MOSAID Technologies Incorporated (
Q2 Fiscal 2011 Results
-- Q2 revenues of $20.0 million, up 15% from $17.3 million in Q2 fiscal
2010
-- Q2 pro forma net income of $9.3 million, up 16% from $8.0 million in Q2
fiscal 2010. Pro forma diluted EPS of $0.78, based on 11.89 million
diluted shares, compared to $0.78 per diluted share in Q2 fiscal 2010,
based on 10.33 million diluted shares
-- Q2 GAAP net income of $6.6 million, up 32% from $5.0 million in Q2
fiscal 2010. GAAP diluted EPS of $0.55, compared to $0.49 per diluted
share in Q2 fiscal 2010
"I am very pleased with the financial results and the operational progress we achieved during the second quarter," said John Lindgren, President and CEO, MOSAID. "We reported another quarter of double-digit revenue growth, with revenues coming in at the top end of guidance. Pro forma net income exceeded guidance."
"During the second quarter, we signed our first wireless patent license agreement with a leading supplier of semiconductor integrated circuit products, opening up another significant source of revenue for our wireless patents," said Lindgren. "MOSAID's wireless patents are currently driving the Company's revenue growth, and with the high rate of Wi-Fi adoption, we anticipate announcing new deals in the near future."
MOSAID had cash and marketable securities of $110.6 million at the end of the second quarter of fiscal 2011, compared to $103.6 million at the end of the first quarter of fiscal 2011. In Q2 fiscal 2011, MOSAID returned $2.9 million to shareholders in quarterly dividend payments.
On November 24, 2010, MOSAID declared a quarterly dividend of $0.25 per share. The dividend, which is an eligible dividend, is payable on January 20, 2011 to shareholders of record as of January 6, 2011.
A reconciliation of pro forma net income to Canadian generally accepted accounting principles (GAAP) net income is included in the pro forma financial statements accompanying this press release.
Second Quarter Operational Highlights
Wireless patent licensing: MOSAID signed a five-year, royalty bearing patent portfolio license agreement with a top-ranked, U.S.-based semiconductor supplier. Under the terms of the non- exclusive agreement, MOSAID granted the company a license under MOSAID's wireless patent portfolio covering semiconductor products sold worldwide that operate in compliance with the IEEE 802.11 standard (known as Wi-Fi). MOSAID also granted the company a license under its microcomponents patent portfolio, covering worldwide sales of 802.11-compliant products.
Patent portfolio development: MOSAID had 2,381 patents and applications at the end of Q2 fiscal 2011, up from 2,050 patents and applications at the end of Q1 fiscal 2011, and up from 1,840 patents and applications one year ago. In January 2010, MOSAID purchased from Samsung Electronics Co. a portfolio of semiconductor patents. The Samsung patents were added to MOSAID's portfolio in Q2 FY11, following the completion of the selection and assignment process.
Litigation update: On August 23, 2010, Cisco Systems Inc. served MOSAID with a Complaint for Declaratory Judgment in the United States District Court for the District of Delaware. In its complaint, Cisco sought a declaration of non-infringement and invalidity with respect to nine U.S. patents and one patent application owned by MOSAID, all of which relate generally to Power-over- Ethernet technology.
Q3 and Fiscal 2011 Guidance
Management offers the following guidance for the third quarter of fiscal 2011:
-- Q3 revenues of $19.0 million to $21.0 million
-- Q3 pro forma net income of $7.4 million to $8.1 million, or $0.62 to
$0.68 per diluted share, based on 11.95 million diluted shares
The Company is offering the following updated guidance for fiscal 2011:
-- Fiscal 2011 revenues in the range of $77.0 million to $80.0 million
-- Fiscal 2011 pro forma net income of $31.2 million to $32.6 million, or
$2.62 to $2.74 per diluted share, based on 11.9 million diluted shares
MOSAID's revenues result primarily from intellectual property agreements, which by their nature may actually close on dates other than those projected. MOSAID's priority and focus is on obtaining the best terms possible under its agreements, rather than on the particular timing of agreement closure. MOSAID's revenues depend upon, among other items, the continued ability of its licensees to pay amounts as they become due. The Company takes steps, including monitoring the creditworthiness of its licensees, in order to manage this risk.
Due to the nature of the expense, patent licensing and litigation expense can vary significantly quarter-to-quarter.
Conference Call and Webcast
Management will hold a conference call and webcast on Wednesday, November 24, 2010 at 5:00 p.m. ET. The webcast will be live at www.mosaid.com and may also be accessed by dialing 1-800- 446-1671. Please provide confirmation number 28421889. The webcast will be available on mosaid.com for 90 days following the event.
About MOSAID
MOSAID Technologies Inc. is one of the world's leading intellectual property companies. MOSAID licenses patented intellectual property in the areas of semiconductors and telecommunications systems and develops semiconductor memory technology. MOSAID counts many of the world's largest technology companies among its licensees. Founded in 1975, MOSAID is based in Ottawa, Ontario, Canada. Visit www.mosaid.com and InvestorChannel.mosaid.com for more information.
Pro forma net income, a non-GAAP measure, is GAAP net income adjusted for stock-based compensation, patent amortization and imputed interest, foreign exchange gains and losses on "Other long-term liabilities," and any other non- recurring items. The Company uses pro forma measures internally to evaluate and manage operating performance, and to forecast and plan. Non-GAAP measures do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other issuers.
Forward Looking Information
This document and certain other public documents incorporated by reference in this document, contain forward-looking statements to the extent they relate to MOSAID or its management, including those identified by the expressions "anticipate," "believe," "could," "estimate," "expect," "foresee," "intend," "may," "plan," "will," "would" and similar expressions. Similarly, statements in this document that describe MOSAID's business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements. These forward-looking statements are not historical facts, but rather reflect MOSAID's current expectations regarding future events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results, performance or achievements to differ materially from those in such forward-looking statements. Assumptions made in preparing forward-looking statements and financial guidance include, but are not limited to, the following: MOSAID's continued expansion of its patent portfolio and of its opportunities for future patent licensing revenue as a result of MOSAID's acquisition of patents from third parties and from development of new inventions; semiconductor and telecommunications product vendors continuing to infringe MOSAID's patents; the timing and amount of MOSAID's litigation expenses; MOSAID's ability to sign new patent licensees; current assumptions as to the identification of products that are unlicensed to MOSAID's wireless patents; and the timing and amount of MOSAID's Research & Development expenses.
Factors that could cause actual results to differ materially from expected results include, but are not limited to, the following: MOSAID's ability to negotiate settlements with licensees; legal rulings and/or regulatory investigations, audits or complaints having an adverse impact on the validity, enforceability, royalty rates, potential royalty rates, and strength or breadth of coverage of MOSAID's essential and/or nonessential patents (including, but not limited to, adverse results from litigation or proceedings in patent offices and government regulatory agencies in various countries around the world); judicial, legislative or regulatory changes that impair the ability of patent holders to earn licensing revenues; worldwide economic conditions and demand for technology products; economic, social, and political conditions both globally and in the countries in which MOSAID or patent licensees operate, including conflict, war and, other security risks, health conditions, possible disruptions in transportation networks and fluctuations in foreign currency exchange rates; non-payment or delays in payment by or insolvency of licensees or other debtors; variability in patent licensees' sales of licensed products; failure to maintain and enforce MOSAID's existing patent portfolio, or failure to obtain valuable patents as a result of R&D activities, or failure to acquire valuable patents from third parties; MOSAID's ability to recruit and retain skilled personnel; change in MOSAID's financial position; consolidation of MOSAID's licensees; natural events, such as severe weather and earthquakes in the locations in which MOSAID or patent licensees operate; and changes in the tax rate applicable to MOSAID as the result of changes in the tax law in the jurisdictions in which profits are determined to be earned and taxed, the outcome of tax audits and the ability to realize deferred tax assets.
Except as may be required by applicable law or stock exchange regulation, we undertake no obligation to update publicly or release any revisions to these forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events. Accordingly, readers should not place undue reliance on forward-looking statements. If we do update one or more forward-looking statements, no inference should be drawn that additional updates will be made with respect to those or other forward-looking statements. Additional information identifying risks and uncertainties affecting MOSAID's business and other factors that could cause MOSAID's financial results to fluctuate are contained in MOSAID's Annual Information Form, under the section entitled "Risk Factors," and in MOSAID's other public filings available online at www.sedar.com.
MOSAID Technologies Incorporated
Unaudited Pro Forma Consolidated Financial Statements
For the Quarter Ended October 31, 2010
The attached pro forma consolidated financial statements have been prepared by Management of MOSAID Technologies Incorporated and have not been reviewed by an auditor.
MOSAID TECHNOLOGIES INCORPORATED
(Subject to the Canada Business Corporations Act)
CONSOLIDATED PRO FORMA STATEMENTS OF INCOME
(In thousands of Canadian Dollars, except per share amounts)
(Unaudited)
Quarter Ended Six Months Ended
October 31, October 31,
2010 2009 2010 2009
--------------------------------------------------------------------------
Revenues $19,962 $17,313 $38,450 $33,536
Operating expenses
Patent portfolio
management 2,248 1,822 4,434 3,533
Patent licensing and
litigation 2,435 1,656 4,988 3,600
Research and development 625 705 1,161 1,516
General and
administration 1,393 1,201 2,741 2,750
Foreign exchange loss 209 13 135 422
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6,910 5,397 13,459 11,821
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Pro forma income from
operations 13,052 11,916 24,991 21,715
Interest income 275 96 617 215
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Pro forma income before
income tax expense 13,327 12,012 25,608 21,930
Income tax expense 3,998 3,963 7,682 7,236
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Pro forma net income $9,329 $8,049 $17,926 $14,694
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Pro forma earnings per
share
Basic $0.79 $0.78 $1.52 $1.43
Diluted $0.78 $0.78 $1.51 $1.43
Weighted average number of
shares
Basic 11,790,143 10,278,862 11,779,049 10,246,996
Diluted 11,898,957 10,339,633 11,860,073 10,299,267
See accompanying Notes to the Consolidated Financial Statements
Pro forma net income is reconciled to GAAP net income as follows:
(Dollar amounts in
thousands) Quarter ended Six Months ended
October 31, October 31,
2010 2009 2010 2009
--------------------------------------------------------------------------
GAAP net income $6,564 $5,021 $11,772 $11,475
Add (deduct):
Stock-based compensation 445 220 843 458
Patent amortization and
imputed interest 4,127 3,828 8,253 7,696
Special committee - 719 - 719
Foreign exchange (gain)
loss (390) (52) 228 (2,929)
Income tax expense - for
the above items (1,367) (1,489) (2,854) (2,291)
Future income tax
revaluation - - (200) -
Discontinued operations
(net of tax) (50) (198) (116) (434)
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Pro forma net income $9,329 $8,049 $17,926 $14,694
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Pro forma foreign exchange loss (gain) is reconciled to GAAP foreign exchange (gain) loss as follows:
(Dollar amounts in
thousands) Quarter ended Six Months ended
October 31, October 31,
2010 2009 2010 2009
--------------------------------------------------------------------------
GAAP foreign exchange
(gain) loss $(181) $(39) $363 $(2,508)
Less: foreign exchange
(gain) loss on long-term
debt (390) (52) 228 (2,929)
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Pro forma foreign exchange
loss $209 $13 $135 $422
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MOSAID Technologies Incorporated
Unaudited Consolidated Financial Statements
For the Quarter Ended October 31, 2010
The attached consolidated financial statements have been prepared by Management of MOSAID Technologies Incorporated and have not been reviewed by an auditor.
MOSAID TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(In thousands of Canadian Dollars, except per share amounts)
(Unaudited)
Quarter Ended Six Months Ended
October 31, October 31,
2010 2009 2010 2009
--------------------------------------------------------------------------
Revenues $19,962 $17,313 $38,450 $33,536
Operating expenses
Patent portfolio
management 2,248 1,822 4,434 3,533
Patent licensing and
litigation 2,435 1,656 4,988 3,600
Research and development 625 705 1,161 1,516
General and
administration 1,393 1,201 2,741 2,750
Foreign exchange (gain)
loss (181) (39) 363 (2,508)
Stock-based compensation
(Note 6) 445 220 843 458
Special committee - 719 - 719
Patent amortization and
imputed interest 4,127 3,828 8,253 7,696
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11,092 10,112 22,783 17,764
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Income from operations 8,870 7,201 15,667 15,772
Interest income 275 96 617 215
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Income before income tax
expense and discontinued 9,145 7,297 16,284 15,987
operations
Income tax expense 2,631 2,474 4,628 4,946
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Income before discontinued
operations 6,514 4,823 11,656 11,041
Discontinued operations
income (net of tax) (Note 50 198 116 434
5)
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Net income 6,564 5,021 11,772 11,475
Dividends 2,944 2,572 5,887 5,133
Retained earnings,
beginning of period 24,967 15,500 22,702 11,607
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Retained earnings, end of
period $28,587 $17,949 $28,587 $17,949
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Earnings per share (Note
4)
Basic - before
discontinued operations $0.55 $0.47 $0.99 $1.08
Diluted - before
discontinued operations $0.55 $0.47 $0.98 $1.07
Basic - net earnings $0.56 $0.49 $1.00 $1.12
Diluted - net earnings $0.55 $0.49 $0.99 $1.11
Weighted average number of
shares
Basic 11,790,143 10,278,862 11,779,049 10,246,996
Diluted 11,898,957 10,339,633 11,860,073 10,299,267
See accompanying Notes to the Consolidated Financial Statements
MOSAID TECHNOLOGIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands of Canadian Dollars)
As at As at
October 31, 2010 April 30, 2010
(unaudited) (audited)
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Current Assets
Cash and cash equivalents $77,726 $70,732
Marketable securities 32,899 30,096
Accounts receivable 6,663 4,880
Prepaid expenses 606 698
Other asset 824 2,053
Future income tax asset 10,157 10,930
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128,875 119,389
Property and equipment 242 257
Acquired intangible assets 74,013 80,685
Investment tax credits receivable 15,810 15,748
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$218,940 $216,079
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Current Liabilities
Accounts payable and accrued liabilities $7,830 $7,734
Deferred revenue 213 4,611
Other liability 980 992
Current portion of other long-term
liabilities 10,482 8,294
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19,505 21,631
Deferred gain on sale-leaseback 722 828
Other long-term liabilities 32,702 33,132
Future income tax liability 6,443 6,147
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59,372 61,738
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Shareholders' Equity (Note 3)
Share capital 126,937 126,573
Contributed surplus 3,366 3,452
Retained earnings 28,587 22,702
Accumulated other comprehensive income 678 1,614
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159,568 154,341
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$218,940 $216,079
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See accompanying Notes to the Consolidated Financial Statements
MOSAID TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of Canadian Dollars)
(Unaudited)
Quarter Ended Six Months Ended
October 31, October 31,
2010 2009 2010 2009
--------------------------------------------------------------------------
Operating
Income before discontinued
operations $6,514 $4,823 $11,656 $11,041
Items not affecting cash
Amortization 3,417 3,034 6,828 6,048
Stock-based compensation 445 220 843 458
Unrealized foreign
exchange (gain) loss on
other long-term (390) (52) 228 (2,929)
liabilities
Future income taxes and
investment tax credits 1,096 1,370 1,324 1,427
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11,082 9,395 20,879 16,045
Change in non-cash working
capital items from (1,157) (2,427) (5,997) 2,312
continuing operations
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9,925 6,968 14,882 18,357
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Investing
Acquisition of property
and equipment and (67) (523) (141) (635)
acquired intangibles
Acquisition of marketable
securities (17,596) (3,000) (27,505) (3,316)
Proceeds on disposal and
maturity of marketable 14,210 (4) 24,702 18,492
securities
(3,453) (3,527) (2,944) 14,541
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Financing
Increase (decrease) in
other long-term 747 (1,343) 1,494 (9,699)
liabilities
Dividends paid (2,944) (2,572) (5,887) (5,133)
Funding of restricted
share unit plan (2,068) - (2,068) -
Issuance of common shares 1,426 486 1,504 989
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(2,839) (3,429) (4,957) (13,843)
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Net cash inflow from
continuing operations 3,633 12 6,981 19,055
Net cash (outflow) inflow
from discontinued (6) (223) 13 (463)
operations
Net cash inflow(outflow) 3,627 (211) 6,994 18,592
Cash and cash equivalents,
beginning of period 74,099 51,702 70,732 32,899
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Cash and cash equivalents,
end of period $77,726 $51,491 $77,726 $51,491
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Supplementary Information:
Cash on hand and bank
balances $74,707 $43,833 $74,707 $43,833
Short-term investments 3,019 7,658 3,019 7,658
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Total cash and cash
equivalents $77,726 $51,491 $77,726 $51,491
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See accompanying Notes to the Consolidated Financial Statements
MOSAID TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands of Canadian Dollars)
(Unaudited)
Quarter Ended Six Months Ended
October 31, October 31,
2010 2009 2010 2009
--------------------------------------------------------------------------
Net income $6,564 $5,021 $11,772 $11,475
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Other comprehensive income,
net of tax:
Gains (losses) on
derivatives designated as
cash flow hedges 240 98 (127) 1,346
Gains (losses) on
derivatives designated as
cash flow hedges in prior
periods transferred to
earnings in the current
period (303) (923) (809) (1,309)
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Other comprehensive (loss)
income (63) (825) (936) 37
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Comprehensive income $6,501 $4,196 $10,836 $11,512
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See accompanying Notes to the Consolidated Financial Statements
MOSAID TECHNOLOGIES INCORPORATED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Quarters ended October 31, 2010 and 2009 (tabular dollar amounts in thousands of Canadian Dollars, except per share amounts) (unaudited)1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP) for interim financial information. Accordingly, they do not include all of the information and note disclosure required by GAAP for annual financial statements. These financial statements are based upon accounting principles consistent with those used in the annual consolidated financial statements with the exception of new accounting policies described in Note 3. Accordingly, these unaudited interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements and notes thereto for the year ended April 30, 2010.
The preparation of these unaudited interim consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. In the opinion of management, these unaudited interim consolidated financial statements reflect all adjustments necessary to state fairly the results for the periods presented. Actual results could differ materially from these estimates and the operating results for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the full fiscal year ending April 30, 2011.
2. Recently Issued Accounting Standards
International Financial Reporting Standards
The Accounting Standards Board of Canada (AcSB) plans to converge Canadian GAAP for publicly accountable enterprises with International Financial Reporting Standards (IFRS) over a transition period that will end effective January 1, 2011 with the adoption of IFRS. The AcSB announced on February 13, 2008 that IFRS will be required in 2011 for publicly accountable profit-oriented enterprises. The changeover date is for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. Starting with the first quarter of fiscal 2012, the Company will provide unaudited consolidated financial information in accordance with IFRS, including comparative figures for fiscal 2011.
The Company has completed a preliminary assessment of the accounting and reporting differences under IFRS as compared to Canadian GAAP. However, management has not yet finalized its determination of the impact of these differences on the consolidated financial statements. As this assessment is finalized, the Company intends to disclose such impacts in its future consolidated financial statements.
In the period leading up to the changeover, the AcSB will continue to issue accounting standards that are converged with IFRS, thus mitigating the impact of adopting IFRS at the changeover date. The International Accounting Standards Board will also continue to issue new accounting standards during the conversion period and, as a result, the final impact of IFRS on the Company's consolidated financial statements will only be measured once all the IFRS applicable standards at the conversion date are known.
Business Combinations
In January 2009, the CICA issued Section 1582, Business Combinations, replacing Section 1581, Business Combinations. This new Section will be applicable to financial statements relating to fiscal years beginning on or after January 1, 2011. Earlier application is permitted. The Section establishes standards for the accounting for a business combination. The Company does not anticipate that the adoption of the new standard will have a significant impact on the consolidated financial statements of the Company.
Consolidated Financial Statements
In January 2009, the CICA issued Section 1601, Consolidated Financial Statements, and Section 1602, Non- Controlling Interests, which together replace Section 1600, Consolidated Financial Statements. These new Sections will be applicable to financial statements relating to fiscal years beginning on or after January 1, 2011. Earlier adoption is permitted. Section 1601 establishes standards for the preparation of consolidated financial statements. Section 1602 establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination. The Company is currently evaluating the impact of the adoption of these new Sections on the consolidated financial statements.
3. Shareholders' equity and other comprehensive income
The following are the changes in shareholders' equity for the six months ended October 31, 2010 and for the year ended April 30, 2010:
Accu-
mulated
Other
Contri- Compre-
Common Common buted Retained hensive
Shares Shares Surplus Earnings Income Total
(Number) ($) ($) ($) ($) ($)
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Balance at April
30, 2010 11,763,626 $126,573 $3,452 $22,702 $1,614 $154,341
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Net income - - - 11,772 - 11,772
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Dividends - - - (5,887) - (5,887)
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Employee and
Director Stock
Option Plan 77,040 2,164 (668) - - 1,496
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Employee and
Director Stock
Purchase
Program 6,448 31 (23) - - 8
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Restricted share
unit plan - (1,831) (238) - - (2,069)
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Stock-based
compensation - - 843 - - 843
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Other
comprehensive
income - - - - (936) (936)
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Balance at
October 31,
2010 11,847,114 $126,937 $3,366 $28,587 $678 $159,568
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Accu-
mulated
Other
Contri- Compre-
Common Common buted Retained hensive
Shares Shares Surplus Earnings Income Total
(Number) ($) ($) ($) ($) ($)
--------------------------------------------------------------------------
Balance at April
30, 2009 10,184,323 $94,741 $3,753 $11,607 $446 $110,547
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Net income - - - 21,750 - 21,750
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Dividends - - - (10,655) - (10,655)
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Employee and
Director Stock
Option Plan 119,475 2,144 (882) - - 1,262
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Employee and
Director Stock
Purchase Program 22,328 496 (337) - - 159
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Restricted share
unit plan - (601) (271) - - (872)
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Stock-based
compensation - - 1,189 - - 1,189
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Equity financing 1,437,500 29,793 - - - 29,793
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Other
comprehensive
income - - - - 1,168 1,168
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Balance at April
30, 2010 11,763,626 $126,573 $3,452 $22,702 $1,614 $154,341
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4. Earnings per Share
The following is a reconciliation of the numerator and denominator of the basic and diluted per share computations:
Quarter Ended Six Months Ended
October 31, October 31,
2010 2009 2010 2009
------------------------------------------------
Income before discontinued
operations $6,514 $4,823 $11,656 $11,041
Discontinued operations
(net of tax) 50 198 116 434
------------------------------------------------
Net income $6,564 $5,021 $11,772 $11,475
------------------------------------------------
------------------------------------------------
Weighted average number of
common
shares outstanding 11,790,143 10,278,862 11,779,049 10,246,996
Net effect of stock
options 108,814 60,771 81,024 52,271
------------------------------------------------
Weighted average diluted
number of
common shares outstanding 11,898,957 10,339,633 11,860,073 10,299,267
------------------------------------------------
------------------------------------------------
Earnings per share
Basic - before
discontinued operations $0.55 $0.47 $0.99 $1.08
Diluted - before
discontinued operations $0.55 $0.47 $0.98 $1.07
Basic - net income $0.56 $0.49 $1.00 $1.12
Diluted - net income $0.55 $0.49 $0.99 $1.11
For the quarters ended October 31, 2010 and October 31, 2009, 222,550 and 247,731 options, respectively, were excluded from the calculation of diluted earnings per share, as the exercise price of these options exceeded the average market price of the Company's common stock during this period and were therefore anti-dilutive.
For the six months ended October 31, 2010 and October 31, 2009, 228,550 and 256,106 options, respectively, were excluded from the calculation of diluted earnings per share as the exercise price of these options exceeded the average market price of the Company's common stock during this period and were therefore anti-dilutive.
There were 774,155 and 474,995 options issued and outstanding as at October 31, 2010 and October 31, 2009, respectively.
5. Discontinued operations
Quarter Ended Six Months Ended
October 31, October 31,
2010 2009 2010 2009
----------------------------------------
Revenues $18 $- $52 $ 18
Gain on sale of assets 52 295 105 628
----------------------------------------
Earnings before tax 70 295 161 646
Income tax expense 20 97 45 212
----------------------------------------
Discontinued operations (net of
tax) $50 $198 $116 $434
----------------------------------------
----------------------------------------
6. Stock-based Compensation
The Company has an Employee and Director Stock Purchase Plan ("ESPP") whereby employees may elect to designate up to 5% of their annual salary to purchase shares of the Company at a 10% discount from the fair market value. The purchase price is deducted over a six month period via payroll. Directors are also eligible to participate in the ESPP.
Also, the Company has an Employee and Director Stock Option Plan ("ESOP"). The exercise price is no lower than the closing market price on the trading day immediately preceding the date of grant. Options granted under the ESOP expire within a period of six years of granting, with vesting periods determined by the Human Resources Committee.
The Company employs a fair value method of accounting for all options issued to employees and directors on or after April 27, 2002. The fair value of options issued in the quarter was calculated using the Black- Scholes option pricing model and the following assumptions:
Quarter ended Quarter ended
October 31, 2010 October 31, 2009
--------------------------------------
Risk free interest rate 1.93% 0.31%
Expected life in years 4.8 5.5
Expected dividend yield 3.78% 6.08%
Volatility 37.17% 38.52%
During the quarter ended October 31, 2010, the Company issued 17,556 Deferred Share Units (DSUs) in lieu of options to directors and officers of the Company under its DSU Plan. DSUs vest evenly over a four year period. DSUs do not have an exercise price and can only be settled using cash consideration.
During the quarter ended October 31, 2010, the Company granted 39,758 Restricted Share Units (RSUs) (2010 - 93,278). The RSUs vest over three years. RSUs do not have an exercise price and are settled using common shares of the Company. During the quarter, the Company funded an independent trustee to purchase 39,758 shares related to the October 2010 grant and 46,639 shares related to a prior year grant and to provide custodial services. The Company recognizes compensation expense equal to the stock price on the grant date, over the vesting period.
7. Financial Instruments
The Company has exposure to the following risks from its use of financial instruments: credit risk, market risk and liquidity risk.
Credit Risk
Credit risk is the risk of financial loss to the Company if a licensee or counter-party to a financial instrument fails to meet its contractual obligations, and arises principally from the Company's accounts receivable and its foreign exchange contracts.
The Company provides extended payment terms to some licensees in the normal course of its operations. The Company's credit risk review includes performing periodic credit evaluations of its most significant licensees. In certain circumstances, the Company may utilize letters of guarantee or credit insurance to mitigate certain credit risks. Many of the Company's licensees are large national and international public companies. Due to the nature of the Company's operations, provisions for doubtful accounts are made on a licensee-by-licensee basis, based upon on-going review of licensee financial status.
Many of the Company's current licensees' operations are focused in the semiconductor industry. The semiconductor industry, particularly the DRAM and Flash memory segment, tends to be cyclical and, from time to time, suffers from economic difficulties due to pricing pressure as a result of an oversupply of memory devices.
Due to the long-term nature of many of the Company's licensing arrangements, in certain circumstances, the Company may not be able to obtain, at reasonable cost, credit insurance or other forms of credit risk mitigation instruments. A default of the remaining payments by one of the Company's licensees could have a materially adverse impact on the Company's future revenues, earnings, cash flow and financial position.
The Company limits its exposure to credit risk from counter-parties to derivative instruments by dealing only with major financial institutions. Management does not expect any counter-parties to fail to meet their obligations.
The Company invests its excess cash in investment grade securities, each with a maturity date not exceeding 12 months. The Company relies upon the credit rating of the counter-party to limit its credit risk. The Company does not invest in asset-backed commercial paper.
The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:
October 31, 2010 April 30, 2010
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Cash and cash equivalents $77,726 $70,732
Marketable securities 32,899 30,096
Accounts receivable 6,663 4,880
Other asset 824 2,053
Other liability (980) (992)
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$117,132 $106,769
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The aging of accounts receivable at the reporting date was:
October 31, 2010 April 30, 2010
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Current $748 $1,367
Past due 5,915 3,513
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$6,663 $4,880
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Of the amount past due, a portion has been recognized as revenue as the Company expects to collect the amount under a credit insurance policy.
Marketable securities comprise the following:
October 31, 2010 April 30, 2010
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Bonds & debentures $7,071 $27,087
Discount notes 25,828 3,009
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$32,899 $30,096
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Carrying values of bonds and debentures and discount notes include accrued interest and approximate market value. Investments in bonds and debentures and discount notes represent holdings in corporate and government short-term marketable securities as at October 31, 2010 and have a maturity date of one year or less.
Market Risk
Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates, will affect the Company's income or the value of its holding of financial instruments.
Foreign Exchange Risk
The Company's revenues are denominated primarily in U.S. dollars, giving rise to exposure to market risks from changes in foreign exchange rates. The Company is exposed to foreign currency fluctuations on its accounts receivable and future cash flows related to licensing arrangements denominated in U.S. dollars, as well as certain operating expenses and its other long-term liabilities obligations.
The Company's foreign exchange risk management includes the use of foreign exchange forward contracts to fix the exchange rates on certain foreign currency exposures. The Company's objective is to manage and control exposures and secure the Company's profitability on existing contracts and anticipated future cash flows. The Company does not utilize derivative instruments for trading or speculative purposes. The Company formally documents all relationships between derivative instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific firm contractually related commitments or anticipated transactions.
The Company also formally assesses, both at the inception and on an on-going basis, whether the derivatives that are used in hedging transactions are highly effective in off-setting changes in fair values or cash flows of hedged items. Hedge ineffectiveness is insignificant.
The forward foreign exchange contracts primarily require the Company to sell U.S. dollars for Canadian dollars at contractual rates. The Company had the following forward exchange contracts.
(In thousands of dollars) October 31, 2010
Equivalent
to CDN
Type Notional Currency Maturity dollars Fair Value
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Sell $9,475 USD less than 3 months $10,186 $511
Sell $18,375 USD 3-12 months $19,146 $313
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$824
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Buy $(5,000) USD 3-12 months $(6,093) $(980)
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(In thousands of dollars) April 30, 2010
Equivalent
to CDN
Type Notional Currency Maturity dollars Fair Value
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Sell $12,875 USD less than 3 months $13,836 $759
Sell $21,225 USD 3-12 months $22,890 $1,294
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$2,053
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Buy $(5,000) USD 3-12 months $(6,093) $(992)
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A one cent strengthening (weakening) of the U.S. dollar against the Canadian dollar would have decreased (increased) other comprehensive income by approximately $260,000 for Q2 fiscal 2011.
Interest Rate Risk
The Company is exposed to interest rate risk due to its holdings of interest-bearing marketable securities. It is the Company's policy to invest in securities with a maturity date of 12 months or less and Company practice to hold such securities, when possible, until maturity. A 1% increase (decrease) to the interest rate would result in an approximate $120,000 decrease (increase) in the fair value of the investments held as at the reporting date.
The Company is also exposed to interest rate risk due to its imputed interest on other long-term liabilities.
Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company's approach to managing liquidity risk is to ensure, as far as possible, that it will always have sufficient liquidity to meet liabilities when due. At October 31, 2010, the Company had $110.6 million of cash and marketable securities and had a secured bank credit facility of $10.0 million, less off balance sheet arrangements, as described in Note 18 to the fiscal 2010 Consolidated Financial Statements, to meet liabilities when due. The credit facility is collateralized by a general security agreement and contains no covenants.
All of the Company's financial liabilities, except for its "other long-term liabilities" and operating lease for its premises, have contractual maturities of less than 30 days.
The following chart indicates the contractual obligations to which the Company is bound over the following five years.
Payments Due by Period
(in thousands of dollars)
Less than After 5
Contractual Obligations Total 1 year 1-3 years 4-5 years years
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Operation lease $1,403 $314 $653 $436 -
Other long-term
obligations $52,978 $11,207 $11,207 $25,470 $5,094
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Total contractual
obligations $54,381 $11,521 $11,860 $25,906 $5,094
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Fair Value
The fair values of cash, marketable securities, accounts receivable, accounts payable and accrued liabilities approximates their carrying values due to their short-term maturity. The recorded amounts of long-term monetary liabilities approximate fair value, estimated by discounting expected cash flows at rates currently offered to the Company for debts of the same remaining maturities and conditions.
Fair value of the forward exchange contracts reflects the cash flow due to or from the Company if settlement had taken place on the reporting date.
The fair value of employee and director deferred stock units is determined using the market price of the Company's common stock on the reporting date.
8. Capital Management
The Company's objective is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. Management defines capital as the Company's shareholders' equity excluding accumulated other comprehensive income.
The Company has certain credit facilities with a Canadian chartered bank, which consist of an operating line, a foreign exchange forward contract facility and standby letters of credit. The Board of Directors does not establish quantitative return on capital criteria for management, but rather promotes year over year sustainable profitable growth. The Board of Directors also reviews on a quarterly basis the level of dividends paid to the Company's shareholders and monitors the share repurchase program activities. There were no changes in the Company's approach to capital management during the period. Neither the Company nor any of its subsidiaries is subject to externally imposed capital requirements.
9. Business Segment Information
The Company operates in one operating segment licensing patented intellectual property in the areas of semiconductors and telecommunications systems and developing semiconductor memory technology.
Contacts: Investor and Media Inquiries: MOSAID Technologies Inc. Michael Salter, Senior Director, Investor Relations and Corporate Communications 613-599-9539 x1205 Email Contact