable instruments (Level 2 assets) or those without
observable market values that would require a high level of judgment to
determine fair value (Level 3 assets).
FASB’s
Statement No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities, Including an Amendment of FASB Statement No. 115”
(“SFAS 159”) also became effective the first quarter of fiscal 2009. This option
was not chosen, so marketable securities continue to be accounted for as
available-for-sale securities under SFAS 115 “Accounting for Certain Investments
in Debt and Equity Securities.”
Inventories
are stated at the lower of cost or market value. Cost is determined by the
first-in, first-out method. The Company writes down the inventory value for
estimated excess and obsolete inventory, based on management’s assessment of
future demand and market conditions. If actual future demand or market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required.
Unrealized
gains or losses on the Company’s available-for-sale securities are included in
comprehensive loss and reported separately in stockholders’ equity.
Net
comprehensive income (loss) includes the Company’s net income (loss), as well as
accumulated other comprehensive income (loss) on available-for-sale securities.
Net comprehensive income (loss) for the three months ended May 3, 2009 and
April 27, 2008, respectively, is as follows (in thousands):
Total
accumulated other comprehensive income (loss) was $0 and $44,000 at May 3, 2009
and April 27, 2008, respectively. Accumulated other comprehensive income
(loss) consists entirely of unrealized gains on available for sale
securities.
In
January 2007, the Company entered into a new capital lease to replace an
expiring lease for software licenses used in the design of its semiconductor
products. Obligations under capital leases represent the present value of future
payments under the lease agreements. Property, plant and equipment include the
following amounts for leases that have been capitalized:
The
capital leases were fully amortized as of January 25, 2009 due to the
restructuring activities in fiscal 2009 and the discontinuation of semiconductor
development efforts utilizing the capitalized software.
In
January 2009, the Company settled in full its outstanding obligation under
capital leases of $420 thousand for a cash payment of $25,000.
On
December 6, 2006, NeoMagic closed the sale and issuance of
(i) 2,500,000 shares of its Common Stock, $.001 par value (the “2006
Shares”), and (ii) warrants to purchase 1,250,000 shares of Common Stock at
an exercise price of $5.20 per share (the “2006 Warrants”). The Company sold and
issued the 2006 Shares and the 2006 Warrants for an aggregate offering price
before deducting any expenses of $11,450,000. After deducting offering costs,
net cash proceeds received by the Company were approximately $10.5 million. The
issuance and sale of the 2006 Shares and the 2006 Warrants was registered under
a shelf Registration Statement on Form S-3, which was declared effective on
October 31, 2006 (the “Primary S-3”).
The 2006
Warrants provide that each holder of a 2006 Warrant may exercise its 2006
Warrant for shares of Common Stock at an exercise price of $5.20 per share, but
no 2006 Warrant was exercisable for cash until one year after its initial
issuance. The 2006 Warrants, however, became net exercisable on June 6,
2007. The 2006 Warrants provide for adjustments to the exercise price per share
and number of shares for which the 2006 Warrants may be exercised in certain
circumstances, including stock splits, stock dividends, certain distributions,
reclassifications and, subject to a minimum price of $4.58 per share, dilutive
issuances (i.e., price based anti-dilution adjustments).
The 2006
Warrants were initially classified as a liability in accordance with EITF No.
00-19, “Accounting for Derivative Financial Instruments Indexed to and
Potentially Settled in a Company’s Own Stock” (“EITF 00-19”). Although the 2006
Warrants as originally issued provided that shares of common stock may be issued
upon a cash exercise under a private placement exemption if the Primary S-3 is
not effective, the staff of the SEC advised the Company that the Company would
be obligated to physically settle the contract only by delivering registered
shares. Under EITF 00-19, if the Company must settle the contract by delivering
registered shares, it is assumed that the Company will be required to net-cash
settle the contract. As a result, the 2006 Warrants were initially required to
be classified as a liability. The fair value of the 2006 Warrants was estimated
to be $5.7 million at the date of issue using the Black-Scholes option pricing
model with the following assumptions: risk-free interest rate of 4.53%; no
dividend yield; an expected life of 5 years; and a volatility factor of 94.9%.
The Company is required to revalue the cash exercisable 2006 Warrants at the end
of each reporting period with the change in value reported in the statement of
operations as a “gain or loss from the change in fair value on revaluation of
warrant liability” in the period in which the change occurred. In fiscal 2008
and fiscal 2007, the Company recognized a gain on the change in fair value on
revaluation of warrant liability of $0.8 million and $1.8 million, respectively.
Since the warrants were initially classified as a liability, the proceeds
allocated to equity were the gross proceeds of $11,450,000 less the fair value
of the warrants of $5,688,000 and less the offering costs allocated to the
warrants of $273,000. The total offering costs of $974,000 were allocated
between the 2006 Warrants and the common stock based on their respective fair
values. Offering costs of $273,000 were allocated to the 2006 Warrants and
reported as interest expense in the statement of operations for fiscal
2007.
In July
2007, the Company offered holders of 2006 Warrants, the ability to amend their
outstanding warrants. The amended 2006 Warrants are only exercisable on a net
share settlement basis and are no longer cash exercisable. Since holders of
amended 2006 warrants cannot make or execute a cash exercise, the Company will
not be required to register the shares issued upon exercise of such amended
warrants under any circumstances. Accordingly, as of July 27, 2007, the
amended 2006 Warrants were no longer required to be classified as a liability
under EITF 00-19 and were reclassified as equity. The Company completed its
warrant exchange offer on July 27, 2007. At that time, 96% of all
outstanding 2006 Warrants were amended, representing 1,200,000 shares of the
1,250,000 shares subject to warrants that had been available for amendment. One
investor holding a warrant to purchase 50,000 shares chose not to participate.
The 2006 Warrants were revalued on July 27, 2007, the date the warrant
exchange offer was completed, and the Company recognized a loss on the change in
fair value on revaluation of warrant liability of $248,000. The fair value of
the 2006 Warrants was estimated to be $3.1 million. The $3.0 million value of
the amended 2006 Warrants was reclassified to equity as of July 27, 2007
and the $0.1 million value of the 2006 Warrants that were not amended remained
on the Company’s balance sheet as a liability of $100 as of May 3, 2009 and $85
as of January 25, 2009.
The
Company maintained a full valuation allowance on its net deferred tax assets as
of May 3, 2009 and April 27, 2008. The valuation allowance was determined
in accordance with the provisions of Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes, or SFAS No. 109, which requires
an assessment of both positive and negative evidence when determining whether it
is more likely than not that deferred tax assets are recoverable; such
assessment is required on a jurisdiction by jurisdiction basis. The Company
intends to maintain a full valuation allowance on the U.S. deferred tax assets
until sufficient positive evidence exists to support reversal of the valuation
allowance.
In June
2006, the Financial Accounting Standards Board (FASB) issued Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with Statement of Financial
Accounting Standards No. 109, “Accounting for Income Taxes” (“FAS 109”).
This interpretation prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition of tax benefits, classification on the balance sheet, interest and
penalties, accounting in interim periods, disclosure, and transition. The
Company adopted FIN 48 effective January 29, 2007. In accordance with FIN
48, paragraph 19, the Company decided to classify interest and penalties as a
component of tax expense. As a result of the implementation of FIN 48, the
Company recognized a $101,000 decrease in liability for unrecognized tax
benefits, which was accounted for as an adjustment to the January 29, 2007
balance of retained earnings.
The
Company has unrecognized tax benefits of approximately $2.3 million as of
January 27, 2008, of which $571 thousand if recognized would result in a
reduction of the Company’s effective tax rate. The Company recorded a decrease
of its unrecognized tax benefits of approximately $0 and $296 thousand as of May
3, 2009 and April 27, 2008, respectively.
Over the
next twelve months, the Company’s existing tax positions may continue to
generate an increase in unrecognized tax benefits subject to management’s
periodic reviews of the Company’s uncertain tax positions. However, the Company
does not expect the changes in unrecognized tax benefits of its tax positions,
if any, will result in recognition of an uncertain tax liability.
The
Company is subject to audit by the IRS for all years since fiscal 2003, and to
audit by the California Franchise Tax Board for all years since fiscal
2001.
Commitments
In May
1996, the Company moved its principal headquarters to a facility in Santa Clara,
California, under a non-cancelable operating lease that expired in April 2003.
In January 1998, the Company entered into a second non-cancelable
operating lease for an adjacent building, which became its new corporate
headquarters. This lease had a co-terminus provision with the original lease
that expired in April 2003. In March 2002, the Company extended the term for
45,000 square feet under this lease for another seven years with a termination
date of April 2010. In January 2009, the Company defaulted on its lease, vacated
the premises, and is currently in negotiations with the landlord to settle the
outstanding debt but cannot provide assurance as to whether a settlement
agreement can be reached on acceptable terms, or at all. In January
2009, the Company moved its principal headquarters to a facility in San Jose,
California, under a non-cancelable operating lease that expires in January 2010.
The Company leased offices in Israel and India under operating leases that
expired in September 2008 and December 2008, respectively. During the quarter
ended January 25, 2009 the leased offices in Israel and India were vacated. As
of May 3, 2009, future minimum lease payments under operating leases are as
follows:
On
September 30, 2008, the Company received notice from the Landlord for its
facility lease that the Company would be in default of its lease if rent payment
arrearages were not paid within five days of the date of notice. Such rent
payment arrearages were not paid by the Company within five days of the date of
notice and are not paid as of the date of this filing. Therefore, the Company is
in default of its headquarter facility lease agreement. Upon a default of the
lease, the Landlord has the right to proceed against the Company for, among
other things, late fees, unpaid rent, attorney’s fees and costs and possession
of the premises. In addition, the Landlord shall have the right to apply the
Company’s security deposit of $176,500 to any rent or other amounts owed to the
Landlord. Upon such application of the security deposit, the Company shall be
required to deposit with the Landlord an amount sufficient to restore the
security deposit to its original amount and the Company’s failure to timely
restore the security deposit shall constitute a material breach of the
lease. Subsequent to our fiscal year ended January 25, 2009, we
received a notice of breach of lease and have been sued by our
Landlord. The Company is currently in settlement negotiations with
the Landlord, but cannot provide assurance as to whether a settlement agreement
can be reached on acceptable terms, or at all.
Design
tool software licenses
We have
commitments under time-based subscription licenses for design tool software of
$285,000 as of May 3, 2009. We have received notice from our vendor
that we are in default of the license agreement and they are seeking the
acceleration of an additional $285,000, which would be payable in October
2009. The Company is currently in settlement negotiations with its
design tool software vendor, but cannot provide assurance as to whether a
settlement agreement can be reached on acceptable terms, or at all.
The
Company generally sells its products with a limited warranty and a limited
indemnification of customers against intellectual property infringement claims.
The Company accrues for known warranty and indemnification issues if a loss is
probable and can be reasonably estimated, and accrues for estimated incurred but
unidentified claims based on historical activity. The accrual and the related
expense for known claims was not significant as of and for the three month
periods ended May 3, 2009 and April 27, 2008, due to product testing, the
short time between product shipment and the detection and correction of product
failures, and a low historical rate of payments on indemnification
claims.
In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141 (revised 2007), or SFAS No. 141(R), Business Combinations.
Under SFAS No. 141(R), an entity is required to recognize the assets
acquired, liabilities assumed, contractual contingencies, and contingent
consideration at their fair value on the acquisition date. It further requires
that acquisition-related costs be recognized separately from the acquisition and
expensed as incurred, restructuring costs generally be expensed in periods
subsequent to the acquisition date, and changes in accounting for deferred tax
asset valuation allowances and acquired income tax uncertainties after the
measurement period impact income tax expense. In addition, acquired in-process
research and development, or IPR&D is capitalized as an intangible asset and
amortized over its estimated useful life. We are required to adopt the
provisions of SFAS No. 141(R) beginning with our fiscal quarter ending
April 26, 2009. The adoption of SFAS No. 141(R) is expected to change
our accounting treatment for business combinations on a prospective basis
beginning in the period it is adopted.
In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160, or SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements—an amendment of Accounting Research Bulletin No. 51.
SFAS 160 establishes accounting and reporting standards for ownership interests
in subsidiaries held by parties other than the parent, the amount of
consolidated net income attributable to the parent and to the noncontrolling
interest, changes in a parent’s ownership interest, and the valuation of
retained noncontrolling equity investments when a subsidiary is deconsolidated.
SFAS 160 also establishes disclosure requirements that clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. SFAS 160 is effective for fiscal years beginning after
December 15, 2008. The adoption of SFAS 160 did not have an impact on the
Company’s consolidated financial position, results of operations and cash
flows.
In
March 2008, the FASB issued Statement of Financial Accounting Standards
No. 161, or SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133. SFAS 161
requires enhanced disclosures about a company’s derivative and hedging
activities. SFAS 161 is effective for financial statements issued for fiscal
years beginning after December 15, 2008. The adoption of SFAS 161 did
not have a material impact on the Company’s results of operations, financial
position or financial statement disclosures as applicable.
In
February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective
Date of FASB Statement No. 157” (“FSP 157-2”), to partially defer FASB
Statement No. 157, “Fair Value Measurements” (“FAS 157”). FSP 157-2 defers
by one year the effective date of FAS 157 for non-financial assets and
non-financial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually),
which for NeoMagic is effective beginning January 26, 2009. The adoption of
FSP 157-2 did not have a material impact on the Company’s results of
operations, financial position or financial statement disclosures as
applicable.
On
April 25, 2008, the Financial Accounting Standards Board issued FASB Staff
Position (FSP) FAS 142-3, “Determination of the Useful Life of Intangible Asset”
(“FSP 142-3”). FSP 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS 142, “Goodwill and Other Intangible
Assets”. The intent of FSP 142-3 is to improve the consistency between the
useful life of a recognized intangible asset under SFAS 142 and the period of
expected cash flows used to measure the fair value of the asset under SFAS
141(R), “Business Combinations”, and other U.S. generally accepted accounting
principles. FSP 142-3 is effective for NeoMagic beginning January 26, 2009.
Earlier adoption is prohibited.
In April
2009, the FASB released three FSPs intended to provide additional application
guidance and enhanced disclosures regarding fair value measurements and
impairments of securities. FSP FAS 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly” (“FSP 157-4”),
provides additional guidelines for estimating fair value in accordance with
SFAS157. FSP FAS 115-2, “Recognition and Presentation of Other-Than-Temporary
Impairments” (“FSP 115-2”), provides additional guidance related to the
disclosure of impairment losses on securities and the accounting for impairment
losses on debt securities. FSP 115-2 does not amend existing guidance related to
other-than-temporary impairments of equity securities. FSP FAS 107-1 and APB
28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP
107-1 and APB 28-1”), increases the frequency of fair value disclosures. All of
the aforementioned FSPs are effective for interim or annual periods ending after
June 15, 2009 and will be effective for the Company beginning with the
third quarter of 2010. The Company does not expect the adoption of these FSPs
will have a material impact on its results of operations, financial position or
its financial statement disclosures as applicable.
In May
2009, the FASB issued FSP 165, “Subsequent Events” (“FAS 165”), which establish
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are
issued. FAS 165 is for interim or annual periods ending after
June 15, 2009 and will be effective for the Company beginning with the
third quarter of 2010. The adoption of FAS 165 is not expected to have a
material effect on the Company’s financial statements.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the American Institute of Certified Public Accountants
(“AICPA”) and the SEC did not or are not believed by management to have a
material impact on the Company’s present or future consolidated financial
statements.
When used
in this discussion, the words “expects,” “anticipates,” “believes” and similar
expressions are intended to identify forward-looking statements. Such statements
reflect management’s current intentions and expectations. However, actual events
and results could vary significantly based on a variety of factors including,
but not limited to: customer acceptance of new NeoMagic products, the market
acceptance of handheld devices developed and marketed by customers that use our
products, our ability to execute product and technology development plans on
schedule, and our ability to access advanced manufacturing technologies in
sufficient capacity without significant cash pre-payments or investment.
Examples of forward-looking statements include statements about our expected
revenues, our competitive advantage in our markets, the potential market for our
products, our expected production timelines, our customer base and our need for
additional financing beyond the next 12 months. These statements are subject to
significant risks and uncertainties, including those set forth below under
Item 1A of Part I of this Form 10-K, that could cause actual results to
differ materially from those projected. 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, to reflect any changes in our expectations with regard thereto
or any changes in events, conditions or circumstances on which any such
statement is based.
Overview
NeoMagic
Corporation was incorporated in California in May 1993 and subsequently
reincorporated in Delaware in February 1997.
Due to
the deteriorating financial markets during fiscal year 2009 and the Company’s
inability to raise additional cash, in September 2008, the Board of Directors
and Management of NeoMagic decided to significantly reduce our operations and
cost structure. The Company has halted the development of new silicon
and is currently focusing on completed device designs which may or may not use
our current inventory of chips. We continue to deliver semiconductor
chips (primarily from our MiMagic 3 product line), software and device designs
to enable new, multimedia handheld devices. Our solutions offer low power
consumption, small form-factor and high performance processing. As part of our
complete system solution, we deliver a suite of middleware and sample
applications for imaging, video and audio functionality, and we provide multiple
operating system ports with customized drivers for our products. Our product
portfolio includes semiconductor solutions known as Applications Processors. Our
Applications Processors are sold under the “MiMagic” brand name with a focus on
enabling high performance multimedia within a low power consumption environment.
In mobile phones, our Applications Processors are designed to work side-by-side
with baseband processors that are used for communications functionality. Target
customers for our products include manufacturers of mobile phones and other
handheld devices.
We
believe multimedia handheld devices will continue to feature increased
functionality including: advanced camera applications, highly compressed video
using H.264 video standards, 3D graphics for gaming, and high quality audio. Our
strategy is to become a leading provider of multimedia system solutions
by:
In the
past, we provided graphics processor semiconductors to top notebook computer
manufacturers. In April 2000, we began to exit the graphics processor market.
However, the majority of our historical net sales through the end of fiscal 2002
continued to come from these products. We do not expect to have revenue related
to these products in the future. We believe that we were one of the first
companies to adopt large amounts of on-chip memory for commercial applications.
Many industry sources consider our graphics processors to be the semiconductor
industry’s first commercially successful embedded DRAM products. Currently,
embedded DRAM technology is used broadly in many applications. On
February 15, 2008, we completed the sale of selected patents, which
included our embedded DRAM patents, and a patent application to Faust
Communications Holdings, LLC for $12.5 million, providing net proceeds of $9.5
million after agency commissions. We have retained a worldwide, non-exclusive,
royalty-free license to use the technology covered by these patents and patent
application for all of our current and future products.
The
Company’s fiscal year end is the last Sunday in January. The first fiscal
quarters of 2010 and 2009 ended on May 3, 2009 and April 27, 2008,
respectively. The Company’s quarters generally have 13 weeks. The first quarter
of fiscal 2010 had 14 weeks and the first quarter of and fiscal 2009 had 13
weeks. The Company’s fiscal years generally have 52 weeks. Fiscal
year 2010 has 53 weeks and fiscal year 2009 had 52 weeks.
Critical
Accounting Policies and Estimates
Our
condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of such statements requires us to make estimates and assumptions
that affect the reported amounts of revenues and expenses during the reporting
period and the reported amounts of assets and liabilities as of the date of the
financial statements. Our estimates are based on historical experience and other
assumptions that we consider to be appropriate in the circumstances. However,
actual future results may vary materially from our estimates.
We
believe that the following accounting policies are “critical” as defined by the
SEC, in that they are both highly important to the portrayal of our financial
condition and results, and require difficult management judgments and
assumptions about matters that are inherently uncertain:
There
have been no significant changes to these policies from the disclosures noted in
our Annual Report on Form 10-K for the fiscal year ended January 25,
2009.
Results
of Operations
Revenue
Net
revenue was $408 thousand for the three months ended May 3, 2009, compared to
$592 thousand for the three months ended April 27, 2008, and consisted
entirely of net product revenue in both quarters. There was no licensing revenue
in either quarter. Net product revenue decreased primarily due to a $165
thousand decrease in shipments of our MiMagic 3 applications processor, and a
decrease in shipments of our MiMagic 6+ application processor of $20 thousand.
The decreased shipments of our MiMagic 3 application processor were primarily
due to no shipments to Exadigm and decreased shipments to Flextronics (formerly
Solectron) for production in Singapore for use in an automated toll-collection
system.
Product
sales to customers located outside the United States (including sales to the
foreign operations of customers with headquarters in the United States, and
foreign system manufacturers that sell to United States-based OEMs) accounted
for 100% and 98% of product revenue in the three months ended May 3, 2009 and
April 27, 2008. In the first quarters of fiscal 2010 and fiscal 2009, 100%
and 90%, respectively, of our revenue resulted from the sale of our MiMagic 3
application processor to Flextronics (formerly Solectron) for production in
Singapore for use in an automated toll-collection system. We expect that export
sales will continue to represent the majority of our product
revenue.
Our
customer base can shift significantly from period to period as some customer
programs end and new programs do not always emerge to replace them. In addition,
new customers are often added from period to period. All sales transactions were
denominated in United States dollars. The following is a summary of the
Company’s product revenue by major geographic area:
The
following customers accounted for more than 10% of product revenue:
Gross
Profit
Gross
profit was $241 thousand and $126 thousand for the three months ended May 3,
2009 and April 27, 2008, respectively. The increase in gross profit is
primarily due to a reduction in cost of our MM3 application
processor.
Research
and Development Expenses
Our
Research and Development for system products has been reduced to two internal
employees in combination with external Contractors. Our development of chip
products has been terminated. Research and development expenses are
primarily directed to development for the mobile television, wireless IP camera,
and multimedia-enriched handsets markets. Research and development expenses
include compensation and associated costs relating to development personnel,
outside engineering consulting, amortization of intangible assets and
prototyping costs, which are comprised of photomask costs and pre-production
wafer costs. Research and development expenses were ($497) thousand and $3.1
million for the three months ended May 3, 2009 and April 27, 2008,
respectively. These expenses include stock based compensation of $3 thousand and
$273 thousand for the three months ended May 3, 2009 and April 27, 2008,
respectively. Research and development expenses decreased in the first quarter
of fiscal 2010 compared to the first quarter of fiscal 2009 primarily due to
decreased labor costs and patent related activity including cancellation of a
patent transfer.
Sales,
General and Administrative Expenses
Sales,
general and administrative expenses were $1.1 million and $1.8 million for the
three months ended May 3, 2009 and April 27, 2008, respectively. These
expenses include stock-based compensation of $90 thousand and $211 thousand for
the three months ended May 3, 2009 and April 27, 2008 respectively. Sales,
general and administrative expenses decreased primarily due to
decreased labor costs, legal and audit fees, and operational
expenses
Gain
on Sale of Patents
In the
first quarter of fiscal 2009 we completed the sale of 18 non-essential patents,
which included our embedded DRAM patents, and a patent application to Faust
Communications Holdings, LLC for $12.5 million, providing net proceeds of $9.5
million after agency commissions. We have retained a worldwide, non-exclusive,
royalty-free license to use the technology covered by these patents and patent
application for all of our current and future products. The patents sold in the
first quarter of fiscal 2009 do not relate to products NeoMagic currently sells
or plans to sell. There were no patent sales in the first quarter of fiscal
2010.
Stock
Compensation
Stock
compensation expense was $97 thousand and $492 thousand for the three months
ended May 3, 2009 and April 27, 2008, respectively. Stock compensation
expense recorded in cost of revenues, research and development expenses and
selling, general and administrative expenses for the three months ended May 3,
2009 and April 27, 2008, is the amortization of the fair value of
share-based payments made to employees and members of our board of directors in
the form of stock options and purchases under the employee stock purchase plan
as we adopted the provision of SFAS No. 123 (R) on the first day of
fiscal 2007 (See Note 2). The fair value of stock options granted and rights
granted to purchase our common stock under the employee stock purchase plan is
recognized as expense over the employee requisite service period.
Interest
Income and Other
The
Company earns interest on its cash and short-term investments. There
was minimal interest and other income for the quarter ended May 3,
2009. For the quarter ended April 27, 2008, the Company earned
interest and other income of $0.1 million. The decrease is primarily due to
lower average cash and short-term investment balances and decreased interest
rates.
Interest
Expense
The
Company incurred minimal interest expense in the quarter ended May 3,
2009. Interest expense for the quarter ended April 27, 2008 was $10
thousand. Interest expense recorded in the first quarters of fiscal 2009
represents interest on our capital leases (See Note 7). The
decreased interest expense is due to declining principal balances.
Gain
from Change in Fair Value of Warrant Liability
The
Company did not record a gain in first quarter 2010 compared to a gain of $25
thousand in the first quarters of fiscal 2009, respectively, for the change in
fair value on revaluation of its warrant liability associated with its warrants
issued on December 6, 2006 (the “2006 Warrants”). The Company is required
to revalue certain of the 2006 Warrants at the end of each reporting period with
the change in value reported in the statement of operations as a “gain (loss)
from change in fair value of warrant liability” in the period in which the
change occurred. We calculate the fair value of the warrants outstanding using
the Black-Scholes model (see Note 8). Following the warrant exchange in the
second quarter of fiscal 2008, the number of 2006 Warrants subject to quarterly
re-evaluation has decreased from warrants to purchase 1,250,000 shares to a
warrant to purchase 50,000 shares, which significantly decreased the magnitude
of the revaluation for the first quarter of fiscal 2009.
Income
Taxes
The
Company did not incur an income tax expense in first quarter fiscal
2010. Income tax expense was $8 thousand for the first quarter fiscal
2009. We did not record a provision for domestic income taxes in the first
quarter of fiscal 2010 or fiscal 2009, as we anticipate either an operating loss
for the fiscal year or utilization of net operating losses.
Liquidity
and Capital Resources
The
Company’s cash, cash equivalents and short-term investments decreased by $140
thousand in the three months ended May 3, 2009 to $43 thousand from $183
thousand at January 25, 2009.
The
Company does not believe its current cash and cash equivalents and investments
will satisfy its projected cash requirements through the next twelve months and
there exists substantial doubt about the Company’s ability to continue as a
going concern. If the Company experiences a material shortfall versus its plan
for fiscal 2010, it expects to take all appropriate actions to ensure the
continuing operation of its business and to mitigate any negative impact on its
cash position. The Company believes that it can take actions to generate cash by
selling or licensing intellectual property, seeking funding from strategic
partners, and seeking further equity or debt financing from financial sources.
We cannot assure you that additional financing will be available on acceptable
terms or at all. Beyond its first quarter fiscal 2010, the adequacy of the
Company’s resources will depend largely on its ability to complete additional
financing and its success in re-establishing profitable operations and positive
operating cash flows.
On
September 24, 2008, the Company announced a cessation of its efforts to raise
additional capital. As a result, NeoMagic proceeded with efforts to
substantially reduce its operating activities and reduce its on-going
expenditures by terminating employment for substantially all of its operational
and engineering employees in all worldwide locations. Beginning September 19,
2008, management, acting based upon a plan approved by the Board of Directors,
eliminated 52 positions in the Company. On September 23, 2008, the remaining
independent directors of the Company, Brett Moyer, Carl Stork and David
Tomasello, notified the Company that they were resigning as directors of
NeoMagic Corporation, effective September 23, 2008. Effective January
9, 2009, our Chief Financial Officer, Steven Berry, resigned his position with
the Company. There have been no appointments to the Board of Directors or a
replacement for our Chief Financial Officer.
Cash and
cash equivalents used in operating activities for the three months ended May 3,
2009 was $140 thousand, compared to $4.0 million of net cash used in operating
activities for the three months ended April 27, 2008. The net cash used in
operating activities for the three months ended May 3, 2009 was primarily due to
net loss of $307 off-set by a gain on debt forgiveness of $24 thousand, an
increase in accounts receivable of $51 thousand, a decrease in accounts payable
of $66 thousand, and a non-cash expense stock based compensation of $97
thousand. The net cash used in operating activities for the three months ended
April 27, 2008 was primarily due to net income of $4.9 million reduced by
the non-operating gain on the sale of patents of $9.5 million, a decrease in
income taxes payable of $0.3 million and a decrease in accounts payable $0.2
million, partially offset by a decrease in accounts receivable of $0.3 million
and non-cash stock based compensation of $0.5 million.
There was
minimal cash provided by investing activities for the three months ended May 3,
2009. Net cash provided by investing activities for the three months ended
April 27, 2008 was $7.0 million. The net cash provided by investing
activities for the three months ended April 27, 2008 was primarily due to
the net proceeds from the sale of patents of $9.5 million partially offset by
net purchases of short-term investments of $2.5 million.
There was
no cash used in financing activities for the three months ended May 3,
2009. Net cash used in financing activities was $ 0.1 million
for the three months ended April 27, 2008. The net cash used in financing
activities for the three months ended April 27, 2008 was due to payments on
capital lease obligations of $0.1 million.
On
September 30, 2008, the Company received notice from the Landlord for its
facility lease that the Company would be in default of its lease if rent payment
arrearages were not paid within five days of the date of notice. Such rent
payment arrearages were not paid by the Company within five days of the date of
notice and are not paid as of the date of this filing. Therefore, the Company is
in default of its headquarter facility lease agreement. Upon a default of the
lease, the Landlord has the right to proceed against the Company for, among
other things, late fees, unpaid rent, attorney’s fees and costs and possession
of the premises. In addition, the Landlord shall have the right to apply the
Company’s security deposit of $176,500 to any rent or other amounts owed to the
Landlord. Upon such application of the security deposit, the Company shall be
required to deposit with the Landlord an amount sufficient to restore the
security deposit to its original amount and the Company’s failure to timely
restore the security deposit shall constitute a material breach of the
lease. Subsequent to our fiscal year ended January 25, 2009, we
received a notice of breach of lease and have been sued by our
Landlord. The Company is currently in settlement negotiations with
the Landlord, but cannot provide assurance as to whether a settlement agreement
can be reached on acceptable terms, or at all.
Since
October 2008, the remaining Company employees have not been fully paid their
earned salaries. As of May 3, 2009, the Company was approximately 16 weeks in
arrears on salary payments to current employees. This represents a salary
liability of $ 274,000. In addition the Company had a vacation liability for
current employees of $120,000 and $116,000 for terminated employees. The Board
of Directors has modified the Company’s vacation policy so the current employees
no longer accrue vacation.
We lease
certain software licenses under capital leases. In January 2009, the Company
settled in full its outstanding obligation under capital leases of $420 thousand
for a cash payment of $25,000.
Contractual
Obligations
The
following summarizes the Company’s contractual obligations at May 3, 2009, and
the effect such obligations are expected to have on our liquidity and cash flow
(in thousands).
We have
commitments under time-based subscription licenses for design tool software of
$285,000 as of May 3, 2009. We have received notice from our vendor
that we are in default of the license agreement and they are seeking the
acceleration of an additional $285,000, which would be payable in October
2009. The Company is currently in settlement negotiations with its
design tool software vendor, but cannot provide assurance as to whether a
settlement agreement can be reached on acceptable terms, or at all.
Off-Balance
Sheet Arrangements
As of May
3, 2009, we had no off-balance sheet arrangements as defined in Item 303(a)
(4) of Regulation S-K.
Recent
Accounting Pronouncements
Please
refer to Note 12
of Notes to our condensed consolidated financial statements included in
Item 1 of Part I for a discussion of the expected impact of recently issued
accounting standards.
Not
Applicable.
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)
designed to ensure that information we are required to disclose in reports that
we file or submit under the Exchange Act is accumulated and communicated to our
management, including our principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure, and that
such information is recorded, processed, summarized and reported within the time
periods specified in the SEC rules and forms. Our Chief Executive Officer, who
is our (Acting) Chief Financial Officer, evaluates the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act as of the end of the period covered by this Quarterly
Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer, who
is also our (Acting) Chief Financial Officer, has concluded that our disclosure
controls and procedures were effective as of May 3, 2009.
Changes
in Internal Controls Over Financial Reporting
During
the third quarter of fiscal 2009, the management of the Company executed a
significant reduction of force. On September 24, 2008, we announced a
cessation of our efforts to raise additional capital. As a result, we proceeded
with efforts to substantially reduce our operating activities and reduce our
on-going expenditures. Beginning September 19, 2008, management,
acting based upon a plan approved by our Board of Directors, eliminated 52
positions in the Company. On September 23, 2008, the remaining independent
directors of the Company, Brett Moyer, Carl Stork and David Tomasello, notified
the Company that they were resigning as directors of NeoMagic Corporation,
effective September 23, 2008. As part of the reduction in force, Steve
Berry, the company’s Chief Financial Officer resigned his position on January 9,
2009. Because of the reduction in force, the resignation of all independent
directors and the resignation of the CFO, control procedures which are normally
in place with separate individuals have necessarily been combined across a
significantly reduced staff. While we believe that internal controls are intact
and carefully monitored, the absence of an external audit committee, the absence
of independent board members, and the combination of staff functions does expose
the Company to risk associated with internal controls.
Inherent
Limitations on Effectiveness of Controls
The
effectiveness of any system of internal control over financial reporting is
subject to inherent limitations, including the risk of exercise of judgment in
designing, implementing, operating, and evaluating the controls and procedures,
and the inability to eliminate the risk of misconduct completely. Accordingly,
any system of internal control over financial reporting can only provide
reasonable, not absolute, assurances. In addition, 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. We intend to
continue to monitor and upgrade our internal controls as necessary or
appropriate for our business, but we cannot assure that such improvements will
be sufficient to provide us with effective internal control over financial
reporting.
Part II. Other Information
The
factors discussed below are cautionary statements that identify important risk
factors that could cause actual results to differ materially from those
anticipated in the forward-looking statements in this Quarterly Report on Form
10-Q. If any of the following risks actually occurs, our business, financial
condition and results of operations would suffer. In this case, the trading
price of our common stock could decline and investors might lose all or part of
their investment in our common stock.
We
Need Additional Capital and We Have Substantially Reduced our Operating
Activities
At May 3,
2009, we had $43 thousand in cash and cash equivalents and $92 thousand in
accounts receivable. We believe that this level of cash, cash equivalents and
accounts receivable is not sufficient to maintain continuing operations at
current levels. We have been unable to raise additional capital to fund
operating activities and have ceased efforts to do so. The adequacy of our
resources will depend largely on our ability to achieve positive operating cash
flows principally through reductions in expenditures. These uncertainties raise
substantial doubt about our ability to continue as a going concern. We are in
the process of taking actions to achieve further reductions in our operating
expenses. We also believe that we can take actions to generate cash by selling
or licensing intellectual property.
We are
not generating sufficient cash from the sale of our products to support our
operations and have been incurring significant losses. We have been funding our
operations primarily with the cash proceeds of the sale of our MM3 application
processor. We expect to incur additional losses and may have negative operating
cash flows through the end of our second fiscal quarter in July 2009 and beyond.
Unless we are able to decrease expenses and increase sales, we will not have
sufficient cash to support our operations and may be forced to file for
bankruptcy. We have taken steps to restructure our operations and reduce our
monthly operational cash expenditures. February 2009, the Board of
Directors decided to cease operations in NeoMagic Israel and NeoMagic India.
These two entities no longer had employees.
There is
no assurance that we will be successful in reducing our operating expenses,
generating sufficient cash flows from operations or obtaining sufficient funding
from any source on acceptable terms, if at all. If we are unable to generate
sufficient cash flows from our operations, we may not be able to continue
operations as proposed, requiring us to modify our business plan, curtail
various aspects of our operations or cease operations. In such event, investors
may lose a portion or all of their investment. The report of our independent
registered public accounting firm, in respect of our 2009 fiscal year, included
an explanatory going concern paragraph regarding substantial doubt as to our
ability to continue as a going concern, which indicates an absence of obvious or
reasonably assured sources of future funding that will be required by us to
maintain ongoing operations.
On
September 24, 2008, we announced a cessation of our efforts to raise
additional capital. As a result, we proceeded with efforts to substantially
reduce our operating activities and reduce our on-going expenditures by
terminating employment for substantially all of our operational and engineering
employees in all worldwide locations. Beginning September 19, 2008, management,
acting based upon a plan approved by our Board of Directors, eliminated 52
positions in the Company. On September 23, 2008, the remaining independent
directors of the Company, Brett Moyer, Carl Stork and David Tomasello, notified
the Company that they were resigning as directors of NeoMagic Corporation,
effective September 23, 2008. We initiated efforts for the orderly
reduction of our operations, including the fulfillment of our outstanding sales
and other contracts, headcount reductions, securing continuing support for its
existing customers, seeking purchasers for our intellectual property and
tangible assets and providing for outstanding and anticipated liabilities. We
anticipate that our operations will consist primarily of supporting sales orders
from our existing customers, collecting the resulting receivables from such
sales orders, collecting proceeds from assets sold, satisfying obligations, and
administration of the corporation.
We
Have a Limited Customer Base
In the
first quarter of fiscal 2010, one customer accounted for 100% of our product
revenue. In each of the last two fiscal years, three customers have accounted
for over two-thirds of our product revenue. In fiscal 2009, one customer
accounted for 90% of product revenue. In fiscal 2008, the top three customers
accounted for 62%, 12%, and 10%, respectively, of product
revenue. There was no licensing revenue in fiscal 2009 and fiscal
2008. We expect that a small number of customers will continue to account for a
substantial portion of our product revenue for the foreseeable future.
Furthermore, the majority of our sales were made, and are expected to continue
to be made, on the basis of purchase orders rather than pursuant to long-term
purchase agreements. As a result, our business, financial condition and results
of operations could be materially adversely affected by the decision of a single
customer to cease using our products, or by a decline in the number of handheld
devices sold by a single customer.
We
May Lose Our Customer Base
Our
products are designed to afford handheld device manufacturer significant
advantages with respect to product performance, power consumption and product
size. To the extent that other future developments in components or
subassemblies incorporate one or more of the advantages offered by our products,
the market demand for our products may be negatively impacted.
We
Have Been Delisted from The Nasdaq Stock Market
On
October 6, 2008, we announced that we received a Nasdaq Staff Determination
letter indicating that we did not comply with the minimum shareholders’ equity,
market value of listed securities or net income requirements for continued
listing set forth in Marketplace Rule 4310(c)(3), and that our common stock was
therefore, subject to delisting from The Nasdaq Capital Market. We did not seek
to challenge the Staff determination and delisting since we would be unable to
comply with these requirements in the near term. As a result, our common stock
was delisted from The Nasdaq Capital Market and trading of our common stock on
The Nasdaq Capital Market was suspended at the opening of business on
October 15, 2008. Trading in our common stock is now conducted through the
over-the-counter market or on the Electronic Bulletin Board of the National
Association of Securities Dealers, Inc. There is no guarantee that an active
trading market for our common stock will be maintained on any exchange. You may
not be able to sell your shares of our stock quickly, at the market price or at
all, if trading in our stock is not active.
A
Lack of Effective Internal Control Over Financial Reporting Could Result in an
Inability to Accurately Report Our Financial Results
Effective
internal controls are necessary for us to provide reliable financial reports. If
we do not provide reliable financial reports or prevent fraud, we will be
subject to potential liability and may have to incur expenses to defend the
Company against governmental proceedings or private litigation and/or to pay
fines or damages. Such proceedings would also require significant management
time and would distract management from focusing on the business. Failing to
provide reliable financial reports would also cause loss of reputation in the
investor community and would likely result in a decrease in our stock
price.
Effective
on January 9, 2009 the Company’s Chief Financial Officer, Steven Berry,
resigned. No replacement has been hired and the Chief Executive
Office also holds the position of (Acting) Chief Financial
Officer. In addition, the Company has significantly reduced its
financial accounting staff which could decrease the effectiveness of its
internal control over financial reporting.
Our
Revenues Are Difficult To Predict
For a
variety of reasons, our revenues are difficult to predict and may vary
significantly from quarter to quarter. Our ability to achieve design wins
depends on a number of factors, many of which are outside of our control,
including changes in the customer’s strategic and financial plans, competitive
factors and overall market conditions. As our experience demonstrates, design
wins themselves do not always lead to production orders because the customer may
cancel or delay products for a variety of reasons. Such reasons may include the
performance of a particular product that may depend on components not supplied
by NeoMagic, market conditions, reorganizations or other internal developments
at the customer and changes in customer personnel or strategy. Even when a
customer has begun volume production of a product containing our chips, volumes
are difficult to forecast because there may be no history to provide a guide,
and because market conditions and other factors may cause changes in the
customer’s plans. Because of the market uncertainties they face, many customers
place purchase orders on a short lead-time basis, rather than providing reliable
long-term purchase orders or purchase forecasts. Our customer base can shift
significantly from period to period as existing customer programs end and new
programs do not always replace ending programs. All of these factors make it
difficult to predict our revenues from period to period.
The
difficulty in forecasting revenues increases the difficulty in anticipating our
inventory requirements. This difficulty increases the likelihood that we may
overproduce particular parts, resulting in inventory write-downs, or
under-produce particular parts, affecting our ability to meet customer
requirements. The difficulty in forecasting revenues also restricts our ability
to provide forward-looking revenue and earnings guidance to the financial
markets and increases the chance that our revenue performance does not match
investor expectations.
We
May Encounter Inventory Excess or Shortage
To have
product inventory to meet potential customer purchase orders, we place purchase
orders for semiconductor wafers from our manufacturer in advance of having firm
purchase orders from our customers. If we do not have sufficient
demand for our products and cannot cancel our current and future commitments
without material impact, we may experience excess inventory, which will result
in an inventory write-down affecting gross margin and results of operations. If
we cancel a purchase order, we must pay cancellation penalties based on the
status of work in process or the proximity of the cancellation to the delivery
date. We must place purchase orders for wafers before we receive purchase orders
from our own customers. This limits our ability to react to fluctuations in
demand for our products, which can be unexpected and dramatic, and from time to
time will cause us to have an excess or shortage of wafers for a particular
product. As a result of the long lead-time for manufacturing wafers and the
increase in “just-in-time” ordering by customers, semiconductor companies from
time-to-time take charges for excess inventory. We did in fact incurred such
charges in fiscal 2009 of $3.6 million and in fiscal 2008 of $0.4 million. While
there have been no write-downs of inventory during the quarter ended May 3,
2009, significant write-downs for excess inventory did occur in fiscal 2009,
which had a material adverse effect on our financial condition and results of
operations. Conversely, failure to order sufficient wafers would cause us to
miss revenue opportunities and, if significant, could impact sales by our
customers, which could adversely affect our customer relationships and thereby
materially adversely affect our business, financial condition and results of
operations.
We
Face Intense Competition in Our Markets
The
market for Applications Processors is intensely competitive and is characterized
by rapid technological change, evolving industry standards and declining average
selling prices. We believe that the principal factors of competition in this
market are audio/video performance, price, features, power consumption, product
size and customer support as well as company stability. Our ability to compete
successfully in the Applications Processor market depends on a number of
factors, including success in designing and subcontracting the manufacture of
new products that implement new technologies, product quality and reliability,
price, ramp of production of our products, customer demand and acceptance of
more sophisticated multimedia functionality on mobile phones and other handheld
devices, end-user acceptance of our customers’ products, market acceptance of
competitors’ products and general economic conditions. Our ability to compete
will also depend on our ability to identify and ensure compliance with evolving
industry standards and market trends. Our small size and perceived instability
are negative factors in competing for business.
We
compete with both domestic and foreign companies, some of which have
substantially greater financial and other resources than us with which to pursue
engineering, manufacturing, marketing and distribution of their products. Our
main competitors include Texas Instruments, Renesas, Marvell, Freescale, ST
Microelectronics, Broadcom, Mediatek, Mtekvision, Core Logic, Telechips and
C&S Technologies. We may also face increased competition from new entrants
into the market, including companies currently in the development stage. We
believe we have significant intellectual properties and have historically
demonstrated expertise in SOC technology. However, if we cannot timely introduce
new products for our markets, support these products in customer programs, or
manufacture these products, such inabilities could have a material adverse
effect on our business, financial condition and operating results.
Some of
our current and potential competitors operate their own manufacturing
facilities. Since we do not operate our own manufacturing facility and may from
time-to-time make binding commitments to purchase products, we may not be able
to reduce our costs and cycle time or adjust our production to meet changing
demand as rapidly as companies that operate their own facilities, which could
have a material adverse effect on our results of operations. In addition, if
production levels increase the value of binding purchase orders may increase
significantly.
Uncertainty
Regarding Future Licensing Revenue and Gain on Sale of Patents
Patents
sold in prior fiscal years, related to products we no longer sell and not to
products that we currently sell or plan to sell. We retained a worldwide,
non-exclusive license under the patents sold. The sales did not include our
important patents covering the unique array processing technology used in our
newer MiMagic products. We cannot assure you that we will be able to generate
any future licensing revenue or gains on sales of patents from our remaining 15
patents as May 3, 2009, or from any future patents that we will own or have the
right to license. The licensing agreement with Sony may be the only licensing
agreement that we ever complete and the patent sales noted above may be the only
patent sales we complete. Furthermore, if we should in the future complete an
agreement to license or sell our patents, we cannot assure you that the proceeds
we receive from such transaction will be as significant as the proceeds we
received from Sony and Faust.
We
Depend on Qualified Personnel
Our
future success depends in part on the continued service of our remaining
personnel, and our ability to identify, hire and retain additional personnel to
serve potential customers in our targeted markets. There is strong competition
for qualified personnel in the semiconductor industry, and we cannot assure you
that we will be able to continue to attract and retain qualified personnel
necessary for the development of our business. We have experienced the loss of
personnel both through headcount reductions and attrition. In the past two years
we have lost some of our executive management, including Jeffery Blanc (Vice
President, Worldwide Sales), Pierre-Yves Couteau (Vice President of Marketing),
Deepraj Puar (Vice President of Operations), and Scott Sullinger (CFO). Steve
Berry joined NeoMagic on August 6, 2007 as CFO. Mr. Berry left the
Company in January 2009 and as of May 3, 2009 our Chief Executive Officer, has
been filling that position.
All our
executive officers are employees “at will”. We have employment contracts with
Douglas R. Young, our chief executive officer, and Syed Zaidi, our chief
operating officer, and until his departure in January 2009 with Steve Berry, our
chief financial officer. Until their departure in September 2008, we had
employment contracts with Deepraj Puar, our vice president of operations, and
Pierre-Yves Couteau, our vice president of marketing. The employment contracts
allow us to terminate their employment at any time but require us to make
severance payments depending upon the circumstances surrounding termination of
employment. We do not maintain key person insurance on any of our personnel. If
we are not able to retain key personnel, if our headcount is not appropriate for
our future direction, or if we fail to recruit key personnel critical to our
future direction in a timely manner, this may have a material adverse effect on
our business, financial condition and results of operations.
In
addition, our future success will depend in part on our ability to identify and
retain qualified individuals to serve on our board of directors. We believe that
maintaining a board of directors comprised of qualified members is critical
given the current status of our business and operations. Moreover, SEC and
Nasdaq Capital Market rules require that three independent board members serve
on our audit committee. Any inability on our part to identify and retain
qualified board members could have a material adverse effect on our business and
we have been delist from the Nasdaq Capital Market. Our stock currently is
trading on the Bulleting Board “pink sheet”.
Since
October 2008, the remaining Company employees have not been fully paid their
earned salaries. As of May 3, 2009, the Company was approximately 16 weeks in
arrears on salary payments to current employees. This represents a salary
liability of $ 274,000. In addition the Company had a vacation liability for
current employees of $120,000 and $116,000 for terminated employees. The Board
of Directors has modified the Company’s vacation policy so the current employees
no longer accrue vacation.
Our
Products May be Incompatible with Evolving Industry Standards and Market
Trends
Our
ability to compete in the future will also depend on our ability to identify and
ensure compliance with evolving industry standards and market trends.
Unanticipated changes in market trends and industry standards could render our
products incompatible with products developed by major hardware manufacturers
and software developers. As a result, we could be required to invest significant
time and resources to redesign our products or obtain license rights to
technologies owned by third parties to comply with relevant industry standards
and market trends. We cannot assure you that we will be able to redesign our
products or obtain the necessary third-party licenses within the appropriate
window of market demand. If our products are not in compliance with prevailing
market trends and industry standards for a significant period of time, we could
miss crucial OEM and ODM design cycles, which could result in a material adverse
effect on our business, financial condition and results of
operations.
We
Depend on Third-Party Manufacturers to Produce Our Products
Our
products require wafers manufactured with state-of-the-art fabrication equipment
and techniques. We currently use one third-party foundry for wafer fabrication.
We expect that, for the foreseeable future, all of our products will be
manufactured at Taiwan Semiconductor Manufacturing Corporation on a
purchase-order-by-purchase-order basis. Since, in our experience, the lead time
needed to establish a relationship with a new wafer fabrication partner is at
least 12 months, and the estimated time for a foundry to switch to a new product
line ranges from four to nine months, we may have no readily available
alternative source of supply for specific products. In addition to time
constraints, switching foundries would require a diversion of engineering
manpower and financial resources to redesign our products so that the new
foundry could manufacture them. We cannot assure you that we can redesign our
products to be manufactured by a new foundry in a timely manner, nor can we
assure you that we will not infringe on the intellectual property of our current
wafer manufacturer when we redesign our products for a new foundry. A
manufacturing disruption experienced by our manufacturing partner, the failure
of our manufacturing partner to dedicate adequate resources to the production of
our products, or the financial instability of our manufacturing partner would
have a material adverse effect on our business, financial condition and results
of operations. Furthermore, if the transition to the next generation of
manufacturing technologies by our manufacturing partner is unsuccessful, our
business, financial condition and results of operations would be materially and
adversely affected.
We have
many other risks due to our dependence on a third-party manufacturer, including:
reduced control over delivery schedules, quality, manufacturing yields and cost,
the potential lack of adequate capacity during periods of excess demand, limited
warranties on wafers supplied to us, and potential misappropriation of our
intellectual property. We are dependent on our manufacturing partner to produce
wafers with acceptable quality and manufacturing yields, to deliver those wafers
on a timely basis to our third party assembly subcontractors and to allocate a
portion of their manufacturing capacity sufficient to meet our needs. Although
our products are designed using the process design rules of the particular
manufacturer, we cannot assure you that our manufacturing partner will be able
to achieve or maintain acceptable yields or deliver sufficient quantities of
wafers on a timely basis or at an acceptable cost. Additionally, we cannot
assure you that our manufacturing partner will continue to devote adequate
resources to produce our products or continue to advance the process design
technologies on which the manufacturing of our products are based.
We
Rely on Third-Party Subcontractors to Assemble and Test Our
Products
Our
products are assembled and tested by third-party subcontractors. We expect that,
for the foreseeable future, the vast majority of our products will be packaged
and assembled on a purchase-order-by-purchase-order basis. We do not have
long-term agreements with any of these subcontractors. Such assembly and testing
is conducted on a purchase order basis. Because we rely on third-party
subcontractors to assemble and test our products, we cannot directly control
product delivery schedules, which could lead to product shortages or quality
assurance problems that could increase the costs of manufacturing or assembly of
our products. Due to the amount of time normally required to qualify assembly
and test subcontractors, product shipments could be delayed significantly if we
were required to find alternative subcontractors. Any problems associated with
the delivery, quality or cost of the assembly and test of our products could
have a material adverse effect on our business, financial condition and results
of operations.
Our
Manufacturing Yields May Fluctuate
Fabricating
semiconductors is an extremely complex process, which typically includes
hundreds of process steps. Minute levels of contaminants in the manufacturing
environment, defects in masks used to print circuits on a wafer, variation in
equipment used and numerous other factors can cause a substantial percentage of
wafers to be rejected or a significant number of die on each wafer to be
nonfunctional. Many of these problems are difficult to diagnose and time
consuming or expensive to remedy. As a result, semiconductor companies often
experience problems in achieving acceptable wafer manufacturing yields, which
are represented by the number of good die as a proportion of the total number of
die on any particular wafer. We typically purchase wafers, not die, and pay an
agreed upon price for wafers meeting certain acceptance criteria. Accordingly,
we bear the risk of the yield of good die from wafers purchased meeting the
acceptance criteria.
Semiconductor
manufacturing yields are a function of both product design, which is developed
largely by us, and process technology, which is typically proprietary to the
manufacturer. Historically, we have experienced lower yields on new products.
Since low yields may result from either design or process technology failures,
yield problems may not be effectively determined or resolved until an actual
product exists that can be analyzed and tested to identify process sensitivities
relating to the design rules that are used. As a result, yield problems may not
be identified until well into the production process, and resolution of yield
problems would require cooperation and communication between the manufacturer
and us. This risk is compounded by the offshore location of our manufacturers,
increasing the effort and time required to identify, communicate and resolve
manufacturing yield problems. As our relationships with new manufacturing
partners develop, yields could be adversely affected due to difficulties
associated with adapting our technology and product design to the proprietary
process technology and design rules of each manufacturer. Any significant
decrease in manufacturing yields could result in an increase in our per unit
product cost and could force us to allocate our available product supply among
our customers, potentially adversely impacting customer relationships as well as
revenues and gross margins. We cannot assure you that our manufacturers will
achieve or maintain acceptable manufacturing yields in the future.
Uncertainty
and Litigation Risk Associated with Patents and Protection of Proprietary
Rights
We rely
in part on patents to protect our intellectual property. As of May 3, 2009, we
had been issued and held 15 patents. These issued patents are scheduled to
expire between 2014 and 2025. In February 2008 we sold 18 patents and one patent
application to Faust Communications, LLC for net proceeds of $9.5 million. The
patents sold related to products we no longer sell and not to products that we
currently sell or plan to sell. We retained a worldwide, non-exclusive license
under the patents sold. The sales did not include our important patents covering
the unique array processing technology used in our newer MiMagic and NeoMobileTV
products. Additionally, we have several patent applications pending. We cannot
assure you that our pending patent applications, or any future applications,
will be approved. Further, we cannot assure you that any issued patents will
provide us with significant intellectual property protection, competitive
advantages, or will not be challenged by third parties, or that the patents of
others will not have an adverse effect on our ability to do business. In
addition, we cannot assure you that others will not independently develop
similar products, duplicate our products or design around any patents that may
be issued to us.
We also
rely on a combination of mask work protection, trademarks, copyrights, trade
secret laws, employee and third-party nondisclosure agreements and licensing
arrangements to protect our intellectual property. Despite these efforts, we
cannot assure you that others will not independently develop substantially
equivalent intellectual property or otherwise gain access to our trade secrets
or intellectual property or disclose such intellectual property or trade
secrets, or that we can meaningfully protect our intellectual property. Our
failure to meaningfully protect our intellectual property could have a material
adverse effect on our business, financial condition and results of
operations.
As a
general matter, the semiconductor industry has experienced substantial
litigation regarding patent and other intellectual property rights. In December
1998, the Company filed a lawsuit in the United States District Court for the
District of Delaware seeking damages and an injunction against Trident
Microsystems, Inc. The suit alleged that Trident’s embedded DRAM graphics
accelerators infringed certain patents held by the Company. In January 1999,
Trident filed a counter claim against the Company alleging an attempted
monopolization in violation of antitrust laws, arising from NeoMagic’s filing of
the patent infringement action against Trident. In September 2005, the Court
ruled that there was no infringement by Trident.
Any
patent litigation, whether or not determined in our favor or settled by us,
would at a minimum be costly and could divert the efforts and attention of our
management and technical personnel from productive tasks, which could have a
material adverse effect on our business, financial condition and results of
operations. We cannot assure you that current or future infringement claims by
third parties or claims for indemnification by customers or end users of our
products resulting from infringement claims will not be asserted in the future
or that such assertions, if proven to be true, will not materially adversely
affect our business, financial condition and results of operations. If any
adverse ruling in any such matter occurs, we could be required to pay
substantial damages, which could include treble damages, to cease the
manufacturing, use and sale of infringing products, to discontinue the use of
certain processes, or to obtain a license under the intellectual property rights
of the third party claiming infringement. We cannot assure you, however, that a
license would be available on reasonable terms or at all. Any limitations in our
ability to market our products, or delays and costs associated with redesigning
our products or payments of license fees to third parties, or any failure by us
to develop or license a substitute technology on commercially reasonable terms
could have a material adverse effect on our business, financial condition and
results of operations.
We
Depend on Foreign Sales and Suppliers
Export
sales have been a critical part of our business. Sales to customers located
outside the United States (including sales to the foreign operations of
customers with headquarters in the United States and foreign manufacturers that
sell to United States-based OEMs) accounted for 100% and 98%, of our
product revenue for the quarter ended May 3, 2009 and April 27, 2008,
respectively. We expect that product revenue derived from foreign sales will
continue to represent a significant portion of our total product
revenue. To date, our foreign sales have been denominated in United
States dollars. Increases in the value of the U.S. dollar relative to the local
currency of our customers could make our products relatively more expensive than
competitors’ products sold in the customer’s local currency.
Foreign
manufacturers have produced, and are expected to continue to produce for the
foreseeable future, all of our wafers. In addition, many of the assembly and
test services we use are procured from foreign sources. Wafers are priced in
U.S. dollars under our purchase orders with our manufacturing
suppliers.
Foreign
sales and manufacturing operations are subject to a variety of risks, including
fluctuations in currency exchange rates, tariffs, import restrictions and other
trade barriers, unexpected changes in regulatory requirements, longer accounts
receivable payment cycles, potentially adverse tax consequences and export
license requirements. In addition, we are subject to the risks inherent in
conducting business internationally including foreign government regulation,
political and economic instability, and unexpected changes in diplomatic and
trade relationships. Moreover, the laws of certain foreign countries in which
our products may be developed, manufactured or sold, may not protect our
intellectual property rights to the same extent as do the laws of the United
States, thus increasing the possibility of piracy of our products and
intellectual property. We cannot assure you that one or more of these risks will
not have a material adverse effect on our business, financial condition and
results of operations.
Our
Financial Results Could Be Affected by Changes in Accounting
Principles
Generally
accepted accounting principles in the United States are subject to issuance and
interpretation by the Financial Accounting Standards Board, or FASB, the
American Institute of Certified Public Accountants, the SEC, and various bodies
formed to promulgate and interpret appropriate accounting principles. A change
in these principles or interpretations could have a significant effect on our
reported financial results, and could affect the reporting of transactions
completed before the announcement of a change.
Our
Stock Price May Be Volatile
The
market price of our Common Stock, like that of other semiconductor companies,
has been and is likely to continue to be, highly volatile. For example, during
the quarter ended May 3, 2009, the highest closing sale price per share was
$0.03 and the lowest was less than $0.01 per share. During the quarter ended
April 27, 2008, the highest closing sale price per share was $1.68 and the
lowest was $0.88 per share. The market has from time to time experienced
significant price and volume fluctuations that may be unrelated to the operating
performance of particular companies. The market price of our Common Stock could
be subject to significant fluctuations in response to various factors, including
sales of our common stock, quarter-to-quarter variations in our anticipated or
actual operating results, announcements of new products, technological
innovations or setbacks by us or our competitors, general conditions in the
semiconductor industry, unanticipated shifts in the markets for mobile phones
and other handheld devices or changes in industry standards, losses of key
customers, litigation commencement or developments, the impact of our financing
activities, including dilution to shareholders, changes in or the failure by us
to meet estimates of our performance by securities analysts, market conditions
for high technology stocks in general, and other events or factors. In future
quarters, our operating results may be below the expectations of public market
analysts or investors.
The
following Exhibits are filed as part of, or incorporated by reference into, this
Report:
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.
INDEX
TO EXHIBITS
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