NEOMAGIC CORP - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-Q

(Mark One)

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

For the quarter ended April 30, 2004

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

For the transition period from to

Commission file number 000-22009

NEOMAGIC CORPORATION

(Exact name of Registrant as specified in its charter)


DELAWARE		77-0344424
[ State or other jurisdiction of incorporation or organization]		[I.R.S. Employer Identification No.]

3250 Jay Street Santa Clara, California		95054
[Address of principal executive offices]		[Zip Code]

(408) 988- 7020

Registrant’s telephone number, including area code

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes x No ¨

The number of shares of the Registrant’s Common Stock, $.001 par value, outstanding at April 30, 2004 was 32,225,338

INDEX


		PAGE
PART I. CONDENSED CONSOLIDATED FINANCIAL INFORMATION

Item 1.	Unaudited Condensed Consolidated Financial Statements:

	Condensed Consolidated Statements of Operations Three months ended April 30, 2004 and 2003	3

	Condensed Consolidated Balance Sheets April 30, 2004 and January 31, 2004	4

	Condensed Consolidated Statements of Cash Flows Three months ended April 30, 2004 and 2003	5

	Notes to Unaudited Condensed Consolidated Financial Statements	6-9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10-22

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	23

Item 4.	Controls and Procedures	23

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	24

Item 2.	Changes in Securities	24

Item 3.	Defaults Upon Senior Securities	24

Item 4.	Submission of Matters to a Vote of Security Holders	24

Item 5.	Other Information	25

Item 6.	Exhibits and Reports on Form 8-K	25

Signatures		26

Exhibit Index		27-28

Certifications

Page 2 of 28

Part I. Financial Information

Item I. Financial Statements

NEOMAGIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended
	April 30, 2004			April 30, 2003
(In thousands, except per share data)
Net sales	$	651		$	624

Cost of sales (1)		715			588

Gross profit (loss)		(64	)		36

Operating expenses:
Research and development (2)		4,868			5,019
Sales, general and administrative (3)		2,140			1,777

Total operating expenses		7,008			6,796

Loss from operations		(7,072	)		(6,760	)

Other income (expense), net:
Interest income and other		103			211
Interest expense		(24	)		(87	)

Loss before income taxes		(6,993	)		(6,636	)

Income tax provision		7			—

Net loss	$	(7,000	)	$	(6,636	)

Basic and diluted net loss per share	$	(.22	)	$	(.22	)

Weighted average common shares outstanding for basic and diluted		32,077			30,277

(1)	Includes $4 and $6 in amortization of deferred stock compensation for the three months ended April 30, 2004 and April 30, 2003, respectively.

(2)	Includes $65 and $67 in amortization of deferred stock compensation for the three months ended April 30, 2004 and April 30, 2003, respectively.

(3)	Includes $49 and $35 in amortization of deferred stock compensation for the three months ended April 30, 2004 and April 30, 2003, respectively.

See accompanying notes to condensed consolidated financial statements.

Page 3 of 28

NEOMAGIC CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	April 30, 2004			January 31, 2004(1)
(In thousands)
ASSETS

Current assets:
Cash and cash equivalents	$	7,310		$	12,342
Short-term investments		29,394			30,240
Accounts receivable, net		145			384
Inventory		666			102
Other current assets		1,307			974

Total current assets		38,822			44,042

Property, plant and equipment, net		3,656			3,302
Employee note receivable		—			10
Intangibles, net		2,745			3,168
Other assets		625			339

Total assets	$	45,848		$	50,861

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	1,178		$	1,344
Compensation and related benefits		1,506			1,257
Income taxes payable		3,675			3,675
Current portion of capital lease obligations		1,971			1,756
Other accruals		265			203

Total current liabilities		8,595			8,235

Capital lease obligations		1,642			799

Commitments and contingencies

Stockholders’ equity:
Common stock		32			32
Additional paid-in-capital		91,212			90,496
Deferred compensation		(458	)		(535	)
Accumulated other comprehensive loss		(15	)		(6	)
Accumulated deficit		(55,160	)		(48,160	)

Total stockholders’ equity		35,611			41,827

Total liabilities and stockholders’ equity	$	45,848		$	50,861

(1)	Derived from the January 31, 2004 audited consolidated financial statements included in the Annual Report on Form 10-K of NeoMagic Corporation for fiscal year 2004.

See accompanying notes to condensed consolidated financial statements.

Page 4 of 28

NEOMAGIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Three Months Ended April 30,
	2004			2003
(In thousands)
Operating activities:
Net loss	$	(7,000	)	$	(6,636	)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization		999			905
Amortization of deferred compensation		118			108
Changes in operating assets and liabilities:
Accounts receivable		239			(4	)
Inventory		(564	)		(224	)
Other current assets		(198	)		(94	)
Other assets		(34	)		43
Accounts payable		(166	)		(456	)
Compensation and related benefits		249			(202	)
Income taxes payable		—			31
Tax benefit from employee stock options		—			3
Other accruals		62			(271	)

Net cash used in operating activities		(6,295	)		(6,797	)

Investing activities:
Purchases of property, plant, equipment and intangibles		(32	)		(105	)
Purchases of short-term investments		(7,695	)		(22,727	)
Maturities of short-term investments		8,532			7,842

Net cash provided by (used in) investing activities		805			(14,990	)

Financing activities:
Payments on capital lease obligations		(217	)		(129	)
Net proceeds from issuance of common stock		675			—

Net cash provided by (used in) financing activities		458			(129	)

Net decrease in cash and cash equivalents		(5,032	)		(21,916	)
Cash and cash equivalents at beginning of period		12,342			37,428

Cash and cash equivalents at end of period	$	7,310		$	15,512

Supplemental schedules of cash flow information:
Cash paid during the period for:
Interest	$	35		$	24
Taxes	$	6		$	6

See accompanying notes to condensed consolidated financial statements.

Page 5 of 28

NEOMAGIC CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and include the accounts of NeoMagic Corporation and its wholly owned subsidiaries (collectively “NeoMagic” or the “Company”). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company, the financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position at April 30, 2004, and the operating results and cash flows for the three months ended April 30, 2004 and 2003. These financial statements and notes should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended January 31, 2004, included in the Company’s Form 10-K filed with the Securities and Exchange Commission.

The results of operations for the three months ended April 30, 2004 are not necessarily indicative of the results that may be expected for the year ending January 31, 2005.

The first fiscal quarters of 2005 and 2004 ended on May 2, 2004 and April 27, 2003, respectively. The Company’s quarters generally have 13 weeks. The first quarter of fiscal 2005 had 14 weeks. The Company’s fiscal years generally have 52 weeks. Fiscal 2005 will have 53 weeks. For ease of presentation, the accompanying financial statements have been shown as ending on the last day of the calendar month of April.

2. Stock Compensation

At April 30, 2004, the Company had several stock-based employee compensation plans, including stock option plans and an employee stock purchase plan. The Company accounts for these plans under the intrinsic value method. The following table illustrates the effect on net loss and earnings per share if the Company had applied the fair value recognition method:


Three months ended April 30,	2004			2003
(in thousands, except per share amounts)
Net loss, as reported	$	(7,000	)	$	(6,636	)
Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects		118			108
Less: Total stock-based compensation expense determined under the fair value method for all awards, net of related tax effects		(1,262	)		(771	)

Pro forma net loss		(8,144	)		(7,299	)

Reported basic and diluted loss per share	$	(0.22	)	$	(0.22	)

Pro forma basic and diluted loss per share	$	(0.25	)	$	(0.24	)

In the three months ended April 30, 2004 and 2003, respectively, the fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model using a dividend yield of 0% and the following additional weighted-average assumptions:


	Option Plans				Stock Purchase Plan
Three months ended April 30,	2004		2003		2004		2003
Risk-free interest rates	3.57	%	1.6	%	1.31	%	1.45	%
Volatility	.71		.55		.79		.68
Expected life of option in years	4.93		2.03		.49		.49

Page 6 of 28

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of its employee stock options.

3. Loss Per Share

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

Per share information is as follows:


Three months ended April 30,	2004			2003
(in thousands except per share data)
Numerator:
Net loss	$	(7,000	)	$

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