Attached files
| file | filename |
|---|---|
| EX-23.1 - AUDITORS' CONSENT - MAGMA DESIGN AUTOMATION INC | lavaexhibit231.htm |
| EX-31.3 - CERTIFICATION - MAGMA DESIGN AUTOMATION INC | lavaexhibit313.htm |
| EX-31.4 - CERTIFICATION - MAGMA DESIGN AUTOMATION INC | lavaexhibit314.htm |
| EX-32.3 - CERTIFICATION - MAGMA DESIGN AUTOMATION INC | lavaexhibit323.htm |
| EX-32.4 - CERTIFICATION - MAGMA DESIGN AUTOMATION INC | lavaexhibit324.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
S ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May1, 2011
or
£ 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.: 0-33213
MAGMA DESIGN AUTOMATION, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE | 77-0454924 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1650 Technology Drive
San Jose, California 95110
(408) 565-7500
(Address, including zip code, and telephone number, including area code, of the registrant's principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class: | Name of Each Exchange on Which Registered: |
COMMON STOCK, par value $0.0001 per share | The Nasdaq Stock Market LLC (Nasdaq Global Market) |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes £ No S
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes £ No S
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes S No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes £ No £
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. S
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer £ | Accelerated filer S |
Non-accelerated filer £ (Do not check if a smaller reporting company) | Smaller reporting company £ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes £ No S
The aggregate market value of the registrant's common stock held by non-affiliates of the registrant, based upon the closing sale price of the registrant's common stock on October 29, 2010, the last business day of the registrant's most recently completed second fiscal quarter, as reported on the Nasdaq Global Market, was $279,920,702. This calculation does not reflect a determination that certain persons are affiliates of the registrant for any other purpose.
As of July 12 2011, the registrant had outstanding 68,153,433 shares of Common Stock, $0.0001 par value.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III incorporates by reference certain information from the registrant's definitive proxy statement (the “Proxy Statement”) for the 2011 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days of the end of the 2011 fiscal year. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as part hereof.
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A (this “Amendment”) amends Magma Design Automation, Inc's (the “Company”) Annual Report on Form 10-K for the fiscal year ended May 1, 2011, originally filed on July 15, 2011 (the “Original Filing”). The Company is filing this Amendment solely to correct a clerical error on the Consolidated Statement of Stockholders' Equity (Deficit) and Comprehensive Income (Loss) on page 54 of the Original Filing. The Accumulated Other Comprehensive Income (Loss) balances as of May 2, 2010 and May 3, 2009 were incorrect due to a footing error. The Consolidated Statement of Stockholders' Equity (Deficit) and Comprehensive Income (Loss) in Item 8 has been revised solely to correct the error. In addition to the above correction we are also including updated certifications required by the filing of this amendment.
Except as described above, no other changes have been made to the Original Filing. This Amendment should be read in conjunction with the Original Filing and our filings made with the SEC subsequent to the Original Filing.
PART II
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
MAGMA DESIGN AUTOMATION, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements and Financial Statement Schedules
Page | |
Consolidated Financial Statements: | |
Supplementary Financial Data: | |
Financial Statement Schedules: | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Magma Design Automation, Inc.
We have audited the accompanying consolidated balance sheets of Magma Design Automation, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of May 1, 2011 and May 2, 2010, and the related consolidated statements of operations, stockholders' equity (deficit) and comprehensive income (loss), and cash flows for each of the three years in the period ended May 1, 2011. Our audits of the basic financial statements included the financial statement schedules listed in the index appearing under Item 15(a)(2). These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Magma Design Automation, Inc. and subsidiaries as of May 1, 2011 and May 2, 2010, and the results of their operations and their cash flows for each of the three years in the period ended May 1, 2011 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of May 1, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated July 14, 2011, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
/S/ GRANT THORNTON LLP
San Francisco, California
July 14, 2011
50
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Magma Design Automation, Inc.
We have audited Magma Design Automation, Inc. and subsidiaries' (a Delaware Corporation) internal control over financial reporting as of May 1, 2011, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Magma Design Automation, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on Magma Design Automation Inc.'s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Magma Design Automation, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of May 1, 2011, based on criteria established in Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Magma Design Automation, Inc. and subsidiaries as of May 1, 2011 and May 2, 2010 and the related consolidated statements of operations, stockholders' equity (deficit) and comprehensive income (loss), and cash flows for each of the three years in the period ended May 1, 2011. Our audits of the basic financial statements included the financial statement schedules listed in the index appearing under Item 15(a)(2). Our report dated July 14, 2011 expressed an unqualified opinion on those financial statements and financial statement schedules.
/S/ GRANT THORNTON LLP
San Francisco, California
July 14, 2011
51
MAGMA DESIGN AUTOMATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
May1, 2011 | May 2, 2010 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 47,088 | $ | 57,518 | |||
Restricted cash | — | 250 | |||||
Short-term investments, pledged as collateral for secured credit line | — | 16,837 | |||||
Accounts receivable, net including receivable from related parties $2,181 and $1,667 at May 1, 2011 and May 2, 2010 | 35,530 | 17,401 | |||||
Prepaid expenses and other current assets | 3,915 | 4,472 | |||||
Total current assets | 86,533 | 96,478 | |||||
Property and equipment, net | 6,066 | 5,979 | |||||
Intangible assets, net | 3,691 | 7,487 | |||||
Goodwill | 7,415 | 7,093 | |||||
Other assets | 2,767 | 5,086 | |||||
Total assets | $ | 106,472 | $ | 122,123 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 3,697 | $ | 2,220 | |||
Accrued expenses | 14,160 | 16,347 | |||||
Secured credit line | — | 11,162 | |||||
Current portion of term debt | 3,750 | 1,688 | |||||
Current portion of other long-term liabilities | 1,199 | 1,901 | |||||
Deferred revenue | 34,390 | 25,528 | |||||
Convertible notes, net of debt discount of $44 at May 2, 2010 | — | 23,206 | |||||
Total current liabilities | 57,196 | 82,052 | |||||
Convertible notes, including (premium) of ($145) and ($1,574) at May 1, 2011 and May 2, 2010, respectively | 3,395 | 28,263 | |||||
Long-term portion of term debt | 19,188 | 13,312 | |||||
Long-term tax liabilities | 1,703 | 1,856 | |||||
Other long-term liabilities | 1,270 | 922 | |||||
Total liabilities | 82,752 | 126,405 | |||||
Commitments and contingencies (Note 15) | |||||||
Stockholders' equity (deficit): | |||||||
Common stock (par value $0.0001, 150,000,000 shares authorized; 70,099,670 and 67,062,656 shares issued and outstanding, respectively, at May 1, 2011 and 55,025,286 and 51,988,272 shares issued and outstanding, respectively, at May 2, 2010) | 7 | 6 | |||||
Additional paid-in capital | 447,328 | 417,131 | |||||
Accumulated deficit | (387,087 | ) | (383,824 | ) | |||
Treasury stock at cost (3,037,014 shares at May 1, 2011 and May 2, 2010, respectively) | (32,615 | ) | (32,615 | ) | |||
Accumulated other comprehensive loss | (3,913 | ) | (4,980 | ) | |||
Total stockholders' equity (deficit) | 23,720 | (4,282 | ) | ||||
Total liabilities and stockholders' equity (deficit) | $ | 106,472 | $ | 122,123 | |||
52
MAGMA DESIGN AUTOMATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Fiscal Year Ended | |||||||||||
May1, 2011 | May 2, 2010 | May 3, 2009 | |||||||||
Revenue: | |||||||||||
Licenses | $ | 86,896 | $ | 62,225 | $ | 76,474 | |||||
Bundled licenses and services | 27,278 | 31,600 | 33,431 | ||||||||
Services | 25,112 | 29,252 | 37,052 | ||||||||
Total revenue | 139,286 | 123,077 | 146,957 | ||||||||
Cost of revenue: | |||||||||||
Licenses | 2,863 | 3,142 | 19,416 | ||||||||
Bundled licenses and services | 3,634 | 4,282 | 10,459 | ||||||||
Services | 12,946 | 13,129 | 18,454 | ||||||||
Total cost of revenue | 19,443 | 20,553 | 48,329 | ||||||||
Gross profit | 119,843 | 102,524 | 98,628 | ||||||||
Operating expenses: | |||||||||||
Research and development | 49,895 | 47,024 | 68,751 | ||||||||
Sales and marketing | 44,625 | 41,247 | 56,024 | ||||||||
General and administrative | 18,642 | 18,214 | 24,307 | ||||||||
Impairment of goodwill | — | — | 60,089 | ||||||||
Amortization of intangible assets | 1,055 | 1,134 | 2,994 | ||||||||
Restructuring charge | 1,200 | 2,730 | 10,661 | ||||||||
Total operating expenses | 115,417 | 110,349 | 222,826 | ||||||||
Operating income (loss) | 4,426 | (7,825 | ) | (124,198 | ) | ||||||
Other income (expense): | |||||||||||
Interest income | 137 | 256 | 637 | ||||||||
Interest and amortization of debt discount/ premium | (2,342 | ) | (4,397 | ) | (4,357 | ) | |||||
Valuation gain (loss), net | 38 | 404 | (442 | ) | |||||||
Loss on extinguishment of debt, notes due in 2014 | (2,093 | ) | — | — | |||||||
Inducement fees on conversion of notes due in 2014 | (2,256 | ) | — | — | |||||||
Other income (expense), net | (315 | ) | 1,486 | (118 | ) | ||||||
Other, net | (6,831 | ) | (2,251 | ) | (4,280 | ) | |||||
Net loss before income taxes | (2,405 | ) | (10,076 | ) | (128,478 | ) | |||||
Benefit from (provision for) income taxes | (857 | ) | 6,742 | (764 | ) | ||||||
Net loss | $ | (3,262 | ) | $ | (3,334 | ) | $ | (129,242 | ) | ||
Net loss per share, basic and diluted | $ | (0.05 | ) | $ | (0.07 | ) | $ | (2.89 | ) | ||
Shares used in per share calculation, basic and diluted | 61,343 | 49,639 | 44,698 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
53
MAGMA DESIGN AUTOMATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except for shares)
The accompanying notes are an integral part of these consolidated financial statements.
Common Stock | Additional Paid-in Capital | Accumulated Deficit | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity (Deficit) | Comprehensive Loss | |||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||
BALANCES AT May 4, 2008 | 43,789,936 | $ | 5 | $ | 382,849 | $ | (251,244 | ) | (3,037,952 | ) | $ | (32,625 | ) | $ | (4,798 | ) | $ | 94,187 | |||||||
Issuance of common stock under stock incentive plans | 3,527,673 | — | 4,693 | — | 938 | 10 | — | 4,703 | |||||||||||||||||
Retirement of common stock | (76,470 | ) | — | (1,342 | ) | — | — | — | — | (1,342 | ) | ||||||||||||||
Repurchase of common stock | (18,291 | ) | — | (10 | ) | — | — | — | — | (10 | ) | ||||||||||||||
Stock-based compensation expense, net of forfeitures | — | — | 18,239 | — | — | — | — | 18,239 | |||||||||||||||||
Stock option exchange | — | — | 913 | — | — | — | — | 913 | |||||||||||||||||
Effect of fair value election of 2% 2010 Notes exchange | — | — | — | (1,490 | ) | — | — | — | (1,490 | ) | |||||||||||||||
Reissuance of treasury stock | — | — | — | (6 | ) | — | — | — | (6 | ) | |||||||||||||||
Comprehensive loss: | |||||||||||||||||||||||||
Net loss | — | — | — | (127,750 | ) | — | — | — | (127,750 | ) | $ | (127,750 | ) | ||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | — | (1,558 | ) | (1,558 | ) | (1,558 | ) | |||||||||||||
Net unrealized gain on investments | — | — | — | — | — | — | 1,003 | 1,003 | 1,003 | ||||||||||||||||
Other comprehensive loss | (555 | ) | |||||||||||||||||||||||
Total comprehensive loss | $ | (128,305 | ) | ||||||||||||||||||||||
BALANCES AT MAY 3, 2009 | 47,222,848 | $ | 5 | $ | 405,342 | $ | (380,490 | ) | (3,037,014 | ) | $ | (32,615 | ) | $ | (5,353 | ) | $ | (13,111 | ) | ||||||
Issuance of common stock under stock incentive plans | 4,784,117 | 1 | 2,628 | — | — | — | — | 2,629 | |||||||||||||||||
Retirement of common stock | (14,285 | ) | — | (1,654 | ) | — | — | — | — | (1,654 | ) | ||||||||||||||
Repurchase of common stock | (4,408 | ) | — | — | — | — | — | — | — | ||||||||||||||||
Stock-based compensation expense, net of forfeitures | — | — | 13,875 | — | — | — | — | 13,875 | |||||||||||||||||
Effect of fair value election of 2% 2010 Notes exchange | — | — | (3,060 | ) | — | — | — | — | (3,060 | ) | |||||||||||||||
Comprehensive loss: | |||||||||||||||||||||||||
Net loss | — | — | — | (3,334 | ) | — | — | — | (3,334 | ) | $ | (3,334 | ) | ||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | — | 373 | 373 | 373 | ||||||||||||||||
Other comprehensive income | 373 | ||||||||||||||||||||||||
Total comprehensive loss | $ | (2,961 | ) | ||||||||||||||||||||||
BALANCES AT MAY 2, 2010 | 51,988,272 | $ | 6 | $ | 417,131 | $ | (383,824 | ) | (3,037,014 | ) | $ | (32,615 | ) | $ | (4,980 | ) | $ | (4,282 | ) | ||||||
Issuance of common stock under stock incentive plans | 4,898,972 | 1 | 4,002 | — | — | — | — | 4,003 | |||||||||||||||||
Retirement of common stock | — | (2,261 | ) | — | — | — | — | (2,261 | ) | ||||||||||||||||
Repurchase of common stock | (1,318,475 | ) | (1 | ) | (5,273 | ) | — | — | — | — | (5,274 | ) | |||||||||||||
Stock-based compensation expense, net of forfeitures | — | — | 13,065 | — | — | — | — | 13,065 | |||||||||||||||||
Conversion of 2014 Notes | 11,493,887 | 1 | 20,664 | — | — | — | — | 20,665 | |||||||||||||||||
Comprehensive loss: | |||||||||||||||||||||||||
Net loss | — | — | — | (3,263 | ) | — | — | — | (3,263 | ) | $ | (3,262 | ) | ||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | — | 1,067 | 1,067 | 1,067 | ||||||||||||||||
Other comprehensive income | 1,067 | ||||||||||||||||||||||||
Total comprehensive loss | $ | (2,195 | ) | ||||||||||||||||||||||
BALANCES AT MAY 1, 2011 | 67,062,656 | $ | 7 | $ | 447,328 | $ | (387,087 | ) | (3,037,014 | ) | $ | (32,615 | ) | $ | (3,913 | ) | $ | 23,720 | |||||||
54
MAGMA DESIGN AUTOMATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal Year Ended | |||||||||||
May1, 2011 | May 2, 2010 | May 3, 2009 | |||||||||
Cash flows from operating activities: | |||||||||||
Net loss | $ | (3,262 | ) | $ | (3,334 | ) | $ | (129,242 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | |||||||||||
Depreciation | 4,538 | 6,278 | 8,633 | ||||||||
Amortization of intangible assets | 4,166 | 4,978 | 28,270 | ||||||||
Provision for doubtful accounts (net of recovery) | 143 | (174 | ) | 1,124 | |||||||
Amortization of debt discount and debt issuance costs | 572 | 1,976 | 2,562 | ||||||||
Amortization of debt premium | (310 | ) | (240 | ) | — | ||||||
Gain on extinguishment of convertible notes | — | (278 | ) | — | |||||||
Loss on extinguishment of convertible notes due 2014 | 2,093 | — | — | ||||||||
Inducement fee on conversion of convertible notes due 2014 | 2,256 | — | — | ||||||||
Loss on auction rate securities | — | 1,407 | 2,174 | ||||||||
Gain on purchased put option | (38 | ) | (1,811 | ) | (1,732 | ) | |||||
Loss (gain) on strategic equity investments | (791 | ) | (2,647 | ) | 290 | ||||||
Stock-based compensation | 13,093 | 13,876 | 19,151 | ||||||||
Restructuring charges | 1,200 | 2,730 | 10,661 | ||||||||
Impairment of goodwill | — | — | 60,089 | ||||||||
Other non-cash items | (46 | ) | 40 | (305 | ) | ||||||
Changes in operating assets and liabilities, net of effect of acquisitions: | |||||||||||
Accounts receivable | (17,291 | ) | 9,746 | 3,063 | |||||||
Prepaid expenses and other assets | 506 | 1,482 | 691 | ||||||||
Accounts payable | 1,457 | 1,008 | (2,044 | ) | |||||||
Accrued expenses | (3,353 | ) | (1,115 | ) | (19,308 | ) | |||||
Deferred revenue | 8,918 | (10,193 | ) | 9,899 | |||||||
Other long-term liabilities | (301 | ) | (7,725 | ) | 605 | ||||||
Net cash flows provided by (used in) operating activities | 13,550 | 16,004 | (5,419 | ) | |||||||
Cash flows from investing activities: | |||||||||||
Cash paid for business and asset acquisitions, net of cash acquired | (958 | ) | (1,943 | ) | (4,467 | ) | |||||
Purchase of property and equipment | (2,288 | ) | (1,885 | ) | (1,147 | ) | |||||
Proceeds from maturities and sale of available-for-sale investments | 16,875 | 1,475 | 5,000 | ||||||||
Sale (Purchase) of strategic investments | 1,602 | 4,633 | (1,801 | ) | |||||||
Restricted cash | — | 1,465 | — | ||||||||
Net cash flows provided by (used in) investing activities | 15,231 | 3,745 | (2,415 | ) | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
55
MAGMA DESIGN AUTOMATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS-(Continued)
(in thousands)
Fiscal Year Ended | |||||||||||
May 1, 2011 | May 2, 2010 | May 3, 2009 | |||||||||
Cash flows from financing activities: | |||||||||||
Proceeds from issuance of common stock, net | 4,005 | 2,243 | 3,789 | ||||||||
Repayment of 2% 2010 Notes | (23,250 | ) | — | — | |||||||
Exchange of 2% 2010 Notes | — | (26,689 | ) | — | |||||||
Issuance of 6% 2014 Notes | — | 26,689 | — | ||||||||
Issuance costs related to the 6% 2014 Notes | — | (1,852 | ) | — | |||||||
Issuance costs related to term debt | (112 | ) | (823 | ) | — | ||||||
Retirement of restricted stock | (2,261 | ) | (1,270 | ) | (1,351 | ) | |||||
Proceeds (repayments) of revolving note | — | (12,181 | ) | 12,181 | |||||||
Purchase of Treasury Stock | (5,273 | ) | — | — | |||||||
Proceeds from term debt | — | 15,000 | 12,550 | ||||||||
Repayment of lease obligations | (2,287 | ) | (2,564 | ) | (1,972 | ) | |||||
Repayment of convertible notes | — | — | (15,216 | ) | |||||||
Repayment of secured credit line | (11,162 | ) | (1,291 | ) | — | ||||||
Restricted cash | 250 | 7,500 | (9,215 | ) | |||||||
Payment of Inducement fees on conversion of 6% 2014 Notes | (2,279 | ) | — | — | |||||||
Proceeds from term loan | 7,938 | — | — | ||||||||
Repurchase 6% 2014 Notes | (4,839 | ) | — | — | |||||||
Net cash provided by (used in) financing activities | (39,270 | ) | 4,762 | 766 | |||||||
Effect of foreign currency translation changes on cash and cash equivalents | 59 | 119 | 327 | ||||||||
Net change in cash and cash equivalents | (10,430 | ) | 24,630 | (6,741 | ) | ||||||
Cash and cash equivalents, beginning of period | 57,518 | 32,888 | 39,629 | ||||||||
Cash and cash equivalents, end of period | $ | 47,088 | $ | 57,518 | $ | 32,888 | |||||
Supplemental disclosure of cash flow information | |||||||||||
Non-cash investing and financing activities: | |||||||||||
Conversion of 6% 2014 Notes to common stock | $ | 20,665 | $ | — | $ | — | |||||
Purchase of equipment under capital leases | $ | 2,149 | $ | 463 | $ | 2,297 | |||||
Purchase of software under installment payment agreement | $ | — | $ | — | $ | 909 | |||||
Issuance of common stock in connection with acquisitions | $ | — | $ | — | $ | 908 | |||||
Cash Paid for: | |||||||||||
Interest | $ | 1,330 | $ | 2,673 | $ | 1,793 | |||||
Income Taxes | $ | 827 | $ | 674 | $ | 1,942 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. | The Company and Summary of Significant Accounting Policies |
The Company
Magma Design Automation, Inc. (the “Company” or “Magma”), a Delaware corporation, was incorporated on April 1, 1997. The Company provides design and implementation, analysis and verification software that enables chip designers to reduce the time it takes to design and produce complex integrated circuits used in the communications, computing, consumer electronics, networking and semiconductor industries. The Company has licensed its products to major semiconductor companies and electronic products manufacturers in Asia, Europe and the United States.
Principles of consolidation
The consolidated financial statements of Magma include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Accounts denominated in foreign currency have been translated from their functional currency to the U.S. dollar.
Fiscal year end
The Company has a 52-53 week fiscal year ending on the Sunday closest to April 30. The Company's fiscal years consist of four quarters of 13 weeks each except for each fifth or sixth fiscal year, which includes one quarter with 14 weeks.
References in this Form 10-K to fiscal 2011 represent the 52 weeks ended May1, 2011, references to fiscal 2010 represent the 52 weeks ended May 2, 2010 and references to fiscal 2009 represent the 52 weeks ended May 3, 2009.
Reclassifications
Certain immaterial amounts in the fiscal 2010 and 2009 consolidated financial statements have been reclassified to conform to the fiscal 2011 presentation.
Use of estimates
Preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Management periodically evaluates such estimates and assumptions for continued reasonableness. Appropriate adjustments, if any, to the estimates used are made prospectively based upon such periodic evaluation. Actual results could differ from those estimates.
Revenue recognition
Revenue is comprised of licenses revenue, bundled licenses and services revenue, and services revenue. Licenses revenue consists of fees for time-based or perpetual licenses of the Company's software products. Bundled licenses and services revenue consists of fees for software licenses and post-contract customer support (“PCS”), where the Company does not have vendor specific objective evidence (“VSOE”) of fair value of PCS. Services revenue consists of fees for services, such as customer training, consulting and PCS associated with unbundled license arrangements. PCS sold with unbundled license arrangements is renewable after the initial PCS period expires, generally in one-year increments for a fixed percentage of the net license fee.
The Company recognizes revenue when all of the following criteria are met:
• | Persuasive evidence of an arrangement exists, |
• | Delivery has occurred, |
• | The vendor's fee is fixed or determinable, and |
• | Collectability is probable. |
The Company defines each of the four criteria above as follows:
Persuasive evidence of an arrangement exists. It is the Company's customary practice to have a written contract, which is signed by both the customer and Magma, or a purchase order from those customers that have previously negotiated an end-user license arrangement or volume purchase agreement, prior to recognizing revenue on an arrangement.
Delivery has occurred. The Company's software may be either physically or electronically delivered to its customers. For those products that are delivered physically, the Company's standard transfer terms are FOB shipping point. For an electronic delivery of software, delivery is considered to have occurred when the customer has been provided with the access codes that allow the customer to take immediate possession of the software on its hardware.
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If an arrangement includes undelivered products or services that are essential to the functionality of the delivered product, delivery is not considered to have occurred.
The fee is fixed or determinable. The fee customers pay for products is negotiated at the outset of an arrangement. If the license fees are a function of variable-pricing mechanisms such as the number of units distributed or copied by the customer, or the expected number of users in an arrangement, such fees are not recognized as revenue until such time as amounts become fixed or determinable. In addition, where the Company grants extended payment terms to a customer, the Company's fees are not considered to be fixed or determinable at the inception of the arrangement.
The Company considers arrangements to have extended payment terms where less than 100% of the license and initial period PCS fee is due within one year from the order date. For bundled agreements, revenue from such arrangements is recognized at the lesser of the aggregate of amounts due and payable or ratably. For unbundled agreements, revenue from such arrangements is recognized as amounts become due and payable. Payments received from customers in advance of revenue being recognized are presented as deferred revenue on the consolidated balance sheets.
Collectability is probable. Collectability is assessed on a customer-by-customer basis. The Company typically sells to customers for which there is a history of successful collection. New customers are subjected to a credit review process that evaluates the customers' financial positions and ultimately their ability to pay. If it is determined from the outset of an arrangement that collectability is not probable based upon the Company's credit review process, revenue is recognized on a cash receipts basis (as each payment is collected).
Multiple element arrangements. The Company allocates revenue on software arrangements involving multiple elements to each element based on the relative fair values of the elements. The Company's determination of fair value of each element in multiple element arrangements is based on VSOE. The Company limits its assessment of VSOE for each element to the price charged when the same element is sold separately or renewal rates of PCS.
The Company has analyzed all of the elements included in its multiple-element arrangements and determined that it has sufficient VSOE to allocate revenue to the PCS components of its perpetual and time-based license products and consulting. Accordingly, assuming all other revenue recognition criteria are met, revenue from unbundled licenses is recognized upon delivery using the residual method and revenue from PCS is recognized ratably over the PCS term. If an unbundled arrangement involves extended payment terms, revenue recognized using the residual method is limited to amounts due and payable. The Company recognizes revenue from bundled licenses ratably over the term of the license period, as the license and PCS portions of a bundled license are not sold separately. Revenue from bundled arrangements with extended payment terms is recognized as the lesser of amounts due and payable or ratable portion of the entire fee.
Certain of the Company's time-based licenses include the rights to specified and unspecified additional products. Revenue from contracts with the rights to unspecified additional software products is recognized ratably over the contract term. The Company recognizes revenue from time-based licenses that include both unspecified additional software products and extended payment terms that are not considered to be fixed or determinable in an amount that is the lesser of amounts due and payable or the ratable portion of the entire fee. Revenue from licenses that include a right to specified upgrades is deferred until the upgrades are delivered because there is no VSOE for the specific upgrade.
The Company provides design methodology assistance and specialized services relating to generalized turnkey design services. The Company has VSOE of fair value for consulting and training services. The Company's consulting services generally are not essential to the functionality of the software. The Company's software products are fully functional upon delivery and implementation does not require any significant modification or alteration. The Company's services to its customers often include assistance with product adoption and integration and specialized design methodology assistance. Customers typically purchase these professional services to facilitate the adoption of the Company's technology and dedicate personnel to participate in the services being performed, but they may also decide to use their own resources or appoint other professional service organizations to provide these services. Software products are billed separately and independently from consulting services, which are generally billed on a time-and-materials or milestone-achieved basis. The Company generally recognizes revenue from consulting and training services as the services are performed provided all other revenue recognition criteria are met.
Where consulting and training services are included in bundled arrangements that include time-based licenses and PCS where VSOE of PCS has not been established, the Company recognizes the entire arrangement fee ratably over the PCS service period, beginning with the delivery of the software, provided that all other revenue recognition criteria are met.
Cost of revenue
Cost of revenue includes cost of licenses revenue, cost of bundled licenses and services revenue and cost of services revenue. Cost of licenses revenue primarily consists of amortization of acquired developed technology and other intangible assets, software maintenance costs, royalties and allocated outside sale representative expenses. Cost of bundled licenses and services revenue includes allocation of license and service costs. Cost of services revenue primarily consists of personnel and related costs to provide product support, consulting services and training, as well as stock-based compensation, asset depreciation, and allocated outside
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sales representative expenses.
Commission expense
The Company recognizes sales commission expense as it is earned by its employees based on the terms of the respective commission plan. According to the terms of the commission plan, commissions for orders recorded are paid by the Company to employees over a period of time, typically over two to six quarters, depending on the size of the respective orders.
Unbilled receivables
Unbilled receivables represent revenue that has been recognized in the financial statements in advance of contractual invoicing to the customer. The Company typically generates invoices 45 days in advance of contractual due dates and will invoice all of the unbilled receivables within one year. In all cases, the revenue and unbilled receivables are for contracts that are non-cancelable, in which there are no contingencies and where the customer has taken delivery of both the software and the encryption key required to operate the software. Unbilled receivables were approximately $8.9 million at May1, 2011 and $2.9 million at May 2, 2010, and are included in accounts receivable on the consolidated balance sheets for each of these periods.
Research and development expenses
Research and development expenses are charged to expense as incurred.
Capitalized software
Software development costs incurred in the research and development of new software products and enhancements to existing software products are expensed as incurred until technological feasibility in the form of a working model has been established. The Company's software is usually available for general release concurrent with the establishment of technological feasibility, and accordingly no significant costs have been capitalized to date.
Software included in property and equipment includes amounts paid during the application development stage for purchased software and customization services, including conversion of old data and expenditures for software used internally.
Foreign currency
Generally, financial statements of foreign subsidiaries are measured using the local currency of the subsidiary as the functional currency. Accordingly, assets and liabilities of the subsidiaries are translated at current rates of exchange at the balance sheet date, and all revenue and expense items are translated using average exchange rates. At May 1, 2011 and May 2, 2010, cumulative foreign currency translation gains and loss are included in accumulated other comprehensive loss on the consolidated balance sheets.
Derivative Financial Instruments
The Company enters into foreign currency forward exchange contracts with financial institutions to minimize the impact of currency exchange rate movements on the Company's operating results. A foreign currency forward exchange contract acts as a hedge by increasing in value when underlying expenses increase due to changes in foreign exchange rates. Conversely, a foreign currency forward exchange contract decreases in value when underlying expenses decrease due to changes in foreign exchange rates.
The Company's forward contracts are not designated as accounting hedges and, therefore, the unrealized gains and losses are recognized in other expense, net, in the accompanying consolidated statements of operations, with the unrealized gains and losses of these forward contracts being recorded as accrued liabilities or other current assets. The Company does not use forward contracts for trading purposes.
The Company's forward contracts each have maturities of less than one year. The Company's foreign currency exchange contracts are valued using Level 2 inputs. Recognized gains or losses with respect to current hedging activities will ultimately depend on how accurately the Company is able to match the amount of currency forward exchange contracts with underlying currency exposures.
The notional fair value of outstanding forward exchange contracts was approximately $0 million and $2.1 million as of May1, 2011 and May 2, 2010, respectively. The Company had realized losses of $0.1 million, $0.6 million and $0.8 million on foreign currency forward exchange contracts for the years ended May1, 2011, May 2, 2010 and May 3, 2009, respectively. As of May1, 2011 and May 2, 2010 the Company recorded an unrealized loss of approximately $0 and $19,000, respectively, in other current liabilities.
Cash equivalent and short-term investments
Cash equivalents consist of highly liquid debt instruments purchased with an original or remaining maturity of three months or less. Investments with an original maturity at the time of purchase between three and twelve months are classified as short-term investments and investments that have a maturity date more than twelve months from the balance sheet date are classified
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as long-term investments.
These investments are typically classified as trading, and the gains or losses are recorded in other income or expense on the statement of operations or available-for-sale, and are recorded on the balance sheet at fair value as of the balance sheet date, with gains or losses considered to be temporary in nature reported as a component of other comprehensive income (loss) within the stockholders' equity on the consolidated balance sheets. As of May1, 2011, all the investments were held in cash and cash equivalents.
The Company has no short-term investments on its consolidated balance sheets as of May 1, 2011. The short-term investments on the consolidated balance sheets as of May 2, 2010 consisted of Auction Rate Securities's ("ARS") that are AAA rated and were secured by pools of student loans guaranteed by state regulated higher education agencies and reinsured by the U.S. Department of Education and the UBS purchased put option.
Restricted cash
The Company's total restricted cash balance was $0 million and $0.2 million as of May1, 2011 and May 2, 2010, respectively. The restricted cash as of May 2, 2010 related to cash held in a certificate of deposit account as security per an agreement with the Company's corporate credit card facility.
Concentration of credit risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, short-term investments and accounts receivable. The Company's cash, cash equivalents and short-term investments generally consist of government agencies, municipal obligations and money market funds with high-quality financial institutions. Accounts receivable are typically unsecured and are derived from license and service sales. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts.
At May1, 2011 and May 2, 2010, one customer accounted for 26% and 10%, respectively, of accounts receivable. The Company had no customers representing 10% or more of revenue for each of the fiscal years ended May1, 2011, May 2, 2010 and May 3, 2009.
Trade accounts receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is Magma's best estimate of the amount of probable credit losses in the Company's existing accounts receivable. The Company determines the allowance based on historical write-off experience, current market trends, and for larger accounts, the ability to pay outstanding balances. Magma continually reviews its allowances for collectability. Past due balances over 90 days and other higher risk amounts are reviewed individually for collectability. Account balances are charged off against the allowance after collection efforts have been exhausted and the potential for recovery is considered remote.
Goodwill
Magma conducts a goodwill impairment analysis annually and as necessary if changes in facts and circumstances indicate that the fair value of Magma's reporting unit may be less than its carrying amount. Magma's goodwill impairment test consists of two steps. Magma performed a goodwill impairment test at December 31, 2008 and recorded an impairment of goodwill of $60.1 million in fiscal 2009. In fiscal 2011 and 2010, Magma did not record any impairment of goodwill.
Intangibles
The Company's intangible assets include acquired intangibles, excluding goodwill. Acquired intangibles with definite lives are amortized on a straight-line basis over the remaining estimated economic life of the underlying products and technologies (original lives assigned are one to six years). The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Recoverability of an asset is measured by comparison of its carrying amount to the expected future undiscounted cash flows that the asset is expected to generate. If it is determined that an asset is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset exceeds its fair value. Based on the Company's review, no impairment existed as of May 1, 2011 and May 2, 2010.
Leases
Magma uses operating leases in its operations. For leases that contain rent escalations or rent concessions, Magma records the total rent payable during the lease term on a straight-line basis over the term of the lease. Magma records the difference between the rents paid and the straight-line rent as a deferred rent liability in the accompanying consolidated balance sheets.
Advertising
Magma expenses the costs of advertising as incurred. Advertising expense was approximately $0.1 million in fiscal 2011,
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$0.2 million in fiscal 2010 and $0.3 million in fiscal 2009, and is included in sales and marketing in the accompanying consolidated statements of operations.
Property and equipment
Property and equipment are recorded at cost. Depreciation of property and equipment is based on the straight-line method over the estimated useful lives of the related assets, generally three to five years. Leasehold improvements are amortized on the straight-line method over the shorter of the lease term or the estimated useful life of the asset. Maintenance and repair costs are charged to operations as incurred.
Property and equipment consisted of the following (in thousands):
May1, 2011 | May 2, 2010 | ||||||
Property and equipment: | |||||||
Computer equipment | $ | 32,282 | $ | 30,827 | |||
Software | 8,788 | 8,390 | |||||
Furniture and fixtures | 4,161 | 4,040 | |||||
Leasehold improvements | 5,856 | 5,701 | |||||
Total Property and equipment | 51,087 | 48,958 | |||||
Accumulated depreciation and amortization | (45,021 | ) | (42,979 | ) | |||
Net Property and equipment | $ | 6,066 | $ | 5,979 | |||
Depreciation expense was $4.5 million, $6.3 million and $8.6 million, respectively, for the years ended May1, 2011, May 2, 2010 and May 3, 2009.
The cost of equipment acquired under capital leases included in property and equipment was $7.4 million and $6.8 million respectively, as of May1, 2011 and May 2, 2010. Accumulated amortization of the leased equipment was $4.9 million, and $4.7 million, respectively, as of May1, 2011 and May 2, 2010. Amortization of assets reported under capital leases was included with depreciation expense.
Impairment of long-lived assets
The Company reviews long-lived assets, such as property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized for assets to be held and used when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Impairment, if any, is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Strategic investments
The Company invests in debt and equity of private companies as part of its business strategy. Magma classifies investments as cost method investments or equity method investments. The Company regularly reviews the assumptions underlying the operating performance and cash flow forecasts based on information provided by these investee companies. Assessing each investment's carrying value requires significant judgment by management as this financial information may be more limited, may not be as timely and may be less accurate than information available from publicly traded companies. If the Company determines, based on the best available evidence, that the carrying value of an investment is impaired, the Company writes down the carrying value of an investment to its estimated fair value and records the related write-down as a loss in equity investment, which is included in other income (expense), net in its consolidated statements of operations. No impairments have been recorded on the Company's strategic investments.
The investments are included in other long-term assets in the consolidated balance sheets. The carrying value of the Company's strategic investments was (in thousands):
May1, 2011 | May 2, 2010 | ||||||
Non-Marketable Securities - Application of Cost Method | $ | — | $ | 721 | |||
Non-Marketable Securities - Application of Equity Method | 531 | 622 | |||||
Total | $ | 531 | $ | 1,343 | |||
The carrying value of a cost method non-marketable investment is the amount paid for the investment unless it has been determined to be other than temporarily impaired, in which case the Company writes the investment down to its estimated fair
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value.
For equity method investments where the Company's ownership interest is between 20% to 50%, or where the Company can exercise significant influence on the investee's operating or financial decisions, the Company records its share of net equity income (loss) of the investee based on its proportionate ownership. The Company invested $0.8 million in Helic, Inc during fiscal 2009, bringing its ownership in Helic to 8%. One of the Company's executives is a member of the board of directors of Helic, which permits the Company to exercise significant influence on Helic's operating decisions. The investment in Helic is accounted as an equity investment.
During the third quarter of fiscal 2011, the Company sold its percentage interest in AutoESL Design, Inc. to Xilinx, Inc. for $1.9 million in cash at closing and $0.5 million in contingent proceeds. The contingent proceeds consist of an amount equal to 20% of the initial consideration to be held in escrow and released for payment 12 months from the date of the agreement, to secure the indemnification obligations of the Company as one of the sellers. The proceeds (net of expenses) of $1.9 million to the Company offset against the net book value of the investment of $1.0 million on the date of sale of the investment resulted in a net gain of $0.9 million, which was recorded in the consolidated statement of operations in other income.
The escrow amount is a contingency representing potential incremental income and will be recognized if and when all contingencies are resolved.
During the fourth quarter of fiscal 2010, the Company sold its 35% ownership interest in Zerosoft, Inc. to Synopsys, Inc for $4.7 million in cash at closing and $4.3 million in contingent proceeds. The contingent proceeds consist of a holdback amount equal to 10% of the initial consideration to be held in escrow and released for payment 15 months from the date of the agreement to secure the indemnification obligations of the Company as one of the sellers, and earnout consideration based upon the achievement of certain annual product performance improvement milestones for the three years subsequent to the sale agreement. The proceeds (net of expenses) of $4.6 million to the Company offset against the net book value of the investment of $1.4 million on the date of sale of the investment resulted in a net gain of $3.2 million, which was recorded in the statement of operations in other income in fiscal 2010.
The holdback amount and earnout consideration are gain contingencies each representing potential incremental income and will be recognized if and when all contingencies are resolved.
The Company recorded its share of net loss incurred by the Company's strategic investments as a net loss on equity investment of $0.1 million, $0.1 million and $0.3 million for the fiscal years ended May1, 2011, May 2, 2010 and May 3, 2009, respectively.
Income taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded against deferred tax assets if it is more likely than not that all or a portion of the deferred tax assets will not be realized.
Treasury stock reissuance
Shares of common stock repurchased by the Company that are not retired are recorded at cost as treasury stock and result in a reduction of stockholders' equity in the Company's consolidated balance sheets. From time to time, treasury shares may be reissued as part of the Company's stock-based compensation programs. When shares are reissued, the Company uses the weighted average cost method for determining cost. If the issuance price is higher than the cost, the excess of the issuance price over cost is credited to additional paid-in capital (“APIC”). If the issuance price is lower than the cost, the difference is first charged against any credit balance in APIC from treasury stock and the balance is charged to retained earnings (accumulated deficit). During the years ended May1, 2011 and May 2, 2010, the Company did not reissue shares from treasury stock.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements based on fair value recognition of share-based payment arrangements, including stock options, restricted stock, restricted stock units and shares issued under the Employee Stock Purchase Plan (“ESPP”). Additionally, the Company has elected to use the straight-line method to recognize its stock-based compensation expenses over the options and awards vesting periods.
The Company uses the Black-Scholes option pricing model to determine the fair value of each stock option grant and each purchase right granted under its ESPP. The fair value of each restricted stock and restricted stock unit is determined using the fair value of the Company's common stock on the date of the grant. Determining the fair value of stock-based awards at the grant date requires the input of various highly subjective assumptions, including expected future stock price volatility, expected term of
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instruments and expected forfeiture rates.
The Company has not recognized a net income tax benefit for stock-based compensation expense for current and prior year periods because it is more likely than not that the deferred tax assets associated with this expense will not be realized. To the extent the Company realizes the deferred tax assets associated with the stock-based compensation expense in the future, the income tax effects of such an event may be recognized at that time. Cash retained as a result of tax benefits for tax deductions in excess of the compensation expense recorded for those options is required to be classified as cash from financing activities. The Company recorded no such excess tax benefits for the fiscal year ended May1, 2011, May 2, 2010 and May 3, 2009.
Fair value of financial instruments
Financial instruments consist of cash and cash equivalents, short and long-term investments, accounts receivable and payable, accrued liabilities, convertible notes, auction rate securities and purchased put options. The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable and payable and accrued liabilities approximate their fair values because of the short-term nature of those instruments. The Company has estimated the fair value of its convertible senior notes and its ARS investment and the put option related to the ARS by using available market information and valuation. Assets and liabilities carried at fair value are classified and disclosed in one of the following three levels:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The following table summarizes the Company's carrying values and market-based fair values of these financial instruments as of May1, 2011 and May 2, 2010 (in thousands):
Carrying Value | Estimated Fair Value | ||||||
May1, 2011 | |||||||
Convertible senior notes due 2014 | $ | 3,250 | $ | 12,065 | |||
May 2, 2010 | |||||||
Convertible senior notes due 2010 | $ | 23,250 | $ | 23,250 | |||
Convertible senior notes due 2014 | $ | 26,689 | $ | 47,405 | |||
Auction rate securities | $ | 16,512 | $ | 16,512 | |||
Purchased put options | $ | 325 | $ | 325 | |||
Information on the carrying value of the convertible notes is provided in Note 9, Convertible Notes. Information on the carrying value of the ARS and purchased put option is provided in Note 3, Fair Value of Financial Instruments.
Comprehensive income (loss)
The Company classifies items of other comprehensive income (loss) by their nature in the financial statements and displays the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in-capital in the equity section of the consolidated balance sheet. Comprehensive income (loss) includes all changes in equity (net assets) during a period from non-owner sources. Comprehensive income (loss) is shown in the consolidated statement of stockholders' equity.
Components of accumulated other comprehensive losses as of May1, 2011 and May 2, 2010 were as follows (in thousands):
Year Ended | |||||||
May1, 2011 | May 2, 2010 | ||||||
Foreign currency translation adjustments | $ | 3,913 | $ | (4,980 | ) | ||
Accumulated Other Comprehensive loss | $ | 3,913 | $ | (4,980 | ) | ||
Adoption of New Accounting Pronouncements
In January 2010, the FASB issued an update, Improving Disclosures about Fair Value Measurements, to ASC 820, Fair Value Measurements and Disclosures, to provide additional disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. The update is effective for interim and annual reporting periods beginning after December 15, 2009, except for the separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements, which shall be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. In the
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period of initial adoption, the reporting entity is not required to provide the disclosures to previous periods presented for comparative purposes, but will be required to provide this comparative information for periods ending after initial adoption. The Company has adopted the additional disclosures requirements effective in the third quarter of fiscal 2011.
Recently Issued Accounting Pronouncements
In December 2010, the FASB issued guidance that clarifies when to perform Step 2 of the Goodwill Impairment Test for reporting units with zero or negative carrying amounts (“ASU 2010-28”). Under the amended guidance, an entity must consider whether it is more likely than not that goodwill impairment exists for reporting units with a zero or negative. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance in ASC 350-25-35-30. If it is more likely than not that goodwill impairment exists, the second step of the goodwill impairment test in ASC 350-20-35 must be performed to measure the amount of goodwill impairment loss, if any. For public entities, ASU 2010-28 is effective for fiscal years, and interim periods within those fiscal year, beginning after December 15, 2010 and early adoption is not permitted. Through fiscal 2011, the Company has historically had negative carrying values. To the extent the Company experiences negative carrying values in the future, this update will be applicable to the Company. The adoption of this amendment is not expected to have a material impact on the Company's consolidated financial statements.
In December 2010, the FASB issued guidance to address the diversity in practice of the presentation of pro forma information for business combinations (“ASU 2010-29”). Under the amended guidance, a public entity that presents comparative financial statements must disclose the pro forma revenue and earnings of the combined entity as though the business combination had occurred as of the beginning of the prior annual reporting period. If comparative financial statements are not presented, the entity must disclose the pro forma revenue and earnings of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29 are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010 and early adoption is permitted. To the extent the Company consummates any business combinations in the future, this update will be applicable to the Company. The adoption of this amendment is not expected to have a material impact on the Company's consolidated financial statements.
In October 2009, the FASB issued an amendment to ASC 605-25, Multiple Element Arrangements (“ASC 605-25”), which modifies how a company separates consideration in multiple-delivery arrangements. The amendment establishes a selling price hierarchy for determining the selling price of a deliverable. The amendment also clarifies the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant. The amendment also eliminates the residual method of allocating revenue and requires the use the relative selling price method for non-software revenue arrangements. This amendment to ASC 605-25 is effective for new revenue arrangements entered into or modified in fiscal years beginning after June 15, 2010 and is effective for the Company on May 2, 2011. Early adoption is permitted. The adoption of this amendment is not expected to have a material impact on the Company's consolidated financial statements.
In October 2009, the FASB issued an amendment to ASC 985-605, which modifies the accounting model for revenue arrangements that include both tangible products and software elements. This amendment to ASC 985-605 is effective for new revenue arrangements entered into or modified in fiscal years beginning after June 15, 2010. Early adoption is permitted. The Company does not sell products that include both tangible products and software elements, therefore this amendment will not impact the Company's consolidated financial statements.
In April 2010, the FASB issued an amendment to ASC 605, Revenue Recognition, to provide guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. This amendment to ASC 605 is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted. The Company does not provide research or development for others and does not recognize revenue using the milestone method, therefore this amendment will not impact the Company's consolidated financial statements.
Note 2.Fair Value Option
During the second quarter of fiscal 2009, the Company elected fair value accounting for the purchased put option recorded in connection with the ARS settlement agreement signed with UBS (see Note 3 Fair Value of Financial Instruments). This election was made in order to mitigate volatility in earnings caused by accounting for the purchased put option and underlying ARS under different methods. The election of fair value led to a $0.4 million loss for fiscal 2010, included in “Valuation gain (loss), net” with the purchased put option asset recorded in long-term investments pledged as collateral for the secured credit line.
Note 3. | Fair Value of Financial Instruments |
The following table is a reconciliation of financial assets measured at fair value using significant unobservable inputs (Level
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3) during the fiscal years ended May1, 2011 and May 2, 2010 (in thousands):
Year Ended | |||||||
May 1, 2011 | May 2, 2010 | ||||||
Beginning balance | $ | 16,837 | $ | 17,908 | |||
Net sales and settlements | (16,875 | ) | (1,475 | ) | |||
Transfers in and/or (out) of Level 3 | — | 1,811 | |||||
Gain (losses) on auction rate securities | 38 | (1,407 | ) | ||||
Ending balance | $ | — | $ | 16,837 | |||
As of May 1, 2011, the Company had cash and cash equivalents of $47.1 million that were classified as Level 1 investments and were quoted at market price. As of May 2, 2010, the ARS's were accounted as Level 3 investments.
Cash, cash equivalents and short-term investments are included in the consolidated balance sheets as follows (in thousands):
Cost | Gross Realized Gains | Gross Realized Losses | Estimated Fair Value | ||||||||||||
May1, 2011 | |||||||||||||||
Cash and cash equivalents | |||||||||||||||
Cash (U.S. and international) | $ | 47,088 | $ | — | $ | — | $ | 47,088 | |||||||
Total cash and cash equivalents | $ | 47,088 | $ | — | $ | — | $ | 47,088 | |||||||
May 2, 2010 | |||||||||||||||
Cash and cash equivalents | |||||||||||||||
Cash (U.S. and international) | $ | 57,518 | $ | — | $ | — | $ | 57,518 | |||||||
Total cash and cash equivalents | 57,518 | — | — | 57,518 | |||||||||||
Short-term investments: | |||||||||||||||
Auction rate securities | 16,875 | — | (38 | ) | 16,837 | ||||||||||
Total cash and cash equivalents and short-term investments | $ | 74,393 | $ | — | $ | (38 | ) | $ | 74,355 | ||||||
The realized losses for the year ended May 2, 2010 were primarily associated with failed ARS as discussed below. Gross realized losses from the sales of marketable securities were immaterial for all periods presented.
The notional fair value of outstanding forward exchange contracts was approximately $0 million and $2.1 million as of May1, 2011 and May 2, 2010, respectively. The Company had realized gain of $0.1 million and realized losses of $0.6 million and $0.8 million on foreign currency forward exchange contracts for the years ended May 1, 2011, May 2, 2010 and May 3, 2009, respectively. As of May 1, 2011 and May 2, 2010, the Company recorded an unrealized gain of $0 and $19,000 in other current assets.
The Company has no short-term investments on its consolidated balance sheets as of May 1, 2011. The short term investments on the consolidated balance sheets as of May 2, 2010 consisted of ARS that were AAA rated and were secured by pools of student loans guaranteed by state regulated higher education agencies and reinsured by the U.S. Department of Education . Due to liquidity issues caused by the global financial crisis, in October 2008, the Company entered into an agreement with UBS which provided it with Auction Rate Securities Rights (“Rights”) to sell the ARS at par value to UBS at any time during the period June 30, 2010 through July 2, 2012. These Rights were a separate freestanding instrument accounted for separately from the ARS, and were registered, nontransferable securities accounted for as a purchased put option initially recorded at fair value. Under the Rights agreement, UBS could, at its discretion, sell the ARS at any time through July 2, 2012 without prior notice to the Company and be required to pay the Company par value for the ARS within one day of the sale transaction settlement. Additionally, UBS offered a “no net cost” secured line of credit to the Company of up to 75% of the market value of the ARS as determined by UBS that expired on June 30, 2010. Due to the Company entering into this agreement with UBS and enabling UBS to sell the ARS at any time, the ARS previously reported as available-for-sale were transferred to trading securities as of May 2, 2010.
During the first quarter of fiscal 2011, the Company exercised its put option and liquidated the $16.8 million of ARS and repaid the outstanding $11.2 million secured line of credit to UBS.
As of May 2, 2010, there was insufficient observable market information available to determine the fair value of the Company's ARS. As of May 2, 2010, the Company engaged a third party valuation service to model Level 3 fair value using an income approach. The Company reviewed the methodologies employed by the third party models. This included a review of all relevant
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data inputs and the appropriateness of key model assumptions (in thousands):
Fair Value at May 2, 2010 | |||||||||||
Balance at May 2, 2010 | Significant Other Observable Inputs (Level 2) | Significant Unobserved Inputs (Level 3) | |||||||||
Trading Securities | |||||||||||
Student Loans AAA rating | |||||||||||
Market Value per UBS @75% liquidity | $ | 11,283 | $ | — | $ | 11,283 | |||||
Add: Value of the illiquid portion using 0.2 year term | 5,554 | — | 5,554 | ||||||||
Fair Value of Student Loans using 0.2 year term | $ | 16,837 | $ | — | $ | 16,837 | |||||
Student Loans AAA rating | |||||||||||
Value of security before liquidity adjustment | $ | 17,272 | $ | — | $ | 17,272 | |||||
Less: Discount for lack of liquidity using the 4.0 year term | (760 | ) | — | (760 | ) | ||||||
Total student loans AAA rating | 16,512 | — | 16,512 | ||||||||
Purchased Put Option | |||||||||||
Value of put option prior to risk adjustment | 326 | — | 326 | ||||||||
Less: Adjustment of credit risk @0.15% | (1 | ) | — | (1 | ) | ||||||
Total purchased put option | 325 | — | 325 | ||||||||
Fair Value of Student Loans using a 4.0 year term | $ | 16,837 | $ | — | $ | 16,837 | |||||
The pricing assumptions for the ARS included the coupon rate, the estimated time to liquidity, current market rates for publicly traded student loans of similar credit rating and an adjustment for lack of liquidity. The student loans are AAA rated and are secured by pools of student loans guaranteed by state regulated higher education agencies and reinsured by the U.S. Department of Education, and have maturities ranging from 2031 to 2047. The coupon rate was assumed to equal the stated maximum auction rate being received, which is determined based on the applicable 91-day U.S. Treasury rate plus 1.20% premium according to provisions outlined in each security's agreement. The estimated time to liquidity was 4.0 years based on (i) expectations from industry brokers for liquidity in the market and (ii) the period over which UBS and other broker-dealers that had issued ARS have agreed to redeem certain ARS at par value.
The purchased put option gave the Company the right to sell the ARS to UBS for a price equal to par value during the period June 30, 2010 to July 2, 2012, providing liquidity for the ARS sooner than the estimated 4.0 years. As the Company planned to exercise the purchased put option on or around June 30, 2010, the value of the purchased put option was determined based on (i) the ability to sell the securities thereby creating liquidity approximately 0.2 year before the ARS market was expected to become liquid and (ii) the avoidance of receiving below-market coupon rate while the security is illiquid and auctions are failing. The fair value of the purchased put option represents the difference between the ARS with an estimated time to liquidity of 4.0 years and the ARS with an estimated time to liquidity of 0.2 year as the purchased put option allowed for the acceleration of liquidity and the avoidance of a below-market coupon rate over the two year time period.
Based on the Level 3 valuation and the transfer of the ARS from the available-for-sale category to the trading category, the Company recorded an other-than-temporary loss of $2.8 million in valuation gain (loss), net in the second quarter of fiscal 2009, including the transfer of accumulated temporary losses of $0.9 million from other comprehensive loss previously recorded as a component of stockholders' equity. For fiscal 2009, total other-than-temporary impairment loss on auction rate securities of $0.3 million was reported in the valuation gain (loss), net in the consolidated statement of operations, this loss was offset by gains related to the purchase put option of $0.7 million. For the year ended May 2, 2010, the Company recorded a realized gain on the ARS of $1.8 million, offset by losses related to the purchased put option of $1.4 million. Upon the exercise of the purchased put option in the first quarter of fiscal 2011, the Company recorded a gain of $38,000 which was reported in “Valuation gain, net” in the consolidated statements of operations.
Note 4. | Basic and Diluted Net Income (Loss) Per Share |
The Company computes net income (loss) per share by dividing net income (loss) (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted net income (loss) per share is impacted by equity instruments considered to be potential common shares, if dilutive, computed using the “treasury stock” method of accounting. Potentially dilutive common shares outstanding include shares issuable under the Company's stock-based compensation plans such as stock options, restricted stock, restricted stock units and employee stock purchase plan, as well as shares issuable upon conversion of redeemable convertible notes.
A summary of weighted average shares used in basic and diluted net income (loss) per share for the fiscal years ended May1, 2
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011, May 2, 2010 and May 3, 2009 is as follows (in thousands):
Years Ended | |||||||||||
May1, 2011 | May 2, 2010 | May 3, 2009 | |||||||||
Numerator | |||||||||||
Net loss | $ | (3,262 | ) | $ | (3,334 | ) | $ | (129,242 | ) | ||
Denominator | |||||||||||
Weighted-average common shares for basic net income (loss) per share | 61,343 | 49,639 | 44,698 | ||||||||
Dilutive effect of common shares equivalents from stock - based compensation plans | — | — | — | ||||||||
Weighted-average common shares for diluted net income (loss) per share | 61,343 | 49,639 | 44,698 | ||||||||
Certain shares issuable under stock options, restricted stock, restricted stock units and the employee stock purchase plan were excluded from the computation of diluted net income (loss) per share in periods when their effect was anti-dilutive; either because the Company incurred a net loss for the period, the exercise price of the options was greater than the average market price of the common stock during the period, or the effect was anti-dilutive as a result of applying the “treasury stock” method. In addition, certain common shares issuable upon conversion of convertible notes were excluded from the computation of diluted net income (loss) per share because their effect was anti-dilutive as a result of applying the “if converted” method.
A summary of the potential common shares excluded from diluted net income (loss) per share for years ended May1, 2011, May 2, 2010 and May 3, 2009 are as follows (in thousands):
Years Ended | |||||
May1, 2011 | May 2, 2010 | May 3, 2009 | |||
Total shares of common stock issuable under Company's stock-based compensation plans | 11,033 | 11,975 | 13,058 | ||
Shares of common stock issuable upon conversion of convertible notes | 6,011 | 19,706 | 3,329 | ||
Note 5. | Balance Sheet Components |
Significant components of certain balance sheet items are as follows (in thousands):
May1, 2011 | May 2, 2010 | ||||||
Accounts receivable, net: | |||||||
Trade accounts receivable, including receivable from related parties $2,181 and $1,667 at May 1, 2011 and May 2, 2010 | $ | 26,750 | $ | 14,475 | |||
Unbilled receivable | 8,939 | 2,943 | |||||
Gross accounts receivable | 35,689 | 17,418 | |||||
Allowance for doubtful accounts | (159 | ) | (17 | ) | |||
Total accounts receivable | $ | 35,530 | $ | 17,401 | |||
Accrued expenses: | |||||||
Accrued sales commissions | $ | 1,160 | $ | 2,098 | |||
Accrued bonuses | 4,013 | 4,456 | |||||
Other payroll and related accruals | 5,219 | 4,168 | |||||
Acquisition accrual | 60 | 353 | |||||
Accrued professional fees | 368 | 475 | |||||
Income taxes payable | 326 | 277 | |||||
Restructuring accrual | 769 | 2,366 | |||||
Other | 2,245 | 2,154 | |||||
Total accrued expenses | $ | 14,160 | $ | 16,347 | |||
Note 6. | Acquisitions |
The Company did not make any acquisitions or material asset purchases during the fiscal years ended May1, 2011 or May 2, 2
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010.
Pursuant to the agreement to acquire SabioLabs, Inc. ("Sabio") during the fiscal year ended May 4, 2008, the Company held back cash consideration of $1.5 million and approximately 213,000 shares of Company common stock valued at $2.2 million to secure certain indemnification obligations of Sabio that may arise for a 15-month period from the date of acquisition. The Company classified the $1.5 million of cash as restricted cash. The Sabio indemnification period ended May 26, 2009; accordingly, the Company released the restricted cash at that time.
For a number of Magma's previously completed acquisitions, the Company has agreed to pay contingent considerations in cash and/or stock to former stockholders of the acquired companies based on the acquired business' achievement of certain technology or financial milestones. The following table summarizes the additions to goodwill and intangible assets recorded by the Company for contingent considerations paid or payable to former stockholders of the acquired companies (in thousands):
Year Ended | |||||||||||||||||||||||
May1, 2011 | May 2, 2010 | May 3, 2009 | |||||||||||||||||||||
Cash | Common Stock Value | Cash | Common Stock Value | Cash | Common Stock Value | ||||||||||||||||||
Goodwill: | |||||||||||||||||||||||
Sabio Labs, Inc | $ | 322 | $ | — | $ | 427 | $ | — | $ | 2,484 | $ | — | |||||||||||
Total goodwill additions | $ | 322 | $ | — | $ | 427 | $ | — | $ | 2,484 | $ | — | |||||||||||
Intangible assets: | |||||||||||||||||||||||
Mojave | $ | — | $ | — | $ | — | $ | — | $ | 920 | $ | 908 | |||||||||||
Other | 370 | — | 347 | — | 102 | — | |||||||||||||||||
Total intangible asset additions | $ | 370 | $ | — | $ | 347 | $ | — | $ | 1,022 | $ | 908 | |||||||||||
Total earnout consideration | $ | 692 | $ | — | $ | 774 | $ | — | $ | 3,506 | $ | 908 | |||||||||||
Note 7. Goodwill and Other Intangible Assets
The following table summarizes the components of goodwill, other intangible assets and related accumulated amortization balances, which were recorded as a result of business combinations and asset purchases (in thousands):
Weighted | May1, 2011 | May 2, 2010 | |||||||||||||||||||||||||||||||
Average Life (months) | Gross Carrying Amount | Goodwill Impairment | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Goodwill Impairment | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||||
Goodwill | $ | 7,415 | $ | — | $ | — | $ | 7,415 | $ | 7,093 | $ | — | $ | — | $ | 7,093 | |||||||||||||||||
Other intangible assets: | |||||||||||||||||||||||||||||||||
Developed technology | 43 | $ | 115,496 | $ | — | $ | (114,237 | ) | $ | 1,259 | $ | 115,436 | $ | — | $ | (112,897 | ) | $ | 2,539 | ||||||||||||||
Licensed technology | 40 | 42,356 | — | (41,480 | ) | 876 | 42,046 | — | (39,291 | ) | 2,755 | ||||||||||||||||||||||
Customer relationship or base | 70 | 5,575 | — | (4,505 | ) | 1,070 | 5,575 | — | (3,981 | ) | 1,594 | ||||||||||||||||||||||
Patents | 57 | 13,015 | — | (13,015 | ) | — | 13,015 | — | (13,004 | ) | 11 | ||||||||||||||||||||||
Acquired customer contracts | 33 | 1,390 | — | (1,089 | ) | 301 | 1,390 | — | (1,090 | ) | 300 | ||||||||||||||||||||||
Assembled workforce | 45 | 1,252 | — | (1,252 | ) | — | 1,252 | — | (1,248 | ) | 4 | ||||||||||||||||||||||
Non-competition agreements | 36 | 600 | — | (600 | ) | — | 600 | — | (572 | ) | 28 | ||||||||||||||||||||||
Trademark | 67 | 900 | — | (715 | ) | 185 | 900 | — | (644 | ) | 256 | ||||||||||||||||||||||
Total | $ | 180,584 | $ | — | $ | (176,893 | ) | $ | 3,691 | $ | 180,214 | $ | — | $ | (172,727 | ) | $ | 7,487 | |||||||||||||||
The increase in gross carrying amount of goodwill and intangible assets is the result of payment of contingent consideration discussed above.
Goodwill is reviewed annually or whenever events or circumstances occur which indicate that goodwill might be impaired. The Company uses a two-step approach to determining whether and by how much goodwill has been impaired. The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment. In estimating the fair value of the Company, the Company made estimates and judgments about future revenues and cash flows for its reporting unit.
To determine the fair value of a reporting unit, the Company uses a market approach. Under the market approach, the fair value of the reporting unit is based on quoted market prices and the number of shares outstanding of the Company's common stock. The first step requires a comparison of the fair value of the Company (reporting unit) to its net book value. If the fair value is greater than net book value, no impairment is deemed to have occurred. If the fair value is less, then the second step must be performed to determine the amount, if any, of actual impairment. The Company uses the income method for the second step. The
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income method is based on a discounted future cash flow approach that uses estimates including the following for the reporting unit: revenue, based on assumed market growth rates and its assumed market share; estimated costs; and appropriate discount rates based on the particular business's weighted average cost of capital. The Company's estimates of market segment growth, market segment share and costs are based on historical data, various internal estimates and certain external sources, and are based on assumptions that are consistent with the plans and estimates it uses to manage the underlying business. The Company's business consists of both established and emerging technologies and its forecasts for emerging technologies are based upon internal estimates and external sources rather than historical information.
During fiscal 2011 and fiscal 2010, the Company conducted its annual goodwill impairment test at December 31, 2010 and December 31, 2009, respectively using the market approach for the first step. At December 31, 2010 and December 31, 2009, the Company determined that the fair value of its reporting unit is greater than the book value of the net assets of the reporting unit and therefore concluded there is no impairment of goodwill.
During fiscal 2009, the Company conducted its annual goodwill impairment test at December 31, 2008. The Company concluded that events had occurred and circumstances had changed during the third quarter of fiscal 2009 which showed the existence of impairment indicators, including a significant decline in the Company's stock price and continued deterioration in the EDA software products market and the related impact on revenue forecasts of the Company. Consistent with the Company's approach in its annual impairment testing, in assessing the fair value of the reporting unit, the Company considered both the market approach and income approach. At December 31, 2008, using the step one market approach, the Company determined that the fair value of its reporting unit was less than the book value of the net assets of the reporting unit and accordingly, the Company performed step two of the impairment test.
In step two of the impairment test, the Company determined the implied fair value of the goodwill and compared it to the carrying value of the goodwill. With the assistance of a third party valuation firm, the Company allocated the fair value of the reporting unit to all of its assets and liabilities as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the amount assigned to its assets and liabilities is the implied fair value of goodwill. The Company's step two analysis resulted in a reduction in fair value of goodwill and the Company therefore recognized an impairment charge of $60.1 million in fiscal 2009.
The Company has included the amortization expense on intangible assets that relate to products sold in cost of licenses revenue, while the remaining amortization is shown as a separate line item on the Company's consolidated statements of operations. The amortization expense related to intangible assets was as follows (in thousands):
Year Ended | |||||||||||
May1, 2011 | May 2, 2010 | May 3, 2009 | |||||||||
Amortization of intangible assets included in: | |||||||||||
Cost of revenue-licenses | $ | 2,491 | $ | 2,746 | $ | 18,680 | |||||
Cost of revenue-bundled licenses and services | 620 | 1,098 | 6,596 | ||||||||
Operating expenses | 1,055 | 1,134 | 2,994 | ||||||||
Total | $ | 4,166 | $ | 4,978 | $ | 28,270 | |||||
As of May1, 2011 the estimated future amortization expense of other intangible assets in the table above is as follows (in thousands):
Fiscal Year | Estimated Amortization Expense | ||
2012 | $ | 2,098 | |
2013 | 1,135 | ||
2014 | 294 | ||
2015 | 118 | ||
2016 | 46 | ||
Thereafter | — | ||
$ | 3,691 | ||
Note 8. | Restructuring Charge |
In fiscal 2009, the Company initiated a restructuring plan (“FY 2009 Restructuring Plan”) designed to improve its cost structure and to better align its resources and improve operating efficiencies. The Company recorded pre-tax restructuring charges of $1.2 million , $2.7 million and $10.7 million during fiscal 2011, fiscal 2010 and fiscal 2009, respectively, in connection with the FY
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2009 Restructuring Plan. These costs relate to severance, expatriate relocation, facilities consolidation and termination, discontinued use of purchased software, and other costs related to the restructuring. The purchased software refers to the Company's legacy customer relationship management tool ("CRM tool"), which the Company is contractually obligated to license through January 30, 2012. Management determined the CRM tool was no longer providing any economic benefit and that the Company was still liable for the final payment on the contract. Accordingly, management recorded a restructuring liability and a restructuring expense of $0.7 million during fiscal 2011.
The cash payments associated with the net restructuring liability are expected to be paid through fiscal 2012. The restructuring liability activity was as follows (in thousands):
Severance | Relocation | Facilities and Other | Net Liability | ||||||||||||
Balance at May 2, 2010 | $ | 1,998 | $ | 9 | $ | 427 | $ | 2,434 | |||||||
Restructuring provision | 516 | (9 | ) | 693 | 1,200 | ||||||||||
Cash payments | (2,286 | ) | — | (579 | ) | (2,865 | ) | ||||||||
Balance at May 1, 2011 | $ | 228 | $ | — | $ | 541 | $ | 769 | |||||||
Note 9. | Convertible Notes |
The Company's 2% Convertible Senior Notes due 2010 (the “2010 Notes”) matured on May 15, 2010. These notes bore interest at 2% per annum, with interest payable on May 15 and November 15 of each year, commencing May15, 2007. During the first quarter of fiscal 2011, the Company paid the remaining principal balance and the outstanding interest on the 2010 Notes of approximately $23.2 million.
The 2010 Notes were convertible into shares of the Company's common stock at an initial conversion price of $15.00 per share, for an aggregate of approximately 1.55 million shares. The 2010 Notes were unsecured senior indebtedness of Magma, which ranked equally in right of payment to Magma's Wells Fargo credit facility and the 6% Convertible Senior Notes due 2014 (the “2014 Notes”) issued following the exchange offer described below. The 2010 Notes were effectively subordinated in right of payment to the Wells Fargo credit facility to the extent of the security interest held by Wells Fargo Bank in the assets of the Company. The Company had an option to redeem the 2010 Notes for cash in an amount equal to 100% of the aggregate outstanding principal amount at the time of such redemption. The 2010 Notes also contained a net share settlement provision that required the Company to deliver to a holder upon conversion of the holder's 2010 Notes cash equal to the lesser of $1,000 and the conversion value of the 2010 Notes, and in the event that the conversion value is in excess of $1,000 upon conversion of the 2010 Notes, cash or common stock at the Company's election.
On September 11, 2009, the Company completed an exchange offer pursuant to which an aggregate principal amount of $26.7 million of its 2010 Notes were exchanged for $26.7 million principal amount of newly issued 2014 Notes. Because the terms of the 2014 Notes were substantially different from the 2010 Notes, the exchange offer was treated as an extinguishment of the $26.7 million principal amount of the 2010 Notes. Following the exchange offer, the principal balance outstanding on the 2010 Notes was approximately $23.2 million. This amount was included in current liabilities. During the first quarter of fiscal 2011, the Company paid the remaining principal balance and the outstanding interest on the 2010 Notes of approximately $23.2 million. In connection with this repayment, the remaining balance of the debt discount and unamortized debt issuance costs related to the remaining 2010 Notes of $44,000 as of May 2, 2010 was written off to other income in the statement of operations.
The fair value of the 2014 Notes when issued in connection with the exchange offer described above was allocated between the fair market value of the 2010 Notes extinguished and the reacquisition of the equity component originally recognized upon issuance of the 2010 Notes. The Company initially recorded the 2014 Notes at fair value of $28.5 million, including a debt premium of $1.8 million. The debt premium is being amortized to interest expense over the term of the 2014 Notes. A total of $1.9 million of underwriting and legal fees related to the 2014 Notes offering was capitalized upon issuance and is being amortized over the term of the 2014 Notes using the effective interest method. An amount of $3.0 million was recorded for the reacquisition of the equity component related to the 2010 Notes as a reduction to additional paid-in-capital. During fiscal 2011, the Company recorded amortization of debt premium of $0.2 million and amortization of debt issuance costs of $0.2 million.
In fiscal 2010, the Company recognized a net gain of $0.3 million on the extinguishment of the 2010 Notes. The net gain is comprised of a $1.2 million gain on the difference between the fair market value of the 2014 Notes and the $26.7 million principal amount of the 2010 Notes that was extinguished, which is offset by the reacquisition of the equity component and the write-off of approximately $0.8 million and $0.1 million in debt discount and issuance costs, respectively, related to the 2010 Notes exchanged.
The 2014 Notes mature on May 15, 2014 and bear interest at 6% per annum, with interest payable on May 15 and November 15 of each year, commencing May 15, 2010. The 2014 Notes are convertible into shares of the Company's common stock at an initial conversion price of $1.80 per share, for an aggregate of approximately 14.8 million shares. Upon conversion, the holders
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of the 2014 Notes will receive shares of common stock of the Company. Except in limited specific circumstances related to a change in control, holders will not receive a cash settlement; therefore, the Company is not required to separately account for the liability and equity components on the 2014 Notes. The 2014 Notes are unsecured senior indebtedness of Magma, which rank equally in right of payment to Magma's credit facility with Wells Fargo Capital Finance, LLC (see Note 10, “Term Loan and Revolving Loans”). The 2014 Notes are effectively subordinated in right of payment to the Wells Fargo credit facility to the extent of the security interest held by Wells Fargo Bank in the assets of the Company. After May 15, 2013, the Company has the option to redeem the 2014 Notes for cash in an amount equal to 100% of the aggregate outstanding principal amount at the time of such redemption.
During the first quarter of fiscal 2011, the Company repurchased an aggregate principal amount of $2.75 million of the 2014 Notes for $4.8 million in cash in private transactions. A loss on extinguishment of the 2014 Notes of $2.1 million is accounted for in the condensed consolidated statements of operations as “Loss on extinguishment of debt, notes due in 2014”.
During the second quarter of fiscal 2011, the Company engaged in separately negotiated transactions with certain holders of its 2014 Notes to convert outstanding 2014 Notes to common stock. Pursuant to those transactions, the holders converted an aggregate principal amount of $20.7 million of the 2014 Notes into 11.5 million shares of the Company's common stock. The 2014 Notes were converted at $1.80 per share per the initial indenture agreement at issuance. On conversion of the notes, the Company incurred $2.3 million in inducement fees, which are accounted for in the condensed statements of operations as “Inducement fees on conversion of notes due in 2014”. As of May 1, 2011, approximately $3.25 million of the 2014 Notes remained outstanding and are convertible into approximately 1.81 million shares of the Company's common stock.
Note 10. | Term Loan and Revolving Loans |
On March 19, 2010, the Company entered into a new four-year credit facility with Wells Fargo Capital Finance, LLC, (as amended, the “New Credit Facility”), which replaced the Company's $15.0 million secured revolving line of credit facility with Wells Fargo Bank, N.A. (the “Credit Facility”). The New Credit Facility provides for a revolving loan not to exceed $15.0 million and a term loan of $15.0 million (“Term Loan A”). The New Credit Facility is secured by a first priority interest in all of the Company's assets. The Term Loan A repayments are in equal quarterly installments of $0.6 million, beginning October 31, 2010.
The Company subsequently executed three amendments in order to clarify certain administrative and operational aspects of the New Credit Facility. The amendments were executed in June 2010, July 2010 and September 2010, respectively, and did not materially alter the terms and conditions of the New Credit Facility. In October 2010, the Company executed a fourth amendment, which expanded the New Credit Facility with an additional term loan of $10.0 million (“Term Loan B”) and extended the maturity date to October 2014. The repayments of Term Loan B principal amounts are in equal installments of $0.4 million beginning April 30, 2011.
Under the terms of the New Credit Facility, outstanding borrowings and letter of credit liabilities may not, at any time, exceed the greater of $40.0 million or 50% of all “post-contract support” revenues and “time based license fee” revenues for the preceding twelve-month period. These requirements could, but to date have not, limited the Company's borrowing availability.
The revolving loan and Term Loan A bear interest at either a LIBOR Rate or a Base Rate, at management's election, in each case determined as follows (plus a margin of 4.50 percentage points): (A) if at a LIBOR Rate, at a per annum rate equal to the LIBOR Rate of the greater of (i) 1.00% per annum and (ii) the one, two or three month LIBOR rate quoted by Bloomberg and (B) if at the Base Rate, the greatest of (i) the Federal Funds Rate plus 0.5%, (ii) the three month LIBOR Rate plus 1.0% and (iii) the Wells Fargo prime rate. Term Loan B bears interest at either a LIBOR Rate or a Base Rate, at management's election, in each case determined as follows (plus a margin of 3.00 percentage points): (A) if at a LIBOR Rate, at a per annum rate equal to the LIBOR Rate of the greater of (i) 1.00% per annum and (ii) the one, two or three month LIBOR rate quoted by Bloomberg and (B) if at the Base Rate the greatest of (i) the Federal Funds Rate plus 0.5%, (ii) the three month LIBOR Rate plus 1.0% and (iii) the Wells Fargo prime rate. In addition, the Company is required to pay fees of 0.5% per annum on the unused amount of the New Credit Facility, and 2.5% per annum for each letter of credit issued and quarterly administrative fees of $10,000.
The Company is required to pay interest and fees monthly, with the outstanding principal amount plus all accrued but unpaid interest and fees payable in full at the maturity date of October 29, 2014.
The New Credit Facility contains covenants that limit the Company's ability to create liens, merge, consolidate, dispose of assets, incur indebtedness and guarantees, repurchase or redeem capital stock and indebtedness, make certain investments, acquisitions and capital expenditures, enter into certain transactions with affiliates or change the nature of the Company's business. Events of default under the New Credit Facility include, but are not limited to, payment defaults, covenant defaults, breaches of representations and warranties, cross defaults to certain other material agreements and indebtedness, bankruptcy and other insolvency events, actual or asserted invalidity of security interests or loan documents, and certain change of control events.
The New Credit Facility also restricts the Company's ability to pay dividends or make other distributions on the Company's stock and requires that the Company maintain certain financial conditions. As of May 1, 2011, the Company had borrowed $25.0 million of term debt and paid three installments of $0.6 million each totaling to $1.7 million on Term Loan A and one installment
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of $0.4 million on Term Loan B. As of May 1, 2011, the unused amount of revolving loan, net of accrued interest under the New Credit Facility, was $13.0 million. As of May 1, 2011, the Company was in compliance with the covenants contained in the New Credit Facility.
The New Credit Facility replaced a credit facility the Company entered into a credit facility with Wells Fargo Capital Finance , LLC, (the "Credit Facility") on October 31, 2008. As amended by the First Amendment dated March 11, 2009, the Second Amendment dated May 21, 2009, and the Third Amendment dated October 1, 2009, the Credit Facility (i) provided for a single revolving line of credit note of up to $15.0 million, which replaced the two previous $7.5 million revolving line of credit notes, (ii) eliminated the requirement that Magma maintain a minimum accounts receivable borrowing base and cash collateral, and (iii) extended the term of the line of credit to September 30, 2010. The note bore an annual interest rate equal to a fluctuating rate of 3.5% above the one month LIBOR rate on outstanding borrowings. The Credit Facility, among other things required that the Company provide certain financial statements to Wells Fargo, restricted the Company's ability to pay dividends or make other distributions on its stock and required that the Company maintain certain financial conditions.
Note 11. | Secured Line of Credit |
In October 2008, the Company obtained a secured line of credit with UBS in conjunction with the settlement agreement it entered into with UBS with respect to the Company's ARS. During the first quarter of fiscal 2011, the Company exercised its ARS put option and liquidated the $16.8 million of ARS and used part of the proceeds to repay its outstanding $11.2 million secured line of credit with UBS (see Note 3 “Fair Value of Financial Instruments”).
As amended January 22, 2009, the secured line of credit was a 100% Loan-to-Par Value No Net Cost loan program. Under this program, the interest rate was based on the lesser of either the weighted average ARS coupon rate or the published UBS Bank rate. This new rate applied to existing outstanding balances and new advances. The initial line of credit obtained in October 2008 was due on demand and allowed for borrowings of up to 75% of the market value of the ARS, as determined by UBS, pledged as collateral for the line of credit. Prior to January 22, 2009, advances under this agreement bore interest at LIBOR plus 1.0% with interest payments payable monthly.
Note 12. | Stockholders' Equity |
Stock Incentive Plans
2010 Stock Incentive Plan
The 2010 Stock Incentive Plan (“2010 Plan”) was approved by the stockholders in September 2010. Under the 2010 Plan, the Company, with the approval of the Compensation Committee of the Board of Directors (the “Committee”), or its delegates, may grant incentive stock options or non-qualified stock options to purchase common stock to employees, directors, advisors, and consultants. They may also be awarded stock appreciation rights ("SARs"), restricted stock, stock bonuses, stock units, performance share awards, and other cash or share-based awards based on the value of the common stock. The shares of common stock delivered under the 2010 Plan may be newly-issued shares or shares held by the Company as treasury stock. The maximum number of shares that may be delivered in connection with awards granted under the 2010 Plan equals (1) 9,810,093 shares (which is the sum of the 5,388,195 shares first authorized for issuance under the 2010 Plan plus the number of shares previously available for award grants under the Company's Amended and Restated 2001 Stock Incentive Plan (“2001 Plan”) that became available for award grants under the 2010 Plan when it was approved), plus (2) any shares covered by awards outstanding under the 2001 Plan on September 23, 2010 that are not issued (or that are forfeited back to the Company) because the related award expired or terminated without the award having been vested, exercised or paid, as the case may be. Among other limitations, the 2010 Plan also provides that a maximum of 1,000,000 shares may be subject to stock options and stock appreciation rights granted to any one individual in any calendar year. The Committee determines the exercise price per share; however, the exercise price of an incentive stock option cannot be less than 100% of the fair market value of the common stock on the option grant date (110% of the fair market value of the common stock on the option grant date for 10% stockholders). The term of the 2010 Plan continues until August 5, 2020 unless it is terminated earlier in accordance with its terms. As of May 1, 2011, there were options to purchase 8,447,013 shares outstanding under the 2010 Plan, and 8,955,807 shares were available for the grant of future options or other awards under the 2010 Plan.
2004 Employment Inducement Award Plan
The 2004 Employment Inducement Award Plan (“Inducement Plan”) was adopted by the Board of Directors on August 30, 2004. Under the Inducement Plan, the Company, with the approval of the Committee, was permitted to grant non-qualified stock options to new hire employees who are not executive officers of the Company as well as, restricted common shares, SARs or stock unit awards. The Committee determined whether an award may be granted, the number of shares/options awarded, the date an award may be exercised, vesting and the exercise price. Each award was subject to an agreement between each applicable employee and the Company. The initial number of shares of common stock issuable under the Inducement Plan was 1,000,000 shares, subject to adjustment for certain changes in the Company's capital structure. On January 24, 2006, the Inducement Plan was amended by the Committee to increase the maximum aggregate number of options, SARs, stock units and restricted shares that may be awarded
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under the Inducement Plan to 2,000,000 shares. As of May 1, 2011, there were options to purchase 65,050 shares outstanding under the Inducement Plan, and no shares available for the grant of future options or other awards under the Inducement Plan. Subsequent to approval by the stockholders of the 2010 Incentive Plan, the Company's authority to grant new awards under the Inducement Plan terminated effective as of August 6, 2010.
2001 Stock Incentive Plan
The 2001 Plan was approved by the stockholders in August 2001. Under the 2001 Plan, the Company, with the approval of the Committee or its delegates, was permitted to grant incentive stock options or non-qualified stock options to purchase common stock to employees, directors, advisors, and consultants as well as restricted common shares, SARs or stock units based on the value of the common stock. The initial number of shares of common stock issuable under the 2001 Plan was 2,000,000 shares, subject to adjustment for certain changes in the Company's capital structure. As of January 1 of each year, commencing with January 1, 2002, the aggregate number of options, restricted awards, SARs, and stock units that could be awarded under the 2001 Plan automatically increased by a number equal to the lesser of 6% of the total number of fully diluted shares of common stock then outstanding, 6,000,000 shares of common stock, or any lesser number as is determined by the Board of Directors. The Committee determined the exercise price per share; however, the exercise price of an incentive stock option could not be less than 100% of the fair market value of the common stock on the option grant date, and the exercise price of a non-qualified stock option could not be less than the par value of the common stock subject to such non-qualified stock options.
As a result of 2010 Plan becoming effective, no shares of the Company's common stock are available for future issuance under the 2001 Plan. As of May 2, 2011, there were options to purchase 7,820,678 shares outstanding under the 2001 Plan.
1998 Stock Incentive Plan
In the fiscal year ended March 31, 1999, the Company adopted the 1998 Stock Incentive Plan (“1998 Plan”). Under the 1998 Plan, the Company was permitted to grant options to purchase common stock to employees, directors, and consultants. Options granted under the 1998 Plan were either incentive stock options or non-qualified stock options. The exercise price of incentive stock options and non-qualified stock options were no less than 100% and 85%, respectively, of the fair market value per share of the Company's common stock on the grant date (110% of fair market value in certain instances), as determined by the Board of Directors. Pursuant to the 1998 Plan, the Board of Directors also had the authority to set the term of the options (no longer than ten years from the date of grant, five years in certain instances). Under the terms of the 1998 Plan, the options become exercisable prior to vesting, and the Company has the right to repurchase such shares at their original purchase price if the optionee is terminated from service prior to vesting. Such rights expire as the options vest over the vesting period, which is generally four years. At May 1, 2011, there were no unvested shares subject to the Company's repurchase rights.
As a result of the 2001 Plan becoming effective, no shares of the Company's common stock are available for future issuance under the 1998 Plan. At May 1, 2011, there were options to purchase 52,285 shares outstanding under the 1998 Plan.
Employee Stock Purchase Plan
The amended and restated Employee Stock Purchase Plan (“Purchase Plan” or “ESPP”) was established in August 6, 2010, and was effective on December 1, 2010. Employees, including officers and employee directors but excluding 5% or greater stockholders, are eligible to participate if they are employed for more than 20 hours per week and five months in any calendar year. The Purchase Plan provides for a series of overlapping offering periods with a duration of 24 months, with new offering periods, beginning in March 1, June 1, September 1 and December 1 of each year and the purchase dates under the new offering periods would be the last day of February, May, August and November. The maximum number of shares a participant can purchase during a single accumulation is 2,500 shares. The Purchase Plan allows employees to purchase common stock through payroll deductions of up to 15% of their eligible compensation. Such deductions will accumulate over a three-month accumulation period without interest. After such accumulation period, shares of common stock will be purchased at a price equal to 85% of the fair market value per share of common stock on either the first day preceding the offering period or the last date of the accumulation period, whichever is less. During the year ended May 1, 2011 a total of 1,399,653 shares with an average price of $1.03 were issued under the original plan and a total of 1,474,708 shares with an average price of $1.17 were issued under the amended Purchase Plan. During fiscal 2010 and 2009 a total of 2,355,171 and 2,009,043 shares with an average price of $0.95 and $1.85 per share were issued under the original Purchase Plan.
A total of 5,200,000 common shares may be issued under the Purchase Plan after September 23, 2010. As of May1, 2011, a total of 3,725,292 shares of common stock remained available for issuance under the Purchase Plan.
Option Exchange Program
In fiscal 2009, the Company filed a Tender Offer Statement on Schedule TO with the SEC relating to an offer by the Company to exchange (the “Exchange Offer”) certain options to purchase up to an aggregate of 6,223,830 shares of the Company's Common Stock, whether vested or unvested, that were granted with an exercise price per share above $4.00. These eligible options could be exchanged for Restricted Stock Units (“RSUs”) upon the terms and subject to the conditions set forth in the Exchange Offer.
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The Company's executive officers, members of the Company's Board of Directors, and the Company's consultants were not eligible to participate in the Exchange Offer.
The Exchange Offer permitted eligible option holders to exchange eligible underwater options for a lesser number of RSUs. The exchange ratio was determined based on the pricing of the original option. The new RSUs have vesting terms based on the individual option holder's service history with the Company.
Options to purchase 5,374,016 shares of the Company's common stock at an average exercise price of $9.92 per share were exchanged for 1,813,303 RSUs. The option exercise prices ranged from $4.34 to $25.85 per share. The RSUs were issued on December 18, 2008 when the market price and the fair value was $0.98 per share of common stock. There is no exercise price for the RSUs. As of December 18, 2008, there was unamortized expense of $5.2 million remaining on the cancelled and unvested option shares.
With the assistance of a third party actuarial firm, the Company determined incremental value of the RSUs to be $1.4 million; therefore the total expense to be amortized over the vesting period of the RSUs is $6.6 million, or $3.66 per share.
Repurchase and Retirement of Common Stock
Effective January 31, 2011, the Company's Board of Directors approved an increase in the Company's stock buy-back program, authorizing the Company to purchase up to $30.0 million of its common stock, an increase in $10.0 million over the original authorization of $20.0 million announced in fiscal 2008.
During fiscal 2011, the Company used approximately $5.3 million to repurchase approximately 1,318,475 shares of its common stock in the open market. The repurchase prices ranged from $2.82 to $5.03 per share. The repurchased shares were retired immediately subsequent to the purchase.
Note 13. | Employee Benefit Plan |
Effective April 1, 1997, the Company adopted a plan (the “401(k) Plan”) that is intended to qualify under Section 401(k) of the Internal Revenue Code of 1986. The 401(k) Plan covers essentially all employees. Eligible employees may make voluntary contributions to the 401(k) Plan up to 100% of their annual eligible compensation, subject to limitations under IRS regulations. The Company is permitted to make contributions to the 401(k) Plan as determined by the Board of Directors. The Company has not made any contributions to the 401(k) Plan.
Note 14. | Stock-Based Compensation |
The stock-based compensation recognized in the consolidated statements of operations was as follows (in thousands):
Year Ended | |||||||||||
May1, 2011 | May 2, 2010 | May 3, 2009 | |||||||||
Cost of revenue | $ | 1,561 | $ | 1,569 | $ | 1,551 | |||||
Research and development expense | 4,627 | 4,598 | 7,405 | ||||||||
Sales and marketing expense | 3,769 | 3,964 | 5,280 | ||||||||
General and administrative expense | 3,136 | 3,745 | 4,915 | ||||||||
Total stock-based compensation expense | $ | 13,093 | $ | 13,876 | $ | 19,151 | |||||
The Company has adopted several stock incentive plans providing stock-based awards to employees, directors, advisors and consultants, including stock options, restricted stock and restricted stock units. The Company also has adopted the ESPP, which enables employees to purchase shares of the Company's common stock. Stock-based compensation expense recognized in the consolidated statements of operations by type of award in fiscal years 2011, 2010 and 2009, was as follows (in thousands):
Year Ended | |||||||||||
May1, 2011 | May 2, 2010 | May 3, 2009 | |||||||||
Stock options | $ | 2,429 | $ | 2,725 | $ | 6,279 | |||||
Restricted stock and restricted stock units | 6,522 | 7,479 | 9,594 | ||||||||
Employee stock purchase plan | 4,142 | 3,672 | 3,278 | ||||||||
Total stock-based compensation expense | $ | 13,093 | $ | 13,876 | $ | 19,151 | |||||
Stock Options and Employee Stock Purchase Plan
The Company uses the Black-Scholes option pricing model to determine the fair value of its stock options and ESPP awards. The Black-Scholes option pricing model incorporates various highly subjective assumptions, including expected future stock price
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volatility and expected terms of the instruments. The Company established the expected term for employee options and awards, as well as forfeiture rates, based on the historical settlement experience, while giving consideration to vesting schedules and to options that have life cycles less than the contractual terms. Assumptions for option exercises and pre-vesting terminations of options were stratified for employee groups with sufficiently distinct behavior patterns. Expected future stock price volatility was developed based on the average of the Company's historical weekly stock price volatility and average implied volatility. The risk-free interest rate for the period within the expected life of the option is based on the yield of United States Treasury notes at the time of grant. The expected dividend yield used in the calculation is zero as the Company has not historically paid dividends.
The assumptions used in the Black-Scholes model and the weighted average grant date fair value per share were as follows:
Year Ended | |||||||||||
May1, 2011 | May 2, 2010 | May 3, 2009 | |||||||||
Stock options: | |||||||||||
Expected life (years) | 3.89 | 3.23 | 3.56 | ||||||||
Volatility | 71 | % | 71-88% | 46-81% | |||||||
Risk-free interest rate | 0.67%-1.63% | 1.50-2.10% | 1.20-3.56% | ||||||||
Expected dividend yield | — | % | — | % | — | ||||||
Weighted average grant date fair value | $ | 2.22 | $ | 1.30 | $ | 0.79 | |||||
ESPP awards: | |||||||||||
Expected life (years) | 1.13 | 1.13 | 1.13 | ||||||||
Volatility | 71 | % | 71-88% | 45-81% | |||||||
Risk-free interest rate | 0.29%-0.71% | 0.29%-0.54% | 0.67-2.25% | ||||||||
Expected dividend yield | — | % | — | % | — | % | |||||
Weighted average grant date fair value | $ | 2.47 | $ | 0.88 | $ | 2.07 | |||||
As of May1, 2011, there was approximately $3.3 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to stock option grants, which will be recognized over the remaining weighted average vesting period of approximately 2.5 years.
As of May1, 2011, the Company had $4.0 million of total unrecognized compensation expense, net of estimated forfeitures, related to the ESPP, which will be recognized over the remaining weighted average vesting period of 1.13 years. Cash received from the purchase of shares under the ESPP was $3.2 million during fiscal 2011, $2.2 million during fiscal 2010 and $3.7 million during fiscal 2009.
A summary of the changes in stock options outstanding and exercisable under the Company's stock incentive plans during the fiscal years ended May1, 2011 and May 2, 2010 is as follows (in thousands, except year and per share amounts):
Number of Shares | Weighted Average Price per Share | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | ||||||||||
Options outstanding at May 3, 2009 | 9,152 | $ | 6.73 | 3.74 | $ | 2,910 | |||||||
Granted | 1,228 | $ | 2.28 | ||||||||||
Exercised | (350 | ) | $ | 1.10 | |||||||||
Forfeited | (561 | ) | $ | 2.15 | |||||||||
Expired | (405 | ) | $ | 9.30 | |||||||||
Options outstanding at May 2, 2010 | 9,064 | $ | 6.51 | 3.00 | $ | 9,798 | |||||||
Granted | 997 | $ | 4.13 | ||||||||||
Exercised | (680 | ) | $ | 1.25 | |||||||||
Forfeited | (206 | ) | $ | 2.84 | |||||||||
Expired | (728 | ) | $ | 11.33 | |||||||||
Options outstanding at May 1, 2011 | 8,447 | $ | 6.33 | 2.73 | $ | 19,721 | |||||||
Vested and expected to vest at May 1, 2011 | 8,232 | $ | 6.40 | 2.30 | $ | 19,157 | |||||||
Exercisable at May 1, 2011 | 6,429 | $ | 7.40 | 2.38 | $ | 12,663 | |||||||
The total intrinsic value of options exercised was $2.5 million, $0.5 million and $17,000 during fiscal 2011, fiscal 2010 and
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fiscal 2009, respectively. Cash received from stock option exercises was $0.8 million in fiscal 2011, $0.4 million in fiscal 2010 and $0.1 million during fiscal 2009.
Restricted Stock and Restricted Stock Units
Restricted stock and restricted stock units were granted to employees at par value under the Company's stock incentive plans, or assumed in connection with an acquisition. In general, restricted stock and restricted stock unit awards vest over two to four years and are subject to the employees' continuing service to the Company.
The cost of restricted stock and restricted stock unit awards is determined using the fair value of the Company's common stock on the date of the grant, and compensation expense is recognized over the vesting period, which is generally one to four years.
A summary of the changes in restricted stock outstanding during the fiscal years ended May1, 2011 and May 2, 2010 is presented below (in thousands, except per share amounts):
Number of Shares | Weighted Average Grant Date Fair Value per Share | |||||
Shares nonvested at May 3, 2009 | 94 | $ | 11.33 | |||
Granted | — | $ | — | |||
Vested | (69 | ) | $ | 11.89 | ||
Forfeited | (20 | ) | $ | 9.65 | ||
Shares nonvested at May 2, 2010 | 5 | $ | 10.28 | |||
Granted | — | $ | — | |||
Vested | (5 | ) | $ | — | ||
Forfeited | — | $ | 10.28 | |||
Shares nonvested at May 1, 2011 | — | $ | — | |||
As of May1, 2011, the Company did not have any unrecognized stock-based compensation expense, net of estimated forfeitures, related to restricted stock awards.
A summary of the changes in restricted stock units outstanding during the fiscal years ended May1, 2011 and May 2, 2010 is presented below (in thousands, except per share amounts):
Number of Shares | Weighted Average Grant Date Fair Value per Share | |||||
Shares nonvested at May 3, 2009 | 2,148 | $ | 2.92 | |||
Granted | 2,633 | $ | 1.66 | |||
Vested | (2,733 | ) | $ | 2.31 | ||
Forfeited | (220 | ) | $ | 1.64 | ||
Shares nonvested at May 2, 2010 | 1,828 | $ | 2.17 | |||
Granted | 1,876 | $ | 3.48 | |||
Vested | (1,860 | ) | $ | 2.66 | ||
Forfeited | (179 | ) | $ | 2.02 | ||
Shares nonvested at May 1, 2011 | 1,665 | $ | 3.60 | |||
As of May1, 2011, there was $5.4 million of unrecognized stock-based compensation expense, net of estimated forfeitures, related to restricted stock unit awards, which will be recognized over the remaining weighted average vesting period of approximately 1.7 years.
The total fair value of restricted stock units that were vested was $7.9 million during fiscal 2011, $5.6 million during fiscal 2010 and $4.1 million during fiscal 2009.
Note 15. | Commitments and Contingencies |
Commitments
The Company leases its facilities under several non-cancelable operating leases expiring at various dates through December 2013. The Company also leases its computer equipment under several capital leases. Approximate future minimum lease payments
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under these operating and capital leases at May1, 2011 are as follows (in thousands):
Fiscal Year | Operating Leases | Capital Leases | Sublease Income | |||||||||
2012 | $ | 3.3 | $ | 1.3 | $ | (0.2 | ) | |||||
2013 | 1.2 | 1.3 | — | |||||||||
2014 | 0.3 | — | — | |||||||||
2015 | — | — | — | |||||||||
2016 | — | — | — | |||||||||
Thereafter | — | — | — | |||||||||
Total expected future commitments | $ | 4.8 | $ | 2.6 | $ | (0.2 | ) | |||||
The future minimum lease payments under capital leases includes $0.1 million of interest in each of fiscal years 2012 and 2013. Rent expense for the years ended May1, 2011, May 2, 2010 and May 3, 2009, was approximately $5.2 million, $5.7 million and $8.0 million, respectively.
Contingencies
The Company is subject to various legal proceedings and disputes that arise in the ordinary course of business from time to time. The number and significance of these legal proceedings and disputes may increase as the Company's size changes. Any claims against the Company, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in the diversion of significant operational resources. As a result, these legal proceedings and disputes could harm the Company's business and have an adverse effect on its consolidated financial statements. However, the results of any litigation or dispute are inherently uncertain and, as of May1, 2011, no estimate could be made of the loss or range of loss, if any, from such litigation matters and disputes. Liabilities are recorded when a loss is probable and the amount can be reasonably estimated. No accrued legal settlement liabilities are recorded on the consolidated balance sheets as of May1, 2011 or May 2, 2010. Litigation settlement and legal fees are expensed in the period in which they are incurred.
In Genesis Insurance Company v. Magma Design Automation, et al., Case No. 06-5526-JW, filed on September 8, 2006 in the United States District Court for the Northern District of California, Genesis seeks a declaration of its rights and obligations under an excess directors and officers liability policy for defense and settlement costs arising out of the securities class action against the Company, in re: Magma Design Automation, Inc. Securities Litigation, as well as a related derivative lawsuit. Genesis seeks a return of $5.0 million it paid towards the settlement of the securities class action and derivative lawsuits from the Company or from another of the Company's excess directors and officers liability insurers, National Union. The Company contends that either Genesis or National Union owes the settlement amounts, but not the Company. The trial court granted summary judgment for the Company and National Union, finding that Genesis owed the settlement amount. Genesis appealed to the Ninth Circuit Court of Appeals, and the Company cross-appealed. On July 12, 2010, the Court of Appeals reversed, ruling that Genesis does not owe the settlement amount under its policy, and remanded the case to the trial court for further proceedings. On December 20, 2010, the trial court ruled on various cross-motions that National Union owes the settlement amount to Genesis. The court entered a judgment in favor of Genesis and the Company on March 2, 2011, requiring that National Union pays $5.0 million plus prejudgment interest to Genesis. On April 1, 2011 National Union appealed the trial court's judgment to the Ninth Circuit Court of Appeals. The opening brief of National Union is due by July 11, 2011. While there can be no assurance as to the ultimate disposition of the litigation, the Company does not believe that its resolution will have a material adverse effect on the Company's financial position, results of operations or cash flows.
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 continue over the agreements' software license period, and are perpetual in some instances. 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 provide may exceed the amount received from the customer. The Company estimates the fair value of its indemnification obligations to be insignificant, based upon its historical experience concerning product and patent infringement claims. Accordingly, the Company has no liabilities recorded for indemnification under these agreements as of May1, 2011.
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' liability insurance policy that reduces its exposure and enables the Company to recover a portion of future
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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 May1, 2011.
In connection with certain of the Company's recent business acquisitions, the Company has also agreed to assume, or cause its subsidiaries to assume, the indemnification obligations of those companies to their respective officers and directors. No liabilities have been recorded for these agreements as of May1, 2011.
Warranties
The Company offers certain 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 May1, 2011. The Company assesses the need for a warranty accrual on a quarterly basis, and there can be no guarantee that a warranty accrual will not become necessary in the future.
Note 16. | Segment Information |
The Company reports segment information using the “management approach.” Under this approach, operating segments are identified in substantially the same manner as they are reported internally and used by the Company's chief operating decision maker (“CODM”) for purposes of evaluating performance and allocating resources. Based on this approach, the Company has one reportable segment as the CODM reviews financial information on a basis consistent with that presented in the consolidated financial statements.
Revenue from North America, Europe, Japan and the Asia Pacific region, which includes India, South Korea, Taiwan, Hong Kong and the People's Republic of China, was as follows (in thousands, except for percentages shown):
Year Ended | |||||||||||
May1, 2011 | May 2, 2010 | May 3, 2009 | |||||||||
North America* | $ | 90,321 | $ | 72,100 | $ | 86,576 | |||||
Europe | 10,818 | 12,927 | 17,893 | ||||||||
Japan | 14,844 | 14,637 | 24,975 | ||||||||
Asia-Pacific (excluding Japan) | 23,303 | 23,413 | 17,513 | ||||||||
$ | 139,286 | $ | 123,077 | $ | 146,957 | ||||||
Year Ended | |||||||||||
May1, 2011 | May 2, 2010 | May 3, 2009 | |||||||||
North America* | 65 | % | 59 | % | 59 | % | |||||
Europe | 8 | % | 10 | % | 12 | % | |||||
Japan | 10 | % | 12 | % | 17 | % | |||||
Asia-Pacific (excluding Japan) | 17 | % | 19 | % | 12 | % | |||||
100 | % | 100 | % | 100 | % | ||||||
* Substantially all of the Company's North America revenue related to the United States for all periods presented.
For the fiscal years ended 2011, 2010 and 2009, the Company had no customers representing 10% or more of total revenue.
The Company has substantially all of its long-lived assets located in the United States.
Note 17. | Income Taxes |
Income tax expense (benefit) consisted of the following (in thousands):
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Year Ended | |||||||||||
May1, 2011 | May 2, 2010 | May 3, 2009 | |||||||||
Current: | |||||||||||
Federal | $ | (21 | ) | $ | (280 | ) | $ | (228 | ) | ||
State | 13 | 14 | (113 | ) | |||||||
Foreign | 1,113 | (6,602 | ) | 1,549 | |||||||
Total current | 1,105 | (6,868 | ) | 1,208 | |||||||
Deferred: | |||||||||||
Foreign | (248 | ) | 126 | (444 | ) | ||||||
Total income tax expense (benefit) | $ | 857 | $ | (6,742 | ) | $ | 764 | ||||
Net loss before provision (benefit) for income taxes consisted of (in thousands):
Fiscal Year Ended | |||||||||||
May1, 2011 | May 2, 2010 | May 3, 2009 | |||||||||
United States | $ | (4,016 | ) | $ | (20,270 | ) | $ | (148,538 | ) | ||
International | 1,611 | 10,194 | 20,060 | ||||||||
Total net loss before provision (benefit) for income taxes | $ | (2,405 | ) | $ | (10,076 | ) | $ | (128,478 | ) | ||
Income tax expense (benefit) differed from the amounts computed by applying the U.S. federal income tax rate of 35% to pretax loss as a result of the following (in thousands):
Fiscal Year Ended | |||||||||||
May1, 2011 | May 2, 2010 | May 3, 2009 | |||||||||
Federal tax benefit at statutory rate | $ | (842 | ) | $ | (3,527 | ) | $ | (44,445 | ) | ||
Permanent differences | 6,184 | 12,262 | 6,868 | ||||||||
Goodwill and intangibles | — | — | 25,157 | ||||||||
State tax, net of federal benefit | (271 | ) | (485 | ) | (5,336 | ) | |||||
Foreign tax withholding, not benefited for U.S. tax purposes | 400 | 520 | 539 | ||||||||
Foreign tax rate differential | (99 | ) | (10,621 | ) | (6,475 | ) | |||||
Credits | (2,001 | ) | (5,140 | ) | 3,259 | ||||||
Change in valuation allowance | (2,517 | ) | 429 | 21,292 | |||||||
Other | 3 | (180 | ) | (95 | ) | ||||||
Total income tax expense (benefit) | $ | 857 | $ | (6,742 | ) | $ | 764 | ||||
The Company has not provided for U.S. income taxes on undistributed earnings of a majority of its foreign subsidiaries because it intends to permanently re-invest these earnings outside the U. S. The cumulative amount of such undistributed earnings upon which no U.S. income taxes have been provided as of May1, 2011 and May 2, 2010 was approximately $8.5 million and $9.9 million, respectively.
In fiscal 2010, the Company received new information related to its unrecognized tax benefit related to withholding taxes in South Korea. This information was not available to the Company in previous financial reporting periods and was considered new information for purposes of assessing the Company's uncertain tax positions as required. The Company considered this new information collectively with all other information available and concluded that it was more-likely-than-not the licenses revenue sourced in South Korea is not subject to withholding tax, and therefore, that the full amount of the tax position will ultimately be realized. Accordingly, a $7.8 million tax benefit related to South Korean withholding tax was recognized as a benefit from income taxes in the consolidated statements of operations, and a corresponding decrease in the long term tax liabilities in the consolidated balance sheets at May 2, 2010. The recognition of the tax benefit does not have any current period or future period cash impact.
The types of temporary differences that give rise to significant portions of the Company's deferred tax assets and liabilities are as follows (in thousands):
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May1, 2011 | May 2, 2010 | ||||||
Deferred tax assets: | |||||||
Capitalized costs | $ | 1,404 | $ | 1,544 | |||
Accrued liabilities | 10,101 | 5,692 | |||||
Property and equipment | 7,899 | 7,976 | |||||
Accrued compensation related expenses | 8,578 | 7,778 | |||||
Net operating loss and credit carryforwards | 52,821 | 61,374 | |||||
Litigation settlement | 2,137 | 2,364 | |||||
Other | 634 | 319 | |||||
Gross deferred tax assets | 83,574 | 87,047 | |||||
Valuation allowance | (81,928 | ) | (84,446 | ) | |||
Total deferred tax assets | 1,646 | 2,601 | |||||
Acquired intangible assets | (1,078 | ) | (1,814 | ) | |||
Unrealized foreign exchange | — | (468 | ) | ||||
Net deferred tax assets | $ | 568 | $ | 319 | |||
As of May1, 2011, the Company had net operating loss carry-forwards for federal and state income tax purposes of approximately $162.8 million and $59.9 million, respectively, available to reduce future income subject to income taxes. The federal and state net operating loss carry-forwards will begin to expire in 2019 and 2012, respectively. The Company also has research credit carry-forwards for federal and California tax purposes of approximately $20.2 million and $18.4 million, respectively, available to reduce future income subject to income taxes. The federal research credit carry-forwards will begin to expire in 2012 and the California research credits carry forward indefinitely.
The Company's management believes that, based on a number of factors, it is more likely than not, that all or some portion of the deferred tax assets will not be realized; and accordingly, for the year ended May1, 2011, the Company has provided a valuation allowance against the Company's U.S. net deferred tax assets. The net change in the valuation allowance was a decrease of $2.5 million and an increase of $0.4 million for the years ended May1, 2011, and May 2, 2010, respectively.
The Company is currently under examination by certain foreign tax authorities. At the present time, it is difficult to predict the results of the tax examination and the timing of the final resolution. The Company's management does not believe that the outcome of this examination would have a material impact to its financial statements. The Company's larger jurisdictions provide a statute of limitations ranging from three to six years. In the U.S., the statute of limitations remains open for fiscal years 2004 and forward.
As of May1, 2011, the Company had approximately $20.6 million of total gross unrecognized tax benefits, of which $1.4 million, if recognized, would favorably affect its effective tax rate in future periods and $1.6 million, if recognized, would result in a credit to additional paid-in capital. The remaining $17.6 million of unrecognized tax benefits, if recognized, would result in an increase in deferred tax assets. However, the Company currently has a full valuation allowance against its U.S. net deferred tax assets which would impact the timing of the effective tax rate benefit should any of such uncertain tax positions be favorably settled in the future.
The Company has adopted the accounting policy that interest and penalties recognized are classified as part of its income taxes. In fiscal 2011, the Company recorded a reversal of $(0.1) million of such interest and penalty expense and as of May1, 2011 the balance of such accrued interest and penalty was $0.3 million.
The following table shows the changes in the gross amount of unrecognized tax benefits as of May1, 2011 (in thousands):
Balance as of May 2, 2010 | $ | 18,404 | |
Gross amount of increases in unrecognized tax benefits for tax positions taken in current year | 1,945 | ||
Gross amount of increases in unrecognized tax benefits for tax positions taken in prior year | 637 | ||
Decreases in unrecognized tax benefits resulting from the lapse of statute of limitation | (356 | ) | |
Balance as of May 1, 2011 | $ | 20,630 | |
The Company does not anticipate that its total unrecognized tax benefits will significantly change due to settlement of examination or the expiration of statute of limitation during the next twelve months.
Note 18. | Related Party Transactions |
In fiscal 2004, the Company began leasing a building for its corporate headquarters from one of its customers under a seven-
80
year lease agreement. The lease was amended in February 2007. In March 2010, the lease was extended for an additional three years. The lease expires in fiscal 2014. In fiscal 2011, 2010 and 2009, the Company recorded $0.9 million, $0.7 million and $0.9 million, respectively, of rent expense and recognized $6.7 million, $6.7 million and $8.1 million from the sale of software licenses to this customer. Accounts receivable from the customer were $2,181 and $1,667 at May 1, 2011 and May 2, 2010
A member of the Company's Board of Directors also serves as a Board member for a customer of Magma. Magma recognized revenue from the sale of software licenses to this customer representing 3% for fiscal 2011 and 0% each for fiscal 2010 and 2009, respectively.
Note 19. | Subsequent Events |
Subsequent to year end, the Company began an investigation, overseen by the Audit Committee of the Board of Directors, of whistleblower allegations related to business expense reimbursements, executive and other employee compensation, and restructuring costs. The investigation was concluded in the first quarter of fiscal 2012. As further discussed in Item 9A of this Form 10-K, certain deficiencies in the Company's internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) were revealed. In conducting the investigation, the Company has incurred legal and administrative costs, currently estimated to be between $1.6 million and $1.8 million, which will be included in general and administrative expense in the first quarter of fiscal 2012.
Selected Consolidated Quarterly Financial Data (Unaudited)
The following table presents selected unaudited consolidated financial data for each of the eight quarters in the two-year period ended May1, 2011. In the Company's opinion, this unaudited information has been prepared on the same basis as the audited information and includes all adjustments (consisting of only normal recurring adjustments) necessary for a fair statement of the financial information for the period presented.
Quarter | |||||||||||||||
First | Second | Third | Fourth | ||||||||||||
FY 2011 | |||||||||||||||
Revenue | $ | 32,556 | $ | 33,926 | $ | 34,765 | $ | 38,039 | |||||||
Gross profit | $ | 27,814 | $ | 28,863 | $ | 29,862 | $ | 33,304 | |||||||
Net income (loss) | $ | (3,258 | ) | $ | (2,714 | ) | $ | 961 | $ | 1,749 | |||||
Net income (loss) per share—Basic(1) | $ | (0.06 | ) | $ | (0.04 | ) | $ | 0.01 | $ | 0.03 | |||||
Net income (loss) per share—Diluted(1) | $ | (0.06 | ) | $ | (0.04 | ) | $ | 0.01 | $ | 0.02 | |||||
Quarter | |||||||||||||||
First | Second | Third | Fourth | ||||||||||||
FY 2010 | |||||||||||||||
Revenue | $ | 28,841 | $ | 29,662 | $ | 30,965 | $ | 33,609 | |||||||
Gross profit | $ | 24,004 | $ | 24,481 | $ | 25,763 | $ | 28,276 | |||||||
Net income (loss) | $ | (4,312 | ) | $ | 4,344 | $ | (2,638 | ) | $ | (728 | ) | ||||
Net income (loss) per share—Basic(1) | $ | (0.09 | ) | $ | 0.09 | $ | (0.05 | ) | $ | (0.01 | ) | ||||
Net income (loss) per share—Diluted(1) | $ | (0.09 | ) | $ | 0.08 | $ | (0.05 | ) | $ | (0.01 | ) | ||||
(1) Earnings per share is computed independently for each of the quarters presented. The sum of the quarterly earnings per share in fiscal 2011and 2010 does not equal the total computed for the year due to rounding.
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Schedule II-Valuation and Qualifying Accounts
Years Ended May1, 2011, May 2, 2010 and May 3, 2009
(in thousands, except per share data)
Balance at Beginning of Period | Additions Charged to Costs and Expenses | Write-offs, Net of Recoveries | Balance at End of Period | ||||||||||
Year ended May 1, 2011 | |||||||||||||
Allowance for doubtful accounts | $ | 17 | 205 | (63 | ) | $ | 159 | ||||||
Year ended May 2, 2010 | |||||||||||||
Allowance for doubtful accounts | $ | 191 | 76 | (250 | ) | $ | 17 | ||||||
Year ended May 3, 2009 | |||||||||||||
Allowance for doubtful accounts | $ | 376 | 1,124 | (1,309 | ) | $ | 191 | ||||||
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PART IV
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) | The following documents are filed as part of this report on Form 10-K: |
(1) | Consolidated Financial Statements. Reference is made to the Index to Registrant's Consolidated Financial Statements under Item 8 in Part II of this Form 10-K. |
(2) | Financial Statement Schedules. Reference is made to the Index to Registrant's Consolidated Financial Statements under Item 8 in Part II of this Form 10-K. |
(3) | Exhibits. Reference is made to Item 15(b) below. |
(b) | Exhibits. |
The exhibit list in the Exhibit Index is incorporated herein by reference as the list of exhibits required as part of this item.
(c) | Financial statements schedules. |
Reference is made to Item 15(a)(2) above.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: July 18, 2011
By | /s/ Peter S.Teshima |
Peter S. Teshima, Corporate Vice President, Finance and Chief Financial Officer | |
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EXHIBIT INDEX
Incorporated by Reference | ||||||
Exhibit Number | Exhibit Description | Form | File No. | Exhibit | Filing Date | Filed Herewith |
2.1 | Agreement and Plan of Merger Dated as of December 20, 2007 by and among Magma Design Automation, Inc., Sabio Labs, Inc., Sabio Acquisition Corp., Sabio Labs, LLC and David Colleran, as Representative | 8-K | 000-33213 | 2.1 | February 27, 2008 | |
3.1 | Amended and Restated Certificate of Incorporation | 10-K | 000-33213 | 3.1 | June 28, 2002 | |
3.2 | Certificate of Correction to the Amended and Restated Certificate of Incorporation | 10-K | 000-33213 | 3.2 | June 28, 2002 | |
3.3 | Amended and Restated Bylaws | 10-K | 000-33213 | 3.3 | June 28, 2002 | |
4.1 | Form of Common Stock Certificate | S-1/A | 333-60838 | 4.1 | November 15, 2001 | |
4.2 | Form of Registration Rights Agreement, dated March 5, 2007, by and between Magma Design Automation, Inc. and certain other parties thereto | 8-K | 000-33213 | 10.2 | March 5, 2007 | |
4.3 | Indenture, dated as of September 11, 2009, between Magma Design Automation, Inc. and U.S. Bank National Association, as Trustee. | 8-K | 000-33213 | 4.1 | September 15, 2009 | |
10.1# | 2010 Stock Incentive Plan | DEF 14 A | 000-33213 | A | August 11, 2010 | |
10.2# | 2010 Stock Option Incentive Agreement | 10Q | 000-33213 | 10.3 | December 9, 2010 | |
10.3# | 2010 Restricted Stock Unit Agreement | 10Q | 000-33213 | 10.4 | December 9, 2010 | |
10.4# | 2001 Stock Incentive Plan, as amended | 10-K | 000-33213 | 10.1 | June 16, 2008 | |
10.5# | 2001 Stock Incentive Plan-Form Notice of Grant of Stock Options for Executive Officers | 10-Q | 000-33213 | 10.2 | November 14, 2005 | |
10.6# | 2001 Stock Incentive Plan-Form of Notice of Grant of Stock Options and Stock Option Agreement | 10-K | 000-33213 | 10.21 | June 16, 2008 | |
10.7# | 2001 Stock Incentive Plan-Form of Notice of Grant of Award and Stock Unit Agreement | 10-K | 000-33213 | 10.22 | June 16, 2008 | |
10.8# | 2001 Stock Incentive Plan-Form of Notice of Grant of Award and Restricted Share Agreement | 10-K | 000-33213 | 10.23 | June 16, 2008 | |
10.9# | 2001 Stock Incentive Plan-Form of Notice of Stock Option Award and Stock Option Agreement (U.S. employees) for replacement options in connection with the Registrant's Offer to Exchange Outstanding Options to Purchase Common Stock, dated June 27, 2005 (as amended August 5, 2005) | SC TO-I/A | 005-77999 | 99(a)(10)(A) | August 5, 2005 | |
10.10# | 2001 Stock Incentive Plan-Form of Notice of Stock Option Award and Stock Option Agreement (for international employees other than those residing in China, Israel, India and the United Kingdom) for replacement options in connection with the Registrant's Offer to Exchange Outstanding Options to Purchase Common Stock, dated June 27, 2005 (as amended August 5, 2005) | SC TO-I/A | 005-77999 | 99(a)(10)(B) | August 5, 2005 | |
10.11# | 2001 Stock Incentive Plan-Form of Notice of Stock Option Award and Stock Option Agreement (for employees residing in China, Israel and India) for replacement options in connection with the Registrant's Offer to Exchange Outstanding Options to Purchase Common Stock, dated June 27, 2005 (as amended August 5, 2005) | SC TO-I/A | 005-77999 | 99(a)(10)(C) | August 5, 2005 | |
88
10.12# | 2001 Stock Incentive Plan-Form of Notice of Stock Option Award and Stock Option Agreement (for employees residing in the United Kingdom) for replacement options in connection with the Registrant's Offer to Exchange Outstanding Options to Purchase Common Stock, dated June 27, 2005 (as amended August 5, 2005) | SC TO-I/A | 005-77999 | 99(a) | August 5, 2005 | |
10.13# | 2001 Stock Incentive Plan-Form of restricted stock unit agreement (for U.S. employees) | SC TO-I/A | 005-77999 | 99(a)(1)(G) | November 20, 2008 | |
10.14# | 2001 Stock Incentive Plan-Form of restricted stock unit agreement (for non-U.S. employees) | SC TO-I/A | 005-77999 | 99(a)(1)(H) | November 20, 2008 | |
10.15# | 2001 Stock Incentive Plan-Forms of stock option agreement (non-U.S. employees) | SC TO-I/A | 005-77999 | 99(d)(10) | November 20, 2008 | |
10.16# | 2001 Employee Stock Purchase Plan, as amended | 10-K | 000-33213 | 10.3 | June 16, 2008 | |
10.17# | 2004 Employment Inducement Award Plan, as amended | 8-K | 000-33213 | 10.1 | January 30, 2006 | |
10.18# | 2004 Employee Inducement Award Plan-Forms of stock option agreement | SC TO-I/A | 005-77999 | 99(d)(12) | November 20, 2008 | |
10.19# | 1998 Stock Incentive Plan | S-1 | 333-60838 | 10.4 | May 14, 2001 | |
10.20# | 1998 Stock Incentive Plan-Form of stock option agreement | S-1/A | 333-60838 | 10.10 | August 14, 2001 | |
10.21# | 1998 Stock Incentive Plan-Form of Amendment to Stock Option Agreement | S-1/A | 333-60838 | 10.11 | August 14, 2001 | |
10.22# | Summary of RSU Change in Control Vesting Provisions | 8-K | 000-33213 | 10.1 | July 21, 2008 | |
10.23# | Summary of Standard Director Compensation Arrangements for Non-Employee Directors (contained on pages 10-12 of the proxy statement for the Company's annual meeting filed August 11, 2010) | DEF 14A | 000-33213 | August 11, 2010 | ||
10.24# | Form of Indemnification Agreement (between the Registrant and the following directors and executive officers: Kevin C. Eichler, Thomas M. Rohrs, Chester J. Silvestri, Susumu Kohyama, Rajeev Madhavan, Roy E. Jewell, Peter S. Teshima, David Sugishita and Govind Kizhepat) | 10-Q | 000-33213 | 10.5 | March 12, 2009 | |
10.25# | Form of Tier 1 Magma Design Automation Employment and Severance Agreement (between the Registrant and the following executive officers: Rajeev Madhavan, Roy E. Jewell and Peter S. Teshima) | 10-Q | 000-33213 | 10.3 | March 12, 2009 | |
10.26# | Form of Tier 2 Magma Design Automation Employment and Severance Agreement | 10-Q | 000-33213 | 10.4 | March 12, 2009 | |
10.27 | Lease for corporate headquarters dated June 19, 2003, between Registrant and 3Com Corporation (assumed by Marvell Technology from 3Com) | 10-Q | 000-33213 | 10.2 | November 14, 2003 | |
10.28 | Office Lease Agreement between Registrant and CA-Skyport I Limited Partnership dated December 28, 2006, for the premises located at 1650 Technology Drive, San Jose, California | 10-Q | 0-33213 | 10.1 | February 8, 2007 | |
10.29 | Sub-Sub Lease Agreement between Registrant and Siemens Communications Inc. dated November 15, 2006 and becoming effective on December 28, 2006 | 10-Q | 0-33213 | 10.2 | February 8, 2007 | |
10.30 | Amendment Number One dated January 24, 2007 to Lease dated June 19, 2003, between Registrant and 3Com Corporation (assumed by Marvell Technology from 3Com) | 10-K | 000-33213 | 10.30 | June 6, 2007 | |
10.31 | Credit Agreement, effective as of March 19, 2010, by and between the Registrant and Wells Fargo Bank, N.A. | |||||
89
Amendment Number One to Credit Agreement and Consent, dated as of June 24, 2010, by and between the lenders identified therein, the Registrant and Wells Fargo Capital Finance. | 10-Q | 000-33213 | 10.5 | December 9, 2010 | ||
10.32 | Amendment Number Two to Credit Agreement and Consent, dated as of July 30, 2010, by and between the lenders identified therein, the Registrant and Wells Fargo Capital Finance. | 10-Q | 000-33213 | 10.6 | December 9, 2010 | |
10.33 | Amendment Number Three to Credit Agreement and Consent, dated as of September 15, 2010, by and between the lenders identified therein, the Registrant and Wells Fargo Capital Finance, LLC. | 10-Q | 000-33213 | 10.7 | December 9, 2010 | |
10.34 | Amendment Number Four to Credit Agreement and Consent, dated as of October 29, 2010, by and between the lenders identified therein, the Registrant and Wells Fargo Capital Finance. | 10-Q | 000-33213 | 10.8 | December 9, 2010 | |
21.1* | List of Subsidiaries | |||||
23.1 | Consent of Grant Thornton LLP | X | ||||
31.1* | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | |||||
31.2* | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | |||||
32.1* | Certification of Chief Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||||
32.2* | Certification of Chief Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||||
31.3 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | X | ||||
31.4 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | X | ||||
32.3 | Certification of Chief Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | X | ||||
32.4 | Certification of Chief Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | X | ||||
# Indicates management contract or compensatory plan or arrangement.
± Portions of this agreement have been omitted pursuant to a request for confidential treatment.
* Indicates exhibits filed previously with the Original Filing.
90