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| LAVA > SEC Filings for LAVA > Form 10-K on 20-Jul-2009 | All Recent SEC Filings |
20-Jul-2009
Annual Report
This Management's Discussion and Analysis of Financial Condition and Results of Operations section should be read in conjunction with "Selected Consolidated Financial Data" and our consolidated financial statements and results appearing elsewhere in this Annual Report. Throughout this section, we make forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can often identify these and other forward looking statements by terms such as "becoming," "may," "will," "should," "predicts," "potential," "continue," "anticipates," "believes," "estimates," "seeks," "expects," "plans," "intends," or comparable terminology. These forward-looking statements include, but are not limited to, our expectations about revenue, completion of in-process development of products, research and development expense, sales and marketing expense, general and administrative expense, cash expenditures, various other operating expenses and acquisitions.
Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, and we have based these expectations on our beliefs and assumptions, such expectations may prove to be incorrect. Our actual results of operations and financial performance could differ significantly from those expressed in or implied by our forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to the risks discussed under the heading "Risk Factors" in Item 1A of this Annual Report and the following factors:
• our substantial amount of indebtedness and repayment obligations with respect to our 2010 Notes;
• an inability to generate sufficient operating cash flow or obtain external financing;
• debt arrangements that may subject us to restrictive covenants that could limit our ability to operate our business;
• financial market conditions that may impede access to or increase the cost of financing operations and investments;
• risk of customer payment defaults;
• any delay of customer orders or failure of customers to renew licenses;
• our ability to maintain or develop relationships with current or potential customers;
• weaker-than-anticipated sales of our products and services;
• competition in the EDA market;
• weakness in the semiconductor or electronic systems industries;
• our lengthy and unpredictable sales cycle;
• difficulty in predicting quarterly results;
• potentially higher-than-anticipated costs of litigation;
• a potential failure of customers to adopt, or to adopt at a sufficiently fast rate, 65-nanometer and smaller design geometries on a large scale;
• market acceptance of existing and new products;
• our ability to continue to deliver competitive products to customers;
• our ability to make payments to satisfy our indemnification obligations;
• our ability to integrate acquired businesses and technologies;
• our ability to manage operations and restructurings of operations;
• changes in accounting rules; and
• potentially higher-than-anticipated costs of compliance with regulatory requirements, including those relating to internal control over financial reporting.
We undertake no additional obligation to update these forward-looking statements.
Change in Fiscal Year End
Prior to fiscal 2009, we had a 52-53 week fiscal year ending on the first Sunday subsequent to March 31. On January 28, 2008, our Board of Directors approved a change of fiscal year from a fiscal year ending on the first Sunday subsequent to March 31 to a fiscal year ending on the Sunday closest to April 30 (except for any given year in which April 30 is a Sunday, in which case the fiscal year will end on April 30), starting with fiscal 2009. Our fiscal years consist of four quarters of 13 weeks each except for each fifth or sixth fiscal year, which includes one quarter with 14 weeks.
Our 2009 fiscal year began on May 5, 2008 and ended on May 3, 2009, resulting in a one-month transition period that began on April 7, 2008 and ended on May 4, 2008. Information for the transition period was included in the quarterly report on Form 10-Q for the quarter ended August 3, 2008, which was filed with the SEC on September 12, 2008. The separate audited financial statements required for the transition period are included in Item 8 of this Form 10-K.
References in this Form 10-K to fiscal 2009 represent the 52 weeks ended May 3, 2009. References in this Form 10-K to fiscal 2008 represent the 52 weeks ended, April 6, 2008. We have not submitted financial information for the 52 weeks ended April 5, 2009 in this Form 10-K because the information is not practical or cost effective to prepare. We believe that the 52 weeks of fiscal 2008 provides a meaningful comparison to the 52 weeks of fiscal 2009 presented in this Form 10-K. We do not believe that there are any significant factors, seasonal or otherwise, that would impact the comparability of information or trends if results for the 52 weeks ended April 5, 2009 were presented in lieu of results for the 52 weeks ended May 3, 2009. We did not experience any unusual amount of business activity or product shipment in the transition month and have reported the loss incurred in that month in our consolidated statements of operations in Item 8 of this Form 10-K. Accordingly, we have not included the results of the one-month transition period that began on April 7, 2008 and ended on May 4, 2008 in this management's discussion and analysis of financial condition and results of operations.
Executive Summary
We provide EDA software products and related services. Our software enables chip designers to reduce the time it takes to design and produce complex integrated circuits used in the communications, computing, consumer electronics, networking and semiconductor industries. Our products are used in all major phases of the chip development cycle, from initial design through physical implementation. Our focus is on software used to design the most technologically advanced integrated circuits, specifically those with minimum feature sizes of 0.13 micron and smaller. See Item 1, "Business" for a more complete description of our business.
As an EDA software provider, we generate substantially all our revenue from the semiconductor and electronics industries. Our customers typically fund purchases of our software and services out of their research and development ("R&D") budgets. As a result, our revenue is heavily influenced by our customers' long-term business outlook and willingness to invest in new chip designs.
The semiconductor industry is highly volatile and cost-sensitive. Our customers focus on controlling costs and reducing risk, lowering R&D expenditures, cutting back on design starts, purchasing from fewer suppliers, and requiring more favorable pricing and payment terms from suppliers. In addition, intense competition among suppliers of EDA products has resulted in pricing pressure on EDA products.
To support our customers, we have focused on providing technologically advanced products to address each step in the IC design process, as well as integrating these products into broad platforms, and expanding our product offerings. Our goal is to be the EDA technology supplier of choice for our customers as they pursue longer-term, broader and more flexible relationships with fewer suppliers.
Our accomplishments during fiscal 2009 include:
• Deployment and adoption of Talus, our platform for design implementation, by our major customers.
• Qualification of the Talus and Quartz products for 40-nanometer process technology in Taiwan Semiconductor Manufacturing Company's ("TSMC") Reference Flow 9.0. Qualifying for the reference flow removes barrier for TSMC customers to adopt the Magma tools.
• Titan, our platform for analog/mixed-signal design, was recognized by Design Automation Conference attendees in voting for Best Overall New Product at the trade show.
• Titan and Hydra were named to EDN magazine's "Hot 100 Electronic Products of 2008."
Below is a summary of our operations for fiscal 2009:
• Revenue for fiscal 2009 was $147 million, a decrease of 31% from the prior year. Licenses and bundled licenses and services sales for fiscal 2009 and 2008 accounted for approximately 75% and 84%, respectively, of our revenue. For fiscal 2009, 55% of our revenue was derived from orders recognized on a ratable basis or due-and-payable or cash-receipts basis. For fiscal 2009, 16% of our revenue was derived from short-term time-based and perpetual licenses recognized up-front (of which 9% of our revenue was from new contracts entered into during fiscal 2009 and the remaining 7% of our revenue from orders received prior to fiscal 2009 but recognized as revenue in fiscal 2009).
• Domestic sales revenue decreased by $41 million or 32% in fiscal 2009 compared to the prior year. The decrease was primarily a result of our customers experiencing continued end market softness in demand for their products and reduced visibility in forecasting their business.
• The number of our employees decreased to 732 as of May 3, 2009, down from 1,030 as of April 6, 2008. Most of the decrease in employees represents reductions to our research and development and sales and marketing organizations.
• For fiscal 2009, cash flows used in operations were $5.4 million, or 4% of fiscal 2009 revenue, and included a $12.5 million one-time payment on Synopsys litigation settlement.
Global Markets
Recent market and economic conditions have been unprecedented and challenging with tighter credit conditions and slower growth through fiscal 2009. Continued concerns about the global financial and banking system, systemic impact of inflation (or deflation), energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a declining real estate market in the U.S. have contributed to increased market volatility and diminished expectations for the global economy generally. These concerns, combined with volatile oil prices, declining business and consumer confidence and increased unemployment have recently contributed to volatility of unprecedented levels. In particular, the semiconductor industry continues to be materially adversely affected by the macroeconomic environment.
As a result of these market conditions, the availability and cost of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. Concern about the stability of the financial markets has led many lenders and institutional investors to reduce, and in some cases, cease to provide funding to borrowers. Continued turbulence in the U.S. and global markets and economies has adversely affected our liquidity and financial condition, and the liquidity and financial condition of our customers. If these market conditions continue, they may continue to limit our ability to access the capital markets to meet liquidity needs, resulting in an adverse effect on our financial condition and results of operations.
Recent Acquisitions
In fiscal 2009, we did not acquire any companies and did not make any material asset purchases.
During fiscal 2008, we acquired companies and purchased technologies that enable us to expand into new markets. We believe that these acquisitions will be a significant factor in our ability to compete successfully in the EDA industry and we expect to make similar acquisitions in the future. These acquisitions have increased the number of our employees and, as a result, increased our research and development and sales and marketing expenses.
On February 26, 2008, we acquired Sabio Labs, Inc., a privately-held developer of analog design solutions for mixed-signal designers. Sabio's software enables designers to create robust analog designs, port complex circuits to new process technologies in foundries efficiently, and explore system design trade-offs early in the design process. The total purchase price for the acquisition was $16.5 million, consisting of approximately 1,574,000 shares of our common stock valued at $16.2 million and transaction costs of $270,000. As part of the initial consideration, 127,000 shares of our common stock valued at $1.3 million was associated with employee retention and is being earned and recorded as compensation expenses in accordance with such employees' vesting schedules. In addition, we agreed to pay up to $7.5 million of contingent consideration in the form of cash or shares of Magma common stock, at our discretion, to the former Sabio stockholders upon achieving certain product integration and booking milestones.
On September 19, 2007, we acquired Rio Design Automation, Inc., a privately-held EDA software company that provides package-aware chip design software. Rio's software enables designers to analyze and optimize integrated circuit design within the context of the package and electronic system, further expanding our product offering. Prior to acquiring Rio, we had an 18% ownership interest in Rio. The total purchase price for the step acquisition was $4.5 million, consisting of $526,000 in cash, approximately 278,700 shares of our common stock valued at $3.8 million, and transaction costs of $168,000.
On April 13, 2007, we acquired certain assets from a privately-held developer of EDA technology. Pursuant to the asset purchase agreement, we paid total consideration of $200,000 in cash. Based on management's estimates and appraisal, the $200,000 consideration was allocated to patents and intellectual property.
During fiscal 2009, a total of $3.6 million in gross contingent cash consideration and a total of $1.1 million in gross contingent stock consideration were earned by various acquired businesses upon their achievement of certain milestones under various prior asset purchase and business combination agreements.
Critical Accounting Policies and Estimates
In preparing our consolidated financial statements, we make estimates, assumptions and judgments that can have a significant impact on our revenue, operating income or loss and net income or loss, as well as on the value of certain assets and liabilities on our balance sheet. We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the most significant potential impact on our financial statements, so we consider these to be our critical accounting policies. We consider the following accounting policies related to revenue recognition, stock-based compensation, allowance for doubtful accounts, cash
equivalent, short-term and long-term investments, strategic investments, asset purchases and business combinations, valuation of long-lived assets and income taxes to be our most critical policies due to the estimation processes involved in each.
Revenue recognition
We recognize revenue in accordance with Statement of Position ("SOP") 97-2, as modified by SOP 98-9, which generally requires revenue earned on software arrangements involving multiple elements (such as software products, upgrades, enhancements, maintenance, installation and training) to be allocated to each element based on the relative fair values of the elements. The fair value of an element must be based on evidence that is specific to us. If evidence of fair value does not exist for each element of a license arrangement and maintenance is the only undelivered element, then all revenue for the license arrangement is recognized over the term of the agreement. If evidence of fair value does exist for the elements that have not been delivered, but does not exist for one or more delivered elements, then revenue is recognized using the residual method, under which recognition of revenue for the undelivered elements is deferred and the residual license fee is recognized as revenue immediately.
Our revenue recognition policy is detailed in Note 1 to the Consolidated Financial Statements in Item 8 of this Form 10-K. Management has made significant judgments related to revenue recognition. Specifically, in connection with each transaction involving our products (referred to as an "arrangement" in the accounting literature) we must evaluate whether our fee is "fixed or determinable" and we must assess whether "collectability is probable." These judgments are discussed below.
The fee is fixed or determinable. With respect to each arrangement, we must make a judgment as to whether the arrangement fee is fixed or determinable. If the fee is fixed or determinable, then revenue is recognized upon delivery of software (assuming other revenue recognition criteria are met). If the fee is not fixed or determinable, then the revenue is recognized when customer installments are due and payable.
In order for an arrangement to be considered to have fixed or determinable fees, 100% of the license, services and initial post contract support fee is to be paid within one year or less from the order date. We have a history of collecting fees on such arrangements according to contractual terms. Arrangements with payment terms extending beyond twelve months are considered not to be fixed or determinable.
Collectability is probable. In order to recognize revenue, we must make a judgment about the collectability of the arrangement fee. Our judgment of the collectability is applied on a customer-by-customer basis pursuant to our credit review policy. We typically sell to customers for which there is a history of successful collection. New customers are subjected to a credit review process, which evaluates the customers' financial positions and ability to pay. If it is determined from the outset of an arrangement that collectability is not probable based upon our credit review process, revenue is recognized on a cash receipts basis (as each payment is collected).
Licenses revenue and bundled licenses and services revenue
We derive license revenue primarily from licenses of our design and implementation software and, to a lesser extent, from licenses of our analysis and verification products. We license our products under time-based and perpetual licenses whereby license revenue is recognized after the execution of a license agreement and the delivery of the product to the customer, provided that there are no uncertainties surrounding the product acceptance, fees are fixed or determinable, collection is probable and there are no remaining obligations other than maintenance.
For perpetual licenses and unbundled time-based license arrangements, where maintenance is included for the first period of the license term, with maintenance thereafter renewable by the customer at the substantive rates stated in their agreements with us, the stated rate for maintenance renewal is vendor-specific objective
evidence ("VSOE") of the fair value of maintenance in these arrangements. For these arrangements license revenue is recognized using the residual method in the period in which the license agreement is executed assuming all other revenue recognition criteria are met. Where an arrangement involves extended payment terms, revenue recognized using the residual method is limited to amounts due and payable.
For transactions that include bundled maintenance for the entire license term we have no VSOE of fair value of maintenance. Therefore, we recognize license revenue ratably over the maintenance period. If an arrangement involves extended payment terms-that is, where payment for less than 100% of the arrangement fee is due within one year of the contract date-we recognize revenue to the extent of the lesser of the amount due and payable or the ratable portion. We classify the revenue recognized from these transactions separately as bundled licenses and services revenue in our consolidated statements of operations.
If we were to change any of these assumptions or judgments, it could cause a material increase or decrease in the amount of revenue that we report in a particular period. Amounts invoiced relating to arrangements where revenue cannot be recognized are reflected on our balance sheet as deferred revenue and recognized over time as the applicable revenue recognition criteria are satisfied.
Services revenue
We derive services revenue primarily from consulting and training for our software products and from maintenance fees for our products. Most of our license agreements include maintenance, generally for a one-year period, renewable annually. Services revenue from maintenance arrangements is recognized on a straight-line basis over the maintenance term. Because we have VSOE of fair value for consulting and training services, revenue is recognized as these services are performed or completed. Our consulting and training services are generally not essential to the functionality of the software. Our products are fully functional upon delivery of the product. Additional factors considered in determining whether the revenue should be accounted for separately include, but are not limited to: degree of risk, availability of services from other vendors, timing of payments and impact of milestones or acceptance criteria on our ability to recognize the software license fee.
Stock-based compensation
Effective April 3, 2006, we adopted SFAS No. 123 (revised 2004), "Share-Based Payment" using the modified prospective transition method. Under SFAS 123R, stock-based compensation expense is measured at the grant date, based on the fair value of the award, and is recognized as expense, net of estimated forfeitures, over the vesting period of the award.
Determining the fair value of stock-based awards at the grant date requires the input of various highly subjective assumptions, including expected future stock price volatility, expected term of instruments and expected forfeiture rates. We established the expected term for employee options and awards, as well as forfeiture rates, based on the historical settlement experience, while giving consideration to vesting schedules and to options that have estimated life cycles less than the contractual terms. Assumptions for option exercises and pre-vesting terminations of options were stratified for employee groups with sufficiently distinct behavior patterns. Expected future stock price volatility was developed based on the average of our historical weekly stock price volatility and average implied volatility. These input factors are subjective and are determined using management's judgment. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially affected.
Unbilled accounts receivable
Unbilled accounts receivable represent revenue that has been recognized in advance of being invoiced to the customer. In all cases, the revenue and unbilled receivables are for contracts which are non-cancelable, in which there are no contingencies and where the customer has taken delivery of both the software and the encryption key
required to operate the software. We typically generate invoices 45 days in advance of contractual due dates, and we invoice the entire amount of the unbilled accounts receivable within one year from the contract inception.
Allowances for doubtful accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We regularly review the adequacy of our accounts receivable allowance after considering the size of the accounts receivable balance, each customer's expected ability to pay and our collection history with each customer. We review significant invoices that are past due to determine if an allowance is appropriate using the factors described above. We also monitor our accounts receivable for concentration in any one customer, industry or geographic region.
As of May 3, 2009, one of our customers accounted for more than 10% of total receivables. The allowance for doubtful accounts represents our best estimate, but changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future. If actual losses are significantly greater than the allowance we have established, that would increase our general and administrative expenses and reported net loss. Conversely, if actual credit losses are significantly less than our allowance, this would decrease our general and administrative expenses and our reported net income would increase.
Fair value option for financial assets and financial liabilities
In February 2007, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("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 permits entities to choose to measure many financial instruments and certain other items at fair value, with changes in fair value recognized in earnings each reporting period. The election, called the fair value option, enables entities to achieve an offset accounting effect for changes in fair value of certain related assets and liabilities without having to apply complex hedge accounting provisions.
We adopted SFAS 159 in the first quarter of fiscal 2009. Our adoption of SFAS 159 permits us to elect to carry certain financial instruments at fair value with corresponding changes in fair value reported in the results of operations. The election to carry an instrument at fair value is made at the individual contract level and can be made only at origination or inception of the instrument, or upon the occurrence of an event that results in a new basis of accounting. Our election is on a prospective basis and is irrevocable.
During the second quarter of fiscal 2009, we elected fair value accounting for the purchased put option recorded in connection with the settlement agreement signed with UBS Financial Services, Inc. ("UBS"). This election was made in order to mitigate volatility in earnings caused by accounting for the purchased put option and underlying auction rate securities ("ARS") under different methods. The initial election of fair value led to a $1.1 million gain included in "Other income (expense), net" with the purchased put option asset recorded in long-term investments for the three months ended November 2, 2008.
During the third fiscal quarter, the Company recorded a loss of $0.3 million on the ARS due to the third quarter valuation. In addition, the Company recorded a gain due to the increase in the valuation of the put option by $1.4 million.
For the fiscal year ended May 3, 2009 a total net gain on the put option of $1.7 million was reported in valuation gain (loss) in the consolidated statement of operations for fiscal 2009, and $2.2 million was reported as a loss on the ARS in other income (expense) in the consolidated statement of operations for fiscal 2009.
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