e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 23, 2006
Commission file number 000-49602
SYNAPTICS INCORPORATED
(Exact name of Registrant as specified in its charter)
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Delaware
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77-0118518 |
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(State or other jurisdiction
of incorporation or organization)
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(I.R.S. Employer
Identification No.) |
3120 Scott Blvd., Suite 130
Santa Clara, California 95054
(Address of principal executive offices) (Zip code)
(408) 454-5100
(Registrants 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Number of shares of Common Stock outstanding at October 24, 2006: 25,319,607
SYNAPTICS INCORPORATED
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2006
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYNAPTICS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
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September 30, |
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June 30, |
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2006 |
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2006 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
51,796 |
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$ |
38,724 |
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Short-term investments |
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193,867 |
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206,452 |
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Accounts receivable, net of allowances of $222 and $189,
respectively |
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41,813 |
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34,034 |
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Inventories |
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9,017 |
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10,010 |
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Prepaid expenses and other current assets |
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3,732 |
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3,407 |
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Total current assets |
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300,225 |
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292,627 |
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Property and equipment, net |
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16,099 |
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16,038 |
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Goodwill |
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1,927 |
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1,927 |
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Other assets |
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20,365 |
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20,829 |
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$ |
338,616 |
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$ |
331,421 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
16,152 |
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$ |
16,542 |
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Accrued compensation |
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3,864 |
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4,842 |
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Income taxes payable |
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10,969 |
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8,078 |
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Other accrued liabilities |
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7,447 |
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5,377 |
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Note payable to a related party |
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1,500 |
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Total current liabilities |
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39,932 |
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34,839 |
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Note payable to a related party |
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1,500 |
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Other liabilities |
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2,071 |
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3,040 |
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Convertible senior subordinated notes |
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125,000 |
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125,000 |
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Stockholders equity: |
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Common stock: |
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$0.001 par
value; 60,000,000 shares authorized; 27,575,943
and 27,462,125 shares issued, respectively |
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28 |
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27 |
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Additional paid-in capital |
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139,013 |
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134,217 |
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Less: 2,521,100 and 2,306,100 common treasury shares,
respectively, at cost |
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(44,611 |
) |
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(39,999 |
) |
Accumulated other comprehensive loss |
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(205 |
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(464 |
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Retained earnings |
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77,388 |
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73,261 |
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Total stockholders equity |
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171,613 |
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167,042 |
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$ |
338,616 |
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$ |
331,421 |
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See notes to condensed consolidated financial statements.
3
SYNAPTICS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
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Three Months Ended |
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September 30, |
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2006 |
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2005 |
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Net revenue |
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$ |
54,815 |
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$ |
51,725 |
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Cost of revenue (1) |
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32,420 |
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28,053 |
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Gross margin |
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22,395 |
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23,672 |
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Operating expenses: |
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Research and development (1) |
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9,188 |
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8,289 |
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Selling, general, and administrative (1) |
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7,801 |
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6,728 |
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Total operating expenses |
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16,989 |
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15,017 |
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Income from operations |
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5,406 |
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8,655 |
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Interest income |
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2,539 |
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1,551 |
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Interest expense |
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(487 |
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(484 |
) |
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Income before provision for income taxes |
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7,458 |
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9,722 |
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Provision for income taxes |
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3,331 |
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4,210 |
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Net income |
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$ |
4,127 |
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$ |
5,512 |
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Net income per share: |
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Basic |
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$ |
0.16 |
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$ |
0.22 |
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Diluted |
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$ |
0.15 |
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$ |
0.20 |
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Shares used in computing net income per share: |
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Basic |
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25,134 |
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24,769 |
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Diluted |
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29,253 |
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29,036 |
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(1) |
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Amounts include share-based compensation costs as follows: |
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Cost of revenue |
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$ |
147 |
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$ |
192 |
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Research and development |
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$ |
1,035 |
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$ |
1,292 |
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Selling, general, and administrative |
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$ |
1,919 |
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$ |
1,826 |
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See notes to condensed consolidated financial statements.
4
SYNAPTICS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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Three Months Ended |
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September 30, |
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2006 |
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2005 |
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Cash flows from operating activities |
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Net income |
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$ |
4,127 |
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$ |
5,512 |
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Adjustments
to reconcile net income to net cash provided by operating activities: |
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Share-based compensation costs |
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3,101 |
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3,310 |
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Deferred taxes from share-based compensation |
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(751 |
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(688 |
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Tax benefit realized from share-based compensation |
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234 |
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184 |
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Excess tax benefit from share-based compensation |
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(183 |
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(139 |
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Depreciation of property and equipment |
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454 |
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377 |
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Amortization of debt issuance costs |
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215 |
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215 |
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Changes in operating assets and liabilities: |
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Accounts receivable, net |
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(7,779 |
) |
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|
893 |
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Inventories |
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993 |
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|
614 |
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Prepaid expenses and other current assets |
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(325 |
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151 |
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Other assets |
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1,000 |
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149 |
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Accounts payable |
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(390 |
) |
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(757 |
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Accrued compensation |
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(978 |
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(2,304 |
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Income taxes payable |
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2,891 |
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|
2,302 |
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Other accrued liabilities |
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2,070 |
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116 |
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Other liabilities |
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(969 |
) |
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69 |
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Net cash provided by operating activities |
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3,710 |
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10,004 |
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Cash flows from investing activities |
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Purchases of short-term investments |
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(69,981 |
) |
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(50,994 |
) |
Proceeds from sales and maturities of short-term investments |
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82,825 |
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39,788 |
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Purchases of property and equipment |
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(515 |
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(1,656 |
) |
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Net cash provided by (used in) investing activities |
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12,329 |
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(12,862 |
) |
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Cash flows from financing activities |
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Purchase of treasury stock |
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(4,612 |
) |
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(18,819 |
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Proceeds from issuance of common stock upon exercise of options
and stock purchase plan |
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|
1,462 |
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|
1,209 |
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Excess tax benefit from share-based compensation |
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183 |
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139 |
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Net cash used in financing activities |
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(2,967 |
) |
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(17,471 |
) |
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Net increase (decrease) in cash and cash equivalents |
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13,072 |
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(20,329 |
) |
Cash and cash equivalents at beginning of period |
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38,724 |
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72,232 |
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Cash and cash equivalents at end of period |
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$ |
51,796 |
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$ |
51,903 |
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Supplemental disclosures of cash flow information |
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Cash paid for income taxes |
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$ |
247 |
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$ |
2,409 |
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See notes to condensed consolidated financial statements.
5
SYNAPTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The accompanying unaudited condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC) and
U.S. generally accepted accounting principles. However, certain information or footnote
disclosures normally included in financial statements prepared in accordance with U.S. generally
accepted accounting principles have been condensed or omitted pursuant to such SEC rules and
regulations. In our opinion, the financial statements include all adjustments, which are of a
normal and recurring nature, necessary for the fair presentation of the results of the interim
periods presented. The results of operations for the interim periods are not necessarily
indicative of the operating results for the full fiscal year or any future period. These financial
statements should be read in conjunction with the audited consolidated financial statements and
related notes included in our annual report on Form 10-K for the fiscal year ended June 30, 2006.
The consolidated financial statements include our financial statements and those of our wholly
owned subsidiaries. All significant intercompany balances and transactions have been eliminated
upon consolidation.
Our fiscal year is the 52- or 53-week period ending on the last Saturday in June. Fiscal 2007
is a 53-week period and fiscal 2006 is a 52-week period. For ease of presentation, the
accompanying consolidated financial statements have been shown as ending on June 30 and calendar
quarter end dates for all annual, interim, and quarterly financial statement captions, unless
otherwise indicated.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally
accepted accounting principles requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenue, expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue
recognition, allowance for doubtful accounts, cost of revenue, inventories, product warranty,
share-based compensation costs, provision for income taxes, income taxes payable, and
contingencies. We base our estimates on historical experience, applicable laws and regulations,
and various other assumptions that we believe to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying value 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 recognize revenue from product sales when there is persuasive evidence that an arrangement
exists, delivery has occurred and title has transferred, the price is fixed or determinable, and
collection is reasonably assured. We accrue for estimated sales returns and other allowances,
based on historical experience, at the time we recognize revenue. We record contract revenue for
research and development as the services are provided under the terms of the contract. We
recognize non-refundable contract fees for which no further performance obligations exist and for
which there is no continuing involvement by us on the earlier of when the payments are received or
when collection is reasonably assured.
Basic net income per share amounts for each period presented were computed using the weighted
average number of shares of common stock outstanding. Diluted net income per share amounts for
each period presented were computed (1) using the weighted average number of potentially dilutive
shares issuable in connection with stock options under the treasury stock method, and (2) using the
weighted average number of shares issuable in connection with convertible debt under the
if-converted method, when dilutive.
6
The following table presents the computation of basic and diluted net income per share (in
thousands, except per share amounts):
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Three Months Ended |
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September 30, |
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2006 |
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2005 |
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Numerator: |
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Basic net income |
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$ |
4,127 |
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$ |
5,512 |
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Interest expense and amortization of debt issuance
costs on convertible notes (net of tax) |
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|
266 |
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|
266 |
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|
|
|
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Diluted net income |
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$ |
4,393 |
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$ |
5,778 |
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Denominator: |
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Shares, basic |
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25,134 |
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|
24,769 |
|
Effect of dilutive share-based awards |
|
|
1,645 |
|
|
|
1,793 |
|
Effect of convertible notes |
|
|
2,474 |
|
|
|
2,474 |
|
|
|
|
|
|
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Shares, diluted |
|
|
29,253 |
|
|
|
29,036 |
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Net income per share: |
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|
|
|
|
|
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Basic |
|
$ |
0.16 |
|
|
$ |
0.22 |
|
|
|
|
|
|
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Diluted |
|
$ |
0.15 |
|
|
$ |
0.20 |
|
|
|
|
|
|
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|
Dilutive net income per share does not include the effect of 2,784,476 and 2,290,831
share-based awards that were outstanding during the three months ended September 30, 2006 and 2005,
respectively. These share-based awards were not included in the computation of diluted net income
per share because the proceeds received, if any, from such share-based awards combined with the
average unamortized compensation costs adjusted for the hypothetical tax benefit or deficiency
creditable or chargeable, respectively, to additional paid-in capital, were greater than the
average market price of our common stock, and therefore, their effect would have been antidilutive.
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4. |
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Cash Equivalents and Short-Term Investments |
Cash equivalents consist of highly liquid investments with original maturities of three months
or less. Short-term investments consist of marketable securities and are classified as securities
available for sale under Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities. Such securities are reported
at fair value, with unrealized gains and losses, net of taxes, excluded from earnings and shown
separately as a component of accumulated other comprehensive income within stockholders equity.
Interest earned on marketable securities is included in interest income. Realized gains and losses
on the sale of marketable securities are determined using the specific identification method.
Inventories are stated at the lower of cost (first-in, first-out method) or market (estimated
net realizable value) and consisted of the following (in thousands):
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September 30, |
|
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June 30, |
|
|
|
2006 |
|
|
2006 |
|
Raw materials |
|
$ |
8,652 |
|
|
$ |
9,743 |
|
Finished goods |
|
|
365 |
|
|
|
267 |
|
|
|
|
|
|
|
|
|
|
$ |
9,017 |
|
|
$ |
10,010 |
|
|
|
|
|
|
|
|
Periodically, we purchase inventory from our subcontractors when a customers delivery
schedule is delayed or a customers order is cancelled. In those circumstances in which our
customer has cancelled its order and we purchase inventory from our subcontractors, we consider a
write-down to reduce the carrying value of the inventory purchased to its net realizable value.
Write-downs to reduce the carrying value of obsolete, slow moving, and non-usable inventory to net
realizable value are charged to cost of revenue.
7
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|
6. |
|
Product Warranties, Indemnifications, and Legal Proceedings |
Product Warranties
We generally warrant our products for a period of 12 months or more from the date of sale and
estimate probable product warranty costs at the time we recognize revenue. Factors that affect our
warranty liability include historical and anticipated rates of warranty claims, materials usage,
and service delivery costs. Warranty costs incurred have not been material in recent years.
However, we assess the adequacy of our warranty obligations periodically and adjust the accrued
warranty liability on the basis of our estimates.
Changes in our accrued warranty liability (included in other accrued liabilities) for the
three-month periods ended September 30, 2006 and 2005 were as follows (in thousands):
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|
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Three Months Ended |
|
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
Beginning accrued warranty |
|
$ |
357 |
|
|
$ |
369 |
|
Provision for product warranties |
|
|
214 |
|
|
|
154 |
|
Cost of warranty claims and settlements |
|
|
(151 |
) |
|
|
(181 |
) |
|
|
|
|
|
|
|
Ending accrued warranty |
|
$ |
420 |
|
|
$ |
342 |
|
|
|
|
|
|
|
|
Indemnifications
In connection with certain third-party agreements we have executed in the past, we are
obligated to indemnify the third party in connection with any technology infringement by us. We
have also entered into indemnification agreements with our officers and directors. Maximum
potential future payments cannot be estimated because these agreements do not have a maximum stated
liability. However, historical costs related to these indemnification provisions have not been
significant. We have not recorded any liability in our consolidated financial statements for such
indemnification obligations.
Legal Proceedings
In March 2006, Elantech Devices Corporation (Elantech) filed a Complaint for Patent
Infringement against us claiming that we infringed one of their patents and seeking damages,
attorneys fees, and a permanent injunction against us infringing or inducing others to infringe
the patent. In April 2006, we filed our Answer to the Complaint and Counterclaims against Elantech
claiming that they have infringed and induced infringement of four of our patents, and seeking
damages, attorneys fees, and a permanent injunction against infringing or inducing others to
infringe.
Elantech responded to our counterclaim denying liability and counterclaimed seeking an
injunction and damages for alleged violations of California law. We subsequently filed a motion to
dismiss the Elantech counterclaims, which was granted in July 2006 with leave to amend the
counterclaims after the adjudication of the patent infringement claims. We intend to vigorously
defend our patents and pursue our counterclaims. We have not recorded any liability associated
with their claims and have expensed as incurred all legal fees associated with the legal
proceedings.
|
|
|
7. |
|
Convertible Senior Subordinated Notes |
During December 2004, we issued an aggregate of $125 million of 0.75% Convertible Senior
Subordinated Notes maturing December 1, 2024 (the Notes) in a private offering pursuant to Rule
144A under the Securities Act of 1933, as amended. In connection with issuing the Notes, we
incurred debt issuance costs of $4.3 million, consisting primarily of the initial purchasers
discount and costs related to legal, accounting, and printing, which are being amortized over five years. We expect to use the net proceeds for working capital and general
corporate purposes and potentially for future acquisitions.
The Notes bear interest at a rate of 0.75% per annum payable on December 1 and June 1 of each
year, beginning June 1, 2005. However, we will pay additional contingent interest on the Notes if
the average trading price of the Notes is at or above 120% of the principal amount of the Notes for
a specified period beginning with the six-month period commencing December 1, 2009. The amount of
contingent interest payable on the Notes with respect to a six-month period, for which contingent
interest applies, will equal 0.375% per annum of the average trading price of
8
the Notes for a specified five trading day period preceding such six-month period. We are also obligated to file
and maintain a shelf registration statement with the SEC covering resales by the holders of the
Notes and the common stock issuable upon conversion of the Notes. In the event of a registration
default, we will be obligated to pay additional interest of up to 0.5% per annum until such
registration default is cured. On June 1, 2005, our Registration Statement for these securities
was declared effective by the SEC.
The Notes are convertible into shares of our common stock, initially at a conversion rate of
19.7918 shares per $1,000 principal amount of Notes, or a total of 2,473,975 shares of common
stock, which is equivalent to an initial conversion price of approximately $50.53 per share of
common stock, subject to adjustment in certain events. The denominator of the diluted net income
per share calculation includes the weighted average effect of the 2,473,975 shares of common stock
issuable upon conversion of the Notes in accordance with Emerging Issues Task Force (EITF) Issue
No. 04-08. Through November 30, 2009, upon the occurrence of a fundamental change as defined in
the indenture governing the Notes, we could potentially be obligated to issue up to 27.7085 shares
per $1,000 of principal amount of Notes, or a total of 3,463,562 shares of common stock, which is
equivalent to a conversion price of $36.09 per share of common stock. The additional 989,587
shares, contingently issuable upon a fundamental change, are not included in the calculation of
diluted net income per share.
The Notes may be converted (1) if, during any calendar quarter commencing after December 31,
2004, the last reported sale price of our common stock for at least 20 trading days in the period
of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is
greater than or equal to 120% of the applicable conversion price on such last trading day; (2) on
or after January 1, 2020; (3) if we have called the Notes for redemption; or (4) during prescribed
periods, upon the occurrence of specified corporate transactions or fundamental changes. On or
after December 1, 2009, we may redeem for cash all or a portion of the notes at a redemption price
of 100% of the principal amount of the notes plus accrued and unpaid interest, including contingent
interest and additional interest, if any. Noteholders have the right to require us to repurchase
all or a portion of their notes for cash on December 1, 2009, December 1, 2014, and December 1,
2019 at a price equal to 100% of the principal amount of the notes to be purchased plus accrued and
unpaid interest, including contingent interest and additional interest, if any. Upon conversion of
the Notes, in lieu of delivering common stock, we may, at our discretion, deliver cash or a
combination of cash and common stock. As of September 30, 2006, none of the conditions for
conversion of the Notes had occurred.
The Notes are unsecured senior subordinated obligations and rank junior in right of payment to
all of our existing and future senior indebtedness, equal in right of payment with all of our
existing and future indebtedness or other obligations that are not, by their terms, either senior
or subordinated to the Notes, including trade debt and other general unsecured obligations that do
not constitute senior or subordinated indebtedness, and senior in right of payment to all of our
future indebtedness that, by its terms, is subordinated to the Notes. There are no financial
covenants in the Notes.
During each of the three month periods ended September 30, 2006 and 2005, we recorded interest
expense of $449,000 on the Notes, which included amortization of debt issuance costs.
|
|
|
8. |
|
Share-Based Compensation |
The purpose of our various share-based compensation plans is to attract, motivate, retain, and
reward high-quality employees, directors, and consultants by enabling such persons to acquire or
increase their proprietary interest in our common stock in order to strengthen the mutuality of
interests between such persons and our stockholders and to provide such persons with annual and
long-term performance incentives to focus their best efforts in the creation of stockholder value.
Consequently, share-based compensatory awards issued subsequent to the initial award to our
employees and consultants are determined primarily on individual performance. Our share-based
compensation plans currently consist of our 1996 Stock Option Plan, our 2000 Nonstatutory Stock
Option Plan, our 2001 Incentive Compensation Plan, and our 2001 Employee Stock Purchase Plan.
Share-based compensation awards available for grant or issuance for each plan as of the
beginning of the fiscal year, including changes in the balance of awards available for grant during
the three months ended September 30, 2006, are as follows:
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 |
|
|
|
Available |
|
|
1996 |
|
|
2000 |
|
|
2001 |
|
|
Employee |
|
|
|
Under All |
|
|
Stock |
|
|
Nonstatutory |
|
|
Incentive |
|
|
Stock |
|
|
|
Share-Based |
|
|
Option |
|
|
Stock Option |
|
|
Compensation |
|
|
Purchase |
|
|
|
Award Plans |
|
|
Plan |
|
|
Plan |
|
|
Plan |
|
|
Plan |
|
Balance at June 30, 2006 |
|
|
3,292,246 |
|
|
|
226,465 |
|
|
|
37,584 |
|
|
|
2,414,826 |
|
|
|
613,371 |
|
Additional shares authorized |
|
|
378,155 |
|
|
|
|
|
|
|
|
|
|
|
378,155 |
|
|
|
|
|
Stock options granted |
|
|
(477,909 |
) |
|
|
|
|
|
|
|
|
|
|
(477,909 |
) |
|
|
|
|
Deferred stock units granted |
|
|
(67,081 |
) |
|
|
|
|
|
|
|
|
|
|
(67,081 |
) |
|
|
|
|
Purchases under employee
stock purchase plan |
|
|
(52,469 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52,469 |
) |
Forfeited and expired |
|
|
46,668 |
|
|
|
500 |
|
|
|
|
|
|
|
46,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006 |
|
|
3,119,610 |
|
|
|
226,965 |
|
|
|
37,584 |
|
|
|
2,294,159 |
|
|
|
560,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We adopted SFAS No. 123R, Share-Based Payment (SFAS 123R), in fiscal 2006 and applied
the provisions of Staff Accounting Bulletin No. 107, Share-Based Payment, to our existing
share-based compensation plans in accordance with the modified prospective transition method.
Previously, we followed Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations in accounting for employee share-based
compensation, as permitted by SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS
123), and we did not recognize compensation expense for stock option grants to employees and
directors with an exercise price equal to the fair market value of the shares at the date of grant.
Accordingly, no share-based compensation costs based on grant date fair value were included in our
consolidated statements of income for any period prior to fiscal 2006.
Share-based compensation and the related tax benefit recognized in our consolidated statements
of income for the three months ended September 30, 2006 and 2005 were (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
Cost of revenue |
|
$ |
147 |
|
|
$ |
192 |
|
Research and development |
|
|
1,035 |
|
|
|
1,292 |
|
Selling, general, and administrative |
|
|
1,919 |
|
|
|
1,826 |
|
|
|
|
|
|
|
|
Total |
|
$ |
3,101 |
|
|
$ |
3,310 |
|
|
|
|
|
|
|
|
Income tax benefit on share-based compensation |
|
$ |
781 |
|
|
$ |
690 |
|
|
|
|
|
|
|
|
We utilize the Black-Scholes option pricing model to estimate the grant date fair value of
certain employee share-based compensatory awards, which requires the input of highly subjective
assumptions, including expected volatility and expected life. Historical and implied volatility
were used in estimating the fair value of our share-based awards, while the expected life of our
options was estimated to be five years based on historical trends since our initial public
offering. Further, as required under SFAS 123R, we now estimate forfeitures for share-based awards
that are not expected to vest. Changes in these inputs and assumptions can materially affect the
measure of estimated fair value of our share-based compensation. We charge the estimated fair
value to earnings on a straight-line basis over the vesting period of the underlying awards, which is generally four years for our stock option
and deferred stock unit awards and up to two years for our employee stock purchase plan. The
Black-Scholes option pricing model was developed for use in estimating the fair value of traded
options having no vesting restrictions and being fully transferable. As our stock option and
employee stock purchase plan awards have characteristics that differ significantly from traded
options, and as changes in the subjective assumptions can materially affect the estimated value,
our estimate of fair value may not accurately represent the value assigned by a third party in an
arms-length transaction. While our estimate of fair value and the associated charge to earnings
materially affects our results of operations, it has no impact on our cash position.
Stock options granted to consultants under our share-based compensation plans are accounted
for at fair value determined by using the Black-Scholes option pricing model in accordance with
EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or In Conjunction with Selling, Goods or Services. These awards are subject to
periodic revaluation over their vesting term, if any. The assumptions used to value share-based
awards to consultants are similar to those used for employees, except that we use the contractual
life of the award rather than the expected life.
10
In accordance with SFAS 123R, we recognize tax benefit upon expensing certain share-based
awards associated with our share-based compensation plans, including nonqualified stock options and
deferred stock unit awards, but under current accounting standards we cannot recognize tax benefit
concurrent with the recognition of share-based compensation expenses associated with incentive
stock options and employee stock purchase plan shares (qualified stock options). For qualified
stock options that vested after our adoption of SFAS 123R, we recognize tax benefit only in the
period when disqualifying dispositions of the underlying stock occur, and for qualified stock
options that vested prior to our adoption of SFAS 123R, the tax benefit is recorded directly to
additional paid-in capital. For the three months ended September 30, 2006, we realized tax benefit
from non-qualified stock option exercises and disqualifying dispositions of qualified stock options
totaling $264,000, of which $27,000 of the tax benefit was recognized as a reduction of the
provision for income taxes, $3,000 reduced deferred tax assets established after our adoption of
SFAS 123R, and the remaining tax benefit was recorded directly to additional paid-in capital.
We determine excess tax benefit using the long-haul method in which we compare the actual tax
benefit associated with the tax deduction from share-based award activity to the hypothetical tax
benefit on the grant date fair values of the corresponding share-based awards. Actual tax benefit
related to the tax deduction for share-based awards exceeded the hypothetical tax benefit on the
grant date fair values of the corresponding share-based awards resulting in excess tax benefit of
$183,000 for the three months ended September 30, 2006.
Historically, we have issued new shares in connection with our share-based compensation plans;
however, 2,521,100 treasury shares are also available for issuance as of September 30, 2006. As of
September 30, 2006, we have $35.4 million remaining under our stock repurchase program, which
expires in October 2007. Any incremental shares repurchased under the stock repurchase program
would be available for issuance.
Deferred Stock Units
Our 2001 Incentive Compensation Plan (2001 Plan) provides for the grant of deferred stock
unit awards (DSUs) to our employees, consultants, and directors. A DSU is a promise to deliver
shares of our common stock at a future date in accordance with the terms of the DSU grant
agreement. We began granting DSU awards in January 2006.
DSUs granted under the 2001 Plan generally vest 25% at the end of 12 months from the vesting
commencement date and at a rate of approximately 2% each month thereafter until fully vested at the
end of 48 months from the vesting commencement date. Delivery of shares under the plan takes place
quarterly for all DSUs vested as of the scheduled delivery dates. Until delivery of shares, the
grantee has no rights as a stockholder.
An election to defer delivery of the underlying shares for unvested DSU awards can be made
provided the deferral election is made at least one year before vesting and the deferral period is
at least five years from the scheduled delivery date.
The following table summarizes DSU activity including DSUs granted, delivered, and forfeited
during the three months ended September 30, 2006 and the balance and aggregate intrinsic value of
DSUs as of September 30, 2006. The aggregate intrinsic value is based on the closing price of our
common stock on September 22, 2006 of $24.44.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
Aggregate |
|
|
Weighted |
|
|
|
Stock Unit |
|
|
Intrinsic |
|
|
Average |
|
|
|
Awards |
|
|
Value |
|
|
Grant Date |
|
|
|
Outstanding |
|
|
(thousands) |
|
|
Fair Value |
|
Balance at June 30, 2006 |
|
|
38,280 |
|
|
|
|
|
|
$ |
29.68 |
|
Granted |
|
|
67,081 |
|
|
|
|
|
|
$ |
21.03 |
|
Delivered |
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(2,250 |
) |
|
|
|
|
|
$ |
26.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006 |
|
|
103,111 |
|
|
$ |
2,520 |
|
|
$ |
24.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized share-based compensation costs for DSUs granted under the 2001 Plan are
approximately $1.9 million as of September 30, 2006, to be recognized over a weighted average
period of approximately three years.
11
Stock Options
Our current share-based compensation plans that provide for the grant of stock options include
our 1996 Stock Option Plan, our 2000 Nonstatutory Stock Option Plan, and our 2001 Incentive
Compensation Plan (the Plans). Under the Plans, employees, consultants, and directors may be
granted incentive stock options or nonqualified stock options to purchase shares of our common
stock at not less than 100% or 85% of the fair market value, respectively, on the date of grant.
Options issued under the Plans generally vest 25% at the end of 12 months from the vesting
commencement date and approximately 2% each month thereafter until fully vested at the end of 48
months from the vesting commencement date. Options not exercised ten years after the date of grant
are cancelled.
In October 2002, we granted 200,000 options to a consultant that at the time were to vest over
four years; however, in December 2002 we hired the consultant as an employee. In accordance with
FIN 44, Accounting for Certain Transactions Involving Stock Compensation, we remeasured the
intrinsic value of the option grant on the date the consultant became an employee and recorded
deferred stock compensation that we were amortizing over the remaining vesting period of the
options. With the adoption of SFAS 123R, we ceased amortizing deferred stock compensation,
reclassified the remaining balance of deferred stock compensation on our balance sheet to
additional paid-in capital, and began expensing the remaining fair value, as previously determined
under SFAS 123, of the underlying options over their remaining vesting periods.
In August 2002, our board approved an option regrant offer to several employees who had
received option grants under the 2001 Incentive Compensation Plan having option exercise prices of
$12.98 and $18.70. The option exercise prices were substantially higher than the price of our
stock at the time of the regrant offer. Under the terms of the regrant, the employees were allowed
to elect to have their option cancelled and in consideration thereof to receive a new option for
the same number of shares as cancelled six months and one day after the date of cancellation. On
March 3, 2003, new options to acquire a total of 106,500 shares were granted pursuant to the
regrant offer with a new exercise price of $6.56 per share. The vesting period and schedule for
the new options remained the same as the vesting period and schedule of the cancelled options.
The following table summarizes stock option activity and weighted average exercise prices for
the three months ended September 30, 2006, and for options outstanding, options vested and expected
to vest, and options exercisable, the weighted average exercise prices, the weighted average
remaining contractual life, and the aggregate intrinsic value as of September 30, 2006. The
aggregate intrinsic value is based on the closing price of our common stock on September 22, 2006
of $24.44 and excludes the impact of options that were not in-the-money.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock |
|
|
Weighted |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Option |
|
|
Average |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Awards |
|
|
Exercise |
|
|
Life |
|
|
Value |
|
|
|
Outstanding |
|
|
Price |
|
|
(years) |
|
|
(thousands) |
|
Balance at June 30, 2006 |
|
|
5,808,011 |
|
|
$ |
14.55 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
477,909 |
|
|
$ |
21.03 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(61,349 |
) |
|
$ |
8.48 |
|
|
|
|
|
|
|
|
|
Forfeited and expired |
|
|
(44,418 |
) |
|
$ |
22.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006 |
|
|
6,180,153 |
|
|
$ |
15.05 |
|
|
|
7.05 |
|
|
$ |
61,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest |
|
|
5,875,475 |
|
|
$ |
14.67 |
|
|
|
6.95 |
|
|
$ |
61,019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable |
|
|
3,477,765 |
|
|
$ |
10.03 |
|
|
|
5.74 |
|
|
$ |
51,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
The following table summarizes cash received and the aggregate intrinsic value for stock
options exercised during the three months ended September 30, 2006 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
September 30, |
|
|
2006 |
|
2005 |
Cash received |
|
$ |
520 |
|
|
$ |
345 |
|
Aggregate intrinsic value |
|
$ |
825 |
|
|
$ |
847 |
|
The grant date fair value of each award granted from our Plans during the three months ended
September 30, 2006 was estimated at the date of grant using the Black-Scholes option pricing model,
assuming no expected dividends and the following assumptions:
|
|
|
|
|
Expected volatility |
|
|
60.5 |
% |
Expected life in years |
|
|
5.0 |
|
Risk-free interest rate. |
|
|
5.02 |
% |
Grant date fair value per award |
|
$ |
11.81 |
|
The expected volatility is based on a weighting of implied and historical volatility; the
expected life is based on historical option exercise trends; and the risk free interest rate is
based on U. S. Treasury yields in effect at the time of grant for the expected life of the option.
Unrecognized share-based compensation costs for stock options granted under the Plans are
approximately $30.3 million as of September 30, 2006, to be recognized over a weighted average
period of approximately three years.
Employee Stock Purchase Plan
Our 2001 Employee Stock Purchase Plan (ESPP) became effective on January 29, 2002, the
effective date of the registration statement for our initial public offering. The ESPP allows
employees to designate up to 15% of their base compensation, subject to legal restrictions and
limitations, to purchase shares of common stock at 85% of the lesser of the fair market value
(FMV) at the beginning of the offering period or the exercise date. The offering period extends
for up to two years and includes four exercise dates occurring at six month intervals. Under the
terms of the plan, if the FMV at an exercise date is less than the FMV at the beginning of the
offering period, the current offering period will terminate and a new offering period of up to two
years will commence.
The following table summarizes shares purchased, weighted average purchase price, cash
received, and the aggregate intrinsic value for ESPP purchases during the three months ended
September 30, 2006 and 2005 (in thousands, except for shares purchased and weighted average
purchase price):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
September 30, |
|
|
2006 |
|
2005 |
Shares purchased |
|
|
52,469 |
|
|
|
49,442 |
|
Weighted average purchase price |
|
$ |
17.96 |
|
|
$ |
17.47 |
|
Cash received |
|
$ |
942 |
|
|
$ |
864 |
|
Aggregate intrinsic value |
|
$ |
181 |
|
|
$ |
192 |
|
In accordance with FASB Technical Bulletin No. 97-1, Accounting under Statement 123 for
Certain Employee Stock Purchase Plans with a Look-Back Option, the early termination of an
offering period followed by the commencement of a new offering period represents a modification to
the terms of the related awards. Under the terms of our ESPP, the offering periods that commenced
on January 1, 2005 and 2006 were terminated on June 30, 2005 and 2006 and new offering periods
commenced on July 1, 2005 and 2006, respectively. The June 30, 2005 modification affected 169
employees and the June 30, 2006 modification affected 13 employees. Both modifications resulted in
incremental compensation costs which are being recognized on a straight-line basis over the period
from the modification date through June 30, 2007.
13
The grant date fair value of each award granted under our ESPP during the three months ended
September 30, 2006 was estimated using the Black-Scholes option pricing model, assuming no expected
dividends and the following weighted average assumptions:
|
|
|
|
|
Expected volatility |
|
|
47.7% - 50.2 |
% |
Expected life in years |
|
|
0.5 - 1.0 |
|
Risk-free interest rate. |
|
|
5.3 |
% |
Grant date fair value per award |
|
$ |
6.31 - $7.84 |
|
The expected volatility is based on either implied volatility or a weighting of implied
and historical volatility; the expected life is based on each period that begins with the
enrollment date until each purchase date remaining in the offering period at the date of enrollment
in the plan; and the risk free interest rate is based on U. S. Treasury yields or yield curve in
effect for each expected life.
Unrecognized share-based compensation costs for awards granted under our ESPP are
approximately $843,000 as of September 30, 2006, and will be recognized over the remainder of
fiscal 2007.
We account for income tax contingencies in accordance with SFAS No. 5, Accounting for
Contingencies. Accordingly, our tax rate may be favorably or unfavorably affected by the release
or establishment, respectively, of tax contingency reserves related to tax uncertainties.
The income tax provision of $3.3 million and $4.2 million for the three months ended September
30, 2006 and 2005, respectively, represented estimated federal, foreign, and state taxes. The
effective tax rate for the three months ended September 30, 2006 was 44.7% and diverged from the
combined federal and state statutory rate primarily due to the impact of accounting for share-based
compensation and foreign withholding taxes, partially offset by the impact of tax-exempt interest
income and the release of contingency reserves. The effective tax rate for the three months ended
September 30, 2005 was 43.3% and diverged from the combined federal and state statutory rate
primarily as a result of the impact of accounting for share-based compensation and other permanent
taxable differences, partially offset by the impact of higher income from foreign operations, the benefit of tax exempt interest income,
and research and development tax credits.
|
|
|
10. |
|
Segment, Customers, and Geographic Information |
We operate in one segment: the development, marketing, and sale of interactive user interface
solutions for electronic devices and products. We generate our revenue from two broad product
categories: the PC market and digital lifestyle product markets. The PC market accounted for 90%
and 73% of net revenue for the three months ended September 30, 2006 and 2005, respectively.
The following is a summary of net revenue from sales to unaffiliated customers within
geographic areas based on the customer location (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
China |
|
$ |
46,553 |
|
|
$ |
40,209 |
|
Taiwan |
|
|
3,273 |
|
|
|
7,244 |
|
Other |
|
|
4,989 |
|
|
|
4,272 |
|
|
|
|
|
|
|
|
|
|
$ |
54,815 |
|
|
$ |
51,725 |
|
|
|
|
|
|
|
|
14
Major customer net revenue data as a percentage of net revenue:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
September 30, |
|
|
2006 |
|
2005 |
Customer A |
|
|
15 |
% |
|
|
* |
|
Customer B |
|
|
14 |
% |
|
|
* |
|
Customer C |
|
|
11 |
% |
|
|
26 |
% |
Major customer accounts receivable as a percentage of accounts receivable:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
As of |
|
|
September 30, |
|
June 30, |
|
|
2006 |
|
2006 |
Customer A |
|
|
20 |
% |
|
|
18 |
% |
Customer B |
|
|
11 |
% |
|
|
* |
|
Customer C |
|
|
10 |
% |
|
|
11 |
% |
Customer D |
|
|
* |
|
|
|
11 |
% |
Our comprehensive income consists of net income plus the effect of unrealized gains and losses
on our short-term investments due to interest rate fluctuations. The unrealized gains and losses
on our short-term investments are considered to be temporary in nature and were not material for
the three months ended September 30, 2006 and 2005. Accordingly, comprehensive income closely
approximated net income.
|
|
|
12. |
|
Recent Accounting Pronouncements |
In June 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109, (FIN
48) which clarifies the accounting for uncertainty in income taxes recognized in an entitys
financial statements in accordance with SFAS No. 109, Accounting for Income Taxes (SFAS 109).
FIN 48 is designed to reduce the disparity in accounting treatment for uncertain tax positions
resulting from diverse interpretations of SFAS 109 among companies. FIN 48 prescribes a
recognition threshold and measurement attribute for financial statement disclosure of tax positions
taken or expected to be taken on a tax return. FIN 48 is effective beginning in our first quarter
of fiscal 2008. We are currently evaluating the requirements of FIN 48 and have not yet determined
the impact of adoption, if any, on our financial position, results of operations, or cash flows.
In September 2006, the U.S. Securities and Exchange Commission released Staff Accounting Bulletin No. 108, (SAB 108),
which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 provides transition guidance for correcting errors and requires registrants to quantify misstatements using both the balance-sheet and income-statement approaches and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. In the year of
adoption only, if the effect is determined to be material, SAB 108 allows registrants to record the effect as a cumulative-effect adjustment to beginning-of-year retained earnings. SAB 108 does not change the requirements within SFAS No. 154, Accounting Changes and Error Corrections-a replacement of APB No. 20 and FASB Statement No. 3, for the correction of an error on financial statements. Further, SAB 108 does not change the Staffs previous guidance in SAB 99 on evaluating
the materiality of misstatements. SAB 108 is effective for our fiscal 2007. We are currently evaluating the requirements of SAB 108 and have not yet determined the impact of adoption, if any, on our financial position, results of operations, or cash flows.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in U.S. generally accepted accounting principles,
15
and expands disclosure about fair value measurements. SFAS 157 applies under other accounting standards that require or permit fair value measurements. Accordingly, SFAS 157 does not require any new fair value measurement. SFAS 157 is effective beginning in our first quarter of fiscal 2009. We are currently evaluating the requirements of SFAS 157 and have not yet determined the impact of adoption, if any, on our financial position,
results of operations, or cash flows.
16
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Forward-Looking Statements and Factors That May Affect Results
You should read the following discussion and analysis in conjunction with our condensed
consolidated financial statements and notes in Item 1 and with our audited consolidated financial
statements and notes included in our Annual Report on Form 10-K for the year ended June 30, 2006.
In addition to the historical information contained in this report, this report contains
forward-looking statements, including those related to market penetration and market share in the
notebook and digital lifestyle product markets; competition in the notebook and digital lifestyle
product markets; revenue from the notebook and digital lifestyle product markets; growth rates of
these markets; average selling prices; product design mix; manufacturing costs; cost-improvement
programs; gross margins; customer relationships; research and development expenses; selling,
general, and administrative expenses; legal proceedings; and liquidity and anticipated cash
requirements. These forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially.
We caution that these statements are qualified by various factors that may affect future
results, including the following: changes in the market for our products and the success of our
customers products, our success in moving products from the design phase into the manufacturing
phase, changes in the competitive environment, infringement claims, warranty obligations related to
product failures, the failure of key technologies to deliver commercially acceptable performance,
our dependence on certain key markets, penetration into new markets, the absence of both long-term
purchase and supply commitments, and our lengthy development and product acceptance cycles. This
report should be read in conjunction with our Annual Report on Form 10-K for the year ended June
30, 2006, including particularly the section captioned Risk Factors.
Overview
We are a leading worldwide developer and supplier of custom-designed user interface solutions
that enable people to interact more easily and intuitively with a wide variety of mobile computing,
entertainment, communications, and other electronic devices. From our inception in 1986 through
fiscal year 1995, we were a development stage company, focused on developing and refining our
pattern recognition and capacitive sensing technologies, and generated revenue by providing
contract engineering and design services. In fiscal year 1996, we began shipping our proprietary
TouchPad. We are a leading supplier of interface solutions to the notebook computer market and the
hard-disk drive, or HDD, portable digital music player market. In fiscal year 2006, we believe we
were the market leader in providing interface solutions for notebook computers and HDD portable
digital music players. We believe our market share results from the combination of our customer
focus, the strength of our intellectual property, and our engineering know-how, which allows us to
design products that meet the demanding design specifications of original equipment manufacturers,
or OEMs.
Our manufacturing operations are based on a virtual manufacturing model in which we outsource
all of our production requirements, eliminating the need for significant capital expenditures for
manufacturing facilities and equipment and allowing us to reduce our investment in inventories.
This approach requires us to work closely with our manufacturing subcontractors to ensure adequate
production capacity to meet our forecasted production requirements. We provide our manufacturing
subcontractors with six-month rolling forecasts and generally issue purchase orders based on our
anticipated requirements for the next 90 days. However, we do not have any long-term supply
contracts with any of our manufacturing subcontractors. Currently, we use two third-party
manufacturers to provide our proprietary capacitive based ASICs, and in certain cases we rely on a
single source or a limited number of suppliers to provide other key components of our products.
Our cost of revenue includes all costs associated with the production of our products, including
materials, manufacturing, and assembly and test costs paid to third-party manufacturers and related
overhead costs associated with our manufacturing operations personnel. Additionally, all warranty
costs and any inventory provisions or write-downs are charged to cost of revenue.
Our gross margin generally reflects the combination of the added value we bring to our
customers products in meeting their custom design requirements and our ongoing cost-improvement
programs. These cost improvement programs include reducing materials and component costs, assembly
and test costs, and implementing design and process improvements. Our newly introduced products
may have lower margins than our more mature products that have realized greater benefits associated
with our ongoing cost improvement programs. As a result, new product introductions may initially
negatively impact our gross margin.
17
Our research and development expenses include costs for supplies and materials related to
product development, as well as the engineering costs incurred to design interface solutions for
customers prior to and after the customers commitment to incorporate those solutions into their
products. These expenses have generally increased, reflecting our continuing commitment to the
technological and design innovation required to maintain a leadership position in our existing
markets and to adapt our existing technologies or develop new technologies for new markets.
Selling, general, and administrative expenses include expenses related to sales, marketing,
and administrative personnel; internal sales and outside sales representatives commissions; market
and usability research; outside legal, accounting, and consulting costs; and other marketing and
sales activities. These expenses have generally increased, reflecting incremental staffing,
commission expense associated with increased business levels, and additional personnel in
anticipation of our continued growth in our existing markets and penetration into new markets.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with U.S. generally
accepted accounting principles requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenue, expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue
recognition, allowance for doubtful accounts, cost of revenue, inventories, product warranty,
provision for income taxes, income taxes payable, and contingencies. We base our estimates on
historical experience, applicable laws and regulations, and various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different assumptions or
conditions.
The methods, estimates, interpretations, and judgments we use in applying our most critical
accounting policies can have a significant impact on the results that we report in our consolidated
financial statements. The SEC considers an entitys most critical accounting policies to be those
policies that are both most important to the portrayal of a companys financial condition and
results of operations and those that require managements most difficult, subjective, or complex
judgments, often as a result of the need to make estimates about matters that are inherently
uncertain when estimated. We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated financial
statements.
Revenue Recognition
We recognize revenue from product sales when there is persuasive evidence that an arrangement
exists, delivery has occurred or title has transferred, the price is fixed or determinable, and
collection is reasonably assured. We accrue for estimated sales returns and other allowances,
based on historical experience, at the time we recognize revenue, which is typically upon shipment.
We record contract revenue for research and development as the services are provided under the
terms of the contract. We recognize non-refundable contract fees for which no further performance
obligations exist and for which there is no continuing involvement by us on the earlier of when the
payments are received or when collection is assured.
Inventory
We state our inventories at the lower of cost or market. We base our assessment of the
ultimate realization of inventories on our projections of future demand and market conditions.
Sudden declines in demand, rapid product improvements, or technological changes, or any combination
of these factors can cause us to have excess or obsolete inventories. On an ongoing basis, we
review for estimated obsolete or unmarketable inventories and write down our inventories to their
net realizable value based upon our forecasts of future demand and market conditions. If actual
market conditions are less favorable than our forecasts, additional inventory reserves may be
required. The following factors influence our estimates: changes to or cancellations of customer
orders, unexpected decline in demand, rapid product improvements and technological advances, and
termination or changes by our OEM customers of any product offerings incorporating our product
solutions.
Periodically, we purchase inventory from our subcontractors when a customers delivery
schedule is delayed or a customers order is cancelled. In those circumstances in which our
customer has cancelled its order and we purchase inventory from our subcontractors, we consider a
write-down to reduce the carrying value of the inventory purchased to its net realizable value.
Write-downs to reduce the carrying value of obsolete, slow moving, and non-usable inventory to net
realizable value are charged to cost of revenue.
18
Share-Based Compensation Costs
We account for employee share-based compensation costs in accordance with Statement of
Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment (SFAS 123R) and apply the
provisions of Staff Accounting Bulletin No. 107, Share-Based Payment (SAB 107). We utilize the
Black-Scholes option pricing model to estimate the grant date fair value of employee share-based
compensatory awards, which requires the input of highly subjective assumptions, including expected
volatility and expected life. Historical and implied volatility were used in estimating the fair
value of our share-based awards, while the expected life for our options was estimated to be five
years based on historical trends since our initial public offering. Further, as required under
SFAS 123R, we now estimate forfeitures for share-based awards that are not expected to vest.
Changes in these inputs and assumptions can materially affect the measure of estimated fair value
of our share-based compensation. We charge the estimated fair value to earnings on a straight-line
basis over the vesting period of the underlying awards, which is generally four years for our stock
option and deferred stock unit awards and up to two years for our employee stock purchase plan.
The Black-Scholes option pricing model was developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable. As our stock option
and employee stock purchase plan awards have characteristics that differ significantly from traded
options, and as changes in the subjective assumptions can materially affect the estimated value,
our estimate of fair value may not accurately represent the value assigned by a third party in an
arms-length transaction. There currently is no market-based mechanism to verify the reliability
and accuracy of the estimates derived from the Black-Scholes option pricing model or other
allowable valuation models, nor is there a means to compare and adjust the estimates to actual
values. While our estimate of fair value and the associated charge to earnings materially affects
our results of operations, it has no impact on our cash position.
The guidance in SFAS 123R and SAB 107 is relatively new and the application of these
principles may be subject to further interpretation and guidance. There are significant variations
among allowable valuation models, and there is a possibility that we may adopt a different
valuation model or refine the inputs and assumptions under our current valuation model in the
future resulting in a lack of consistency in future periods. Our current or future valuation model
and the inputs and assumptions we make may also lack comparability to other companies that use
different models, inputs, or assumptions, and the resulting differences in comparability could be
material.
Income Taxes
We recognize federal, foreign, and state current tax liabilities or assets based on our
estimate of taxes payable or refundable in the then current fiscal year for each tax jurisdiction.
We also recognize federal, foreign, and state deferred tax liabilities or assets for our estimate
of future tax effects attributable to temporary differences and carryforwards and record a
valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based
on available evidence and our judgment, are not expected to be realized. If our assumptions, and
consequently our estimates, change in the future, the valuation allowance we have established for
our deferred tax assets may be changed, which could impact income tax expense.
We account for income tax contingencies in accordance with SFAS No. 5, Accounting for
Contingencies. The calculation of tax liabilities involves significant judgment in estimating the
impact of uncertainties in the application of highly complex tax laws. Resolution of these
uncertainties in a manner inconsistent with our expectations could have a material impact on our
results of operations and financial condition. We believe we have adequately provided for
reasonably foreseeable outcomes in connection with the resolution of income tax contingencies.
However, our results have in the past, and could in the future, include favorable and unfavorable
adjustments to our estimated tax liabilities in the period an assessment is made or resolved, upon
the filing of an amended return based upon a change in facts, circumstances, or interpretation, or
upon the expiration of a statute of limitation. Accordingly, our effective tax rate could
fluctuate materially from period to period.
In accordance with SFAS 123R, we recognize tax benefit upon expensing certain share-based
awards associated with our share-based compensation plans, including nonqualified stock options and
deferred stock unit awards, but under current accounting standards we cannot recognize tax benefit
concurrent with the recognition of share-based compensation expenses associated with incentive
stock options and employee stock purchase plan shares (qualified stock options). For qualified
stock options that vested after our adoption of SFAS 123R, we recognize tax benefit only in the
period when disqualifying dispositions of the underlying stock occur and, for qualified stock
options that vested prior to our adoption of SFAS 123R, the tax benefit is recorded directly to
additional paid-in capital. Accordingly, because we cannot recognize the tax benefit for
share-based compensation expense associated with qualified stock options until the occurrence of
future disqualifying dispositions of the underlying stock, and because a
19
portion of that tax benefit may be directly recorded to additional paid-in capital, our future
quarterly and annual effective tax rates will be subject to greater volatility and, consequently,
our ability to estimate reasonably our future quarterly and annual effective tax rates is greatly
diminished.
Results of Operations
Three months ended September 30, 2006 compared with the three months ended September 30, 2005
Net Revenue.
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Septebmer 30, |
|
|
|
2006 |
|
|
2005 |
|
|
$ Change |
|
|
% Change |
|
PC applications |
|
$ |
49,256 |
|
|
$ |
37,661 |
|
|
$ |
11,595 |
|
|
|
30.8 |
% |
% of net revenue |
|
|
89.9 |
% |
|
|
72.8 |
% |
|
|
|
|
|
|
|
|
Digital lifestyle product applications |
|
|
5,559 |
|
|
|
14,064 |
|
|
|
(8,505 |
) |
|
|
-60.5 |
% |
% of net revenue |
|
|
10.1 |
% |
|
|
27.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
54,815 |
|
|
$ |
51,725 |
|
|
$ |
3,090 |
|
|
|
6.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue was $54.8 million for the three months ended September 30, 2006 compared with
$51.7 million for the three months ended September 30, 2005, an increase of $3.1 million, or 6.0%.
We identify the vertical markets that our products serve as the personal computing market (PC)
and the digital lifestyle product markets. The increase in net revenue for the three months ended
September 30, 2006 was primarily attributable to an $11.6 million, or 30.8%, increase in PC
applications net revenue, partially offset by an $8.5 million decrease in digital lifestyle product
applications net revenue. The growth of our PC applications revenue was attributable to notebook
market share gains, coupled with notebook industry growth, and a significant increase in demand for
our capacitive multimedia control modules. Our digital lifestyle product applications revenue
declined to approximately 10% of net revenue for the three months ended September 30, 2006 from
approximately 27% of net revenue for the three months ended September 30, 2005, primarily due to a
decline in orders for our portable digital music player interface solutions. The increase in net
revenue reflects a 33% increase in overall unit shipments including our multimedia control modules
that generally are integrated into notebook computers utilizing our touchpads, and was partially
offset by lower average selling prices due primarily to product design mix and general competitive
pricing pressure. Net revenue from PC dual pointing applications as a percent of net revenue was
essentially unchanged at 15% for both the three months ended September 30, 2006 and the three
months ended September 30, 2005.
Gross Margin. Gross margin as a percentage of net revenue was 40.9%, or $22.4 million, for
the three months ended September 30, 2006 compared with 45.8%, or $23.7 million, for the three
months ended September 30, 2005. As each product we sell utilizes our capacitive technologies in a
design that is generally unique or specific to a customers application, gross margin varies on a
product-by-product basis, making our cumulative gross margin a blend of our product specific
designs and independent of the vertical markets that our products serve. The decline in gross
margin as a percentage of net revenue primarily reflected an unfavorable product design mix, which
included a substantial increase in multi-media oriented products containing a greater percentage of
third party content and general competitive pricing pressure, partially offset by lower
manufacturing costs resulting from our continuing design and process improvement programs.
Non-cash share-based compensation costs included in cost of revenue were $147,000, or 0.3% of net
revenue, and $192,000, or 0.4% of net revenue, for the three months ended September 30, 2006 and
2005, respectively.
20
Operating Expenses.
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Septebmer 30, |
|
|
|
2006 |
|
|
2005 |
|
|
$ Change |
|
|
% Change |
|
Research and development expenses |
|
$ |
9,188 |
|
|
$ |
8,289 |
|
|
$ |
899 |
|
|
|
10.8 |
% |
% of net revenue |
|
|
16.8 |
% |
|
|
16.0 |
% |
|
|
|
|
|
|
|
|
Selling, general, and administrative expenses |
|
|
7,801 |
|
|
|
6,728 |
|
|
|
1,073 |
|
|
|
15.9 |
% |
% of net revenue |
|
|
14.2 |
% |
|
|
13.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
$ |
16,989 |
|
|
$ |
15,017 |
|
|
$ |
1,972 |
|
|
|
13.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of net revenue |
|
|
31.0 |
% |
|
|
29.0 |
% |
|
|
|
|
|
|
|
|
Research and Development Expenses. Research and development expenses increased as a
percentage of net revenue to 16.8% from 16.0%, while the cost of research and development
activities increased $899,000, or 10.8%, to $9.2 million for the three months ended September 30,
2006 compared with $8.3 million for the three months ended September 30, 2005. The increase in
research and development expenses primarily reflected a $617,000 increase in temporary labor and
consulting costs, a $324,000 increase in employee cash compensation costs resulting from additional
staffing, increased base compensation related to our annual performance review process, employee
benefit costs, and recruiting costs, partially offset by a $257,000 reduction in non-cash
share-based compensation costs. Non-cash share-based compensation costs included in research and
development expenses were $1.0 million, or 1.9% of net revenue, and $1.3 million, or 2.5% of net
revenue, for the three months ended September 30, 2006 and 2005, respectively.
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses
increased as a percentage of net revenue to 14.2% from 13.0%, while the cost of selling, general,
and administrative activities increased $1.1 million, or 15.9%, to $7.8 million for the three
months ended September 30, 2006 compared with $6.7 million for the three months ended September 30,
2005. The increase in selling, general, and administrative expenses primarily reflected a $556,000
increase in employee cash compensation costs resulting from additional staffing, increased base
compensation related to our annual performance review process, employee benefit costs, and
recruiting costs, and a $410,000 increase in legal fees. The increase in legal fees is primarily
related to our ongoing patent infringement litigation with Elantech Devices Corporation, which is
more fully described in Part II Other Information Item 1 Legal Proceedings. Non-cash
share-based compensation costs included in selling, general, and administrative expenses were $1.9
million, or 3.5% of net revenue, and $1.8 million, or 3.5% of net revenue, for the three months
ended September 30, 2006 and 2005, respectively.
Income from Operations.
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Septebmer 30, |
|
|
|
2006 |
|
|
2005 |
|
|
$ Change |
|
|
% Change |
|
Income from operations |
|
$ |
5,406 |
|
|
$ |
8,655 |
|
|
$ |
(3,249 |
) |
|
|
-37.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of net revenue |
|
|
9.9 |
% |
|
|
16.7 |
% |
|
|
|
|
|
|
|
|
We generated operating income of $5.4 million, or 9.9% of net revenue, for the three
months ended September 30, 2006 compared with $8.7 million, or 16.7% of net revenue, for the three
months ended September 30, 2005. As noted above, the decrease in operating income primarily
reflected the impact of a lower gross margin percentage combined with higher operating expenses,
partially offset by the increase in operating leverage resulting from the 6.0% increase in net
revenue.
21
Interest Income/(Expense).
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Septebmer 30, |
|
|
|
2006 |
|
|
2005 |
|
|
$ Change |
|
|
% Change |
|
Interest income |
|
$ |
2,539 |
|
|
$ |
1,551 |
|
|
$ |
988 |
|
|
|
63.7 |
% |
% of net revenue |
|
|
4.6 |
% |
|
|
3.0 |
% |
|
|
|
|
|
|
|
|
Interest expense |
|
|
(487 |
) |
|
|
(484 |
) |
|
|
(3 |
) |
|
|
0.6 |
% |
% of net revenue |
|
|
-0.9 |
% |
|
|
-0.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
2,052 |
|
|
$ |
1,067 |
|
|
$ |
985 |
|
|
|
92.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of net revenue |
|
|
3.7 |
% |
|
|
2.1 |
% |
|
|
|
|
|
|
|
|
Interest Income. Interest income was $2.5 million for the three months ended September
30, 2006 compared with $1.6 million for the three months ended September 30, 2005. The $988,000
increase in interest income resulted from a combination of substantially higher average interest
rates and higher average invested cash balances. The increase in average invested cash balances
was primarily attributable to $18.5 million of net cash flows from operations during the past
twelve months.
Interest Expense. Interest expense was $487,000 for the three months ended September 30, 2006
essentially unchanged when compared with interest expense of $484,000 for the three months ended
September 30, 2005. Interest expense primarily reflects the combination of interest expense and
amortization of debt issuance costs related to our convertible senior subordinated notes issued in
December 2004. The annual debt service cost on the notes is approximately $938,000, which excludes
$860,000 of amortization of debt issuance costs.
Provision for Income Taxes.
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended Septebmer 30, |
|
|
2006 |
|
2005 |
|
$Change |
|
% Change |
Income before provision for income taxes |
|
$ |
7,458 |
|
|
$ |
9,722 |
|
|
$ |
(2,264 |
) |
|
|
-23.3 |
% |
Provision for income taxes |
|
|
3,331 |
|
|
|
4,210 |
|
|
|
(879 |
) |
|
|
-20.9 |
% |
% of income before provision for income taxes |
|
|
44.7 |
% |
|
|
43.3 |
% |
|
|
|
|
|
|
|
|
The provision for income taxes for the three months ended September 30, 2006 was
approximately $3.3 million compared with $4.2 million for the three months ended September 30,
2005, reflecting lower pre-tax profit levels. The income tax provision represented estimated
federal, foreign, and state taxes for the three months ended September 30, 2006 and 2005. The
effective tax rate for the three months ended September 30, 2006 was 44.7% and diverged from the
combined federal and state statutory rate primarily due to the impact of accounting for share-based
compensation and foreign withholding taxes, partially offset by the impact of tax-exempt interest
income and the release of contingency reserves. The effective tax rate for the three months ended
September 30, 2005 was 43.3% and diverged from the combined federal and state statutory rate
primarily as a result of the impact of accounting for share-based compensation and other permanent
taxable differences, partially offset by the impact of higher income from foreign operations, the
benefit of tax exempt interest income, and research and development tax credits.
In accordance with SFAS 123R, we recognize tax benefit upon expensing certain share-based
awards associated with our share-based compensation plans, including nonqualified stock options and
deferred stock unit awards, but under current accounting standards, we cannot recognize tax benefit
concurrent with the recognition of share-based compensation expenses associated with incentive
stock options and employee stock purchase plan shares (qualified stock options). For qualified
stock options that vested after our adoption of SFAS 123R, we recognize tax benefit only in the
period when disqualifying dispositions of the underlying stock occur, and for qualified stock
options that vested prior to our adoption of SFAS 123R, the tax benefit is recorded directly to
additional paid-in capital. Tax benefit associated with total share-based compensation was
approximately $781,000 for the three months ended September 30, 2006. Excluding the impact of
share-based compensation and the related tax benefit, the effective tax rate for the three months
ended September 30, 2006 and 2005 would have been 38.9% and 37.6%, respectively. Because we cannot
recognize the tax benefit for share-based compensation expense associated with qualified stock
22
options until the occurrence of future disqualifying dispositions of the underlying stock and
because a portion of that tax benefit may be recorded directly to additional paid-in capital, our
future quarterly and annual effective tax rates will be subject to greater volatility and,
consequently, our ability to reasonably estimate our future quarterly and annual effective tax
rates is greatly diminished.
Liquidity and Capital Resources
Our cash, cash equivalents, and short-term investments were $245.7 million as of September 30,
2006 compared with $245.2 million as of June 30, 2006, an increase of $487,000. The increase in
cash, cash equivalents, and short-term investments was primarily attributable to cash generated
from operating activities of $3.7 million and proceeds from stock option exercises and our employee
stock purchase plan activity of $1.5 million, partially offset by $4.6 million of cash used for the
repurchase of 215,000 shares of our common stock.
Cash Flows from Operating Activities. Operating activities during the three months ended
September 30, 2006, generated cash of approximately $3.7 million compared with $10.0 million of
cash generated during the three months ended September 30, 2005. For the three months ended
September 30, 2006, net cash provided by operating activities was primarily attributable to net
income of $4.1 million plus adjustments for non-cash charges, including share-based compensation
costs, depreciation, and amortization of debt issuance costs totaling $3.8 million, partially
offset by deferred tax, net of realized and excess tax benefit generated from share-based
compensation aggregating $700,000, and a $3.5 million net increase in operating assets and
liabilities. For the three months ended September 30, 2005, net cash provided by operating
activities was primarily attributable to net income of $5.5 million plus adjustments for non-cash
charges, including share-based compensation costs, depreciation, and amortization of debt issuance
costs totaling $3.9 million and a net decrease in operating assets and liabilities of 1.2 million,
partially offset by deferred tax, net of realized and excess tax benefit generated from share-based
compensation aggregating $643,000.
Cash Flows from Investing Activities. Our investing activities typically relate to purchases
of government-backed securities and investment-grade fixed income instruments and purchases of
property and equipment. Investing activities during the three months ended September 30, 2006
generated net cash of $12.3 million compared with net cash used of $12.9 million during the three
months ended September 30, 2005. During the three months ended September 30, 2006, net cash
provided by investing activities consisted of proceeds from sales and maturities of short-term
investments of $82.8 million, partially offset by purchases of $70 million of short-term
investments and purchases of $515,000 of property and equipment. Cash used by investing activities
during the three months ended September 30, 2005 consisted of purchases of $51.0 million of
short-term investments and purchases of $1.7 million of property and equipment, which included $1.3
million for building improvements, partially offset by $39.8 million in proceeds from sales and
maturities of short-term investments.
Cash Flows from Financing Activities. Net cash used in financing activities for the three
months ended September 30, 2006 was $3.0 million compared with net cash used in financing
activities of $17.5 million for the three months ended September 30, 2005. Our financing
activities for the three months ended September 30, 2006 consisted primarily of $4.6 million of
cash used for the purchase of treasury stock, partially offset by $1.5 million in proceeds from
common stock issued under our stock option plans and employee stock purchase plan and $183,000 of
excess tax benefit from share-based compensation. Our financing activities for the three months
ended September 30, 2005 consisted primarily of $18.8 million of cash used for the purchase of
treasury stock, partially offset by $1.2 million in proceeds from common stock issued under our
stock option plans and employee stock purchase plan and $139,000 of excess tax benefit from
share-based compensation.
Common Stock Repurchase Program. In October 2005, our board of directors authorized an
additional $40 million for our stock repurchase program, raising the aggregate authorization level
to $80 million. The program authorizes us to repurchase our common stock on the open market or in privately negotiated
transactions depending upon market conditions and other factors. The number of shares purchased
and the timing of purchases is based on the level of our cash balances, general business and market
conditions, and other factors, including alternative investment opportunities. Common stock
repurchased under this program is held as treasury stock. Purchases under this program totaled
2,521,100 shares through September 30, 2006 for an aggregate cost of $44.6 million, or an average
cost of $17.69 per share. The authorization for the remaining $35.4 million available under the
stock repurchase program will expire in October 2007.
Convertible Senior Subordinated Notes. During December 2004, we issued $125 million of 0.75%
Convertible Senior Subordinated Notes maturing on December 1, 2024 (the Notes) in a private
offering pursuant to Rule 144A under the Securities Act of 1933, as amended. The Notes bear
interest at a rate of 0.75% per annum
23
payable on December 1 and June 1 of each year. We will pay
additional contingent interest on the Notes if the average trading price of the Notes is at or
above 120% of the principal amount of the Notes for a specified period beginning with the six-month
period commencing December 1, 2009. The amount of contingent interest payable on the Notes with
respect to a six-month period, for which contingent interest applies, will equal 0.375% per annum
of the average trading price of the Notes for a specified five trading-day period preceding such
six-month period.
The Notes are convertible into 2,473,975 shares of our common stock, subject to adjustment in
certain events. The denominator of the diluted net income per share calculation includes the
weighted average effect of the 2,473,975 shares of common stock issuable upon conversion of the
Notes. Through November 30, 2009, upon the occurrence of a fundamental change as defined in the
indenture governing the Notes, we could potentially be obligated to issue up to 989,587 additional
shares, or a total of 3,463,562 shares of common stock. These additional shares, contingently
issuable upon a fundamental change, are not included in the calculation of diluted net income per
share.
The Notes may be converted (1) if, during any calendar quarter commencing after December 31,
2004, the last reported sale price of our common stock for at least 20 trading days in the period
of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is
greater than or equal to 120% of the applicable conversion price on such last trading day; (2) on
or after January 1, 2020; (3) if we have called the Notes for redemption; or (4) during prescribed
periods, upon the occurrence of specified corporate transactions or fundamental changes. On or
after December 1, 2009, we may redeem for cash all or a portion of the notes at a redemption price
of 100% of the principal amount of the notes plus accrued and unpaid interest, including contingent
interest and additional interest, if any. Noteholders have the right to require us to repurchase
all or a portion of their notes for cash on December 1, 2009, December 1, 2014, and December 1,
2019 at a price equal to 100% of the principal amount of the Notes to be purchased plus accrued and
unpaid interest, including contingent interest and additional interest, if any. Upon conversion of
the Notes, in lieu of delivering common stock, we may, at our discretion, deliver cash or a
combination of cash and common stock. As of September 30, 2006, none of the conditions for
conversion or redemption of the Notes had occurred.
The Notes are unsecured senior subordinated obligations and rank junior in right of payment to
all of our existing and future senior indebtedness, equal in right of payment with all of our
existing and future indebtedness or other obligations that are not, by their terms, either senior
or subordinated to the Notes, including trade debt and other general unsecured obligations that do
not constitute senior or subordinated indebtedness, and senior in right of payment to all of our
future indebtedness that, by its terms, is subordinated to the Notes. There are no financial
covenants in the Notes.
Note Payable to a Related Party. The note payable of $1.5 million to National Semiconductor
Corporation (National) due August 2007 represents limited-recourse debt that is secured solely by a
portion of our stockholdings in Foveon, Inc., or Foveon, in which National is also an investor. We
do not anticipate making any payments under the limited-recourse loan with National, either prior
to or at maturity, unless Foveon is participating in a liquidity event, such as an initial public
offering of its equity securities or a merger, through which we would receive amounts in excess of
our $1.5 million note payable plus the associated accrued interest.
$100 Million Shelf Registration. We have registered an aggregate of $100 million of common
stock and preferred stock for issuance in connection with acquisitions, which shares generally will
be freely tradeable after their issuance under Rule 145 of the Securities Act unless held by an
affiliate of the acquired company, in which case such shares will be subject to the volume and
manner of sale restrictions of Rule 144.
$125 Million Shelf Registration. We have registered an aggregate of $125 million of our 0.75%
Convertible Senior Subordinated Notes due 2024 and the common stock issuable upon conversion of the
notes. The shares issued upon conversion generally will be freely tradeable after their issuance unless held by an
affiliate, in which case such shares will be subject to the volume and manner of sale restrictions
of Rule 144.
Liquidity and Capital Resources. We believe our existing cash, cash equivalents, and
short-term investment balances and anticipated cash flows from operating activities will be
sufficient to meet our working capital and other cash requirements over the course of at least the
next 12 months. Our future capital requirements will depend on many factors, including our rate of
revenue growth or decline, the timing and extent of spending to support product development
efforts, costs related to protecting our intellectual property, the expansion of sales and
marketing activities, the timing of introductions of new products and enhancements to existing
products, the costs to ensure access to adequate manufacturing capacity, the continuing market
acceptance of our product solutions, our common stock repurchase program, and the amount and timing
of our investments in, or acquisitions of, other technologies or
24
companies. Further equity or debt
financing may not be available to us on acceptable terms or at all. If sufficient funds are not
available or are not available on acceptable terms, our ability to take advantage of unexpected
business opportunities or to respond to competitive pressures could be limited or severely
constrained.
Contractual Obligations and Commercial Commitments
The following table sets forth a summary of our material contractual obligations and
commercial commitments as of September 30, 2006 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period |
|
|
|
|
|
|
|
Less than |
|
|
1-3 |
|
|
3-5 |
|
|
More than |
|
Contractual Obligations |
|
Total |
|
|
1 year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
Convertible senior subordinated notes (1) (2) |
|
$ |
143 |
|
|
$ |
1 |
|
|
$ |
2 |
|
|
$ |
2 |
|
|
$ |
138 |
|
Note payable (1) |
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Building leases |
|
|
2 |
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
148 |
|
|
$ |
5 |
|
|
$ |
3 |
|
|
$ |
2 |
|
|
$ |
138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents both principal and interest payable through the maturity date of the underlying
note. |
|
(2) |
|
Our convertible senior subordinated notes include a provision allowing the noteholders to
require us, at the noteholders discretion, to repurchase their notes at a redemption price of
100% of the principal amount of the notes plus accrued and unpaid interest (including
contingent interest and additional interest, if any) on December 1, 2009, December 1, 2014,
and December 1, 2019 and in the event of a fundamental change as described in the indenture
governing the notes. The early repayment of the notes is not reflected in the above schedule,
but if all the noteholders elected to exercise their rights to require us to repurchase their
notes on December 1, 2009, then our contractual obligations for the three-to-five year period
would be increased by $123 million and no amounts would be due in more than 5 years. |
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109, (FIN
48) which clarifies the accounting for uncertainty in income taxes recognized in an entitys
financial statements in accordance with SFAS No. 109, Accounting for Income Taxes (SFAS 109).
FIN 48 is designed to reduce the disparity in accounting treatment for uncertain tax positions
resulting from diverse interpretations of SFAS 109 among companies. FIN 48 prescribes a
recognition threshold and measurement attribute for financial statement disclosure of tax positions
taken or expected to be taken on a tax return. FIN 48 is effective beginning in our first quarter
of fiscal 2008. We are currently evaluating the requirements of FIN 48 and have not yet determined
the impact of adoption, if any, on our financial position, results of operations, or cash flows.
In September 2006, the U.S. Securities and Exchange Commission released Staff Accounting
Bulletin No. 108, (SAB 108), which provides interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be considered in quantifying a current
year misstatement. SAB 108 provides transition guidance for correcting errors and requires
registrants to quantify misstatements using both the balance-sheet and income-statement approaches
and to evaluate whether either approach results in quantifying an error that is material in light
of relevant quantitative and qualitative factors. In the year of adoption only, if the effect is
determined to be material, SAB 108 allows registrants to record the effect as a cumulative-effect
adjustment to beginning-of-year retained earnings. SAB 108 does not change the requirements within
SFAS No. 154, Accounting Changes and Error Correctionsa replacement of APB No. 20 and FASB
Statement No. 3, for the correction of an error on financial statements. Further, SAB 108 does
not change the Staffs previous guidance in SAB 99 on evaluating the materiality of misstatements.
SAB 108 is effective for our fiscal 2007. We are currently evaluating the requirements of SAB 108
and have not yet determined the impact of adoption, if any, on our financial position, results of
operations, or cash flows.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (SFAS 157).
SFAS 157 defines fair value, establishes a framework for measuring fair value under U.S. generally
accepted accounting principles, and expands disclosure about fair value measurements. SFAS 157
applies under other accounting standards that require or permit fair value measurements.
Accordingly, SFAS 157 does not require any new fair value measurement. SFAS 157 is effective
beginning in our first quarter of fiscal 2009. We are currently evaluating the
25
requirements of
SFAS 157 and have not yet determined the impact of adoption, if any, on our financial position,
results of operations, or cash flows.
|
|
|
ITEM 3. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our market risk has not changed significantly from the interest rate and foreign currency
risks disclosed in Item 7A of our Annual Report on Form 10-K for the fiscal year ended June 30,
2006.
|
|
|
ITEM 4. |
|
CONTROLS AND PROCEDURES |
As of the end of the period covered by this report, our Chief Executive Officer and Chief
Financial Officer have reviewed and evaluated the effectiveness of our disclosure controls and
procedures, which included inquiries made to certain other of our employees. Based on their
evaluation, our Chief Executive Officer and Chief Financial Officer have each concluded that our
disclosure controls and procedures are designed to ensure that information required to be disclosed
is accumulated and communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, to allow timely decisions regarding required disclosure and are effective and
sufficient to ensure that we record, process, summarize, and report information required to be
disclosed by us in our periodic reports filed under the Securities Exchange Act within the time
periods specified by the Securities and Exchange Commissions rules and forms.
During the fiscal quarter covered by this report, there have not been any changes in our
internal control over financial reporting that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
26
PART II OTHER INFORMATION
|
|
|
ITEM 1. |
|
LEGAL PROCEEDINGS |
On March 10, 2006, Elantech Devices Corporation filed a Complaint for Patent Infringement
against us in the United States District Court for the Northern District of California, San Jose
Division, claiming that we infringed Elantechs U.S. Patent No. 5,825,352 and seeking single and
treble damages, attorneys fees, and a permanent injunction against us infringing or inducing
others to infringe the patent. On April 6, 2006, we filed our Answer to the Complaint and
Counterclaims against Elantech Devices Corporation, claiming that Elantech has infringed and
induced infringement of our U.S. Patent Nos. 5,543,591, 5,880,411, 5,943,052, and 6,380,931 and
seeking single and treble damages, attorneys fees, and a permanent injunction against infringing
or inducing others to infringe.
Elantech responded to our counterclaim denying liability and counterclaimed seeking an
injunction and damages for alleged violations of California law. We subsequently filed a motion to
dismiss the Elantech counterclaims, which was granted on July 7, 2006 with leave to amend the
counterclaims after the adjudication of the patent infringement claims. We intend to vigorously
defend our patents and pursue our counterclaims.
|
|
|
ITEM 2. |
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Issuer Purchases of Equity Securities
In October 2005, our board of directors authorized an expansion of our stock repurchase
program for up to an additional $40 million of our common stock. The following sets forth
purchases of our common stock under the repurchase program for each fiscal month during the three
month period ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Maximum |
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Dollar Value |
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
of Shares |
|
|
|
|
|
|
|
Average |
|
|
Purchased |
|
|
that May |
|
|
|
Total |
|
|
Price |
|
|
as Part of |
|
|
Yet Be |
|
|
|
Number |
|
|
Paid |
|
|
Publicly |
|
|
Purchased |
|
|
|
of Shares |
|
|
per |
|
|
Announced |
|
|
Under the |
|
Period |
|
Purchased |
|
|
Share |
|
|
Program |
|
|
Program |
|
June 25,
2006 July 22, 2006 |
|
|
|
|
|
|
|
|
|
|
2,306,100 |
|
|
$ |
40,000,000 |
|
July 23, 2006 August 19, 2006 |
|
|
215,000 |
|
|
$ |
21.45 |
|
|
|
2,521,100 |
|
|
$ |
35,388,000 |
|
August 20, 2006 September 23, 2006 |
|
|
|
|
|
|
|
|
|
|
2,521,100 |
|
|
$ |
35,388,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
215,000 |
|
|
$ |
21.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.1 |
|
|
Certification of Chief Executive Officer |
|
|
|
|
|
|
31.2 |
|
|
Certification of Chief Financial Officer |
|
|
|
|
|
|
32.1 |
|
|
Section 1350 Certification of Chief Executive Officer |
|
|
|
|
|
|
32.2 |
|
|
Section 1350 Certification of Chief Financial Officer |
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
SYNAPTICS INCORPORATED
|
|
Date: October 26, 2006 |
By: |
/s/ Francis F. Lee
|
|
|
|
Name: |
Francis F. Lee |
|
|
|
Title: |
President and Chief Executive Officer |
|
|
|
|
|
|
By: |
/s/ Russell J. Knittel
|
|
|
|
Name: |
Russell J. Knittel |
|
|
|
Title: |
Senior Vice President, Chief Financial Officer, and
Chief Administrative Officer |
|
|
28
exv31w1
EXHIBIT 31.1
Certification of Chief Executive Officer
I, Francis F. Lee, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Synaptics Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control
over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting.
Date: October 26, 2006
|
|
|
|
|
|
|
|
|
/s/ Francis F. Lee
|
|
|
Francis F. Lee |
|
|
Chief Executive Officer |
|
exv31w2
EXHIBIT 31.2
Certification of Chief Financial Officer
I, Russell J. Knittel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Synaptics Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
d) Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control
over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting.
Date: October 26, 2006
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/s/ Russell J. Knittel
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Russell J. Knittel |
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Chief Financial Officer |
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exv32w1
EXHIBIT 32.1
Section 1350 Certification of Chief Executive Officer
In connection with the Quarterly Report on Form 10-Q of Synaptics Incorporated (the Company)
for the quarterly period ended September 23, 2006 as filed with the Securities and Exchange
Commission on the date hereof (the Report), I, Francis F. Lee, Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) |
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and |
(2) |
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The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company. |
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Francis F. Lee |
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Chief Executive Officer |
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October 26, 2006 |
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exv32w2
EXHIBIT
32.2
Section 1350 Certification of Chief Financial Officer
In connection with the Quarterly Report on Form 10-Q of Synaptics Incorporated (the Company)
for the quarterly period ended September 23, 2006 as filed with the Securities and Exchange
Commission on the date hereof (the Report), I, Russell J. Knittel, Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) |
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and |
(2) |
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The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company. |
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Russell J. Knittel |
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Chief Financial Officer |
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October 26, 2006 |
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