UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the Quarterly Period Ended September 30, 2008
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Transition Period from
to
Commission File Number 000-31803
TRANSMETA CORPORATION
(Exact name of Registrant as specified in its charter)
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Delaware
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77-0402448
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(State or other jurisdiction of
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(I.R.S. employer
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incorporation or organization)
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identification no.)
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2540 Mission College Boulevard, Santa Clara, CA 95054
(Address of principal executive offices, including zip code)
(408) 919-3000
(Registrants 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
þ
No
o
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 large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
þ
There were 12,204,671 shares of the Registrants common stock, par value $0.00001 per
share, outstanding on October 15, 2008.
TRANSMETA CORPORATION
FORM 10-Q
Quarterly Period Ended September 30, 2008
TABLE OF CONTENTS
Caution Regarding Forward-Looking Statements
The following condensed consolidated financial statements, related notes, and management
discussion and analysis contained in this report should be read in conjunction with the information
included in our Annual Report on Form 10-K for the year ended December 31, 2007 and subsequent
reports filed with the Securities and Exchange Commission (SEC).The information contained in this
report is not a complete description of our business or the risks associated with an investment in
our common stock. We urge you to carefully review and consider the various disclosures made by us
in this report and in our other reports filed regularly with the SEC, some of which reports discuss
our business in greater detail.
This report contains forward-looking statements that are based upon our current
expectations, estimates and projections about our industry that reflect our beliefs and certain
assumptions based upon information made available to us at the time of this report. Words such as
anticipates, expects, intends, plans, believes, seeks, estimates, may, could,
will and variations of these words or similar expressions are intended to identify
forward-looking statements. Such statements include, but are not limited to, statements concerning
anticipated trends or developments in our business and the markets in which we operate, the
competitive nature and anticipated growth of those markets, our expectations for our future
performance and the market acceptance of our products, our ability to migrate our products to
smaller process geometries, and our future gross margins, operating expenses and need for
additional capital.
Investors are cautioned that such forward-looking statements are only predictions, which
may differ materially from actual results or future events. These statements are not guarantees of
future performance and are subject to risks, uncertainties and assumptions that are difficult to
predict. Some of the important risk factors that may affect our business, results of operations and
financial condition are set out and discussed below in Part II, Item 1A entitled Risk Factors.
You should carefully consider those risks, in addition to the other information in this report and
in our other filings with the SEC, before deciding to invest in our company or to maintain or
change your investment. Investors are cautioned not to place reliance on these forward-looking
statements, which reflect managements analysis only as of the date of this report. We undertake no
obligation to revise or update any forward-looking statement for any reason.
Financial terminology, used widely throughout this Quarterly Report on Form 10-Q, has
been abbreviated and, as such, these abbreviations are defined below for your convenience
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Accounting Principles Board opinion
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APB Opinion
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Black-Scholes-Merton valuation model
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BSM model
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FASB Emerging Issues Task Force issue
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EITF Issue
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FASB Interpretation
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FIN
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FASB Staff Accounting Position
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FSP
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Financial Accounting Standards Board
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FASB
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SEC Staff Accounting Bulletin
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SAB
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Securities and Exchange Commission
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SEC
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Statement of Financial Accounting Standards
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SFAS
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From time to time we will refer to the abbreviated names of certain entities and, as
such, have provided a chart to indicate the full names of those entities for your convenience.
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Advanced Micro Devices, Inc.
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AMD
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Intel Corporation
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Intel
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Microsoft Corporation
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Microsoft
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NEC Electronics
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NEC
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Novafora,
Inc.
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Novafora
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NVIDIA Corporation
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NVIDIA
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Seiko Epson Corporation
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Epson
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Sony Corporation
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Sony
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Toshiba Corporation
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Toshiba
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3
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
TRANSMETA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
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September 30,
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December 31,
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2008
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2007(1)
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(unaudited)
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(In thousands, except for share data)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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205,271
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$
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15,607
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Short-term investments
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49,969
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2,968
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Accounts receivable
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2
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163
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Other receivables, current
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149,400
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Prepaid expenses and other current assets
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1,963
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2,476
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Total current assets
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257,205
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170,614
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Other receivables, long-term
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85,200
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Property and equipment, net
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194
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284
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Patents and patent rights, net
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2,388
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Other assets
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200
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800
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Total assets
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$
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257,599
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$
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259,286
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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1,029
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$
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341
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Accrued compensation
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774
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15,351
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Income tax payable
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15
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3,306
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Accrued restructuring costs
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352
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1,592
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Other accrued liabilities
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473
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1,028
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Current portion of deferred income from settlement and licensing
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23,460
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23,460
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Current portion of long-term payable
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800
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667
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Total current liabilities
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26,903
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45,745
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Long-term deferred income from settlement and licensing, net of
current portion
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193,545
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211,140
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Long-term payables, net of current portion
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200
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800
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Total liabilities
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220,648
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257,685
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Commitments and contingencies (notes 13 and 15)
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Stockholders equity:
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Convertible preferred stock, $0.00001 par value, at amounts
paid in; authorized shares 5,000,000. Issued and outstanding
shares - 1,000,000 and liquidation preference of $7.5 million,
at September 30, 2008 and December 31, 2007
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6,966
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6,966
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Common stock, $0.00001 par value, at amounts paid in;
authorized shares 50,000,000. Issued and outstanding
12,204,088 shares at September 30, 2008 and 12,021,388 at
December 31, 2007
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743,641
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739,268
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Treasury stock 39,843 shares at September 30, 2008 and December
31, 2007
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(2,439
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)
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(2,439
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)
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Accumulated other comprehensive income
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190
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29
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Accumulated deficit
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(711,407
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)
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(742,223
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)
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Total stockholders equity
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36,951
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1,601
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Total liabilities and stockholders equity
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$
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257,599
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$
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259,286
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(1)
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Derived from the audited financial statements of Transmeta Corporation
as of December 31, 2007 but does not include all disclosures required
by accounting principles generally accepted in the United States.
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(See Notes to Unaudited Condensed Consolidated Financial Statements)
4
TRANSMETA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2008
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2007
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2008
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2007
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(In thousands, except for per share data)
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Revenue:
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Product
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$
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$
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$
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253
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$
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167
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License
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25,299
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1
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25,905
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1
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Service
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43
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168
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2,186
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Total revenue
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25,299
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44
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26,326
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2,354
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Cost of revenue:
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Product
|
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3
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80
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Service(*)
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|
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18
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|
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|
163
|
|
|
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1,236
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Impairment charge on inventories
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|
|
|
|
|
|
|
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|
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|
364
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|
|
|
|
|
|
|
|
|
|
|
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Total cost of revenue
|
|
|
|
|
|
|
18
|
|
|
|
166
|
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|
|
1,680
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|
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|
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|
|
|
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Gross profit
|
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25,299
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26
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26,160
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|
674
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Operating expenses:
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|
|
|
|
|
|
|
|
|
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|
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Income from settlement and licensing
|
|
|
(5,865
|
)
|
|
|
|
|
|
|
(17,595
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)
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Income from license and receivable
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|
|
(2,855
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)
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|
|
|
|
|
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(2,855
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)
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Research and development(*)
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1,586
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1,336
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6,751
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8,809
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Selling, general and administrative(*)
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3,700
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6,107
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12,150
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17,857
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Restructuring charges, net
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(97
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)
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|
177
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|
|
|
700
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|
|
|
8,878
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Amortization of patents and patent rights
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|
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|
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1,711
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2,388
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5,134
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Impairment charge on long-lived and
other assets
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|
|
|
|
|
|
|
|
|
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|
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|
302
|
|
|
|
|
|
|
|
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Total operating expenses
|
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|
(3,531
|
)
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|
|
9,331
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|
1,539
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|
40,980
|
|
|
|
|
|
|
|
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|
|
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Operating income (loss)
|
|
|
28,830
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|
|
|
(9,305
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)
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|
|
24,621
|
|
|
|
(40,306
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)
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Interest income and other, net
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|
1,813
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|
|
|
250
|
|
|
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6,197
|
|
|
|
1,109
|
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Interest expense
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|
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|
|
|
(15
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)
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|
|
(2
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)
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(53
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)
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|
|
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|
|
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Net income (loss) before income tax
|
|
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30,643
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|
|
|
(9,070
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)
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|
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30,816
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|
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(39,250
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)
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Provision for income taxes
|
|
|
|
|
|
|
3
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|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net income (loss)
|
|
|
30,643
|
|
|
|
(9,073
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)
|
|
|
30,816
|
|
|
|
(39,257
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)
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|
|
|
|
|
|
|
|
|
|
|
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|
Deemed dividend for beneficial
conversion feature of preferred stock
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|
|
|
|
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(3,630
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)
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|
|
|
|
|
|
(3,630
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common
shareholders
|
|
$
|
30,643
|
|
|
$
|
(12,703
|
)
|
|
$
|
30,816
|
|
|
$
|
(42,887
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net income (loss) per share attributable to
common shareholders basic
|
|
$
|
2.52
|
|
|
$
|
(1.24
|
)
|
|
$
|
2.54
|
|
|
$
|
(4.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to
common shareholders diluted
|
|
$
|
2.31
|
|
|
$
|
(1.24
|
)
|
|
$
|
2.33
|
|
|
$
|
(4.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic
|
|
|
12,170
|
|
|
|
10,236
|
|
|
|
12,145
|
|
|
|
10,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted
|
|
|
13,265
|
|
|
|
10,236
|
|
|
|
13,220
|
|
|
|
10,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) Includes stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service revenue
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
82
|
|
|
$
|
18
|
|
Research and development
|
|
|
156
|
|
|
|
(271
|
)
|
|
|
1,599
|
|
|
|
11
|
|
Selling, general and administrative
|
|
$
|
731
|
|
|
$
|
244
|
|
|
$
|
2,047
|
|
|
$
|
941
|
|
(See Notes to Unaudited Condensed Consolidated Financial Statements)
5
TRANSMETA
CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
30,816
|
|
|
$
|
(39,257
|
)
|
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
3,728
|
|
|
|
970
|
|
Depreciation
|
|
|
194
|
|
|
|
465
|
|
Gain on disposal of fixed assets, net
|
|
|
(37
|
)
|
|
|
(171
|
)
|
Realized gain on marketable securities
|
|
|
(14
|
)
|
|
|
|
|
Amortization of patents and patent rights
|
|
|
2,388
|
|
|
|
5,134
|
|
Impairment charge on inventories
|
|
|
|
|
|
|
364
|
|
Impairment charge on long-lived and other assets
|
|
|
|
|
|
|
302
|
|
Non cash restructuring charges
|
|
|
700
|
|
|
|
8,878
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, current
|
|
|
161
|
|
|
|
265
|
|
Inventories
|
|
|
|
|
|
|
(360
|
)
|
Prepaid expenses and other current assets
|
|
|
513
|
|
|
|
47
|
|
Other receivables
|
|
|
234,600
|
|
|
|
|
|
Other assets
|
|
|
600
|
|
|
|
1,131
|
|
Accounts payable and accrued liabilities
|
|
|
(14,855
|
)
|
|
|
(643
|
)
|
Income tax payable
|
|
|
(3,291
|
)
|
|
|
(45
|
)
|
Deferred income from settlement and licensing
|
|
|
(17,595
|
)
|
|
|
|
|
Deferred revenue
|
|
|
|
|
|
|
(15
|
)
|
Advances from customers
|
|
|
|
|
|
|
(1,320
|
)
|
Accrued restructuring charges
|
|
|
(1,940
|
)
|
|
|
(9,270
|
)
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
235,968
|
|
|
|
(33,525
|
)
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of available-for-sale investments
|
|
|
(139,616
|
)
|
|
|
(2,978
|
)
|
Proceeds from sale or maturity of
available-for-sale investments
|
|
|
92,734
|
|
|
|
24,000
|
|
Proceeds from fixed asset disposals
|
|
|
37
|
|
|
|
186
|
|
Purchase of property and equipment
|
|
|
(104
|
)
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(46,949
|
)
|
|
|
21,161
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net proceeds from direct placement offering
of common stock and warrants
|
|
|
|
|
|
|
11,600
|
|
Net proceeds from issuance of preferred stock
|
|
|
|
|
|
|
6,966
|
|
Proceeds from sales of common stock under
employee stock purchase and incentive option
plans
|
|
|
441
|
|
|
|
1,832
|
|
Proceeds from exercise of warrants
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
645
|
|
|
|
20,398
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
189,664
|
|
|
|
8,034
|
|
Cash and cash equivalents at beginning of period
|
|
|
15,607
|
|
|
|
11,595
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
205,271
|
|
|
$
|
19,629
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash financing
activities during the period:
|
|
|
|
|
|
|
|
|
Deemed dividend for beneficial conversion feature of
preferred stock
|
|
$
|
|
|
|
$
|
(3,630
|
)
|
|
|
|
|
|
|
|
(See Notes to Unaudited Condensed Consolidated Financial Statements)
6
TRANSMETA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Overview
Formation and Business of the Company
Transmeta Corporation (the Company or Transmeta) develops and licenses innovative
computing, microprocessor and semiconductor technologies and related intellectual property.
Incorporated in California as Transmeta Corporation on March 3, 1995, Transmeta was reincorporated
on October 26, 2000 as a Delaware corporation. Transmeta first became known for designing,
developing and selling its highly efficient x86-compatible software-based microprocessors, which
deliver a balance of low power consumption, high performance, low cost and small size suited for
diverse computing platforms.
The Company is presently focused on licensing to other companies its advanced power
management technologies for controlling leakage and increasing power efficiency in semiconductor
devices (licensed under its LongRun2
tm
trademark) and its portfolio of intellectual
property rights.
Recent
Developments
On November 17, 2008, the Company
announced that the Company had entered into an Agreement and Plan of
Merger (Merger Agreement) to be acquired by Novafora for $255.6 million in cash, subject to working capital
and other adjustments, in a transaction where Transmeta would be merged with and into a
wholly-owned subsidiary of Novafora. The Merger Agreement provides, among other things, that Transmeta may
not enter into any future licensing transaction prior to closing of the merger without Novaforas consent.
The foregoing description of the
Merger Agreement and other references to the Merger Agreement in this Form 10-Q
do not purport to be complete and are qualified in their entirety by reference to the full text of the Merger Agreement,
a copy of which will be filed with the SEC, and the terms of which
are incorporated herein by reference.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and
generally accepted accounting principles (GAAP) in the United States for interim financial
information. However, certain information or footnote disclosures normally included in financial
statements prepared in accordance with GAAP in the United States have been condensed, or omitted,
pursuant to the rules and regulations of the SEC. The condensed consolidated balance sheet as of
December 31, 2007 was derived from the audited financial statements included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2007, but does not include all
disclosures required by GAAP in the United States, although the Company believes that the
disclosures made are adequate to make the information presented not misleading. The preparation of
financial statements in accordance with GAAP in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial statements. Actual
results could differ from those estimates. Significant estimates made in preparing the financial
statements include revenue recognition and costs of revenue, long-lived and intangible asset
valuations, restructuring charges and loss contingencies. In the opinion of the Companys
management, the financial statements include all adjustments (which are of a normal and recurring
nature) necessary for the fair presentation of the results of the interim periods presented. These
financial statements should be read in conjunction with the audited consolidated financial
statements and the notes thereto included in the Companys Annual Report on Form 10-K for the year
ended December 31, 2007. The results of operations for the three and nine months ended September
30, 2008 are not necessarily indicative of the operating results for the full fiscal year or any
future period.
Reclassifications
Certain reclassifications have been made to prior year balances in order to conform to
the current year presentation. Such reclassifications have had no impact on previously reported net
loss or working capital.
2. Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial
Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115
(SFAS 159).
SFAS 159 allows entities to elect to measure many financial instruments and certain other items
that are similar to financial instruments at fair value that are not currently required to be
measured at fair value. The election is made on an instrument-by-instrument basis and is
irrevocable. If the fair value option is elected for an instrument, SFAS 159 specifies that all
subsequent changes in fair value for that instrument shall be reported in earnings. Upon initial
adoption, SFAS 159 provides entities with a one-time chance to elect the fair value option for the
eligible items. The effect of the first measurement to fair value should be reported as a
cumulative-effect adjustment to the opening balance of retained earnings (cumulative deficit) in
the year the statement is adopted. SFAS 159 became effective for the Company beginning on
January 1, 2008. The Company did not make any elections for fair value accounting and therefore, it
did not record a cumulative-effect adjustment to its opening cumulative deficit balance.
In December 2007, the FASB issued SFAS No. 141 (revised 2007),
Business Combinations
(SFAS
141(R)). SFAS 141(R) defines the acquirer as the entity that obtains control of one or more
businesses in the business combination and establishes the acquisition date as the date that the
acquirer achieves control. SFAS 141(R) requires the acquirer to recognize the assets acquired,
liabilities assumed, contractual contingencies, and contingent consideration at their fair values
as of the acquisition date. Additionally, non-controlling interests (formerly known as minority
interests) will be valued at fair value at the acquisition date. SFAS 141(R) further requires that
acquisition-related costs be recognized separately from the acquisition and expensed as incurred,
that restructuring costs generally be expensed in periods subsequent to the acquisition date, and
that changes in deferred tax asset valuation allowances and income tax uncertainties after the
acquisition date generally be recorded as income tax expense. In addition, acquired in-process
research and development will be capitalized as an intangible asset and
7
amortized over its
estimated useful life. The Companys adoption of SFAS 141(R) will prospectively change its
accounting treatment for any business combinations effected on or after January 1, 2009. Earlier
adoption is prohibited.
In December 2007, the FASB issued SFAS No.160,
Non-controlling Interests in Consolidated
Financial Statements an amendment of ARB No. 51
(SFAS 160). SFAS 160 changes the accounting
and reporting for minority interests, which will be re-characterized as non-controlling interests
and classified as a component of equity. The amount of net income attributable to the
non-controlling interest will be included in consolidated net income on the face of the income
statement. SFAS 160 also includes expanded disclosure requirements regarding the interests of the
parent and its non-controlling interest. As of September 30, 2008, the Company did not have any
minority interests, so it anticipates no impact from adopting SFAS 160. The Companys adoption of
SFAS 160 will prospectively change its accounting treatment for any non-controlling interests
acquired starting January 1, 2009. Earlier adoption is prohibited.
In February 2008, the FASB issued FSP FAS 157-2,
Effective FAS Date of FASB Statement
No. 157
(FSP FAS 157-2), to partially defer SFAS No. 157,
Fair Value Measurements
(SFAS 157). FSP FAS 157-2 defers by one year the effective date of SFAS 157 for nonfinancial assets
and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a
recurring basis (at least annually), which for the Company is effective beginning January 1, 2009.
The Company is currently evaluating the impact of adopting the provisions of FSP FAS 157-2.
On April 25, 2008, the FASB issued FSP FAS142-3,
Determination of the Useful Life of
Intangible Asset
(FSP FAS142-3). FSP FAS 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 (SFAS 142)
. The intent
of FSP FAS 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 FAS 142-3 is effective for the Company beginning January 1, 2009. As of September
30, 2008, the Company did not have any intangible assets, so it anticipates no impact from adopting
FSP FAS 142-3. The Companys adoption of FSP FAS 142-3 will prospectively change its accounting
treatment for any intangible assets acquired starting January 1, 2009. Early adoption is
prohibited.
On May 9, 2008, the FASB issued SFAS No. 162,
The Hierarchy of Generally Accepted
Accounting Principles
(SFAS 162). The new standard is intended to improve financial reporting
by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used
in preparing financial statements that are presented in conformity with U.S. GAAP for
nongovernmental entities. SFAS 162 becomes effective 60 days following the Securities and Exchanges
Commissions approval of the Public Company Accounting Oversight Board Auditing amendments to AU
Section 411,
The Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles
. The Company anticipates no impact from adopting SFAS 162.
On October 10, 2008, the FASB issued FSP FAS 157-3,
Determining the Fair Value of a Financial
Asset When the Market for That Asset is Not Active
(FSP FAS 157-3), to clarify the application
of SFAS 157 in a market that is not active, providing an example to illustrate key considerations
in determining the fair value of a financial asset when the market for that financial asset is not
active. This FSP applies to financial assets within the scope of accounting pronouncements that
require or permit fair value measurement in accordance with SFAS 157 and is effective upon
issuance. The Company has determined there is no impact from adopting the provisions of FSP FAS
157-3 for this current Quarterly Report on Form 10-Q.
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 Companys present or future
consolidated financial statements.
3. Net Comprehensive Income (Loss)
Net comprehensive income (loss) includes the Companys net income (loss), as well as
accumulated other comprehensive income (loss) on available-for-sale investments and foreign
currency translation adjustments. Net comprehensive income (loss) for the three and nine months
ended September 30, 2008 and 2007, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net income (loss)
|
|
$
|
30,643
|
|
|
$
|
(9,073
|
)
|
|
$
|
30,816
|
|
|
$
|
(39,257
|
)
|
Net change in unrealized gain on investments
|
|
|
137
|
|
|
|
15
|
|
|
|
151
|
|
|
|
44
|
|
Net change in foreign currency translation
adjustments
|
|
|
(4
|
)
|
|
|
7
|
|
|
|
10
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net comprehensive income (loss)
|
|
$
|
30,776
|
|
|
$
|
(9,051
|
)
|
|
$
|
30,977
|
|
|
$
|
(39,162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of accumulated other comprehensive income, net of taxes, as of September 30, 2008
and December 31, 2007 were as follows:
8
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
Net unrealized gain (loss) on investments
|
|
$
|
147
|
|
|
$
|
(4
|
)
|
Cumulative foreign currency translation adjustments
|
|
|
43
|
|
|
|
33
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
$
|
190
|
|
|
$
|
29
|
|
|
|
|
|
|
|
|
4. Income from Settlement and Licensing
On December 31, 2007, the Company entered into a settlement, release and license
agreement and a LongRun and LongRun2 technology license agreement with Intel, thus settling patent
infringement litigation between the Company and Intel. Under the original terms of the agreement,
the Company received from Intel an initial payment of $150 million in January 2008, and was
scheduled to receive from Intel annual payments of $20 million for each of the next five years, for
total additional payments of $100 million.
Under the December 31, 2007 agreement, the Company granted Intel a perpetual non-exclusive
license to all of the Companys patents and patent applications, including any patent rights later
acquired by the Company, now existing or as may be filed during the next ten years. The Company
also agreed to transfer technology and to grant to Intel a non-exclusive license to the Companys
LongRun and LongRun2 technologies and future improvements. Intel granted the Company a covenant not
to sue for the Companys development and licensing to third parties of its LongRun and LongRun2
technologies.
In September 2008, the Company entered into an amendment to the December 31, 2007
settlement, release and license agreement to accelerate all future payment obligations under that
agreement and a computing technology license agreement. The Company received a cash payment of
$91.5 million in September 2008 which was applied to the carrying cost of $88.6 million of other
receivable from Intel. The excess of the cash received over the receivable from Intel of $2.9
million was reported as operating income from license and receivable since the separate fair values
of the license and payment acceleration elements cannot be determined. Under the September 2008
license agreement, the Company granted Intel a fully paid-up non-exclusive license to use and
exploit certain proprietary computing technologies.
The Company expects to recognize the fair value of the proceeds from Intel under the December
31, 2007 agreement using the subscription model since the fair value of the license to Intel for
future patents filed or acquired by the Company during the ten-year capture period cannot be
determined. The Company reviewed FASB Concept Statements Nos. 5 and 6, and concluded that elements
of both revenue and gain were present and that the relative values of the revenue and gain elements
cannot be determined. Therefore, the Company expects to recognize the entire present value of
$234.6 million as a ratable ten-year income from settlement and licensing within operations of
$23.5 million per year in years 2008 through 2017. The Company applied APB Opinion No. 21
Interest
on Receivables and Payables
in recording the present value of $234.6 million. Of the $15.4 million
original difference between the settlement amount of $250 million and the present value of Intel
payments scheduled to be recognized over the years 2008 to 2013, $4.0 million was recognized as
imputed interest income through September 30, 2008. As of September 30, 2008, no future imputed
interest income will be recognized as the Intel other receivables were fully paid on September 30,
2008.
As of September 30, 2008 and December 31, 2007, the present value of other receivables
from Intel was as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
Non-interest bearing note, consisting of
Payments of 5 x $20 million (due Jan 2009-Jan 2013), plus the
initial $150 million
payment (due Jan 2008) as of December 31, 2007
|
|
$
|
100,000
|
|
|
$
|
250,000
|
|
|
|
Unamortized discount on $150
million initial payment,
based on 4.70% imputed
interest rate
|
|
|
|
|
|
|
(600
|
)
|
Unamortized discount on $100
million of 2009-2013
payments, based on 5.41%
imputed interest rate
|
|
|
(11,355
|
)
|
|
|
(14,800
|
)
|
|
|
|
|
|
|
|
Less unamortized discount based on imputed interest rates
|
|
|
(11,355
|
)
|
|
|
(15,400
|
)
|
|
|
|
|
|
|
|
|
|
Less payment acceleration per September 2008 agreement
|
|
|
(88,645
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of other receivables from Intel
|
|
$
|
|
|
|
$
|
234,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other receivables, current
|
|
|
|
|
|
|
149,400
|
|
Other receivables, long-term
|
|
|
|
|
|
|
85,200
|
|
|
|
|
|
|
|
|
Present value of other receivables from Intel
|
|
$
|
|
|
|
$
|
234,600
|
|
|
|
|
|
|
|
|
As of September 30, 2008, the Company expects to recognize income from settlement and
licensing within operations of $5.9 million per quarter through the fourth quarter of 2017.
5. Financial Statement Components
9
Property and Equipment
The following table presents property and equipment information as of September 30, 2008
and December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
Property and equipment, net
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
$
|
2,325
|
|
|
$
|
2,325
|
|
Computer equipment
|
|
|
3,599
|
|
|
|
3,519
|
|
Furniture and fixtures
|
|
|
395
|
|
|
|
395
|
|
Computer software
|
|
|
719
|
|
|
|
775
|
|
|
|
|
|
|
|
|
|
|
|
7,038
|
|
|
|
7,014
|
|
Less accumulated depreciation and amortization
|
|
|
(6,844
|
)
|
|
|
(6,730
|
)
|
|
|
|
|
|
|
|
Total
|
|
$
|
194
|
|
|
$
|
284
|
|
|
|
|
|
|
|
|
6. Cash and Cash Equivalents, Marketable Securities and Fair Value of Financial Instruments
The Company considers all highly liquid investment securities with remaining maturities,
at the date of purchase, of three months or less, to be cash equivalents. The Company determines
the appropriate classification of marketable securities at the time of purchase and evaluates such
designation as of each balance sheet date. To date, all marketable securities have been classified
as available-for-sale and are carried at fair value with unrealized gains and losses, if any,
included as a component of accumulated other comprehensive income (loss) in stockholders equity.
Interest, dividends and realized gains and losses are included in interest income and other, net.
Realized gains and losses are recognized based on the specific identification method.
All cash equivalents and short-term investments as of September 30, 2008 and December 31,
2007, which were classified as available-for-sale, are summarized
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
(In thousands)
|
|
Fair Value
|
|
|
Book Value
|
|
|
Unrealized Gain
|
|
|
Unrealized (Loss)
|
|
As of September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
887
|
|
|
$
|
887
|
|
|
$
|
|
|
|
$
|
|
|
Federal agency paper
|
|
|
252,920
|
|
|
|
252,773
|
|
|
|
164
|
|
|
|
(17
|
)
|
Commercial paper
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities: available for sale
|
|
|
253,807
|
|
|
|
253,660
|
|
|
|
164
|
|
|
|
(17
|
)
|
Cash
|
|
|
1,433
|
|
|
|
1,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and short term investments
|
|
$
|
255,240
|
|
|
$
|
255,093
|
|
|
$
|
164
|
|
|
$
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
14,627
|
|
|
$
|
14,627
|
|
|
$
|
|
|
|
$
|
|
|
Federal agency paper
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
2,968
|
|
|
|
2,972
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities: available for sale
|
|
|
17,595
|
|
|
|
17,599
|
|
|
|
|
|
|
|
(4
|
)
|
Cash
|
|
|
980
|
|
|
|
980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and short term investments
|
|
$
|
18,575
|
|
|
$
|
18,579
|
|
|
$
|
|
|
|
$
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities and cash are reported at fair value and classified as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
September 30, 2008
|
|
|
December 31, 2007
|
|
Cash
|
|
$
|
1,433
|
|
|
$
|
980
|
|
Cash equivalents
|
|
|
203,838
|
|
|
|
14,627
|
|
Short term investments
|
|
|
49,969
|
|
|
|
2,968
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and short term investments
|
|
$
|
255,240
|
|
|
$
|
18,575
|
|
|
|
|
|
|
|
|
The following is a summary of estimated fair values of marketable securities, and the associated
net unrealized gain (loss), by contractual maturity:
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
(In thousands)
|
|
Fair Value
|
|
|
Book Value
|
|
|
Unrealized Gain
|
|
|
Unrealized (Loss)
|
|
As of September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts maturing within one year
|
|
$
|
253,807
|
|
|
$
|
253,660
|
|
|
$
|
164
|
|
|
$
|
(17
|
)
|
Amounts maturing after one year, within five years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities: available for sale
|
|
$
|
253,807
|
|
|
$
|
253,660
|
|
|
$
|
164
|
|
|
$
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts maturing within one year
|
|
$
|
17,595
|
|
|
$
|
17,599
|
|
|
$
|
|
|
|
$
|
(4
|
)
|
Amounts maturing after one year, within five years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total marketable securities: available for sale
|
|
$
|
17,595
|
|
|
$
|
17,599
|
|
|
$
|
|
|
|
$
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had restricted cash balance of $110,000 at December 31, 2007 which served as
collateral for the Companys credit card program. In April 2008, the cash restrictions were
released and the Company no longer has any restricted cash.
The Company manages its cash equivalents and short-term investments as a single portfolio
of highly marketable securities that is intended to be available to meet its current cash
requirements. For the three months ended September 30, 2008 and 2007, the Company had no gross
realized gains or losses on sales of its available-for-sale securities. For the nine months ended
September 30, 2008 and 2007, the gross realized gain on sales was $14,000 and zero, respectively.
There were no gross realized losses for the nine months ended September 30, 2008 and 2007.
To date, there have been no impairment charges on the Companys available-for-sale
securities related to other-than-temporary declines in market value.
The gross unrealized losses related to the Companys portfolio of available-for-sale
securities were primarily due to a decrease in the fair value of debt securities purchased during
the most recent three months. The Company has determined that the gross unrealized losses on its
available-for-sale securities as of September 30, 2008 are temporary in nature. The Company
reviewed its investment portfolio to identify and evaluate investments that have indications of
possible impairment. Factors considered in determining whether a loss is temporary include the
magnitude of the decline in market value, the length of time the market value has been below cost
(or adjusted cost), credit quality, and the Companys ability and intent to hold the securities for
a period of time sufficient to allow for any anticipated recovery in market value.
The total net unrealized gain of $147,000 is comprised of gross unrealized gains of
approximately $164,000 and of gross unrealized loss of approximately $17,000 as of September 30,
2008. The gross unrealized loss relates to securities with a fair value of $43.0 million that have
been in a loss position for less than twelve months.
Fair Value of Financial Instruments
On January 1, 2008, the Company adopted SFAS 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 1, 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.
SFAS 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 entitys pricing based upon their own market assumptions. The fair value
hierarchy consists of the following three levels:
Level 1
|
-
|
Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
Level 2
|
-
|
Inputs are quoted prices for similar assets or liabilities in an active market, quoted
prices for identical or similar assets or liabilities in markets that are not active,
inputs other than quoted prices that are observable and market-corroborated inputs which
are derived principally from or corroborated by observable market data.
|
|
Level 3
|
-
|
Inputs are derived from valuation techniques in which one or more significant inputs or
value drivers are unobservable (i.e., supported by little or no market activity).
|
The following table summarizes the Companys financial assets and liabilities measured at
fair value on a recurring basis as of September 30, 2008 and the basis for that measurement:
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Level 1)
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in Active
|
|
|
(Level 2)
|
|
|
|
Balance as of
|
|
|
Markets of Identical
|
|
|
Significant Other
|
|
(In thousands)
|
|
September 30, 2008
|
|
|
Assets
|
|
|
Observable Inputs
|
|
Available-for-sale securities
|
|
$
|
253,807
|
|
|
$
|
887
|
|
|
$
|
252,920
|
|
|
|
|
|
|
|
|
|
|
|
The Companys 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. Level 2 instrument valuations are obtained from readily-available pricing sources for
comparable instruments. As of September 30, 2008, the Company did not have any financial assets or
liabilities without observable market values that would require a high level of judgment to
determine fair value (Level 3).
FASBs SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities, Including an Amendment of FASB Statement No. 115
also became effective the first
quarter of fiscal 2008. 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.
7. Stock Based Compensation
On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004),
Share-Based
Payment
(SFAS 123(R)) which requires the measurement and recognition of compensation expense
for all share-based payment awards made to employees and directors, including employee stock
options and employee stock purchases, related to all the Companys stock-based compensation plans.
Stock-based compensation expense is measured at grant date, based on the estimated fair
value of the award, reduced by an estimate of the annualized rate of stock option forfeitures, and
is recognized as expense over the employees expected requisite service period, using the
straight-line method.
The following table summarizes stock-based compensation expense related to employee stock
options, restricted stock awards and employee stock purchase grants under SFAS 123(R) for the three
and nine months ended September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(In thousands, except for per share data)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Stock-based compensation expense by type of award:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
$
|
809
|
|
|
$
|
373
|
|
|
$
|
3,576
|
|
|
$
|
1,716
|
|
Restricted stock awards
|
|
|
12
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
Employee stock purchase plan
|
|
|
66
|
|
|
$
|
(399
|
)
|
|
|
140
|
|
|
|
(746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
|
887
|
|
|
|
(26
|
)
|
|
|
3,728
|
|
|
|
970
|
|
Tax effect on stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net effect of stock-based compensation on results
of operations
|
|
$
|
887
|
|
|
$
|
(26
|
)
|
|
$
|
3,728
|
|
|
$
|
970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options and Employee Stock Purchase Plan (ESPP):
Net cash proceeds from the sales of
common stock under employee stock purchase and incentive stock option plans were $0.3 million and
$0.2 million for the three months ended September 30, 2008 and 2007, respectively, and $0.4 million
and $1.8 million for the nine months ended September 30, 2008 and 2007, respectively. No income tax
benefit was realized from the sales of common stock under employee stock purchase and incentive
stock plans during either the three or nine months ended September 30, 2008 and 2007. 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.
For the three months ended September 30, 2008 and 2007, the Company recorded $66,000 and a
credit of $(0.4) million, respectively, of stock-based compensation expense (credit) related to
ESPP. For the nine months ended September 30, 2008 and 2007, the Company recorded $0.1 million and
$(0.7) million of stock-based compensation expense (credit) related to ESPP, respectively. The
$(0.7) million ESPP credit recorded for the nine months ended September 30, 2007 was due to true-up
of prior accruals upon the January 31, 2007 purchase date reflecting reduced employee contributions
due to the headcount reductions.
In accordance with the terms of the 2000 Employee Stock Purchase Plan (2000 Purchase
Plan), if the fair market value on any given purchase date is less than the fair market value on
the grant date, the grant offering is cancelled and all participants are enrolled in the next
subsequent grant offering. A modification charge is recorded as a result of this grant offering
cancellation and new grant offering. There were zero and $30,000 modification charges recorded
during the three months ended September 30, 2008 and 2007, respectively. In the nine months ended
September 30, 2008 and 2007, the Company recorded modification charges of zero and $50,000,
respectively, related to the 2000 Purchase Plan, which is included in the table above under the
caption Employee stock purchase plan.
Valuation Assumptions
The Company estimates the fair value of stock options using the BSM model. This is
the same model that the Company previously used in preparing its pro forma disclosure required
under SFAS No. 123, Share-Based Payment. The BSM model determines the fair value of stock-based
compensation and is affected by the Companys stock price on the date of the grant as well as
assumptions regarding a number of
12
highly complex and subjective variables. These variables include expected volatility, expected
life of the award, expected dividend rate, and expected risk-free rate of return. The assumptions
for expected volatility and expected life are the two assumptions that significantly affect the
grant date fair value. The BSM option-pricing model was developed for use in estimating the value
of traded options that have no vesting or hedging restrictions and are fully transferable. Because
employee stock options have certain characteristics that are significantly different from traded
options, and because changes in the subjective assumptions can materially affect the estimated
value, if actual results differ significantly from these estimates, stock-based compensation
expense and the Companys results of operations could be materially impacted.
The fair value of stock awards and ESPP offerings is estimated as of the grant date using
the BSM option-pricing model assuming a dividend yield of 0% and the additional weighted-average
assumptions as listed in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
Employee Stock Option Plans
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
Risk-free interest rate
|
|
|
2.8
|
%
|
|
|
4.5
|
%
|
|
|
2.9
|
%
|
|
|
4.6
|
%
|
Expected life in years
|
|
|
4.3
|
|
|
|
4.0
|
|
|
|
4.3
|
|
|
|
4.0
|
|
Expected stock price volatility
|
|
|
102
|
%
|
|
|
91
|
%
|
|
|
104
|
%
|
|
87% to 90%
|
Weighted-average fair value of
stock options granted
|
|
$
|
10.36
|
|
|
$
|
7.09
|
|
|
$
|
10.50
|
|
|
$
|
7.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
Employee Stock Purchase Plan (ESPP)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
Risk-free interest rate
|
|
|
2.3
|
%
|
|
|
5.1
|
%
|
|
|
2.1
|
%
|
|
|
5.1
|
%
|
Expected life in years
|
|
|
1.3
|
|
|
|
1.3
|
|
|
|
1.3
|
|
|
|
1.3
|
|
Expected stock price volatility
|
|
|
102
|
%
|
|
|
86
|
%
|
|
102% to 151%
|
|
71% to 86%
|
Weighted-average fair value of
purchase rights granted under the
purchase plan
|
|
$
|
7.66
|
|
|
$
|
5.07
|
|
|
$
|
9.19
|
|
|
$
|
5.88
|
|
In the Companys pro forma disclosures prior to the adoption of SFAS 123(R), the Company
accounted for forfeitures upon occurrence. SFAS 123(R) requires forfeitures to be estimated at the
time of grant and revised if necessary in subsequent periods if actual forfeitures differ from
those estimates. Based on the Companys historical experience of option pre-vesting cancellations,
the Company has assumed an annualized forfeiture rate of 21.0% and 8.0% for its employees options
and directors and officers options, respectively. The Company also has assumed an annualized
forfeiture rate of 55.0% and 67% for its employee stock purchases for the three months ended
September 30, 2008 and 2007, respectively. Accordingly, as of September 30, 2008, the Company
estimated that the stock-based compensation for the options not expected to vest was approximately
$4.1 million. Therefore, the unrecorded deferred stock-based compensation balance related to stock
options was adjusted to approximately $10.1 million after including estimated forfeitures. This
will be recognized over a weighted-average period of approximately 2.9 years and will be adjusted
for subsequent changes in estimated forfeitures on a quarterly basis.
The dividend yield of zero is based on the fact that the Company has never paid cash
dividends and has no present intention to pay cash dividends. Expected volatility is based on the
historical volatility of the Companys common stock. The risk-free interest rates are taken from
the Daily Federal Yield Curve Rates as of the grant dates as published by the Federal Reserve and
represent the yields on actively traded treasury securities for terms equal to the expected life of
the options. The expected life calculation for employee stock option plans is based on historical
trends. The expected life assumption used for the ESPP is the weighted average expected life for
the four purchase periods within each 24-month offering period.
Restricted Stock Awards
On September 16, 2008, the Companys Board of Directors approved the issuance of restricted
stock awards to employees. A total of 25,900 restricted shares were granted and will vest with
respect to 100% of the shares on August 24, 2009. The restricted stock awards were valued at fair
market value at the date of grant and the Company assumed an annualized forfeiture rate of 21.0%
for these awards.
As of September 30, 2008, the Company estimated that the stock-based compensation for the
awards not expected to vest was approximately $69,000. Therefore, the unrecorded deferred
stock-based compensation balance related to restricted stock was adjusted to approximately $0.3
million after including estimated forfeitures. This will be recognized over a weighted-average
period of approximately 0.9 years and will be adjusted for subsequent changes in estimated
forfeitures on a quarterly basis.
Tax effects of stock-based compensation
The Company has adopted the alternative transition method in accordance with SFAS
123(R) to calculate the excess tax credit pool.
8. Employee Stock Option Plans
Equity Incentive Plans
The Companys equity incentive plans authorize the award of options, restricted stock and
stock bonuses, and provide for the grant of both incentive stock options that qualify under
Section 422 of the Internal Revenue Code to employees and nonqualified stock options to employees,
directors and consultants. Under the Companys equity incentive plans, stock options generally have
a vesting period of four years,
13
are exercisable for a period not to exceed ten years from the date of issuance and are generally
granted at prices not less than the fair market value of the Companys common stock on the grant
date.
The Company initially reserved 350,000 shares of common stock under its 2000 Equity
Incentive Plan. The aggregate number of shares reserved for issuance under the Companys 2000
Equity Incentive Plan increases automatically on January 1 of each year by an amount equal to 5% of
the total outstanding shares of the Company on the immediately preceding December 31.
The following is a summary of the Companys stock option and restricted stock activity
under its equity incentive plans, and related information for the nine months ended September 30,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
Shares Available for
|
|
|
|
|
|
|
Weighted
Average
|
|
|
Contractual
Term
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
Grant
|
|
|
Number of Shares
|
|
|
Exercise Price
|
|
|
(In Years)
|
|
|
(in thousands)
|
|
Balance at December 31, 2007
|
|
|
1,429,195
|
|
|
|
1,897,368
|
|
|
$
|
19.42
|
|
|
|
|
|
|
|
|
|
Additional shares reserved
|
|
|
601,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock granted
|
|
|
(25,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(252,695
|
)
|
|
|
252,695
|
|
|
|
14.29
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
|
|
|
|
(134,163
|
)
|
|
|
1.24
|
|
|
|
|
|
|
|
|
|
Options forfeited / canceled / expired
|
|
|
385,073
|
|
|
|
(385,073
|
)
|
|
|
23.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008
|
|
|
2,136,742
|
|
|
|
1,630,827
|
|
|
$
|
19.18
|
|
|
|
8.27
|
|
|
$
|
3,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to be vested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,200,179
|
|
|
$
|
21.11
|
|
|
|
7.93
|
|
|
$
|
2,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares exercisable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
|
|
|
|
628,853
|
|
|
$
|
27.87
|
|
|
|
6.71
|
|
|
$
|
1,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic
value (the difference between the Companys closing stock price on the last trading day of the
third quarter of fiscal 2008 and the exercise price, multiplied by the number of in-the-money
options) that would have been received by the option holders had all option holders exercised their
options on September 30, 2008. This amount changes based on the fair market value of the Companys
stock. Total intrinsic value of options exercised was $18,000 and $33,000 for the three months
ended September 30, 2008 and 2007, respectively, and $1.6 million and $0.1 million for the nine
months ended September 30, 2008 and 2007, respectively.
The exercise prices for options outstanding and exercisable as of September 30, 2008 and
their weighted average remaining contractual lives were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Exercisable
|
|
|
|
|
|
|
Weighted
Average
|
|
Weighted
Average
|
|
|
|
|
|
Weighted
Average
|
Range of Exercise Prices
|
|
Shares
Outstanding
|
|
Contractual
Life (In Years)
|
|
Exercise
Price
|
|
Shares
Exercisable
|
|
Exercise
Price
|
$10.04 - $13.11
|
|
|
166,612
|
|
|
|
8.94
|
|
|
$
|
11.27
|
|
|
|
68,278
|
|
|
$
|
11.26
|
|
$13.32 - $13.32
|
|
|
3,000
|
|
|
|
9.46
|
|
|
|
13.32
|
|
|
|
|
|
|
|
|
|
$13.36 - $13.36
|
|
|
778,249
|
|
|
|
9.21
|
|
|
|
13.36
|
|
|
|
171,216
|
|
|
|
13.36
|
|
$13.40 - $14.40
|
|
|
107,250
|
|
|
|
8.70
|
|
|
|
13.73
|
|
|
|
37,081
|
|
|
|
13.68
|
|
$14.41 - $14.41
|
|
|
175,000
|
|
|
|
9.61
|
|
|
|
14.41
|
|
|
|
|
|
|
|
|
|
$14.63 - $24.20
|
|
|
184,350
|
|
|
|
6.44
|
|
|
|
16.80
|
|
|
|
156,405
|
|
|
|
17.17
|
|
$24.60 - $49.20
|
|
|
175,806
|
|
|
|
5.15
|
|
|
|
37.63
|
|
|
|
155,313
|
|
|
|
38.73
|
|
$49.60- $223.40
|
|
|
36,526
|
|
|
|
2.27
|
|
|
|
115.52
|
|
|
|
36,526
|
|
|
|
115.52
|
|
$244.80 - $244.80
|
|
|
600
|
|
|
|
2.66
|
|
|
|
244.80
|
|
|
|
600
|
|
|
|
244.80
|
|
$260.20 - $260.20
|
|
|
3,434
|
|
|
|
2.10
|
|
|
|
260.20
|
|
|
|
3,434
|
|
|
|
260.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$10.04 - $260.20
|
|
|
1,630,827
|
|
|
|
8.27
|
|
|
$
|
19.18
|
|
|
|
628,853
|
|
|
$
|
27.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
Par Value Stock Options
On December 17, 2007, the Companys Board of Directors approved the issuance of two
groups of grants of restricted shares to employees in the form of immediately exercisable stock
options to purchase shares of the Companys common stock at a per share exercise price equal to the
par value of the underlying common stock. A total of 122,000 shares were granted under the two
grants. The first group of grants, for an aggregate of 25,100 shares, vested with respect to 100%
of the shares upon the Companys receipt of the initial $150 million payment from Intel in
January 2008. The second group of grants, for an aggregate of 96,900 shares, vested with respect to
100% of the shares on August 22, 2008. In the nine months ended September 30, 2008, a total of
28,400 shares from the second group were repurchased and retired by the Company due to termination
of employment for certain employees.
Employee Stock Purchase Plan
The Company adopted the 2000 Purchase Plan in November 2000. The 2000 Purchase Plan
allows employees to designate up to 15% of their total compensation to purchase shares of the
Companys common stock at 85% of the lesser of the fair market value of the Companys common stock
at either the first or last day of each offering period. Upon effectiveness of the Purchase Plan,
the Company reserved 100,000 shares of common stock under the 2000 Purchase Plan. In addition, the
aggregate number of shares reserved for issuance under the 2000 Purchase Plan increases
automatically on January 1 of each year starting by an amount equal to 1% of the total outstanding
shares of the Company on the immediately preceding December 31. A total of 14,760 and 6,527 shares
were purchased under the 2000 Purchase Plan during the three months ended September 30, 2008 and
2007, respectively, and a total of 28,382 and 84,093 shares were purchased during the nine months
ended September 30, 2008 and 2007, respectively. As of September 30, 2008, 885,405 shares had been
issued under the 2000 Purchase Plan. As of September 30, 2008, the total compensation cost related
to options to purchase the Companys common stock under the 2000 Purchase Plan but not yet
recognized was approximately $79,000 will be recognized on a straight-line basis over a
weighted-average period of approximately 0.9 years.
9. Stockholders Equity
The following table summarizes the changes in stockholders equity during the nine months
ended September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
Beginning balance:
|
|
$
|
1,601
|
|
|
$
|
42,683
|
|
Net income (loss)
|
|
|
30,816
|
|
|
|
(39,257
|
)
|
Proceeds from stock option exercises and ESPP
|
|
|
441
|
|
|
|
1,826
|
|
Proceeds from exercise of warrants
|
|
|
204
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
3,728
|
|
|
|
970
|
|
Net proceeds from direct placement offering of common stock and warrants
|
|
|
|
|
|
|
11,600
|
|
Net proceeds from issuance of preferred stock
|
|
|
|
|
|
|
6,966
|
|
Beneficial conversion feature of preferred stock
|
|
|
|
|
|
|
3,630
|
|
Deemed dividend for preferred stocks beneficial conversion feature
|
|
|
|
|
|
|
(3,630
|
)
|
Other comprehensive income
|
|
|
161
|
|
|
|
95
|
|
|
|
|
|
|
|
|
Ending balance:
|
|
$
|
36,951
|
|
|
$
|
24,883
|
|
|
|
|
|
|
|
|
The corresponding changes in shares of the Companys common stock outstanding, adjusted for
the August 2007 one-for-20 reverse split, during the nine months ended September 30, 2008 and 2007,
are summarized below:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2008
|
|
2007
|
Beginning balance:
|
|
|
12,021,388
|
|
|
|
9,893,820
|
|
Shares issued from stock option exercises and ESPP
|
|
|
40,545
|
|
|
|
127,691
|
|
Shares issued from warrant exercises
|
|
|
22,655
|
|
|
|
|
|
Shares issued from stock option exercises of par value stock options
|
|
|
122,000
|
|
|
|
|
|
Shares issued of restricted stock
|
|
|
25,900
|
|
|
|
|
|
Stock repurchased and retired
|
|
|
(28,400
|
)
|
|
|
|
|
Shares from direct placement offering of common stock and warrants
|
|
|
|
|
|
|
2,000,000
|
|
Refund of fractional shares due to reverse stock split
|
|
|
|
|
|
|
(123
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance:
|
|
|
12,204,088
|
|
|
|
12,021,388
|
|
|
|
|
|
|
|
|
|
|
15
Outstanding Warrants
In September 2007, warrants to purchase an aggregate of one million shares of the
Companys common stock with a five-year term and $9.00 exercise price per share were issued as part
of a direct placement of registered common stock and warrants. The following warrants to purchase
common stock remain outstanding as of September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
|
|
Number of
|
|
Price per
|
|
|
Date
|
|
Shares
|
|
Share
|
|
Expiration Date
|
|
|
|
|
|
|
|
September 2007
|
|
|
977,345
|
|
|
$
|
9.00
|
|
|
September 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred Stock
In July 2007, the Company sold 1,000,000 shares of the Companys Series B Preferred
Stock, par value $0.00001 per share (the Series B Preferred Stock) to AMD in consideration for
$7.5 million cash, with net proceeds of approximately $7.0 million after issuance costs. The
Series B Preferred Stock is convertible, at any time at the option of AMD, into 713,470 shares of
the Companys common stock. Concurrently with this stock purchase agreement, the Company also
entered into a voting agreement with AMD and a registration rights agreement relating to the
Series B Preferred Stock. Each share of the Series B Preferred Stock is entitled to vote on all
matters and is entitled to the number of votes per share of the Series B Preferred Stock equal to
the number of shares of the Company common stock into which each share of Series B Preferred Stock
is convertible.
Each share of the Series B Preferred Stock is entitled to receive dividends, prior and in
preference to the Company common stock, at a rate of $0.60 per calendar year when and if declared
by the Companys Board of Directors. Each share of the Series B Preferred Stock is also entitled to
certain preferences in the event of any Liquidation of the Company. A Liquidation includes
(i) the liquidation, dissolution or winding up of the Company; (ii) the merger or consolidation of
the Company by means of any transaction or series of related transactions, provided that the
applicable transaction will not be deemed a Liquidation unless the Companys stockholders
constituted immediately prior to such transaction hold less than 50% of the voting power of the
surviving or acquiring entity immediately after such transaction; or (iii) a sale of all or
substantially all of the Companys assets requiring approval of the Companys stockholders. In the
event of a Liquidation, the holders of the Series B Preferred Stock will be entitled to receive,
out of the Company assets that may be legally distributed to the Companys stockholders, before any
payment or distribution of assets to the holders of the Company common stock, a liquidation
preference consisting of (i) $7.50 per share of the Series B Preferred Stock, plus (ii) declared
but unpaid dividends on such share, minus (iii) the amount of any cash dividends received by the
holders of Series B Preferred Stock, minus (iv) the amount of any payment received by the holders
of Series B Preferred Stock respecting a merger or asset sale consummated prior to such
Liquidation.
Recent Developments
On
November 16, 2008, pursuant to the patent license agreement described below in Note 16, AMD agreed to transfer to the
Company 700,000 shares of the Companys Series B Preferred Stock held
by AMD.
Warrants issued in September 2007
In September 2007 the Company issued warrants with a five year term to purchase an
aggregate of one million shares of the Companys common stock at an exercise price of $9.00 per
share as part of a $12.8 million direct placement offering of registered common stock and warrants.
These warrants contain specific terms for a Fundamental Transaction.
A Fundamental Transaction occurs if, while the warrant is outstanding, (1) the Company
pays a dividend in, or makes a distribution of, shares of its capital stock, (2) consolidates or
merges with or into another corporation, or (3) sells, transfers or disposes of its property,
assets or business, resulting in distribution to the Companys common stockholders of cash, of the
successors or acquirers common stock, or of any other kind of securities or property.
In these cases, the warrant holder will receive, upon exercise, the same amount and kind of
cash, securities or property from such Fundamental Transaction, as if the warrant exercise occurred
immediately prior to such transaction. The successor or acquirer Company has the obligation to
provide the warrant holders this consideration.
Certain limited Fundamental Transactions permit the holder of a warrant to receive cash
consideration in lieu of Company common stock, at the warrant holders option. These transactions
must be a consolidation or merger (with loss of majority voting power) or sale of all or
substantially all of the Companys assets. Additionally, such select transactions must be for
either all cash, a Rule 13-3e transaction, or for equity of a non-traded entity. In these cases,
warrant holders may choose between exercise for Company common stock (as above) or receipt of cash
determined by the Black-Scholes-Merton option value of the remaining term of the unexercised
warrants. The Black-Scholes-Merton pricing model to be used has specific terms for average common
share price, risk-free interest rate and historical price volatility.
10. Earnings (Loss) per Share
Earnings (loss) per share is calculated in accordance with SFAS 128,
Earnings Per Share
. Basic earnings (loss) per share is calculated by dividing the earnings (loss) by the weighted
average number of common shares outstanding during the period. Diluted earnings (loss) per share is
calculated by dividing the earnings (loss) by the weighted average number of common shares and
potentially dilutive securities outstanding during the period. Potentially dilutive common shares
consist of incremental common shares issuable upon exercise of stock options, warrants, convertible
preferred stock and employee stock purchases. The dilutive effect of the convertible preferred
stock is calculated under the if-converted method, giving income recognition for the add back of
any deemed dividend for the beneficial conversion
16
feature at issuance of the preferred stock. The dilutive effect of other outstanding potential shares is reflected in diluted
earnings per share by application of the treasury stock method. This method includes consideration
of the amounts to be paid by the employees, the amount of excess tax benefits that would be
recognized in equity if the instruments were exercised and the amount of unrecognized stock-based
compensation related to future services. No potential dilutive common shares are included in the
computation of any diluted per share amount when a loss is reported.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(In thousands, except per share amounts)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders
|
|
$
|
30,643
|
|
|
$
|
(12,703
|
)
|
|
$
|
30,816
|
|
|
$
|
(42,887
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute basic net income (loss) per share
|
|
|
12,170
|
|
|
|
10,236
|
|
|
|
12,145
|
|
|
|
10,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of potentially dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B Preferred Stock
|
|
|
713
|
|
|
|
0
|
|
|
|
713
|
|
|
|
0
|
|
Warrants issued in direct placement offering
|
|
|
368
|
|
|
|
0
|
|
|
|
348
|
|
|
|
0
|
|
Employee stock options and ESPP
|
|
|
14
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute diluted net income (loss) per share
|
|
|
13,265
|
|
|
|
10,236
|
|
|
|
13,220
|
|
|
|
10,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to common shareholders basic
|
|
$
|
2.52
|
|
|
$
|
(1.24
|
)
|
|
$
|
2.54
|
|
|
$
|
(4.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to common shareholders basic
|
|
$
|
2.31
|
|
|
$
|
(1.24
|
)
|
|
$
|
2.33
|
|
|
$
|
(4.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2008 and 2007, options, warrants and convertible
preferred stock to purchase approximately 1.5 million and 2.5 million shares, respectively were
excluded from the calculation of diluted net income per share because they were anti-dilutive after
considering proceeds from exercise, taxes and related unrecognized stock-based compensation
expense. For the nine months ended September 30, 2008 and 2007, options, warrants and convertible
preferred stock to purchase approximately 1.6 million and 2.5 million shares, respectively were
excluded from the calculation of diluted net income per share because they were anti-dilutive after
considering proceeds from exercise, taxes and related unrecognized stock-based compensation
expense.
11. Restructuring Charges
For the three and nine months ended September 30, 2008, the Company recorded a credit of
$(0.1) million and an expense of $0.7 million of restructuring charges, respectively, compared to
$0.2 million and $8.9 million over the comparable periods in 2007, respectively.
The Company recorded termination and severance charges of $7.2 million related to a
workforce reduction during the first nine months of 2007 as a result of the Companys strategic
restructuring to focus its ongoing efforts on licensing the Companys technologies and intellectual
property. Additionally, the Company recorded $1.7 million for the first nine months of 2007 for
rented facilities, net of estimated sublease income.
In the first three months of 2008, the Company recorded additional charges and changed
estimates of $0.3 million related to reduced potential for sublease income in the last six months
of the lease. During the three months ended June 30, 2008, the Company recorded an additional
$0.5 million in restructuring charge for restoration costs on leases that expired in June 2008.
Reversal of $0.1 million as a change in estimate was recorded during the three months ended
September 30, 2008. The accrued restructuring liabilities as of September 30, 2008 are expected to
be paid during the current fiscal year.
17
Accrued restructuring charges consist of the following at September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess
|
|
|
Workforce
|
|
|
|
|
(In thousands)
|
|
Facilities
|
|
|
Reduction
|
|
|
Total
|
|
Balance as of December 31, 2007
|
|
$
|
1,537
|
|
|
$
|
55
|
|
|
$
|
1,592
|
|
|
|
Restructuring charges
|
|
|
131
|
|
|
|
|
|
|
|
131
|
|
Change in estimates
|
|
|
212
|
|
|
|
(1
|
)
|
|
|
211
|
|
Cash drawdowns
|
|
|
(951
|
)
|
|
|
(3
|
)
|
|
|
(954
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2008
|
|
$
|
929
|
|
|
$
|
51
|
|
|
$
|
980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
455
|
|
|
|
|
|
|
|
455
|
|
Change in estimates
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Cash drawdowns
|
|
|
(924
|
)
|
|
|
|
|
|
|
(924
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2008
|
|
$
|
460
|
|
|
$
|
51
|
|
|
$
|
511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in estimates
|
|
|
(97
|
)
|
|
|
|
|
|
|
(97
|
)
|
Cash drawdowns
|
|
|
(11
|
)
|
|
|
(51
|
)
|
|
|
(62
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2008
|
|
$
|
352
|
|
|
$
|
|
|
|
$
|
352
|
|
|
|
|
|
|
|
|
|
|
|
12. Business Segments and Major Customers
The Company has determined that, in accordance with FASBs SFAS 131,
Disclosure About
Segments of an Enterprise and Related Information,
it operates in one segment and is evaluated by
management on a single segment basis: the development, licensing, marketing and sale of hardware
and software technologies for the semiconductor and computing market.
Sales by geographic area are categorized based on the customers billing address. The
following is a summary of the Companys net revenue by major geographic area during the three and
nine months ended September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
Japan
|
|
|
*
|
%
|
|
|
97
|
%
|
|
|
*
|
%
|
|
|
93
|
%
|
North America
|
|
|
99
|
%
|
|
|
*
|
%
|
|
|
95
|
%
|
|
|
*
|
%
|
Other
|
|
|
*
|
%
|
|
|
*
|
%
|
|
|
*
|
%
|
|
|
*
|
%
|
|
|
|
*
|
|
% represents less than 10% of total revenue
|
Revenues are highly concentrated among those customers that account for more than 10% of
revenues for a particular period. For the three months ended September 30, 2008 and 2007 there was
one such customer, respectively, that accounted for 99% and 97% respectively, of total revenues.
For the nine months ended September 30, 2008 and 2007 there were one and two such customers,
respectively, that accounted for 95% and 93%, respectively, of total revenues.
Long lived assets of $0.4 million and $3.5 million as of September 30, 2008 and
December 31, 2007, respectively, were located entirely within the United States.
13. Commitments and Contingencies
The Companys lease of approximately 126,000 square feet of office space expired in
June 2008 on the four buildings in Santa Clara, California that the Company occupied for the past
10 years. In June 2008, the Company vacated approximately 104,000 square feet of the original
leased office space. Subsequently, in July 2008, the Company signed a one year extension to the
original lease for the remaining 22,500 square feet of office space.
The Company leases its facility and certain equipment under non-cancelable operating
leases expiring through 2009.
The Companys contractual obligations at September 30, 2008 are summarized in the table
below:
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future Minimum Payments Due by Period
|
|
|
|
|
|
|
|
Remainder of
|
|
|
|
|
|
(In thousands)
|
|
Total
|
|
|
2008
|
|
2009
|
|
Operating leases(1)
|
|
$
|
270
|
|
|
$
|
68
|
|
|
$
|
202
|
|
Unconditional contractual obligations(2)
|
|
|
1,000
|
|
|
|
200
|
|
|
|
800
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,270
|
|
|
$
|
268
|
|
|
$
|
1,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Operating leases includes the lease extension agreement for
approximately 22,500 square feet of office space in Santa Clara,
California that was signed in July 2008.
|
|
(2)
|
|
Contractual obligations include agreements to purchase goods or
services that are enforceable and legally binding on the Company and
that specify all significant terms, including, fixed or minimum
quantities to be purchased; fixed, minimum or variable price
provisions; and the approximate timing of the transaction. Purchase
obligations also include agreements for design tools and software for
use in product development.
|
Indemnifications and warranties
The Company generally sells its products and certain technology licenses with a
limited indemnification of customers against intellectual property infringement claims related to
those products or technologies. The Companys policy is to accrue for known indemnification issues
if a loss is probable and can be reasonably estimated and to accrue for estimated incurred but
unidentified issues based on historical activity. To date, there have been no such accruals or
related expenses.
As permitted under Delaware law, the Company has agreements whereby its officers and
directors are indemnified for certain events or occurrences while the officer or director is or was
serving, at the Companys request, in such capacity. The term of the indemnification period is for
the officers or directors term in such capacity. The maximum potential amount of future payments
that the Company could be required to make under these indemnification agreements is unlimited. The
Company has a director and officer insurance policy that reduces its exposure and enables the
Company to recover a portion of future amounts to be paid. To date, payments under these agreements
have not been material.
14. Income Taxes
The Company adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income
Taxes an Interpretation of FASB Statement No. 109
(FIN 48) on January 1, 2007. FIN 48 is an
interpretation of FASB SFAS No. 109,
Accounting for Income Taxes
, that is intended to reduce
the diversity in practice associated with certain aspects of measurement and recognition in
accounting for income taxes. FIN 48 prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position that an entity takes or
expects to take in a tax return. Additionally, FIN 48 provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods, disclosures and transition.
Under FIN 48, an entity may only recognize or continue to recognize tax positions that meet a more
likely than not threshold. In accordance with its accounting policy, The Company recognizes
accrued interest and penalties related to unrecognized tax benefits as a component of income tax
expense
At January 1, 2007, the cumulative unrecognized tax benefit pursuant to FIN 48 was
$7.7 million, which would have resulted in a decrease in retained earnings except the decrease was
netted against deferred tax assets with a full valuation allowance or other fully reserved amounts,
and if recognized there will be no effect on the Companys effective tax rate. Upon adoption of FIN
48 the Company recognized no adjustment in the liability for unrecognized income tax benefits. At
December 31, 2007, the Company had $8.2M of unrecognized tax benefits of which $22.9K impacted the
effective tax rate. For the three and nine months ended September 30, 2008 and 2007, no interest
related to unrecognized tax benefits was recorded.
At September 30, 2008, there was no material increase in the liability for unrecognized
tax benefits nor any accrued interest and penalties related to uncertain tax positions.
The Company is currently open to audit under the statute of limitations by the Internal
Revenue Service and state tax authorities for the years ending December 31, 1999 through 2007 due
to carryforward of unutilized net operating losses and research development credits.
For FIN 48 purposes, the Company accounts for interest and penalties related to uncertain
tax positions as part of its provision for federal, state, and foreign income taxes.
15. Litigation and Asserted Claims
Litigation
The Company is subject to legal claims and litigation arising in the ordinary course
of its business, such as employment or intellectual property claims, including but not limited to
the matters described below. Although there are no legal claims or litigation matters pending that
19
the Company expects to be material in relation to its business, consolidated financial condition,
results of operations or cash flows, legal claims and litigation are subject to inherent
uncertainties and an adverse result in one or more matters could negatively affect its results.
Beginning in September 2001, the Company, certain of its directors and former officers,
and certain of the underwriters for its initial public offering were named as defendants in three
putative shareholder class actions that were consolidated in and by the United States District
Court for the Southern District of New York in
In re Transmeta Corporation Initial Public Offering
Securities Litigation,
Case No. 01 CV 6492. The complaints allege that the prospectus issued in
connection with the Companys initial public offering on November 7, 2000 failed to disclose
certain alleged actions by the underwriters for that offering, and alleges claims against the
Company and several of its directors and former officers under Sections 11 and 15 of the Securities
Act of 1933, as amended, and under Sections 10(b) and Section 20(a) of the Securities Exchange Act
of 1934, as amended. Similar actions have been filed against more than 300 other companies that
issued stock in connection with other initial public offerings during 1999-2000. Those cases have
been coordinated for pretrial purposes as
In re Initial Public Offering Securities Litigation,
Master File No. 21 MC 92 (SAS). In July 2002, the Company joined in a coordinated motion to dismiss
filed on behalf of multiple issuers and other defendants. In February 2003, the District Court
granted in part and denied in part the coordinated motion to dismiss, and issued an order regarding
the pleading of amended complaints. Plaintiffs subsequently proposed a settlement offer to all
issuer defendants, which settlement would provide for payments by issuers insurance carriers if
plaintiffs fail to recover a certain amount from underwriter defendants. Although the Company and
the individual defendants believe that the complaints are without merit and deny any liability, but
because they also wished to avoid the continuing waste of management time and expense of
litigation, they accepted plaintiffs proposal to settle all claims that might have been brought in
this action. The Companys insurance carriers were part of the proposed settlement, and the Company
and the individual Transmeta defendants expect that their share of any global settlement will be
fully funded by their director and officer liability insurance. In April 2006, the District Court
held a final settlement approval hearing on the proposed issuer settlement and took the matter
under submission. Meanwhile the consolidated case against the underwriter defendants went forward,
and in December 2006, the Court of Appeals for the Second Circuit held that a class could not be
certified in that case. As a result of the Court of Appeals holding, the District Court suggested
that the proposed issuer settlement could not be approved in its proposed form and should be
modified. In June 2007, the District Court entered an order terminating the proposed settlement
based upon a stipulation among the parties to the settlement. It is unclear what impact these
developments will have on the Companys case. The Company expects that the parties will likely seek
to reformulate a settlement in light of the Court of Appeals ruling, and the Company believes that
the likelihood that it would be required to pay any material amount is remote. It is possible that
the parties may not reach a final written settlement agreement or that the District Court may
decline to approve any settlement in whole or part. In the event that the parties do not reach
agreement on a final settlement, the Company and the Transmeta defendants believe that they have
meritorious defenses and intend to defend any remaining action vigorously.
In July 2007, the Company received a letter on behalf of a putative stockholder, Vanessa
Simmonds, demanding that the Company investigate and prosecute a claim for alleged short-swing
trading in violation of Section 16(b) of the Securities Exchange Act against the underwriters of
the Companys November 2000 initial public offering and unidentified directors, officers and
stockholders of the Company. In October 2007, Simmonds filed a purported shareholder derivative
action in the United States District Court for the Western District of Washington, captioned
Simmonds v. Morgan Stanley, et al.
, Case No. C07-1636 RSM, against three of the underwriters of
the Companys initial public offering. In February 2008, Simmonds filed an amended complaint. None
of the Companys current or former directors or officers is named as a party in the action. The
Company is named only as a nominal defendant in the action, and Simmonds does not seek any remedy
or recovery from the Company. In March 2008, the court entered a stipulated order providing that
the Company shall not be required to answer or otherwise respond to the amended complaint.
On January 31, 2008, the directors and certain officers of the Company were named as
defendants in a purported shareholder derivative action in the Superior Court for Santa Clara
County, California, captioned
Riley Investment Partners Investment Fund, L.P., et al. v. Horsley,
et al. (Transmeta Corp.),
Case No. 1:08-CV-104667. The complaint alleged claims for breach of
fiduciary duty, gross mismanagement, waste of corporate assets and abuse of control relating to the
compensation of the Companys management. Defendants filed a demurrer to the complaint in
March 2008. In April 2008, plaintiffs filed a notice of intent to file an amended complaint. In
July 2008, all parties entered into a settlement agreement and releases providing for, among other
things, the dismissal with prejudice of this action, with each party to bear its own litigation
fees and costs. The parties jointly filed a stipulation of dismissal with the Court and, on
July 24, 2008, the Court entered an order dismissing this action with prejudice.
16.
Subsequent Events
Patent
License Agreement with AMD
On
November 16, 2008, the Company entered into a patent license agreement with AMD. The agreement grants a non-exclusive
license under Transmetas patent to AMD, and includes FoundryCo, which AMD recently announced as part of its Asset
Smart
strategy. Under the terms of the agreement, AMD will transfer to Transmeta 700,000 shares of Transmetas Series B
Preferred Stock held by AMD.
Merger
Agreement with Novafora
On
November 17, 2008, the Company announced that the Company had entered into a Merger Agreement to be acquired by Novafora
for $255.6 million in cash, subject to working capital and other adjustments, in a transaction where Transmeta would be
merged with and into a wholly-owned subsidiary of Novafora. The Merger Agreement provides, among other things, that
Transmeta may not enter into any future licensing transaction prior to closing of the merger without Novaforas consent.
Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the financial condition and results of our
operations should be read in conjunction with the unaudited condensed consolidated financial
statements and related notes included elsewhere in this Quarterly Report on
Form 10-Q
. This
discussion contains forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those discussed below. Factors that could cause or contribute
to such differences include, but are not limited to, those identified below, and those discussed in
the section titled Risk Factors included in Item 1A of this Quarterly Report on
Form 10-Q
.
Overview
Transmeta Corporation (Transmeta, the Company or We) develops and licenses
innovative computing, microprocessor and semiconductor technologies and related intellectual
property. Founded in 1995, we first became known for designing, developing and selling our highly
efficient x86-compatible software-based microprocessors, which deliver a balance of low power
consumption, high performance, low cost and small size suited for diverse computing platforms.
20
From our inception in 1995 through the fiscal year ended December 31, 2004, our business
model was focused primarily on designing, developing and selling highly efficient x86-compatible
software-based microprocessors. In 2003, we began diversifying our business model to establish a
revenue stream based upon the licensing of certain of our intellectual property and advanced
computing and semiconductor technologies. In January 2005, we put most of our microprocessor
products to end-of-life status and began modifying our business model to further leverage our
intellectual property rights and to increase our business focus on licensing our advanced power
management and other proprietary technologies. In 2005, we also entered into strategic alliance
agreements with Sony and Microsoft to leverage our microprocessor design and development
capabilities by providing engineering services to those companies under contract. During 2005 and
2006, we pursued three lines of business: (1) licensing of intellectual property and technology,
(2) engineering services, and (3) product sales.
In 2007, we streamlined and restructured our operations to focus on our core business of
developing and licensing intellectual property and technology. During the first two quarters of
2007, we reduced our workforce by approximately 140 employees and initiated the closure of our
offices in Taiwan and Japan. As a result of our operational streamlining activities in fiscal 2007,
we have ceased pursuing engineering services as a separate line of business, ceased our operations
relating to microprocessor production support and exited the business of selling microprocessor
products.
On December 31, 2007, we entered into a settlement agreement with Intel resolving our
patent litigation and licensing to Intel our patents and our LongRun and LongRun2 technologies. As
of September 30, 2008, we expect to recognize income from our settlement and licensing agreement
with Intel within operations of $5.9 million per quarter through the fourth quarter of 2017.
We are presently focused on licensing to other companies our advanced power management
technologies for controlling leakage and increasing power efficiency in semiconductor devices
(licensed under our LongRun2
tm
trademark) and our portfolio of intellectual property
rights.
Patent
License
Agreement with AMD
On
November 16, 2008, we entered into a patent license agreement with AMD. The agreement grants a non-exclusive license under
Transmetas patent to AMD, and includes FoundryCo, which AMD recently announced as part of its Asset Smart strategy.
Under the terms of the agreement, AMD will transfer to Transmeta 700,000 shares of Transmetas Series B Preferred Stock
held by AMD.
Merger
Agreement with Novafora
On
November 17, 2008, we announced that we had entered into a Merger Agreement to be acquired by Novafora for $255.6 million
in cash, subject to working capital and other adjustments, in a transaction where Transmeta would be merged with and into
a wholly-owned subsidiary of Novafora. The Merger Agreement provides, among other things, that Transmeta may not enter
into any future licensing transaction prior to closing of the merger
without Novaforas consent.
21
Results of Operations
The following table sets forth, for the periods indicated, certain financial data as a
percentage of total revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
1
|
%
|
|
|
7
|
%
|
License
|
|
|
100
|
%
|
|
|
2
|
%
|
|
|
98
|
%
|
|
|
0
|
%
|
Service
|
|
|
0
|
%
|
|
|
98
|
%
|
|
|
1
|
%
|
|
|
93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of product
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
3
|
%
|
Costs of license
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Costs of service(*)
|
|
|
0
|
%
|
|
|
41
|
%
|
|
|
1
|
%
|
|
|
53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment charges on long-lived assets
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
0
|
%
|
|
|
41
|
%
|
|
|
1
|
%
|
|
|
71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
100
|
%
|
|
|
59
|
%
|
|
|
99
|
%
|
|
|
29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from settlement and licensing
|
|
|
-23
|
%
|
|
|
0
|
%
|
|
|
-67
|
%
|
|
|
0
|
%
|
Gain from receivable and license
|
|
|
-11
|
%
|
|
|
0
|
%
|
|
|
-11
|
%
|
|
|
0
|
%
|
Research and development(*)
|
|
|
6
|
%
|
|
|
3036
|
%
|
|
|
26
|
%
|
|
|
374
|
%
|
Selling, general and administrative(*)
|
|
|
15
|
%
|
|
|
13880
|
%
|
|
|
46
|
%
|
|
|
759
|
%
|
Restructuring charges
|
|
|
0
|
%
|
|
|
402
|
%
|
|
|
3
|
%
|
|
|
377
|
%
|
Amortization of patents and patent rights
|
|
|
-1
|
%
|
|
|
3889
|
%
|
|
|
9
|
%
|
|
|
218
|
%
|
Impairment charge on long-lived and other assets
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
-14
|
%
|
|
|
21207
|
%
|
|
|
6
|
%
|
|
|
1741
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
114
|
%
|
|
|
-21148
|
%
|
|
|
93
|
%
|
|
|
-1712
|
%
|
Interest income and other, net
|
|
|
7
|
%
|
|
|
568
|
%
|
|
|
24
|
%
|
|
|
47
|
%
|
Interest expense
|
|
|
0
|
%
|
|
|
-34
|
%
|
|
|
0
|
%
|
|
|
-2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
121
|
%
|
|
|
-20614
|
%
|
|
|
117
|
%
|
|
|
-1667
|
%
|
Provision for income taxes
|
|
|
0
|
%
|
|
|
7
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
121
|
%
|
|
|
-20621
|
%
|
|
|
117
|
%
|
|
|
-1667
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend for beneficial conversion feature
of preferred stock
|
|
|
0
|
%
|
|
|
-8250
|
%
|
|
|
0
|
%
|
|
|
-154
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders
|
|
|
121
|
%
|
|
|
-28871
|
%
|
|
|
117
|
%
|
|
|
-1821
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) Includes stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service revenue
|
|
|
0
|
%
|
|
|
2
|
%
|
|
|
0
|
%
|
|
|
1
|
%
|
Research and development
|
|
|
1
|
%
|
|
|
-616
|
%
|
|
|
6
|
%
|
|
|
0
|
%
|
Selling, general and administrative
|
|
|
3
|
%
|
|
|
555
|
%
|
|
|
8
|
%
|
|
|
40
|
%
|
Total Revenue
Revenues have historically been generated from three types of activities: product,
license and services. Product revenues consist of sales of x86-compatible software-based
microprocessors. License revenues consist of deliverable-based technology transfer fees from
licensing advanced power management and other proprietary technologies. Service revenues consist of
design services and development services fees received for either fixed fee or time and materials
based engineering services, as well as maintenance support fees. Total revenue for the three and
nine months ended September 30, 2008 and 2007 is summarized in the following table:
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
Change in
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
Product
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
n/a
|
|
|
$
|
253
|
|
|
$
|
167
|
|
|
$
|
86
|
|
|
|
51
|
%
|
License
|
|
|
25,299
|
|
|
|
1
|
|
|
|
25,298
|
|
|
|
2529800
|
%
|
|
|
25,905
|
|
|
|
1
|
|
|
|
25,904
|
|
|
|
2590400
|
%
|
Service
|
|
|
|
|
|
|
43
|
|
|
|
(43
|
)
|
|
|
(100
|
%)
|
|
|
168
|
|
|
|
2,186
|
|
|
|
(2,018
|
)
|
|
|
(92
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
25,299
|
|
|
$
|
44
|
|
|
$
|
25,255
|
|
|
|
57398
|
%
|
|
$
|
26,326
|
|
|
$
|
2,354
|
|
|
$
|
23,972
|
|
|
|
1018
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue in the three and nine months ended September 30, 2008 increased by
$25.3 million and $24.0 million over comparable periods in 2007, respectively.
Product Revenue.
Product revenue was zero for each of the three months ended September
30, 2008 and 2007. Product revenue increased by $0.1 million for the nine months ended September
30, 2008 over the comparable periods in 2007. The increase for the nine months comparison was due
primarily due to an increase in sales of previously reserved inventory. We have exited the business
of selling microprocessor products and expect no further product revenues in fiscal 2008.
License Revenue.
License revenue increased by $25.3 million and $25.9 million for the
three and nine months ended September 30, 2008, over comparable periods in 2007, respectively. Our
receipt of royalties from our LongRun2 licensees depends on our licensees incorporating our
technology into their manufacturing products, bringing their products to market, and the success of
their products. Our licensees are not contractually obligated to manufacture, distribute or sell
products using our licensed technologies.
We expect that our license revenue will vary from period to period, depending in part on
the adoption of our LongRun2 technology by our licensees and potential licensees, and the success
of the products incorporating our technology sold by our licensees. The increase for both
comparisons was primarily due to $25.0 million in revenue received for our LongRun2 license from a
one time license with NVIDIA.
Service Revenue.
Service revenue is comprised of three sub-types: (i) maintenance and
technical support service revenue; (ii) fixed fee development service revenue; and
(iii) time-and-materials-based design service revenue. Service revenues in the three and nine
months ended September 30, 2008 decreased by $43,000 and $2.0 million over the comparable periods
in 2007, respectively. The decrease in total service revenue was primarily attributable to the
completion of the Sony engineering service contract in the first quarter of 2007. Service revenue
in the nine months ended September 30, 2008 consisted of a $0.2 million time and materials service
contract for an existing LongRun2 licensing customer. We have decided not to continue pursuing
engineering services as a separate line of business; however, we intend to continue providing
engineering and support services as an important element of our technology licensing business.
Deferred income related to services was zero as of September 30, 2008 and 2007.
Customer Concentration Information
We have derived the majority of our revenue from a limited number of customers.
Additionally, we derive a significant portion of our revenue from customers located in Asia, which
subjects us to economic cycles in that region as well as the geographic areas in which they sell
their products. Revenues are highly concentrated among those customers each comprising more than
10% of annual revenue. For the three and nine months ended September 30, 2008, one customer
accounted for more than 10% of total revenues. For the three and nine months ended September 30,
2007, one and two customers accounted for more than 10% of total revenues, respectively.
Costs of Revenues
Costs of revenues, consisting of cost of product revenue, cost of license revenue and
cost of service revenue, are summarized for the three and nine months ended September 30, 2008 and
2007 in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
Change in
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
Product(*)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
n/a
|
|
|
$
|
3
|
|
|
$
|
80
|
|
|
$
|
(77
|
)
|
|
|
(96
|
%)
|
License
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
n/a
|
|
Royalties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
n/a
|
|
Service(*)
|
|
|
|
|
|
|
18
|
|
|
|
(18
|
)
|
|
|
(100
|
%)
|
|
|
163
|
|
|
|
1,236
|
|
|
|
(1,073
|
)
|
|
|
(87
|
%)
|
Impairment
charge on inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
n/a
|
|
|
|
|
|
|
|
364
|
|
|
|
(364
|
)
|
|
|
(100
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
$
|
|
|
|
$
|
18
|
|
|
$
|
(18
|
)
|
|
|
(100
|
%)
|
|
$
|
166
|
|
|
$
|
1,680
|
|
|
$
|
(1,514
|
)
|
|
|
(90
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(*) Includes stock-based
compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
n/a
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
n/a
|
|
Cost of service revenue
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
|
(100
|
%)
|
|
$
|
82
|
|
|
$
|
18
|
|
|
$
|
64
|
|
|
|
356
|
%
|
23
Cost of Product Revenue
There was no associated cost of product revenue for the three months ended September 30,
2008 and 2007. The decrease of $77,000 in cost of product revenue for the nine months ended
September 30, 2008 over the comparable period in 2007 was primarily due to the product sales of
previously written-down and fully reserved inventory in the first quarter of fiscal 2008.
Cost of License Revenue
There was no associated cost of licensing revenue for the three and nine months ended
September 30, 2008 and 2007.
Cost of Service Revenue
The cost of service revenue is comprised of three sub-types: (i) maintenance and
technical support services pursuant to LongRun2 licenses; (ii) fixed fee development services; and
(iii) time and materials based design services. Cost of service revenue is comprised mainly of
compensation and benefits of engineers assigned directly to the projects, hardware and software,
and other computer support.
For the three and nine months ended September 30, 2008, the cost of service revenue
decreased by $18,000 and $1.1 million, respectively, over comparable periods in 2007, respectively.
The decreases in cost of service revenue was a result of the decrease in headcount related costs
due to completion of the design service contract for Sony and Microsoft in the first quarter of
fiscal 2007.
Impairment Charges on Inventories
In 2006, we built our inventory of 90 nanometer Efficeon products in anticipation of a
ramp in demand resulting from the Microsoft FlexGo program, but our sales of 90 nanometer Efficeon
products were minimal during 2006 and we received no production orders for our special
FlexGo-enabled Efficeon products. Accordingly, we recorded impairment for all our remaining 90
nanometer Efficeon products as of December 31, 2006. In the first quarter of fiscal 2007, we
received an additional $0.4 million of new raw material for the FlexGo program of Fujitsu die,
which we impaired as of March 31, 2007. In 2007, we exited the business of selling microprocessor
products and expect no further product revenues in fiscal 2008.
Income from Settlement and Licensing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Change in
|
|
Change in
|
|
Nine Months Ended September 30,
|
|
|
Change in
|
|
|
Change in
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
Percent
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
Income from settlement and licensing
|
|
$
|
5,865
|
|
|
$
|
|
|
|
$
|
5,865
|
|
|
|
n/a
|
|
|
$
|
17,595
|
|
|
$
|
|
|
|
$
|
17,595
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2008, we recognized income from
settlement and licensing of $5.9 million and $17.6 million, respectively, compared to zero for the
three and nine months ended September 30, 2007. We expect to recognize the entire present value of
$234.6 million from the settlement, release and license agreement entered into with Intel on
December 31, 2007 as income from settlement and licensing within operations, on a ten-year ratable
basis, over the years 2008-2017. As of September 30, 2008, we expect to recognize income from
settlement and licensing within operations of $5.9 million per quarter through the fourth quarter
of 2017.
Income from license and receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Change in
|
|
Change in
|
|
Nine Months Ended September 30,
|
|
|
Change in
|
|
|
Change in
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
Percent
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
Income from license and receivable
|
|
$
|
2,855
|
|
|
$
|
|
|
|
$
|
2,855
|
|
|
|
n/a
|
|
|
$
|
2,855
|
|
|
$
|
|
|
|
$
|
2,855
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For each of the three and nine months ended September 30, 2008, we recognized a income from
license and receivable of $2.9 million, compared to zero for each of the three and nine months
ended September 30, 2007. In September 2008, we entered into an amendment to the December 31, 2007
settlement, release and license agreement to accelerate all future payment obligations under the
agreement and a computing technology license agreement with Intel. This resulted in an operating
gain of $2.9 million for the excess of cash received over the carrying cost of the receivable.
24
Research and Development
Total research and development expenses for the three and nine months ended September 30,
2008 and 2007 are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
Nine Months Ended September 30,
|
|
|
Change in
|
|
|
Change in
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
Research and development expenses
|
|
$
|
1,430
|
|
|
$
|
1,607
|
|
|
$
|
(177
|
)
|
|
|
(11
|
%)
|
|
$
|
5,152
|
|
|
$
|
8,798
|
|
|
$
|
(3,646
|
)
|
|
|
(41
|
%)
|
Stock-based compensation
|
|
|
156
|
|
|
|
(271
|
)
|
|
|
427
|
|
|
|
158
|
%
|
|
|
1,599
|
|
|
|
11
|
|
|
|
1,588
|
|
|
|
14436
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development
expenses
|
|
$
|
1,586
|
|
|
$
|
1,336
|
|
|
$
|
250
|
|
|
|
19
|
%
|
|
$
|
6,751
|
|
|
$
|
8,809
|
|
|
$
|
(2,058
|
)
|
|
|
(23
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2008, total research and
development expenses increased by $0.3 million and decreased by $2.1 million over comparable
periods in 2007, respectively. Research and development expenses for the three months comparison
decreased by $0.2 million primarily due to a $0.1 million decrease in compensation and a $0.1
million decrease in allocated expenses from facility and IT expenses as a result of headcount
reductions. Stock-based compensation increased $0.4 million in the three months comparison
primarily due to a $0.4 million credit true-up for ESPP for terminated employee forfeitures in
2007. Research and development expenses for the nine months comparison decreased by $3.6 million
primarily due to a $4.0 million decrease in compensation as a result of headcount reductions, a
$0.8 million decrease in facility and IT allocations, a $0.3 million decrease in employee insurance
as a result of headcount reductions and a $0.1 million decrease in software and hardware
maintenance offset by a $1.1 million increase due to a lower allocation-out for cost of revenue on
the Sony contract, a $0.5 million increase in outside services and consultants and a $0.1 million
increase in non-recurring engineering charges. Stock compensation increased $1.6 million in the
nine months comparison primarily due to a $0.6 million credit true-up for ESPP for terminated
employee forfeitures in 2007 and a $0.9 million increase due to the grant of stock options in the
fourth quarter of 2007.
Selling, General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
Nine Months Ended September 30,
|
|
|
Change in
|
|
|
Change in
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
Selling, general and administrative expenses
|
|
$
|
2,969
|
|
|
$
|
5,863
|
|
|
$
|
(2,894
|
)
|
|
|
(49
|
%)
|
|
$
|
10,103
|
|
|
$
|
16,916
|
|
|
$
|
(6,813
|
)
|
|
|
(40
|
%)
|
Stock-based compensation
|
|
|
731
|
|
|
|
244
|
|
|
|
487
|
|
|
|
200
|
%
|
|
|
2,047
|
|
|
|
941
|
|
|
|
1,106
|
|
|
|
118
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total selling, general and administrative expenses
|
|
$
|
3,700
|
|
|
$
|
6,107
|
|
|
$
|
(2,407
|
)
|
|
|
(39
|
%)
|
|
$
|
12,150
|
|
|
$
|
17,857
|
|
|
$
|
(5,707
|
)
|
|
|
(32
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2008, total selling, general and
administrative expenses decreased by $2.4 million and $5.7 million over comparable periods in 2007,
respectively. Selling, general and administrative expenses for the three months comparison
decreased by $2.9 million primarily due to $1.2 million decrease in legal and outside services
primarily related to the Intel settlement, a $1.1 million decrease in outside services and
consultants, $0.2 million decrease in corporate insurance, a $0.1 million decrease in rent expense
related to the restructured office space, a $0.1 million decrease in building maintenance costs
primarily due to a reduced estimate on restoration costs, $0.1 million decrease in asset
depreciation primarily due to gradual retirements of assets due to the restructure and a $0.1
million decrease in accounting services offset by a $0.1 million due to a smaller charge out of
Facility and IT expenses to R&D. Stock-based compensation increased $0.5 million primarily due to
grant of stock options in the fourth quarter of 2007.
Selling, general and administrative expenses for the nine months comparison decreased by
$6.8 million primarily due to a $2.7 million decrease in legal and outside services primarily
related to the Intel settlement, a $1.6 million decrease in compensation as a result of headcount
reductions, a $1.1 million decrease in outside services and consultants, a $0.7 million decrease in
rent expense related to the restructured office space, a $0.6 million decrease in corporate
insurance, a $0.3 million decrease in asset depreciation due to gradual retirements of assets due
to the restructure, a $0.1 million decrease in software and hardware maintenance, a $0.1 million
decrease in travel expenses, a $0.1 million decrease in recruiting expenses and a $0.1 million
decrease in accounting services offset by an increase of a $0.8 million due to a smaller charge out
of Facility and IT expenses to R&D. Stock-based compensation increased $1.1 million primarily due
to grant of stock options in the fourth quarter of 2007.
Restructuring Charges, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
Nine Months Ended September 30,
|
|
|
Change in
|
|
|
Change in
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
Restructuring charges
|
|
$
|
(97
|
)
|
|
$
|
177
|
|
|
$
|
(274
|
)
|
|
|
(155
|
%)
|
|
$
|
700
|
|
|
$
|
8,878
|
|
|
$
|
(8,178
|
)
|
|
|
(92
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2008, restructuring charges decreased
by $0.3 million and $8.2 million over comparable periods in 2007, respectively. The decrease for
the three months comparison was primarily due to a $0.2 million decrease due to a lower estimate on
restoration costs and a $0.1 million related to workforce cost reductions initiated in
February 2007. The decrease for the nine months comparison was primarily due to a $7.2 million
decrease related to workforce cost reductions initiated in February 2007 and a
25
$1.7 million
decrease related to leased facility restructuring cost, offset by a $0.7 million increased expense
due largely to restoration costs for the restructured buildings.
Amortization of Patents and Patent Rights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
Nine Months Ended September 30,
|
|
|
Change in
|
|
|
Change in
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
Amortization of patent and patent rights
|
|
$
|
|
|
|
$
|
1,711
|
|
|
$
|
(1,711
|
)
|
|
|
(100
|
%)
|
|
$
|
2,388
|
|
|
$
|
5,134
|
|
|
$
|
(2,746
|
)
|
|
|
(53
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2008, amortization of patents and patent
rights decreased by $1.7 million and $2.7 million over comparable periods in 2007, respectively.
The decrease for both periods was primarily due to patent and patent rights that were fully
amortized by the second quarter of 2008. Amortization charges relate to various patents and patent
rights acquired from Epson and others during fiscal 2001. Also included in the amortization charges
are accretion expenses associated with the liability recorded from the acquisition of these patents
and patent rights.
Impairment Charge on Long-Lived and Other Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
Nine Months Ended September 30,
|
|
|
Change in
|
|
|
Change in
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
Impairment charges
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
n/a
|
|
|
$
|
|
|
|
$
|
302
|
|
|
$
|
(302
|
)
|
|
|
(100
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no impairment chargers on long-lived and other assets for the three months ended
September 30, 2008 and 2007. For the nine months ended September 30, 2008, impairment charges on
long-lived and other assets decreased by $0.3 million primarily due to prepaid software maintenance
that was impaired in the first quarter of fiscal 2007 related to an end of life product.
Interest Income and Other, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
Nine Months Ended September 30,
|
|
|
Change in
|
|
|
Change in
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
Interest income and other, net
|
|
$
|
1,813
|
|
|
$
|
250
|
|
|
$
|
1,563
|
|
|
|
625
|
%
|
|
$
|
6,197
|
|
|
$
|
1,109
|
|
|
$
|
5,088
|
|
|
|
459
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2008, interest income and other, net
increased by $1.6 million and $5.1 million, over comparable periods in 2007, respectively. The
increase for the three months comparison was primarily due to $1.2 million of imputed interest
income resulting from the Intel settlement, release and license agreement and $0.4 million of
interest income generated from the increased cash and short-term investment position due to receipt
of the $150 million payment from Intel in January 2008. The increase for the nine months comparison
was primarily due to $4.0 million of imputed interest income resulting from the Intel settlement,
release and license agreement and $1.2 million of interest income generated from the increased cash
and short-term investment position due to receipt of the $150 million payment from Intel in
January 2008 offset by $0.2 million of gain in 2007 on the disposal of long-lived assets. As of
September 30, 2008, no future imputed interest income will be recognized as the Intel other
receivables were fully-paid on September 30, 2008.
Provision for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Change in
|
|
|
Change in
|
|
|
Nine Months Ended September 30,
|
|
|
Change in
|
|
|
Change in
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
Provision for income taxes
|
|
$
|
|
|
|
$
|
3
|
|
|
$
|
(3
|
)
|
|
|
(100
|
%)
|
|
$
|
|
|
|
$
|
7
|
|
|
$
|
(7
|
)
|
|
|
(100
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For fiscal 2008, reported income and accreted interest income from the Intel settlement,
release and license agreement does not create tax expense as the entire $250 million settlement was
recognized as income in the 2007 income tax returns.
Liquidity and Capital Resources
For the nine months ended September 30, 2008, we had positive cash flows of
$236.0 million from our operations, compared to negative cash flows of $33.5 million from our
operations for the comparable period in 2007.
26
The following comparison table summarizes our usage of cash and cash equivalents for the
nine months ended September 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
Change in
|
|
|
Change in
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
Dollars
|
|
|
Percent
|
|
Net cash provided by (used in) operating activities
|
|
$
|
235,968
|
|
|
$
|
(33,525
|
)
|
|
$
|
269,493
|
|
|
|
804
|
%
|
Net cash provided by (used in) investing activities
|
|
|
(46,949
|
)
|
|
|
21,161
|
|
|
|
(68,110
|
)
|
|
|
(322
|
%)
|
Net cash provided by financing activities
|
|
|
645
|
|
|
|
20,398
|
|
|
|
(19,753
|
)
|
|
|
(97
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
$
|
189,664
|
|
|
$
|
8,034
|
|
|
$
|
181,630
|
|
|
|
2261
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
For the nine months ended September 30, 2008, net cash provided by operating activities
was $236.0 million. Our net income of $30.8 million was adjusted for non-cash charges consisting
primarily of $3.7 million of stock compensation, $2.4 million of amortization of patents and
patents rights, $0.7 million of non-cash restructuring accruals and $0.2 million of depreciation.
The net changes in our operating assets at September 30, 2008 compared to December 31, 2007
included primarily of decreases of $234.6 million in other receivables due to Intel payments of
$150 million in January 2008 per the settlement, release and license agreement and of $91.5 million
in September 2008 for remaining payment acceleration and non-exclusive license for computing
technology, $1.3 million in other assets, prepaid expenses and other current assets, and accounts
receivable, partially offset by decreases of $17.6 million due to recognition of deferred income
from settlement and licensing, $14.9 million in accounts payable and accrued liabilities,
$3.3 million in income tax payable due to tax payments made related to the year ended December 31,
2007, and $1.9 million in accrued restructuring payments.
For the nine months ended September 30, 2007, net cash used in operating activities was
$33.5 million. Our net loss of $39.3 million was adjusted for non-cash charges consisting primarily
of $8.9 million of non-cash restructuring accruals, $5.1 million of amortization of patents and
patents rights, $1.0 million of stock compensation, $0.4 million for impairment of inventories,
$0.5 million of depreciation and $0.3 million for impairment of long-lived assets. These charges
were partially offset by $0.2 million gain on disposal of fixed assets. The net changes in our
operating assets at September 30, 2007 compared to December 31, 2006 included primarily of
decreases of $9.3 million in accrued restructuring payments, $0.6 million in accounts payable and
accrued liabilities, and $1.3 million in advances from customers, and an increase of $0.4 million
in inventories partially offset by decreases of $1.1 million in other assets and $0.3 million in
accounts receivable.
Investing activities
Net cash used in investing activities was $46.9 million for the nine months ended
September 30, 2008 compared to net cash provided by investing activities of $21.1 million for the
comparable period in fiscal 2007.
Net cash used in investing activities for the nine months ended September 30, 2008, was
primarily due to the purchase of available-for-sale investments of $139.6 million, partially offset
by $92.7 million in proceeds provided from the sale or maturity of available-for-sale investments,
plus cash used for $0.1 million of equipment purchases.
Net cash provided by investing activities for the nine months ended September 30, 2007,
was primarily due to $24.0 million in proceeds provided from the maturity of available-for-sale
investments, partially offset by the purchase of available-for-sale investments of $3.0 million and
net $0.1 million cash provided by fixed assets disposals less new purchases.
Financing activities
Net cash provided by financing activities was $0.6 million for the nine months ended
September 30, 2008 compared to $20.4 million for the comparable period in fiscal 2007.
For the nine months ended September 30, 2008, net cash provided by financing activities
included $0.4 million from sales of common stock under our employee stock purchase and stock option
plans and $0.2 million in net proceeds from exercises of warrants.
For the nine months ended September 30, 2007, net cash provided by financing activities
included $11.6 million proceeds from direct placement of common stock and warrants, $7.0 million
from Series B Preferred Stock issued to AMD, and $1.8 million in net proceeds from the sale of our
common stock under our employee stock purchase and stock option plans.
Contractual Obligations
As of September 30, 2008, we had the following contractual obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future Minimum Payments Due by Period
|
|
|
|
|
|
|
|
Remainder of
|
|
|
|
|
(In thousands)
|
|
Total
|
|
|
2008
|
|
|
2009
|
|
Operating leases(1)
|
|
$
|
270
|
|
|
$
|
68
|
|
|
$
|
202
|
|
Unconditional contractual obligations(2)
|
|
|
1,000
|
|
|
|
200
|
|
|
|
800
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,270
|
|
|
$
|
268
|
|
|
$
|
1,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Operating leases includes the lease extension agreement for
approximately 22,500 square feet of office space in Santa Clara,
California that was signed in July 2008.
|
|
(2)
|
|
Contractual obligations include agreements to purchase goods or
services that are enforceable and legally binding on us and that
specify all significant terms, including, fixed or minimum quantities
to be purchased; fixed, minimum or variable price provisions; and the
approximate timing of the transaction. Purchase obligations also
include agreements for design tools and software for use in product
development.
|
27
Off-Balance Sheet Arrangements
As of September 30, 2008, we had no off balance sheet arrangements as defined in Item
303(a) (4) of Regulation S-K.
Critical Accounting Policies
The process of preparing financial statements requires the use of estimates on the part
of our management. The estimates used by management are based on our historical experiences
combined with managements understanding of current facts and circumstances. Certain of our
accounting policies are considered critical as they are both important to the portrayal of our
financial condition and results and require significant or complex judgment on the part of
management. For a description of what we believe to be our most critical accounting policies and
estimates, please refer to Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations, of our Annual Report on Form 10-K, for the year ended December 31, 2007,
which was filed with the Securities and Exchange Commission on March 17, 2008.
Critical accounting policies affecting us, the critical estimates made when applying
them, and the judgments and uncertainties affecting their application have not changed materially
since December 31, 2007.
Recent Accounting Pronouncements
See Note 2 Recent Accounting Pronouncements in the Notes to the Unaudited Condensed
Consolidated Financial Statements for a full description of relevant recent accounting
pronouncements including the respective expected dates of adoption.
Item 3
. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk.
As of September 30, 2008, we had cash, cash equivalents and
short-term investments of $255.2 million. Our cash equivalents and short-term investments are
exposed to financial market risk due to fluctuations in interest rates, which may affect our
interest income. As of September 30, 2008, our cash equivalents and short-term investments included
money market funds and short and medium term treasury bills and earned interest at an average rate
of 1.0%. Due to the relative short-term nature of our investment portfolio, our interest income is
extremely vulnerable to sudden changes in market interest rates. A hypothetical 1.0% decrease in
interest rates would have resulted in a $2.6 million decrease in our annualized interest income.
Actual results may differ materially from this sensitivity analysis. We do not use our investment
portfolio for trading or other speculative purposes.
Foreign Currency Exchange Risk.
All of our sales and substantially all of our expenses
are denominated in U.S. dollars. As a result, we have relatively little exposure to foreign
currency exchange risk. We do not currently enter into forward exchange contracts to hedge
exposures denominated in foreign currencies or any other derivative financial instruments for
trading or speculative purposes. However, in the event our exposure to foreign currency risk
increases, we may choose to hedge those exposures.
Item 4
. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and our chief
financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the
end of the period covered by this Quarterly Report on Form 10-Q. The term disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act, means
controls and other procedures of a company that are designed to ensure that information required to
be disclosed by us in the reports that we file or submit under the Securities Exchange Act is
recorded, processed, summarized and reported, within the time periods specified in the SECs rules
and forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by a company in the reports that it
files or submits under the Securities Exchange Act is accumulated and communicated to our
management, including our principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding required
disclosure. Based on that evaluation, our chief executive officer and chief financial officer have
concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our
disclosure controls and procedures were effective.
Inherent Limitations on Effectiveness of Controls
Our management, including our chief executive officer and our chief financial officer,
does not expect that our disclosure controls and procedures or our internal control over financial
reporting will prevent or detect all errors and all fraud. Any control system, no matter how well
designed and operated, can provide only reasonable, not absolute, assurance that the control
systems objectives will be met. The design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered relative to their costs.
Further, because of the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that misstatements due to error or fraud will not occur or that all
control issues and instances of fraud, if any, within the company have been detected. These
inherent limitations include the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the
individual acts of some persons, by collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in part on certain assumptions about
the likelihood of future events, and there can be no assurance that any design will succeed in
achieving our stated goals under all potential future conditions.
28
Projections of any evaluation of controls effectiveness to future periods are subject to risks.
Over time, controls may become inadequate because of changes in conditions or deterioration in the
degree of compliance with policies or procedures.
Changes in Internal Control over Financial Reporting
Internal control over financial reporting is a process designed by, or under the
supervision of, our chief executive officer and our chief financial officer, and effected by our
board of directors, management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with GAAP. A companys internal control over financial reporting includes
those policies and procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the companys assets that could have a material
effect on the financial statements. There was no change in our internal control over financial
reporting during the three months ended September 30, 2008 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1.
Legal Proceedings
We are subject to legal claims and litigation arising in the ordinary course of our
business, such as employment or intellectual property claims, including but not limited to the
matters described below. Although there are no legal claims or litigation matters pending that we
expect to be material in relation to our business, consolidated financial condition, results of
operations or cash flows, legal claims and litigation are subject to inherent uncertainties and an
adverse result in one or more matters could negatively affect our results.
Beginning in September 2001, the Company, certain of our directors and former officers,
and certain of the underwriters for our initial public offering were named as defendants in three
putative shareholder class actions that were consolidated in and by the United States District
Court for the Southern District of New York in
In re Transmeta Corporation Initial Public Offering
Securities Litigation
, Case No. 01 CV 6492. The complaints allege that the prospectus issued in
connection with our initial public offering on November 7, 2000 failed to disclose certain alleged
actions by the underwriters for that offering, and alleges claims against us and several of our
directors and former officers under Sections 11 and 15 of the Securities Act, and under Sections
10(b) and Section 20(a) of the Securities Exchange Act. Similar actions have been filed against
more than 300 other companies that issued stock in connection with other initial public offerings
during 1999-2000. Those cases have been coordinated for pretrial purposes as
In re Initial Public
Offering Securities Litigation
, Master File No. 21 MC 92 (SAS). In July 2002, we joined in a
coordinated motion to dismiss filed on behalf of multiple issuers and other defendants. In
February 2003, the District Court granted in part and denied in part the coordinated motion to
dismiss, and issued an order regarding the pleading of amended complaints. Plaintiffs subsequently
proposed a settlement offer to all issuer defendants, which settlement would provide for payments
by issuers insurance carriers if plaintiffs fail to recover a certain amount from underwriter
defendants. Although we and the individual defendants believe that the complaints are without merit
and deny any liability, but because we also wished to avoid the continuing waste of management time
and expense of litigation, we accepted plaintiffs proposal to settle all claims that might have
been brought in this action. Our insurance carriers are part of the proposed settlement, and we and
the individual Transmeta defendants expect that our share of any global settlement will be fully
funded by our director and officer liability insurance. In April 2006, the District Court held a
final settlement approval hearing on the proposed issuer settlement and took the matter under
submission. Meanwhile the consolidated case against the underwriter defendants went forward, and in
December 2006, the Court of Appeals for the Second Circuit held that a class could not be certified
in that case. As a result of the Court of Appeals holding, the District Court suggested that the
proposed issuer settlement could not be approved in its proposed form and should be modified. In
June 2007, the District Court entered an order terminating the proposed settlement based upon a
stipulation among the parties to the settlement. It is unclear what impact these developments will
have on our case. We expect that the parties will likely seek to reformulate a settlement in light
of the Court of Appeals ruling, and we believe that the likelihood that we would be required to
pay any material amount is remote. It is possible that the parties may not reach a final written
settlement agreement or that the District Court may decline to approve any settlement in whole or
part. In the event that the parties do not reach agreement on a final settlement, we and the
Transmeta defendants believe that we have meritorious defenses and intend to defend any remaining
action vigorously.
In July 2007, we received a letter on behalf of a putative stockholder, Vanessa Simmonds,
demanding that we investigate and prosecute a claim for alleged short-swing trading in violation of
Section 16(b) of the Securities Exchange Act against the underwriters of our November 2000 initial
public offering and unidentified directors, officers and stockholders of Transmeta. In October
2007, Simmonds filed a purported shareholder derivative action in the United States District Court
for the Western District of Washington, captioned
Simmonds v. Morgan Stanley, et al.
, Case
No. C07-1636 RSM, against three of the underwriters of our initial public offering. In February
2008, Simmonds filed an amended complaint. None of our current or former directors or officers is
named as a party in the action. Transmeta is named only as a nominal defendant in the action, and
Simmonds does not seek any remedy or recovery from Transmeta. In March 2008, the court entered a
stipulated order providing that we will not be required to answer or otherwise respond to the
amended complaint.
29
On January 31, 2008, the directors and certain officers of the Company were named as
defendants in a purported shareholder derivative action in the Superior Court for Santa Clara
County, California, captioned
Riley Investment Partners Investment Fund, L.P., et al. v. Horsley,
et al. (Transmeta Corp.),
Case No. 1:08-CV-104667. The complaint alleged claims for breach of
fiduciary duty, gross mismanagement, waste of corporate assets and abuse of control relating to the
compensation of the Companys management. Defendants filed a demurrer to the complaint in March
2008. In April 2008, plaintiffs filed a notice of intent to file an amended complaint. In July
2008, all parties entered into a settlement agreement and releases providing for, among other
things, the dismissal with prejudice of this action, with each party to bear its own litigation
fees and costs. The parties jointly filed a stipulation of dismissal with the Court and, on July
24, 2008, the Court entered an order dismissing this action with prejudice.
Item 1A.
Risk Factors
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.
Risks
Related to Our Merger with Novafora
On November 17, 2008,
we announced that we had entered into a Merger Agreement to be acquired by Novafora for $255.6 million in cash, subject
to working capital and other adjustments, in a transaction where Transmeta would be merged with and into a wholly-owned
subsidiary of Novafora. There are numerous risks associated with our having entered into this agreement, including the
following:
We
cannot assure you that all conditions to the merger will be met and
the merger consummated.
The consummation of
the merger is subject to a number of closing conditions, including the following: (i) accuracy of the representations
made by us and Novafora in the Merger Agreement, (ii) our and Novaforas performance of the agreements and covenants
under the Merger Agreement, (iii) receipt of our stockholders approval of the merger, (iv) no order by a governmental
authority preventing the consummation of the merger, (v) no pending or threatened proceeding by a governmental authority
that would prevent the merger or cause the merger to be rescinded, and (vi) no material adverse effect on our business or
our ability to consummate the merger occurring after the date of the
Merger Agreement that is continuing.
Accordingly, investors should not
place undue reliance on the occurrence of the merger. In the event the merger is not completed, we may be subject to many
risks, including:
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the diversion of our managements attention from our day-to-day business and the unavoidable disruption to our employees and our relationships with customers;
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the market price of our common stock could decline to the extent that the market price of our common stock
reflects a market belief that the merger would be completed and its potential benefits would be realized;
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we could be required to pay Novafora a termination fee under certain circumstances; and
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the amount of the costs, fees and expenses and charges related to the merger.
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In
addition, if the merger does not occur, there can be no assurance
that a comparable transaction will be consummated.
Whether
or not the merger is completed, the business of Transmeta could
suffer due to the announcement of the merger and the restrictions on
the conduct of our business prior to the completion of the
merger.
The announcement of the merger may have a negative impact on our ability to attract and retain key management,
development or other personnel, maintain and attract new customers and maintain strategic relationships with third parties.
We have agreed to certain restrictions on the conduct of our business in connection with the proposed merger with Novafora
that require us to conduct our business in the ordinary course consistent with past practices, subject to specific
limitations. In addition, the Merger Agreement provides, among other things, that Transmeta may not enter into any
future licensing transaction prior to closing of the merger without Novaforas consent. These restrictions may delay
or prevent us from undertaking business opportunities that may arise pending completion of the merger.
Costs
associated with the merger are difficult to estimate, may be higher
than expected and may result in the consideration to be received by
our stockholders in the merger to be less than expected.
We will incur substantial direct transaction and other costs associated with the merger, which costs cannot be
estimated accurately at this time. Because the per share consideration to be received by our stockholders in the merger
is subject to a working capital and other adjustments, if the transaction and other costs we incur prior to the
consummation of the merger exceed estimates, the dollar value per share that our stockholders will receive upon
the consummation of the merger will be reduced.
Our executive officers and
directors have interests with respect to the merger that are different from, or in addition to, interests of our
stockholders generally, which may influence them to support the
merger.
When
considering the recommendation of our board of directors regarding
the merger, you should be aware of the interests that our executive
officers and directors have in the merger that are different from, or
in addition to, interests of our stockholders generally. These
interests include, among others:
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existing agreements that provide, among other things, for severance and other benefits as a result of the merger;
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continued director and executive officer indemnification and insurance; and
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acceleration of certain options held by our executive officers and directors.
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As a result, our executive
officers may be more
likely to vote to adopt the merger agreement and approve the merger than
if they did not have these other interests. As of November 17, 2008,
executive officers and directors, who together beneficially owned
approximately 18% of the outstanding shares of our common stock
(excluding options, warrants and other convertible securities), have
agreed to vote in favor of the adoption of the merger agreement and
the approval of the merger.
30
We substantially restructured our operations and changed our business plan in 2007, and we might
fail to operate successfully under our current business plan, which is unproven.
In 2007, after experiencing negative cash flows from our operations and incurring
substantial operating losses for several years, we restructured our operations, ceased or exited
several of our legacy lines of business, substantially reduced our workforce, and focused on
developing and licensing our technology and intellectual property as our core business. We might
not succeed in operating under our new business plan for many reasons, including the risks that we
might not be able to continue developing viable technologies, might not achieve market acceptance
for our technologies, might not earn adequate revenues from our licensing business, and might not
achieve profitability. Employee concern about such risks or the effect of our restructuring and new
business plan on their workloads or continued employment might cause our employees to seek or
accept other employment, depriving us of the human and intellectual capital that we need in order
to succeed.
Because we necessarily lack historical operating and financial results for our current business
plan, it will be difficult for us, as well as for investors, to predict or evaluate our business
prospects and performance. Our business prospects must be considered in light of the uncertainties
and difficulties frequently encountered by companies undergoing a business transition or in the
early stages of development.
We might lose key technical or management personnel, on whose knowledge, leadership and technical
expertise we rely. Such losses could prevent us from operating successfully under our current
business plan.
Our success under our current business plan depends heavily upon the contributions of our
key technical and management personnel, whose knowledge, leadership and technical expertise would
be difficult to replace. Many of these individuals have developed specialized knowledge and skills
relating to our technologies and business. Our restructuring plan resulted in substantial headcount
reductions in 2007, and employee concern about the future of the business and their continued
prospects for employment may cause our employees to seek employment elsewhere, depriving us of the
human and intellectual capital we need to be successful. We have also had substantial turnover in
our management team during 2007, including the February 2007 appointment of Lester M. Crudele as
our president and chief executive officer, the August 2007 appointment of Sujan Jain as our chief
financial officer, the December 2007 appointment of Daniel L. Hillman as our vice president of
engineering, and the separation of several former officers from Transmeta during the first half of
2007. All of our executive officers and key personnel are employees at will. We have no individual
employment contracts and do not maintain key person insurance on any of our personnel. We might not
be able to execute on our business model if we were to lose the services of any of our key
personnel. If any of these individuals were to leave our company unexpectedly, we could face
substantial difficulty in hiring qualified successors and could experience a loss in productivity
while any such successor develops the necessary training and experience.
Our recent restructuring and the evolution of our business could place significant strain on our
management systems, infrastructure and other resources, and our business may not succeed if we fail
to manage such changes effectively.
Our ability to succeed under our current business plan after restructuring our operations
in 2007 requires effective planning and management process. Changes in our business plans could
place significant strain on our management systems, infrastructure and other resources. In
addition, we expect that we will continue to improve our financial and managerial controls and
procedures. If we fail to manage these processes and resources effectively, our employee-related
costs and employee turnover could increase and our business may not succeed.
31
Our current business plan depends on increasing our LongRun2 licensing revenue, and we might be
unsuccessful in our efforts to license our LongRun2 technology to other parties
.
Our licensing business depends on our successful attraction of new licensees. Our ability
to enter into new LongRun2 licensing agreements depends in part upon the adoption of our LongRun2
technology by our licensees and potential licensees, and the success of the products incorporating
our technology sold by licensees. While we anticipate that we will continue our efforts to license
our technology to licensees, we cannot predict the timing or the extent of any future licensing
revenue, and past levels of license revenues may not be indicative of future periods.
We have limited visibility regarding when and to what extent our licensees will use our LongRun2 or
other licensed technologies and we might be unsuccessful in our efforts to generate royalty revenue
.
We have earned limited royalties from our LongRun2 licensees. Our receipt of royalties
from our LongRun2 licenses depends on our licensees incorporating our technology into their
manufacturing and products, bringing their products to market, and the success of their products.
Our licensees are not contractually obligated to manufacture, distribute or sell products using our
licensed technologies. Thus, our entry into and full performance of our obligations under our
LongRun2 licensing agreements do not necessarily assure us of any future royalty revenue. Any
royalties that we are eligible to receive are based upon our licensees use of our licensed
technologies and, as a result, we do not have direct access to information that would enable us to
forecast the timing and amount of any future royalties. Factors that negatively affect our
licensees and their customers could adversely affect our future royalties. The success of our
licensees is subject to a number of factors, including:
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the competition that our licensees face and the market acceptance of their products;
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the pricing policies of our licensees for their products incorporating our technology;
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the engineering, marketing and management capabilities of our licensees and technical
challenges unrelated to our technology that they face in developing their products;
and
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the financial and other resources of our licensees.
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Because we do not control the business practices of our licensees and their customers, we
have little influence or information regarding the extent to which our licensees promote or use our
technology.
Our results of operations could be adversely affected by global economic conditions and the
effects of these conditions on our customers businesses and levels of business activity.
Our operations and performance depend significantly on global economic conditions and their
impact on levels of spending by our customers and potential customers. Global economic conditions
have recently deteriorated significantly in many countries and regions, including without
limitation the United States, and may remain depressed for the foreseeable future. This may reduce
demand for our products and services and have a material adverse effect on our results of
operations. In addition, recent turmoil in the financial services market and tightening of credit
have led to increased market volatility and widespread reduction of business activity in general.
We face intense competition in the development of advanced technologies. Our customers and
competitors are much larger than we are and have significantly greater resources. We may not be
able to compete effectively
.
The development of power management and transistor leakage control technologies is an
emerging field subject to rapid technological change, and our competition for licensing such
technologies, and providing related services, is unknown and could increase. Our LongRun2
technologies are highly proprietary and, though the subject of patents and patents pending, are
marketed primarily as trade secrets subject to strict confidentiality protocols. Although we are
not aware of any other company having developed, offered or demonstrated any comparable power
management or leakage control technologies, we note that most semiconductor companies have internal
efforts to reduce transistor leakage and power consumption in current and future semiconductor
products. Indeed, all of our current and prospective licensees are larger, technologically
sophisticated companies, which generally have significant resources and internal efforts to develop
their own technological solutions.
We might be unable to keep pace with technological change in our industry, and our technology
offerings might not be competitive.
The semiconductor industry is characterized by rapid technological change. Our technology
offerings may not be competitive if we fail to develop and introduce new technology or technology
enhancements that meet evolving customer demands. It may be difficult or costly for us, or we may
not be able, to enhance existing technologies to fully meet customer demands, particularly in view
of our recent restructuring of our operations.
We might experience payment disputes for amounts owed to us under our LongRun2 licensing
agreements, and such a dispute may harm our business results
.
The standard terms of our LongRun2 license agreements require our licensees to document
the royalties owed to us from the sale of products that incorporate our technology and report this
data to us on a quarterly basis. While standard license terms give us the right to audit books and
records of our licensees to verify this information, audits can be expensive, time consuming, and
potentially detrimental to our ongoing business relationship with our licensees. Our failure to
audit our licensees books and records may result in us receiving more or less royalty revenues
than we are entitled to under the terms of our license agreements. The result of such royalty
audits could result in an increase, as a result of a licensees underpayment, or decrease, as a
result of a licensees overpayment, to previously reported royalty revenues. Such adjustments would
be recorded in the period they are determined. Any adverse material adjustments resulting from
royalty audits or dispute resolutions may harm our business results and cause our stock price to
decline. Royalty audits may also trigger disagreements over contract terms with our licensees and such disagreements could hamper customer relations, divert the efforts
and attention of our management from normal operations and impact our business operations and
financial condition.
32
We currently derive a substantial portion of our revenue from a small number of customers and
licensees, and our operating results would be adversely affected if any customer were to cancel,
reduce or delay a transaction.
Our customer base is highly concentrated. For example, for the three months ended
September 30, 2008 and 2007 there was one such customer, that accounted for 99% and 97%
respectively, of total revenues. For the nine months ended September 30, 2008 and 2007 there were
one and two such customers, respectively, that accounted for 95% and 93%, respectively, of total
revenues. We expect that a small number of customers will continue to account for a significant
portion of our revenue.
Our customers and licensees are significantly larger than we are and have bargaining
power to demand changes in terms and conditions of our agreements. Changes or delays in performance
under our agreements could adversely affect our operating results.
We may be unable to protect our proprietary technologies and defend our intellectual property
rights. Our competitors might gain access to our technologies, and we might not compete
successfully in our markets.
We believe that our success will depend in part upon our proprietary technologies and
intellectual property. We rely on a combination of patents, copyrights, trademarks, trade secret
laws and contractual obligations with employees and third parties to protect our proprietary
technologies and intellectual property. These legal protections provide only limited protection and
may be time consuming and expensive to obtain and enforce. If we fail to protect our proprietary
rights adequately, our competitors or potential licensees might gain access to our technology. As a
result, our competitors might use or offer similar technologies, and we might not be able to
compete successfully. Moreover, despite our efforts to protect our proprietary rights, unauthorized
parties may copy aspects of our products and technologies, and obtain and use information that we
regard as proprietary. Also, our competitors may independently develop similar, but not infringing,
technologies, duplicate our technologies, or design around our patents or our other intellectual
property. In addition, other parties may breach confidentiality agreements or other protective
contracts with us, and we may not be able to enforce our rights in the event of these breaches.
Furthermore, the laws of many foreign countries do not protect our intellectual property rights to
the same extent as the laws of the United States. We may be required to spend significant resources
to monitor and protect our intellectual property rights. We may initiate claims or litigation
against third parties based on our proprietary rights. Any litigation surrounding our rights could
force us to divert important financial and other resources from our business operations.
Our pending patent applications may not be approved, and our patents, including any
patents that may issue as a result of our patent applications, may not provide us with any
competitive advantage or may be challenged by third parties. For example, beginning in March 2007,
several months after we brought action against Intel for infringing certain of our patents, Intel
filed requests to have those of our patents in suit reexamined by the Patent and Trademark Office
(PTO), and the PTO granted all of Intels requests for reexamination. Such proceedings can be
expensive and time consuming, perhaps taking several years to complete, and the schedule for such
proceedings is difficult to predict and could be delayed for many reasons, including the increasing
popularity of such proceedings. For example, the PTO has yet to take an initial action in most of
the patent reexamination proceedings requested by Intel, and the timing of such proceedings is
uncertain and can be delayed by many factors, including PTO workload. Our patents might not be
upheld, or their claims could be narrowed through amendment, as a result of such proceedings. For
example, in three of the reexamination proceedings initiated by Intel, we have proposed to amend
certain claims of our patents by adding limitations that we believe would improve those claims.
Even the pendency of such proceedings may interfere with or impair our ability to enforce or
license our patent rights.
Any dispute regarding our intellectual property may require us to indemnify certain licensees or
third parties, the cost of which could severely hamper our business operations and financial
condition
.
In any potential dispute involving our patents or other intellectual property, our
licensees could also become the target of litigation. Our LongRun2 license agreements and certain
of our development services agreements provide limited indemnities. Our indemnification obligations
could result in substantial expenses. In addition to the time and expense required for us to supply
such indemnification to our licensees, a licensees development, marketing and sales of licensed
products incorporating our LongRun2 technology could be severely disrupted or shut down as a result
of litigation, which in turn could severely hamper our business operations and financial condition.
33
We have significant international business relationships, which expose us to risk and
uncertainties.
Most of our current licensees are based in Asia, and many prospective business growth
opportunities in our industry are outside of United States. In attempting to conduct and expand
business internationally, we are exposed to various risks that could adversely affect our
international operations and, consequently, our operating results, including:
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difficulties and costs of servicing international customers;
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fluctuations in currency exchange rates;
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unexpected changes in regulatory requirements, including imposition of currency exchange controls;
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longer accounts receivable collection cycles;
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import or export licensing requirements;
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potentially adverse tax consequences;
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political and economic instability; and
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potentially reduced protection for intellectual property rights.
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Our operating results are difficult to predict and fluctuate significantly. A failure to meet the
expectations of investors could result in a substantial decline in our stock price.
Our operating results fluctuate significantly from quarter to quarter, and we expect that
our operating results will fluctuate significantly in the future as a result of one or more of the
risks described in this section or as a result of numerous other factors. Additionally, a large
portion of our expenses, including rent and salaries, is fixed or difficult to reduce. You should
not rely on quarter-to-quarter comparisons of our results of operations as an indication of our
future performance. Our stock price has declined substantially since our stock began trading
publicly. If our future operating results fail to meet or exceed the expectations of investors, our
stock price could be adversely affected.
A sale of a substantial number of shares of our common stock may cause the price of our common
stock to decline
.
Sales of a substantial number of shares of our common stock in the public market could
adversely affect the market price of our common stock. Significant sales by an investor or
combination of investors during a period of relatively thin trading would likely depress the stock
price, at least temporarily, and increase the markets perception of historic volatility.
The price of our common stock has been volatile and is subject to wide fluctuations
.
The market price of our common stock has been volatile and is likely to remain subject to
wide fluctuations in the future. Many factors could cause the market price of our common stock to
fluctuate, including:
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variations in our quarterly results;
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market conditions in our industry, the industries of our customers and the economy as a whole;
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announcements of technological innovations by us or by our competitors;
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introductions of new products or new pricing policies by us or by our competitors;
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acquisitions or strategic alliances by us or by our competitors;
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recruitment or departure of key personnel;
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the gain or loss of significant customers; and
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changes in the estimates of our operating performance or changes in recommendations by securities analysts.
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34
In addition, the stock market generally and the market for semiconductor and other
technology-related stocks in particular has experienced declines for extended periods historically,
and could decline from current levels, which could cause the market price of our common stock to
fall for reasons not necessarily related to our business, results of operations or financial
condition. The market price of our stock also might decline in reaction to events that affect other
companies in our industry, even if these events do not directly affect us. Accordingly, you may not
be able to resell your shares of common stock at or above the price you paid. Securities litigation
is often brought against a company following a period of volatility in the market price of its
securities, and we have been subject to such litigation in the past. Any such lawsuits in the
future will divert managements attention and resources from other matters, which could also
adversely affect our business and the price of our stock.
If we were to raise additional funds through the issuance of equity or convertible debt
securities, the percentage ownership of our stockholders would be reduced, and these newly issued
securities might have rights, preferences or privileges senior to those of our then-existing
stockholders. For example, during third quarter of 2007 we sold preferred stock to AMD, and common
stock and warrants to selected institutional investors. The exercise of such preferred rights or
warrants by investors could have an adverse effect on the price of our stock.
We might need to raise additional financing, which might not be available or might be available
only on terms unfavorable to us or our stockholders
.
Although we believe that our existing cash and cash equivalents and short-term investment
balances will be sufficient to fund our operations, planned capital and research and development
expenditures for the next twelve months, it is possible that we may need to raise significant
additional funds through public or private equity or debt. A variety of business contingencies
could contribute to our need for funds in the future, including the need to:
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fund expansion;
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develop or enhance our products or technologies;
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enhance our operating infrastructure;
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respond to competitive pressures; or
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acquire complementary businesses or technologies.
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If we were to raise additional funds through the issuance of equity or convertible debt
securities, the percentage ownership of our stockholders would be reduced, and these newly issued
securities might have rights, preferences or privileges senior to those of our then-existing
stockholders. For example, in order to raise equity financing, we may decide to sell our stock at a
discount to our then current trading price, which may have an adverse effect on our future trading
price. We might not be able to raise additional financing on terms favorable to us, or at all.
Our certificate of incorporation and bylaws, stockholder rights plan and Delaware law contain
provisions that could discourage or prevent a takeover, even if an acquisition would be beneficial
to our stockholders
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Provisions of our certificate of incorporation and bylaws, as well as provisions of
Delaware law, could make it more difficult for a third party to acquire us, even if doing so would
be beneficial to our stockholders. These provisions include:
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establishing a classified board of directors so that not all members of our board may be elected at one time;
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providing that directors may be removed only for cause and only with the vote of 66 2/3% of our outstanding shares;
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requiring super-majority voting to amend some provisions in our certificate of incorporation and bylaws;
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authorizing the issuance of blank check preferred
stock that our board could issue to increase the number of shares outstanding and to discourage a takeover attempt;
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limiting the ability of our stockholders to call special meetings of stockholders;
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prohibiting stockholder action by written consent, which requires all stockholder actions to be taken at a meeting
of our stockholders; and
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establishing advance notice requirements for nominations for election to our board or for proposals that can be
acted upon by stockholders at stockholder meetings.
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In addition, the stockholder rights plan, which we implemented in 2002, and Section 203
of the Delaware General Corporation Law may discourage, delay or prevent a change in control.
35
Our business is subject to potential tax liabilities, which could change our effective tax rate.
We are subject to income taxes in the United States and other foreign jurisdictions.
Significant judgment is required in determining our worldwide provision for income taxes. In the
ordinary course of our business, there are many transactions and calculations where the ultimate
tax determination is uncertain. Although we believe our tax estimates are reasonable, we cannot
assure you that the final determination of any tax audits and litigation will not be materially
different from that which is reflected in historical income tax provisions and accruals. Should
additional taxes be assessed as a result of an audit or litigation, there could be a material
effect on our cash, income tax provision and net income in the period or periods for which that
determination is made.
Additionally, a number of factors may impact our future effective tax rates including:
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the jurisdictions in which profits are determined to be earned and taxed;
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the resolution of issues arising from tax audits with various tax authorities;
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adjustments to deferred tax assets utilized in 2007 to reduce the tax effect of various tax returns;
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adjustments to estimated taxes upon finalization of various tax returns;
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increases in expenses not deductible for tax purposes;
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changes in available tax credits and available net operating loss carryovers;
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changes in the valuation of any deferred tax assets and liabilities;
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changes in share-based compensation; or
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changes in tax laws or the interpretation of such tax laws and changes in generally accepted accounting principles.
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Our results of operations could vary as a result of the methods, estimates, and judgments we use in
applying our accounting policies.
The methods, estimates, and judgments we use in applying our accounting policies have a
significant impact on our results of operations. Such methods, estimates, and judgments are, by
their nature, subject to substantial risks, uncertainties, and assumptions, and factors may arise
over time that lead us to change them. Changes in those methods, estimates, and judgments could
significantly affect our results of operations. In particular, the calculation of share-based
compensation under SFAS 123(R) requires us to use valuation methodologies and a number of
assumptions, estimates, and conclusions regarding matters such as expected forfeitures, expected
volatility of our share price, the expected dividend rate with respect to our common stock, and the
expected exercise behavior of our employees. Under applicable accounting principles, we cannot
compare and adjust our expense when we learn about additional information affecting our previous
estimates, with the exception of changes in expected forfeitures of share-based awards. Factors may
arise over time that leads us to change our estimates and assumptions with respect to future
share-based compensation arrangements, resulting in variability in our share-based compensation
expense over time. Changes in forecasted share-based compensation expense could affect our cost of
revenues; research and development expenses; selling, general and administrative expenses; and our
effective tax rate.
We may develop or identify material weaknesses in our internal control over financial reporting.
In compliance with the Sarbanes-Oxley Act of 2002, we test our system of internal control
over financial reporting as of December 31 of the applicable fiscal year. In our evaluation as of
December 31, 2004, we identified six material weaknesses. A material weakness is a deficiency, or a
combination of deficiencies, those results in there being a reasonable possibility that a material
misstatement of the annual or interim financial statements will not be prevented or detected. The
material weaknesses that we had identified affected all of our significant accounts. Certain of
those material weaknesses resulted in a restatement of our previously filed financial results for
the second quarter of fiscal 2004 and affected the balances of our inventories, other accrued
liabilities and cost of revenue accounts. We have remediated all of those material weaknesses in
our system of internal control over financial reporting, but we cannot assure you that we will not
in the future develop or identify material weaknesses or significant deficiencies in our internal
control over financial reporting.
36
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
(c)
As of September 30, 2008, we repurchased a total of 28,400 shares of our common stock at
an average price per share of $0.00001, including 800 shares in the three months ending September
30, 2008. These shares were originally issued pursuant to grants of restricted shares to employees
in the form of par value stock options to purchase our common stock. These shares represent the
unvested portion of the restricted stocks that were repurchased from employees at the time their
employment with us was terminated.
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Total Number
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of Shares
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Maximum Number of
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Total Number
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Average
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Purchased as Part
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Shares that May Yet
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of Shares
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Total
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Price Paid
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of Publicly Announced
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Be Purchased Under
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Period
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Purchased
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Paid
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per Share
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Plans or Programs
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the Plans or Programs
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07/01/08 - 07/31/08
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800
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$
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$
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0.00001
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08/01/08 - 08/31/08
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$
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09/01/08 - 09/30/08
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$
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Total
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800
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$
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$
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0.00001
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Item 4.
Submission of Matters to a Vote of Security Holders
We held our 2008 Annual Meeting of Stockholders on September 18, 2008. The matters voted upon
at the meeting for stockholders of record as of August 19, 2008, and the vote with respect to each
such matter are set forth below:
(i) The election of three Class II directors, each for a term of three years and until his
successor has been elected and qualified or until his earlier resignation, death or removal:
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For
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Withheld
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Robert V. Dickinson
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8,031,128
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1,196,304
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Bryant R. Riley
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8,674,834
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552,598
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T. Peter Thomas
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7,469,821
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1,757,611
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In addition to these three individuals elected as directors at the meeting, the following five
individuals continued in their offices as directors after the meeting: R. Hugh Barnes, Lester M.
Crudele, Murray A. Goldman, T. Peter Thomas and Rick Timmins.
(ii) To ratify the selection of Burr, Pilger & Mayer LLP as our independent registered public
accounting firm for the fiscal year 2008.
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For
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Against
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Abstain
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8,396,920
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70,956
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759,554
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Item 6.
Exhibits
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Exhibit
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Number
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Exhibit Title
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10.40
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License agreement between Transmeta
Corporation and NVIDIA Corporation.
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10.41
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Amendment number 1 to the settlement, release and license
agreement between
Transmeta Corporation and Intel Corporation.
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10.42
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Technology license agreement between Transmeta
Corporation and Intel Corporation.
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31.01
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Certification by Lester M. Crudele pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934.
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31.02
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Certification by Sujan Jain pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934.
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32.01*
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Certification by Lester M. Crudele pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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32.02*
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Certification by Sujan Jain pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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*
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As contemplated by SEC Release No. 33-8212, these exhibits are
furnished with this quarterly report on Form 10-Q and are not deemed
filed with the Securities and Exchange Commission and are not
incorporated by reference in any filing of Transmeta Corporation under
the Securities Act of 1933 or the Securities Exchange Act of 1934,
including this quarterly report, whether made before or after the date
hereof and irrespective of any general incorporation language in any
filings.
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37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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TRANSMETA CORPORATION
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By
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/s/ Sujan Jain
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Sujan Jain
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Executive Vice President and Chief Financial Officer
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Date:
November 17, 2008
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(Principal Financial Officer and Duly Authorized Officer)
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38
INDEX TO EXHIBITS
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Exhibit
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Number
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Exhibit Title
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10.40
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License agreement between Transmeta
Corporation and NVIDIA Corporation.
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10.41
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Amendment number 1 to the settlement, release and license
agreement between
Transmeta Corporation and Intel Corporation.
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10.42
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Technology license agreement between Transmeta
Corporation and Intel Corporation.
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31.01
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Certification by Lester M. Crudele pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934.
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31.02
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Certification by Sujan Jain pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934.
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32.01*
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Certification by Lester M. Crudele pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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32.02*
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Certification by Sujan Jain pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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*
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As contemplated by SEC Release No. 33-8212, these exhibits are
furnished with this quarterly report on Form 10-Q and are not deemed
filed with the Securities and Exchange Commission and are not
incorporated by reference in any filing of Transmeta Corporation under
the Securities Act of 1933 or the Securities Exchange Act of 1934,
including this quarterly report, whether made before or after the date
hereof and irrespective of any general incorporation language in any
filings.
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39
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