MOSAID Technologies Inc.
TSX : MSD

MOSAID Technologies Inc.

August 27, 2009 16:00 ET

MOSAID Reports Results for First Quarter Fiscal 2010 and Dividend

Quarterly dividend of $0.25 per share payable on October 8, 2009

OTTAWA, ONTARIO--(Marketwire - Aug. 27, 2009) - MOSAID Technologies Incorporated (TSX:MSD) today announced financial results for the first quarter of fiscal 2010, ended July 31, 2009.

- Q1 revenues of $16.2 million, up 28% from $12.7 million in Q1 fiscal 2009

- Q1 pro forma net income of $6.6 million up 65% from $4.0 million in Q1 fiscal 2009. Q1 pro forma EPS of $0.65 per diluted share up 76% from $0.37 in Q1 fiscal 2009

- Q1 GAAP net income of $6.4 million or $0.63 per diluted share, compared with $1.4 million or $0.13 per diluted share in Q1 fiscal 2009

"The substantial increase in Q1 revenues reflects the higher number of licensees contributing to quarterly revenues through both fixed payment and royalty based term licenses," said John Lindgren, President and CEO, MOSAID. "This quarter, a key operational highlight was the introduction of an HLNAND™ silicon chip and memory module, demonstrating the importance of targeted R&D investment to our business model as an intellectual property development and licensing company. MOSAID's objective is to drive market adoption of the HLNAND memory architecture and interface by licensing this innovative technology to third-party manufacturers."

"MOSAID also filed suit against IBM Corporation for patent infringement," said Lindgren. "While we prefer to reach negotiated settlements, the Company is determined to protect its intellectual property rights through the courts, when necessary."

MOSAID had cash and marketable securities of $52.4 million at the end of the first quarter of fiscal 2010, compared to $51.8 million at the end of the fourth quarter of fiscal 2009. In Q1 fiscal 2010, MOSAID returned $2.6 million to shareholders in quarterly dividend payments.

On August 27, 2009, MOSAID declared a quarterly dividend of $0.25 per share. The dividend, which is an eligible dividend, is payable on October 8, 2009 to shareholders of record as of September 25, 2009.

A reconciliation of pro forma net income to Canadian generally accepted accounting principles (GAAP) net income is included in the Notes to the Financial Statements accompanying this press release.

First Quarter Operational Highlights

Semiconductor memory patent licensing: During the quarter, MOSAID granted a six-year patent license agreement to an unnamed fabless semiconductor memory company. Under the cross-licensing agreement, this company's DRAM (Dynamic Random Access Memory) and embedded DRAM products are licensed for a six-year term commencing August 2009. A series of fixed payments is due to MOSAID during that period. The licensee also transferred to MOSAID ownership of five United States patent families related to DRAM technology.

Innovation: MOSAID began sampling a HyperLink NAND (HLNAND) semiconductor chip and memory module. The devices target the emerging market for SCM (Storage Class Memory) technology, which involves replacing or augmenting rotating magnetic disk storage with solid state storage devices and systems. MOSAID showcased its two new devices - a 64Gb (gigabit) semiconductor chip and a 64GB (gigabyte) memory module - at the 2009 Flash Memory Summit in early August in California.

Patent litigation: MOSAID initiated litigation against IBM Corporation of Armonk, New York, for infringement of six of MOSAID's United States patents. In a complaint filed in the United States District Court of the District of Delaware, MOSAID claims that IBM has infringed and is infringing MOSAID's patents by making and selling microprocessor and Application Specific Integrated Circuit (ASIC) products which practice MOSAID's patents.

Patent portfolio development: MOSAID's portfolio comprised 1,788 patents and applications at the end of the first quarter of fiscal 2010, up 96% from 912 patents and applications one year ago.

Q2 and Fiscal 2010 Guidance

Management offers the following guidance for the second quarter of fiscal 2010:

- Q2 revenues of $16.0 million to $17.0 million

- Q2 pro forma net income of $5.7 million to $6.4 million, or $0.55 to $0.62 per diluted share, based on 10.4 million diluted shares

The Company is maintaining its previously announced guidance for fiscal 2010:

- Fiscal 2010 revenues in the range of $65.0 million to $67.0 million

- Fiscal 2010 pro forma net income of $21.5 million to $22.5 million, or $2.07 to $2.17 per diluted share, based on 10.4 million diluted shares

MOSAID's revenues result primarily from intellectual property agreements, which by their nature may actually close on dates other than those projected. MOSAID's priority and focus is on obtaining the best terms possible under its agreements, rather than on the particular timing of agreement closure. MOSAID's revenues depend upon, among other items, the continued ability of its licensees to pay amounts as they become due. The Company takes steps, including monitoring the creditworthiness of its licensees, in order to manage this risk.

Conference Call and Webcast

Management will hold a conference call and webcast on Thursday, August 27, 2009 at 5:00 p.m. ET. The webcast will be live at www.mosaid.com and may also be accessed by dialing 1-800-447-0521. The webcast will be available on mosaid.com for 90 days following the event.

About MOSAID

MOSAID Technologies Inc. is one of the world's leading intellectual property companies. MOSAID develops semiconductor memory technology and licenses patented intellectual property in the areas of semiconductors and telecommunications systems. MOSAID counts many of the world's largest semiconductor companies among its licensees. Founded in 1975, MOSAID is based in Ottawa, Ontario.

Pro forma net income, a non-GAAP measure, is GAAP net income adjusted for stock-based compensation, patent amortization and imputed interest, foreign exchange gains and losses on "Other long-term liabilities," and any other non-recurring items. The Company uses pro forma measures internally to evaluate and manage operating performance, and to forecast and plan. Non-GAAP measures do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other issuers.

Forward Looking Information

This document and certain other public documents incorporated by reference in this document, contain forward-looking statements to the extent they relate to MOSAID or its management, including those identified by the expressions "anticipate," "believe," "foresee," "estimate," "expect," "intend," "could," "may," "plan," "will," "would" and similar expressions. Similarly, statements in this document that describe MOSAID's business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements. These forward-looking statements are not historical facts, but rather reflect MOSAID's current expectations regarding future events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results, performance or achievements to differ materially from those in such forward-looking statements. Assumptions made in preparing forward-looking statements and financial guidance include, but are not limited to, the following: MOSAID's continued expansion of its patent portfolio and of its opportunities for future patent licensing revenue as a result of MOSAID's acquisition of patents from third parties and from development of new inventions; DRAM manufacturers continuing to infringe MOSAID's patents; the timing and amount of MOSAID's litigation expenses; MOSAID's ability to sign new patent licensees; current assumptions as to the identification of products that are unlicensed to MOSAID's wireless patents; and the timing and amount of MOSAID's Research & Development expenses.

Factors that could cause actual results to differ materially from expected results include, but are not limited to, the following: the extent of embedded DRAM proliferation in the System-on-a-Chip markets; legal rulings and/or regulatory investigations or complaints having an adverse impact on the validity, enforceability, potential royalty rates, and strength or breadth of coverage of MOSAID's essential and/or nonessential patents (including, but not limited to, adverse results from litigation or proceedings in patent offices and government regulatory agencies in various countries around the world); judicial, legislative or regulatory changes that impair the ability of patent holders to earn licensing revenues; economic, social, and political conditions in the countries in which MOSAID or patent licensees operate, including security risks, health conditions, possible disruptions in transportation networks and fluctuations in foreign currency exchange rates; non-payment or delays in payment by, or insolvency of, licensees or other debtors; variability in patent licensees' sales of licensed products, failure to maintain and enforce MOSAID's existing patent portfolio, or failure to obtain valuable patents as a result of research and development activities, or failure to acquire valuable patents from third parties; MOSAID's ability to recruit and retain skilled personnel; change in MOSAID's financial position; consolidation of MOSAID's licensees; natural events, such as severe weather and earthquakes in the locations in which MOSAID or patent licensees operate; and changes in the tax rate applicable to MOSAID as the result of changes in the tax law in the jurisdictions in which profits are determined to be earned and taxed, the outcome of tax audits and the ability to realize deferred tax assets.

MOSAID assumes no obligation to update or revise any forward-looking statements. Additional information identifying risks and uncertainties affecting MOSAID's business and other factors that could cause MOSAID's financial results to fluctuate are contained in MOSAID's Annual Information Form, under the section entitled "Risk Factors," and in MOSAID's other public filings available online at www.sedar.com.



MOSAID TECHNOLOGIES INCORPORATED
(Subject to the Canada Business Corporations Act)
CONSOLIDATED PRO FORMA STATEMENTS OF INCOME
(In thousands of Canadian Dollars, except per share amounts)
(Unaudited)

Quarter ended Quarter ended
July 31, 2009 July 31, 2008
--------------------------------------------------------------------------

Revenues $16,223 $12,652

Operating expenses
Patent portfolio management 1,711 1,123
Patent licensing and litigation 1,944 4,417
Research and development 811 567
General and administration 1,549 1,149
Foreign exchange loss (gain) 409 (61)
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6,424 7,195
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Pro forma income from operations 9,799 5,457
Net interest income 119 522
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Pro forma income before income tax 9,918 5,979
Income tax expense 3,273 1,973
--------------------------------------------------------------------------
Pro forma net income (Note 6) $6,645 $4,006
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Pro forma earnings per share
Basic $0.65 $0.37
Diluted $0.65 $0.37

Weighted average number of shares
Basic 10,215,130 10,688,327
Diluted 10,249,535 10,725,212

See accompanying Notes to the Consolidated Financial Statements



MOSAID TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(In thousands of Canadian Dollars, except per share amounts)
(Unaudited)

Quarter ended Quarter ended
July 31, 2009 July 31, 2008
--------------------------------------------------------------------------

Revenues $16,223 $12,652

Operating expenses
Patent portfolio management 1,711 1,123
Patent licensing and litigation 1,944 4,417
Research and development 811 567
General and administration 1,549 1,149
Foreign exchange (gain) loss (2,469) 518
Other 238 147
Patent amortization and imputed interest 3,868 3,260
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7,652 11,181
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Income from operations 8,571 1,471
Net interest income 119 522
--------------------------------------------------------------------------
Income before income tax expense and
discontinued operations 8,690 1,993
Income tax expense 2,472 801
--------------------------------------------------------------------------
Income before discontinued operations 6,218 1,192
Discontinued operations income
(net of tax) (Note 5) 236 168
--------------------------------------------------------------------------
Net income 6,454 1,360
Dividends 2,561 2,684
Normal course issuer bid - 1,378
Retained earnings, beginning of period 11,607 19,297
--------------------------------------------------------------------------
Retained earnings, end of period $15,500 $16,595
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Earnings per share (Note 4)
Basic - before discontinued operations $0.61 $0.11
Diluted - before discontinued operations $0.61 $0.11

Basic - net earnings $0.63 $0.13
Diluted - net earnings $0.63 $0.13

Weighted average number of shares
Basic 10,215,130 10,688,327
Diluted 10,249,535 10,725,212

See accompanying Notes to the Consolidated Financial Statements



MOSAID TECHNOLOGIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands of Canadian Dollars)

As at As at
July 31, 2009 April 30, 2009
(unaudited) (audited)
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Current Assets
Cash and cash equivalents $51,702 $32,899
Marketable securities 708 18,888
Accounts receivable 4,884 10,434
Prepaid expenses 826 759
Other asset 1,308 446
Future income taxes recoverable 11,519 11,519
--------------------------------------------------------------------------
70,947 74,945

Capital assets 577 563
Acquired intangibles 76,485 79,402
Future income taxes recoverable 17,492 17,549
--------------------------------------------------------------------------
$165,501 $172,459
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--------------------------------------------------------------------------

Current Liabilities
Accounts payable and accrued liabilities $5,768 $6,341
Income tax payable 1,432 1,432
Deferred revenue 2,843 3,432
Current portion of other long-term
liabilities 10,139 20,869
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20,182 32,074
Deferred gain on sale-leaseback 986 1,039
Other long-term liabilities 28,297 28,799
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49,465 61,912
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Shareholders' Equity
Share capital (Note 3) 95,577 94,741
Contributed surplus 3,651 3,753
Retained earnings 15,500 11,607
Accumulated other comprehensive income 1,308 446
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116,036 110,547
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$165,501 $172,459
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See accompanying Notes to the Consolidated Financial Statements



MOSAID TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of Canadian Dollars)
(Unaudited)

Quarter ended Quarter ended
July 31, 2009 July 31, 2008
--------------------------------------------------------------------------

Operating
Income before discontinued operations $6,218 $1,192
Items not affecting cash
Amortization 3,014 2,457
Stock-based compensation 238 147
Unrealized foreign exchange (loss) gain
on other long-term liabilities (2,877) 579
Future income tax recoverable 57 (1,511)
--------------------------------------------------------------------------
6,650 2,864
Change in non-cash working capital items
from continuing operations 4,739 6,123
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11,389 8,987
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Investing
Acquisition of capital assets and
acquired intangibles (112) (1,337)
Acquisition of short-term marketable
securities (316) (32,706)
Proceeds on disposal/maturity of
short-term marketable securities 18,496 27,138
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18,068 (6,905)
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Financing
Long-term liabilities (8,356) (333)
Repurchase of shares - (3,818)
Dividends (2,561) (2,684)
Issue of common shares 503 143
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(10,414) (6,692)
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Net cash (outflow) from continuing
operations 19,043 (4,610)
Net cash (outflow) inflow from
discontinued operations (240) (308)
--------------------------------------------------------------------------
Net cash (outflow) inflow 18,803 (4,918)
Cash and cash equivalents, beginning of
period 32,899 22,133
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Cash and cash equivalents, end of period $51,702 $17,215
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Supplementary Information:

Cash on hand and bank balances $ 9,966 $14,368
Short-term investments 41,736 2,847
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Total cash and cash equivalents $51,702 $17,215
--------------------------------------------------------------------------
--------------------------------------------------------------------------

See accompanying Notes to the Consolidated Financial Statements



MOSAID TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands of Canadian Dollars)
(Unaudited)

Quarter ended Quarter ended
July 31, 2009 July 31, 2008
--------------------------------------------------------------------------

Net income $6,454 $1,360
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Other comprehensive income, net of tax:
Gains and losses on derivatives
designated as cash flow hedges 1,248 (175)
Gains and losses on derivatives
designated as cash flow hedges
in prior periods transferred to
revenue in the current period (386) 166
--------------------------------------------------------------------------
Other comprehensive loss 862 (9)
--------------------------------------------------------------------------

Comprehensive income $7,316 $1,351
--------------------------------------------------------------------------
--------------------------------------------------------------------------

See accompanying Notes to the Consolidated Financial Statements


MOSAID TECHNOLOGIES INCORPORATED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Quarters ended July 31, 2009 and 2008
(tabular dollar amounts in thousands of Canadian Dollars,
except per share amounts)


1. Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP) for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements.

In the opinion of management, all adjustments consisting of normal recurring adjustments, considered necessary for a fair presentation of the Company's financial position, results of operations and cash flows have been included. Operating results for the interim period presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the full fiscal year ending April 30, 2010.

2. Adoption of New Accounting Standards

Effective May 1, 2009 the Company adopted the following new accounting standard issued by the Canadian Institute of Chartered Accountants.

Goodwill and intangible assets

In February 2008, the CICA issued Section 3064, Goodwill and Intangible Assets, replacing Section 3062, Goodwill and Other Intangible Assets and Section 3450, Research and Development Costs. Various changes have been made to other sections of the CICA Handbook for consistency purposes. The new Section will be applicable to financial statements relating to fiscal years beginning on or after October 1, 2008. Accordingly, the Company will adopt the new standards for its fiscal year beginning May 1, 2009. It establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented companies. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062.

As a result of adoption of the above policy, there was no material impact on the Consolidated Statement of Income.

3. Shareholders' equity and other comprehensive income

The following are the changes in shareholders' equity for the three months ended July 31, 2009 and July 31, 2008:



Accumu-
Lated
Other
compre-
Common Common Contributed Retained hensive
shares shares surplus earnings income Total
(number) ($) ($) ($) ($) ($)
--------------------------------------------------------------------------
Balance
at April
30, 2009 10,184,323 $94,741 $3,753 $11,607 $446 $110,547
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Net income 6,454 6,454
--------------------------------------------------------------------------
Dividends (2,561) (2,561)
--------------------------------------------------------------------------
Employee
Stock
Option
Program 44,950 715 (355)
--------------------------------------------------------------------------
Employee
Share
Purchase
Program 17,964 121 15
--------------------------------------------------------------------------
Stock-based
compensation 238
--------------------------------------------------------------------------
Unrealized
derivative
gains on
cash flow
hedges - net 862 862
--------------------------------------------------------------------------
Balance
at July
31, 2009 10,247,237 $95,577 $3,651 $15,500 $1,308 $116,036
--------------------------------------------------------------------------


4. Earnings per Share

The following is a reconciliation of the numerator and denominator of the
basic and diluted per share computations:

Quarter Ended July 31,
2009 2008
--------------------------------------------------------------------------

Income before discontinued operations $6,218 $1,192
Discontinued operations (net of tax) 236 168
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Net income $6,454 $1,360
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Weighted average number of common
shares outstanding 10,215,130 10,688,327
Net effect of stock options 34,405 36,885
--------------------------------------------------------------------------
Weighted average diluted number of
common shares outstanding 10,249,535 10,725,212
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Earnings per share
Basic - before discontinued operations $0.61 $0.11
Diluted - before discontinued operations $0.61 $0.11

Basic - net income $0.63 $0.13
Diluted - net income $0.63 $0.13


For the quarters ended July 31, 2009 and July 31, 2008, 259,606 and 266,106 options, respectively, were excluded from the calculation of diluted earnings per share, as the exercise price of these options exceeded the average market price of the Company's common stock during this period and were therefore anti-dilutive.

There were 519,645 and 385,169 options issued and outstanding as at July 31, 2009 and July 31, 2008, respectively.



5. Discontinued operations

Quarter Ended July 31,
2009 2008
--------------------------------------------------------------------------

Revenues $18 $22

Expenses - -
--------------------------------------------------------------------------

Gain from operations 18 22
Gain on sale of assets 333 202
--------------------------------------------------------------------------
Earnings before tax 351 224
Income tax expense 115 56
--------------------------------------------------------------------------
Discontinued operations (net of tax) $236 $168
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6. Reconciliation of pro forma net income with GAAP net income

Quarter Ended July 31,
2009 2008
--------------------------------------------------------------------------

GAAP net income $6,454 $1,360
Add (deduct):
Stock-based compensation 238 147
Patent amortization and imputed interest 3,868 3,260
Foreign exchange (gain) loss (2,877) 579
Income tax expense - for the above items (802) (1,172)
Discontinued operations (net of tax) (236) (168)
--------------------------------------------------------------------------
Pro forma net income $6,645 $4,006
--------------------------------------------------------------------------
--------------------------------------------------------------------------


7. Stock-based Compensation

The Company has an employee stock purchase plan program whereby employees may elect to designate up to 5% of their annual salary to purchase shares of the Company at a 10% discount from the fair market value. The purchase price is deducted over a six month period via payroll. Directors are also eligible to participate in the Stock Purchase Plan.

Also, the Company has an Employee and Director Stock Option Plan. The exercise price is no lower than the closing market price on the trading day immediately preceding the date of grant. Options granted under the Plan expire within a period of six years of granting, with vesting periods determined by the Human Resources Committee.

The Company employs a fair value method of accounting for all options issued to employees and directors on or after April 27, 2002. The fair value of options issued in the quarter was calculated using the Black-Scholes option pricing model and the following assumptions:



Quarter Ended July 31,
2009 2008
--------------------------------------------------------------------------
Risk free interest rate 0.36% 3.17%
Expected life in years 5.5 5.5
Expected dividend yield 6.97% 6.72%
Volatility 40.62% 53.64%


For the quarter ended July 31, 2009, the Company issued nil Deferred Share Units in lieu of options to directors and officers of the Company under its Deferred Share Unit Plan. Those deferred share units vest evenly over a four year period. Deferred share units do not have an exercise price and can only be settled using cash consideration.

The Company implemented a restricted share unit plan ("RSU Plan") for certain employees in October 2008, and has granted 72,700 RSUs under the RSU Plan. The RSUs vest over three years. Under the RSU Plan, units are settled using common shares of the Company. During fiscal year 2009, the Company funded an independent trustee to purchase the required shares and to provide custodial services. The Company recognizes compensation expense, as measured by the purchase price of the shares, over the vesting period.

8. Financial Instruments

The Company has exposure to the following risks from its use of financial instruments: credit risk, market risk and liquidity risk.

Credit Risk

Credit risk is the risk of financial loss to the Company if a licensee or counter-party to a financial instrument fails to meet its contractual obligations, and arises principally from the Company's accounts receivable and its foreign exchange contracts.

The Company provides credit to some licensees in the normal course of its operations. The Company's credit risk review includes performing periodic credit evaluations of its most significant licensees. In certain circumstances, the Company may utilize letters of guarantee or credit insurance to mitigate certain credit risks. The Company's licensees are, for the most part, large national and international public companies. Due to the nature of the Company's operations, provisions for doubtful accounts are made on a licensee-by-licensee basis, based upon on-going review of licensee financial status.

Many of the Company's current licensees' operations are focused in the semiconductor industry. The semiconductor industry, particularly the DRAM memory segment, has been suffering, for some time, from economic difficulties due to pricing pressure as a result of an oversupply of memory devices.

Due to the long-term nature of many of the Company's licensing arrangements and the prolonged downturn in the semiconductor industry, in certain circumstances, the Company may not be able to obtain at reasonable cost credit insurance or other forms of credit risk mitigation instruments. A default of the remaining payments by one of the Company's licensees could have a materially adverse impact on the Company's future revenues, earnings, cash flow and financial position.

The Company limits its exposure to credit risk from counter-parties to derivative instruments by dealing only with major financial institutions. Management does not expect any counter-parties to fail to meet their obligations.

The Company invests its excess cash in investment grade securities, each with a maturity date not exceeding 12 months. The Company relies upon the credit rating of the counter-party to limit its credit risk. The Company does not invest in asset-backed commercial paper.

The carrying amount of financial assets represents the maximum credit exposure. The maximum credit exposure to credit risk at the reporting date was:



July 31, 2009 April 30, 2009
--------------------------------------------------------------------------

Cash $51,702 $32,899
Marketable securities 708 18,888
Accounts receivable 4,884 10,434
Other asset 1,308 446
--------------------------------------------------------------------------
--------------------------------------------------------------------------
$58,602 $62,667
--------------------------------------------------------------------------
--------------------------------------------------------------------------



The aging of accounts receivable at the reporting date was:

July 31, 2009 April 30, 2009
--------------------------------------------------------------------------

Current $264 $2,676
Past due 4,620 7,758
--------------------------------------------------------------------------
--------------------------------------------------------------------------
$4,884 $10,434
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Of the amount past due, a portion has been recognized as revenue as the
Company expects to collect the amount under a credit insurance policy, and
a portion has been recorded as deferred revenue as there is uncertainty
regarding ultimate collection.


Marketable securities comprise the following:

July 31, 2009 April 30, 2009
--------------------------------------------------------------------------

Bonds & debentures $- $13,099
Discount notes 708 5,789
--------------------------------------------------------------------------
--------------------------------------------------------------------------
$708 $18,888
--------------------------------------------------------------------------
--------------------------------------------------------------------------


Carrying values of bonds and debentures and discount notes include accrued interest and approximate market value. Investments in bonds and debentures and discount notes represent holdings in corporate and government short-term marketable securities as at July 31, 2009 and have a maturity date of one year or less.

Market Risk

Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates, will affect the Company's income or the value of its holding of financial instruments.

Foreign Exchange Risk

The Company's revenues are denominated primarily in U.S. dollars, giving rise to exposure to market risks from changes in foreign exchange rates. The Company is exposed to foreign currency fluctuations on its accounts receivable and future cash flows related to licensing arrangements denominated in U.S. dollars, as well as certain operating expenses and its other long-term liabilities obligations.

The Company's foreign exchange risk management includes the use of foreign exchange forward contracts to fix the exchange rates on certain foreign currency exposures. The Company's objective is to manage and control exposures and secure the Company's profitability on existing contracts and anticipated future cash flows. The Company does not utilize derivative instruments for trading or speculative purposes. The Company formally documents all relationships between derivative instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific firm contractually related commitments or anticipated transactions.

The Company also formally assesses, both at the inception and on an on-going basis, whether the derivatives that are used in hedging transactions are highly effective in off-setting changes in fair values or cash flows of hedged items. Hedge ineffectiveness is insignificant.

The forward foreign exchange contracts primarily require the Company to sell U.S. dollars for Canadian dollars at contractual rates. The Company had the following forward exchange contracts.



(In thousands of dollars) July 31, 2009

Equivalent to
Type Notional Currency Maturity CDN dollars Fair Value

Sell $10,575 USD less than 3 months $12,787 $923
Sell $15,775 USD 3-12 months $19,017 $1,345
Buy $5,000 USD 3-12 months $(6,114) $(484)
Buy $5,000 USD greater than 12 months $(6,093) $(476)
--------------------------------------------------------------------------
$1,308
--------------------------------------------------------------------------


(In thousands of dollars) April 30, 2009

Equivalent to
Type Notional Currency Maturity CDN dollars Fair Value

Sell $8,500 USD less than 3 months $10,576 $289
Sell $18,600 USD 3-12 months $23,099 $640
Buy $5,000 USD less than 3 months $(6,328) $(240)
Buy $5,000 USD 3-12 months $(6,114) $(117)
Buy $5,000 USD greater than 12 months $(6,093) $(126)
--------------------------------------------------------------------------
$446
--------------------------------------------------------------------------


A one cent strengthening (weakening) of the U.S. dollar against the Canadian dollar would have decreased (increased) other comprehensive income by approximately $210,000; pro forma income would have increased (decreased) by approximately $20,000.

Interest Rate Risk

The Company is exposed to interest rate risk due to its holdings of interest-bearing marketable securities. It is the Company's policy to invest in securities with a maturity date of 12 months or less and Company practice to hold such securities, when possible, until maturity. A 1% increase (decrease) to the interest rate would result in an approximate $64,000 decrease (increase) in the fair value of the investments held as at the reporting date.

The Company is also exposed to interest rate risk due to its imputed interest on other long-term liabilities.

Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company's approach to managing liquidity risk is to ensure, as far as possible, that it will always have sufficient liquidity to meet liabilities when due. At July 31, 2009, the Company had $52.4 million of cash and marketable securities and had a secured bank credit facility of $10.0 million, less off balance sheet arrangements as described in Note 17 to the fiscal 2009 Consolidated Financial Statements to meet liabilities when due. The credit facility is collateralized by a general security agreement and contains no covenants.

All of the Company's financial liabilities, except for its "other long-term liabilities" and operating lease for its premises, have contractual maturities of less than 30 days.

The following chart indicates the contractual obligations to which the Company is bound over the following five years.



Payments Due by Period
(in thousands of dollars)

Less than After 5
Contractual Obligations Total 1 year 1-3 years 4-5 years years

Operation leases $1,851 $715 $ 496 $496 $145

Other long-term
obligations $48,758 $11,913 $15,265 $10,790 $10,790
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Total contractual
obligations $50,609 $12,628 $15,761 $11,286 $10,935
--------------------------------------------------------------------------


Fair Value

The fair values of cash, marketable securities, accounts receivable, accounts payable and accrued liabilities approximates their carrying values due to their short-term maturity. The recorded amounts of long-term monetary liabilities approximate fair value, estimated by discounting expected cash flows at rates currently offered to the Company for debts of the same remaining maturities and conditions.

Fair value of the forward exchange contracts reflects the cash flow due to or from the Company if settlement had taken place on the reporting date.

The fair value of employee and director deferred stock units is determined using the market price of the Company's common stock on the reporting date.

9. Capital Management

The Company's objective is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. Management defines capital as the Company's shareholders' equity excluding accumulated other comprehensive income.

The Company has certain credit facilities with a Canadian chartered bank, which consist of an operating line, a foreign exchange forward contract facility and standby letters of credit. The Board of Directors does not establish quantitative return on capital criteria for management, but rather promotes year over year sustainable profitable growth. The Board of Directors also reviews on a quarterly basis the level of dividends paid to the Company's shareholders and monitors the share repurchase program activities. There were no changes in the Company's approach to capital management during the period. Neither the Company nor any of its subsidiaries is subject to externally imposed capital requirements.

10. Business Segment Information

The Company operates in one business segment as a developer and licensor of semiconductor and telecommunications technologies.

11. International Financial Reporting Standards

The Accounting Standards Board of Canada ("AcSB") plans to converge Canadian GAAP for publicly accountable enterprises with International Financial Reporting Standards ("IFRS") over a transition period that will end effective January 1, 2011 with the adoption of IFRS. The AcSB announced on February 13, 2008 that IFRS will be required in 2011 for publicly accountable profit-oriented enterprises. The changeover date is for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The Company will convert to these new standards according to the timetable set with these new rules. The Company is currently in the process of developing a conversion implementation plan and assessing the impacts of the conversion on the consolidated financial statements and disclosures of the Company.

Contact Information

  • Investor and Media Inquiries:
    Michael Salter
    Director, Investor Relations and Corporate Communications
    613-599-9539 x1205
    salter@mosaid.com