Q3 Fiscal 2011 Financial Highlights
-- Q3 revenues of $20.2 million, up 14% from $17.7 million in Q3 fiscal
2010
-- Q3 pro forma net income of $9.4 million, up 29% from $7.3 million in Q3
fiscal 2010. Pro forma diluted EPS of $0.78, compared to $0.70 per
diluted share in Q3 fiscal 2010
-- Q3 GAAP net income of $7.4 million, up 231% from $2.2 million in Q3
fiscal 2010. GAAP diluted EPS of $0.61, compared to $0.21 per diluted
share in Q3 fiscal 2010
"The Company delivered excellent results during the third quarter," said John Lindgren, President and CEO, MOSAID. "Revenue growth reflected an increase in running royalty payments, while pro forma net income exceeded guidance due primarily to lower than expected operating expenses. The Company continued to generate strong cash flow from operations. As a result, we are raising annual guidance for pro forma net income."
"During the quarter, we settled our patent litigation suit against IBM, resulting in a favorable patent licensing agreement," said Lindgren. "We strengthened the patent portfolio with the purchase of patents and applications related to optical communications, wireless communications, sensor networks, storage systems, and power management systems. We also continued to file patents on our own inventions. As well, we introduced the MOSAID Dividend Reinvestment Plan, a cost- effective way for shareholders to accumulate shares in the Company."
MOSAID had cash and marketable securities of $118.9 million at the end of the third quarter of fiscal 2011, compared to $110.6 million at the end of the second quarter of fiscal 2011. In Q3 fiscal 2011, MOSAID returned $3.0 million to shareholders in quarterly dividend payments.
On March 3, 2011, MOSAID declared a quarterly dividend of $0.25 per share. The dividend, which is an eligible dividend, is payable on April 20, 2011 to shareholders of record as of April 6, 2011.
A reconciliation of pro forma net income to Canadian generally accepted accounting principles (GAAP) net income included is in the pro forma financial statements accompanying this press release.
Third Quarter Operational Highlights
Patent portfolio: MOSAID had 2,647 patents and applications at the end of Q3 fiscal 2011, up from 2,381 patents and applications at the end of Q2 fiscal 2011, and up from 1,915 patents and applications one year ago. During the quarter, MOSAID purchased for an undisclosed sum more than 200 optical communications patents and applications from PGT-Photonics S.p.A. of Italy. The Company also acquired patents related to sensor networks, and patents related to Hierarchical Storage Management computing systems and Power Management Systems. Subsequent to quarter end, the Company acquired wireless communications patents and applications related to handsets. There are no revenue sharing arrangements related to any of these acquisitions.
Litigation update: On Dec. 16, 2010, MOSAID entered into a patent license agreement with IBM Corporation. Under the terms of the non-exclusive worldwide patent license agreement, IBM received a five-year license to certain of MOSAID's patents. IBM will make a series of fixed payments to MOSAID during the term of the agreement. A separate settlement agreement ended the pending litigation between MOSAID and IBM.
Concerning the Complaint for Declaratory Judgment filed by Cisco Systems against MOSAID, during the third quarter, Cisco filed an Amended Complaint and MOSAID filed its Answer. A case management conference has yet to be scheduled.
Concerning MOSAID's Breach of Contract Complaint against LSI Corporation and Agere Systems, during the third quarter a case status conference was held, and it is expected that a trial date will soon be set.
Corporate developments: MOSAID established a Dividend Reinvestment Plan that allows qualified shareholders to acquire additional MOSAID shares by reinvesting any cash dividends paid on their respective shareholdings, without payment of brokerage or administration fees. The Company also announced changes to the Board of Directors. Jerry Mills, an acclaimed patent litigation attorney, technology entrepreneur and investor was appointed to the Board. Rob Kramer, Managing Partner of Altitude Capital Partners, stepped down from the Board due to other commitments. The Board thanks him for his many contributions.
Q4 and Fiscal 2011 Financial Guidance
Management offers the following guidance for the fourth quarter of fiscal 2011:
-- Q4 revenues of $20.2 million to $21.3 million
-- Q4 pro forma net income of $6.2 million to $6.9 million, or $0.51 to
$0.57 per diluted share, based on 12.1 million diluted shares
The Company is updating its guidance for fiscal 2011:
-- Fiscal 2011 revenues are now expected to be in the range of $78.9
million to $80.0 million, compared to $77.0 million to $80.0 million
previously
-- Fiscal 2011 pro forma net income is now expected to be in the range of
$33.5 million to $34.2 million, or $2.79 to $2.85 per diluted share,
based on 12.0 million diluted shares, compared to the previous guidance
of $31.2 million to $32.6 million, or $2.62 to $2.74 per diluted share,
based on 11.9 million diluted shares
The above information is considered material forward-looking information. Financial guidance is provided to assist investors and other interested parties in understanding the Company's business. The reader is cautioned that using this information for any other purpose may be inappropriate.
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.
The "Forward-Looking Information" section of this document provides information on various risks and uncertainties faced by the Company.
Conference Call and Webcast
Management will hold a conference call and webcast on Thursday, March 3, 2011 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 29045992. 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 communications technologies 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.
FINANCIAL STATEMENTS AND NOTES TO FOLLOW
MOSAID Technologies Incorporated
Unaudited Pro Forma Consolidated Financial Statements
For the Quarter Ended January 31, 2011
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 Nine Months Ended
January 31 January 31
2011 2010 2011 2010
----------------------------------------------------------------------------
Revenues $20,211 $17,688 $58,661 $51,224
Operating expenses
Patent portfolio
management 2,136 1,670 6,570 5,203
Patent licensing and
litigation 2,338 3,066 7,326 6,666
Research and development 827 621 1,988 2,137
General and administration 1,768 1,615 4,509 4,365
Foreign exchange loss
(gain) 75 (28) 210 394
----------------------------------------------------------------------------
7,144 6,944 20,603 18,765
----------------------------------------------------------------------------
Pro forma income from
operations 13,067 10,744 38,058 32,459
Investment income 337 96 954 311
----------------------------------------------------------------------------
Pro forma income before
income tax expense 13,404 10,840 39,012 32,770
Income tax expense 4,021 3,580 11,703 10,816
----------------------------------------------------------------------------
Pro forma net income $9,383 $7,260 $27,309 $21,954
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Pro forma earnings per share
Basic $0.79 $0.70 $2.31 $2.14
Diluted $0.78 $0.70 $2.29 $2.13
Weighted average number of
shares
Basic 11,865,305 10,307,569 11,807,801 10,267,187
Diluted 12,046,946 10,367,317 11,929,406 10,324,734
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 Nine Months ended
January 31 January 31
2011 2010 2011 2010
---------------------------------------------------------------------------
GAAP net income $7,375 $2,224 $19,147 $13,699
Add (deduct):
Stock-based compensation 572 331 1,415 789
Patent amortization and
imputed interest 4,129 3,631 12,382 11,327
Special committee - - - 719
Foreign exchange (gain) (628) (282) (400) (3,212)
Income tax expense - for the
above items (1,987) (1,154) (4,841) (3,444)
Future income tax
revaluation - 2,706 (200) 2,706
Discontinued operations (net
of tax) (78) (196) (194) (630)
---------------------------------------------------------------------------
Pro forma net income $9,383 $7,260 $27,309 $21,954
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Pro forma foreign exchange loss (gain) is reconciled to GAAP foreign
exchange (gain) as follows:
(Dollar amounts in
thousands) Quarter ended Nine Months ended
January 31 January 31
2011 2010 2011 2010
---------------------------------------------------------------------------
GAAP foreign exchange (gain) $(553) $(310) $(190) $(2,818)
Less: foreign exchange
(gain) on long-term debt (628) (282) (400) (3,212)
---------------------------------------------------------------------------
Pro forma foreign exchange
loss (gain) $75 $(28) $210 $394
---------------------------------------------------------------------------
---------------------------------------------------------------------------
MOSAID Technologies Incorporated
Unaudited Consolidated Financial Statements
For the Quarter Ended January 31, 2011
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 Nine Months Ended
January 31 January 31
2011 2010 2011 2010
---------------------------------------------------------------------------
Revenues $20,211 $17,688 $58,661 $51,224
Operating expenses
Patent portfolio
management 2,136 1,670 6,570 5,203
Patent licensing and
litigation 2,338 3,066 7,326 6,666
Research and development 827 621 1,988 2,137
General and administration 1,768 1,615 4,509 4,365
Foreign exchange (gain) (553) (310) (190) (2,818)
Stock-based compensation
(Note 6) 572 331 1,415 789
Special committee - - - 719
Patent amortization and
imputed interest 4,129 3,631 12,382 11,327
---------------------------------------------------------------------------
11,217 10,624 34,000 28,388
---------------------------------------------------------------------------
Income from operations 8,994 7,064 24,661 22,836
Investment income 337 96 954 311
---------------------------------------------------------------------------
Income before income tax
expense and discontinued 9,331 7,160 25,615 23,147
Income tax expense 2,034 5,132 6,662 10,078
---------------------------------------------------------------------------
Income before discontinued
operations 7,297 2,028 18,953 13,069
Discontinued operations
income
(net of tax) (Note 5) 78 196 194 630
---------------------------------------------------------------------------
Net income 7,375 2,224 19,147 13,699
Dividends 2,968 2,581 8,855 7,714
Retained earnings, beginning
of period 28,587 17,949 22,702 11,607
---------------------------------------------------------------------------
Retained earnings, end of
period $32,994 $17,592 $32,994 $17,592
---------------------------------------------------------------------------
Earnings per share (Note 4)
Basic - before
discontinued operations $0.61 $0.20 $1.61 $1.27
Diluted - before
discontinued operations $0.61 $0.20 $1.59 $1.27
Basic - net earnings $0.62 $0.22 $1.62 $1.33
Diluted - net earnings $0.61 $0.21 $1.61 $1.33
Weighted average number of
shares
Basic 11,865,305 10,307,569 11,807,801 10,267,187
Diluted 12,046,946 10,367,317 11,929,406 10,324,734
See accompanying Notes to the Consolidated Financial Statements
MOSAID TECHNOLOGIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands of Canadian Dollars)
As at As at
January 31, 2011 April 30, 2010
(unaudited) (audited)
----------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $89,205 $70,732
Marketable securities 29,646 30,096
Accounts receivable 7,104 4,880
Prepaid expenses 759 698
Other asset 627 2,053
Future income tax asset 9,797 10,930
----------------------------------------------------------------------------
137,138 119,389
Property and equipment 268 257
Acquired intangible assets 71,919 80,685
Investment tax credits
receivable 15,861 15,748
----------------------------------------------------------------------------
$225,186 $216,079
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Current Liabilities
Accounts payable and
accrued liabilities $8,046 $7,734
Deferred revenue 243 4,611
Other liability 1,085 992
Current portion of other
long-term liabilities 11,357 8,294
----------------------------------------------------------------------------
20,731 21,631
Deferred gain on sale-
leaseback 669 828
Other long-term liabilities 31,858 33,132
Future income tax liability 6,909 6,147
----------------------------------------------------------------------------
60,167 61,738
----------------------------------------------------------------------------
Shareholders' Equity (Note
3)
Share capital 128,379 126,573
Contributed surplus 3,131 3,452
Retained earnings 32,994 22,702
Accumulated other
comprehensive income 515 1,614
----------------------------------------------------------------------------
165,019 154,341
----------------------------------------------------------------------------
$225,186 $216,079
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements
MOSAID TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of Canadian Dollars)
(Unaudited)
Quarter Ended Nine Months Ended
January 31 January 31
2011 2010 2011 2010
---------------------------------------------------------------------------
Operating
Income before discontinued
operations $7,297 $2,028 $18,953 $13,069
Items not affecting cash
Amortization 3,426 3,039 10,254 9,087
Stock-based compensation 572 276 1,415 734
Unrealized foreign
exchange (gain) on other
long-term liabilities (628) (282) (400) (3,212)
Future income taxes and
investment tax credits 831 4,654 2,155 6,081
---------------------------------------------------------------------------
11,498 9,715 32,377 25,759
Change in non-cash working
capital items from
continuing operations (342) 8,086 (6,339) 10,399
---------------------------------------------------------------------------
11,156 17,801 26,038 36,158
---------------------------------------------------------------------------
Investing
Acquisition of property
and equipment and
acquired intangibles (1,359) (5) (1,500) (640)
Acquisition of marketable
securities (11,254) - (38,759) (3,316)
Proceeds on disposal and
maturity of arketable
securities 14,507 (5) 39,209 18,487
---------------------------------------------------------------------------
1,894 (10) (1,050) 14,531
---------------------------------------------------------------------------
Financing
Increase (decrease) in other
long-term liabilities 742 642 2,236 (9,057)
Dividends paid (2,968) (2,581) (8,855) (7,714)
Funding of restricted share
unit plan (17) (880) (2,085) (880)
Issuance of common shares 652 306 2,156 1,295
---------------------------------------------------------------------------
(1,591) (2,513) (6,548) (16,356)
---------------------------------------------------------------------------
Net cash inflow from
continuing operations 11,459 15,278 18,440 34,333
Net cash inflow (outflow)
inflow from discontinued
operations 20 (231) 33 (693)
---------------------------------------------------------------------------
Net cash inflow 11,479 15,047 18,473 33,640
Cash and cash equivalents,
beginning of period 77,726 51,492 70,732 32,899
---------------------------------------------------------------------------
Cash and cash equivalents,
end of period $89,205 $66,539 $89,205 $66,539
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Supplementary Information:
Cash on hand and bank
balances $89,205 $62,181 $89,205 $62,181
Short-term investments - 4,358 - 4,358
---------------------------------------------------------------------------
Total cash and cash
equivalents $89,205 $66,539 $89,205 $66,539
---------------------------------------------------------------------------
---------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements
MOSAID TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands of Canadian Dollars)
(Unaudited)
Quarter Ended Nine Months Ended
January 31 January 31
2011 2010 2011 2010
---------------------------------------------------------------------------
Net income $7,375 $2,224 $19,147 $13,699
---------------------------------------------------------------------------
Other comprehensive income,
net of tax:
Gains (losses) on
derivatives designated as
cash flow hedges 324 134 197 1,479
Gains (losses) on
derivatives designated as
cash flow hedges in prior
periods transferred to
earnings in the current
period (487) (982) (1,296) (2,291)
---------------------------------------------------------------------------
Other comprehensive income
(loss) (163) (848) (1,099) (812)
---------------------------------------------------------------------------
Comprehensive income $7,212 $1,376 $18,048 $12,887
---------------------------------------------------------------------------
---------------------------------------------------------------------------
See accompanying Notes to the Consolidated Financial Statements
MOSAID TECHNOLOGIES INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Quarters ended January 31, 2011 and 2010
(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 nine months ended January 31, 2011 and for the year ended April 30, 2010:
Accumu-
lated
Other
Contri- Compre-
Common Common buted Retained hensive
Shares Shares Surplus Earnings Income Total
(Number) ($) ($) ($) ($) ($)
---------------------------------------------------------------------------
Balance at April
30, 2010 11,763,626 $126,573 $3,452 $22,702 $1,614 $154,341
---------------------------------------------------------------------------
Net income - - - 19,147 - 19,147
---------------------------------------------------------------------------
Dividends - - - (8,855) - (8,855)
---------------------------------------------------------------------------
Employee and
Director Stock
Option Plan 102,303 2,912 (889) - - 2,023
---------------------------------------------------------------------------
Employee and
Director Stock
Purchase
Program 13,474 155 (23) - - 132
---------------------------------------------------------------------------
Restricted share
unit plan - (1,261) (824) - - (2,085)
---------------------------------------------------------------------------
Stock-based
compensation - - 1,415 - - 1,415
---------------------------------------------------------------------------
Other
comprehensive
income - - - - (1,099) (1,099)
---------------------------------------------------------------------------
Balance at
January 31, 2011 11,879,403 $128,379 $3,131 $32,994 $515 $165,019
---------------------------------------------------------------------------
Accumu-
lated
Other
Contri- Compre-
Common Common buted Retained hensive
Shares Shares Surplus Earnings Income Total
(Number) ($) ($) ($) ($) ($)
---------------------------------------------------------------------------
Balance at April
30, 2009 10,184,323 $94,741 $3,753 $11,607 $446 $110,547
---------------------------------------------------------------------------
Net income - - - 21,750 - 21,750
---------------------------------------------------------------------------
Dividends - - - (10,655) - (10,655)
---------------------------------------------------------------------------
Employee and
Director Stock
Option Plan 119,475 2,144 (882) - - 1,262
---------------------------------------------------------------------------
Employee and
Director Stock
Purchase
Program 22,328 496 (337) - - 159
---------------------------------------------------------------------------
Restricted share
unit plan - (601) (271) - - (872)
---------------------------------------------------------------------------
Stock-based
compensation - - 1,189 - - 1,189
---------------------------------------------------------------------------
Equity financing 1,437,500 29,793 - - - 29,793
---------------------------------------------------------------------------
Other
comprehensive
income - - - - 1,168 1,168
---------------------------------------------------------------------------
Balance at April
30, 2010 11,763,626 $126,573 $3,452 $22,702 $1,614 $154,341
---------------------------------------------------------------------------
4. Earnings per Share
The following is a reconciliation of the numerator and denominator of the basic and diluted per share computations:
Quarter Ended Nine Months Ended
January 31 January 31
------------------------------------------------
2011 2010 2011 2010
------------------------------------------------
Income before discontinued
operations $7,297 $2,028 $18,953 $13,069
Discontinued operations (net
of tax) 78 196 194 630
------------------------------------------------
Net income $7,375 $2,224 $19,147 $13,699
------------------------------------------------
------------------------------------------------
Weighted average number of
common 11,865,305 10,307,569 11,807,801 10,267,187
Net effect of stock options 181,641 59,748 121,605 57,547
------------------------------------------------
Weighted average diluted
number of 12,046,946 10,367,317 11,929,406 10,324,734
------------------------------------------------
------------------------------------------------
Earnings per share
Basic - before
discontinued operations $0.61 $0.20 $1.61 $1.27
Diluted - before
discontinued operations $0.61 $0.20 $1.59 $1.27
Basic - net income $0.62 $0.22 $1.62 $1.33
Diluted - net income $0.61 $0.21 $1.61 $1.33
For the quarters ended January 31, 2011 and January 31, 2010, 3,000 and 439,131 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 nine months ended January 31, 2011 and January 31, 2010, 225,050 and 442,131 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 752,892 and 639,395 options issued and outstanding as at January 31, 2011 and January 31, 2010, respectively.
5. Discontinued operations
Quarter Ended Nine Months Ended
January 31 January 31
------------------------------------------------
2011 2010 2011 2010
------------------------------------------------
Revenues $57 $- $113 $18
------------------------------------------------
Gain on sale of assets 52 292 157 920
------------------------------------------------
Earnings before tax 109 292 270 938
Income tax expense 31 96 76 308
------------------------------------------------
Discontinued operations (net
of tax) $78 $196 $194 $630
------------------------------------------------
------------------------------------------------
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 January 31,
2011 2010
-----------------------------------------------
Risk free interest rate 2.55% 0.28%
Expected life in years 5.0 5.5
Expected dividend yield 3.23% 5.30%
Volatility 36.96% 38.68%
During the quarter ended January 31, 2011, the Company did not issue Deferred Share Units (DSUs) (2010 - 16,446) 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 January 31, 2011, the Company granted 634 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 634 shares related to the Q3 fiscal 2011 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:
January 31, 2011 April 30, 2010
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Cash and cash equivalents $89,205 $70,732
Marketable securities 29,646 30,096
Accounts receivable 7,104 4,880
Other asset 627 2,053
Other liability (1,085) (992)
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$125,497 $106,769
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The aging of accounts receivable at the reporting date was:
January 31, 2011 April 30, 2010
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Current $4,220 $1,367
Past due 2,884 3,513
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$7,104 $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:
January 31, 2011 April 30, 2010
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Bonds & debentures $719 $27,087
Discount notes 28,927 3,009
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$29,646 $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 January 31, 2011 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) January 31, 2011
Equivalent to Fair
Type Notional Currency Maturity CDN dollars Value
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less than 3
Sell $6,750 USD months $6,910 $149
Sell $10,750 USD 3-12 months $11,280 $478
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$627
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less than 3
Buy $(5,000) USD months $(6,093) $(1,085)
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(In thousands of dollars) April 30, 2010
Equivalent to Fair
Type Notional Currency Maturity CDN dollars Value
---------------------------------------------------------------------------
less than 3
Sell $12,875 USD 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 $250,000 for Q3 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 January 31, 2011, the Company had $118.9 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 1-3 4-5 After 5
Contractual Obligations Total 1 year years years years
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Operation lease $1,362 $327 $654 $381 $-
Other long-term
obligations 52,114 11,525 10,523 25,055 5,011
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Total contractual
obligations $53,476 $11,852 $11,177 $25,436 $5,011
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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 communications technologies and developing semiconductor memory technology.
Contacts: MOSAID Technologies Inc. Michael Salter, Senior Director IR 613-599-9539 x 1205 Email Contact MOSAID Technologies Inc. Joe Brown, Vice President and CFO 613-599-9539 x 1206 Email Contact