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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2005
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 number: 000-32967
HPL TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 77-0550714
(State of Incorporation) (I.R.S. Employer Identification No.)
2033 Gateway Place, Suite 400,
San Jose, California 95110
(Address of Principal Executive Offices) (Zip Code)
(408) 437-1466
(Registrant's telephone number, including area code)
Securities registered under Section 12(b)of the Act:
None
Securities registered under Section 12(g)of the Act:
Common Stock, $0.001 Par Value
(Title of Class)
1
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 |X| 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 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. |X|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 under the Securities Exchange Act of 1934). Yes |_| No
|X|
The aggregate market value of the shares of the registrant's common
stock held by non-affiliates of the registrant (all stockholders other than
officers, directors and 5% or greater stockholders) as of September 30, 2004 was
$11,359,716 (based upon an average of the closing bid and asked price of $0.57
per share as of such date, as reported in the "Pink Sheets" published by Pink
Sheets LLC).
As of May 31, 2005, the registrant had outstanding 38,768,065 shares of
common stock.
TABLE OF CONTENTS
PART I
Item 1 Business 4
Item 2 Properties 16
Item 3 Legal Proceedings 16
Item 4 Submission of Matters to a Vote of Security Holders 18
PART II
Item 5 Market for Registrant's Common Stock, Related Stockholder Matters and Issuer Purchases of Equity 19
Securities
Item 6 Selected Financial Data 19
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 21
Item 7A Quantitative and Qualitative Disclosures about Market Risk 40
Item 8 Financial Statements and Supplementary Data 42
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 67
Item 9A Controls and Procedures 67
2
PART III
Item 10 Directors and Executive Officers of the Registrant 69
Item 11 Executive Compensation 69
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 72
Item 13 Certain Relationships and Related Transactions 73
Item 14 Principal Accountant Fees and Services 73
PART IV
Item 15 Exhibits and Financial Statement Schedules 74
3
PART I
GENERAL
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that involve
substantial risks and uncertainties. In some cases you can identify these
statements by forward-looking words such as "anticipate", "believe", "could",
"estimate", "expect", "intend", "may", "should", "will", and "would" or similar
words. You should read statements that contain these words carefully because
they may discuss our future expectations, contain projections of our future
results of operations or of our financial condition or state other
"forward-looking" information. However, there may be events in the future that
we are not able to accurately predict or control. The factors listed in Item 7
under the caption "Risk Factors", as well as any cautionary language in this
report, provide examples of risks, uncertainties and events that may cause our
actual results to differ materially from the expectations we describe in our
forward-looking statements. You should be aware that the occurrence of any of
the events described in these risk factors and elsewhere in this report could
have a material adverse effect on our business, financial condition and results
of operations.
ITEM 1. BUSINESS
OVERVIEW
We are focused on a single objective - to maximize yield potential in
every phase of the semiconductor product lifecycle, from process technology
development, through design, and into manufacturing and test. By combining our
proven, configurable enterprise software platforms and proprietary TestChip
Intellectual Property ("TestChip IP"), we enable manufacturers of semiconductors
and flat panel displays to quickly identify and correct yield-limiting factors
in their design, technology development and manufacturing processes. We provide
one of the industry's most comprehensive yield optimization solutions.
Unless we specify otherwise, all references to the Company and HPL in
this report refer to HPL and its subsidiaries. Our principal executive offices
are located at 2033 Gateway Place, Suite 400, San Jose, California 95110 and our
telephone number is (408) 437-1466.
INDUSTRY BACKGROUND
Semiconductor Industry
The semiconductor product development process can be grouped into three
broad stages: 1) process technology development, 2) design and 3) manufacturing.
These stages are described below:
1) Process Technology Development. Semiconductor production
begins with the development of "process technology", during
which a semiconductor fabricator determines device
characteristics and assesses the yield impact on manufacturing
margins. Based on the results of the assessment, physical
"design rules" and electrical "process parameters" are created
to assure that products can be reliably produced in a given
fabrication facility. These design rules and process
parameters guide the product design process in the second
stage of product development, described below.
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2) Design. The second stage of semiconductor development is
product design. Design requires complex software to place and
connect individual electrical components (transistors) to
construct the functionality of a product. A leading-edge
design can call for millions of transistors and
interconnections on a square centimeter of silicon. To
manufacture a semiconductor product that functions properly,
it must be designed with exact precision and expressly for a
given semiconductor process technology, described above.
3) Manufacturing. The third step in the semiconductor development
process is manufacturing. Manufacturing requires hundreds of
individual processing steps to form patterned layers of
material on a wafer which create transistors and connect them
to form the desired electronic circuitry or function.
Additionally, the manufacturing process includes packaging and
testing of the individual chips themselves. In the case of new
technology, interactions among the various wafer fabrication
processes and/or the design frequently cause new types of
defects and new sources of failure. Constant and accurate
measurement and inspection are required to find defects and
eliminate defect sources during wafer manufacturing as well as
assembly and test processes. The early detection and
subsequent resolution of yield problems can result in
significant cost savings to the manufacturer.
We believe that two fundamental semiconductor industry trends have
aligned to create a significant opportunity for us. The first trend is the
continuing fragmentation of the semiconductor development chain. The industry
has evolved from classic semiconductor companies (integrated device
manufacturers, or IDMs) that were once self-contained with full technology
development, design, and manufacturing capabilities contained within one company
into an industry of specialized companies with sub-market segments. Over the
past twenty years, this outsourcing trend has given birth to many large and
growing industry niches including assembly and test subcontractors, Electronic
Design Automation ("EDA") companies, pure-play wafer foundries, and intellectual
property ("IP") providers. The success of foundries has enabled fabless
companies engaged in design and sales/marketing, but not manufacturing, to
develop and flourish.
The second trend is the increasing complexity of process technologies
that accompanies each new technology node, or smaller chip features, such as
90nm and 65nm (known as "nodes"). Process variations and defects that were once
a concern for manufacturing only are now having significant impact on design,
and new process modules required for advanced device structures are affecting
designs in unanticipated ways. For example, low capacitance interconnects and
resolution enhancement technologies introduced at the 130nm technology node have
necessitated dramatic changes in how circuit topologies are formed. Redundant
connections ("vias") between metal lines and optical proximity correction
("OPC") techniques have become mandatory for 130nm devices. These effects were
not fully comprehended during the transition to 130nm, and as the industry moves
to more advanced technology nodes (90nm, 65nm, 45nm), the interdependency
between technology development, semiconductor design and manufacturing will
continue to intensify.
As the semiconductor industry continues to fragment, tighter linkages
between the different stages of the semiconductor development chain are becoming
more critical. Because of these two pervasive and divergent trends, we are in a
unique position to provide product solutions that bridge the technology
development, design, and manufacturing worlds with tools, data, and IP to
optimize yields and accelerate time-to-volume. Point solutions are emerging to
solve problems in this growing solution space, referred to as Design for
Manufacturing ("DFM"). We have a unique combination of products, IP, and
expertise to provide high-value, yield-focused, comprehensive solutions in the
DFM segment.
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Importance of Yield
Yield is a measurement of the efficiency of a product development
process. Specifically, yield is the percentage of properly functioning devices
produced at each stage in the manufacturing process. Improvement of yield or
"yield learning" is often challenging and involves the continual identification
and resolution of the root causes of failure in the design and manufacturing
process. New products built with newer, less mature semiconductor manufacturing
processes often start with very low yields because fabrication procedures and
device technologies are not yet fully optimized. During the transition from
early fabrication to volume production, yield improvements can be achieved, but
are often difficult as production equipment and processes are stressed to
maximize throughput. Even as production volumes increase, yield may often fall
as new production equipment is brought on-line and test programs are enhanced to
reduce test escapes.
Yield improvement is a multi-faceted challenge as thousands of factors
in the semiconductor production process may affect yield. These factors
contribute to yield loss based on the sensitivity and margin of the design and
manufacturing. By definition, failures are either random or systematic in
nature. Random failures are typically caused by arbitrary particles introduced
into the fabrication process, causing circuit faults such as a bridge between
two adjacent metal lines. Systematic failures emanate from non-random sources
such as equipment or environmental changes, and design sensitivity or material
property variations. Due to yield learning, each successive generation of
semiconductors becomes somewhat less sensitive to existing failure modes but
remain susceptible to new failure modes. This creates a constant need to capture
and analyze more data to improve yields. The sheer volume of data, and the
amount of complex analysis required, has become an impediment to improving the
yield learning curve. To identify factors that affect yield in a new process,
semiconductor companies must collect and analyze an immense (and growing) amount
of data that is generated throughout the semiconductor product development
lifecycle, often from several worldwide locations and, increasingly, from supply
chain partners. In any semiconductor fabrication facility, there are likely to
be as many as 50 different sets and formats of data produced, each with
thousands of individual parameters that need to be tracked. While this data
provides important clues to yield enhancement, the efficient collection,
correlation and analysis across the various data sets presents a substantial
challenge for the semiconductor industry.
High yield is an essential requirement for a profitable semiconductor
business, especially during the introduction of new products. Selling prices and
profit margins are typically higher in the early stages of a new semiconductor
product lifecycle. Just a small acceleration along the yield learning curve can
create disproportionately greater revenue and profitability. Another benefit of
fast yield ramp-up is the increased revenue that is associated with the measured
speed of microprocessors, application specific integrated circuits ("ASICs") and
telecom devices. High parametric yield enables parts to operate at higher
frequencies and subsequently command higher selling prices. As the product
lifecycles advance, high yield can accelerate cost reductions and maximize
efficiency gains. These factors make it essential that semiconductor companies
monitor and maintain yield on an ongoing basis throughout the entire product
lifecycle. In today's volatile markets where capacity utilization rates
fluctuate, yield improvement remains fundamental to business success. Given the
immense costs of a semiconductor fabrication facility and the economics of
production efficiency, the rate of yield learning is a critical component in the
profitability of any semiconductor company.
Flat Panel Industry
Continued innovation in the flat panel display ("FPD") industry is
driving the proliferation of liquid crystal display ("LCD") applications in
entertainment and communication devices such as cell phones, digital cameras,
and computer and television monitors, as well as other fields such as
industrial, automotive, and aviation.
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The latest estimates by DisplaySearch predict the global FPD market
(including AM-LCD) will grow 140% to $62 billion by the end of 2006. The
projected demand for LCD-TVs, forecasted to be at a 76.5% compound annual growth
rate, is the future growth driver for the FPD market with about 189 million
units expected to be shipped by 2006. Manufacturing cost reductions, faster
ramp, improved return on investment, and higher yields driven by yield
management solutions will enhance the performance of FPD manufacturers.
The move to new FPD substrate sizes (i.e. generations 6 and 7) is
expected to reduce manufacturing costs. In addition, the improvements in
manufacturing processes are focused on cost reduction with the introduction of
new processes in the thin film transistor ("TFT") array, color filter, liquid
crystal and module process. These new changes present significant manufacturing
and yield management challenges. FPD yield management solutions empower
engineers to solve yield related problems by aggregating all yield-relevant data
and providing them with sophisticated analysis techniques.
Currently, most FPD yield management tools are internally developed by
FPD manufacturers. The development and integration of these yield management
tools is a significant challenge for FPD manufacturers and a significant driving
force for implementing commercial yield management tools that are scalable,
collaborative, open, reliable and extensible.
HPL PRODUCTS AND TECHNOLOGY
HPL provides an integrated suite of yield enhancement software
solutions that enables customers to optimize yields in all three stages of
semiconductor development: process technology development, design and
manufacturing. Derived from years of experience working with leading
semiconductor manufacturing companies, HPL has embedded much of the industry's
best practices directly into its yield optimization products. HPL's yield
optimization software delivers high-impact business results by reducing the time
to high yield through streamlined data analysis and enhancing collaboration
among process technology development, design and manufacturing.
Odyssey(TM)
Odyssey is a production-proven defect and yield data management
solution. Odyssey and its predecessors are in use at over seventy manufacturing
sites worldwide. Odyssey delivers results efficiently and reliably, leveraging
error-correcting processes to assure users of maximum up-time. It has an open
and equipment vendor-neutral architecture that supports most inspection, review
and classification tools with a full range of charting, wafer mapping,
statistical analysis and lot dispositioning solutions. Odyssey is easy to use
and provides high productivity with its all-in-one graphical user interface
("GUI"). Odyssey simplifies and automates in-line defect analysis, reducing
cycle times and enabling engineers to address other critical yield-limiting
issues.
Odyssey also efficiently correlates different data types to quickly
deduce the root cause of manufacturing problems. Advanced Data Mining algorithms
uncover hidden correlations, and easy-to-use templates automate daily and
repetitive analyses at preset intervals. Odyssey includes several optional
analysis modules including:
Metrology, which collects and analyzes data from inline production
equipment. Metrology captures measurements such as resistivity,
critical dimensions, wafer flatness, and oxide and etch rate monitors;
Parametric, which analyzes data collected from inline Wafer Electrical
Test and end-of-line Wafer Acceptance Test automatic test equipment.
Standard support is included for systems such as Agilent and Keithley
testers;
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BIN, which utilizes final wafer sort (chip probe) data, collected with
Automated Test Equipment from companies such as Teradyne, Advantest,
Credence, LTX and Agilent, and permits users to correlate final yield
with all other data types to help identify causes of yield loss;
BIT, which analyzes failing bit signatures, failing patterns per die
and per wafer, and graphically overlays failure data with defect data;
and
WIP, which encompasses process flow, tool and route information
collected by Manufacturing Execution Systems, such as PROMIS(TM),
FACTORYworks(TM), WorkStream(TM) and SiView(TM). A key feature of this
module is that it permits the user to investigate problems found in
other data domains and identify the tool or tool group which may be the
source of the problem, thereby saving significant fab engineering time
in diagnosing yield problems.
Memory YIELDirector
Memory YIELDirector ("MYD") accelerates yield learning and problem
resolution for DRAM, SRAM and Flash memory arrays on semiconductor devices. MYD
automates analysis of fab and test data for all memory types including embedded
memory. Using powerful analysis algorithms, MYD automatically descrambles and
classifies failing bitmaps into unique signatures, and correlates them with
in-line defect inspection data to determine defect "kill" ratios. MYD also helps
correlate bitmap failures with fatal defects (defects that cause failures in the
device) to isolate the root causes of failure mechanisms in memories.
DSSA Sentry
DSSA Sentry is a new production-proven tool that employs defect spatial
signature analysis ("DSSA") algorithms to automatically classify the
distributions of defects found on semiconductor wafers. These distributions
appear visually as streaks, lines or other noticeable patterns of defects and
usually cause large yield loss. By detecting these patterns or signatures early
in the process, potential yield killers can be caught and the problem sources
rapidly identified and fixed. Critical signatures like CMP and handling
scratches, photo-lithography induced repeaters, and streaks are easily detected
by the DSSA sentry tool. Production use has shown a signature capture rate of
over 80%, compared to the typical manual review process which captures only
about 5% of actual fab signatures. Consequently, DSSA Sentry offers users a high
ROI by finding more yield killers earlier in the process.
YieldProjectorTM
YieldProjector enables design engineers to improve the projected yield
of a design before it ever reaches the manufacturing process. YieldProjector
simulates the yield impact of a wide-range of random defects on a design's
layout, based on statistical information from similar manufacturing process. It
calculates the probable number of fatal defects on each layer of the design
along with the projected yield of that layer. YieldProjector graphically
highlights yield-limiters in the design layout so design engineers can compare
various layout options and critical feature usage to improve a design's immunity
to random manufacturing defects. This significantly increases yield and speeds
time to volume production.
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Cell Designer
Cell Designer addresses the core issue of Design for Manufacturability
("DFM"): predicting the electrical performance of a circuit manufactured on
silicon in a specific process. Starting from a circuit's layout level
representation, calibrated process simulation accurately predicts the effects of
lithography, etch and process variability to obtain physical predictions for
circuit performance and yield. Utilizing tight integration between process and
circuit simulation environments, Cell Designer enables rapid, what-if analysis
and fast, interactive operation. Cell Designer can be applied to a wide variety
of design styles, including memory, standard cell and custom logic. Designers
using Cell Designer may produce better, more accurate and better yielding
circuits than previously possible. We market and sell Cell Designer under an
exclusive agreement with Sequoia Design Systems, Inc., the developer of the
product.
Recipe Management and Editing ("RME")
RME is a universal enterprise solution that facilitates the management
and control of process recipes from a central repository. Process recipes are
used to control the program process and metrology tools at every step in a
semiconductor manufacturing process. RME dramatically reduces product scrap,
improves yield and increases productivity of semiconductor fabs. A patented
off-line editing module allows engineers to edit process recipes at their desk
or anywhere on the corporate intranet without sacrificing security or increasing
tool downtime.
Odyssey-FPD
Odyssey-FPD is a yield optimization solution built specifically for the
unique challenges of FPD manufacturers. Odyssey-FPD leverages our highly
scalable Odyssey platform. This enables FPD customers to integrate relevant
manufacturing data, including defect, parametric and test, into a seamless and
powerful yield optimization environment.
Odyssey-FPD is tailored to the FPD industry's yield management needs
and provides the information control backbone of fab-wide data. It gathers,
integrates and leverages all yield, process and test-floor related data into an
automated, customizable and easy to use data collection, analysis and reporting
system. The benefits to customers are numerous, but relate primarily to
accelerated yield learning rates and reduced time to corrective action for yield
and process excursions. With its "analysis recorder" automated functionality and
an enterprise development toolkit, production lots are dispositioned more
quickly, increasing productivity; excursions are identified in real time, and
engineering resources are freed from repetitive tasks, enabling them to
concentrate on corrective actions.
TestChip Technologies Products and Services
Our TestChip products address the needs of semiconductor companies in
many aspects of process technology development, design and manufacturing.
Developing process technology is a lengthy process that frequently takes 18-24
months, and requires a number of expert resources to design and validate each
process step, followed by process qualification. The complexity of smaller chip
features, such as 90 nm and 65 nm (known as "nodes"), requires a large number of
devices and circuits that characterize not only each process step, but also the
integrated process behavior and performance. This increasing complexity, coupled
with smaller chip sizes, is causing semiconductor producers to adopt yield
solutions such as those offered by our TestChip products.
HPL's TestChip products provide capabilities to accelerate
semiconductor process technology development to the 65nm node and beyond.
Additionally, for advanced technology nodes, these products provide new and
innovative methods for semiconductor manufacturing process characterization and
monitoring. We have deployed advanced semiconductor process technologies using
our TestChip solutions at leading IDMs. Semiconductor manufacturers have used
TestChip solutions for more than eight years, at seven technology nodes
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and across multiple process technologies, such as CMOS, BiCMOS, Radio Frequency
("RF"), Analog and others. HPL has successfully completed TestChip projects for
technology nodes from 350nm to 45nm.
The TestChip product line consists of a library of proprietary IP and
TestChip circuits, supplemented by powerful software products, and services,
each of which are described more fully below. HPL will also customize the
TestChip Technology IP and services to better enable project success.
TestChip Technology Development IP & Chip Sets
Our proprietary TestChip IP contains over 1,500 standard module
elements to address the full breadth of advanced CMOS technology development
concerns, including 193nm lithography, copper and low-k interconnect
integration, and advanced transistor development. Our TestChip IP also contains
elements for improving yield in test structures, non-volatile memory,
Silicon-on-Insulator ("SOI"), high-power devices, Silicon-Germanium, and RF
devices. From this IP, we can produce GDSII, HTML documentation and test
programs, all generated from a common database resulting in consistent and high
quality results.
TestChip TechXpress Array Technology Platforms
Our TestChip TechXpress(TM) array technology platforms alleviate many
issues involved in sub-130nm technology development and monitoring. Traditional
methods allow a limited number of devices and circuits to be used for
identifying and resolving process and yield issues. Our TechXpress(TM) array
platforms dramatically increase the number of devices and circuits that can be
used, thereby resulting in more effective identification, diagnosis and
resolution of process and yield issues.
The TechXpress(TM) Array Family comprises three powerful technology
platforms: TDSRAMTM, TDROMTM and TDParametricTM. From these technology platforms
HPL has generated over twenty different unique TestChip solutions that span the
entire semiconductor lifecycle, each targeted at solving specific problems
encountered at the various stages of process life cycle. TestChip Solutions are
grouped into four chip sets that are used by process integration and yield
engineers to target specific tasks found at each stage of the process life
cycle. The chips sets are classified as, ToolBox (for early materials and litho
characterization), RaceTrack (for technology development, process integration
and primary parameter characterization), OnRamp (for parametric, systematic and
random defectivity based Yield Ramp) and Expressway (for parametric and
systematic yield monitoring).
Within each chip set are test vehicles that target all key areas of
nanometer-era Front-End-of-Line (FEOL) and Back-End-of-Line (BEOL) process
integration and yield ramp, and have proven effectiveness from 180nm to 45nm.
The TestChip solutions are sold as "chip sets" combined with a powerful software
analysis tool called TestChip Advantage(TM). TestChip Advantage(TM) has analysis
modules customized to each of the unique TestChip solutions that enable the
customer to quickly turn large amounts of TestChip data into actionable
information for development and debug of their processes.
TDSRAM: The TDSRAM is used for bitcell development and process
qualification. The TDSRAM bit is designed to measure key process parameters and
is intentionally more sensitive to variations and yield issues than a
conventional SRAM design. The TDSRAM can also be used to measure defect
densities during volume manufacturing.
TDROM: The TDROM measures process excursion and design rule skews,
making it ideally suited for process characterization and monitoring. The higher
number of circuits built within a specific TDROM provide a more dramatic
increase in spatial resolution than is possible with traditional test
structures.
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TDParametric: The TDParametric array is unique in its ability to
measure the intrinsic electrical properties of the process. It produces a
parametric response that provides a finer resolution of the measurement.
TDParametric can be used, among other things, for via resistance measurements
and FET matching effects measurements.
Some of the specific use cases for the array family products are
bitcell development, process qualification, systematic yield loss diagnosis,
process characterization and process monitoring. Customers use results derived
from the arrays to correlate yield and analyze failures electrically and
physically.
TestChip Advantage(TM)
TestChip Advantage(TM) is a sophisticated analysis and data reduction
software based on our yield management software. Engineers can extract answers
from the wafer test data using this software, saving them invaluable time by
automating tedious analysis setup and by providing customized novel viewing of
the experiments that HPL provides for yield understanding and root cause yield
loss assessment. Using the TestChip Advantage(TM) templates and database, we
capture the knowledge and intent of the various experiments during the design
phase. Yield engineers are able to access the wafer results (both historical and
current) to analyze process issues and shifts prior to product yield loss.
TestChip Advantage(TM) allows the customer to view results grouped by
experiment type, by layer, and by figures of merit. Both bit map and parametric
data are available with the ability to do statistical analysis of parameters
over multiple wafers and lots. Trend Analysis is also available between wafers /
lots including spatial analysis of failures within a die or across wafer.
TestChip Advantage(TM) also enables the customer to do split lot analysis and to
classify wafers based on different process equipment used. The software supports
customization by the user using advanced data mining features. These
capabilities allow fast wafer level analysis, all accessible from a
user-friendly menu system, which in turn enables trend monitoring and
identification of potential yield hits.
SALES AND MARKETING
We rely on our direct sales force, distributors and sales agents to
market our products to the semiconductor and flat panel display manufacturing
markets. Our direct sales efforts have focused primarily on licensing our
software products and TestChip technologies to semiconductor IDMs, foundries and
flat panel display manufacturers. Our direct sales force operates out of our
headquarters in San Jose, California and our facilities in Bedford,
Massachusetts; Austin, Texas; Plano, Texas; Yokohama, Japan; Hsin Chu, Taiwan;
and Aix-en-Provence, France.
Our sales and marketing personnel also focus on developing our
relationships with industry partners, which include semiconductor original
equipment manufacturers ("OEMs") who can bundle our products in their hardware.
These joint-marketing relationships provide us with access to the customer bases
of these OEMs. We intend to continue to expand our industry relationships in the
future.
RESEARCH AND DEVELOPMENT
The market for DFM and yield optimization is characterized by rapid
technological development and product innovation. We believe that timely
development of new products and enhancements to existing products are necessary
to maintain our competitive position. Accordingly, we devote a significant
portion of our human and financial resources to research and development
programs and seek to maintain close relationships with customers to remain
responsive to their needs.
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The complexity of DFM and yield optimization requires domain expertise
in physical integrated circuit ("IC") design and fabrication as well as software
development. Today, we employ a staff of software development engineers focused
on the development of yield-optimization software products. Our team also
encompasses a core group of engineers and technicians with extensive education,
experience and expertise in the semiconductor domain. Virtually every discipline
associated with the lifecycle of an IC is represented at our company, including
device physics, product design, product engineering, yield engineering, failure
analysis engineering, fab management, process engineering and testing.
COMPETITION
The worldwide market for productivity enhancement tools and systems for
semiconductor companies is highly competitive and characterized by rapidly
changing technologies. We face direct competition from semiconductor companies
that have developed or have the ability to develop their own proprietary
yield-optimization tools and systems, as well as third-party providers of
yield-management software and services.
The tools and systems against which our products and services most
often compete are those that semiconductor companies have created in-house as
part of a specific fabrication process or through a dedicated development group.
We must overcome a tendency that some producers may have to resist outside
solutions.
The third-party providers that compete in the market for
yield-optimization tools are, generally, divisions of larger semiconductor
equipment OEMs, such as KLA-Tencor, or smaller private companies, such as Yield
Dynamics. Additionally, PDF Solutions provides service-based solutions where HPL
products can also be used. The success of our business or other businesses like
ours might prompt increased competition. As a result, we must continue to
improve existing products, develop new products and protect our innovations
through intellectual property laws in order to continue to differentiate our
product offerings.
Significant factors in our target market's choice of
productivity-enhancement software include its performance, ease of use,
reliability, price, compatibility with existing systems, installed base and
technical service and support. While price is an important competitive factor,
we believe that customers will choose the most effective productivity software,
even if it is more expensive, because of the added profitability from better
production yield.
INTELLECTUAL PROPERTY
Our future success and competitive position depends heavily upon our
continued ability to develop new proprietary technology while protecting our
existing intellectual property. To protect our products and their underlying
technology, and to prevent competitors from using our technology in their
products, we use a combination of patents, trade secrets and copyrights. As of
March 31, 2005, we held ten U.S. patents and five Taiwan patents, expiring at
different times between 2013 and 2025, had two pending U.S. patents, and eight
U.S. patent applications and twelve foreign patent applications in process. We
expect that, if granted, the duration of these patents will be 20 years from the
date of filing the application. We continue to vigilantly pursue U.S. and
foreign patent filings. We have additional patent applications that we are
developing internally and may file in the future.
There is no assurance that any of our current or future patent
applications will result in the issuance of patents, and our existing or future
patents may be circumvented, declared invalid or challenged as to scope or
ownership. For these and other reasons, we may not realize any competitive
advantage from our existing patents and any patents that we may be granted in
the future. Furthermore, our competitors may develop technologies that are
similar or superior to our proprietary technologies or design around any patents
that we may hold. To the extent that others are able to obtain patents that
overlap with our technologies or processes, we may be required to license these
patents.
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If we are unable to license these patents or obtain licenses on
acceptable terms, we may need to alter our products or discontinue selling them
altogether. In addition, we have not secured patent protection in all foreign
countries for all equivalent U.S. patents we hold and we cannot be certain that
the steps we take to prevent misappropriation of our intellectual property
abroad will be effective, or that the application of foreign laws to technology
developed abroad will not adversely affect the validity or enforceability of our
U.S. patents.
Much of our intellectual property has not been patented or is not
patentable. Accordingly, we have historically protected our non-patented
intellectual property as a trade secret. Trade secret protection is in many ways
inferior to patent protection. Others may reverse-engineer our non-patented
technologies and lawfully use any underlying technology that is discovered in
this process. We typically enter into confidentiality agreements with
prospective customers, distributors and business partners prior to disclosing
material proprietary information. These agreements prohibit unauthorized use and
disclosure of our trade secrets and other proprietary information. We currently
require all of our employees to enter into similar agreements. While we believe
that these agreements provide a measure of protection of our intellectual
property, they may be declared invalid or unenforceable, or we may not have the
resources to seek enforcement in the event of a breach. Additionally, courts
only protect trade secrets from misappropriation to the extent that we have
taken reasonable steps to protect the confidentiality of these trade secrets. It
is possible that a court would find our trade-secret protection practices
inadequate and declare portions of our trade secrets unprotected from
misappropriation.
Much of our source code is written by programmers and engineers in the
Republic of Armenia. We generally rely on U.S. and Armenian copyright law and
international treaties for protection of our software source code, software
object code, training materials and user manuals created by our employees. While
U.S. copyright law protects the expression of an idea, it does not protect the
idea itself from being copied. As a result, others may be able to glean valuable
concepts and methods from our copyrighted material and lawfully use these ideas
and methods in a competing product or venture by simply changing the manner of
expression. In an effort to protect our software from misappropriation, we do
not typically divulge our source code to customers or vendors.
EMPLOYEES
As of April 30, 2005, we employed approximately 218 employees worldwide
with 75 in the United States, 120 in Armenia and 23 in four other locations
around the world. None of our employees are represented by a labor union or are
subject to a collective bargaining agreement. We believe that our relationship
with our employees is good.
DIRECTORS AND OFFICERS
The following table sets forth the directors and officers of the
Company, their ages and positions as of May 31, 2005:
Name Age Position
- ------------------------------------------------ ---------- ------------------------------------------------------
Cary D. Vandenberg 49 President and Chief Executive Officer
Michael P. Scarpelli 38 Chief Financial Officer, Senior Vice President of
Administration and Secretary
Elias Antoun 48 Director, Chairman of the Board
Lawrence Kraus 42 Director
Dr. Yervant Zorian 49 Director
Dr. Victor Boksha 44 Vice President of Business Development
Dean Frazier 45 Vice President of Marketing
Brian Gordon 47 Vice President of Software Engineering
Dr. Greg Yeric 47 Chief Technologist
13
CARY D. VANDENBERG. Mr. Vandenberg joined the Company in May 2003 as
President and Chief Executive Officer. Prior to joining HPL, Mr. Vandenberg was
Vice President of Strategic Business Development at Communicant Semiconductor
Technologies AG, a European based semiconductor foundry. He worked at
Communicant from July 2001 to May 2003 and during this period he was responsible
for the design kit and modeling group, corporate partnerships, and the
e-business strategy. Mr. Vandenberg has over 20 years of management experience
in software and semiconductor companies including positions at Sequencia, Inc.
(President & CEO), JENOPTIK INFAB Intrack, Inc. (President), and PROMIS Systems
Corporation Ltd. (Vice President). Mr. Vandenberg holds a Bachelor of Science
degree in commerce from Santa Clara University.
MICHAEL P. SCARPELLI. Mr. Scarpelli has been our Chief Financial
Officer, Treasurer, Senior Vice President of Administration and Secretary since
July 2002. In these roles, he is principally responsible for the Company's
worldwide finance function, legal, contracts, and facilities. Mr. Scarpelli
joined the Company in January 2002 as Vice President of Corporate Development,
responsible for the oversight of the Company's mergers and acquisitions
function. Prior to joining HPL, Mr. Scarpelli was an auditor with
PricewaterhouseCoopers LLP since 1989 and an audit partner since 1998. Mr.
Scarpelli received his Bachelor of Arts degree in economics from the University
of Western Ontario and is a Certified Public Accountant and a Chartered
Accountant.
ELIAS ANTOUN. Mr. Antoun is President and Chief Executive Officer of
Genesis Microchip, Inc. and a member of its board of directors since November
2004. Mr. Antoun joined our Board of Directors in August 2000 and serves as a
member of our audit and compensation committees. Prior to this, he was President
and Chief Executive Officer of Pixim, Inc. of Mountain View, California, a
semiconductor solutions provider for video imaging from March 2004 to November
2004. From February 2000 to August 2003, he was President and Chief Executive
Officer of MediaQ, Inc., a provider of semiconductor solutions which was
acquired by NVIDIA Corporation in August 2003. From March 1998 to January 2000,
Mr. Antoun served as Executive Vice President, Consumer Products Division at LSI
Logic. Mr. Antoun has served as the Chairman of the Board since July 2002. Mr.
Antoun's term expires at the next election of directors.
LAWRENCE KRAUS. Mr. Kraus is a co-founder of the Company and has served
as a member of the board of directors of the Company's principal operating
subsidiary, HPLI, since its formation in 1989. From February 2001 to September
2002, Mr. Kraus served as HPLI's Vice President of Strategic Marketing. Mr.
Kraus previously served as HPLI's Director of Hardware Development from May 1989
to January 1995 and as the Vice President and General Manager of HPLI's hardware
divisions until their sale to Credence Systems Corporation in June 1998. With
the sale of the hardware divisions to Credence, Mr. Kraus joined Credence as a
Director of Operations and served in that capacity until February 2001. Mr.
Kraus is currently a manager of hardware development at Advantest America, Inc.
Mr. Kraus was elected to our board of directors in August 2000 and his term
expires at the next election of directors.
DR. YERVANT ZORIAN. Dr. Zorian has served as Vice President and Chief
Scientist at Virage Logic Corporation since June 2000. He previously was the
Chief Technology Advisor at LogicVision and a Distinguished Member of the
Technical Staff at Bell Laboratories, Lucent Technologies. Dr. Zorian has
chaired several Institute of Electrical and Electronic Engineering ("IEEE")
symposiums and workshops. He currently serves as the editor and chief emeritus
of IEEE Design & Test of Computers and is the Vice President of IEEE Computer
Society. He has authored four books, received several best paper awards and
holds twelve U.S. patents in the area of test technology. Dr. Zorian is an
honorary doctor of the National Academy of Science, Armenia, and is a Fellow of
IEEE. Mr. Zorian was elected to our board of directors in August 2000 and his
term expires at the next election of directors.
14
DR. VICTOR BOKSHA. Dr. Boksha joined HPL in November 2003 as the Vice
President of Business Development and is currently focused on building new
products and industry relationships in the emerging Design for Manufacturing
("DFM") market. Dr. Boksha is a semiconductor industry veteran, with an
extensive background in lithography, RET and TCAD. He brings to HPL almost 25
years of technology and business experience in high-volume mask and wafer
manufacturing, simulation, equipment design, advanced lithography development,
yield improvement and venture investments. Recently, he worked with Cadence
Design Systems on a new DFM business opportunity and also advised a leading
silicon intellectual property provider on technology strategy. Previously he
worked for OPC Technologies, which was acquired by Mentor Graphics, and brought
RET capabilities to the Calibre product line. Prior to OPC, he worked for
Technology Modeling Associates ("TMA"), which is currently part of Synopsys. He
holds a M.Sc. degree in Management from MIT Sloan School and a Ph.D. degree in
laser microlithography from Belarus Academy of Science.
DEAN FRAZIER. Mr. Frazier joined HPL in March 2004 as the Vice
President of Marketing. Mr. Frazier is responsible for worldwide marketing
activities at HPL. He has over twenty years of semiconductor industry experience
in IC design, semiconductor process development and EDA software. From 2002 to
2004, Mr. Frazier was a founder of EMASYS Corporation, a developer of business
intelligence software for IC companies. He served as VP of Engineering &
Operations for Chameleon Systems, a venture-funded fabless IC company, from 2001
to 2002; as Director of Design Technology for Chips & Technologies, which was
acquired by Intel, from 1991 to 2000; and has held various marketing and
engineering roles at Seattle Silicon (1987-1990) and Motorola (1982-1987). Mr.
Frazier holds a Bachelor of Science degree in Chemical Engineering from Stanford
University.
BRIAN GORDON. Mr. Gordon joined HPL in September 2003 as the Vice
President of Software Development and is responsible for the development of all
software products at HPL. He has more than 20 years experience in the design,
development and implementation of mission-critical enterprise software for
manufacturing. From 1984 to 2003, Mr. Gordon was Chief Technology Officer at
Camstar Systems, a leading provider of enterprise manufacturing performance
management systems for semiconductor, electronics, life sciences, and other
global industrial manufacturers. In this role he was the Chief Architect
responsible for the design, development, delivery and support of all software
products. Prior to Camstar, he was the founder of a successful consulting
practice, developing manufacturing and accounting software for midrange
customers. His work has been patented, and he has also published many technical
articles.
DR. GREG YERIC. Dr. Greg Yeric joined HPL in February 2002 through the
acquisition of TestChip Technologies, where he had worked since September 1997.
Dr. Yeric has been our Chief Technologist since August 2004, responsible for
HPL's technical guidance for yield management, technology development IP, and
DFM solutions. Over the last 8 years at HPL and TestChip, Dr. Yeric has been
instrumental in the execution of technology development and yield enhancement
programs across each technology node, from 0.35um through 45nm and over a
spectrum of process technologies (CMOS, SOI, Mixed-Signal). Prior to joining
HPL, he was with Motorola's Advanced Products Research and Development
Laboratories and was a technologist driving CMOS process shrink initiatives with
an emphasis on interconnect characterization and reliability, as well as
developing CMOS platform process integration methodologies for logic,
microprocessor, and NVM technologies from June 1993 to September 1997. He has a
Ph.D. in Electrical Engineering from the University of Texas at Austin and is an
author of numerous technical publications and a regular speaker at technical
industry events.
15
ITEM 2. PROPERTIES
The following table sets forth the Company's principal properties as of
May 31, 2005. We believe that our existing facilities are adequate for our
current needs
Square Expiration of
Location Footage Lease Term Uses
- ------------------------------ ---------------------------- ----------------------------- ------------------------------------
Austin, Texas 25,140 February 2006 Offices
Bedford, Massachusetts 12,050 October 2005 Offices; research and development
Chennai, India 2,097 March 2007 Offices
HsinChu, Taiwan 1,636 May 2006 Offices
Plano, Texas 18,302 March 2006 Offices
San Jose, California 12,500 December 2005 Executive offices
Yerevan, Armenia 18,772 December 2009 Offices; research and development
Yokohama, Japan 2,444 April 2006 Offices
ITEM 3. LEGAL PROCEEDINGS
Between July 31, 2002 and November 15, 2002, several class-action
lawsuits were filed against the Company, certain current and former officers and
directors of the Company, and our independent auditors in the United States
District Court for the Northern District of California. The lawsuits were
consolidated into a single action (the "Securities Class Action"), which alleged
that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934, Rule 10b-5 promulgated thereunder, and Sections 11, 12(a)(2) and 15
of the Securities Act of 1933 by making a series of material misrepresentations
as to the financial condition of the Company during the class period of July 31,
2001 to July 19, 2002.
On March 11, 2005, the United States District Court for the Northern
District of California granted final approval of the Securities Class Action
settlement. On April 13, 2005, the period for appeals expired, and the
settlement is now final. We issued 5,319,613 new shares of common stock on May
11, 2005, in consideration for the settlement of the Securities Class Action.
Former shareholders of Covalar Technologies Group, Inc., which was
acquired by us in February 2002, brought suit in the District Court of Dallas
County, Texas, against our independent auditors and the managing underwriter in
our initial public offering, in connection with claims relating to the
acquisition (the "Covalar Action"). On April 26, 2004, the Company and our
former President and Chief Executive Officer were named as defendants in this
action. On July 13, 2004, we signed a settlement and release agreement with the
plaintiffs in the Covalar Action contingent on the settlement of the Securities
Class Action. Pursuant to this settlement agreement, we placed 2,000,000 shares
in escrow in October 2004. On December 20, 2004, the court issued an order
dismissing us without prejudice from the Covalar Action, pursuant to the
Company's settlement agreement with the plaintiffs. On April 15, 2005, we
authorized the release of 1,000,000 shares from escrow to the former Covalar
shareholders. The remaining 1,000,000 shares will remain in escrow until October
2006. During this period, we have an option to acquire these shares at $1.00 per
share. If we do not exercise our option by October 13, 2006, the shares will be
released to the former shareholders.
As part of our initial public offering, we signed an underwriting
agreement, which contained provisions in favor of our underwriters. The managing
underwriter was named as a defendant in the Covalar Action and the FabCentric
Action described below. Subject to a reservation of rights, we have accepted the
underwriter's request to indemnify the underwriter in connection with our
initial public offering and to advance expenses in the Covalar Action. The
underwriter's legal counsel submitted bills totaling $850,000 through December
31, 2003, which we had accrued. On April 11, 2005, we entered into a settlement
16
and release agreement with the underwriter for a total of $425,000, which
is to be paid on or before August 11, 2005. Accordingly, during the three month
period ended March 31, 2005, we reduced the accrual related to the Covalar
Action.
On May 22, 2003, five former shareholders of FabCentric, Inc., which we
acquired in December 2001, sued us, our former President and Chief Executive
Officer and former Chief Financial Officer, and our independent auditors in a
lawsuit pending in Superior Court in the County of Santa Clara, California (the
"FabCentric Action"). The plaintiffs subsequently added the managing underwriter
in our initial public offering and our current Chief Financial Officer as
defendants. This lawsuit alleges claims for fraud, negligent misrepresentation,
breach of warranties and covenants, breach of contract, negligence, and
violations of the California Corporations Code and seeks rescission or,
alternatively, damages, costs and expenses. After several rounds of demurrers,
the auditors and the underwriters filed answers to the fourth amended complaint
in May 2005. Answers by the Company and our former CEO and CFO have been
extended by stipulation.
On February 17, 2005, we participated in a mediation session with the
FabCentric plaintiffs. On February 23, 2005, the FabCentric plaintiffs agreed in
principle to settle with us and our former CEO and CFO by participating in the
HPL Parties' settlement in the Securities Class Action, in addition to receiving
2,100,000 shares of common stock from us, $500,000 in cash from our insurer,
Twin City Fire Insurance Company ("Twin City"), and 25% of the net recovery, if
any, from Twin City in the litigation described below. The parties are preparing
the settlement documentation. The Company anticipates issuing the 2,100,000 new
shares of common stock to the FabCentric plaintiffs along with an additional
336,387 shares to the plaintiffs in the Securities Class Action pursuant to an
anti-dilution provision following the Superior Court's determination that the
settlement was made in good faith.
We were also a nominal defendant in consolidated stockholder derivative
lawsuits filed between July 31, 2002 and December 31, 2002, in Superior Court in
the County of Santa Clara, California. These lawsuits asserted derivative claims
on behalf of us against our current and former officers and directors and our
independent auditors. The consolidated complaint asserted claims for insider
trading, breach of fiduciary duties, breach of contract, professional negligence
and unjust enrichment, and sought damages suffered by the Company, treble
damages for the sale of shares, costs and expenses of these actions and such
other relief as the court may deem appropriate. On April 6, 2005, the Superior
Court in the County of Santa Clara, California, approved the settlement of the
derivative actions. Our contribution to plaintiffs' attorney's fees of $950,000,
which was our only contribution to the settlement, was fully funded by our
excess directors and officers liability insurance ("D&O") policies.
Additionally, Twin City (our first-layer excess D&O carrier) filed a
declaratory relief action on October 6, 2003, in Superior Court in the County of
Santa Clara, California, against us, our former President and Chief Executive
Officer, our former Chief Financial Officer, and other former and current
officers and directors of the Company seeking a determination that no coverage
is afforded the defendants under Twin City's policy, which follows form to the
Company's primary D&O policy issued by Executive Risk Indemnity Inc. Executive
Risk has already agreed to pay its policy limits for the Securities Class
Action, exhausting the limits of the primary D&O policy. We filed a Second
Amended Cross-Complaint on September 29, 2004, seeking a declaration that Twin
City and our other excess D&O insurance carriers, National Union Fire Insurance
Company ("National Union") and St. Paul Mercury Insurance Company ("St. Paul"),
are obligated to indemnify us for losses in connection with the Securities Class
Actions and related litigation and that Twin City has breached its insurance
contract by not paying the defendants' defense expenses on a current basis.
17
On January 11, 2005, we argued cross-motions for summary adjudication,
in the Twin City matter. The parties sought a declaration regarding whether
exclusionary language in our D&O liability insurance application excluded
coverage for insureds that did not have knowledge of Y. David Lepejian's
unlawful conduct. The Superior Court, in a ruling issued on January 12, 2005,
held that this exclusionary language did not preclude coverage for insureds who
did not have knowledge of the unlawful conduct, including the Company. Twin
City's motion to reconsider the Superior Court's January 12, 2005 ruling was
denied on February 22, 2005 and an amended order was issued on March 9, 2005.
We intend to continue to oppose the remaining claims made in the Third
Amended Complaint filed by Twin City and to seek coverage under Twin City's
policy. To date, Twin City has advanced or agreed to advance, subject to a
reservation of rights, a total of $900,000 under a reservation of rights to fund
our settlements of the Securities Class Action and the FabCentric Action.
On December 21, 2004, National Union, our third-layer excess D&O
carrier, paid $1,000,000 into escrow in exchange for a full policy release. St.
Paul, our fourth-layer excess D&O carrier has similarly paid $125,000 into
escrow in exchange for a full policy release The proceeds have now been used to
settle the consolidated derivative action and for legal defense costs.
As of December 31, 2004, we had accrued $9.1 million relating to the
9,756,000 new shares of common stock we had agreed to issue to settle the above
actions. On March 31, 2005, we reduced the accrual to $8.4 million reflecting
the estimated value of our common stock. Accordingly, there was a $730,000
reduction in legal settlement expenses in the three month period ended March 31,
2005.
Following our dismissal from the FabCentric Action, the only remaining
litigation in which we are a party will be our claim against Twin City discussed
above. This matter is in the early stages of litigation and accordingly it may
ultimately be resolved on a basis different than currently estimated. Because
there could be many factors that enter into the ultimate resolution of this
matter which are not within our control, we are not able to estimate the maximum
potential financial exposure to litigate this matter or the potential financial
benefit to us should it be resolved successfully. The resolution of the Twin
City litigation could have a material effect on our financial condition, results
of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
On September 30, 2002, our common stock was delisted from the Nasdaq
National Market. Since that time, no established public trading market has
existed for our common stock and shares of our common stock are neither listed
on any national securities exchange nor presently traded on any public stock
exchange or in any other public market. Although quotations for shares of our
common stock may be obtained through the over-the-counter "pink sheets"
maintained by Pink Sheets LLC (a centralized quotation service that collects and
publishes market maker quotes for over-the-counter securities), because
secondary market activity for shares of our common stock has been limited and
sporadic, such quotations may not accurately reflect the price or prices at
which purchasers or sellers would currently be willing to purchase or sell
shares of our common stock. The following table shows the range of high and low
closing bid prices for our common stock for the periods indicated, as reported
in the Pink Sheets under the symbol "HPLA.PK." The quotations on the Pink Sheets
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions.
Fiscal 2005 High Low
- -------------------------- -------------- --------------
First Quarter $ 0.70 $ 0.14
Second Quarter $ 0.86 $ 0.45
Third Quarter $ 0.66 $ 0.51
Fourth Quarter $ 0.93 $ 0.55
Fiscal 2004 High Low
- ------------------------- -------------- --------------
First Quarter $ 0.25 $ 0.11
Second Quarter $ 0.26 $ 0.12
Third Quarter $ 0.30 $ 0.18
Fourth Quarter $ 0.36 $ 0.20
As of May 31, 2005 there were approximately 136 holders of record of
our common stock and 38,768,065 shares of common stock outstanding. No dividends
have been paid on our common stock since inception, and we do not anticipate
paying any dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
In April, 2005 we issued 2,000,000 shares of common stock, pursuant to
the settlement of the Covalar Action - see Item 3 Legal Proceedings. This
offering was exempt from registration under Section 4(2) of the Act. In May
2005, we issued 5,319,613 shares of common stock pursuant to the settlement of
the Securities Class Action - see Item 3 Legal Proceedings. These securities
constituted exempted securities under Section 3(a)(10) of the Act and were not
registered for issuance pursuant to Section 5 of the Act.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations", and the consolidated financial statements of HPL and
the notes to the consolidated financial statements included elsewhere in this
annual report on Form 10-K. The consolidated statement of operations data for
19
the years ending March 31, 2005, 2004 and 2003 and the consolidated balance
sheet data at March 31, 2005 and 2004 are derived from the audited financial
statements included elsewhere in this annual report on Form 10-K. The
consolidated statement of operations data for the years ending March 31, 2002
and 2001 and the consolidated balance sheet data at March 31, 2003, 2002 and
2001 are derived from audited financial statements for the periods not included
in this annual report on Form 10-K. Our historical results are not necessarily
indicative of results to be expected in future periods.
Statement of Operations Data:
Years Ended March 31,
2005 2004 2003 2002 2001
------------- -------------- ------------- ------------- --------------
(in thousands, except per share data)
Revenues:
Software licenses $ 3,176 $ 4,799 $ 5,281 $ 1,614 $ 3,159
Consulting services, maintenance and other 6,593 7,902 10,311 2,899 1,156
------------- -------------- ------------- ------------- --------------
Total revenues 9,769 12,701 15,592 4,513 4,315
------------- -------------- ------------- ------------- --------------
Cost of revenues:
Software licenses 96 507 656 587 133
Consulting services, maintenance and other (1) 2,752 3,131 3,808 507 243
------------- -------------- ------------- ------------- --------------
Total cost of revenues 2,848 3,638 4,464 1,094 376
------------- -------------- ------------- ------------- --------------
Gross profit 6,921 9,063 11,128 3,419 3,939
------------- -------------- ------------- ------------- --------------
Operating expenses:
Research and development (1) 6,590 6,384 10,515 6,118 3,349
Sales, general and administrative (1) 8,264 13,604 19,788 9,285 4,329
Legal settlement expense 470 7,900 - - -
Goodwill impairment - - 30,570 - -
Stock-based compensation 45 315 1,047 3,547 2,369
Amortization of intangible assets 1,181 1,327 1,494 294 137
------------- -------------- ------------- ------------- --------------
Total operating expenses 16,550 29,530 63,414 19,244 10,184
------------- -------------- ------------- ------------- --------------
Loss from operations (9,629) (20,467) (52,286) (15,825) (6,245)
Interest income and other income 138 252 617 1,104 62
Interest expense (3) (39) (149) (196) (252)
------------- -------------- ------------- ------------- --------------
Loss before income taxes (9,494) (20,254) (51,818) (14,917) (6,435)
Provision for income taxes (71) 89 - - -
------------- -------------- ------------- ------------- --------------
Net loss $(9,423) $(20,343) $ (51,818) $(14,917) $(6,435)
============= ============== ============= ============= ==============
Net loss per share basic and diluted $ (0.30) $ (0.65) $ (1.69) $ (0.62) $ (0.37)
Shares used in per share computations:
Basic and diluted 31,332 31,145 30,645 24,038 17,496
- ----------------------------------------------------------
(1) Excludes the following stock-based compensation
charges:
Cost of revenues $ - $ - $ 18 $ 39 $ 60
Research and development 15 113 414 692 296
Sales, general administrative 30 202 615 2,816 2,013
------------- -------------- ------------- ------------- --------------
$ 45 $ 315 $ 1,047 $ 3,547 $ 2,369
============= ============== ============= ============= ==============
20
Consolidated Balance Sheet Data:
March 31,
2005 2004 2003 2002 2001
------------- -------------- ------------- ------------- --------------
(in thousands)
Cash, cash equivalents and short-term investments $ 3,246 $ 10,210 $ 21,741 $ 47,109 $ 989
Working capital (deficit) (1) (3,635) 3,393 13,525 35,062 (7,169)
Total assets 34,802 44,865 60,385 101,308 5,455
Long-term debt, less current portion 13 39 130 280 295
Total stockholders' equity (deficit) $ 16,938 $ 26,042 $ 46,032 $ 82,316 $(6,748)
(1) Included in working capital in 2005, 2004 and 2003 is a non-cash
liability of $4,335,000 relating to advances from our former CEO
which were reclassified to equity on the settlement of our
litigation - See Item 3. Legal Proceedings.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Item 1:
Business; Item 6: Selected Financial Data; and Item 8: Financial Statements and
Supplementary Data. This discussion and analysis contains forward-looking
statements that involve risks, uncertainties and assumptions. Forward-looking
statements are often, though not always identified by words and phrases such as
"expect", "believe", "should", and "will". Our actual results may differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including, but not limited to, those set forth under
"Risk Factors" and elsewhere in this report. HPL undertakes no obligation to
update any forward-looking statement to reflect events after the date of this
report.
OVERVIEW
We provide comprehensive yield-optimization solutions to the
semiconductor industry and flat-panel display manufacturers. We license our
software products and sell related services through our direct sales force,
distributors, and sales agents.
In each of the last three fiscal years, a relatively small number of
customers have accounted for a large portion of our revenues, and the
composition of our major customers has changed from year to year. This is
because we currently have a limited sales force, our products have a lengthy
sales cycle and we recognize relatively large license revenues upon entering
into perpetual licensing agreements. We had two, three, and three end customers
that individually accounted for at least 10% of our revenues in the years ended
March 31, 2005, 2004 and 2003, respectively. In the aggregate, these end
customers accounted for 34%, 42%, and 61% of our revenues in the years ended
March 31, 2005, 2004 and 2003, respectively.
From July 2002 until today, as a result of our investigation into
financial and accounting irregularities which ultimately lead to a restatement
of our financial statements for the years ended March 31, 2001 and 2002, and the
litigation discussed in the Liquidity and Capital Resources section below, we
experienced a significant period of transition. In our year ended March 31,
2003, senior management was focused on determining the impact of the financial
21
restatement on our business going forward, integrating previously acquired
businesses and cutting costs to reflect the level of sales activities we were
experiencing. In our year ended March 31, 2004, we began to hire a new
management team, filling five senior positions with the hiring of a new Chief
Executive Officer, Senior Vice President of Sales, Vice President of Software
Development, Vice President of Marketing and Vice President of Business
Development. With the new management team in place, we have shifted our focus
and resources in order to better integrate our yield analysis software
capabilities with our TestChip solutions to better compete in the DFM market
segment with our unique product offerings. This has resulted in a decrease in
our revenue in the years ended March 31, 2005 and March 31, 2004 from the year
ended March 31, 2003. In the year ended March 31, 2005 we experienced an
operating loss of $9.4 million. At March 31, 2005, we have $3.2 million in cash
and cash equivalents and short-term investments.
As of March 31, 2005, we had an accumulated deficit of $107.5 million.
Since going public in 2001, we have not achieved profitability on a quarterly or
annual basis. As we continue to build our customer base and further develop new
products, we expect to continue to incur net operating losses at least through
our year ending March 31, 2006. We will need to generate significantly higher
revenues in order to sustain our operations and to achieve and maintain
profitability. Our ability to generate higher revenues may continue to be
impacted by our previous litigation, the capital spending trends of our
potential and current customers in the semiconductor industry, the time to
market of our new products and our ability to compete in our market segment. See
"Liquidity and Capital Resources" below.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect our reported assets, liabilities, revenues
and expenses, and our related disclosure of contingent assets and liabilities.
On an on-going basis, we evaluate our estimates, including those related to
revenue recognition, goodwill and identifiable, separately recorded intangible
assets, litigation, contingent liabilities and income taxes. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. Our estimates then form the
basis of judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies and the related
judgments and estimates significantly affect the preparation of our consolidated
financial statements:
Revenue Recognition
Revenue recognition rules are very complex, and certain judgments
affect the application of our revenue policy. The amount and timing of our
revenue is difficult to predict, and any shortfall in revenue or delay in
recognizing revenue could cause our operating results to vary significantly from
quarter to quarter. In addition to determining our results of operations for a
given period, our revenue recognition determines the timing of certain expenses,
such as commissions, royalties and other variable expenses.
We derive revenues principally from the sale of software licenses,
software maintenance contracts and consulting services. We offer two types of
licenses: perpetual and time-based. Perpetual licenses have no expiration date,
while time-based licenses require renewal. Our software product licenses provide
a narrowly defined subset of features for a given customer. The customer may
acquire additional licenses to extend the functionality of our products as its
technologies and facilities change or if it wishes to use additional features of
our software for its production process. Our licenses usually limit the number
of people who can use the software at a given time.
22
Revenues from software licenses are generally recognized upon the
execution of a binding agreement and delivery of the software, provided that:
the fee is fixed or determinable; vendor-specific objective evidence exists to
allocate a portion of the total license fee to any undelivered elements of the
arrangement; collection is reasonably assured; and the agreement does not
contain customer acceptance clauses. If customer acceptance clauses exist,
revenues are recognized upon customer acceptance if all other revenue
recognition criteria are met.
If consulting or other services sold in connection with the software
license are essential to the functionality of the software or involve
significant production, customization or modification of software, we recognize
revenue on either a percentage-of-completion or completed contract basis. For
the percentage-of-completion method, we recognize revenues using labor hours
incurred as the measure of progress against the total labor hours estimated for
completion of the project. We consider a project completed after all contractual
obligations are met. At times, an unbilled accounts receivable balance can exist
which comprises revenue recognized in advance of contractual billings. We make
provisions for estimated contract losses in the period in which the loss becomes
probable and can be reasonably estimated. Estimates of total labor hours or
expected losses on contracts are subject to judgment and actual amounts may
differ significantly from those estimates.
For contracts with multiple obligations (e.g., deliverable and
undeliverable products, post-contract support and other services), we allocate
revenues to the undelivered elements of the contract based on vendor specific
objective evidence of their fair value. This objective evidence is the sales
price of the element when sold separately or the renewal rate specified in the
agreement for licensing arrangements with terms of one year or greater that
include post-contract customer support and software updates. We recognize
revenues allocated to undelivered products when the criteria for software
license revenues set forth above are met. Revenues from time-based software
licenses are generally recognized ratably over the period of the licenses.
Determining whether objective evidence of fair value exists is subject to
judgment and resulting fair values used in determining the value of the
undelivered elements is also subject to judgment and estimates.
Software maintenance revenues are recognized ratably over the term of
the maintenance period, which is generally one year. Our software maintenance
includes product maintenance updates, Internet-based technical support and
telephone support. Revenues derived from our consulting services are recognized
as the services are performed. Revenues derived from software development
projects are recognized on a completed contract basis.
We also derive revenues from the sale of software licenses, maintenance
and post-contract support services through our distributors. Revenues from sales
made through our distributors for which the distributors have return rights are
recognized when the distributors have sold the software licenses or service to
their customers and the criteria for revenue recognition under SOP 97-2, as
amended, are met. Revenues from maintenance and post-contract support services
sold through our distributors are recognized ratably over the contract period.
Amounts invoiced to our customers in excess of recognized revenues are
recorded as deferred revenues. The timing and amounts invoiced to customers can
vary significantly depending on specific contract terms and can therefore have a
significant impact on deferred revenues in any given period.
Goodwill and Intangible Assets
Consideration paid in connection with acquisitions is required to be
allocated to the acquired assets, including certain identifiable intangible
assets, goodwill, and liabilities acquired. Acquired assets and liabilities are
23
recorded based on our estimate of fair value, which requires significant
judgments, including those with respect to future estimated cash flows and
discount rates. For identifiable intangible assets that we separately record, we
are required to estimate the useful life of the assets and recognize their cost
as an expense over the useful lives. We use the straight-line method to amortize
long-lived assets, except goodwill, which results in an equal amount of expense
in each period.
We assess the impairment of identifiable intangibles and long-lived
assets whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. Furthermore, we assess the impairment of goodwill
at least annually. Factors we consider important which could trigger an
impairment review include the following:
o significant underperformance relative to historical or projected future
operating results;
o significant changes in the manner of our use of the acquired assets or
the strategy for our overall business;
o significant negative industry or economic trends;
o significant decline in our stock price for a sustained period;
o market capitalization relative to net book value; and
o a current expectation that, more likely than not, a long-lived asset
will be sold or otherwise disposed of significantly before the end of
its previously estimated useful life.
When one or more of the above indicators of impairment occurs we
estimate the value of long-lived assets and intangible assets to determine
whether there is an impairment. We measure any impairment based on the projected
discounted cash flow method, which requires us to make several estimates
including the estimated cash flows associated with the asset, the period over
which these cash flows will be generated and a discount rate commensurate with
the risk inherent in our current business model. These estimates are subjective
and if we made different estimates, it could materially impact the estimated
fair value of these assets and the conclusions we reached regarding an
impairment. We identified triggering events in the second, third and fourth
quarter of our year ended March 31, 2003 which required us to perform the first
step of the analysis.
The first and second steps of the two-step process are as follows:
Step 1 - We compare the fair value of our reporting units to the carrying value,
including goodwill. For each reporting unit where the carrying value, including
goodwill, exceeds the unit's fair value, we proceed on to Step 2. If a unit's
fair value exceeds the carrying value, no further analysis is performed and no
impairment charge is necessary. We measure fair value by weighing equally our
projected five year discounted cash flows with a terminal value discounted to
the measurement date (the "Income Approach") and looking at comparable public
companies and the multiples at which they trade, based on their trailing twelve
months revenue and forward looking twelve months revenue compared to our
comparable revenue to determine our market value (the "Market Approach").
Step 2 - We perform an allocation of the fair value of the reporting unit to our
identifiable tangible and non-goodwill intangible assets and liabilities. This
derives an implied fair value for the reporting unit's goodwill. We then compare
the implied fair value of the reporting unit's goodwill with the carrying amount
of the reporting unit's goodwill. If the carrying amount of the reporting unit's
goodwill is greater than the implied fair value of its goodwill, an impairment
charge would be recognized for the excess.
At March 31, 2003, we performed Step 1 as of March 31, 2003 and
determined that goodwill was impaired. We then performed Step 2 and determined
that a $30.6 million impairment charge was required in the three months ended
March 31, 2003. During 2004 and 2005, we continued to test for impairment on an
annual basis and determined that there was no further impairment in goodwill.
24
Litigation
Management's estimated range of liability related to some of the
pending litigation is based on claims for which our management can estimate the
amount and range of loss. As of March 31, 2005, we have settled the Securities
Action, the Covalar Action and (in principal) the Fabcentric Action. These
settlements require the Company to issue approximately 9,755,207 shares of HPL
common stock which have been valued at $8.4 million in a manner consistent with
our measurement of potential goodwill impairment. Accordingly, we have accrued
this non-cash cost in our financial statements as of March 31, 2005.
Income Taxes
We are required to estimate our income taxes in each of the
jurisdictions in which we operate as part of the process of preparing our
consolidated financial statements. This process involves estimating our actual
current tax exposure, together with assessing temporary differences resulting
from differing treatment of items, such as deferred revenue, for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities. We then assess the likelihood that our net deferred tax assets will
be recovered from future taxable income and, to the extent we believe that
recovery is not likely, we must establish a valuation allowance. We currently
have a full valuation allowance on our gross deferred tax assets. In the event
our future taxable income is expected to be sufficient to utilize our deferred
tax assets, an adjustment to the valuation allowance will be made, increasing
income in the period in which such determination is made.
Stock-based compensation
We currently account for our employee stock option plans using the
intrinsic value method described in Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" and related interpretations.
Under APB Opinion No. 25, deferred stock compensation is recorded for the
difference, if any, between an option's exercise price and the fair value of the
underlying common stock on the grant date of the option. As currently permitted
by SFAS No. 123, "Accounting for Stock-Based Compensation," we adopted the
"disclosure only" alternative described in SFAS No. 123 for its employee stock
plans.
We currently account for stock issued to non-employees in accordance
with the provisions of SFAS No. 123 and Emerging Issues Task Force Consensus
("EITF") No. 96-18 "Accounting for Equity Instruments that Are Issued to Other
than Employees For Acquiring, or in Conjunction with Selling, Goods or
Services." Under SFAS No. 123 and EITF No. 96-18, stock options and warrants
issued to non-employees are accounted for at their fair value calculated using
the Black-Scholes option pricing model.
Compensation expense resulting from employee and non-employee stock
options are amortized to expense using an accelerated approach over the term of
the options in accordance with Financial Accounting Standards Board
Interpretation ("FIN") No. 28, "Accounting for Stock Appreciation Rights and
Other Variable Stock Option or Award Plans." Pursuant to FAS 123(R), and
commencing with fiscal 2007, we will be required to record compensation expense
for all share-based payment transaction, as described below.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2004, the EITF delayed the effective date for the
recognition and measurement guidance previously discussed under EITF Issue No.
03-01, "The Meaning of Other-Than-Temporary Impairment and Its Application to
25
Certain Investments" ("EITF 03-01") as included in paragraphs 10-20 of the
proposed statement. The proposed statement will clarify the meaning of
other-than-temporary impairment and our application to investments in debt and
equity securities, in particular investments within the scope of FASB Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and
investments accounted for under the cost method. We will evaluate the impact of
EITF 03-01 once the final guidance is issued.
In December 2004, the FASB issued SFAS No. 123 (R), Share-Based Payment
("SFAS 123(R)"), an amendment of SFAS No. 123 and SFAS No. 95 Statement of Cash
Flows. The statement eliminates the ability to account for share-based
compensation transactions using APB No. 25 and requires that the cost of
share-based payment transactions (including those with employees and
non-employees) be recognized in the financial statements. SFAS No. 123(R)
applies to all share-based payment transactions in which an entity acquires
goods or services by issuing its shares, share options, or other equity
instruments or by incurring liabilities based on the price of an entity's shares
or that require settlement by the issuance of equity instruments. In March 2005,
the SEC issued Staff Accounting Bulletin (SAB)107 ("SAB 107") which expresses
views of the SEC staff regarding the application of SFAS No. 123(R). Among other
things, SAB 107 provides interpretive guidance related to the interaction
between SFAS No. 123(R) and certain SEC rules and regulations, as well as
provides the SEC staff's views regarding the valuation of share-based payment
arrangements for public companies. In April 2005, the SEC amended the compliance
dates for SFAS 123(R) to provide that the provisions of this statement will be
effective for fiscal years beginning after June 15, 2005. We will adopt SFAS
123(R) as of the beginning of our 2007 fiscal year. Although we are currently
assessing the application of SFAS No. 123(R), we believe that the adoption of
this statement will have a material impact on our results of operations,
depending on the amount of stock options we grant in future periods.
In December 2004, the FASB issued FASB Staff Position ("FSP") No.
109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004 ("FSP No. 109-2"). FSP
No. 109-2 provides guidance under SFAS No. 109, Accounting for Income Taxes
("SFAS No. 109"), with respect to recording the potential impact of the
repatriation provisions of the American Jobs Creation Act of 2004 (the "Jobs
Act") on enterprises' income tax expense and deferred tax liability. FSP No.
109-2 states that an enterprise is allowed time beyond the financial reporting
period of enactment of the Jobs Act to evaluate the effect of the Jobs Act on
its plan for reinvestment or repatriation of foreign earnings for purposes of
applying SFAS No. 109. The Jobs Act was enacted on October 22, 2004. We do not
believe that the adoption of FSP No.109-2 will have a material effect on our
financial position, results of operation or cash flows.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Non-monetary Assets, an amendment of APB Opinion No. 20, Accounting for
Non-monetary Transactions." The amendments made by this Statement are based on
the principle that exchanges of non-monetary assets should be measured based on
the fair value of the assets exchanged. This Statement also eliminates the
exception for non-monetary exchanges of similar productive assets and replaces
it with a broader exception for exchanges of non-monetary assets that do not
have commercial substance. We are required to adopt the provisions of this
Statement beginning April 1, 2006 for all non-monetary asset exchanges and will
apply its provisions prospectively upon adoption. We do not believe this will
have a material impact on our consolidated financial statements.
26
RESULTS OF OPERATIONS
The following table sets forth statement of operations data for the
periods indicated as a percentage of total revenues.
Year ended March 31,
------------------------------------------------------------------
2005 2004 2003
--------------- -------------- --------------
Revenues:
Software licenses 33 % 38 % 34 %
Consulting services, maintenance and other 67 % 62 % 66 %
--------------- -------------- --------------
Total revenues 100 % 100 % 100 %
--------------- -------------- --------------
Cost of revenues:
Software licenses 1 % 4 % 4 %
Consulting services, maintenance and other 28 % 25 % 24 %
--------------- -------------- --------------
Total cost of revenues 29 % 29 % 28 %
--------------- -------------- --------------
Gross profit 71 % 71 % 72 %
--------------- -------------- --------------
Operating expenses:
Research and development 67 % 50 % 67 %
Sales, general and administrative 85 % 107 % 127 %
Legal settlement expense 5 % 62 % - %
Goodwill impairment - % - % 196 %
Stock based compensation 0 % 3 % 7 %
Amortization of intangible assets 12 % 10 % 10 %
--------------- -------------- --------------
Total operating expenses 169 % 232 % 407 %
--------------- -------------- --------------
Loss from operations (99)% (161)% (335)%
=============== ============== ==============
Comparison of years ended March 31, 2005 and 2004
Revenues. Total revenues decreased to $9.8 million in the year ended
March 31, 2005 from $12.7 million in the year ended March 31, 2004, or a
decrease of 23%. Our sales cycle for the license of our software products has
historically been very long, our products are new and our customers spend a
significant amount of time evaluating our products. Customer purchase orders
typically include integration and installation services, rights of return and
acceptance criteria. As such, we defer a significant amount of our license
revenue until integration and installation services are complete, rights of
return lapse and final acceptance occurs. The amount of our license revenue is
currently at levels that have resulted in no meaningful trend from period to
period. Our ability to sell our products in the future may also be affected by
declines in capital spending by potential customers in the semiconductor
industry.
Product sales were highly concentrated, with 34% of total revenues in
the year ended March 31, 2005 coming from two customers and 42% of total
revenues in the year ended March 31, 2004 coming from three customers.
Software license revenue decreased to $3.2 million in the year ended
March 31, 2005, from $4.8 million in the year ended March 31, 2004, or a
decrease of 34%. Software license revenue in the year ended March 31, 2004
includes $2.2 million in deferred revenue from March 31, 2002 which was accepted
in the year ended March 31, 2004.
27
Consulting services, maintenance and other revenues decreased to $6.6
million in the year ended March 31, 2005, down from $7.9 million in the year
ended March 31, 2004, or a decrease of 17%. The decrease was principally due to
a reduced level of orders from one of our largest customers, as we have shifted
in focus from lower-margin, higher-volume services work to high-margin,
lower-volume services work with this customer.
Gross profit. As a percentage of revenues, gross profit remained
constant at 71% year-over-year. Gross profit has been and will continue to be
affected by a variety of factors, the most important of which is the relative
mix of revenues among software licenses, maintenance fees and consulting
services.
Research and development. Research and development expenses represented
67% of revenues in the year ended March 31, 2005 compared to 50% of revenues in
the year ended March 31, 2004. Actual costs increased slightly to $6.6 million
in the year ended March 31, 2005, up from $6.4 million for the year ended March
31, 2004. This increase was primarily attributable to the development of new
products. Salaries and related benefits of research and development engineers
represent the single largest component of our research and development expenses.
In the year ended March 31, 2005, salaries and related benefits comprised of
$4.2 million of the total research and development expenses compared to $3.9
million in the year ended March 31, 2004. We expect our research and development
costs to remain relatively stable for the foreseeable future.
Sales, general and administrative. Sales, general and administrative
expenses in the year ended March 31, 2005 were $8.3 million, or 85% of revenues,
compared to $13.6 million, or 107% of revenues in the year ended March 31, 2004.
The decrease in costs was primarily due to decreases in staff, professional fees
and costs associated with litigation. Salary costs decreased to $4.7 million for
the year ended March 31, 2005 compared to $6.2 million for the year ended March
31, 2004. Legal and professional fees associated with the litigation were
approximately $800,000 and $2.7 million during years ended March 31, 2005 and
2004, respectively. The $800,000 is net of $492,000 in legal fees funded by D&O
insurance proceeds and a reversal of $425,000 in legal accruals. We expect our
legal fees to continue to decrease in future periods as the litigation
proceedings are resolved.
Legal settlement expense. At March 31, 2005, we were able to reasonably
estimate the cost of the potential settlement of the Securities Action, the
Covalar Action and the Fabcentric Action. As such, we increased the accrual by
$470,000 bringing our total estimated legal settlement expense to $8.4 million
from $7.9 million in the year ended March 31, 2004, which amount represents our
estimate of the value of the common stock to be issued in connection with such
settlements. At December 31, 2004, we had accrued $9.1 million for estimated
potential settlement. Accordingly, there was a $730,000 reduction in legal
settlement expenses in the three month period ended March 31, 2005. See
"Liquidity and Capital Resource" below.
Goodwill impairment. At March 31, 2005 and March 31, 2004 we performed
an impairment test and determined that there was no impairment in goodwill.
Future goodwill impairment tests may result in charges to earnings if the
Company determines that goodwill has been impaired.
Stock-based compensation. Stock-based compensation expense in the year
ended March 31, 2005 was $45,000, compared with $315,000 in the year ended March
31, 2004. Stock-based compensation expense in the year ended March 31, 2005
decreased from the previous year primarily as a result of decreases in staff
from prior acquisitions, which resulted in the reversal of previously expensed
stock-based compensation which was not earned by the terminated employees, and
that certain stock-based compensation expenses became fully amortized during
fiscal 2005.
28
Amortization of intangible assets. Amortization of intangible assets
was $1.2 million in the year ended March 31, 2005, compared to $1.3 million in
the year ended March 31, 2004. Other intangible assets were fully amortized at
March 31, 2005.
Interest income and other income. Interest income for the year ended
March 31, 2005 and 2004 was $138,000 and $252,000, respectively. This decrease
was due to less interest income from lower average balances of cash, cash
equivalents and short-term investments, during the year ended March 31, 2005.
Interest Expense. Interest expense for the year ended March 31, 2005
and 2004 was $3,000 and $39,000, respectively. The decrease in interest expense
was due to a reduction of interest paid on equipment and furniture under capital
lease obligations.
Provision for income taxes. In the years ended March 31, 2005 and 2004,
we incurred net operating losses resulting in net deferred taxes. We have
recorded valuation allowances for the full amount of our net deferred tax
assets, because the future realization of the deferred tax assets was determined
to be not likely as of March 31, 2005 and 2004. In the year ended March 31,
2005, the provision for income tax in the amount of $(71,000) was due to a tax
benefit of $178,000 that resulted from a tax refund from the State of California
net of a $107,000 provision for foreign income taxes.
Comparison of years ended March 31, 2004 and 2003
Revenues. Total revenues decreased to $12.7 million in the year ended
March 31, 2004 from $15.6 million in the year ended March 31, 2003, or a
decrease of 19%.
Product sales were highly concentrated, with 42% of total revenues in
the year ended March 31, 2004 coming from three customers and 61% of total
revenues in the year ended March 31, 2003 coming from four customers.
Software license revenue decreased to $4.8 million in the year ended
March 31, 2004, from $5.3 million in the year ended March 31, 2003, or a
decrease of 9%. Software license revenue in the year ended March 31, 2004
includes $2.2 million in deferred revenue from March 31, 2002 which was accepted
in the year ended March 31, 2004. Software license revenue in the year ended
March 31, 2003 includes $4.6 million in revenue deferred as a result of our
financial restatement in the year ended March 31, 2002 as customer acceptance
was received in the period.
Consulting services, maintenance and other revenues decreased to $7.9
million in the year ended March 31, 2004, down from $10.3 million in the year
ended March 31, 2003, or a decrease of 23%. The decrease was due to customer
delays in providing layout design specifications for custom services work and
verifying silicon testing results as well as a shift in focus from low-margin,
higher-volume services work to higher-margin, lower-volume services work.
Gross profit. As a percentage of revenues, gross profit decreased
slightly to 71% in the year ended March 31, 2004 from 72% in the year ended
March 31, 2003. The modest decline was primarily due to the above variances in
revenue from period to period and changes in cost of revenues. In addition, in
the year ended March 31, 2004, we expensed $491,000 in deferred costs relating
to the sale of a software license recognized in the period. This additional
expense was partially offset by increased margins in our service business as a
result of a shift in focus as noted above. Gross profit has been and will
continue to be affected by a variety of factors, the most important of which is
the relative mix of revenues among software licenses, maintenance fees and
consulting services.
29
Research and development. Research and development expenses represented
50% of revenues in the year ended March 31, 2004 compared to 67% of revenues in
the year ended March 31, 2003. Actual costs decreased to $6.4 million in the
year ended March 31, 2004, down from $10.5 million for the year ended March 31,
2003. This decrease was primarily attributable to the cost-cutting measures
commenced in September 2002 and continued through December 2003. Salaries and
related benefits of research and development engineers represent the single
largest component of our research and development expenses.
Sales, general and administrative. Sales, general and administrative
expenses in the year ended March 31, 2004 were $13.6 million, or 107% of
revenues, compared to $19.8 million, or 127% of revenues in the year ended March
31, 2003. The decrease in costs was primarily due to decreases in staff,
professional fees and costs associated with litigation and the restatement of
our financial statements. Legal and professional fees associated with litigation
and the restatement of our financial statements were approximately $2.7 million
and $3.9 million during years ended March 31, 2004 and 2003, respectively. We
expect the level of legal fees to decline significantly in fiscal 2005 as our
pending legal matters are resolved.
Legal settlement expense. In the year ended March 31, 2004, we were
able to reasonably estimate the cost of the potential settlement of the
Securities Action and the Covalar Action, and as such, we accrued $7.9 million,
our estimate of the value of the common stock to be issued in connection with
such settlement. The liability will be revalued quarterly until the effective
date of the settlements. See "Liquidity and Capital Resources" below.
Goodwill impairment. The Company operates within one reporting unit as
defined by SFAS 142. Therefore, goodwill is not allocated within the Company, as
it is considered enterprise goodwill. During the fourth quarter of the year
ended March 31, 2003, the Company determined that there were indicators of
impairment to the carrying value of goodwill, principally as a result of
reducing its revenue forecast given the then current economic environment in the
semiconductor industry. The Company performed its annual impairment review for
goodwill and other intangible assets on March 31, 2003 and recorded a charge of
$30.6 million relating to goodwill impairment, which is recorded as a component
of operating income in the accompanying consolidated statement of operations.
The amount of goodwill impairment was based on the fair value of the Company,
representing its only reporting unit utilizing a valuation based on both the
discounted cash flow and market approach. At March 31, 2004 we performed an
impairment test and determined that there was no further impairment in goodwill.
Future goodwill impairment tests may result in charges to earnings if the
Company determines that goodwill has been further impaired.
Stock-based compensation. Stock-based compensation expense in the year
ended March 31, 2004 was $315,000, compared with $1.0 million in the year ended
March 31, 2003. Stock-based compensation expense in the year ended March 31,
2004 decreased from the previous year primarily as a result of decreases in
staff related to acquisitions, which resulted in the reversal of previously
expensed stock-based compensation which was not earned by the terminated
employees.
Amortization of intangible assets. Amortization of intangible assets
was $1.3 million in the year ended March 31, 2004, compared to $1.5 million in
the year ended March 31, 2003. This decrease in amortization is due to certain
intangible assets being fully amortized prior to fiscal 2004.
Interest income and other income. Interest income for the year ended
March 31, 2004 and 2003 was $252,000 and $617,000, respectively. This decrease
was due to less interest income from lower average balances of cash, cash
equivalents and short-term investments, during the year ended March 31, 2004.
30
Interest Expense. Interest expense for the year ended March 31, 2004
and 2003 was $39,000 and $149,000, respectively. The decrease in interest
expense was due to a reduction of interest paid on equipment and furniture under
capital lease obligations.
Provision for income taxes. In the years ended March 31, 2004 and 2003,
we incurred operating losses for which we have recorded valuation allowances for
the full amount of our net deferred tax assets, because the future realization
of the deferred tax assets was not likely as of March 31, 2004 and 2003. In the
year ended March 31, 2004, the provision for income tax in the amount of $89,000
resulted from foreign income tax withholding.
LIQUIDITY AND CAPITAL RESOURCES
Our financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. Accordingly, the financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amount and classification of liabilities that
might be necessary if we are unable to continue as a going concern. We have
experienced net losses and negative cash flows since going public in July 2001
and, as of March 31, 2005, we had an accumulated deficit of $107.5 million. We
expect to have a net operating loss in our year ending March 31, 2006. For the
year ended March 31, 2005, cash used in operations and to fund capital
expenditures was $7.2 million. Such conditions raise doubt about our ability to
continue as a going concern and our independent registered public accounting
firm has included a going concern uncertainty paragraph in their report, which
is included in this Form 10-K. At March 31, 2005, we had approximately $3.2
million in cash and cash equivalents and short-term investments. Our current
operating plan for the year ending March 31, 2006 projects that cash available
from planned revenue combined with the $3.2 million on hand at March 31, 2005
will not be adequate to fund operations through March 31, 2006. Our future cash
position will be adversely affected by slow or diminished revenue growth,
research and development expenses, additional sales and marketing costs and
higher general and administrative expenses, such as professional fees associated
with the litigation. We need to raise additional capital or we will be forced to
curtail or cease operations. There is no assurance that the Company will be able
to raise such funds on terms acceptable to the Company, or at all.
Net cash used in operating activities for the year ended March 31, 2005
was approximately $6.7 million, compared to $9.4 million used in operating
activities for the year ended March 31, 2004 and $23.8 million used in operating
activities in the year ended March 31, 2003. Our cash used in operations for the
years ended March 31, 2005, 2004, and 2003 was primarily due to our net loss,
adjusted for certain non-cash items including depreciation and amortization,
legal settlement expense, goodwill impairment, stock-based compensation and
deferred revenue.
Net cash provided by investing activities was $5.2 million for the year
ended March 31, 2005 compared to $3.7 million used in investing activities for
the year ended March 31, 2004 and $7.1 million provided by investing activities
for the year ended March 31, 2003. The cash provided by investing activities for
the year ended March 31, 2005 consisted primarily of sale of marketable
securities to fund current operations. The cash used in investing activities for
the year ended March 31, 2004 consisted primarily of the purchase of marketable
securities and the cash provided by investing activities for the year ended
March 31, 20