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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q


(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended March 31, 2005

 

 

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from ____________ to ____________.


Commission File No.: 0-31773


 

LOGICVISION, INC.

(Exact name of registrant as specified in its charter)


Delaware

 

94-3166964

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification Number)


25 Metro Drive, Third Floor

San Jose, California 95110

(Address of principal executive offices)

 

Telephone: (408) 453-0146

(Registrant’s telephone number, including area code)

 


          Indicate by check mark whether the registrant (l) 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 at least the past 90 days.

Yes   x

No   o

          Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes   o

No   x

          At April 29, 2005, 18,539,386 shares of Registrant’s Common Stock, $0.0001 par value were outstanding.



LOGICVISION, INC.

FORM 10-Q

QUARTERLY PERIOD ENDED MARCH 31, 2005

INDEX

 

 

 

Page

 

 

 


Part I:     Financial Information

3

 

 

 

Item 1:     Financial Statements

3

 

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets at March 31, 2005, and December 31, 2004

3

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended
March 31, 2005 and 2004

4

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended 
March 31, 2005 and 2004

5

 

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

 

 

 

 

 

Item 2:     Management’s Discussion and Analysis of Financial Condition and Results of Operations

13

 

 

 

 

Item 3:     Quantitative and Qualitative Disclosures About Market Risk

28

 

 

 

 

Item 4:     Controls and Procedures

29

 

 

 

Part II:     Other Information

30

 

 

 

Item 6:     Exhibits

30

 

Signatures

31

 

Exhibit Index

 


PART I:    FINANCIAL INFORMATION

ITEM 1:    FINANCIAL STATEMENTS

LOGICVISION, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)

 

 

 

March 31,
2005

 

December 31,
2004

 

 

 



 



 

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,471

 

$

5,790

 

Short-term investments

 

 

17,895

 

 

15,552

 

Accounts receivable, net of allowance for doubtful accounts of $9 and $11

 

 

933

 

 

1,125

 

Prepaid expenses and other current assets

 

 

1,616

 

 

1,459

 

 

 



 



 

Total current assets

 

 

24,915

 

 

23,926

 

Property and equipment, net

 

 

1,067

 

 

907

 

Long-term investments

 

 

1,233

 

 

4,960

 

Intangible assets, net

 

 

691

 

 

767

 

Goodwill

 

 

6,846

 

 

6,846

 

Other long-term assets

 

 

1,193

 

 

1,837

 

 

 



 



 

Total assets

 

$

35,945

 

$

39,243

 

 

 



 



 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Short-term debt

 

$

3,500

 

$

3,500

 

Accounts payable

 

 

543

 

 

481

 

Accrued liabilities

 

 

1,911

 

 

2,385

 

Deferred revenue, current portion

 

 

5,214

 

 

4,885

 

 

 



 



 

Total current liabilities

 

 

11,168

 

 

11,251

 

Deferred revenue

 

 

1,546

 

 

3,184

 

 

 



 



 

Total liabilities

 

 

12,714

 

 

14,435

 

Commitments and contingencies (See Note 5)

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value:

 

 

 

 

 

 

 

Authorized: 5,000 shares;

 

 

 

 

 

 

 

Issued and outstanding: no shares issued and outstanding

 

 

—  

 

 

—  

 

Common stock, $0.0001 par value:

 

 

 

 

 

 

 

Authorized: 125,000 shares;

 

 

 

 

 

 

 

Issued and outstanding: 18,532 shares at March 31, 2005 and 18,170 shares at December 31, 2004

 

 

2

 

 

2

 

Additional paid-in capital

 

 

104,092

 

 

103,734

 

Deferred stock-based compensation

 

 

—  

 

 

(1

)

Accumulated other comprehensive income

 

 

(50

)

 

74

 

Accumulated deficit

 

 

(80,813

)

 

(79,001

)

 

 



 



 

Total stockholders’ equity

 

 

23,231

 

 

24,808

 

 

 



 



 

Total liabilities and stockholders’ equity

 

$

35,945

 

$

39,243

 

 

 



 



 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3


LOGICVISION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

 

 

Three Months Ended
March 31,

 

 

 


 

 

 

2005

 

2004

 

 

 



 



 

Revenues:

 

 

 

 

 

 

 

License

 

$

2,697

 

$

1,149

 

Service

 

 

928

 

 

933

 

Product

 

 

52

 

 

138

 

 

 



 



 

Total revenues

 

 

3,677

 

 

2,220

 

 

 



 



 

Cost of revenues:

 

 

 

 

 

 

 

License

 

 

186

 

 

52

 

Service

 

 

569

 

 

542

 

Product

 

 

25

 

 

59

 

 

 



 



 

Total cost of revenues

 

 

780

 

 

653

 

 

 



 



 

Gross profit

 

 

2,897

 

 

1,567

 

 

 



 



 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

 

1,690

 

 

1,247

 

Sales and marketing

 

 

1,776

 

 

1,417

 

General and administrative

 

 

1,289

 

 

1,208

 

 

 



 



 

Total operating expenses

 

 

4,755

 

 

3,872

 

 

 



 



 

Loss from operations

 

 

(1,858

)

 

(2,305

)

Interest and other income

 

 

62

 

 

98

 

 

 



 



 

Loss before provision for income taxes

 

 

(1,796

)

 

(2,207

)

Provision for income taxes

 

 

16

 

 

18

 

 

 



 



 

Net loss

 

$

(1,812

)

$

(2,225

)

 

 



 



 

Net loss per share, basic and diluted

 

$

(0.10

)

$

(0.14

)

 

 



 



 

Weighted average number of shares outstanding, basic and diluted

 

 

18,389

 

 

15,901

 

 

 



 



 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4


LOGICVISION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

 

 

 

Three Months Ended March 31,

 

 

 


 

 

 

2005

 

2004

 

 

 



 



 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(1,812

)

$

(2,225

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

217

 

 

151

 

Amortization of deferred stock-based compensation

 

 

1

 

 

43

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

193

 

 

1,631

 

Prepaid expenses and other current assets

 

 

(157

)

 

(49

)

Other long-term assets

 

 

644

 

 

(7

)

Accounts payable

 

 

62

 

 

(555

)

Accrued liabilities

 

 

(473

)

 

274

 

Deferred revenue

 

 

(1,309

)

 

(716

)

 

 



 



 

Net cash used in operating activities

 

 

(2,634

)

 

(1,453

)

 

 



 



 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of investments

 

 

(2,531

)

 

(2,069

)

Purchase of property and equipment

 

 

(295

)

 

(123

)

Proceeds from maturities of investments

 

 

3,800

 

 

1331

 

 

 



 



 

Net cash provided by (used in) investing activities

 

 

974

 

 

(861

)

 

 



 



 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net

 

 

358

 

 

475

 

Proceeds from short-term debt

 

 

500

 

 

—  

 

Repayment of short-term debt

 

 

(500

)

 

—  

 

 

 



 



 

Net cash provided by financing activities

 

 

358

 

 

475

 

 

 



 



 

Effect of exchange rate on cash

 

 

(17

)

 

(22

)

 

 



 



 

Net decrease in cash and cash equivalents

 

 

(1,319

)

 

(1,861

)

Cash and cash equivalents, beginning of period

 

 

5,790

 

 

10,175

 

 

 



 



 

Cash and cash equivalents, end of period

 

$

4,471

 

$

8,314

 

 

 



 



 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5


LOGICVISION, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1.    Basis of Presentation

          The accompanying unaudited condensed consolidated financial statements include the accounts of LogicVision, Inc. (“LogicVision” or the “Company”) and its wholly-owned subsidiaries after elimination of all inter-company transactions. The Company’s fiscal year ends on December 31.

          The accompanying unaudited condensed consolidated financial statements of LogicVision have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes necessary for a fair statement of financial position, results of operations and cash flows in conformity with GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The December 31, 2004 fiscal year end balance sheet data was derived from the audited financial statements and does not include all disclosures required by GAAP. Operating results for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2005 or any other future period. The unaudited condensed consolidated interim financial statements contained herein should be read in conjunction with the audited financial statements and footnotes for the year ended December 31, 2004 included in the Company’s Annual Report on Form 10-K as filed with the SEC.

          The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and to disclose contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates.

Reclassifications

          The Company reclassified its investments in auction rate securities at December 31, 2003 and March 31, 2004 from cash equivalents to short-term investments.  Accordingly, the Company has reclassified $5.3 million and $4.3 million of these investments from cash and cash equivalents at December 31, 2003 and March 31, 2004, respectively.  In addition, the gross purchases and sales of these securities have also been reported as investing activities in the Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2004, rather than as a component of cash and cash equivalents.   These investments are recorded at cost, which approximates fair market value due to their variable interest rates, which typically reset every 7 to 35 days.  Although the stated contractual maturities of these investments are long-term, the Company has the ability to liquidate these investments on a short-term basis.

Net Loss Per Share

          Statement of Financial Accounting Standards (“SFAS”), No. 128, “Earnings Per Share,” requires a dual presentation of basic and diluted earnings per share (“EPS”). Basic EPS excludes dilution and is computed by dividing net income or loss by the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects the potential dilution that would occur if outstanding securities to issue common stock were exercised or converted to common stock. Diluted net loss per share for the three months ended March 31, 2005 and 2004 does not differ from basic net loss per share since potential shares of common stock issuable upon exercise of stock options and warrants are anti-dilutive under the treasury stock method.

6


          The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share amounts):

 

 

Three Months Ended
March 31,

 

 

 


 

 

 

2005

 

2004

 

 

 



 



 

Numerator - Basic and Diluted

 

 

 

 

 

 

 

Net loss

 

$

(1,812

)

$

(2,225

)

 

 



 



 

Denominator - Basic and Diluted

 

 

 

 

 

 

 

Common stock outstanding

 

 

18,389

 

 

15,901

 

 

 



 



 

Basic and Diluted net loss per share

 

$

(0.10

)

$

(0.14

)

 

 



 



 

          Options and warrants to purchase an aggregate of 4.8 million shares of common stock were outstanding at March 31, 2005, and were excluded from the computation of diluted shares because of their antidilutive effect on  net loss per share for the three months then ended.

Note 2.    Recently Issued Accounting Standards

          In December 2004, the Financial Accounting Standards Board (“FASB”), issued SFAS 123 (Revised 2004) “Share-Based Payment,” or SFAS 123(R), which replaces SFAS 123 and supersedes APB Opinion No. 25.  SFAS 123(R) requires that compensation costs relating to share-based payment transactions be recognized in financial statements.  The pro forma disclosure previously permitted under SFAS 123 will no longer be an acceptable alternative to recognition of expenses in the financial statements. In March 2005, the SEC issued Staff Accounting Bulletin 107 (“SAB 107”), which offers guidance on SFAS 123(R). SAB 107 was issued to assist preparers by simplifying some of the implementation challenges of SFAS 123(R) while enhancing the information that investors receive. SFAS 123(R) and SAB 107 were effective for reporting periods beginning after June 15, 2005; however in April 2005, the SEC approved a new rule that SFAS 123(R) and SAB 107 are now effective for public companies for annual, rather than interim, periods beginning after June 15, 2005. The Company is currently reviewing the financial accounting, income tax and internal control implications of SFAS 123(R) and SAB 107. The adoption of SFAS 123(R) and SAB 107 are expected to have a significant impact on the Company’s financial position and results of operations.

          In December 2004, FASB issued SFAS 153, “Exchanges of Nonmonetary Assets—an amendment to APB Opinion No. 29.” This statement amends APB 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. Adoption of this statement on July 1, 2005 is not expected to have a material impact on the Company’s results of operations or financial condition.

Note 3.    Cash and Cash Equivalents and Investments

          The Company considers all highly liquid investment instruments purchased with original maturities of three months or less at the acquisition date to be cash equivalents.  Investment instruments purchased with original maturities of more than three months, which mature in less than twelve months, are considered to be short-term investments. All investments are classified as available-for-sale and are reported at fair value. Interest and realized gains and losses are included in interest income. Realized gains and losses are recognized based on the specific identification method.

7


          Cash, cash equivalents and investments consist of the following (in thousands):

 

 

March 31, 2005

 

December 31, 2004

 

 

 


 


 

 

 

Cost

 

Unrealized
Losses

 

Estimated
Fair Value

 

Cost

 

Unrealized
Losses

 

Estimated
Fair Value

 

 

 



 



 



 



 



 



 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

812

 

$

—  

 

$

812

 

$

1,541

 

$

—  

 

$

1,541

 

Commecial Paper

 

 

995

 

 

—  

 

 

995

 

 

—  

 

 

—  

 

 

—  

 

Money market funds

 

 

2,363

 

 

—  

 

 

2,363

 

 

2,711

 

 

—  

 

 

2,711

 

U.S. government agency notes

 

 

301

 

 

—  

 

 

301

 

 

1,538

 

 

—  

 

 

1,538

 

 

 



 



 



 



 



 



 

Total cash and cash equivalents

 

$

4,471

 

$

—  

 

$

4,471

 

$

5,790

 

$

—  

 

$

5,790

 

 

 



 



 



 



 



 



 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

1,375

 

$

—  

 

$

1,375

 

 

—  

 

 

—  

 

 

—  

 

U.S. government agency notes

 

 

16,629

 

 

(109

)

 

16,520

 

$

15,552

 

$

—  

 

$

15,552

 

 

 



 



 



 



 



 



 

Total short-term investments

 

$

18,004

 

$

(109

)

$

17,895

 

$

15,552

 

$

—  

 

$

15,552

 

 

 



 



 



 



 



 



 

Long-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency notes

 

$

1,238

 

$

(5

)

$

1,233

 

$

4,960

 

$

—  

 

$

4,960

 

 

 



 



 



 



 



 



 

Total long-term investments

 

$

1,238

 

$

(5

)

$

1,233

 

$

4,960

 

$

—  

 

$

4,960

 

 

 



 



 



 



 



 



 

Total cash and cash equivalents, and investments

 

$

23,713

 

$

(114

)

$

23,599

 

$

26,302

 

$

—  

 

$

26,302

 

 

 



 



 



 



 



 



 

Note 4.    Loan Agreement

          The Company has a Loan Agreement with a bank under which it may borrow, on a revolving basis, up to $5.0 million at an interest rate equal to prime rate, which was equal to an annual rate of 5.75% at March 31, 2005. The agreement is unsecured and is not collateralized by the Company’s assets.  Under the agreement, the Company must comply with certain operating and reporting covenants and is not permitted to pay dividends, or make material investments or dispositions without the prior written consent of the bank. If the Company fails to comply with its covenants under the agreement, the bank can declare any outstanding amounts immediately due and payable and cease advancing money or extending credit to or for the Company. The agreement expires on February 28, 2006.  At March 31, 2005 there was $3.5 million outstanding and the Company was in compliance with all the operating and reporting covenants under the Agreement.

Note 5.    Commitments and Contingencies

Lease obligations

          The Company and its subsidiaries in Canada, India and Japan rent office facilities under noncancelable operating leases which expire through March 2010. The Company and its subsidiaries are responsible for certain maintenance costs, taxes and insurance under the respective leases. Total future minimum payments under such operating leases at March 31, 2005 were $1.9 million as follows (in thousands):

8


Year ending December 31,

 

Operating
Leases

 


 



 

2005

 

 

397

 

2006

 

 

463

 

2007

 

 

372

 

2008

 

 

322

 

2009

 

 

310

 

Thereafter

 

 

78

 

 

 



 

 

 

$

1,942

 

 

 



 

Off-balance Sheet Arrangements

          The Company’s off-balance sheet arrangements consist solely of operating leases as described above.

Indemnification Obligations

          The Company enters into standard license agreements in the ordinary course of business. Pursuant to these agreements, the Company agrees to indemnify its customers for losses suffered or incurred by them as a result of any patent, copyright, or other intellectual property infringement claim by any third party with respect to the Company’s products. These indemnification obligations have perpetual terms.  The Company’s normal business practice is to limit the maximum amount of indemnification to the amount received from the customer.  On occasion, the maximum amount of indemnification the Company may be required to make may exceed its normal business practices. The Company estimates the fair value of its indemnification obligations as insignificant, based upon its historical experience concerning product and patent infringement claims. Accordingly, the Company had no liabilities recorded for indemnification under these agreements as of March 31, 2005.

          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 Company’s request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a directors and officers insurance policy that reduces its exposure and enables the Company to recover a portion of future amounts paid. As a result of the Company’s insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. Accordingly, no liabilities have been recorded for these agreements as of March 31, 2005.

Warranties

          The Company offers its customers a warranty that its products will conform to the documentation provided with the products. To date, there have been no payments or material costs incurred related to fulfilling these warranty obligations. Accordingly, the Company has no liabilities recorded for these warranties as of March 31, 2005. The Company assesses the need for a warranty reserve on a quarterly basis, and there can be no guarantee that a warranty reserve will not become necessary in the future.

Note 6.    Concentration of Credit Risk

          The Company has been dependent on a relatively small number of customers for a substantial portion of its revenue, although the customers comprising this group have changed from time to time. In the three months ended March 31, 2005, three customers accounted for 23%, 15% and 13% of its revenues, respectively.  In the three months ended March 31, 2004, two customers accounted for 21% and 20% of its revenues, respectively.   

          At March 31, 2005, four customers accounted for 25%, 13%, 12% and 10% of net accounts receivable, respectively.  At December 31, 2004, two customers accounted for approximately 19% and 11% of net accounts receivable, respectively.

9


Note 7.    Comprehensive Loss

          SFAS 130, “Reporting Comprehensive Income,” requires companies to classify items of other comprehensive income by their nature in the financial statements and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the stockholders’ equity section of the balance sheet.

          LogicVision’s other comprehensive income consists primarily of adjustments to translate the financial statements of the Company’ foreign subsidiaries into U.S. dollars for consolidation, and unrealized gains (losses) on available-for-sale investments. The functional currency of the Company’s foreign subsidiaries is the local currency and therefore, the translation adjustments of those statements into U.S. dollars are recorded in accumulated other comprehensive income, which is reported as a separate component of stockholders’ equity.

          For the three months ended March 31, 2005 and 2004, comprehensive loss, which was comprised of the Company’s net loss for the periods and changes in foreign currency translation adjustments and unrealized gains (losses) on investments were as follows (in thousands):

 

 

Three Months Ended
March 31,

 

 

 


 

 

 

2005

 

2004

 

 

 


 


 

Net loss

 

$

(1,812

)

$

(2,225

)

Other comprehensive income -

 

 

 

 

 

 

 

Cumulative translation adjustment

 

 

(10

)

 

(19

)

Unrealized losses on available-for-sale investments, net

 

 

(114

)

 

—  

 

 

 



 



 

Comprehensive loss

 

$

(1,936

)

$

(2,244

)

 

 



 



 

Note 8.    Deferred Stock-Based Compensation

          The Company accounts for employee stock-based compensation plans using the intrinsic value method. Accordingly, deferred compensation is only recorded if the current market price of the underlying stock exceeds the exercise price on the date of grant.

10


          Had compensation cost for the Company’s stock-based compensation plan been determined based on the minimum value at the grant date for awards consistent with the provisions of SFAS 123, the Company’s net loss would have been increased to the pro forma amounts indicated below (in thousands, except per share data):

 

 

Three Months Ended
March 31,

 

 

 


 

 

 

2005

 

2004

 

 

 


 


 

Net loss, as reported

 

$

(1,812

)

$

(2,225

)

Add: Stock-based compensation expense included in reported net loss

 

 

1

 

 

42

 

Deduct: Total stock-based compensation expense determined under fair value based method for all awards granted

 

 

(964

)

 

(923

)

 

 



 



 

Pro forma net loss

 

$

(2,775

)

$

(3,106

)

 

 



 



 

Loss per share:

 

 

 

 

 

 

 

Basic and diluted - as reported

 

$

(0.10

)

$

(0.14

)

 

 



 



 

Basic and diluted - pro forma

 

$

(0.15

)

$

(0.20

)

 

 



 



 

          The value of the option grants has been calculated on the date of grant using the Black-Scholes options pricing model with the following weighted-average assumptions:

 

 

Three Months Ended
March 31,

 

 

 


 

 

 

2005

 

2004

 

 

 


 


 

Expected average life of option

 

 

5.84 years

 

 

3.25 years

 

Risk-free interest rate

 

 

3.98

%

 

2.46

%

Expected dividends

 

 

—  

 

 

—  

 

Expected volatility

 

 

322

%

 

283

%

          The value of the purchase rights under the Company’s Purchase Plan has been calculated on the date of grant using the Black-Scholes options pricing model with the following weighted-average assumptions:

 

 

Three Months Ended
March 31,

 

 

 


 

 

 

2005

 

2004

 

 

 


 


 

Expected average life of option

 

 

0.5 years

 

 

0.5 years

 

Risk-free interest rate

 

 

1.82

%

 

1.12

%

Expected dividends

 

 

—  

 

 

—  

 

Expected volatility

 

 

307

%

 

257

%

          These pro forma amounts may not be representative of the effects for future years as options vest over several years and additional awards are generally made each year.  

11


Note 10.    Segment Reporting

          SFAS 131, “Disclosure about Segments of an Enterprise and Related Information,” requires the presentation of segment information in a manner consistent with that of chief operating decision makers. Although the Company offers various design and manufacturing embedded test software products and services to its customers, the Company does not manage its operations by these products and services, but instead views the Company as one operating segment when making business decisions. The Company does not manage its operations on a geographical basis. Revenues attributed to the United States and to all foreign countries are based on the geographical location of the customers. The Company uses one measurement of profitability for its business.

          The following is a summary of the Company’s revenues by geographic operations (in thousands):

 

 

Three Months Ended
March 31,

 

 

 


 

 

 

2005

 

2004

 

 

 


 


 

Net revenues:

 

 

 

 

 

 

 

United States

 

$

2,827

 

$

1,585

 

Japan

 

 

667

 

 

524

 

Others

 

 

183

 

 

111

 

 

 



 



 

 

 

$

3,677

 

$

2,220

 

 

 



 



 

The following is a summary of the Company’s long-lived assets (in thousands):

 

 

March 31,
2005

 

December 31,
2004

 

 

 


 


 

United States

 

$

783

 

$

596

 

India

 

 

130

 

 

140

 

Canada

 

 

96

 

 

99

 

Japan

 

 

58

 

 

72

 

 

 



 



 

 

 

$

1,067

 

$

907

 

 

 



 



 

12


ITEM 2:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto set forth in Item 1 of this report and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

When used in this Report, the words “expects,” “anticipates,” “intends,” “estimates,” “plans,” “believes,” and similar expressions are intended to identify forward-looking statements. These are statements that relate to future periods and include statements about the features, benefits and performance of our current and future products, services and technology, plans for future products and services and for enhancements of existing products and services,  our expectations regarding future revenues, sources of revenues and expenses, fluctuations in future operating results, our estimates regarding the adequacy of our capital resources, our capital requirements and our needs for additional financing, planned capital expenditures, use of our working capital, our critical accounting policies and estimates, our internal controls, our patent applications and licensed technology, our efforts to protect intellectual property, our ability to attract customers, establish license agreements and obtain orders, the impact of economic and industry conditions on our customers, customer demand, our growth strategy, our marketing efforts, our business development efforts, future acquisitions or investments, our focus on larger orders with major customers, our employee matters, our competitive position, our foreign currency risk strategy, and the impact of recent accounting pronouncements.  Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, those risks discussed below, as well as the possibility that orders could be modified, cancelled or not renewed, our ability to negotiate and obtain customer agreements and orders, lengthening sales cycles, the concentration of sales to large customers, dependence upon and trends in capital spending budgets in the semiconductor industry and fluctuations in general economic conditions, our ability to rapidly develop new technology and introduce new products, our ability to safeguard our intellectual property and the risks set forth below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Future Operating Results.” These forward-looking statements speak only as of the date hereof. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

          In the sections of this report entitled “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Results,” all references to “LogicVision,” “we,” “us,” “our” or the “Company” mean LogicVision, Inc. and its subsidiaries, except where it is made clear that the term means only the parent company.

          LogicVision and the LogicVision logo are our registered trademarks. We also refer to trademarks of other corporations and organizations in this document.

Critical Accounting Policies and Estimates

          LogicVision’s financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States of America. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Critical accounting policies for LogicVision include revenue recognition and allowance for doubtful accounts, accounting for income taxes, estimated liabilities and impairment of long-lived assets and goodwill, which are discussed in more detail under the caption “Critical Accounting Policies and Estimates” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

13


Results of Operations

          Cost of Revenues

          Cost of license revenues consists of shipping, product packaging, software license and maintenance costs, materials and labor costs, and royalties paid to third party vendors. Cost of service revenues consists of compensation and related costs and third-party consultant costs associated with providing postcontract customer support and consulting services.

          Operating Expenses

          Research and development expenses consist primarily of compensation and related costs for personnel, consulting services, and amortization of intangible assets. All research and development costs are expensed as incurred.

          Sales and marketing expenses consist primarily of compensation and related costs for sales and marketing personnel, marketing programs, public relations, promotional materials, travel and related trade show expenses.

          General and administrative expenses consist primarily of compensation and related costs for general management, information technology, finance and accounting personnel, insurance, professional services and related fees and expenses.

Revenues, cost of revenues and gross profit

          The table below sets forth the fluctuations in revenues, cost of revenues and gross profit data for the three months ended March 31, 2005 and 2004 (in thousands, except percentage data):

 

 

March 31,
2005

 

% of
Revenue

 

March 31,
2004

 

% of
Revenue

 

Dollar
Change

 

Percentage
Change

 

 

 


 


 


 


 


 


 

Three months ended:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

License

 

$

2,697

 

 

73.4

%

$

1,149

 

 

51.8

%

$

1,548

 

 

134.7

%

Service

 

 

928

 

 

25.2

%

 

933

 

 

42.0

%

 

(5

)

 

-0.5

%

Product

 

 

52

 

 

1.4

%

 

138

 

 

6.2

%

 

(86

)

 

-62.3

%

 

 



 



 



 



 



 



 

Total revenues

 

$

3,677

 

 

100.0

%

$

2,220

 

 

100.0

%

$

1,457

 

 

65.6

%

 

 



 



 



 



 



 



 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

License

 

$

186

 

 

5.1

%

$

52

 

 

2.3

%

$

134

 

 

257.7

%

Service

 

 

569

 

 

15.5

%

 

542

 

 

24.4

%

 

27

 

 

5.0

%

Product

 

 

25

 

 

0.7

%

 

59

 

 

2.7

%

 

(34

)

 

-57.6

%

 

 



 



 



 



 



 



 

Total cost of revenues

 

$

780

 

 

21.3

%

$

653

 

 

29.4

%

$

127

 

 

19.4

%

 

 



 



 



 



 



 



 

Gross profit

 

 

2,897

 

 

78.7

%

 

1,567

 

 

70.6

%

 

1,330

 

 

84.9

%

 

 



 



 



 



 



 



 

          Total revenues increased primarily due to an increase in license revenues resulting from an existing order in which the license revenue was recognized based on payment terms in accordance with our normal revenue recognition policies, and other orders from newer customers.  We expect that revenues in the second quarter of 2005 will decrease compared with the first quarter of 2005 due to the timing of revenue recognition of existing orders.

           Total cost of revenues increased primarily due to an increase in cost of license revenue resulting from the use of third party software.

14


Revenues by product line and country

          The table below sets forth the fluctuations in revenues by product line and country for the three months ended March 31, 2005 and 2004 (in thousands, except percentage data):

 

 

March 31,
2005

 

% of
Revenue

 

March 31,
2004

 

% of
Revenue

 

 

 


 


 


 


 

Three months ended:

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue by product line:

 

 

 

 

 

 

 

 

 

 

 

 

 

ETCreate

 

$

2,881

 

 

78.4

%

$

2,082

 

 

93.8

%

ETAccess

 

 

777

 

 

21.1

%

 

138

 

 

6.2

%

SiVision

 

 

19

 

 

0.5

%

 

—  

 

 

—  

 

 

 



 



 



 



 

Total revenues

 

$

3,677

 

 

100.0

%

$

2,220

 

 

100.0

%

 

 



 



 



 



 


Three months ended:

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue by country:

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

$

2,826

 

 

76.9

%

$

1,585

 

 

71.4

%

Japan

 

 

667

 

 

18.1

%

 

524

 

 

23.6

%

Other

 

 

184

 

 

5.0

%

 

111

 

 

5.0

%

 

 



 



 



 



 

Total revenues

 

$

3,677

 

 

100.0

%

$

2,220

 

 

100.0

%

 

 



 



 



 



 

Product line:

          ETCreate is the product sub-family formerly known as icBIST, which consists of embedded test intellectual property and corresponding design automation software that provides embedded test solutions for different components of an ASIC or SOC design. ETCreate revenue increased in part from higher license revenues from existing customers and in part from license revenue from an existing order in which the license revenue was recognized based on payment terms in accordance with our normal revenue recognition policies.

          ETAccess is the product sub-family which consists of hardware and software products for use with third party test platforms. ETAccess enables faster time-to-market and lower test costs through the support of interactive or test program controlled at-speed testing, datalogging, and debug of silicon designed with LogicVision’s embedded test IP. ETAccess revenue increased primarily from an existing order in which the license revenue was recognized based on payment terms in accordance with our normal revenue recognition policies.

          The SiVision product sub-family consists of parametric analysis and visualization software that uses semiconductor manufacturing process and test data to help assess parametric yields and identify parametric yield limiters. The SiVision product was acquired with the acquisition of SiVerion, Inc. in November 2004.

Operating Expenses:

          The table below sets forth operating expense data for the three ended March 31, 2005 and 2004 (in thousands, except percentage data):

 

 

March 31,
2005

 

% of
Revenue

 

March 31,
2004

 

% of
Revenue

 

Dollar
Change

 

Percentage
Change

 

 

 


 


 


 


 


 


 

Three months ended:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

1,690

 

 

46.0

%

$

1,247

 

 

56.2

%

$

443

 

 

35.5

%

Sales and marketing

 

 

1,776

 

 

48.3

%

 

1,417

 

 

63.8

%

 

359

 

 

25.3

%

General and administrative

 

 

1,289

 

 

35.1

%

 

1,208

 

 

54.4

%

 

81

 

 

6.7

%

 

 



 



 



 



 



 



 

Total operating expenses

 

$

4,755

 

 

129.4

%

$

3,872

 

 

174.4

%

$

883

 

 

22.8

%

 

 



 



 



 



 



 



 

15


          Research and development expenses increased primarily due to an increase in compensation and other related expenses resulting from the hiring of 12 additional employees of $0.2 million, and an increase in third-party consulting expenses of $0.2 million.

          Sales and marketing expenses increased primarily due to compensation and related expenses related to the hiring of 4 additional employees.

          General and administrative expenses increased primarily due to compensation and related expense resulting from the hiring of 2 additional employees.

          A portion of the increase in operating expenses is a direct result of our acquisition of SiVerion, Inc. in November 2004.

          We expect to continue to invest in our research and development projects as well as service operations required to support our business development activities.

Other Items:

          The table below sets forth other data for the three months ended March 31, 2005 and 2004 (in thousands, except percentage data):

 

 

March 31,
2005

 

% of
Revenue

 

March 31,
2004

 

% of
Revenue

 

Dollar
Change

 

Percentage
Change

 

 

 


 


 


 


 


 


 

Three months ended:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

$

62

 

 

1.7

%

$

98

 

 

4.4

%

$

(36

)

 

-36.7

%

Provision for income taxes

 

$

16

 

 

0.4

%

$

18

 

 

0.8

%

$

(2

)

 

-11.1

%

          Interest and other income decreased due to lower investment balances.

          Provision for income taxes.  Our net operating losses are generated domestically, and amounts attributed to our foreign operations have been insignificant for all periods presented.  Our income tax provisions are primarily related to state and foreign taxes. No benefit for income taxes has been recorded due to the uncertainty of the realization of deferred tax assets. From inception through December 31, 2004, we incurred net losses for federal and state tax purposes. As of December 31, 2004, we had federal and California net operating loss carryforwards of approximately $65.1 million and $16.7 million available to reduce future federal and California taxable income, respectively. These federal and California carryforwards begin to expire in 2006 and 2005, respectively, if not utilized. The extent to which these carryforwards can be used to offset future taxable income may be limited under Section 382 of the Internal Revenue Code and applicable state tax law.

Liquidity and Capital Resources

          At March 31, 2005, we had cash and cash equivalents and investments of $23.6 million and working capital of $13.7 million.

          Net cash used in operating activities was $2.6 million and $1.5 million in the first quarter of 2005 and 2004, respectively. Net cash used in operating activities in the first quarter of 2005 was primarily due to a net loss of $1.8 million, a decrease in deferred revenue of $1.3 million and a decrease in accrued liabilities of $0.5 million, partially offset by a decrease of other assets of $0.6 million, a decrease in accounts receivable of $0.2 million, and non-cash charges relating to depreciation and amortization of $0.2 million. Net cash used in operating activities in the first quarter of 2004 was primarily due to a net loss of $2.2 million, a decrease in deferred revenue of $0.7 million, and a decrease in accounts payable of $0.6 million, partially offset by non-cash charges relating to depreciation and amortization of $0.2 million, a decrease in accounts receivable of $1.6 million, and an increase in other accrued liabilities of $0.3 million. 

16


          Net cash provided by investing activities was $1.0 million in the first quarter of 2005 and net cash used in investing activities was $0.9 million in the first quarter of 2004. Net cash provided by investing activities in the first quarter of 2005 was primarily due to the proceeds from maturities of marketable securities of $3.8 million, partially offset by the purchase of marketable securities of $2.5 million and the purchase of property and equipment of $0.3 million. Net cash used in investing activities in the first quarter of 2004 was primarily due to the purchase of marketable securities of $2.1 million and the purchase of property and equipment of $0.1 million, partially offset by the proceeds from maturities of marketable securities of $1.3 million.

          Net cash provided by financing activities was $0.4 million and $0.5 million for the first quarter of 2005 and 2004, respectively. Net cash provided by financing activities for the first quarter of both 2005 and 2004 were primarily due to the proceeds from the employee stock purchase plan and exercises of employee stock options.

          We have a revolving loan agreement with a bank under which we may borrow up to $5.0 million at an interest rate equal to prime rate, which was equal to an annual rate of 5.75% at March 31, 2005.  Under the agreement, we must comply with certain operating and reporting covenants and are not permitted to pay dividends, or make material investments or dispositions without the prior written consent of the bank. If we fail to comply with its covenants under the agreement, the bank can declare any outstanding amounts immediately due and payable and cease advancing money or extending credit to or for us. There were $3.5 million outstanding under this agreement at March 31, 2005, and the agreement expires on February 28, 2006.  At March 31, 2005, we were in compliance with all operating and reporting covenants under the loan agreement.

          We expect to finance our future commitments using existing cash resources.  We currently anticipate that our available cash resources will be sufficient to meet our anticipated operating and capital requirements for at least the next 12 months.

          We intend to continue to invest in the development of new products and enhancements to our existing products. Our future liquidity and capital requirements will depend upon numerous factors, including the costs and timing of expansion of product development efforts and the success of these development efforts, the costs and timing of expansion of sales and marketing and customer support activities, the extent to which our existing and new products gain market acceptance, competing technological and market developments, the costs involved in maintaining and enforcing patent claims and other intellectual property rights, the level and timing of license and service revenues, available borrowings under line of credit arrangements and other factors. In addition, we may utilize cash resources to fund acquisitions of, or investments in, complementary businesses, technologies or product lines. From time to time, we may be required to raise additional funds through public or private financing, strategic relationships or other arrangements. There can be no assurance that such funding, if needed, will be available on terms attractive to us, or at all. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Strategic arrangements, if necessary to raise additional funds, may require us to relinquish our rights to certain of our technologies or products. Our failure to raise capital when needed could have a material adverse effect on our business, operating results and financial condition.

17


Contractual Obligations and Other Commercial Commitments 

          At March 31 2005, our obligations under contractual obligations and commercial commitments, primarily leasing arrangements, were as follows (in thousands):

Year ending December 31,

 

Operating
Leases

 


 


 

     2005

 

 

397

 

     2006

 

 

463

 

     2007

 

 

372

 

     2008

 

 

322

 

     2009

 

 

310

 

Thereafter

 

 

78

 

 

 



 

 

 

$

1,942

 

 

 



 

          We rent office facilities under noncancelable operating leases which expire through March 2010. We are responsible for certain maintenance costs, taxes and insurance under the respective leases. Total future minimum payments under such operating leases at March 31, 2005 were $1.9 million.

18


FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

If the semiconductor industry does not adopt embedded test technology on a widespread basis, our revenues could decline and our stock price could fall.

          To date, the semiconductor industry has not adopted embedded test technology as an alternative to current testing methods on a widespread basis. If the semiconductor industry does not adopt embedded test technology widely and in the near future, our growth will be limited, our revenues could decline, and our stock price could fall. We cannot assure you that integrated circuit designers and design companies’ customers will accept embedded test technology as an alternative to current testing methods in the time frame we anticipate, or at all. The industry may fail to adopt embedded test technology for many reasons, including the following:

 

potential customers may determine that existing solutions adequately address their testing needs, or the industry may develop alternative technologies to address their testing needs;

 

 

 

 

potential customers may not be willing to accept the perceived delays in the early design stages associated with implementing embedded test technology in order to achieve potential time and cost savings at later stages of silicon debugging and production testing;

 

 

 

 

potential customers may have concerns over the reliability of embedded testing methods relative to existing test methods;

 

 

 

 

our existing and potential customers may react to declines in demand for semiconductors by curtailing or delaying new initiatives for new complex semiconductors or by extending the approval process for new projects, thereby lengthening our sales cycles;

 

 

 

 

our current and potential customers may not accept or embrace our LV2004TM integrated family of products;

 

 

 

 

our current and potential customers may not accept our SiVisionTM product; and

 

 

 

 

designers may be reluctant to take on the added responsibility of incorporating embedded test technology as part of their design process, or to learn how to implement embedded test technology.

If the industries into which we sell our products experience recession or other cyclical effects impacting our customers’ research and development budgets, our operating results could be negatively impacted.

          Our sales are dependent upon capital spending trends and new design projects, and a substantial portion of our costs is fixed in the near term. The demand from our customers is uncertain and difficult to predict. Slower growth in the semiconductor and systems markets such as postponed or canceled capital expenditures for previously planned expansions or new fabrication facility construction projects, a reduced number of design starts, reduction of design and test budgets or continued consolidation among our customers would harm our business and financial condition.

          The primary customers for semiconductors that incorporate our embedded test technology are companies in the communications, medical products, networking, server and high-end consumer products industries. Any significant downturn in these particular markets or in general economic conditions which result in the cutback of research and development budgets or capital expenditures would likely result in a reduction in demand for our products and services and could harm our business.  If the economy declines as a result of economic, political or social turmoil, existing and prospective customers may further reduce their design budgets or delay implementation of our products, which could harm our business and operating results.

          In addition, the markets for semiconductor products are cyclical. In recent years, most countries have experienced significant economic difficulties. These difficulties triggered a significant downturn in the semiconductor market, resulting in reduced budgets for chip design tools. In addition, the electronics industry has historically been subject to seasonal and cyclical fluctuations in demand for its products, and this trend may continue in the future. These industry downturns have been, and may continue to be, characterized by diminished product demand, excess manufacturing capacity and subsequent erosion of average selling prices. As a result, our future operating results may reflect substantial fluctuations from period to period as a consequence of these industry patterns, general economic conditions affecting the timing of orders from customers and other factors. Any negative factors affecting the semiconductor industry, including the downturns described here, could significantly harm our business, financial condition and results of operations.

19


We have a history of losses and an accumulated deficit of approximately $80.8 million as of March 31, 2005. If we do not generate sufficient net revenue in the future to achieve or sustain profitability, our stock price could decline.

          We have incurred significant net losses since our inception, including losses of $1.8 million for the three months ended March 31, 2005, $8.4 million for the year ended December 31, 2004 and $12.0 million for the year ended December 31, 2003. At March 31, 2005, we had an accumulated deficit of approximately $80.8 million.  We expect our future revenues to be impacted by our long sales cycle and our revenue recognition policies, and we expect to continue to invest in our research and development projects as well as service operations required to support our business development activities. Because we expect to continue to invest in product and business development, our expenditures could continue to outpace growth in our revenues, if any, thus preventing us from achieving and maintaining profitability. To achieve and maintain profitability, we will need to generate and sustain substantially higher revenues while maintaining reasonable cost and expense levels. If we fail to achieve profitability within the time frame expected by securities analysts or investors and our cash balances continue to decline, the market price of our common stock will likely decline. We may not achieve profitability if our revenues do not increase or if they increase more slowly than we expect. In addition, our operating expenses are largely fixed, and any shortfall in anticipated revenues in any given period could harm our operating results.

The sales and implementation cycles for our products are typically long and unpredictable, taking from six months to two years for sales and an additional six to twelve months for implementation. As a result, we may have difficulty predicting future revenues and our revenues and operating results may fluctuate significantly, which could cause our stock price to fluctuate.

          Our sales cycle has ranged from six months to two years and our customers’ implementation cycle has been approximately an additional six to twelve months.  We believe that convincing a potential customer to integrate our technology into an integrated circuit at the design stage, which we refer to as a design win, is critical to retaining existing customers and to obtaining new customers. However, acceptance of our embedded test technology generally involves a significant commitment of resources by prospective customers and a fundamental change in their method of designing and testing integrated circuits. Many of our potential customers are large enterprises that generally do not adopt new design methodologies quickly. Also, we may have limited access to the key decision-makers of potential customers who can authorize the adoption of our technology. As a result, the period between our initial contact with a potential customer and the sale of our products to that customer, if any, is often lengthy and may include delays associated with our customers’ budgeting and approval processes, as well as a substantial investment of our time and resources. We have incurred high customer engagement and support costs, including sales commissions, and the failure to manage these costs could harm our operating results.

          If we fail to achieve a design win with a potential customer early in a given product cycle, it is unlikely that the potential customer will become a customer before its next product cycle, if at all. Because of the length of our sales cycle, our failure to achieve design wins could have a material and prolonged adverse effect on our sales and revenue growth. Our revenue streams may fluctuate significantly due to the length of our sales cycle, which may make our future revenues difficult to project and may cause our stock price to fluctuate.

Fluctuations in our revenues and operating results could cause the market price of our common stock to decline.

          Our revenues and operating results have fluctuated significantly from quarter to quarter in the past and may do so in the future, which could cause the market price of our common stock to decline. Accordingly, quarter-to-quarter comparisons of our results of operations may not be an indication of our future performance. In future periods, our revenues and results of operations may be below the estimates of public market analysts and investors. This discrepancy could cause the market price of our common stock to decline.

          Fluctuations in our revenues and operating results may be caused by:

 

timing, terms and conditions of customer agreements;

 

 

 

 

customers placing orders at the end of the quarter;

20


 

the mix of our license and services revenues;

 

 

 

 

timing of sales commission expenses and the recognition of license revenues from related customer agreements;

 

 

 

 

changes in our and our customers’ development schedules and levels of expenditures on research and development;

 

 

 

 

industry patterns and changes or cyclical and seasonal fluctuations in the markets we target;

 

 

 

 

timing and completion of milestones under customer agreements;

 

 

 

 

timing and acceptance of new technologies, product releases or enhancements by us, our competitors or our customers; and

 

 

 

 

market and general economic conditions.

          Delays or deferrals in purchasing decisions by our customers may increase as we develop new or enhanced products. Our current dependence on a small number of customers increases the revenue impact of each customer’s actions relative to these factors. Our expense levels are based, in large part, on our expectations regarding future revenues, and as a result net income for any quarterly period in which material customer agreements are delayed could vary significantly from our budget projections.

The accounting rules regarding revenue recognition may cause fluctuations in our revenues independent of our order position.

          The accounting rules we are required to follow require us to recognize revenues only when certain criteria are met. As a result, for a given quarter it is possible for us to fall short in our revenues and/or earnings estimates even though total orders are according to our plan or, conversely, to meet our revenue and/or earnings estimates even though total orders fall short of our plan, due to revenues produced by deferred revenues. Orders for software support and consulting services yield revenues over multiple quarters, often rather than at the time of sale. The specific terms agreed to with a customer and/or any changes to the rules interpreting such terms may have the effect of requiring deferral of product revenues in whole or in part or, alternatively, of requiring us to accelerate the recognition of such revenues for products to be used over multiple years.

Intense competition in the semiconductor and systems industries, particularly in the design and test of semiconductors, could prevent us from increasing or sustaining our revenues and prevent us from achieving or sustaining profitability.

          The semiconductor and systems industries are extremely competitive and characterized by rapidly changing technology. The market for embedded test solutions is still evolving, and we expect competition to become more intense in the future. Our current principal competitors in the design phase of product development include:

 

electronic design automation providers such as Cadence Design Systems, Inc., Magma Design Automation Inc., Mentor Graphics Corporation and Synopsys, Inc., all of which offer basic built-in self-test capability;

 

 

 

 

smaller test tool providers;

 

 

 

 

potential customers that develop test solutions internally; and

 

 

 

 

integrated device manufacturers, such as International Business Machines Corporation, that use their own test solutions in chips manufactured for and sold to others.

          Our embedded test technology also has the potential to impact the automated test equipment market, which may place us in competition with traditional hardware tester manufacturers such as Advantest Corporation, Agilent Technologies, Inc., Credence Systems Corporation, Inovys Corporation, LTX Corporation and Teradyne, Inc.  As embedded test becomes adopted more widely in the market, any of these automated test equipment companies, or others, may offer their own embedded test solutions. Some of our competitors in electronic design automation and external test equipment businesses are significantly larger than we are and have greater financial resources, greater name recognition and longer operating histories than we have.  Some of our competitors offer a more comprehensive range of products covering the entire design flow and complete external test flow, and they may be able to respond more quickly or adjust prices more effectively to take advantage of new opportunities or customer requirements.

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In addition, all of the tester manufacturers listed above participate in our LVReady partner program through which our embedded test access software is integrated into their test platform, which may provide them with additional insight into our business and technology.  Increased competition in the semiconductor industry could result in pricing pressures, reduced sales, reduced margins or failure to achieve or maintain widespread market acceptance, any of which could prevent us from increasing or sustaining our revenues and achieving or sustaining profitability.

Our target markets are comprised of a limited number of customers. If we fail to obtain or retain customer relationships, our revenues could decline.

          We derive a significant portion of our revenues from a relatively small number of customers. Three customers accounted for approximately 23%, 15% and 13% of total revenues in the first quarter of 2005, respectively. Five customers accounted for approximately 55% of total revenues in 2004, of which two customers accounted for 20% and 17%, respectively. We anticipate that we will continue to rely on a limited number of customers for a substantial portion of our future revenues and we must obtain additional large orders from customers on an ongoing basis to increase our revenues and grow our business. In addition, the loss of any significant or well-known customer could harm our operating results or our reputation. In particular, a loss of a significant customer could cause fluctuations in our results of operations because our expenses are fixed in the short term, it takes us a long time to replace customers and, because of required methods of revenue recognition, any offsetting license revenues may need to be recognized over a period of time.

Our products incorporate technology licensed from third parties, including Nortel Networks. If any of these licenses are terminated, our ability to develop and license our products could be delayed or reduced.

          We use technology, including software, which we license from third parties. In particular, we license technology from Nortel Networks under two patents for testing embedded memories and digital systems, and we use the Nortel technology in our embedded test technology. Our license agreement with Nortel may be terminated if we materially violate the terms of the agreement, if a competitor of Nortel acquires a significant percentage of our common stock without first obtaining Nortel’s consent or if we bring patent infringement proceedings against Nortel under any patent embodied in, or acquired as a result of access to, the technology we license from Nortel. If we do not maintain our existing third party technology licenses or enter into licenses for alternative technologies, we could be required to cease or delay product shipments while we seek to develop alternative technologies.

We depend on third parties to provide electronic design automation software that is compatible with our solution. If these third parties do not continue to provide compatible design products, we would need to develop alternatives, which could delay product introductions and cause our revenues and operating results to decline.

          Our customers depend on electronic design automation software to design their products using our solution. We depend on the same software to develop our products. Although we have established relationships with a variety of electronic design automation vendors to gain access to this software and to assure compatibility, these relationships may be terminated with limited notice. If any of these relationships were terminated and we were unable to obtain alternative software in a timely manner, our customers could be unable to use our solution. In addition, we could experience a significant increase in development costs, our development process could take longer, product introductions could be delayed and our revenues and operating results could decline.

If automated test equipment companies are unwilling to work with us to make our technology compatible with theirs, we may need to pursue alternatives, which could increase the time it takes us to bring our solution to market and decrease customer acceptance of our technology.

          Although we are presently working with a number of automated test equipment companies to achieve optimal compatibility of our technologies, these companies may elect not to work with us in the future. If automated test equipment companies are unwilling to incorporate modifications into their equipment and operating systems to allow them to work with our technology, we may need to seek alternatives. These alternatives might not provide optimal levels of test function, and pursuing these alternatives could increase the time and expense it takes us to bring our technology to market, either of which could decrease customer acceptance of our technology and cause our revenues and margins to decline.

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Our future success will depend on our ability to keep pace with rapid technological advancements in the semiconductor industry. If we fail to develop and introduce new products and enhancements on a timely basis, our ability to attract and retain customers could be impaired, which would cause our operating results to decline.

          The semiconductor industry is characterized by rapidly changing technology, evolving industry standards, rapid changes in customer requirements, frequent product introductions and ongoing demands for greater speed and functionality. We must continually design, develop and introduce new products with improved features to be competitive. Our products may not achieve market acceptance or adequately address the changing needs of the marketplace, and we may not be successful in developing and marketing new products or enhancements to our existing products on a timely basis. The introduction of products embodying new technologies, the emergence of new industry standards or changes in customer requirements could render our existing products obsolete and unmarketable. We may not have the financial resources necessary to fund future innovations. If we are unable, for technical, legal, financial or other reasons, to respond in a timely manner to changing market conditions or customer requirements, our business and operating results could be seriously harmed.

Future changes in financial accounting standards, including pronouncements and interpretations of accounting pronouncements on software revenue recognition and stock-based compensation, may cause adverse unexpected revenue fluctuations and affect our reported results of operations.

          A change in accounting policies can have a significant effect on our reported results and may even affect our reporting of transactions completed before a change is announced. In particular, new pronouncements and varying interpretations of pronouncements on software revenue recognition and stock-based compensation have occurred with frequency, may occur in the future and could impact our revenues and results of operations. Required changes in our methods of revenue recognition could result in deferral of revenues recognized in current periods to subsequent periods or accelerated recognition of deferred revenues to current periods, each of which could cause shortfalls in meeting the expectations of investors and securities analysts. Our stock price could decline as a result of any shortfall.

          For example, we expect the adoption of the FASB’s recently issued SFAS 123(R), which requires compensation costs relating to share-based payment transactions be recognized in financial statements, will have a material adverse impact on our results of operations and loss per share.

          Accounting policies affecting many other aspects of our business, including rules relating to revenue recognition, purchase accounting for business combinations and employee stock option grants have recently been revised or are under review. Changes to those rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.

While we believe that we currently have adequate internal controls over financial reporting, we are exposed to risks from recent legislation requiring companies to evaluate those internal controls.

          Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal control structure and procedures for financial reporting. We have an ongoing program to perform the system and process evaluation and testing necessary to comply with these requirements. This legislation is relatively new and neither companies nor accounting firms have significant experience in complying with its requirements. As a result, we expect to incur increased expense and to devote additional management resources to Section 404 compliance. In the event our chief executive officer, chief financial officer or independent registered public accounting firm determine that our internal controls over financial reporting are not effective as defined under Section 404, investor perceptions of our company may be adversely affected and could cause a decline in the market price of our stock.

Compliance with changing regulation of corporate governance and public disclosure may result in additional costs.

          Changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and recent SEC and NASDAQ rules and regulations are creating new duties and requirements for us and our executives, directors, attorneys and independent accountants.  In order to comply with these new rules, we will have to incur additional costs for personnel and use additional outside legal, accounting and advisory

23


services, which will increase our operating expenses.  Management time associated with these compliance efforts necessarily reduces time available for other operating activities, which could adversely affect operating results. To date, our costs to comply with these rules have not been significant; however, we cannot predict or estimate the amount of future additional costs we may incur or the timing of such costs.

Our embedded test products may have errors or defects that users identify after deployment, which could harm our reputation and our business.

          Our products may contain undetected errors when first introduced or when new versions or enhancements are released. We have from time to time found errors in versions of our embedded test products, and we may find errors in our products in the future. The occurrence of errors could cause sales of our products to decline, divert the attention of management and engineering personnel from our product development efforts and cause significant customer relations problems. Customer relations problems could damage our reputation, hinder market acceptance of our products and result in loss of future revenues.

We must continually attract and retain engineering personnel, or we will be unable to execute our business strategy.

          Our strategy for encouraging the adoption of our technology requires that we employ highly skilled engineers to develop our products and work with our customers.  In the past, we have experienced difficulty in hiring and retaining highly skilled engineers with appropriate qualifications to support our business.  As a result, our future success depends in part on our ability to identify, attract, retain and motivate qualified engineering personnel.  Competition for qualified engineers is intense, especially in the Silicon Valley where our headquarters are located.  If we lose the services of a significant number of our engineers and we cannot hire and integrate additional engineers, it could disrupt our ability to develop our products and implement our business strategy.

We may be unable to replace the technical, sales, marketing and managerial contributions of key individuals.

          We depend on our senior executives, and our research and development, sales and marketing personnel, who are critical to our business.  We do not have long-term employment agreements with our key employees, and we only maintain a key person life insurance policy on our Chairman, which expires in June 2005.  If we lose the services of any of these key executives, our product development processes and sales efforts could be slowed.  We may also incur increased operating expenses and be required to divert the attention of other senior executives to search for their replacements. The integration of any executives or new personnel could disrupt our ongoing operations.

If we fail to protect our intellectual property rights, competitors may be able to use our technologies, which could weaken our competitive position, reduce our revenues or increase our costs.

          Our success and ability to compete depend largely upon the protection of our proprietary technology. We rely on a combination of patent, copyright, trademark and trade secret laws, confidentiality procedures and licensing arrangements to establish and protect our proprietary rights. Our pending patent applications may not result in issued patents, and our existing and future patents may not be sufficiently broad to protect our proprietary technologies. Policing unauthorized use of our products is difficult and we cannot be certain that the steps we have taken will prevent the misappropriation or unauthorized use of our technologies, particularly in foreign countries where the laws may not protect our proprietary rights as fully as U.S. laws. Any patents we obtain or license may not be adequate to protect our proprietary rights. Our competitors may independently develop similar technology, duplicate our products or design around any patents issued to us or our other intellectual property rights.

          Litigation may be necessary to enforce our intellectual property rights or to determine the validity or scope of the proprietary rights of others. As a result of any such litigation, we could lose our proprietary rights and incur substantial unexpected operating costs. We may need to take legal action to enforce our proprietary rights in the future. Any action we take to protect our intellectual property rights could be costly and could absorb significant management time and attention. In addition, failure to adequately protect our trademark rights could impair our brand identity and our ability to compete effectively.

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Any dispute involving our patents or other intellectual property could include our industry partners and customers, which could trigger our indemnification obligations to them and result in substantial expense to us.

          In any dispute involving our patents or other intellectual property, our licensees could also become the target of litigation. This could trigger technical support and indemnification obligations in some of our license agreements which could result in substantial expenses. In addition to the time and expense required for us to support or indemnify our licensees, any such litigation could severely disrupt or shut down the business of our licensees, which in turn could hurt our relations with our customers and cause our revenues to decrease.

Failure to obtain export licenses could harm our business.

          We must comply with U.S. Department of Commerce regulations in shipping our software and hardware products and other technologies outside the United States.  Although we have not had any significant difficulty complying with these regulations to date, any significant future difficulty in complying could harm our business, operating results and financial condition.

We have limited control over third-party representatives who market, sell and support our products in foreign markets. Loss of these relationships could decrease our revenues and harm our business.

          We offer our products and services for sale through distributors and sales representatives in China, Israel, Korea, Taiwan and Germany. We anticipate that sales in these markets will account for a portion of our total revenues in future periods.  During 2004, we appointed a new distributor in Germany and in 2005 we appointed a sales representative in Israel.  Our third-party representatives are not obligated to continue selling our products, and they may terminate their arrangements with limited prior notice. Growing our relationship with this new distributor and sales representative, or establishing alternative distribution channels in these markets could consume substantial management time and resources, decrease our revenues and increase our expenses.

We face business, political and economic risks because a portion of our revenues and operations are outside of the United States.

          International revenues accounted for 23% of our total revenues for the quarter ended March 31, 2005 and 22% of our total revenues for the year ended December 31, 2004.  In addition to our international sales, we have operations in Canada, Japan, the United Kingdom and India.  Our success depends upon continued expansion of our international operations, and we expect that international revenues will continue to be an important component of our total future revenues. Our international business involves a number of risks, including:

 

our ability to adapt our products to foreign design methods and practices;

 

 

 

 

the uncertainty of international orders due to typically lengthy international selling cycles;

 

 

 

 

cultural differences in the conduct of business;

 

 

 

 

difficulty in attracting qualified personnel;

 

 

 

 

managing foreign branch offices and subsidiaries;

 

 

 

 

longer payment cycles for and greater difficulty collecting accounts receivable;

 

 

 

 

unexpected changes in regulatory requirements, royalties and withholding taxes that restrict the repatriation of earnings;

 

 

 

 

tariffs and other trade barriers;

 

 

 

 

the burden of complying with a wide variety of foreign laws; and

 

 

 

 

political, economic, health or military conditions associated with worldwide conflicts and events.

          As we increase our direct selling activities in Japan, a portion of our international revenues is denominated in Japanese yen, which is subject to exposure from movements in foreign currency exchange rates. In addition, some of our international revenues are denominated in U.S. dollars, creating a risk that fluctuation in currency exchange rates will make our prices uncompetitive. To the extent that profit is generated or losses are incurred in foreign countries, our effective income tax rate may be significantly affected. Any of these factors could significantly harm our future international sales and, consequently, our revenues and overall results of operations and business and financial condition.

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We may be unable to consummate future potential acquisitions or investments or successfully integrate acquired businesses or investments or foreign operations with our business, which may disrupt our business, divert management’s attention and slow our ability to expand the range of our proprietary technologies and products.

          We intend to continue to expand the range of our proprietary technologies and products, and we may acquire or make investments in additional complementary businesses, technologies or products, if appropriate opportunities arise.  For example, we recently completed the acquisition of SiVerion, Inc.  We may be unable to identify suitable acquisition or investment candidates at reasonable prices or on reasonable terms, or consummate future acquisitions or investments, each of which could slow our growth strategy. Our recent acquisition of SiVerion, Inc. and any future acquisitions may involve risks such as the following:

 

we may not achieve the anticipated benefits of the acquisitions;

 

 

 

 

our acquisition and integration costs may be higher than we anticipated and may cause our quarterly and annual operating results to fluctuate;

 

 

 

 

we may be unable to retain key employees, such as management, technical or sales personnel, of the acquired businesses;

 

 

 

 

we may experience difficulty and expense in assimilating the operations and personnel of the acquired businesses, which could be further affected by the acquired businesses not being located near our existing sites;

 

 

 

 

we may incur amortization or impairment expenses if an acquisition results in significant goodwill or other intangible assets;

 

 

 

 

we may be unable to complete the development and application of the acquired technology or products or integrate the technology or products with our own;

 

 

 

 

we may be exposed to unknown liabilities of acquired companies;

 

 

 

 

we may experience difficulties in establishing and maintaining uniform standards, controls, procedures and policies;

 

 

 

 

our relationships with key customers of acquired businesses may be impaired, due to changes in management and ownership of the acquired businesses; or

 

 

 

 

our stockholders may be diluted if we pay for the acquisition with equity securities.

          These factors could disrupt our ongoing business, distract our management and employees and increase our expenses or otherwise harm our operating results.

Intellectual property litigation, which is common in our industry, could be costly, harm our reputation, limit our ability to license or sell our proprietary technologies or products and divert the attention of management and technical personnel.

          The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights. While we have not received formal notice of any infringement of the rights of any third party, questions of infringement in the semiconductor field involve highly technical and subjective analyses. Litigation may be necessary in the future to enforce any patents we may receive and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity, and we may not prevail in any future litigation. Any such litigation, whether or not determined in our favor or settled, could be costly, could harm our reputation and could divert the efforts and attention of our management and technical personnel from normal business operations. Adverse determinations in litigation could result in the loss of our proprietary rights, subject us to significant liabilities, require us to seek licenses from third parties or prevent us from licensing our technology or selling our products, any of which could harm our business.

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Our stock price may decline significantly because of stock market fluctuations that affect the prices of technology stocks. A decline in our stock price could result in securities class action litigation against us that could divert management’s attention and harm our business.

          The stock market has experienced significant price and trading volume fluctuations that have adversely affected the market prices of common stock of technology companies. These broad market fluctuations may reduce the market price of our common stock. In the past, securities class action litigation has often been brought against a company after periods of volatility in the market price of securities. In the future, we may be a target of similar litigation. Securities litigation could result in substantial costs and divert our management’s attention and resources, which in turn could harm our ability to execute our business plan.

If investors price our common stock below $1.00 per share, our stock may fail to meet the requirements for continued listing on The Nasdaq National Market, in which case the price and liquidity of our common stock may decline.

          The Nasdaq Stock Market has quantitative maintenance criteria for the continued listing of common stock on The Nasdaq National Market, including maintaining a minimum closing bid of $1.00 per share. As of March 31, 2005, we were in compliance with all Nasdaq National Market listing requirements. However, our stock price has declined significantly over the past year and experienced volatility. If the closing bid price of our common stock price falls and remains below $1.00 per share for 30 consecutive days, our common stock may not remain listed on The Nasdaq National Market. If we fail to maintain continued listing on The Nasdaq National Market and must move to a market with less liquidity, our financial condition could be harmed and our stock price would likely decline. If we are delisted, it could have a material adverse effect on the market price of, and the liquidity of the trading market for, our common stock.

Our ability to raise capital in the future may be limited and our failure to raise capital when needed could prevent us from growing.

          We believe that our existing cash resources and available debt financing will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, the timing and amount of our working capital and capital expenditure requirements may vary significantly depending on numerous factors, including:

 

the level and timing of license and service revenues;

 

 

 

 

the costs and timing of expansion of product development efforts and the success of these development efforts;

 

 

 

 

the extent to which our existing and new products gain market acceptance;

 

 

 

 

the costs and timing of expansion of sales and marketing activities;

 

 

 

 

competing technological and marketing developments;

 

 

 

 

the extent of international operations;

 

 

 

 

the need to adapt to changing technologies and technical requirements;

 

 

 

 

the costs involved in maintaining and enforcing patent claims and other intellectual property rights;

 

 

 

 

the existence of opportunities for expansion and for acquisitions of, investments in, complementary businesses, technologies or product lines; and

 

 

 

 

access to and availability of sufficient management, technical, marketing and financial personnel.

          If our capital resources are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity securities or debt securities or obtain debt financing. The sale of additional equity securities or debt securities would result in additional dilution to our stockholders. Additional debt would result in increased expenses and could result in covenants that would restrict our operations. If adequate funds are not available or are not available on acceptable terms, this would significantly limit our ability to hire, train or retain employees, support our expansion, take advantage of unanticipated opportunities such as acquisitions of businesses or technologies, develop or enhance products, or respond to competitive pressures.

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ITEM 3:

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Fluctuations

          In the normal course of business, we are exposed to market risk from the effect of foreign exchange rate fluctuations on the U.S. dollar value from our foreign operations. A significant portion of our revenues has been denominated in U.S. dollars; however, as we increase our direct sales activities in Japan, an increasing portion of our revenues may be denominated in the Japanese yen. In addition, the operating expenses incurred by our foreign subsidiaries are denominated in local currencies. Accordingly, we are subject to exposure from movements in foreign currency exchange rates.  To date, the effect of changes in foreign currency exchange rates on our financial position and operating results has not been material. We currently do not use financial instruments to hedge foreign currency risks. We intend to assess the use of financial instruments to hedge currency exposures on an ongoing basis.

Interest Rate Risk

          Our exposure to market risk for changes in interest rates relate primarily to our investment portfolio. We have not used derivative financial instruments in our investment portfolio. We invest our excess cash in high-quality corporate issuers and in debt instruments of the U.S. Government and, by policy, limit the amount of credit exposure to any one issuer. As stated in our policy, we are averse to principal loss and seek to preserve our invested funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in high credit quality securities and by positioning our portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. The portfolio includes only investments with active secondary or resale markets to ensure portfolio liquidity.

          Investments in both fixed and floating rate interest-earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to rising interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates.  A hypothetical 100 basis point increase in interest rates would result in approximately a $0.1 million decline in the fair value of our available-for-sale securities at March 31, 2005.

          Investments are classified as available for sale and cost of securities sold is based on the specific identification method. At March 31, 2005, we had Certificates of Deposit, short-term U.S. government securities and long-term U.S. government securities of $1.4 million, $16.6 million and $1.2 million, respectively. 

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ITEM 4:

CONTROLS AND PROCEDURES

          (a) Evaluation of disclosure controls and procedures. We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met.  Our disclosure controls and procedures have been designed to meet, and management believes that they meet, reasonable assurance standards.  Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

          Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that, subject to the limitations noted above, our disclosure controls and procedures were effective to ensure that material information relating to us, including our consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.

          (b) Changes in internal controls. There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified in connection with the evaluation described in Item 4(a) above that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

ITEM: 6    EXHIBITS

(a)

  Exhibits.

 

 

 


 

 

 

10.2.1

 

Amendment dated February 18, 2005 to the amended and Restated 2000 Employee Stock Purchase Plan.

 

 

 

 

 

10.13

 

2005 Bonus Plan.

 

 

 

 

 

31.1

 

Rule 13a-14(a) Certification of Chief Executive Officer.

 

 

 

 

 

31.2

 

Rule 13a-14(a) Certification of Chief Financial Officer.

 

 

 

 

 

32.1*

 

Statement of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).

 

 

 

 

 

32.2*

 

Statement of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).



*

In accordance with Item 601(b) (32) (ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purpose of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

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SIGNATURE

           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.

          Dated: May 13, 2005

 

LOGICVISION, INC.

 

(Registrant)

 

 

 

 

By:

/s/ JAMES T. HEALY

 

 


 

 

James T. Healy
President, Chief Executive Officer and Director
(Principal Executive Officer)

 

 

 

 

By:

/s/ BRUCE M. JAFFE

 

 


 

 

Bruce M. Jaffe
Vice President of Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)

31 


EXHIBIT INDEX

Exhibit
 Number

 

Description of Exhibit


 


10.2.1

 

Amendment dated February 18, 2005 to the amended and Restated 2000 Employee Stock Purchase Plan.

 

 

 

10.13

 

2005 Bonus Plan.

 

 

 

31.1

 

Rule 13a-14(a) Certification of Chief Executive Officer.

 

 

 

31.2

 

Rule 13a-14(a) Certification of Chief Financial Officer.

 

 

 

32.1*

 

Statement of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).

 

 

 

32.2*

 

Statement of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).

 


*

In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purpose of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

32