NEOMAGIC CORP - 10-Q Quarterly Report

QuickLinks -- Click here to rapidly navigate through this document

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

Form 10-Q

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended October 31, 2002
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission file number 000-22009

NEOMAGIC CORPORATION
(Exact name of Registrant as specified in its charter)

DELAWARE [State or other jurisdiction of incorporation or organization]		77-0344424 [I.R.S. Employer Identification No.]
3250 Jay Street Santa Clara, California [Address of principal executive offices]		95054 [Zip Code]
(408) 988-7020 Registrant's telephone number, including area code

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

The number of shares of the Registrant's Common Stock, $.001 par value, outstanding at November 30, 2002 was 29,947,125

NEOMAGIC CORPORATION

FORM 10-Q
INDEX

		PAGE
PART I. CONSOLIDATED CONDENSED FINANCIAL INFORMATION
Item 1.	Unaudited Consolidated Condensed Financial Statements:
	Consolidated Condensed Statements of Operations Three and Nine months ended October 31, 2002 and 2001	3
	Consolidated Condensed Balance Sheets October 31, 2002 and January 31, 2002	4
	Consolidated Condensed Statements of Cash Flows Nine months ended October 31, 2002 and 2001	5
	Notes to Unaudited Consolidated Condensed Financial Statements	6-12
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	12-27
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27
Item 4.	Controls and Procedures	27
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	28
Item 2.	Changes in Securities	28
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Submission of Matters to a Vote of Security Holders	28
Item 5.	Other Information	28
Item 6.	Exhibits and Reports on Form 8-K	28
	Signatures	29
	Certifications	30-31

Part I. Financial Information

Item 1. Financial Statements

NEOMAGIC CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

			Three Months Ended						Nine Months Ended
			October 31, 2002			October 31, 2001			October 31, 2002			October 31, 2001
Net sales			$	655		$	83		$	1,511		$	351
Cost of product sales				780			1			2,085			8
Impairment of certain acquired intangible assets				367			—			367			—

Total				1,147			1			2,452			8

Gross margin (loss)				(492	)		82			(941	)		343
Operating expenses:
	Research and development(1)			5,662			6,041			18,131			19,344
	Sales, general and administrative(2)			2,127			1,857			7,836			5,805
	Impairment of certain acquired intangible assets			506			—			506			—
	Special Charges			—			—			3,600			—

		Total operating expenses		8,295			7,898			30,073			25,149

Loss from operations				(8,787	)		(7,816	)		(31,014	)		(24,806	)
Other income (expense), net:
	Income, net of expenses, from the sale of DVD assets			—			—			1,580			—
	Interest income and other income			277			843			1,557			2,987
	Interest expense			—			—			—			(11	)

Loss before income tax benefit and cumulative effect of change in accounting principle				(8,510	)		(6,973	)		(27,877	)		(21,830	)
Income tax benefit				—			(188	)		(6,339	)		(770	)

Loss before cumulative effect of change in accounting principle				(8,510	)		(6,785	)		(21,538	)		(21,060	)
Cumulative effect of change in accounting principle				(4,175	)		—			(4,175	)		—

Net loss			$	(12,685	)	$	(6,785	)	$	(25,713	)	$	(21,060	)

Basic and diluted net loss per share			$	(0.44	)	$	(0.26	)	$	(0.90	)	$	(0.81	)
Weighted average common shares outstanding for basic and diluted				29,157			26,263			28,453			26,032

(1): Includes $101 and $500 in amortization of deferred stock compensation for the three months ended October 31, 2002 and October 31, 2001, respectively, and $863 and $1,520 for the nine months ended October 31, 2002 and October 30, 2001, respectively.
(2): Includes $143 and $121 in amortization of deferred stock compensation for the three months ended October 31, 2002 and October 31, 2001, respectively, and $906 and $365 for the nine months ended October 31, 2002 and October 31, 2001, respectively.

See accompanying notes to consolidated condensed financial statements.

NEOMAGIC CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)

			October 31, 2002			January 31, 2002(1)
			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	44,912		$	38,996
	Short-term investments			29,363			32,914
	Accounts receivable, net			435			125
	Inventory			726			78
	Income tax receivable			8			3,303
	Other current assets			1,612			3,005

		Total current assets		77,056			78,421
Property, plant and equipment, net				4,329			3,734
Restricted cash				—			15,000
Employee notes receivable				1,300			1,300
Goodwill				—			3,792
Intangibles, net				4,789			5,705
Other assets				474			357

		Total assets	$	87,948		$	108,309

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable		$	2,169		$	2,147
	Accrued compensation and related benefits			1,447			1,253
	Income taxes payable			3,522			3,934
	Deferred rent			284			582
	Deferred gain on the sale of DVD assets			—			1,580
	Other accrued liabilities			1,598			607
	Current portion of capital lease obligations			744			—

		Total current liabilities		9,764			10,103
Capital lease obligations				1,357			—
Stockholders' equity:
	Common stock			30			28
	Additional paid-in-capital			88,979			86,436
	Deferred compensation			(186	)		(2,004	)
	Accumulated other comprehensive income			(10	)		19
	Retained earnings			(11,986	)		13,727

		Total stockholders' equity		76,827			98,206

		Total liabilities and stockholders' equity	$	87,948		$	108,309

(1): Derived from the January 31, 2002 audited consolidated financial statements included in the Annual Report on Form 10-K of NeoMagic Corporation for fiscal year 2002.

See accompanying notes to consolidated condensed financial statements.

NEOMAGIC CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

			Nine Months Ended
			October 31, 2002			October 31, 2001
Operating activities:
Net loss			$	(25,713	)	$	(21,060	)
Adjustments to reconcile net loss to net cash used for operating activities:
	Depreciation and amortization			2,206			2,801
	Loss on disposal of property, plant and equipment			2			77
	Loss on restructuring of wafer purchase agreement			3,600			—
	Income, net of expenses, from the sale of DVD assets			(1,580	)		—
	Amortization of deferred compensation			1,771			1,885
	Impairment of acquired intangible assets and goodwill			5,048			—
	Changes in operating assets and liabilities:
		Accounts receivable		(310	)		190
		Inventory		(648	)		—
		Income tax receivable		3,295			896
		Other current assets		1,393			737
		Restricted cash		15,000			(15,000	)
		Other assets		(457	)		1,232
		Accounts payable		22			(1,571	)
		Compensation and related benefits		194			(645	)
		Income taxes payable		(412	)		2,581
		Other accruals		(2,387	)		(628	)

Net cash provided by (used for) operating activities				1,024			(28,505	)

Investing activities:
	Net proceeds from the sale of DVD assets			1,580			—
	Proceeds from sale of property, plant, and equipment			—			1
	Purchases of property, plant and equipment			(702	)		(893	)
	Purchases of short-term investments			(41,191	)		(44,707	)
	Maturities of short-term investments			44,713			49,620

Net cash provided by investing activities				4,400			4,021

Financing activities:
	Repayment on note receivable from stockholders			—			40
	Net proceeds from issuance of common stock			492			573

Net cash provided by financing activities				492			613

Net increase (decrease) in cash and cash equivalents				5,916			(23,871	)
Cash and cash equivalents at beginning of period				38,996			72,852

Cash and cash equivalents at end of period			$	44,912		$	48,981

Supplemental schedules of cash flow information:
Cash paid (received) during the period for:
	Interest		$	—		$	11
	Taxes		$	(9,568	)	$	(5,700	)
Supplemental disclosure of non-cash financing activities:
	Issuance of common stock in connection with restructuring of wafer purchasing agreement Interest		$	2,100		$	—

See accompanying notes to consolidated condensed financial statements.

NEOMAGIC CORPORATION
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1. Basis of Presentation:

The unaudited consolidated condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and include the accounts of NeoMagic Corporation and its wholly owned subsidiaries collectively ("NeoMagic" or the "Company"). Certain information and Note disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company, the financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position at October 31, 2002, the operating results for the three and nine months ended October 31, 2002 and 2001, and the cash flows for the nine months ended October 31, 2002 and 2001. These financial statements and notes should be read in conjunction with the Company's audited financial statements and notes thereto for the year ended January 31, 2002, included in the Company's most recent Form 10-K filed with the Securities and Exchange Commission.

The results of operations for the three and nine months ended October 31, 2002 are not necessarily indicative of the results that may be expected for the year ending January 31, 2003.

The third fiscal quarters of 2003 and 2002 ended on October 27, 2002 and October 28, 2001, respectively. For ease of presentation, the accompanying financial statements have been shown as ending on the last day of the calendar month of October.

2. Recent Accounting Pronouncements:

In July 2002, the Financial Accounting Standards Board approved Statement of Financial Accounting Standards No. 146 (SFAS 146) "Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146 addresses the financial accounting and reporting for obligations associated with an exit activity, including restructuring, or with a disposal of long-lived assets. Exit activities include, but are not limited to, eliminating or reducing product lines, terminating employees and contracts and relocating plant facilities or personnel. SFAS 146 specifies that a company will record a liability for a cost associated with an exit or disposal activity only when that liability is incurred and can be measured at fair value. Therefore, commitment to an exit plan or a plan of disposal expresses only management's intended future actions and, therefore, does not meet the requirement for recognizing a liability and the related expense. SFAS 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. The Company does not anticipate that the adoption of SFAS 146 will have a material effect on its financial position or results of operations.

In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and the accounting and reporting provisions of APB No. 30, "Reporting the Results of Operations for a Disposal of a Segment of a Business." The Company adopted SFAS 144 on February 1, 2002. In accordance with SFAS 144, the Company assesses the recoverability of its long-lived assets by comparing projected undiscounted net cash flows associated with those assets against their respective carrying amounts to determine whether impairment exists. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. See Note 9 "Intangible Assets" for the effect of adopting the provisions and the results of impairment assessments.

NeoMagic adopted Statement of Financial Accounting Standards No. 141 (SFAS 141) "Business Combinations", and Statement of Financial Accounting Standards No. 142 (SFAS 142) "Goodwill and Other Intangible Assets," in the first quarter of fiscal 2003. See Note 3 "Cumulative Effect of Accounting Change" for the effect of adopting the provisions and the results of transitional impairment tests.

3. Cumulative Effect of An Accounting Change:

On February 1, 2002, NeoMagic adopted Statement of Accounting Standards No. 142 (SFAS 142), "Goodwill and Other Intangibles Assets, which required companies to discontinue the amortization of goodwill and certain intangible assets with an indefinite useful life. Instead, goodwill and intangible assets deemed to have an indefinite useful life must be reviewed for impairment using a two step method upon adoption of SFAS 142 and annually thereafter, or more frequently when indicators of impairment exist.

Upon adoption of the standard, the Company tested goodwill for impairment using the two-step process prescribed in SFAS 142. The Company completed the first of the two required transitional impairment tests of goodwill and indefinite lived intangible assets as of February 1, 2002 during the second quarter of fiscal 2003. The Company determined that there were indicators of impairment, as the carrying value of the reporting unit exceeded fair value derived from the market capitalization model. The second step of the transitional impairment test, which is to determine the amount of impairment, was completed in the third quarter of fiscal 2003 by comparing the implied values of the goodwill to the fair values of net tangible assets and identifiable intangibles. Based on the results of the second transitional impairment test, the Company recorded a non-cash accounting change adjustment of $4.2 million, reflecting a reduction in the carrying value of its goodwill, as a cumulative effect of an accounting change in the accompanying consolidated condensed statements of operations.

4. Loss Per Share:

The following data show the amounts used in computing loss per share and the effect on the weighted-average number of shares of diluted potential common stock.

Per share information calculated on this basis is as follows:

		Three Months Ended October 31,						Nine Months Ended October 31,
		2002			2001			2002			2001
		(in thousands, except per share amounts)
Numerator:
	Loss from continuing operations	$	(8,510	)	$	(6,785	)	$	(21,538	)	$	(21,060	)
	Cumulative effect of an accounting change		(4,175	)		—			(4,175	)		—

Net loss		$	(12,685	)	$	(6,785	)	$	(25,713	)	$	(21,060	)

Denominator:
	Denominator for basic and diluted loss per share—weighted average shares outstanding		29,157			26,263			28,453			26,032

Loss per share from continuing operations		$	(.29	)	$	(.26	)	$	(.75	)	$	(.81	)
Cumulative effect per share of an accounting change			(.15	)		—			(.15	)		—

Basic and diluted loss per share		$	(.44	)	$	(.26	)	$	(.90	)	$	(.81	)

For the three months ended October 31, 2002 and October 31, 2001 and for the nine months ended October 31, 2002 and October 31, 2001, respectively, basic earnings per share equals diluted earnings per share due to the net loss for those periods.

5. Divestitures:

In April 2000, pursuant to an asset purchase agreement, the Company sold the principal assets of the DVD product group to LSI Logic ("Buyer"). The assets primarily consisted of fixed assets and intangible assets. In exchange for the assets sold to the Buyer, the Company received $11.7 million in a lump-sum cash payment. An additional $2.3 million was contingent on the Company's performance of certain obligations related to the transfer of licenses with third parties to the Buyer. The Company wrote-off approximately $3.6 million in capitalized intellectual property, fixed assets and prepaid expenses related to the DVD product group that was transferred to the Buyer. In addition, the Company accrued approximately $0.6 million in transaction costs and approximately $2.3 million in retention packages for the affected employees during the first quarter of fiscal 2001. During the second quarter of fiscal 2001, the Company incurred additional costs of $0.3 million. During the third quarter of fiscal 2001, the Company received a $1.5 million cash payment which was previously contingent on the Company's performance of certain obligations related to the transfer of licenses with third parties to the Buyer. As a result, the Company recorded a pre-tax gain of approximately $6.5 million on the sale, which is recorded in Income, net of expenses, from the sale of DVD assets on the Consolidated Condensed Statements of Operations for the year ended January 31, 2001. In the first quarter of fiscal 2003, the Company received a $1.6 million cash payment previously contingent on the transfer of licenses with third parties to the Buyer, which is recorded as a gain in the Consolidated Condensed Statements of Operations for the nine months ended October 31, 2002.

6. Inventories:

Inventories are stated at the lower of cost or market value. Cost is determined by the first-in, first-out method. The Company writes down the inventory value for estimated excess and obsolete inventory, based on management's assessment of future demand and market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Inventory consists of:		October 31, 2002		January 31, 2002
		(in thousands)
Raw materials		$	175	$	—
Work in process			99		—
Finished goods			452		78

	Total	$	726	$	78

7. Accumulated Other Comprehensive Income:

Total accumulated other comprehensive loss was $10 thousand at October 31, 2002 compared to other comprehensive income of $19 thousand at January 31, 2002. Accumulated other comprehensive income consists entirely of unrealized gains and losses on available for sale securities.

8. Goodwill:

Effective February 1, 2002, NeoMagic adopted SFAS 142, which was issued by the Financial Accounting Standards Board in July 2001. Under this standard, the Company ceased amortizing goodwill effective February 1, 2002. The Company completed the transitional tests for goodwill impairment using the two-step process prescribed in SFAS 142. See Note 3 "Cumulative Effect of Accounting Change" for the effects of adopting the provisions and the results of transitional impairment tests. In addition, on adoption of SFAS 142, the Company reclassified certain intangibles with net book value $383 thousand, consisting of assembled workforce and acquisition costs, which are no longer defined as an acquired intangible under SFAS 142, to goodwill. Accordingly, there was no

amortization of assembled workforce and acquisition costs recognized during the nine months ended October 31, 2002.

The following table presents a reconciliation of previously reported net loss and net loss per share to the amounts adjusted to exclude goodwill and acquired workforce amortization (in thousands, except per share data):

		Three Months Ended October 31,						Nine Months Ended October 31,
		2002			2001			2002			2001
Net loss:
	As reported	$	(12,685	)	$	(6,785	)	$	(25,713	)	$	(21,060	)
	Goodwill amortization		—			1			—			3
	Workforce amortization		—			74			—			222
	Acquisition costs amortization		—			21			—			63

	As adjusted	$	(12,685	)	$	(6,689	)	$	(25,713	)	$	(20,772	)

Basic and diluted net loss per share:
	As reported	$	(0.44	)	$	(0.26	)	$	(0.90	)	$	(0.81	)
	Goodwill amortization		—			—			—			—
	Workforce amortization		—			0.01			—			0.01
	Acquisition costs amortization		—			—			—			—

	As adjusted	$	(0.44	)	$	(0.25	)	$	(0.90	)	$	(0.80	)

9. Intangible Assets:

The following table provides a summary of the carrying amount of intangible assets that will continue to be amortized and excludes amounts originally allocated to an intangible asset representing the value of the assembled workforce:

Intangible assets subject to amortization were as follows (in thousands):

October 31, 2002	Cost		Accumulated Amortization			Net
Licensed intellectual property	$	3,159	$	(11	)	$	3,148
Core technology		1,800		(500	)		1,300
Developed technology		550		(333	)		217
Patents		1,697		(1,573	)		124

	$	7,206	$	(2,417	)	$	4,789

January 31, 2002		Cost			Accumulated Amortization