Add
PDFS to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| PDFS > SEC Filings for PDFS > Form 10-K on 16-Mar-2009 | All Recent SEC Filings |
16-Mar-2009
Annual Report
Overview
We analyze our customers' IC design and manufacturing processes to identify, quantify, and correct the issues that cause yield loss to improve our customers' profitability by improving time-to-market, increasing yield and reducing total design and manufacturing costs. We package our solutions in various ways to meet our customers' specific business and budgetary needs, each of which provides us various revenue streams. We receive a mix of fixed fees and variable, performance-based fees for the vast majority of our Integrated Yield Ramp offerings. The fixed fees are typically reflective of the length of time and the resources needed to characterize a customer's manufacturing process and receive preliminary results of proposed yield improvement suggestions. The variable fee, or what we call gainshare, usually depends on our achieving certain yield targets by a deadline. Variable fees are currently typically tied to wafer volume on the node size of the manufacturing facility where we performed the yield improvement. We receive license fees and service fees for related installation, integration, training, and maintenance and support services for our software that we license on a stand-alone basis.
From our incorporation in 1992 through late 1995, we were primarily focused on research and development of our proprietary manufacturing process simulation and yield and performance modeling software. From late 1995 through late 1998, we continued to refine and sell our software, while expanding our offering to include yield and performance improvement consulting services. In late 1998, we began to sell our software and consulting services, together with our newly developed proprietary technologies, under the term Design-to-Silicon-Yield solutions, reflecting our current business model. In April 2000, we expanded our research and development team and gained additional technology by acquiring AISS. AISS now operates as PDF Solutions, GmbH, a German company, which continues to develop software and provide development services to the semiconductor industry. In July 2001, we completed the initial public offering of our common stock. In 2003, we enhanced our product and service offerings, including increased software applications, through the acquisitions of IDS and WaferYield. In 2006, we further complemented our technology offering by acquiring SiA and adding its FDC software capabilities to our integrated solution. In 2007, we increased our IP solutions portfolio, particularly in logic design technology, through the acquisition of Fabbrix. In 2008, we solidified our market leading position in the FDC software market, particularly in Korea, and now provide complementary technology to our mæstria product through the acquisition of certain assets of Triant.
Subject to the current general economic downturn, demand for consumer electronics and communications devices continues to drive technological innovation in the semiconductor industry as the need for products with greater performance, lower power consumption, reduced costs and smaller size continues to grow with each new product generation. In addition, advances in computing systems and mobile devices have fueled demand for higher capacity memory chips. To meet these demands, IC manufacturers and designers are constantly challenged to improve the overall performance of their ICs by designing and manufacturing ICs with more embedded applications to create greater functionality while lowering cost per transistor. As a result, both logic and memory manufacturers have migrated to more and more advanced manufacturing nodes, capable of integrating more devices with higher performance, higher density, and lower power. As this trend continues, companies will continually be challenged to improve process capabilities to optimally produce ICs with minimal random and systematic yield loss, which is driven by the lack of compatibility between the design and its respective manufacturing process. We believe that as volume production of deep submicron ICs continues to grow, the difficulties of integrating IC designs with their respective processes and ramping new manufacturing processes will create a greater need for products and services that address the yield loss and escalating cost issues the semiconductor industry is facing today and will face in the future.
The semiconductor industry is currently experiencing significant challenges, primarily due to a deteriorating macroeconomic environment, and it is unclear when a turnaround may occur. As a result of this downturn, some of our customers faced financial challenges in fiscal 2008 and may continue to face such challenges in fiscal 2009. The current economic downturn has contributed to the substantial reduction in our revenue and could continue to harm our business, operating results and financial condition.
Due to the current decline in our stock price and market capitalization, our fiscal 2008 net loss, expected future net losses, reduced future cash flow estimates, and slower growth rates in our industry, we recorded impairment totaling $64.0 million in fiscal 2008, representing all of our acquired goodwill. We also recorded impairment of $6.3 million relating to our acquired intangible assets, and valuation allowance on our deferred tax assets of $24.4 million.
We plan operating expense levels primarily based on forecasted revenue levels. To partially offset the impact of our expected decrease in revenue, we have implemented cost savings initiatives, including reducing headcount and other discretionary spending. During the year ended December 31, 2008, we initiated two restructuring plans to improve our operating results and to align our cost structure with expected revenue.
The following were our financial highlights for the year ended December 31, 2008.
º •
º Total revenue was $74.0 million, which was a decrease of
$20.4 million, or 22%, compared to the year ended December 31, 2007.
Design-to-Silicon-Yield solutions revenue was $55.1 million, which was
a decrease of $15.3 million, of 22%, from the year ended December 31,
2007. The decrease in Design-to-Silicon Yield solutions revenue was
primarily the result of lower bookings, as customers have delayed
purchases for capacity expansion and investment in leading-edge
technology. The dramatic downturn in the semiconductor industry
combined with weakness in worldwide economies has been the primary
contributors to this reduction. Gainshare performance incentives
revenue was $18.9 million, which was a decrease of $5.2 million, or
21%, from the year ended December 31, 2007. The decrease in revenue
from gainshare performance incentives was primarily the result of
reduced volumes in customer manufacturing facilities.
º •
º Net loss for the year ended December 31, 2008 was $95.7 million, an
increase of $92.8 million compared to net loss of $2.9 million for the
year ended December 31, 2007. The increase in net loss was primarily
attributable to an impairment on goodwill and intangible assets,
decreases in revenue, and the establishment of a valuation allowance
against deferred tax assets, partially offset by decreases in
operating expenses, the result of cost control efforts.
º •
º Net loss per basic and diluted share was $3.48 for the year ended
December 31, 2008 compared to $0.10 for the year ended December 31,
2007, an increase in net loss of $3.38 per basic and diluted share.
º •
º Cash, cash equivalents and investments decreased $3.8 million to
$41.5 million during the year ended December 31, 2008, primarily due
to the repurchase of $6.9 million of our common stock, the negative
effect of changes in foreign currency exchange rates of $1.7 million,
payments of $1.6 million for businesses acquired, and capital
expenditures of $1.1 million, partially offset by net cash provided by
operating activities of $7.6 million.
On May 24, 2007, we completed the acquisition of Fabbrix, Inc. ("Fabbrix"), a provider of silicon intellectual property designed to create highly manufacturable and area-efficient designs targeted for advanced technology nodes. With this acquisition, we have enhanced our strength in silicon characterization to enable a true co-optimization of the manufacturing fabric and the logic elements. Total cost for the acquisition was $6.2 million, which included $2.7 million cash, 272,000 shares of our common stock valued at $2.9 million, and $674,000 in acquisition costs. Pursuant to the terms of the acquisition, $405,000 in cash and 41,000 shares of our common stock were held in escrow as security against certain financial and other contingencies. The escrow, less amounts deducted to satisfy contingencies, was required to be released no later than on the 18 month anniversary of the acquisition and was released to the selling stockholders in November 2008. In connection with this Fabbrix acquisition, we recorded $2.2 million of goodwill and $7.8 million of identifiable intangible assets with a weighted average life of 5.4 years.
On October 7, 2008, we completed the acquisition of substantially all of the assets of Triant's FDC business, excluding certain receivables, but including certain customer contracts and technologies. Triant developed and licensed FDC software applications and services dedicated to the semiconductor industry to enable customers to rapidly identify sources of process variations and manufacturing excursions. This
acquisition creates additional opportunities for our leading process control solutions within the installed customer base, including leading semiconductor, flat panel display, and wafer manufacturers. Total cost for the acquisition was $1.9 million, which included $1.6 million in cash and $312,000 in acquisition costs. Pursuant to the terms of the acquisition, $374,000 in cash was held in escrow as security against certain financial and other contingencies. The cash held in escrow, less amounts deducted to satisfy contingencies was required to be released following the statutory notice to creditors associated with Triant's liquidation and wind up process. The escrow was released to Triant in February 2009. In connection with the acquisition, we recorded $1.7 million of identifiable intangible assets with a weighted average life of 3.4 years and $147,000 of goodwill. The consolidated financial statements for the year ended December 31, 2008 include the results of Triant since the date of acquisition.
Subsequent to the acquisition of Triant, we completed our annual goodwill impairment test as prescribed under SFAS No. 142. In addition, due to the continued decline within the semiconductor industry brought on by the deteriorating global economic environment, we anticipated further declines in our future operational results. As a result, we determined these factors, among others, to be impairment indicators which triggered the necessity of an impairment analysis under SFAS No. 144 for our long-lived assets. These tests also included the goodwill and certain intangible assets recognized as part of the acquisition of Triant. This determination relating to our Triant acquisition was in part made after several public announcements were issued by a key customer of Triant's, regarding its own financial outlook and anticipated capital expenditure spending levels; which in turn caused us to revise our projected revenue from what had been expected at the date of the acquisition.
Critical Accounting Policies
Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Note 1 of "Notes to Consolidated Financial Statements" includes a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. The following is a brief discussion of the more significant accounting policies and methods that we use.
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. Our preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We based our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The most significant estimates and assumptions relate to revenue recognition, software development costs, recoverability of goodwill and acquired intangible assets, estimated useful lives of acquired intangibles and the realization of deferred tax assets. Actual amounts may differ from such estimates under different assumptions or conditions.
We derive revenue from two sources: Design-to-Silicon-Yield Solutions and Gainshare Performance Incentives. We recognize revenue in accordance with the provisions of American Institute of Certified Public Accountants' Statement of Position ("SOP") No. 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts and SOP No. 97-2, Software Revenue Recognition, as amended.
Design-to-Silicon-Yield Solutions-Revenue that is derived from Design-to-Silicon-Yield solutions comes from services and software licenses. We recognize revenue for each element of Design-to-Silicon-Yield solutions as follows:
Services-We generate a significant portion of our Design-to-Silicon-Yield solutions revenue from fixed-price solution implementation service contracts delivered over a specific period of time. These contracts require accurate estimation of cost to perform obligations and overall scope of each engagement. Revenue under contracts for solution implementation services is recognized as services are performed using the cost-to-cost percentage of completion method of contract accounting. Losses on solution implementation contracts are recognized in the period when they become evident. Revisions in profit estimates are reflected in the period in which the conditions that require the revisions become known and can be estimated. If we do not accurately estimate the resources required or the scope of work to be performed, or do not manage the projects properly within the planned period of time or satisfy our obligations under contracts, resulting contract margins could be materially different than those anticipated when the contract was executed. Any such reductions in contract margin could have a material negative impact on our operating results.
On occasion, we have licensed our software products as a component of our fixed price services contracts. In such instances, the software products are licensed to customers over a specified term of the agreement with support and maintenance to be provided over the license term. Under these arrangements, where vendor-specific objective evidence of fair value ("VSOE") exists for the support and maintenance element, the support and maintenance revenue is recognized separately over the term of the supporting period. The remaining fee is recognized as services are performed using the cost-to-cost percentage of completion method of contract accounting. VSOE for maintenance, in these instances, is generally established based upon a negotiated renewal rate. Under arrangements where software products are licensed as a component of its fixed-price service contract and where VSOE does not exist to allocate a portion of the total fixed-price to the undelivered elements, revenue is recognized for the total fixed-price as the lesser of either the percentage of completion method of contract accounting or ratably over the longer of either the term of the agreement or the supporting period. Costs incurred under these arrangements are deferred and recognized in proportion to revenue recognized under these arrangements.
Revenue from related support and maintenance services is recognized ratably over the term of the support and maintenance contract, generally one year, while revenue from consulting, installation and training services is recognized as services are performed. When bundled with software licenses in multiple element arrangements, support and maintenance, consulting (other than for our fixed price solution implementations), installation, and training revenue is allocated to each element of a transaction based upon its fair value as determined by our VSOE. VSOE is generally established for maintenance based upon negotiated renewal rates while VSOE for consulting, installation, and training is established based upon our customary pricing for such services when sold separately. When VSOE does not exist to allocate a portion of the total fee to the undelivered elements, revenue is recognized ratably over the longest service period of the undelivered elements
Software Licenses-We also license our software products separate from
our integrated solution implementations. For software license arrangements
that do not require significant modification or customization of the
underlying software, software license revenue is recognized under the
residual method when (1) persuasive evidence of an arrangement exists,
(2) delivery has occurred, (3) the fee is fixed or determinable,
(4) collectibility is probable, and (5) the arrangement does not require
services that are essential to the functionality of the software. When
arrangements include multiple elements such as support and maintenance,
consulting (other than for our fixed price solution implementations),
installation, and training, revenue is allocated to each element of a
transaction based upon its fair value as determined by our VSOE and such
services are recorded as services. VSOE is generally established for
maintenance based upon negotiated renewal rates while VSOE for
consulting, installation and training services is established based upon our customary pricing for such services when sold separately. When VSOE does not exist to allocate a portion of the total fee to the undelivered elements, revenue is recognized ratably over the longest period of the undelivered elements. Revenue for software licenses with extended payment terms is not recognized in excess of amounts due. For software license arrangements that require significant modification or customization of the underlying software, the software license revenue is recognized as services are performed using the cost-to-cost percentage of completion method of contract accounting, and such revenue is recorded as services.
Gainshare Performance Incentives-When we enter into a contract to provide yield improvement services, the contract usually includes two components: (1) a fixed fee for performance by us of services delivered over a specific period of time; and (2) a gainshare performance incentives component where the customer may pay a variable fee, usually after the fixed fee period has ended. Revenue derived from gainshare performance incentives represents profit sharing and performance incentives earned based upon our customers reaching certain defined operational levels established in related solution implementation service contracts. Gainshare performance incentives periods are usually subsequent to the delivery of all contractual services and therefore have no cost to us. Due to the uncertainties surrounding attainment of such operational levels, we recognize gainshare performance incentives revenue (to the extent of completion of the related solution implementation contract) upon receipt of performance reports or other related information from our customers supporting the determination of amounts and probability of collection. Gainshare performance incentives revenue is dependent on many factors which are outside our control, including among others, continued production of the related ICs by our customers, sustained yield improvements by our customers and our ability to enter into new Design-to-Silicon-Yield solutions contracts containing provisions for gainshare performance incentives.
Costs for the development of new software products and substantial enhancements to existing software products are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized in accordance with SFAS No. 86, Computer Software to be Sold, Leased or Otherwise Marketed. Because we believe our current process for developing software is essentially completed concurrently with the establishment of technological feasibility, no costs have been capitalized to date.
During the fourth quarter of fiscal 2008, we observed impairment indicators, relating to our long-lived assets, including the trading of common stock below our book value and a further deterioration in the semiconductor industry, brought on by the deteriorating global economic environment, which triggered the necessity of an impairment test as of December 31, 2008. As such, in accordance with SFAS No. 144, we assessed the recoverability of our long-lived assets by comparing the carrying value of those intangible assets to the undiscounted cash flows of the asset group. The analysis indicated that the carrying value of those assets exceeded the undiscounted cash flows. As such, we determined that certain acquired intangible assets were impaired. We measured the amount of impairment by calculating the amount by which the carrying value of the assets exceeded their estimated fair values, which were based on projected discounted future net cash flows. As a result of this impairment analysis, we recorded an impairment of $6.3 million during the fourth fiscal quarter of 2008.
In accordance with SFAS No. 142, goodwill is measured and tested for impairment on an annual basis and more frequently in certain circumstances, accordingly, we have selected December 31 as the date to perform the annual testing requirements. We perform a two-step testing on goodwill impairment. The first step requires that we compare the estimated fair value of our single reporting unit to the carrying value of the reporting unit, including goodwill. If the fair value of the reporting unit is greater than the carrying,
goodwill is not considered to be impaired and no further testing is required. If the fair value of the reporting unit is less than the carrying value, we are required to complete the second step which compares the implied fair value of the reporting unit goodwill with the carrying value of that goodwill An impairment is recognized in an amount equal to the excess of the carrying value of the goodwill over the implied fair value of that goodwill.
As discussed in Note 12, Customer and Geographic Information, we consider ourselves to be in one operating segment. In addition, we have determined that our operating segment is also our reporting unit as the operating segment comprises only a single component. To determine the reporting unit's fair value, we used the income valuation approach. In determining our overall conclusion of reporting unit's fair value, we also consider the estimated values derived from the income valuation approach as compared to the valuation under the market approach as one measure that the estimated value is reasonable.
The income approach provides an estimate of fair value based on discounted expected future cash flows. Estimates and assumptions with respect to the determination of the fair value of our reporting unit using the income approach include our operating forecasts, revenue growth rates, and risk-commensurate discount rates and costs of capital. Our estimates of revenues and costs are based on historical data, various internal estimates and a variety of external sources, and are developed as part of our routine long-range planning process.
The market approach provides an estimate of the fair value of our reporting unit using various prices or market multiples applied to the reporting unit's operating results and then applying an appropriate control premium, which is determined by considering control premiums offered as part of acquisitions in both our market segment and comparable market segments.
We completed our annual impairment analysis of goodwill as of December 31, 2008, including the second step prescribed by SFAS No. 142. As part of the second step of our goodwill impairment test, we determined the fair value of our goodwill by allocating the estimated fair value of our reporting unit to our assets and liabilities, including the estimated fair value of our unrecorded intangible assets, on a fair value basis. After allocating its assets and liabilities on a fair value basis, we recorded an impairment of all of our goodwill of $64.0 million.
Allocating assets and liabilities on a fair value basis and determining the fair value of unrecorded intangible assets required that we make assumptions and estimates about the fair value of assets and liabilities where the fair values of those assets and liabilities were not readily available or observable. In addition, we made estimates regarding our forecasted revenue, expenses and cash flows, our research and development activities, our customer turnover rates, applicable discount rates and costs of capital and the marketability of our current and future technology.
We are currently amortizing our remaining acquired intangible assets over estimated useful lives of one to seven years, which are based on the estimated period of benefit to be delivered from such assets. However, a decrease in the estimated useful lives of such assets would cause additional amortization expense or impairment on such asset in future periods.
We account for temporary differences between book and tax entries by recording deferred tax assets and liabilities in accordance with SFAS No. 109, Accounting for Income Taxes, ("SFAS No. 109"), which established financial accounting and reporting standards for the effect of income taxes. We must assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recover is not likely, we must establish a valuation allowance. Changes in the net deferred tax assets, less offsetting valuation allowance, in a period are recorded through the income tax provision in the condensed consolidated statements of operations. For the year ended December 31, 2008, we concluded that a valuation allowance was required based on our evaluation and weighting of the positive and negative
evidence. See Note 10 to the consolidated financial statements for further discussion. If, in the future, we determine that these deferred tax assets are more likely than not to be realized, a release of all or part, of the related valuation allowance could result in a material income tax benefit in the period such determination is made.
. . .
|
|