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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 24, 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.) |
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3120 Scott Blvd., Ste 130
Santa Clara, California
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95054 |
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(Address of principal executive offices)
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(Zip Code) |
(408) 454-5100
Registrants telephone number, including area code
Securities registered pursuant to section 12(b) of the Act:
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Title of each class |
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Name of each exchange on which registered |
Common Stock, par value $.001 per share
Preferred Stock Purchase Rights
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The Nasdaq Global Select Market
The Nasdaq Global Select Market |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filed, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
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 Act). Yes o No þ
The aggregate market value of Common Stock held by nonaffiliates of the registrant (20,082,352
shares) based on the closing price of the registrants Common Stock as reported on the Nasdaq
Global Select Market on December 23, 2005, was $494,025,859. For purposes of this computation,
all officers, directors, and 10% beneficial owners of the registrant are deemed to be affiliates.
Such determination should not be deemed to be an admission that such officers, directors, or 10%
beneficial owners are, in fact, affiliates of the registrant.
As of September 1, 2006, there were outstanding 25,046,353 shares of the registrants Common
Stock, par value $.001 per share.
Documents Incorporated by Reference
Portions of the registrants definitive Proxy Statement for the 2006 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.
SYNAPTICS INCORPORATED
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED JUNE 30, 2006
TABLE OF CONTENTS
Statement Regarding Forward-Looking Statements
The statements contained in this report on Form 10-K that are not purely historical are
forward-looking statements within the meaning of applicable securities laws. Forward-looking
statements include statements regarding our expectations, anticipation, intentions,
beliefs, or strategies regarding the future, whether or not those words are used.
Forward-looking statements also include statements regarding revenue, margins, expenses, and
earnings analysis for fiscal 2007 and thereafter; technological innovations; products or product
development, including their performance, market position, and potential; our product development
strategies; potential acquisitions or strategic alliances; the success of particular product or
marketing programs; the amounts of revenue generated as a result of sales to significant customers;
and liquidity and anticipated cash needs and availability. All forward-looking statements included
in this report are based on information available to us as of the filing date of this report, and
we assume no obligation to update any such forward-looking statements. Our actual results could
differ materially from the forward-looking statements. Among the factors that could cause actual
results to differ materially are the factors discussed in Item 1A. Risk Factors.
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PART I
ITEM 1. BUSINESS
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,
communications, entertainment, and other electronic devices. We currently target the personal
computer, or PC, market and the market for digital lifestyle products, including portable digital
music and video players, mobile phones, and other select electronic device markets with our
customized interface solutions.
We are the market leader in providing interface solutions for notebook computers. Our
original equipment manufacturer, or OEM, customers include tier one PC OEMs. We generally supply
our OEM customers through their contract manufacturers, which take delivery of our products and pay
us directly for them.
Our website is located at www.synaptics.com. Through our website, we make available
free of charge all of our Securities and Exchange Commission filings, including our annual reports
on Form 10-K, our proxy statements, our quarterly reports on Form 10-Q, and our current reports on
Form 8-K as well as Form 3, Form 4, and Form 5 Reports for our directors, officers, and principal
stockholders, together with amendments to those reports filed or furnished pursuant to Section
13(a), 15(d), or 16 under the Securities Exchange Act. These reports are available immediately
after their electronic filing with the Securities and Exchange Commission. The website also
includes corporate governance information, including our Code of Conduct, our Code of Ethics for
the CEO and Senior Financial Officers, and our Board Committee Charters.
PC Market
We provide custom interface solutions for navigation, cursor control, and multimedia controls
for many of the worlds premier PC OEMs. In addition to notebooks, other PC applications for our
technology include peripherals, such as keyboards, mice, and monitors, as well as desktop and PC
remote control applications. Our solutions for the PC market include the TouchPad, a
touch-sensitive pad that senses the position of a persons finger on its surface; the TouchStyk, a
self contained, easily integrated pointing stick module; and dual pointing solutions, which combine
both a TouchPad and a pointing stick into a single notebook computer, enabling users to use the
interface of their choice. Additional products offered for the PC markets include LuxPad, Dual
Mode TouchPad, LightTouch, QuickStroke®, RoundPad, and Dual Mode TouchPad.
The latest industry projections for notebook unit growth for the period 2006-2010 show a
compound annual growth rate of 16.1% compared with 5.4% for desktop computers, reflecting the
continued migration of desktops to notebooks fueled by users desire for mobile computing and
on-the-go access to applications, information, and digital content, which is expanding on a daily
basis. Based on the strength of our technology and engineering know-how, we believe we are well
positioned to take advantage of the growth opportunity in the notebook market and to provide
innovative, value-added interface solutions for each of the key end-user preferences. We estimate
that in fiscal 2006 approximately 80% of all notebook computers sold used solely a touch pad
interface; 4% used solely a pointing stick interface; and 16% used a dual pointing interface, which
consists of both a touch pad and a pointing stick. Our notebook product lines of touch pads and
pointing sticks allow us to address 100% of the notebook market.
Digital Lifestyle Product Markets
We believe our extensive intellectual property portfolio, our experience in providing
interface solutions to major OEMs of electronic devices, and our proven track record of growth in
our expanding core notebook computer interface business position us to be a key technological
enabler for multiple consumer electronic devices targeted to meet the growing digital lifestyle
trend. Based on these strengths, we are addressing the opportunities created by the growth of
mobile computing, communications, and entertainment devices within the digital lifestyle products
markets. Digital lifestyle products include portable digital music and video players, mobile
phones, remote controls, personal digital assistants, or PDAs, as well as a variety of mobile,
handheld, wireless, and entertainment devices. We believe our existing technologies, our range of
product solutions, and our emphasis on ease of use, small size,
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low power consumption, advanced functionality, durability, and reliability will enable us to
serve multiple aspects of the markets for digital lifestyle products and other electronic devices.
Our array of custom solutions for digital lifestyle products includes the ScrollStrip and
TouchRing, which are scrolling solutions allowing users to navigate efficiently through menus and
content; LightTouch capacitive buttons, which provide illuminated button functionality; and
MobileTouch®, NavPoint®, and our ClearPad.
Industry projections for the portable digital music player market for the period 2006-2009
suggest a compound annual growth rate of 9.3% for the overall market and a compound annual growth
rate exceeding 16.7% for the hard disk drive, or HDD, portion of the market, reflecting the trend
toward portable digital music player products containing greater data storage capacities. These
products require a simple, durable, and intuitive user interface solution to navigate efficiently
through menus and scroll through extensive play lists and songs contained in the host device. We
believe we are well positioned to take advantage of this growing market based on our technology,
engineering know-how, and the acceptance of our custom-designed user interface solutions by OEMs in
this market.
Our Strategy
Our objective is to continue to enhance our position as a leading supplier of interface
solutions for the notebook computer market and to become a leading supplier of interface solutions
for digital lifestyle products. Key aspects of our strategy to achieve this objective include
those set forth below.
Extend Our Technological Leadership
We plan to utilize our extensive intellectual property portfolio and technological expertise
to extend the functionality of our product solutions and offer innovative product solutions to
customers across multiple markets. We intend to continue utilizing our technological expertise to
reduce the overall size, weight, cost, and power consumption of our interface solutions while
increasing their applications, capabilities, and performance. We plan to continue enhancing the
ease of use and functionality of our solutions. We also plan to expand our research and
development efforts through strategic acquisitions and alliances, increased investment in our
engineering activities, and the hiring of additional engineering personnel. We believe that these
efforts will enable us to meet customer expectations and to achieve our goal of supplying on a
timely and cost-effective basis the most advanced, easy-to-use, functional interface solutions to
our target markets.
Enhance Our Position in the Notebook Computer and Portable Digital Music Player Markets
We intend to continue introducing market-leading interface solutions in terms of performance,
functionality, size, and ease of use. We plan to continue enhancing our customers industrial
design alternatives and device functionality through innovative product development based on our
existing capabilities and technological advances.
Capitalize on Growth of New Markets
We intend to capitalize on the growth of new markets, including the digital lifestyle product
markets, brought about by the convergence of computing, communications, and entertainment devices.
We plan to offer innovative, intuitive interface solutions that address the evolving portability,
connectivity, and functionality requirements of these new markets. We plan to offer these
solutions to existing and potential OEM customers to enable increased functionality, reduced size,
lower cost, and enhanced industrial design features and user experience of their products. We plan
to utilize our existing technologies as well as aggressively pursue new technologies as new markets
evolve that demand new solutions.
Emphasize and Expand Customer Relationships
We plan to emphasize and expand our strong and long-lasting customer relationships and to
provide the most advanced interface solutions for our customers products. We believe that our
interface solutions enable our customers to deliver a positive user experience and to differentiate
their products from those of their competitors.
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We continually attempt to enhance the competitive position of our customers by providing them
with innovative, distinctive, and high-quality interface solutions on a timely and cost-effective
basis. To do so, we work continually to improve our productivity, to reduce costs, and to speed
the delivery of our interface solutions. We endeavor to streamline the entire design and delivery
process through our ongoing design, engineering, and production improvement efforts. We also
devote considerable effort to support our customers after the purchase of our interface solutions.
Pursue Strategic Relationships and Acquisitions
We intend to develop and expand strategic relationships to enhance our ability to offer
value-added customer solutions, penetrate new markets, and strengthen the technological leadership
of our product solutions. We also intend to acquire companies in order to expand our technological
expertise and to establish or strengthen our presence in selected target markets.
Continue Virtual Manufacturing
We plan to expand and diversify our production capacity through third-party relationships,
thereby strengthening our virtual manufacturing platform. This strategy results in a scalable
business model; enables us to concentrate on our core competencies of research and development,
technological advances, and product design; and reduces our capital expenditures. Our virtual
manufacturing strategy allows us to maintain a variable cost model, in which we do not incur most
of our manufacturing costs until our product solutions have been shipped and billed to our
customers.
Product Solutions
We develop, enhance, and acquire interface technologies that enrich the interaction between
people and their mobile computing, communications, and entertainment devices. Our innovative and
intuitive interfaces can be engineered to accommodate many diverse platforms, and our expertise in
human factors and usability can be utilized to improve the features and functionality of our
solutions. Our extensive array of technologies includes ASICs, firmware, software, and pattern
recognition and touch sensing technologies
Our interface solutions are custom engineered, total solutions for our customers and include
sensor design, module layout, ASICs, firmware, and software features for which we provide
manufacturing and design support and device testing. This allows us to be a one-stop supplier for
complete interface design from the early design stage, to manufacturing, to testing and support.
Through our technologies and expertise, we seek to provide our customers with customized solutions
that address their individual design issues and result in high-performance, feature-rich, and
reliable interface solutions. We believe our interface solutions offer the following
characteristics:
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Ease of Use. Our interface solutions offer the ease of use and intuitive interaction
that users demand. |
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Small Size. The small, thin size of our interface solutions enables our customers to
reduce the overall size and weight of their products in order to satisfy consumer demand
for portability. |
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Low Power Consumption. The low power consumption of our interface solutions enables
our customers to offer products with longer battery life or smaller battery size. |
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Advanced Functionality. Our interface solutions offer advanced features, such as
virtual scrolling, customizable tap zones, edge motion, and tapping and dragging icons,
to enhance user experience. |
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Reliability. The reliability of our interface solutions satisfies consumer
requirements for dependability, which is a major component of consumer satisfaction. |
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Durability. Our interface solutions withstand repeated use, harsh physical
treatment, and temperature fluctuations while providing a superior level of performance. |
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We believe these characteristics will enable us to maintain our leadership position in the
notebook computer market and to enhance our position as a technological enabler within the markets
for digital lifestyle products and other electronic devices.
Our interface solutions are engineered to our customers specifications, including features
and functionality, industrial design, mechanical, and electrical requirements. Our custom products
also offer unique integration options, including allowing our capacitive sensors to be placed
underneath the plastic of the device, which allows for streamlined and stylized designs,
incorporating LEDs to indicate status or enhance industrial design, and incorporating tactile
indicators, including ridges, Braille bumps, and textures designed to provide the user with
additional feedback.
Our emphasis on technological leadership and customized-design capabilities positions us to
provide unique interface solutions that address specific customer requirements. Our long-term
working relationships with large, global OEMs provide us with experience in satisfying their
demanding design specifications and other requirements. Our custom product solutions provide OEMs
with numerous benefits, including the following:
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customized, modular integration; |
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reduced product development costs; |
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shorter product time to market; |
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compact and efficient platforms; |
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improved product functionality and utility; and |
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product differentiation. |
We work with our customers to customize our solutions in order to meet their industrial design
requirements and to differentiate their products from those of competitors. This collaborative
effort reduces the duplication and overlap of investment and resources, enabling our OEM customers
to devote more time and resources to the market development of their products.
We utilize capacitive technology rather than resistive or mechanical technology in our product
solutions. Unlike resistive and mechanical technology, our solid state capacitive technology
requires no moving parts or activation force, thereby offering a durable, more reliable solution
that can be integrated into both curved and flat surfaces. Capacitive technologies also allow for
much thinner sensors than resistive or mechanical technology, providing for slimmer, more compact
and unique industrial designs.
Products
Our family of product solutions allows our customers to solve their interface needs and
differentiate their products from those of their competitors.
TouchPad
Our TouchPad, which takes the place and exceeds the functionality of a mouse, is a small,
touch-sensitive pad that senses the position of a persons finger on its surface through the
measurement of capacitance. Our TouchPad provides an accurate, comfortable, and reliable method
for screen navigation and cursor movement and provides a platform for interactive input. Our
TouchPad solutions allow our customers to provide stylish, simple, user-friendly, and intuitive
interface solutions for both the consumer and corporate markets. Our TouchPad solutions offer
various advanced features, including the following:
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Virtual scrolling. This feature enables the user to scroll through any document by
swiping a finger along the side or bottom of the TouchPad. |
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Customizable tap zones. These zones permit designated portions of the TouchPad to be
used to simulate mouse clicks, launch applications, and perform other selected
functions. |
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PalmCheckTM. PalmCheck eliminates false activation when a persons palm
accidentally rests on the TouchPad. |
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EdgeMotionTM. This feature permits cursor movement to continue when a
users finger reaches the edge of the TouchPad. |
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Tapping and dragging of icons. This feature allows the user to simply tap and hold
on an icon in order to drag it, rather than being forced to hold a button down in order
to drag an icon. |
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Multi-finger gestures. This feature allows the user to designate specific actions
when more than one finger is used on the TouchPad. |
Our TouchPad solutions are available in a variety of sizes, electrical interfaces, and
thicknesses. Our TouchPad solutions are designed to meet the electrical and mechanical
specifications of our customers. Customized firmware and driver software ensure the availability
of specialized features. As a result of their solid state characteristics, our TouchPad solutions
have no moving parts that wear out, resulting in a robust and reliable input solution that also
allows for unique industrial designs.
TouchStyk
Our TouchStyk is a proprietary pointing stick interface solution. TouchStyk is a
self-contained, easily integrated module that uses similar capacitive technology as our TouchPad.
TouchStyk is enabled with press-to-select and tap-to-click capabilities and can be easily
integrated into multiple computing and communications devices. In addition, our design greatly
reduces susceptibility to electromagnetic interference, thereby providing greater pointing accuracy
and preventing the pointer from drifting when not in use.
We are currently shipping our TouchStyk in notebooks, portable multimedia players, and ultra
mobile personal computers. Our modular approach allows OEMs to include our TouchPad, our
TouchStyk, or a combination of both interfaces in their products.
Dual Pointing Solutions
Our dual pointing solutions offer a TouchPad with a pointing stick in a single notebook
computer, enabling users to select their interface of choice. Our dual pointing solution also
provides the end user the ability to use both interfaces interchangeably. Our dual pointing
solution provides the following advantages:
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cost-effective and simplified OEM integration; |
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simplified OEM product line because one device contains both solutions; |
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single-source supplier, which eliminates compatibility issues; and |
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end user flexibility because one notebook can address both user preferences. |
We have developed two solutions for use in the dual pointing market. Our first solution
integrates all the electronics for controlling a third-party resistive strain gauge pointing stick
onto our TouchPad PCB. This solution simplifies OEM integration by eliminating the need to procure
the pointing stick electronics from another party and physically integrate them into the notebook.
Our second dual pointing solution uses our TouchStyk rather than a third-party pointing stick and
offers the same simplified OEM integration. The second solution is a completely modular design,
allowing OEMs to offer TouchPad-only, TouchStyk-only, or dual pointing solutions on a
build-to-order basis.
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LuxPad
LuxPad is an innovative illuminated TouchPad. The LuxPad is designed to allow our customers
to differentiate their products. The LuxPad can either light up the entire touchpad, light up a
logo in the center of the TouchPad, or light up designated virtual buttons on the TouchPad,
depending on the preference of the notebook designer.
Dual Mode TouchPad
Dual Mode TouchPad is designed to transform the TouchPad from a cursor control device to a
launch and control center with the touch of a button. In default mode, the Dual Mode provides
cursor control for on screen navigation as a standard TouchPad. When the user taps on a launch
icon located on the TouchPad surface, icons illuminate on the TouchPad surface.
The Dual Mode offers a variety of customization options to the OEM, including tap zones for
launching applications and multimedia controls, scrolling zones to adjust volume, and programmable
buttons so end users can choose which application they would like to launch through our Dual Mode
driver. To regain cursor control, the user simply taps the mode switch button and the illuminated
icons disappear, allowing the user to control the cursor for on-screen navigation. The Dual Mode
TouchPad is currently shipping in Medion and Toshiba notebooks.
QuickStroke
QuickStroke provides a fast, easy, and accurate way to input Chinese characters. Using our
recognition technology that combines our patented software with our TouchPad, QuickStroke can
recognize handwritten, partially finished Chinese characters, thereby saving considerable time and
effort. Our QuickStroke operates with our touch pad products that can be integrated into notebook
computers, keyboards, and a host of stand-alone interface devices that use either a pen or a
finger.
Our patented Incremental Recognition Technology allows users to simply enter the first few
strokes of a Chinese character and QuickStroke accurately interprets the intended character. Since
the typical Chinese character consists of an average of 13 strokes, QuickStroke technology saves
considerable time and effort. We can port different alphabets or characters to our underlying
pattern recognition engine, allowing us to offer support for different languages.
TouchRing
Our TouchRing is an integrated, solid state scrolling wheel utilizing our capacitive touch
sensing technology that enables the user to navigate through menus and scroll through lists. Our
TouchRing is utilized in MP3 players, personal media players, and remote controls enabling the user
to navigate efficiently through menus and scroll through extensive play lists and songs.
ScrollStrip
ScrollStrip is a one-dimensional TouchPad that provides a simple and intuitive way for users
to scroll through menus, navigate through content, and adjust controls. A ScrollStrip can be used
in a wide variety of applications that require a thin, robust, accurate, and easy-to-use input and
navigation device, including PC peripherals, such as keyboards and mice, and digital lifestyle
products. ScrollStrip is thin, lightweight, and flexible and can be mounted on curved surfaces to
meet the industrial design needs of our OEM customers. Currently, the ScrollStrip is incorporated
into a number of devices, including MP3 players, PC keyboards, and computer mice.
LightTouch
LightTouch is a simple, easy to use, stylish interface solution that replaces mechanical
buttons with an illuminated sensor programmed to perform functions, such as multimedia controls,
including pause, play, fast-forward, and rewind. LightTouch is designed for integration under the
plastic face of a device, allowing for a sealed, thin design that is both stylish and durable.
Currently, a number of custom LightTouch solutions are available in the market, including
multimedia controls for notebook PCs, a multimedia keyboard, and as button controls for MP3
players.
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MobileTouch
MobileTouch is a new product solution specifically designed for the mobile phone environment
that combines our expertise in ease of use with our technology capabilities. The result is custom
designed modules that can combine our scrolling, selection, and navigation capabilities into a
simple, easy to use interface solution that improves access to mobile phone content and
applications. Our MobileTouch solutions are currently shipping in Samsung and Pantech & Curitel
mobile phone designs in Korea.
ClearPad
ClearPad consists of a clear, thin capacitive sensor that can be placed over any viewable
surface, including display devices, such as LCDs. Similar to our traditional TouchPad, our
ClearPad has various distinct advantages, including light weight; low profile form factor; high
reliability, durability, and accuracy; and low power consumption. ClearPad, can be mounted on or
under curved surfaces, providing for unique and sleek industrial designs.
NavPoint
The NavPoint solution offers users improved functionality and versatility in accessing and
managing content in handheld devices through unique navigation controls, including short- and
long-distance scrolling features, tapping, and mouse-like cursor navigation. Our NavPoint
interface solution has been used in a PDA.
Technologies
We have developed and own an extensive array of technologies encompassing ASICs, firmware,
software, pattern recognition, and touch sensing technologies. With 81 U.S. patents issued and 55
U.S. patents pending, including many non-U.S. counterparts, we continue to develop technology in
these areas. We believe these technologies and the related intellectual property create barriers
for competitors and allow us to provide interface solutions in a variety of high-growth market
segments.
Our broad line of interface solutions currently is based upon the following key technologies:
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capacitive position sensing technology; |
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capacitive force sensing technology; |
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transparent capacitive position sensing technology; |
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pattern recognition technology; |
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mixed signal, very large scale integrated circuit, or VLSI, technology; and |
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proprietary microcontroller technology. |
In addition to these technologies, we develop firmware and driver software that we incorporate
into our products, which provide unique features, such as virtual scrolling, customizable tap
zones, PalmCheck, EdgeMotion, and tapping and dragging of icons. In addition, our ability to
integrate all of our products to interface with major operating systems, including Windows 98,
Windows 2000, Windows NT, Windows CE, Windows XP, Windows ME, Mac OS, Pocket PC, Palm OS, Symbian,
UNIX, and LINUX, provides us with a competitive advantage.
Capacitive Position Sensing Technology. This technology provides a method for sensing the
presence, position, and contact area of one or more fingers or a conductive stylus on a flat or
curved surface, such as our TouchPad, TouchRing, and ScrollStrip. Our technology works with very
light touch and provides highly responsive cursor navigation, scrolling, and selection. It uses no
moving parts, can be implemented under plastic, and is extremely durable.
Capacitive Force Sensing Technology. This technology senses the direction and magnitude of a
force applied to an object. The object can either move when force is applied, like a typical
joystick used for gaming
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applications, or it can be isometric, with no perceptible motion during use, like our
TouchStyk. The primary competition for this technology is resistive strain gauge technology.
Resistive strain gauge technology requires electronics that can sense very small changes in
resistance, presenting challenges to the design of that circuitry, including sensitivity to
electrical noise and interference. Our electronic circuitry determines the magnitude and direction
of an applied force, permits very accurate sensing of tiny changes in capacitance, and minimizes
electrical interference from other sources.
Transparent Capacitive Position Sensing Technology. This technology allows us to build
transparent sensors for use with our capacitive position sensing technology, such as in our
ClearPad. It has all the advantages of our capacitive position sensing technology and allows for
visual feedback when incorporated with a display device, such as an LCD. Our technology does not
require calibration, does not produce undesirable internal reflections, and has reduced power
requirements, allowing for longer battery life.
Pattern Recognition Technology. This technology is a set of software algorithms and
techniques for converting real-world data, such as handwriting, into a digital form that can be
recognized and manipulated within a computer, such as our QuickStroke product and gesture decoding
for our TouchPad products. Our technology provides reliable handwriting recognition and can be
used in other applications such as signature verification.
Mixed Signal VLSI Technology. This hybrid analog-digital integrated circuit technology
combines the power of digital computation with the ability to interface with non-digital,
real-world signals, such as the position of a finger or stylus on a surface. Our patented design
techniques permit us to utilize this technology to optimize our core ASIC engine for all our
products.
Proprietary Microcontroller Technology. This technology consists of a proprietary 16-bit
microcontroller core embedded in the digital portion of our mixed signal ASIC, which allows us to
optimize our ASIC for position sensing tasks. Our embedded microcontroller provides great
flexibility in customizing our product solutions utilizing firmware, which eliminates the need to
design new circuitry for each new application.
Competing Technology
Many interface solutions currently utilize resistive sensing technology. Resistive sensing
technology consists of a flexible membrane above a flat, rigid, electrically conductive surface.
When finger or stylus pressure is applied to the membrane, it deforms until it makes contact with
the rigid layer below, at which point attached electronics can determine the position of the finger
or stylus. Since the flexible membrane is a moving part, it is susceptible to mechanical wear and
will eventually suffer degraded performance. Due to the way that resistive position sensors work,
it is not possible for them to detect more than a single finger or stylus at any given time. The
positional accuracy of a resistive sensor is limited by the uniformity of the resistive coating as
well as by the mechanics of the flexible membrane. Finally, implementations of resistive
technology over display devices, such as an LCD, result in reduced transmissivity, or the amount of
light that can pass through the display, requiring the use of backlighting and thereby reducing the
battery life of the device.
Research and Development
We conduct ongoing research and development programs that focus on advancing our technologies,
developing new products, improving design and manufacturing processes, and enhancing the quality
and performance of our product solutions. Our goal is to provide our customers with innovative
solutions that address their needs and improve their competitive positions. Our research and
development is focused on advancing our existing interface technologies, improving our current
product solutions, and expanding our technologies to serve new markets. Our vision is to develop
interface solutions, such as touch, handwriting, vision, and voice capabilities, that can be
readily incorporated into varied electronic devices.
Our research and development programs focus on the development of accurate, easy to use,
reliable, and intuitive user interfaces for electronic devices. We believe our innovative
interface technologies can be applied to many diverse products. We believe the interface is a key
factor in the differentiation of these products. We believe that our interface technologies enable
us to provide customers with product solutions that have significant advantages over alternative
technologies in terms of functionality, size, power consumption, durability, and reliability. We
also intend to pursue strategic relationships and acquisitions to enhance our research and
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development capabilities, leverage our technology, and shorten our time to market with new
technological applications.
Our research, design, and engineering teams frequently work directly with our customers to
design custom solutions for specific applications. We focus on enabling our customers to overcome
technical barriers and enhance the performance of their products. We believe our engineering
know-how and electronic systems expertise provide significant benefits to our customers by enabling
them to concentrate on their core competencies of production and marketing.
As of June 30, 2006, we employed 145 people in our technology, engineering, and product design
functions in the United States, the United Kingdom, Taiwan, and Hong Kong. Our research and
development expenses were approximately $21.4 million, $25.0 million, and $35.4 million in fiscal
2004, 2005, and 2006, respectively.
Intellectual Property Rights
Our success and ability to compete depend in part on our ability to maintain the proprietary
aspects of our technologies and products. We rely on a combination of patents, copyrights, trade
secrets, trademarks, confidentiality agreements, and other contractual provisions to protect our
intellectual property, but these measures may provide only limited protection. Our research,
design, and engineering teams frequently work directly with our OEM customers to design custom
solutions for specific applications.
As of June 30, 2006, we held 81 U.S. patents and had 55 U.S. pending patent applications,
including many non-U.S. counterparts to the U.S. patents and U.S. pending patent applications.
Collectively, these patents and patent applications cover various aspects of our key technologies,
including touch sensing, pen sensing, handwriting recognition, customizable tap zones, edge motion,
and virtual scrolling technologies. Our proprietary software is protected by copyright laws. The
source code for our proprietary software is also protected under applicable trade secret laws.
Our extensive array of technologies includes ASICs, firmware, software, and pattern
recognition and position sensing technologies. Our products rely on a combination of these
technologies, making it difficult to use any single technology as the basis for replicating our
products. Furthermore, the length and customization of the customer design cycle serve to protect
our intellectual property rights.
Patent applications that we have filed or may file in the future may not result in a patent
being issued. Our issued patents may be challenged, invalidated, or circumvented, and claims of
our patents may not be of sufficient scope or strength, or issued in the proper geographic regions,
to provide meaningful protection or any commercial advantage. We have not applied for, and do not
have, any copyright registration on our technologies or products. We have applied to register
certain of our trademarks in the United States and other countries. There can be no assurance that
we will obtain registrations of trademarks in key markets. Failure to obtain registrations could
compromise our ability to protect fully our trademarks and brands and could increase the risk of
challenge from third parties to our use of our trademarks and brands. In addition, our failure to
enforce and protect our intellectual property rights or obtain from third parties the right to use
necessary technology could have a material adverse effect on our business, financial condition, and
results of operations.
We do not consistently rely on written agreements with our customers, suppliers,
manufacturers, and other recipients of our technologies and products, and therefore some trade
secret protection may be lost and our ability to enforce our intellectual property rights may be
limited. Furthermore, our customers, suppliers, manufacturers, and other recipients of our
technologies and products may seek to use our technologies and products without appropriate
limitations. In the past, we did not consistently require our employees and consultants to enter
into confidentiality agreements, employment agreements, or proprietary information and invention
agreements. Therefore, our former employees and consultants may try to claim some ownership
interest in our technologies and products and may use our technologies and products competitively
and without appropriate limitations.
Other companies, including our competitors, may develop technologies that are similar or
superior to our technologies, duplicate our technologies, or design around our patents and may have
or obtain patents or other proprietary rights that would prevent, limit, or interfere with our
ability to make, use, or sell our products. Effective intellectual property protection may be
unavailable or limited in some foreign countries in which we operate, such as
9
China and Taiwan. Unauthorized parties may attempt to copy or otherwise use aspects of our
technologies and products that we regard as proprietary. There can be no assurance that our means
of protecting our proprietary rights in the United States or abroad will be adequate or that
competitors will not independently develop similar technologies. If our intellectual property
protection is insufficient to protect our intellectual property rights, we could face increased
competition in the market for our technologies and products.
We may receive notices from third parties that claim our products infringe their rights. From
time to time, we receive notice from third parties of the intellectual property rights such parties
have obtained. We cannot be certain that our technologies and products do not and will not
infringe issued patents or other proprietary rights of third parties. Any infringement claims,
with or without merit, could result in significant litigation costs and diversion of resources,
including the payment of damages, which could have a material adverse effect on our business,
financial condition, and results of operations.
Customers
Our customers include many of the worlds largest PC OEMs, based on unit shipments, as well as
a variety of consumer electronics manufacturers. Our demonstrated track record of technological
leadership, design innovation, product performance, cost effectiveness, and on-time delivery have
resulted in our leadership position in providing interface solutions to the notebook market. We
believe our strong relationship with our OEM customers, many of which are currently developing
digital lifestyle products, will position us as a source of supply for their product offerings.
In fiscal 2006, our OEM customers included the following:
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Acer |
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Asustek |
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Creative Labs |
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Dell |
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ECS |
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Fujitsu |
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Gateway |
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Hewlett-Packard |
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IBM |
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Lenovo |
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NEC |
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Philips |
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Samsung |
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Toshiba |
We generally supply products to our OEM customers through their contract manufacturers. We
sell our products directly to these contract manufacturers, which include Compal, Inventec,
Kangzhun Electronical, Lenovo, Sincere Joy, and Wistron. Sales to Inventec and Wistron in the
aggregate accounted for approximately 24% of our net revenue in fiscal 2006, and sales to Inventec
accounted for approximately 34% of our net revenue in fiscal 2005. No other customer accounted for
more than 10% of our net revenue during either fiscal 2005 or 2006.
We consider both the OEMs and their contract manufacturers to be our customers. In most
cases, the OEMs determine the design and pricing requirements and make the overall decision
regarding the use of our interface solutions in their products. Their contract manufacturers place
orders with us for the purchase of our products, take title to the products purchased upon shipment
by us, and pay us directly for those purchases. These customers have no return privileges except
for warranty provisions.
Strategic Relationships
We have used strategic relationships to enhance our ability to offer value-added customer
solutions in the past and we intend to enter into additional strategic relationships with companies
that may help us serve our target markets.
Sales and Marketing
We sell our product solutions for incorporation into the products of our OEM customers. We
generate sales through direct sales employees as well as outside sales representatives and
distributors. Our sales personnel receive substantial technical assistance and support from our
internal engineering resources because of the highly technical nature of our product solutions.
Sales frequently result from multi-level sales efforts that involve senior
10
management, design engineers, and our sales personnel interacting with our customers decision
makers throughout the product development and order process.
We currently employ 51 sales and marketing professionals. We maintain seven customer support
offices domestically and internationally, which are located in the United States, the United
Kingdom, Taiwan, Japan, China, and Hong Kong. In addition, we utilize sales representatives in
Singapore, Malaysia, Korea, and Europe and sales distributors in Japan.
International sales, primarily in the Asian and European markets, constituted approximately
96%, 98%, and 98% of our revenue in fiscal 2004, 2005, and 2006, respectively. A significant
portion of these sales were made to companies located in China and Taiwan that provide
manufacturing services for major notebook computer and digital lifestyle product OEMs. All of
these sales were denominated in U.S. dollars.
Manufacturing
We employ a virtual manufacturing platform through third-party relationships. We currently
utilize two semiconductor wafer manufacturers to supply us with silicon wafers integrating our
proprietary design specifications. The completed silicon wafers are forwarded to third-party
package and test processors for further processing into die and packaged ASICs, as applicable,
which are then utilized in our custom interface products.
After processing and testing, the die and ASICs are consigned to various subcontractors for
assembly. During the assembly process, our die or ASIC is combined with other components to
complete the module for our custom interface solution. The finished assembled product is
subsequently shipped by our subcontractors directly to our customers for integration into their
products.
We believe our virtual manufacturing strategy provides a scalable business model; enables us
to concentrate on our core competencies of research and development, technological advances, and
product design; and reduces our capital expenditures. In addition, this strategy significantly
reduces our working capital requirements for inventory because we do not incur most of our
manufacturing costs until we have actually shipped our interface products to our customers and
billed those customers for those products.
Our third-party manufacturers are Asian-based organizations. We provide our manufacturing
subcontractors with six-month rolling forecasts of our production requirements. We do not,
however, have long-term agreements with any of our manufacturing subcontractors that guarantee
production capacity, prices, lead times, or delivery schedules. The strategy of relying on those
parties exposes us to vulnerability owing to our dependence on few sources of supply. We believe,
however, that other sources of supply are available. In addition, we may establish relationships
with other manufacturing subcontractors in order to reduce our dependence on any one source of
supply.
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.
Backlog
As of June 30, 2006, we had a backlog of orders of approximately $28.7 million, an increase of
$3.3 million compared with our backlog of orders as of June 30, 2005 of approximately $25.4
million. The increase in backlog is primarily related to the increase in demand for our products.
Our backlog consists of product orders for which purchase orders have been received and which are
generally scheduled for shipment within three months. Most orders are subject to rescheduling or
cancellation with limited penalties. Because of the possibility of customer changes in product
shipments, our backlog as of a particular date may not be indicative of net sales for any
succeeding period.
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Competition
Our principal competitor in the sale of notebook touch pads is Alps Electric, a Japanese
conglomerate. Our principal competitors in the sale of notebook pointing sticks are Alps Electric,
NMB, and CTS. In the markets for digital lifestyle products, and other electronic devices, our
competitors include Alps Electric, Panasonic, Gunze, Interlink, Cypress, Quantum Technology
Management, and various other companies involved in user interface solutions. In certain cases,
large OEMs may develop alternative interface solutions for their own products or provide key
components for use in designing interface solutions.
In the notebook interface market we plan to continue to compete primarily on the basis of our
technological expertise, design innovation, customer service, and the long track record of
performance of our interface solutions, including their ease of use, reliability, and
cost-effectiveness as well as their timely design, production, and delivery schedules. Our
pointing stick solutions, including our proprietary TouchStyk, enable us to address the approximate
4% of the notebook computer market that uses solely a pointing stick rather than a touch pad as the
user interface as well as the approximate 16% of the notebook market that uses dual pointing
interfaces. Our ability to supply OEMs with TouchPads, TouchStyks, and dual pointing alternatives
enhances our market position as we can provide OEMs with the following advantages:
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single source supplier to eliminate compatibility issues; |
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cost-effective and simplified integration; |
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simplified product line to address both interface preferences; |
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end user flexibility because one notebook can address both user preferences; and |
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modular approach allowing OEMs to utilize our TouchPad, our TouchStyk, or a
combination of both interfaces. |
In the interface markets for digital lifestyle products and other electronic devices, we
compete primarily based on the advantages of our systems knowledge of capacitive sensing and neural
pattern recognition technologies. We believe our solutions based engineering expertise coupled
with our technologies offer benefits in terms of size, power consumption, durability, light
transmissivity, resolution, ease of use, and reliability when compared to our competitors and other
technologies. While these markets continue to evolve and we do not know what the competitive
factors will ultimately be, we believe we are positioned to compete aggressively for this business
based on our proven track record, our marquee global customer base, and our reputation for design
innovation. However, some of our competitors have greater market recognition, larger customer
bases, and substantially greater financial, technical, marketing, distribution, and other resources
than we possess that afford them potential competitive advantages. As a result, they may be able
to introduce new product solutions and respond to customer requirements more quickly than we can.
In addition, new competitors, alliances among competitors, or alliances among competitors and OEMs
may emerge and allow competitors to rapidly acquire significant market share.
Furthermore, our competitors or our customers may develop technologies in the future that more
effectively address the interface needs of the notebook market and other markets. Our sales,
profitability, and success depend on our ability to compete with other suppliers of interface
solutions and components used in interface solutions. Our competitive position could be adversely
affected if one or more of our current OEMs reduce their orders or if we are unable to develop new
customers for our interface solutions.
Employees
As of June 30, 2006, we employed a total of 254 persons, including 58 in finance,
administration, and operations; 51 in sales and marketing; and 145 in research and development. Of
these employees, 184 were located in North America, 48 in Asia/Pacific, and 22 in Europe. We
consider our relationship with our employees to be good, and none of our employees are represented
by a union in collective bargaining with us.
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Competition for qualified personnel in our industry is extremely intense, particularly for
engineering and other technical personnel. Our success depends on our continued ability to
attract, hire, and retain qualified personnel.
Executive Officers
The following table sets forth certain information regarding our executive officers:
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Age |
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Position |
Francis F. Lee
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54 |
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President, Chief Executive Officer, and Director |
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Thomas J. Tiernan
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43 |
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Senior Vice President and General Manager |
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Russell J. Knittel
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56 |
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Senior Vice President, Chief Financial Officer, Chief Administrative
Officer, Secretary, and Treasurer
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Shawn P. Day, Ph.D.
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40 |
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Vice President of Research and Development |
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Thomas D. Spade
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40 |
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Vice President of Worldwide Sales |
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William T. Stacy, Ph.D.
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64 |
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Vice President of Operations |
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Clark F. Foy
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42 |
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Vice President of Marketing |
Francis F. Lee has served as a director and the President and Chief Executive Officer of our
company since December 1998. He was a consultant from August 1998 to November 1998. From May 1995
until July 1998, Mr. Lee served as General Manager of NSM, a Hong Kong-based joint venture between
National Semiconductor Corporation and S. Megga. Mr. Lee held a variety of executive positions for
National Semiconductor from 1988 until August 1995. These positions included Vice President of
Communication and Computing Group, Vice President of Quality and Reliability, Director of Standard
Logic Business Unit, and various other operations and engineering management positions. Mr. Lee is
a director of Foveon, Inc., a privately held company in which we have an ownership interest. Mr.
Lee holds a Bachelor of Science degree, with honors, in electrical engineering from the University
of California at Davis.
Thomas J. Tiernan has been Senior Vice President and General Manager of our company since
March 2006. Prior to joining our company, Mr. Tiernan served as Vice President and General Manager
of Symbol Technologies Mobile Computing Division. From 1985 to 2004, Mr. Tiernan held various
management and executive positions at Hewlett-Packard, including running the Network Storage
business in the Americas, the Enterprise Systems business in Asia Pacific, and the PC business in
Japan. Mr. Tiernan holds a Bachelors Degree in Electrical Engineering from California State
Polytechnic University and a Masters of Science in Computer Engineering from Santa Clara
University.
Russell J. Knittel has been Senior Vice President, Chief Financial Officer, Chief
Administrative Officer, Secretary, and Treasurer of our company since November 2001. He served as
the Vice President of Administration and Finance, Chief Financial Officer, and Secretary of our
company from April 2000 until October 2001. Mr. Knittel served as Vice President and Chief
Financial Officer of Probe Technology Corporation from May 1999 to March 2000. He was a consultant
from January 1999 until April 1999. Mr. Knittel was Vice President and Chief Financial Officer at
Starlight Networks from November 1994 to December 1998. Mr. Knittel holds a Bachelor of Arts
degree in accounting from California State University at Fullerton and a Masters of Business
Administration from San Jose State University.
Shawn P. Day, Ph.D. has been the Vice President of Research and Development of our company
since June 1998. He served as the Director of Software Development of our company from November
1996 until May 1998 and as principal software engineer from August 1995 until October 1996. Mr.
Day holds a Bachelor of Science degree and a Doctorate, both in electrical engineering, from the
University of British Columbia in Vancouver, Canada.
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Thomas D. Spade has been the Vice President of Worldwide Sales of our company since July 1999.
From May 1998 until June 1999, he served as our Director of Sales. From May 1996 until April
1998, Mr. Spade was the Director of International Sales for Alliance Semiconductor. Mr. Spade
previously has held additional sales and management positions at Alliance Semiconductor, Anthem
Electronics, Arrow Electronics, and Andersen Consulting. Mr. Spade holds a Bachelor of Arts degree
in economics and management from Albion College.
William T. Stacy, Ph.D. has been the Vice President of Operations of our company since October
2001. From August 1992 to June 2001, Mr. Stacy held a number of business management positions in
the Data Management and Analog Groups of National Semiconductor. Most recently, from April 1999
until June 2001, he was Vice President of the Wireless Division. Prior to joining National
Semiconductor, he held a series of operational and business management positions at Philips
Semiconductors. He started his career in Philips Research Laboratories in Eindhoven, where he
worked on magnetic and semiconducting device structures. Mr. Stacy holds a Bachelor of Science
degree in physics and mathematics from Oregon State University and a Masters and Ph.D. degree in
physics from the University of Illinois.
Clark F. Foy has been Vice President of Marketing of our company since February 2003. Mr. Foy
was the Vice President of Product Marketing for the Optical Storage Group of Oak Technology, Inc.
from January 2002 to February 2003. Mr. Foy served as Vice President of Marketing at Gadzoox
Networks, a provider of networking infrastructure products from June 2000 to January 2002. Mr. Foy
has also held various management positions at Quantum Corporation and Compaq Computer Corporation.
Mr. Foy holds a Bachelors Degree in Business Administration from Miami University and a Masters
of Management from Northwestern Universitys Kellogg Graduate School of Management.
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ITEM 1A. RISK FACTORS
You should carefully consider the following factors, together with all the other information
included in this report, in evaluating our company and our business.
We currently depend on our TouchPad and TouchStyk products, and the notebook computer market, for a
significant portion of our revenue, and a downturn in these products or market could have a
disproportionate impact on our revenue.
Historically, we have derived a substantial portion of our revenue from the sale of our
TouchPad and TouchStyk products for notebook computers. While our long-term objective is to derive
revenue from multiple interface solutions for both the notebook computer market and the markets for
digital lifestyle products and other electronic devices, we anticipate that sales of our TouchPads
and TouchStyks for notebooks will continue to represent a significant portion of our revenue. The
PC market as a whole has experienced a slowdown in the rate of growth. A continued or accelerated
softening in the demand in the notebook portion of the PC market or the level of our participation
in that market would cause our business, financial condition, and results of operations to suffer
more than they would have if we offered a more diversified line of products.
Sales of our interface solutions for digital lifestyle products have been volatile in the past two
years, and we cannot assure you that our net revenue from our interface solutions for digital
lifestyle products will increase or be less volatile in the future.
Sales of our interface solutions for digital lifestyle products have been volatile in the
past. We cannot assure you that our net revenue from our interface solutions for digital lifestyle
products will increase or be less volatile in the future. Sales of our interface solutions for
digital lifestyle products were $85.3 million, or 41% of our net revenue, in fiscal 2005 and $27.0
million, or 15% of our net revenue, in fiscal 2006. Further, our interface business for digital
lifestyle products faces many uncertainties. Our inability to address these uncertainties
successfully and to become a leading supplier of interfaces for digital lifestyle products would
result in a slower growth rate than we currently anticipate. We do not know whether our user
interface solutions for the digital lifestyle product market will gain market acceptance or will
ever result in a substantial portion of our revenue on a consistent basis. The failure to succeed
in these other markets would result in no return on the substantial investments we have made to
date and plan to make in the future to penetrate these markets.
We cannot assure you that our interface business for digital lifestyle products will be successful
or that we will be able to generate significant revenue from the markets for digital lifestyle
products.
Various target markets for our interfaces, such as those for PDAs, smart phones, smart
handheld devices, and interactive games and toys, are uncertain, may develop slower than
anticipated, or could utilize competing technologies. The market for certain of these products
depends in part upon the development and deployment of wireless and other technologies, which may
or may not address the needs of users of these new products.
Our ability to generate significant revenue from the markets for digital lifestyle products
and other electronic devices will depend on various factors, including the following:
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the development and growth of these markets; |
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the ability of our technologies and product solutions to address the needs of these
markets, the requirements of OEMs, and the preferences of end users; and |
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our ability to provide OEMs with interface solutions that provide advantages in terms
of size, power consumption, reliability, durability, performance, and value-added
features compared to alternative solutions. |
Many manufacturers of these products have well-established relationships with competitive
suppliers. Penetrating these markets will require us to offer better performance alternatives to
existing solutions at competitive costs. We generally do not have a significant backlog of orders
for our interface solutions to be incorporated in products in these markets. The failure of any of
these target markets to develop as we expect, or our failure to
15
penetrate these markets to a significant extent, will impede our anticipated sales growth and
could result in substantially reduced earnings from those we anticipate. We cannot predict the
size or growth rate of these markets or the market share we will achieve in these markets in the
future.
Our historical financial performance is based on sales of interface solutions to the notebook
computer market and may not be indicative of our future performance in other markets.
Our historical financial performance primarily reflects the sale of interface solutions for
notebook computers. While we expect sales of our interface solutions for notebook computers to
continue to generate a substantial percentage of our revenue, we expect to derive a substantial
portion of our revenue from sales of our product solutions from digital lifestyle products,
including portable digital music players, and other electronic devices. We have a limited
operating history in these markets upon which you can evaluate our prospects, which may make it
difficult to predict our actual results in future periods. Actual results of our future operations
may differ materially from our anticipated results.
Market acceptance of our customers existing or new products that utilize our interface solution
may decline or may not develop and, as a result, our sales may decline or may not increase.
We do not sell any products to end users. Instead, we design various interface solutions that
our OEM customers incorporate into their products. As a result, our success depends almost
entirely upon the widespread market acceptance of our OEM customers products. We do not control
or influence the manufacture, promotion, distribution, or pricing of the products that incorporate
our interface solutions. Instead, we depend on our customers to manufacture and distribute
products incorporating our interface solutions and to generate consumer demand through marketing
and promotional activities. Even if our technologies successfully meet our customers price and
performance goals, our sales would decline or fail to develop if our customers do not achieve
commercial success in selling their products that incorporate our interface solutions.
Competitive advances by OEMs in the PC or digital lifestyle product markets, which do not
utilize our interface solutions broadly in their product offerings, at the expense of our other OEM
customers could result in lost sales opportunities. Within the digital lifestyle product market,
the portable digital music player market also has become an important factor in our operating
results. Any significant slowdown in the use of our interface solutions by our customers in this
market, the reduced demand for our customers products, or a slowdown in this market would
adversely affect our sales.
If we fail to maintain and build relationships with our customers and do not continue to satisfy
our customers, we may lose future sales and our revenue may stagnate or decline.
Because our success depends on the widespread market acceptance of our customers products, we
must continue to maintain our relationships with the leading notebook computer and portable digital
music player OEMs. In addition, we must identify areas of significant growth potential in other
markets, establish relationships with OEMs in those markets, and assist those OEMs in developing
products that use our interface technologies. Our failure to identify potential growth
opportunities, particularly in new markets, or establish and maintain relationships with OEMs in
those markets, would prevent our business from growing in those markets.
Our ability to meet the expectations of our customers requires us to provide innovative
interface solutions for customers on a timely and cost-effective basis and to maintain customer
satisfaction with our interface solutions. We must match our design and production capacity with
customer demand, maintain satisfactory delivery schedules, and meet performance goals. If we are
unable to achieve these goals for any reason, our customers could reduce their purchases from us
and our sales would decline or fail to develop.
Our customer relationships also can be affected by factors affecting our customers that are
unrelated to our performance. These factors can include a myriad of situations, including business
reversals of customers, determinations by customers to change their product mix or abandon business
segments, or mergers, consolidations, or acquisitions involving our customers, such as the
combination of Compaq and Hewlett-Packard or the acquisition of IBMs PC business unit by Lenovo.
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Two customers accounted for an aggregate of 24% of our sales in fiscal 2006, and the loss of sales
to these customers could harm our business, financial condition, and results of operations.
Sales to two customers that provide contract manufacturing services to major OEMs accounted
for an aggregate of 24% of our net revenue during the fiscal ended June 30, 2006, and one customer
accounted for an aggregate of 34% of our net revenue during the fiscal ended June 30, 2005. These
customers are Inventec and Wistron in fiscal 2006 and Inventec in fiscal 2005. Additionally,
receivables from each of Compal, Wistron, and Kangzhun Electronical exceeded 10% of accounts
receivable and in the aggregate represented 40% of accounts receivable at June 30, 2006.
Compal, Inventec, Kangzhun Electronical, and Wistron are contract manufacturers that serve our
OEM customers. Any material delay, cancellation, or reduction of orders from any one or more of
these contract manufacturers or the OEMs they serve could harm our business, financial condition,
and results of operations. The adverse effect would be more substantial if our other customers in
the notebook computer industry do not increase their orders or if we are unsuccessful in generating
orders for interface solutions in the markets for digital lifestyle products and other electronic
devices, from existing or new customers. Many of these contract manufacturers sell to the same
OEMs, and therefore our concentration with certain OEMs may be higher than with any individual
contract manufacturer. Concentration in our customer base may make fluctuations in revenue and
earnings more severe and make business planning more difficult.
Our revenue may decline if customers for which we are sole source providers seek alternative
sources of supply.
We serve as the sole source provider for some of our OEM customers. Those customers may
choose to reduce their dependence on us by seeking second sources of supply, which could reduce our
revenue. To remain a sole source provider, we must continue to demonstrate to our customers that
we have adequate alternate sources for components, that we maintain adequate alternatives for
production, and that we can deliver value added products on a timely basis.
We rely on others for our production and any interruptions of these arrangements could disrupt our
ability to fill our customers orders.
We utilize subcontractors for all of our production requirements. The majority of our
manufacturing is conducted in China, Hong Kong, Thailand, and Taiwan by manufacturing
subcontractors that also perform services for numerous other companies. We do not have a
guaranteed level of production capacity with any of our subcontractors. Qualifying new
manufacturing subcontractors, and specifically semiconductor foundries, is time consuming and might
result in unforeseen manufacturing and operations problems. The loss of our relationships with our
manufacturing subcontractors or assemblers or their inability to conduct their manufacturing and
assembly services for us as anticipated in terms of cost, quality, and timeliness could adversely
affect our ability to fill customer orders in accordance with required delivery, quality, and
performance requirements. If this were to occur, the resulting decline in revenue would harm our
business.
We depend on third parties to maintain satisfactory manufacturing yields and delivery schedules,
and their inability to do so could increase our costs, disrupt our supply chain, and result in our
inability to deliver our products, which would adversely affect our results of operations.
We depend on our manufacturing subcontractors to maintain high levels of productivity and
satisfactory delivery schedules at manufacturing and assembly facilities located primarily in
China, Hong Kong, Thailand, and Taiwan. We provide our manufacturing subcontractors with six-month
rolling forecasts of our production requirements. We do not, however, have long-term agreements
with any of our manufacturing subcontractors that guarantee production capacity, prices, lead
times, or delivery schedules. Our manufacturing subcontractors serve other customers, a number of
which have greater production requirements than we do. As a result, our manufacturing
subcontractors could determine to prioritize production capacity for other customers or reduce or
eliminate deliveries to us on short notice. At times, we have experienced lower than anticipated
manufacturing yields and lengthening of delivery schedules. Lower than expected manufacturing
yields could increase our costs or disrupt our supplies. We may encounter lower manufacturing
yields and longer delivery schedules in commencing
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volume production of our new products. Any of these problems could result in our inability to
deliver our product solutions in a timely manner and adversely affect our operating results.
Shortages of components and materials may delay or reduce our sales and increase our costs, thereby
harming our results of operations.
The inability to obtain sufficient quantities of components and other materials necessary for
the production of our products could result in reduced or delayed sales or lost orders. Any delay
in or loss of sales could adversely impact our operating results. Many of the materials used in
the production of our products are available only from a limited number of foreign suppliers,
particularly suppliers located in Asia. In most cases, neither we nor our manufacturing
subcontractors have long-term supply contracts with these suppliers. As a result, we are subject
to economic instability in these Asian countries as well as to increased costs, supply
interruptions, and difficulties in obtaining materials. Our customers also may encounter
difficulties or increased costs in obtaining the materials necessary to produce their products into
which our product solutions are incorporated.
From time to time, materials and components used in our product solutions or in other aspects
of our customers products have been subject to allocation because of shortages of these materials
and components. Shortages in the future could cause delayed shipments, customer dissatisfaction,
and lower revenue.
We are subject to lengthy development periods and product acceptance cycles, which can result in
development and engineering costs without any future revenue.
We provide interface solutions that are incorporated by OEMs into the products they sell.
OEMs make the determination during their product development programs whether to incorporate our
interface solutions or pursue other alternatives. This process requires us to make significant
investments of time and resources in the custom design of interface solutions well before our
customers introduce their products incorporating these interfaces and before we can be sure that we
will generate any significant sales to our customers or even recover our investment. During a
customers entire product development process, we face the risk that our interfaces will fail to
meet our customers technical, performance, or cost requirements or that our products will be
replaced by competitive products or alternative technological solutions. Even if we complete our
design process in a manner satisfactory to our customer, the customer may delay or terminate its
product development efforts. The occurrence of any of these events could cause sales to not
materialize, to be deferred, or to be cancelled, which would adversely affect our operating
results.
We do not have long-term purchase commitments from our customers, and their ability to cancel,
reduce, or delay orders could reduce our revenue and increase our costs.
Our customers do not provide us with firm, long-term volume purchase commitments, but instead
issue purchase orders. As a result, customers can cancel purchase orders or reduce or delay orders
at any time. The cancellation, delay, or reduction of customer purchase orders could result in
reduced revenue, excess inventory, and unabsorbed overhead. We have an established presence in the
notebook computer market and have only recently established a presence in the digital lifestyle
products markets. These markets are subject to severe competitive pressures, rapid technological
change, and product obsolescence, which increase our inventory and overhead risks, resulting in
increased costs.
We face intense competition that could result in our losing or failing to gain market share and
suffering reduced revenue.
We serve intensely competitive markets that are characterized by price erosion, rapid
technological change, and competition from major domestic and international companies. This
intense competition could result in pricing pressures, lower sales, reduced margins, and lower
market share. Any movement away from high-quality, custom designed, feature-rich interface
solutions to lower priced alternatives would adversely affect our business. Some of our
competitors, particularly in the markets for digital lifestyle products and other electronic
devices, have greater market recognition, larger customer bases, and substantially greater
financial, technical, marketing, distribution, and other resources than we possess and that afford
them competitive advantages. As a result, they may be able to devote greater resources to the
promotion and sale of products, to negotiate lower prices for raw materials and components, to
deliver competitive products at lower prices, and to introduce new product solutions and respond to
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customer requirements more quickly than we can. Our competitive position could suffer if one
or more of our customers determine not to utilize our custom engineered, total solutions approach
and instead decide to design and manufacture their own interfaces, to contract with our
competitors, or to use alternative technologies.
Our ability to compete successfully depends on a number of factors, both within and outside
our control. These factors include the following:
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our success in designing and introducing new interface solutions, including those
implementing new technologies; |
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our ability to predict the evolving needs of our customers and to assist them in
incorporating our technologies into their new products; |
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our ability to meet our customers requirements for low power consumption, ease of
use, reliability, durability, and small form factor; |
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the quality of our customer services; |
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the rate at which customers incorporate our interface solutions into their own products; |
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product or technology introductions by our competitors; and |
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foreign currency fluctuations, which may cause a foreign competitors products to be
priced significantly lower than our product solutions. |
If we do not keep pace with technological innovations, our products may not be competitive and our
revenue and operating results may suffer.
We operate in rapidly changing markets. Technological advances, the introduction of new
products, and new design techniques could adversely affect our business unless we are able to adapt
to the changing conditions. Technological advances could render our solutions obsolete, and we may
not be able to respond effectively to the technological requirements of evolving markets. As a
result, we will be required to expend substantial funds for and commit significant resources to
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continue research and development activities on existing and potential interface solutions, |
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hire additional engineering and other technical personnel, and |
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purchase advanced design tools and test equipment. |
Our business could be harmed if we are unable to develop and utilize new technologies that
address the needs of our customers, or our competitors or customers do so more effectively than we
do.
Our efforts to develop new technologies may not result in commercial success, which could cause a
decline in our revenue and could harm our business.
Our research and development efforts with respect to new technologies may not result in
customer or market acceptance. Some or all of those technologies may not successfully make the
transition from the research and development lab to cost-effective production as a result of
technology problems, competitive cost issues, yield problems, and other factors. Even when we
successfully complete a research and development effort with respect to a particular technology,
our customers may decide not to introduce or may terminate products utilizing the technology for a
variety of reasons, including the following:
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difficulties with other suppliers of components for the products, |
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superior technologies developed by our competitors and unfavorable comparisons of our
solutions with these technologies, |
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price considerations, and |
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lack of anticipated or actual market demand for the products. |
The nature of our business requires us to make continuing investments for new technologies.
Significant expenses relating to one or more new technologies that ultimately prove to be
unsuccessful for any reason could have a material adverse effect on us. In addition, any
investments or acquisitions made to enhance our technologies may prove to be unsuccessful. If our
efforts are unsuccessful, our business could be harmed.
We may not be able to enhance our existing product solutions and develop new product solutions in a
timely manner.
Our future operating results will depend to a significant extent on our ability to continue to
provide new interface solutions that compare favorably with alternative solutions on the basis of
time to introduction, cost, and performance. Our success in maintaining existing and attracting
new customers and developing new business depends on various factors, including the following:
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innovative development of new solutions for customer products, |
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utilization of advances in technology, |
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maintenance of quality standards, |
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efficient and cost-effective solutions, and |
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timely completion of the design and introduction of new interface solutions. |
Our inability to enhance our existing product solutions and develop new product solutions on a
timely basis could harm our operating results and impede our growth.
A technologically new interface solution that achieves significant market share could harm our
business.
Our interface solutions are designed to integrate touch, handwriting, and vision capabilities.
New computing and communications devices could be developed that call for a different interface
solution. Existing devices also could be modified to allow for a different interface solution.
Our business could be harmed if our products become noncompetitive as a result of a technological
breakthrough that allows a new interface solution to displace our solutions and achieve significant
market acceptance.
International sales and manufacturing risks could adversely affect our operating results.
Our manufacturing and assembly operations are primarily conducted in China, Thailand, Hong
Kong, and Taiwan by manufacturing contractors. We have sales and logistics operations in Hong
Kong, sales support operations in Japan, Taiwan, and China, and research and development activities
in the United Kingdom. These international operations expose us to various economic, political,
and other risks that could adversely affect our operations and operating results, including the
following:
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difficulties and costs of staffing and managing a multi-national organization, |
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unexpected changes in regulatory requirements, |
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differing labor regulations, |
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potentially adverse tax consequences, |
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tariffs and duties and other trade barrier restrictions, |
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possible employee turnover or labor unrest, |
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greater difficulty in collecting accounts receivable, |
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the burdens and costs of compliance with a variety of foreign laws, |
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potentially reduced protection for intellectual property rights, and |
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political or economic instability in certain parts of the world. |
The risks associated with international operations could negatively affect our operating
results.
Our business may suffer if international trade is hindered, disrupted, or economically
disadvantaged.
Political and economic conditions abroad may adversely affect the foreign production and sale
of our products. Protectionist trade legislation in either the United States or foreign countries,
such as a change in the current tariff structures, export or import compliance laws, or other trade
policies, could adversely affect our ability to sell interface solutions in foreign markets and to
obtain materials or equipment from foreign suppliers.
Changes in policies by the U.S. or foreign governments resulting in, among other things,
higher taxation, currency conversion limitations, restrictions on the transfer of funds, or the
expropriation of private enterprises also could have a material adverse effect on us. Any actions
by countries in which we conduct business to reverse policies that encourage foreign investment or
foreign trade also could adversely affect our operating results. In addition, U.S. trade policies,
such as most favored nation status and trade preferences for certain Asian nations, could affect
the attractiveness of our services to our U.S. customers and adversely impact our operating
results.
Our operating results could be adversely affected by fluctuations in the value of the U.S. dollar
against foreign currencies.
We transact business predominantly in U.S. dollars and bill and collect our sales in U.S.
dollars. A weakening of the dollar could cause our overseas vendors to require renegotiation of
either the prices or currency we pay for their goods and services. In the future, customers may
negotiate pricing and make payments in non-U.S. currencies. During fiscal 2006, approximately 5%
of our costs were denominated in non-U.S. currencies, including British pounds, Hong Kong dollars,
Japanese Yen, Chinese Yuan, and Taiwan dollars.
If our overseas vendors or customers require us to transact business in non-U.S. currencies,
fluctuations in foreign currency exchange rates could affect our cost of goods, operating expenses,
and operating margins and could result in exchange losses. In addition, currency devaluation can
result in a loss to us if we hold deposits of that currency. Hedging foreign currencies can be
difficult, especially if the currency is not freely traded. We cannot predict the impact of future
exchange rate fluctuations on our operating results. We currently do not hedge any foreign
currencies, accordingly, we have no foreign currency hedge contracts outstanding as of the end of
our fiscal year.
A majority of our subcontractors are located in Taiwan, Thailand, Hong Kong, and China, increasing
the risk that a natural disaster, labor strike, war, or political unrest in those countries would
disrupt our operations.
A majority of our subcontractors are located in Taiwan, Thailand, Hong Kong, and China.
Events out of our control, such as earthquakes, fires, floods, or other natural disasters, or
political unrest, war, labor strikes, or work stoppages in these countries would disrupt their
operations, which would impact our operations. The risk of earthquakes in Taiwan is significant
because of its proximity to major earthquake fault lines. An earthquake, such as the one that
occurred in Taiwan in September 1999, could cause significant delays in shipments of our product
solutions until we are able to shift our outsourced operations. In addition, there is political
tension between Taiwan and China that could lead to hostilities. If any of these events occur, we
may not be able to obtain alternative capacity. Failure to secure alternative capacity could cause
a delay in the shipment of our product solutions, which would cause our revenue to fluctuate or
decline.
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Variability of customer requirements resulting in cancellations, reductions, or delays may
adversely affect our operating results.
We must provide increasingly rapid product turnaround and respond to ever-shorter lead times.
A variety of conditions, both specific to individual customers and generally affecting the demand
for the OEMs products, may cause customers to cancel, reduce, or delay orders. Cancellations,
reductions, or delays by a significant customer or by a group of customers could adversely affect
our operating results. On occasion, customers require rapid increases in production, which can
strain our resources and reduce our margins. Although we have been able to obtain increased
production capacity from our third-party manufacturers, we may be unable to do so at any given time
to meet our customers demands if their demands exceed anticipated levels.
Our operating results may experience significant fluctuations that could result in a decline in the
price of our stock.
In addition to the variability resulting from the short-term nature of our customers
commitments, other factors contribute to significant periodic and seasonal quarterly fluctuations
in our results of operations. These factors include the following:
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the cyclicality of the markets we serve; |
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the timing and size of orders; |
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the volume of orders relative to our capacity; |
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product introductions and market acceptance of new products or new generations of products; |
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evolution in the life cycles of our customers products; |
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timing of expenses in anticipation of future orders; |
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changes in product mix, including the percentage of dual pointing and single pointing
products shipped; |
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availability of manufacturing and assembly services; |
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changes in cost and availability of labor and components; |
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timely delivery of product solutions to customers; |
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pricing and availability of competitive products; |
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introduction of new technologies into the markets we serve; |
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pressures on reducing selling prices; |
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the absolute and relative levels of corporate enterprise and consumer notebook purchases; and |
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changes in economic conditions. |
Accordingly, you should not rely on period-to-period comparisons as an indicator of our future
performance. Negative or unanticipated fluctuations in our operating results may result in a
decline in the price of our stock.
If we fail to manage our growth effectively, our infrastructure, management, and resources could be
strained, our ability to effectively manage our business could be diminished, and our operating
results could suffer.
The failure to manage our growth effectively could strain our resources, which would impede
our ability to increase revenue. We have increased the number of our interface solutions and plan
to expand further the number
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and diversity of our solutions and their use in the future. Our ability to manage our planned
diversification and growth effectively will require us to
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successfully hire, train, retain, and motivate additional employees, including
employees outside the United States; |
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enhance our global operational, financial, and management systems; and |
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expand our production capacity. |
As we expand and diversify our product and customer base, we may be required to increase our
overhead and operating expenses. We also may be required to increase staffing and other
expenditures, including expenses in order to meet the anticipated demand of our customers. Our
customers, however, do not commit to firm production schedules for more than a short time in
advance. Any increase in expenses in anticipation of future orders that do not materialize would
adversely affect our profitability. Our customers also may require rapid increases in design and
production services that place an excessive short-term burden on our resources and the resources of
our third-party manufacturers. If we cannot manage our growth effectively, our business and
results of operations could suffer.
We plan to implement a new enterprise resource planning system, or ERP system, in fiscal 2007.
Delays in implementation, design errors not identified prior to implementation, or unanticipated
costs associated with the implementation could adversely affect us.
We plan to implement a new ERP system during fiscal 2007, and we will invest significant
financial and personnel resources into this project throughout the fiscal year. If we are
unsuccessful in implementing the system under the planned timeline and the implementation date is
delayed into the last quarter of fiscal 2007, our ability to assess our internal control over
financial reporting will be adversely affected, potentially resulting in a material weakness in, or
the inability to assess, internal control over financial reporting as of the end of the fiscal
year.
If we fail to identify and correct significant design errors in the ERP system prior to
implementation or the ERP system does not function as designed, we could lose our ability to
execute normal business operations, including the ability have our products manufactured and to
ship products and, as a result, our business operations could be adversely affected.
If our estimate of the ERP system implementation cost is significantly understated or we run
into unanticipated system integration costs, we would incur unplanned capital expenses, which would
negatively affect our cash flow and may require us to assess for impairment costs capitalized in
connection with the ERP system implementation, potentially resulting in an impairment write-down.
Accordingly, our cash flows and our results of operations could be adversely affected.
We depend on key personnel who would be difficult to replace, and our business will likely be
harmed if we lose their services or cannot hire additional qualified personnel.
Our success depends substantially on the efforts and abilities of our senior management and
key personnel. The competition for qualified management and key personnel, especially engineers,
is intense. Although we maintain noncompetition and nondisclosure covenants with most of our key
personnel, we do not have employment agreements with most of them. The loss of services of one or
more of our key employees or the inability to hire, train, and retain key personnel, especially
engineers and technical support personnel, and capable sales and customer-support employees outside
the United States, could delay the development and sale of our products, disrupt our business, and
interfere with our ability to execute our business plan.
Our inability to protect our intellectual property could impair our competitive advantage, reduce
our revenue, and increase our costs.
Our success and ability to compete depend in part on our ability to maintain the proprietary
aspects of our technologies and products. We rely on a combination of patents, copyrights, trade
secrets, trademarks, confidentiality agreements, and other contractual provisions to protect our
intellectual property, but these measures
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may provide only limited protection. We license from third parties certain technology used in
and for our products. These third-party licenses are granted with restrictions, and there can be
no assurances that such third-party technology will remain available to us on terms beneficial to
us. Our failure to enforce and protect our intellectual property rights or obtain from third
parties the right to use necessary technology could have a material adverse effect on our business,
financial condition, and results of operations. In addition, the laws of some foreign countries do
not protect proprietary rights as fully as do the laws of the United States.
Patents may not issue from the patent applications that we have filed or may file in the
future. Our issued patents may be challenged, invalidated, or circumvented, and claims of our
patents may not be of sufficient scope or strength, or issued in the proper geographic regions, to
provide meaningful protection or any commercial advantage. We have not applied for, and do not
have, any copyright registration on our technologies or products. We have applied to register
certain of our trademarks in the United States and other countries. There can be no assurance that
we will obtain registrations of principle or other trademarks in key markets. Failure to obtain
registrations could compromise our ability to protect fully our trademarks and brands and could
increase the risk of challenge from third parties to our use of our trademarks and brands.
We do not consistently rely on written agreements with our customers, suppliers,
manufacturers, and other recipients of our technologies and products, and therefore some trade
secret protection may be lost and our ability to enforce our intellectual property rights may be
limited. Additionally, our customers, suppliers, manufacturers, and other recipients of our
technologies and products may seek to use our technologies and products without appropriate
limitations. In the past, we did not consistently require our employees and consultants to enter
into confidentiality agreements, employment agreements, or proprietary information and invention
assignment agreements. Therefore, our former employees and consultants may try to claim some
ownership interest in our technologies and products and may use our technologies and products
competitively and without appropriate limitations.
We may be required to incur substantial expenses and divert management attention and resources in
defending intellectual property litigation against us.
We may receive notices from third parties that claim our products infringe their rights. From
time to time, we receive notice from third parties of the intellectual property rights such parties
have obtained. We cannot be certain that our technologies and products do not and will not
infringe issued patents or other proprietary rights of others. While we are not currently subject
to any infringement claim, any future claim, with or without merit, could result in significant
litigation costs and diversion of resources, including the attention of management, and could
require us to enter into royalty and licensing agreements, any of which could have a material
adverse effect on our business. There can be no assurance that such licenses could be obtained on
commercially reasonable terms, if at all, or that the terms of any offered licenses would be
acceptable to us. If forced to cease using such technology, there can be no assurance that we
would be able to develop or obtain alternate technology. Accordingly, an adverse determination in
a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us
from manufacturing, using, or selling certain of our products, which could have a material adverse
effect on our business, financial condition, and results of operations.
Furthermore, parties making such claims could secure a judgment awarding substantial damages,
as well as injunctive or other equitable relief that could effectively block our ability to make,
use, or sell our products in the United States or abroad. Such a judgment could have a material
adverse effect on our business, financial condition, and results of operations. In addition, we
are obligated under certain agreements to indemnify the other party in connection with infringement
by us of the proprietary rights of third parties. In the event we are required to indemnify
parties under these agreements, it could have a material adverse effect on our business, financial
condition, and results of operations.
We may incur substantial expenses and divert management resources in prosecuting others for their
unauthorized use of our intellectual property rights.
The markets in which we compete are characterized by frequent litigation regarding patents and
other intellectual property rights. Other companies, including our competitors, may develop
technologies that are similar or superior to our technologies, duplicate our technologies, or
design around our patents and may have or obtain patents or other proprietary rights that would
prevent, limit, or interfere with our ability to make, use, or sell our products. Effective
intellectual property protection may be unavailable or limited in some foreign countries in
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which we operate, such as China and Taiwan. Unauthorized parties may attempt to copy or
otherwise use aspects of our technologies and products that we regard as proprietary. There can be
no assurance that our means of protecting our proprietary rights in the United States or abroad
will be adequate or that competitors will not independently develop similar technologies. If our
intellectual property protection is insufficient to protect our intellectual property rights, we
could face increased competition in the market for our technologies and products.
Should any of our competitors file patent applications or obtain patents that claim inventions
also claimed by us, we may choose to participate in an interference proceeding to determine the
right to a patent for these inventions because our business would be harmed if we fail to enforce
and protect our intellectual property rights. Even if the outcome is favorable, this proceeding
could result in substantial cost to us and disrupt our business.
In the future, we also may need to file lawsuits to enforce our intellectual property rights,
to protect our trade secrets, or to determine the validity and scope of the proprietary rights of
others. This litigation, whether successful or unsuccessful, could result in substantial costs and
diversion of resources, which could have a material adverse effect on our business, financial
condition, and results of operations.
If we become subject to product returns and product liability claims resulting from defects in our
products, we may fail to achieve market acceptance of our products and our business could be
harmed.
We develop complex products in an evolving marketplace and generally warrant our products for
a period of 12 months or more from the date of sale. Despite testing by us and our customers,
defects may be found in existing or new products. In fiscal 2001, a manufacturing error of one of
our manufacturing subcontractors was discovered. Although the error was promptly discovered
without significant interruption of supply and the manufacturing subcontractor rectified the
problem at its own cost, any such manufacturing errors or product defects could result in a delay
in recognition or loss of revenue, loss of market share, or failure to achieve market acceptance.
Additionally, these defects could result in financial or other damages to our customers; cause us
to incur significant warranty, support, and repair costs; and divert the attention of our
engineering personnel from our product development efforts. In such circumstances, our customers
could also seek and obtain damages from us for their losses. A product liability claim brought
against us, even if unsuccessful, would likely be time-consuming and costly to defend. The
occurrence of these problems would likely harm our business.
Potential strategic alliances may not achieve their objectives, and the failure to do so could
impede our growth.
We anticipate that we will enter into strategic alliances. Among other matters, we
continually explore strategic alliances designed to enhance or complement our technology or to work
in conjunction with our technology; to provide necessary know-how, components, or supplies; and to
develop, introduce, and distribute products utilizing our technology. Any strategic alliances may
not achieve their intended objectives, and parties to our strategic alliances may not perform as
contemplated. The failure of these alliances may impede our ability to introduce new products and
enter new markets.
Any acquisitions that we undertake could be difficult to integrate, disrupt our business, dilute
stockholder value, and harm our operating results.
We expect to pursue opportunities to acquire other businesses and technologies in order to
complement our current interface solutions, expand the breadth of our markets, enhance our
technical capabilities, or otherwise offer growth opportunities. While we have no current
definitive agreements underway, we may acquire businesses, products, or technologies in the future.
If we make any future acquisitions, we could issue stock that would dilute existing stockholders
percentage ownership, incur substantial debt, assume contingent liabilities, or experience higher
operating expenses. Our experience in acquiring other businesses and technologies is limited.
Potential acquisitions also involve numerous risks, including the following:
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problems assimilating the purchased operations, technologies, or products; |
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unanticipated costs associated with the acquisition; |
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diversion of managements attention from our core businesses; |
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adverse effects on existing business relationships with suppliers and customers; |
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risks associated with entering markets in which we have little or no prior experience; and |
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potential loss of key employees of purchased organizations. |
We cannot assure you that we would be successful in overcoming problems encountered in
connection with any acquisitions, and our inability to do so could disrupt our operations and
adversely affect our business.
The PC and electronics industries are cyclical and may result in fluctuations in our operating
results.
The PC and electronics industries have experienced significant economic downturns at various
times. These downturns are characterized by diminished product demand, accelerated erosion of
average selling prices, and production overcapacity. In addition, the PC and electronics
industries are cyclical in nature. We seek to reduce our exposure to industry downturns and
cyclicality by providing design and production services for leading companies in rapidly expanding
industry segments. We may, however, experience substantial period-to-period fluctuations in future
operating results because of general industry conditions or events occurring in the general
economy.
The valuation of our technology conducted in connection with our international operating structure
may be challenged, which could result in additional taxes, interest, and penalties.
In fiscal 2005, we implemented an international operating structure. Under this structure,
generally, one of our affiliates licensed from us certain rights to the pre-existing and in-process
technology associated with our products for exploitation in all geographic markets except the U.S.,
Japanese, and Korean markets, which we refer to as ROW markets. Our affiliate also acquired
ownership of all future economic rights to product sales in ROW markets by entering into an
agreement to license certain intangibles and a cost-sharing agreement under which we and our
affiliate will share research and development costs in accordance with certain tax rules and
regulations. We believe this structure appropriately reflects where our profits are generated and
may result in future tax advantages to us, but there can be no assurances that this will be the
case.
We expect to incur additional expenses in complying with corporate governance and public disclosure
requirements.
Changing laws, regulations, and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations, and Nasdaq Global Select
Market rules, are creating uncertainty and increased expenses for companies such as ours. These
new or changed laws, regulations, and standards are subject to varying interpretations in many
cases due to their lack of specificity and, as a result, their application in practice may evolve
over time as new guidance is provided by regulatory and governing bodies, which could result in
continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing
revisions to disclosure and governance practices. We are committed to maintaining high standards
of corporate governance and public disclosure. As a result, our efforts to comply with evolving
laws, regulations, and standards have resulted in, and are likely to continue to result in,
increased general and administrative expenses and a diversion of management time and attention from
revenue-generating activities to compliance activities. In particular, our efforts to comply with
Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required
assessment of our internal control over financial reporting and our external auditors audit of
that assessment has required the commitment of significant financial and managerial resources. We
expect these efforts to require the continued commitment of significant resources. In addition, it
has become more difficult and more expensive for us to obtain director and officer liability
insurance. As a result, we may have difficulty attracting and retaining qualified board members,
which could harm our business. If our efforts to comply with new or changed laws, regulations, and
standards differ from the activities intended by regulatory or governing bodies due to ambiguities
related to practice, our reputation may be harmed.
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The accounting requirements for income taxes on certain of our share-based awards will subject our
future quarterly and annual effective tax rates to greater volatility and, consequently, our
ability to estimate reasonably our future quarterly and annual effective tax rates is greatly
diminished.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based
Payment (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
currently for those 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 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.
Future changes in financial accounting standards or practices may cause adverse unexpected
fluctuations and affect our reported results of operations.
A change in accounting standards or practices could have a significant effect on our reported
results of operations. New accounting pronouncements and varying interpretations of accounting
pronouncements have occurred in the past and may occur in the future. Changes to existing rules or
the questioning of current practices may adversely affect our reported financial results or the way
we conduct our business. For example, the Financial Accounting Standards Board issued SFAS 123R
requiring us to recognize all share-based payments to employees, including grants of stock options,
in the financial statements based on their fair value eliminating the pro forma footnote
disclosures that were allowed as an alternative to financial statement recognition. This
requirement, while not affecting our cash flow, adversely affected our reported financial results
and impaired our ability to provide guidance on our future reported financial results as a result
of the variability of the factors used to establish the fair value of stock options and the
accounting for income taxes thereon.
We increased our leverage as a result of the sale of our 0.75% convertible senior subordinated
notes.
As a result of the sale of our 0.75% convertible senior subordinated notes in fiscal 2005, we
incurred $125 million of indebtedness. As a result of this indebtedness, our interest payment
obligations have increased. Our interest payment obligations on the notes is approximately
$938,000 annually. The degree to which we are now leveraged could have adverse consequences,
including the following:
|
|
|
a limitation on our ability to obtain future financing for working capital,
acquisitions, or other purposes; |
|
|
|
|
an increase in our vulnerability to industry downturns and competitive pressures; and |
|
|
|
|
a possible competitive disadvantage with less leveraged competitors and competitors
that may have better access to capital resources. |
Our ability to meet our debt service obligations will depend upon our future performance,
which will be subject to the financial, business, and other factors affecting our operations, many
of which are beyond our control.
Legislation affecting the markets in which we compete could adversely affect our ability to
implement our growth strategies.
Our ability to expand our business may be adversely impacted by future laws or regulations.
Our customers products may be subject to laws relating to environmental regulations,
communications, encryption technology, electronic commerce, e-signatures, and privacy. Any of
these laws could be expensive to comply with, and the marketability of our products could be
adversely affected.
27
We must finance the growth of our business and the development of new products, which could have an
adverse effect on our operating results.
To remain competitive, we must continue to make significant investments in research and
development, marketing, and business development. Our failure to increase sufficiently our net
sales to offset these increased costs would adversely affect our operating results.
From time to time, we may seek additional equity or debt financing to provide for funds
required to expand our business. We cannot predict the timing or amount of any such requirements
at this time. If such financing is not available on satisfactory terms, we may be unable to expand
our business or to develop new business at the rate desired and our operating results may suffer.
Debt financing increases expenses and must be repaid regardless of operating results. Equity
financing could result in additional dilution to existing stockholders.
Continuing uncertainty of the U.S. economy may have serious implications for the growth and
stability of our business and may negatively affect our stock price.
The revenue growth and profitability of our business depends significantly on the overall
demand in the notebook computer market and in the markets for digital lifestyle products and other
electronic devices. Softening demand in these markets caused by ongoing economic uncertainty may
result in decreased revenue or earnings levels or growth rates. The U.S. economy has been
historically cyclical, and market conditions continue to be challenging, which has resulted in
individuals and companies delaying or reducing expenditures. Further delays or reductions in
spending could have a material adverse effect on demand for our products, and consequently on our
business, financial condition, results of operations, prospects, and stock price.
The market price of our common stock has been and may continue to be volatile.
The trading price of our common stock has been and may continue to be subject to wide
fluctuations in response to various factors, including the following:
|
|
|
variations in our quarterly results; |
|
|
|
|
the financial guidance we may provide to the public, any changes in such guidance, or
our failure to meet such guidance; |
|
|
|
|
changes in financial estimates by industry or securities analysts or our failure to
meet such estimates; |
|
|
|
|
various market factors or perceived market factors, including rumors, whether or not
correct, involving us, our customers, our suppliers, or our competitors; |
|
|
|
|
announcements of technological innovations by us or by our competitors; |
|
|
|
|
introductions of new products or new pricing policies by us or by our competitors; |
|
|
|
|
acquisitions or strategic alliances by us or by our competitors; |
|
|
|
|
recruitment or departure of key personnel; |
|
|
|
|
the gain or loss of significant orders; |
|
|
|
|
the gain or loss of significant customers; |
|
|
|
|
market conditions in our industry, the industries of our customers, and the economy as a whole; and |
|
|
|
|
hedging activities by investors holding positions in our convertible senior subordinated notes. |
In addition, stocks of technology companies have experienced extreme price and volume
fluctuations that often have been unrelated or disproportionate to these companies operating
performance. Public announcements by
28
technology companies concerning, among other things, their performance, accounting practices,
or legal problems could cause the market price of our common stock to decline regardless of our
actual operating performance.
Our charter documents and Delaware law could make it more difficult for a third party to acquire
us, and discourage a takeover.
Our certificate of incorporation and the Delaware General Corporation Law contain provisions
that may have the effect of making more difficult or delaying attempts by others to obtain control
of our company, even when these attempts may be in the best interests of our stockholders. Our
certificate of incorporation also authorizes our board of directors, without stockholder approval,
to issue one or more series of preferred stock, which could have voting and conversion rights that
adversely affect or dilute the voting power of the holders of common stock. Delaware law also
imposes conditions on certain business combination transactions with interested stockholders.
Our certificate of incorporation divides our Board of Directors into three classes, with one class
to stand for election each year for a three-year term after the initial election. The
classification of directors tends to discourage a third party from initiating a proxy solicitation
or otherwise attempting to obtain control of our company and may maintain the incumbency of our
Board of Directors, as this structure generally increases the difficulty of, or may delay,
replacing a majority of directors. Our certificate of incorporation authorizes our Board of
Directors to fill vacancies or newly created directorships. A majority of the directors then in
office may elect a successor to fill any vacancies or newly created directorships.
Our stockholders rights plan may adversely affect existing stockholders.
Our stockholders rights plan may have the effect of deterring, delaying, or preventing a
change in control that might otherwise be in the best interests of our stockholders. In general,
stock purchase rights issued under the rights plan become exercisable when a person or group
acquires 15% or more of our common stock or a tender offer or exchange offer of 15% or more of our
common stock is announced or commenced. After any such event, our other stockholders may purchase
additional shares of our common stock at 50% of the then-current market price. The rights will
cause substantial dilution to a person or group that attempts to acquire us on terms not approved
by our board of directors. The rights should not interfere with any merger or other business
combination approved by our board of directors as the rights may be redeemed by us at $0.01 per
stock purchase right at any time before any person or group acquires 15% or more of our outstanding
common stock. The rights expire in August 2012.
Sales of large numbers of shares could adversely affect the price of our common stock.
All of the 25,046,353 shares of our common stock outstanding as of September 1, 2006 are
eligible for resale in the public markets. Of these shares, 1,215,987 shares held by affiliates
are eligible for resale in the public markets subject to compliance with the volume and manner of
sale rules of Rule 144 or 701 under the Securities Act of 1933, as amended, and the balance of the
shares are eligible for resale in the public markets either as unrestricted shares or pursuant to
Rule 144(k). In general, under Rule 144 as currently in effect, any person (or persons whose
shares are aggregated for purposes of Rule 144) who beneficially owns restricted securities with
respect to which at least one year has elapsed since the later of the date the shares were acquired
from us, or from an affiliate of ours, is entitled to sell within any three-month period a number
of shares that does not exceed the greater of 1% of the then outstanding shares of our common stock
and the average weekly trading volume in common stock during the four calendar weeks preceding such
sale. Sales under Rule 144 also are subject to certain manner-of-sale provisions and notice
requirements and to the availability of current public information about us.
Rule 701, as currently in effect, permits our employees, officers, directors, and consultants
who purchase shares pursuant to a written compensatory plan or contract to resell these shares in
reliance upon Rule 144, but without compliance with specific restrictions. Rule 701 provides that
affiliates may sell their Rule 701 shares under Rule 144 without complying with the holding period
requirement and that non-affiliates may sell their shares in reliance on Rule 144 without complying
with the holding period, public information, volume limitation, or notice provisions of Rule 144.
A person who is not an affiliate, who has not been an affiliate within three months prior to sale,
and who beneficially owns restricted securities with respect to which at least two years have
elapsed since the later of the date the shares were acquired from us, or from an affiliate of ours,
is entitled to sell such shares under Rule 144(k) without regard to any of the volume limitations
or other requirements described above. Sales of substantial amounts of common stock in the public
market could adversely affect prevailing market prices.
29
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 discussed above. The issuance or subsequent sale of these shares in the public market
could adversely affect prevailing market prices.
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
discussed above. The issuance or subsequent sale of these shares in the public market could
negatively affect the market price of our common stock.
We have registered for offer and sale the shares of common stock that are reserved for
issuance pursuant to our outstanding share-based compensation plans. Shares issued after the
effective date of such registration statements in connection with our share-based compensation
plans generally will be eligible for sale in the public market, except that affiliates will
continue to be subject to volume limitations and other requirements of Rule 144. The issuance or
subsequent sale of such shares could depress the market price of our common stock.
ITEM
1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our principal executive offices as well as our principal research, development, sales,
marketing, and administrative functions are located in our 70,000 square foot facility in Santa
Clara, California. We believe this facility will be adequate to meet our needs for the foreseeable
future. Our Asia/Pacific headquarters are located in Hong Kong where we lease approximately 13,300
square feet, and our European headquarters are located in Cambridge, United Kingdom where we lease
approximately 5,600 square feet. We also maintain 4,800 square feet of office space in Taiwan,
2,500 square feet of office space in China, and 900 square feet of office space in Japan. We have
satellite sales support offices in Thailand, Korea, and Texas.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
30
PART II
|
|
|
ITEM 5. |
|
MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES |
Market Information on Common Stock
Our common stock has been listed on the Nasdaq Global Select Market (formerly on the Nasdaq
National Market) under the symbol SYNA since January 29, 2002. Prior to that time, there was no
public market for our common stock. The following table sets forth for the periods indicated the
high and low sales prices of our common stock as quoted on the Nasdaq Global Select Market.
|
|
|
|
|
|
|
|
|
Year ended June 30, 2005: |
|
High |
|
Low |
First quarter |
|
$ |
21.00 |
|
|
$ |
13.53 |
|
Second quarter |
|
$ |
40.00 |
|
|
$ |
20.42 |
|
Third quarter |
|
$ |
41.19 |
|
|
$ |
20.80 |
|
Fourth quarter |
|
$ |
24.23 |
|
|
$ |
17.70 |
|
|
|
|
|
|
|
|
|
|
Year ended June 30, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter |
|
$ |
21.78 |
|
|
$ |
15.05 |
|
Second quarter |
|
$ |
26.97 |
|
|
$ |
17.94 |
|
Third quarter |
|
$ |
30.84 |
|
|
$ |
22.35 |
|
Fourth quarter |
|
$ |
26.85 |
|
|
$ |
19.87 |
|
On September 1, 2006, the closing sales price of our common stock on the Nasdaq Global Select
Market was $25.22 per share.
Stockholders
As
of September 1, 2006, there were approximately 250 holders of record of our common stock.
Dividends
We have never declared or paid cash dividends on our preferred stock or our common stock. We
currently plan to retain any earnings to finance the growth of our business rather than to pay cash
dividends. Payments of any cash dividends in the future will depend on our financial condition,
results of operations, and capital requirements as well as other factors deemed relevant by our
board of directors.
Our revolving line of credit also places restrictions on the payment of any dividends.
31
Share-Based Compensation Plan Information
The following table sets forth information with respect to our common stock that may be issued
from both stockholder approved and unapproved plans upon delivery of shares for deferred stock
units, exercise of outstanding stock options, the weighted average exercise price of outstanding
stock options, and the number of securities available for future issuance under our various
share-based compensation plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
|
|
|
|
|
|
|
|
|
(d) |
|
|
|
Number of |
|
|
(b) |
|
|
|
|
|
|
Number of Securities |
|
|
|
Securities to |
|
|
Number of |
|
|
(c) |
|
|
Remaining Available |
|
|
|
be Issued |
|
|
Securities to |
|
|
Weighted- |
|
|
for Future Issuance |
|
|
|
Upon |
|
|
be Issued |
|
|
Average |
|
|
Under Share-Based |
|
|
|
Delivery of |
|
|
Upon |
|
|
Exercise |
|
|
Compensation Plans |
|
|
|
Shares for |
|
|
Exercise of |
|
|
Price of |
|
|
[Excluding Securities |
|
|
|
Deferred |
|
|
Outstanding |
|
|
Outstanding |
|
|
Reflected in Columns |
|
Plan Category |
|
Stock Units |
|
|
Options |
|
|
Options |
|
|
(a) and (b)] |
|
Share-Based
Compensation Plans Approved by Stockholders |
|
|
38,280 |
|
|
|
5,752,677 |
|
|
$ |
14.64 |
|
|
|
3,254,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-Based
Compensation Plans Not Approved By Stockholders (1) |
|
|
|
|
|
|
55,334 |
|
|
$ |
4.96 |
|
|
|
37,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
38,280 |
|
|
|
5,808,011 |
|
|
$ |
14.55 |
|
|
|
3,292,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents options granted under our 2000 nonstatutory stock option plan. The plan was adopted
by our board of directors in September 2000 and provides for the grant of options to purchase up to
200,000 shares of our common stock. Unless terminated earlier by our board of directors, the plan
will terminate in September 2010. The exercise price of options granted under the plan is the fair
market value of our common stock on the date of grant. Generally, the shares subject to options
granted under the plan vest 25% on the first anniversary of the option grant date and 1/48th in
each month thereafter. The exercise price for any options granted under the plan may be paid in
cash, in shares of our common stock valued at fair market value on the exercise date, or in any
other form of legal consideration that may be acceptable to the board of directors or administrator
in their discretion, including through a same-day sale program without any cash outlay by the
optionee. The term of options granted under the plan may not exceed 10 years. Outstanding awards
and the number of shares remaining available for issuance under the plan will be adjusted in the
event of a stock split, stock dividend, or other similar change in our capital stock. |
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. There were no purchases under the
stock repurchase program during the quarter ended June 30, 2006; however, subsequent to June 30,
2006 we repurchased 215,000 shares for $4.6 million, or an average cost of $21.45 per share.
32
|
|
|
ITEM 6. |
|
SELECTED FINANCIAL DATA |
The following table presents selected financial data for each fiscal year in the five year period ended June 30, 2006. As our past operating results are not necessarily indicative of our future operating results, the selected financial data below should be read in conjunction with Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related notes contained elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended June 30, |
|
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
|
(in thousands, except for per share data) |
|
Consolidated Statements of Income Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
100,201 |
|
|
$ |
100,701 |
|
|
$ |
133,276 |
|
|
$ |
208,139 |
|
|
$ |
184,557 |
|
Cost of revenue(1) |
|
|
59,016 |
|
|
|
58,417 |
|
|
|
77,244 |
|
|
|
112,090 |
|
|
|
101,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
41,185 |
|
|
|
42,284 |
|
|
|
56,032 |
|
|
|
96,049 |
|
|
|
82,853 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development(1) |
|
|
16,594 |
|
|
|
19,837 |
|
|
|
21,419 |
|
|
|
24,991 |
|
|
|
35,356 |
|
Selling, general, and administrative(1) |
|
|
9,873 |
|
|
|
10,733 |
|
|
|
13,571 |
|
|
|
18,423 |
|
|
|
28,019 |
|
Other operating expense (income) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,800 |
) |
|
|
|
|
Amortization of deferred stock compensation(2) |
|
|
453 |
|
|
|
516 |
|
|
|
517 |
|
|
|
328 |
|
|
|
|
|
Amortization of goodwill and other acquired
intangible assets |
|
|
134 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring |
|
|
|
|
|
|
|
|
|
|
432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
27,054 |
|
|
|
31,126 |
|
|
|
35,939 |
|
|
|
39,942 |
|
|
|
63,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
14,131 |
|
|
|
11,158 |
|
|
|
20,093 |
|
|
|
56,107 |
|
|
|
19,478 |
|
Interest income, net |
|
|
325 |
|
|
|
904 |
|
|
|
833 |
|
|
|
2,225 |
|
|
|
6,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
14,456 |
|
|
|
12,062 |
|
|
|
20,926 |
|
|
|
58,332 |
|
|
|
25,523 |
|
Provision for income taxes |
|
|
5,056 |
|
|
|
4,344 |
|
|
|
7,934 |
|
|
|
20,347 |
|
|
|
11,822 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
9,400 |
|
|
$ |
7,718 |
|
|
$ |
12,992 |
|
|
$ |
37,985 |
|
|
$ |
13,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.70 |
|
|
$ |
0.33 |
|
|
$ |
0.53 |
|
|
$ |
1.48 |
|
|
$ |
0.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.42 |
|
|
$ |
0.31 |
|
|
$ |
0.48 |
|
|
$ |
1.30 |
|
|
$ |
0.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
13,523 |
|
|
|
23,473 |
|
|
|
24,418 |
|
|
|
25,736 |
|
|
|
24,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
22,544 |
|
|
|
25,132 |
|
|
|
27,108 |
|
|
|
29,761 |
|
|
|
29,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts exclude amortization of deferred stock compensation as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
$ |
28 |
|
|
$ |
28 |
|
|
$ |
20 |
|
|
$ |
12 |
|
|
$ |
|
|
Research and development |
|
|
167 |
|
|
|
159 |
|
|
|
91 |
|
|
|
8 |
|
|
|
|
|
Selling, general, and administrative |
|
|
258 |
|
|
|
329 |
|
|
|
406 |
|
|
|
308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock compensation |
|
$ |
453 |
|
|
$ |
516 |
|
|
$ |
517 |
|
|
$ |
328 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
|
Beginning with fiscal 2006, we adopted SFAS 123R and as a result ceased amortizing
deferred stock compensation. Accordingly, no amortization of deferred stock compensation
was recorded for the year ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
2002 |
|
2003 |
|
2004 |
|
2005 |
|
2006 |
|
|
(in thousands) |
Consolidated Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, and short-term investments |
|
$ |
65,180 |
|
|
$ |
77,286 |
|
|
$ |
96,299 |
|
|
$ |
228,921 |
|
|
$ |
245,176 |
|
Working capital |
|
|
73,318 |
|
|
|
83,815 |
|
|
|
106,624 |
|
|
|
235,240 |
|
|
|
257,788 |
|
Total assets |
|
|
90,381 |
|
|
|
104,508 |
|
|
|
132,653 |
|
|
|
311,205 |
|
|
|
331,421 |
|
Long-term debt, capital leases, and equipment
financing obligations, less current portion |
|
|
1,759 |
|
|
|
1,528 |
|
|
|
1,500 |
|
|
|
126,500 |
|
|
|
126,500 |
|
Total stockholders equity |
|
|
74,003 |
|
|
|
86,264 |
|
|
|
109,140 |
|
|
|
144,660 |
|
|
|
167,042 |
|
Basic net income per share amounts for each period presented have been computed using the
weighted average number of shares of common stock outstanding. Diluted net income per share
amounts for each period presented have been computed (1) using the weighted average number of
potentially dilutive shares issuable in connection with stock options and restricted stock units
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.
In fiscal 2001, we recorded amortization of goodwill and other intangible assets of $784,000
in connection with the acquisition of Absolute Sensors Limited, or ASL, a United Kingdom company,
and the acquisition of the employees of a former Taiwanese sales agent. As a result of the
adoption of Statement of Financial Accounting
33
Standard No. 142, Goodwill and Other Intangible Assets in fiscal 2002, we ceased amortizing
goodwill. Accordingly, we recorded amortization of other intangible assets of $134,000 and $40,000
in fiscal 2002 and 2003, respectively, associated with the ASL acquisition and the acquisition of
the employees of a former Taiwanese sales agent. These assets were fully amortized in fiscal 2003.
|
|
|
ITEM 7. |
|
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 financial
statements and related notes contained elsewhere in this report. This discussion contains
forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results
may differ materially from those anticipated in these forward-looking statements as a result of a
variety of factors, including those set forth under Item 1A. 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,
communications, entertainment, and other electronic devices. Through our proprietary TouchPad, we
are the worlds leading supplier of interface solutions to the notebook computer market. With our
TouchStyk, we offer OEMs the choice of a touch pad, a pointing stick, or a combination of both of
our proprietary interface solutions for dual pointing applications. 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 allow us to design products that meet the demanding design
specifications of OEMs.
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
collectibility is reasonably assured. Our revenue increased from $100.2 million in fiscal 2002 to
$208.1 million in fiscal 2005, but declined to $184.6 million in fiscal 2006. Despite the decline
from fiscal 2005 to fiscal 2006, our revenue increased at a compound annual growth rate of
approximately 16.5% from fiscal 2002 to fiscal 2006. In fiscal 2002, we derived 98% of our product
revenue from the personal computer market. In fiscal 2006, revenue from the personal computer
market accounted for 85% of our net revenue.
In June 2003, we acquired NSM Technology Limited, or NSM, a Hong Kong company. The
acquisition of NSM provided us with a highly skilled and experienced work force to expand our
global presence and infrastructure to support customers in the Asia/Pacific region. Many of our
customers are migrating their manufacturing operations from Taiwan to China, and our OEM customers
are beginning to establish design centers in that region. With our expanded global presence,
including offices in Taiwan, Hong Kong, Korea, Japan, and China, we are better positioned to
provide local sales, operations, and engineering support services to our existing customers, as
well as potential new customers, within the Asia/Pacific region.
Our manufacturing operations are based on a variable cost model in which we outsource all of
our production requirements and drop ship our products directly to our customers from our
manufacturing subcontractors facilities, eliminating the need for significant capital expenditures
and allowing us to minimize our investment in inventories. This approach requires us to work
closely with our manufacturing subcontractors to ensure adequate production capacity to meet our
forecasted volume requirements. We provide our manufacturing subcontractors with six-month rolling
forecasts and 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 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, assembly and test costs paid to
third-party manufacturers, and related overhead costs associated with our indirect manufacturing
operations personnel. Additionally, all warranty costs, yield losses, and any inventory provisions
or write-downs are charged to cost of revenue.
34
Our gross margin generally reflects the combination of the added value we bring to our
customers products in meeting their custom design requirements and the impact of our ongoing
cost-improvement programs. These cost-improvement programs include reducing materials and
component costs and implementing design and process improvements. Our newly introduced products
may have lower margins than our more mature products, which have realized greater benefits
associated with our ongoing cost-improvement programs. As a result, new product introductions may
initially negatively impact our gross margin.
Our research and development expenses include expenses related to product development,
engineering, materials costs, patent expenses, and the costs incurred to design interface solutions
for customers prior to 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 develop new technologies for new markets.
Selling, general, and administrative expenses include expenses related to sales, marketing,
and administrative personnel; Sarbanes-Oxley Act compliance; internal sales and outside sales
representatives commissions; market research and consulting; and other marketing and sales
activities. These expenses have generally increased, primarily reflecting increased corporate
governance costs related to Sarbanes-Oxley Act compliance, staffing, commission expense associated
with higher revenue levels, and additional management personnel in anticipation of our continued
growth in our existing markets and penetration into new markets.
In connection with the grant of stock options to our employees and consultants, we have
recorded deferred stock compensation, representing the difference between the deemed fair value of
our common stock for financial reporting purposes and the exercise price of these options at the
dates of grant. Deferred stock compensation is presented as a reduction of stockholders equity
and is amortized on a straight-line basis over the applicable vesting period. Options granted are
typically subject to a four-year vesting period. We amortized the deferred stock compensation over
the vesting periods of the applicable options and recorded expense associated with deferred stock
compensation of approximately $517,000 and $328,000 in fiscal 2004 and 2005, respectively. Upon
the adoption of Statement of Financial Accounting Standards No. 123R, Share-Based Payment (FAS
123R) in fiscal 2006, we ceased amortizing deferred stock compensation, as FAS 123R required us to
expense share-based compensation costs based on grant date fair value. The adoption of FAS 123R
had no effect on our cash flows, but did result in a $13.2 million charge to our operating income.
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, intangible assets, and contingencies. We base
our estimates on historical experience, applicable laws, 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 Securities and Exchange Commission 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
collectibility is reasonably
35
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.
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.
36
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 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 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
currently for 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 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
Fiscal year ended June 30, 2006 compared with fiscal year ended June 30, 2005
Net Revenue.
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
PC applications |
|
$ |
122,877 |
|
|
$ |
157,511 |
|
|
$ |
34,634 |
|
|
|
28.2 |
% |
% of net revenue |
|
|
59.0 |
% |
|
|
85.3 |
% |
|
|
|
|
|
|
|
|
Digital lifestyle product applications |
|
|
85,262 |
|
|
|
27,046 |
|
|
|
(58,216 |
) |
|
|
-68.3 |
% |
% of net revenue |
|
|
41.0 |
% |
|
|
14.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
208,139 |
|
|
$ |
184,557 |
|
|
$ |
(23,582 |
) |
|
|
-11.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue was $184.6 million for the year ended June 30, 2006 compared with $208.1
million for the year ended June 30, 2005, a decrease of $23.6 million, or 11.3%. We identify the
vertical markets that our products serve as the personal computing market (PC) and the digital
lifestyle product markets. The decrease in net revenue was primarily attributable to a $58.2
million, or 68.3%, decrease in digital lifestyle product net revenue, which was $27.0 million for
the year ended June 30, 2006, compared with $85.3 million for the year ended June 30, 2005. Our
digital lifestyle product revenue declined to approximately 14.7% of net revenue for the year ended
June 30, 2006 from approximately 41.0% of net revenue for the year ended June 30, 2005, primarily
due to a decline in orders from a customer from the HDD portable digital music player market. The
decrease in digital lifestyle product
net revenue was partially offset by an increase in PC applications net revenue of $34.6
million, or 28.2%, for the year ended June 30, 2006 compared with the year ended June 30, 2005.
The increase in PC applications net revenue was attributable to notebook industry growth, coupled
with market share gains, additional penetration in PC
37
peripherals, and adoption by notebook OEMs of
our capacitive interface multimedia controls. An increase in total unit shipments of approximately
6% was offset by lower average selling prices resulting from changes in product design mix and
general competitive pricing pressure. Net revenue from PC dual pointing applications declined to
approximately 15% of net revenue for the year ended June 30, 2006 compared with 16% of net revenue
for the year ended June 30, 2005. The decrease in net revenue from PC dual pointing applications
reflected the continuing shift toward single pointing solutions, driven by the combination of
consumer and small business demand for low-priced notebook computers relative to high-priced
notebook computers for business use and the impact of competitive solutions in the dual pointing
segment of the notebook market.
Gross Margin. Gross margin as a percentage of net revenue was 44.9% for the year ended June
30, 2006 compared with 46.1% for the year ended June 30, 2005. As each product we sell utilizes
our capacitive technologies in a design that is unique or specific to a customers application,
gross margins vary on a product-by-product basis, making our gross margins product design specific
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, lower average
selling prices resulting from general competitive pricing pressure, and the inclusion of non-cash
share-based compensation costs of $682,000, partially offset by lower manufacturing costs resulting
from our continuing design and process improvement programs and lower materials, assembly, and test
costs. Non-cash share-based compensation costs resulted from our adoption of SFAS 123R on a
modified prospective basis at the beginning of fiscal 2006 and year-over-year were responsible for
a 0.4% decline in our gross margin as a percentage of revenue.
Operating Expenses.
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
Research and development expenses |
|
$ |
24,991 |
|
|
$ |
35,356 |
|
|
$ |
10,365 |
|
|
|
41.5 |
% |
% of net revenue |
|
|
12.0 |
% |
|
|
19.1 |
% |
|
|
|
|
|
|
|
|
Selling, general & administrative expenses |
|
|
18,423 |
|
|
|
28,019 |
|
|
|
9,596 |
|
|
|
52.1 |
% |
% of net revenue |
|
|
8.9 |
% |
|
|
15.2 |
% |
|
|
|
|
|
|
|
|
Other operating expense (income) |
|
|
(3,800 |
) |
|
|
|
|
|
|
3,800 |
|
|
|
-100.0 |
% |
% of net revenue |
|
|
-1.8 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
Amortization of deferred stock compensation |
|
|
328 |
|
|
|
|
|
|
|
(328 |
) |
|
|
-100.0 |
% |
% of net revenue |
|
|
0.1 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
$ |
39,942 |
|
|
$ |
63,375 |
|
|
$ |
23,433 |
|
|
|
58.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of net revenue |
|
|
19.2 |
% |
|
|
34.3 |
% |
|
|
|
|
|
|
|
|
Research and Development Expenses. Research and development expenses increased as a
percentage of net revenue to 19.1% from 12.0%, while spending on research and development
activities increased $10.4 million, or 41.5%, to $35.4 million from $25.0 million for the year
ended June 30, 2006 compared with the year ended June 30, 2005. The primary contributor to the
increase in research and development expenses was the inclusion of non-cash share-based
compensation costs of $4.8 million as a result of adopting SFAS 123R on a modified prospective
basis at the beginning of fiscal 2006. Excluding non-cash share-based compensation costs, research
and development expenses increased approximately $5.6 million, or 22.3%, primarily reflecting a
$3.1 million increase in project spending, a $1.9 million increase in employee compensation costs
resulting from additional staffing, increased base compensation related to our annual performance
review process, employee benefit costs, and recruiting costs, and a $1.6 million increase in
temporary labor and consulting costs, partially offset by a $1.4 million reduction in incentive
pay.
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses
increased as a percentage of net revenue to 15.2% from 8.9%, while the cost of selling, general,
and administrative activities increased $9.6 million, or 52.1%, to $28.0 million from $18.4 million
for the year ended June 30, 2006 compared
with the year ended June 30, 2005. The increase in selling, general, and administrative
expenses reflected the inclusion of non-cash share-based compensation costs of $7.7 million as a
result of adopting SFAS 123R on a modified prospective basis at the beginning of fiscal 2006.
Excluding non-cash share-based compensation costs,
38
selling, general, and administrative expenses
increased $1.9 million, or 10.2%, primarily relecting a $2.4 million increase in employee
compensation costs resulting from additional staffing, increased base compensation related to our
annual performance review process, employee benefit costs, and recruiting costs, a $451,000
increase in outside commission costs, a $381,000 increase in temporary labor and consulting costs,
and a $140,000 increase in travel and related costs, partially offset by a $1.5 million reduction
in incentive pay.
Other operating expense (income). The year ended June 30, 2005 included the receipt of a
one-time payment of $3.8 million for a cross license agreement settled certain intellectual
property disputes with a competitor. The cross license agreement does not provide for any future
service obligations or commitments from us and contains the mutual releases of the parties
respective claims.
Amortization of Deferred Stock Compensation. Beginning with fiscal 2006, we adopted SFAS 123R
and as a result ceased amortizing deferred stock compensation. Accordingly, no amortization
expense for deferred stock compensation was recorded for the year ended June 30, 2006 while
$328,000 was recorded for the year ended June 30, 2005.
Operating Income. We generated operating income of $19.5 million, or 10.6% of net revenue,
for the year ended June 30, 2006 compared with $56.1 million, or 26.9% of net revenue, for the year
ended June 30, 2005. As discussed in the preceding paragraphs, the decline in operating income was
primarily related to the decrease in operating leverage resulting from the 11.3% decline in net
revenue, lower gross margin percentage, and higher operating expenses which included a $13.2
million increase in non-cash share-based compensations costs related to our adoption of SFAS 123R
on a modified prospective basis at the beginning of fiscal 2006.
Interest Income/(Expense).
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
|
$ Change |
|
|
% Change |
|
Interest income |
|
$ |
3,370 |
|
|
$ |
7,984 |
|
|
$ |
4,614 |
|
|
|
136.9 |
% |
% of net revenue |
|
|
1.6 |
% |
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
Interest expense |
|
|
(1,145 |
) |
|
|
(1,939 |
) |
|
|
(794 |
) |
|
|
69.3 |
% |
% of net revenue |
|
|
-0.5 |
% |
|
|
-1.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
2,225 |
|
|
$ |
6,045 |
|
|
$ |
3,820 |
|
|
|
171.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of net revenue |
|
|
1.1 |
% |
|
|
3.2 |
% |
|
|
|
|
|
|
|
|
Interest Income. Interest income was $8.0 million for the year ended June 30, 2006
compared with $3.4 million for the year ended June 30, 2005. The $4.6 million increase in interest
income resulted from a combination of substantially higher average interest rates and substantially
higher average invested cash balances. The increase in cash balances was primarily the result of
the net cash proceeds of $120.7 million received from the issuance of our convertible senior
subordinated notes in December 2004 aided by $24.8 million of net cash flows from operations during
fiscal 2006.
Interest Expense. Interest expense was $1.9 million for the year ended June 30, 2006 compared
with $1.1 million for the year ended June 30, 2005. The $794,000 increase in interest expense
resulted from 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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2006 |
|
$ Change |
|
% Change |
Provision for income taxes |
|
$ |
20,347 |
|
|
$ |
11,822 |
|
|
$ |
(8,525 |
) |
|
|
-41.9 |
% |
% of income before provision for income taxes |
|
|
34.9 |
% |
|
|
46.3 |
% |
|
|
|
|
|
|
|
|
% of net revenue |
|
|
9.8 |
% |
|
|
6.4 |
% |
|
|
|
|
|
|
|
|
39
The provision for income taxes for the year ended June 30, 2006 was approximately $11.8
million compared with $20.3 million for the year ended June 30, 2005, reflecting significantly
lower pre-tax profit levels, partially offset by a substantially higher effective tax rate. The
income tax provision represented estimated federal, foreign, and state taxes for the years ended
June 30, 2005 and 2006. The effective tax rate for the year ended June 30, 2006 was approximately
46.3% and diverged from the combined federal and state statutory rate primarily as a result of the
impact of accounting for share-based compensation and foreign withholding taxes, partially offset
by the impact of the release of contingency reserves, tax-exempt interest income, and the benefit
of research and development tax credits. The effective tax rate for the year ended June 30, 2005
was approximately 34.9% and diverged from the combined federal and state statutory rate primarily
as a result of the impact of higher income from lower taxed foreign operations, the release of
contingency reserves, the benefit of research and development tax credits, and tax-exempt interest
income, partially offset by foreign withholding taxes and permanent taxable differences.
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
currently for 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 $2.9
million for the year ended June 30, 2006. Excluding the impact of share-based compensation and the
related tax benefit, the effective tax rate for the year ended June 30, 2006 would have been 38.1%.
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 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.
Fiscal year ended June 30, 2005 compared with fiscal year ended June 30, 2004
Net Revenue.
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
2005 |
|
|
$ Change |
|
|
% Change |
|
PC applications |
|
$ |
111,512 |
|
|
$ |
122,877 |
|
|
$ |
11,365 |
|
|
|
10.2 |
% |
% of net revenue |
|
|
83.7 |
% |
|
|
59.0 |
% |
|
|
|
|
|
|
|
|
Digital lifestyle product applications |
|
|
21,764 |
|
|
|
85,262 |
|
|
|
63,498 |
|
|
|
291.8 |
% |
% of net revenue |
|
|
16.3 |
% |
|
|
41.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
133,276 |
|
|
$ |
208,139 |
|
|
$ |
74,863 |
|
|
|
56.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue was $208.1 million for the year ended June 30, 2005 compared with $133.3
million for the year ended June 30, 2004, an increase of $74.9 million, or 56%. 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 was primarily attributable to a $63.5
million increase in digital lifestyle product applications net revenue, which was
$85.3 million for the year ended June 30, 2005 compared with $21.8 million for the year ended
June 30, 2004. Our digital lifestyle product revenue grew to approximately 41% of net revenue for
the year ended June 30, 2005 from approximately 16% of net revenue for the year ended June 30,
2004, primarily driven by a combination of market growth and market share growth for HDD portable
digital music players. The increase in digital lifestyle product applications net revenue was also
primarily responsible for the increase in total net revenue for the year ended June 30, 2005
compared with the year ended June 30, 2004. The remaining $11.4 million increase in net revenue
was attributable to an increase in net revenue from PC applications as a result of market growth.
The overall increase in net revenue was driven by a 69% increase in total unit shipments,
reflecting the significant increase in digital lifestyle product unit shipments partially offset by
lower average selling prices resulting from changes in product design mix and general competitive
pricing pressure. Net revenue from PC dual pointing applications declined to 16% of net revenue
for the year ended June 30, 2005 compared with 27% of net revenue for the year ended June 30,
40
2004.
The decrease in net revenue from PC dual pointing applications reflected the continuing shift
toward single pointing solutions, driven by the combination of consumer and small business demand
for low-priced notebook computers relative to high-priced notebook computers for business use and
the impact of competitive solutions in the dual pointing segment of the notebook market.
Gross Margin. Gross margin as a percentage of net revenue was 46.1% for the year ended June
30, 2005 compared with 42.0% for the year ended June 30, 2004. As each product we sell utilizes
our capacitive technologies in a design that is unique or specific to a customers application,
gross margins vary on a product-by-product basis, making our gross margins product design specific
and independent of the vertical markets that our products serve. The improvement in gross margin
as a percentage of net revenue primarily reflected the benefit of a favorable product design mix,
improved manufacturing yields, and lower manufacturing costs, which were driven by the combination
of our continuing design and process improvement programs and lower materials, assembly, and test
costs, partially offset by lower average selling prices resulting from general competitive pricing
pressure.
Operating Expenses.
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
2005 |
|
|
$ Change |
|
|
% Change |
|
Research and development expenses |
|
$ |
21,419 |
|
|
$ |
24,991 |
|
|
$ |
3,572 |
|
|
|
16.7 |
% |
% of net revenue |
|
|
16.1 |
% |
|
|
12.0 |
% |
|
|
|
|
|
|
|
|
Selling, general & administrative expenses |
|
|
13,571 |
|
|
|
18,423 |
|
|
|
4,852 |
|
|
|
35.8 |
% |
% of net revenue |
|
|
10.2 |
% |
|
|
8.9 |
% |
|
|
|
|
|
|
|
|
Other operating expense (income) |
|
|
|
|
|
|
(3,800 |
) |
|
|
(3,800 |
) |
|
|
|
* |
% of net revenue |
|
|
0.0 |
% |
|
|
-1.8 |
% |
|
|
|
|
|
|
|
|
Amortization of deferred stock compensation |
|
|
517 |
|
|
|
328 |
|
|
|
(189 |
) |
|
|
-36.6 |
% |
% of net revenue |
|
|
0.4 |
% |
|
|
0.1 |
% |
|
|
|
|
|
|
|
|
Restructuring |
|
|
432 |
|
|
|
|
|
|
|
(432 |
) |
|
|
-100.0 |
% |
% of net revenue |
|
|
0.3 |
% |
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
$ |
35,939 |
|
|
$ |
39,942 |
|
|
$ |
4,003 |
|
|
|
11.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of net revenue |
|
|
27.0 |
% |
|
|
19.2 |
% |
|
|
|
|
|
|
|
|
Research and Development Expenses. Research and development expenses decreased as a
percentage of net revenue to 12.0% from 16.1%, while spending on research and development
activities increased $3.6 million, or 16.7%, to $25.0 million from $21.4 million, for the year
ended June 30, 2005 compared with the year ended June 30, 2004. The increase in research and
development expenses reflected primarily a $3.4 million increase in employee compensation costs
resulting from additional staffing, increased base compensation related to our annual performance
review process, higher incentive pay, and other personnel related costs. The increase in research
and development expenses also reflected increased expensed equipment costs and higher travel
related costs, partially offset by lower outside services costs.
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses
decreased as a percentage of net revenue to 8.9% from 10.2%, while spending on selling, general,
and administrative activities
increased approximately $4.9 million, or 35.8%, to $18.4 million from $13.6 million, for the
year ended June 30, 2005 compared with the year ended June 30, 2004. The increase in selling,
general, and administrative expenses reflected an approximately $2.0 million increase in employee
compensation costs resulting from additional staffing, increased base compensation related to our
annual performance review process, and higher incentive pay. Increased corporate governance costs
in connection with Sarbanes-Oxley Act compliance, increased legal fees, and higher travel related
costs contributed $936,000, $662,000, and $474,000, respectively, to the increase in selling,
general, and administrative expenses.
Other operating expense (income). During the year ended June 30, 2005, we entered into a
cross license agreement with a competitor. The cross licenses are worldwide, non-exclusive,
non-transferable, and royalty-free. The cross license agreement settles certain intellectual
property claims of the parties and contains mutual releases of
41
the intellectual property claims of
the parties. In connection with the cross license agreement, which does not provide for any future
service obligations or commitments from us, we received a one-time payment of $3.8 million, which
is included as other operating expense (income).
Amortization of Deferred Stock Compensation. The year ended June 30, 2005 included
amortization expense for deferred stock compensation of $328,000 compared with $517,000 for the
year ended June 30, 2004. Upon the adoption of FAS 123R in the first quarter of fiscal 2006, we
ceased amortizing deferred stock compensation, as FAS 123R required us to expense stock options
based on grant date fair value.
Restructuring. In June 2003, we completed the acquisition of NSM. In connection with the
acquisition of NSM, we identified duplicate operational positions at our San Jose and Taiwan
locations, resulting in a $432,000 restructuring charge in the first quarter of fiscal 2004,
consisting primarily of severance costs for terminated employees.
Operating Income. We generated operating income of $56.1 million, or 26.9% of net revenue,
for the year ended June 30, 2005 compared with $20.1 million, or 15.0% of net revenue, for the year
ended June 30, 2004. As discussed in the preceding paragraphs, the improvement in operating income
was primarily related to the increased operating leverage resulting from the 56% increase in net
revenue as both research and development and selling, general, and administrative expenses declined
as a percentage of net revenue, combined with the $3.8 million intellectual property claim
settlement, and the higher gross margin percentage.
Interest Income/(Expense).
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
2005 |
|
|
$ Change |
|
|
% Change |
|
Interest income |
|
$ |
967 |
|
|
$ |
3,370 |
|
|
$ |
2,403 |
|
|
|
248.5 |
% |
% of net revenue |
|
|
0.7 |
% |
|
|
1.6 |
% |
|
|
|
|
|
|
|
|
Interest expense |
|
|
(134 |
) |
|
|
(1,145 |
) |
|
|
(1,011 |
) |
|
|
754.5 |
% |
% of net revenue |
|
|
-0.1 |
% |
|
|
-0.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
833 |
|
|
$ |
2,225 |
|
|
$ |
1,392 |
|
|
|
167.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of net revenue |
|
|
0.6 |
% |
|
|
1.1 |
% |
|
|
|
|
|
|
|
|
Interest Income. Interest income was $3.4 million for the year ended June 30, 2005
compared with $1.0 million for the year ended June 30, 2004. The $2.4 million increase in interest
income resulted from a combination of substantially higher average invested cash balances and
higher average interest rates. The increase in cash balances was primarily the result of the net
cash proceeds of $120.7 million received from the issuance of our convertible senior subordinated
notes in December 2004 aided by $42.5 million of net cash flows from operations.
Interest Expense. Interest expense was $1.1 million for the year ended June 30, 2005 compared
with $134,000 for the year ended June 30, 2004. The $1.0 million increase in interest expense
resulted from 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, exclusive of amortization of debt issuance costs.
Provision for Income Taxes.
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2005 |
|
$ Change |
|
% Change |
Provision for income taxes |
|
$ |
7,934 |
|
|
$ |
20,347 |
|
|
$ |
12,413 |
|
|
|
156.5 |
% |
% of income before provision for income taxes |
|
|
37.9 |
% |
|
|
34.9 |
% |
|
|
|
|
|
|
|
|
% of net revenue |
|
|
6.0 |
% |
|
|
9.8 |
% |
|
|
|
|
|
|
|
|
The provision for income taxes for the year ended June 30, 2005 was $20.3 million
compared with $7.9 million for the year ended June 30, 2004, reflecting the higher pre-tax profit
levels. The income tax provision
42
represented estimated federal, foreign, and state taxes for the
years ended June 30, 2005 and 2004. The effective tax rate for the year ended June 30, 2005 was
approximately 34.9% and diverged from the combined federal and state statutory rate primarily as a
result of the impact of higher income from lower taxed foreign operations, the release of
contingency reserves, the benefit of research and development tax credits, and tax-exempt interest
income, partially offset by foreign withholding taxes and permanent taxable differences. The
effective tax rate for the year ended June 30, 2004 was approximately 37.9% and diverged from the
combined federal and state statutory rate primarily due to the benefit of research and development
tax credits, and tax exempt interest income, partially offset by other permanent taxable
differences.
Quarterly Results of Operations
The following table sets forth our unaudited quarterly results of operations for the eight
quarters in the two-year period ended June 30, 2006. You should read the following table in
conjunction with the financial statements and related notes contained elsewhere in this report. We
have prepared this unaudited information on the same basis as our audited financial statements.
This table includes all adjustments, consisting only of normal recurring adjustments, that we
consider necessary for a fair presentation of our financial position and operating results for the
quarters presented. Past operating results are not necessarily indicative of future operating
performance; accordingly, you should not draw any conclusions about our future results from the
results of operations for any quarter presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
September |
|
|
December |
|
|
March |
|
|
June |
|
|
September |
|
|
December |
|
|
March |
|
|
June |
|
|
|
2004 |
|
|
2004 |
|
|
2005 |
|
|
2005 |
|
|
2005 |
|
|
2005 |
|
|
2006 |
|
|
2006 |
|
|
|
(unaudited) |
|
|
|
(in thousands) |
|
Net revenue |
|
$ |
38,091 |
|
|
$ |
56,543 |
|
|
$ |
56,668 |
|
|
$ |
56,837 |
|
|
$ |
51,725 |
|
|
$ |
48,555 |
|
|
$ |
40,365 |
|
|
$ |
43,912 |
|
Cost of revenue(1) |
|
|
20,899 |
|
|
|
30,155 |
|
|
|
30,481 |
|
|
|
30,555 |
|
|
|
28,053 |
|
|
|
26,384 |
|
|
|
22,257 |
|
|
|
25,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
17,192 |
|
|
|
26,388 |
|
|
|
26,187 |
|
|
|
26,282 |
|
|
|
23,672 |
|
|
|
22,171 |
|
|
|
18,108 |
|
|
|
18,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development(1) |
|
|
6,043 |
|
|
|
6,248 |
|
|
|
6,157 |
|
|
|
6,543 |
|
|
|
8,289 |
|
|
|
8,345 |
|
|
|
9,106 |
|
|
|
9,616 |
|
Selling, general, and
administrative(1) |
|
|
3,766 |
|
|
|
4,388 |
|
|
|
4,937 |
|
|
|
5,332 |
|
|
|
6,728 |
|
|
|
6,913 |
|
|
|
6,952 |
|
|
|
7,426 |
|
Other operating expense
(income) (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,800 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred
stock compensation(3) |
|
|
102 |
|
|
|
85 |
|
|
|
71 |
|
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating
expenses |
|
|
9,911 |
|
|
|
10,721 |
|
|
|
11,165 |
|
|
|
8,145 |
|
|
|
15,017 |
|
|
|
15,258 |
|
|
|
16,058 |
|
|
|
17,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
7,281 |
|
|
|
15,667 |
|
|
|
15,022 |
|
|
|
18,137 |
|
|
|
8,655 |
|
|
|
6,913 |
|
|
|
2,050 |
|
|
|
1,860 |
|
Interest income |
|
|
268 |
|
|
|
397 |
|
|
|
1,118 |
|
|
|
1,587 |
|
|
|
1,551 |
|
|
|
1,901 |
|
|
|
2,179 |
|
|
|
2,353 |
|
Interest expense |
|
|
(26 |
) |
|
|
(151 |
) |
|
|
(483 |
) |
|
|
(485 |
) |
|
|
(484 |
) |
|
|
(485 |
) |
|
|
(485 |
) |
|
|
(485 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
7,523 |
|
|
|
15,913 |
|
|
|
15,657 |
|
|
|
19,239 |
|
|
|
9,722 |
|
|
|
8,329 |
|
|
|
3,744 |
|
|
|
3,728 |
|
Provision for income taxes |
|
|
3,092 |
|
|
|
6,189 |
|
|
|
3,983 |
|
|
|
7,083 |
|
|
|
4,210 |
|
|
|
3,526 |
|
|
|
2,121 |
|
|
|
1,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,431 |
|
|
$ |
9,724 |
|
|
$ |
11,674 |
|
|
$ |
12,156 |
|
|
$ |
5,512 |
|
|
$ |
4,803 |
|
|
$ |
1,623 |
|
|
$ |
1,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.18 |
|
|
$ |
0.38 |
|
|
$ |
0.44 |
|
|
$ |
0.47 |
|
|
$ |
0.22 |
|
|
$ |
0.20 |
|
|
$ |
0.07 |
|
|
$ |
0.07 |
|
Diluted |
|
$ |
0.16 |
|
|
$ |
0.33 |
|
|
$ |
0.38 |
|
|
$ |
0.41 |
|
|
$ |
0.20 |
|
|
$ |
0.18 |
|
|
$ |
0.06 |
|
|
$ |
0.07 |
|
Shares used in computing
net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
25,099 |
|
|
|
25,816 |
|
|
|
26,315 |
|
|
|
25,717 |
|
|
|
24,769 |
|
|
|
24,299 |
|
|
|
24,737 |
|
|
|
25,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
27,694 |
|
|
|
29,372 |
|
|
|
31,464 |
|
|
|
30,316 |
|
|
|
29,036 |
|
|
|
28,781 |
|
|
|
29,201 |
|
|
|
29,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes the amortization of deferred stock compensation as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
$ |
4 |
|
|
$ |
3 |
|
|
$ |
3 |
|
|
$ |
2 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Research and development |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and
administrative |
|
|
90 |
|
|
|
82 |
|
|
|
68 |
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of
deferred stock
compensation |
|
$ |
102 |
|
|
$ |
85 |
|
|
$ |
71 |
|
|
$ |
70 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
|
During the fourth quarter of fiscal 2005, we entered into a cross license agreement
with a competitor, which is non-exclusive, non-transferable, and royalty-free. The cross
license agreement settled certain intellectual property claims and contained mutual
releases of the intellectual property claims of the parties. In connection with the cross
license agreement, which does not provide for any future service obligations or commitments
from us, we received a one-time payment which is included as other operating expense
(income). |
|
(3) |
|
Beginning with fiscal 2006, we adopted SFAS 123R and as a result ceased amortizing
deferred stock compensation. Accordingly, no amortization of deferred stock compensation
was recorded for the year ended June 30, 2006 |
43
Liquidity and Capital Resources
Our cash, cash equivalents, and short-term investments were $245.2 million as of June 30, 2006
compared with $228.9 million as of June 30, 2005. The increase in cash, cash equivalents, and
short-term investments was primarily attributable to cash generated from operating activities of
$24.8 million and proceeds from stock option exercises of $8.5 million, partially offset by $18.8
million of cash used for the repurchase of approximately 1.2 million shares of our common stock.
Cash Flows from Operating Activities. During the year ended June 30, 2006, the net cash
provided by operating activities of $24.8 million was primarily attributable to net income of $13.7
million, plus tax benefit from stock options of $6.2 million and adjustments for non-cash charges,
including share-based compensation costs of $13.2 million and depreciation, deferred taxes, and
amortization of debt issuance costs totaling $4.0 million, partially offset by a net increase in
operating assets and liabilities of $7.1 million and excess tax benefit from share-based
compensation of $5.2 million. The net increase in operating assets and liabilities related
primarily to a reduction of income taxes payable of $6.8 million. During the year ended June 30,
2005, the net cash provided by operating activities of $42.5 million was primarily attributable to
net income of $38.0 million, plus tax benefit from stock options of $10.0 million, and adjustments
for non-cash charges for depreciation, amortization of deferred stock compensation, amortization of
debt issuance costs, and deferred taxes totaling $3.7 million, partially offset by a net increase
in operating assets and liabilities of $9.1 million. During the year ended June 30, 2004, net cash
generated from operating activities was $14.8 million, primarily reflecting our net income of $13.0
million, plus tax benefit from stock options of $4.2 million, and adjustments for non-cash charges
for depreciation, amortization of deferred stock compensation, and deferred taxes totaling $1.0
million, partially offset by a net increase in operating assets and liabilities of $3.4 million.
Cash Flows from Investing Activities. Our investing activities principally relate to
purchases, sales, and maturities of government-backed securities, investment-grade fixed income
instruments, and auction rate securities and used net cash for the years ended June 30, 2004, 2005,
and 2006 of $2.1 million, $137.7 million, and $53.2 million, respectively. Net cash used in
investing activities during fiscal 2006 consisted of purchases of $250.9 million for short-term
investments and $3.1 million for purchases of capital assets, partially offset by proceeds from
sales and maturities of $200.8 million for short-term investments. Net cash used in investing
activities during fiscal 2005 consisted of purchases of $221.4 million for short-term investments,
$13.8 million for purchases of capital assets, and a $4.0 million investment in Foveon, Inc.,
partially offset by proceeds from sales and maturities of $101.5 million for short-term
investments. Our purchases of capital assets included our 70,000 square-foot building located in
Santa Clara, California. We used approximately $11.7 million of cash for the purchase and
reconfiguration of the building and moved our San Jose operations into the new facility in July
2005. Net cash used in investing activities during fiscal 2004 consisted of purchases of $21.2
million for short-term investments and $908,000 for purchases of capital assets, largely offset by
proceeds from sales and maturities of $19.7 million for short-term investments and the settlement
of $240,000 of restricted cash.
Cash Flows from Financing Activities. Net cash provided by (used in) financing activities for
the years ended June 30, 2004, 2005, and 2006 was $5.2 million, $107.9 million, and $(5.1) million,
respectively. Our financing activities for the year ended June 30, 2006 primarily related to $18.8
million for the purchase of our common stock on the open market, partially offset by $8.5 million
of proceeds from common stock issued under share-based compensation plans and $5.2 million from
excess tax benefit from share-based compensation. Our
financing activities for the year ended June 30, 2005 related primarily to proceeds from the
issuance of $125.0 million of convertible senior subordinated notes and $8.4 million of proceeds
from common stock issued under our stock option plans and employee stock purchase plan, partially
offset by $21.2 million for the purchase of our common stock on the open market and $4.3 million of
debt issuance costs. Our financing activities for the year ended June 30, 2004 were primarily
related to proceeds from common stock issued under our stock option plans and employee stock
purchase plan, and repayment of notes receivable from stockholders, less payments made on capital
lease and equipment financing obligations.
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
44
investment opportunities.
Common stock repurchased under this program is held as treasury stock. Purchases under this
program totaled 2,306,100 shares through June 30, 2006 for an aggregate cost of $40.0 million, or
an average cost of $17.34 per share. The authorization for the remaining $40.0 million available
under the stock repurchase program will expire in October 2007. Subsequent to June 30, 2006, we
repurchased 215,000 shares for $4.6 million, or an average cost of $21.45 per share.
Bank Credit Facility. We currently maintain a $15 million working capital line of credit with
Silicon Valley Bank. The Silicon Valley Bank revolving line of credit, which expires on November
26, 2006, has an interest rate equal to Silicon Valley Banks prime lending rate and provides for a
security interest in substantially all of our assets. We had not borrowed any amounts under the
line of credit as of June 30, 2006.
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 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 June 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 long-term 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 long-term note payable plus the associated accrued interest.
45
$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 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 June 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 |
|
$ |
125 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
125 |
|
Note payable |
|
|
2 |
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
|
Building leases |
|
|
2 |
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
129 |
|
|
$ |
1 |
|
|
$ |
3 |
|
|
$ |
|
|
|
$ |
125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 increase by $125 million with a
corresponding decrease in amounts due in more than five years.
Off-Balance Sheet Arrangements
We do not have any transactions, arrangements, or other relationships with unconsolidated
entities that are reasonably likely to affect our liquidity or capital resources. We have no
special purpose or limited purpose entities that provide off-balance sheet financing, liquidity, or
market or credit risk support; engage in leasing, hedging, research and development services; or
other relationships that expose us to liability that is not reflected in the financial statements.
Recent Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board issued SFAS No. 154, Accounting Changes
and Error Corrections, (SFAS 154). SFAS 154, which replaces APB Opinion No. 20, Accounting
Changes, (APB
46
20) and SFAS No. 3 Reporting Accounting Changes in Interim Financial Statements,
applies to all voluntary changes in accounting principle and changes the requirements for
accounting for and reporting of a change in accounting principle. APB 20 previously required that
most voluntary changes in accounting principle be recognized by including in net income of the
period of change a cumulative effect of changing to the new accounting principle, while SFAS 154
requires retrospective application to prior periods financial statements of a voluntary change in
accounting principle, unless it is impracticable. SFAS 154 enhances the consistency of financial
information between periods. SFAS 154 will be effective beginning the first quarter of our fiscal
2007. The adoption of SFAS 154 will not have a material impact on our financial position, results
of operations, or cash flows.
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.
47
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk
Our exposure to market risk for changes in interest rates relates primarily to our cash, cash
equivalents, and short-term investments. Due to the conservative nature of our investment
portfolio, which is predicated on capital preservation and liquidity and consists primarily of
government-backed securities and investment-grade instruments, we would not expect the fair value
of our investments to be significantly affected by changes in market interest rates; however, our
interest income will fluctuate with changes in market interest rates. We do not use our investment
portfolio for trading or other speculative purposes.
The table below presents principal amounts and related weighted average interest rates by year
of maturity for our investment portfolio and debt obligations as of June 30, 2006 (in thousands,
except for average interest rates):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30, |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
Thereafter |
|
Total |
|
Fair Value |
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents variable rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market |
|
$ |
31,273 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
31,273 |
|
|
$ |
31,273 |
|
Average interest rate |
|
|
4.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.2 |
% |
|
|
|
|
Cash equivalents fixed rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Paper |
|
$ |
3,992 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,992 |
|
|
$ |
3,991 |
|
Average interest rate |
|
|
5.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.1 |
% |
|
|
|
|
Total cash equivalents |
|
$ |
35,265 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
35,265 |
|
|
$ |
35,264 |
|
Average interest rate |
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.3 |
% |
|
|
|
|
Short-term
investments
variable rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate preferred |
|
$ |
35,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
35,000 |
|
|
$ |
35,000 |
|
Average interest rate |
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.0 |
% |
|
|
|
|
Asset backed securities |
|
$ |
21,700 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
21,700 |
|
|
$ |
21,700 |
|
Average interest rate |
|
|
5.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.2 |
% |
|
|
|
|
Municipal securities |
|
$ |
78,855 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
78,855 |
|
|
$ |
78,855 |
|
Average interest rate |
|
|
3.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.9 |
% |
|
|
|
|
Short-term investments
fixed rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agencies |
|
$ |
6,000 |
|
|
$ |
10,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
16,000 |
|
|
$ |
15,811 |
|
Average interest rate |
|
|
4.0 |
|
|
|
4.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.5 |
% |
|
|
|
|
Municipal securities |
|
$ |
35,763 |
|
|
$ |
19,597 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
55,360 |
|
|
$ |
55,086 |
|
Average interest rate |
|
|
2.8 |
% |
|
|
3.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.0 |
% |
|
|
|
|
Total
short-term investments |
|
$ |
177,318 |
|
|
$ |
29,597 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
206,915 |
|
|
$ |
206,452 |
|
Average interest rate |
|
|
4.1 |
% |
|
|
3.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Senior Subordinated Notes
Fixed rate amounts |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
125,000 |
|
|
$ |
125,000 |
|
|
$ |
102,656 |
|
Average interest rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.75 |
% |
|
|
0.75 |
% |
|
|
|
|
Note payable
to related party
Fixed rate amounts |
|
$ |
|
|
|
$ |
1,500 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,500 |
|
|
$ |
1,500 |
|
Average interest rate |
|
|
|
|
|
|
6.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.0 |
% |
|
|
|
|
Our Convertible Senior Subordinated Notes bear a fixed coupon interest rate of 0.75% and
mature in December 2024. Accordingly, we are not exposed to changes in interest rates related to
our long-term debt instruments. The notes are not listed on any securities exchange or included in
any automated quotation system. The fair value of the notes may increase or decrease for various
reasons, including fluctuations in the market price of our common stock, fluctuations in market
interest rates, and fluctuations in general economic conditions. The principal and carrying amount
of the notes at June 30, 2006 was $125 million and the fair value of the notes was approximately
$102.7 million based on trading prices.
Our 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
48
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 preceding
schedule, but if all the noteholders elected to exercise their rights to require us to repurchase
their notes on December 1, 2009, then maturities in the 2010 column would increase by $125 million
and maturities in the thereafter column would decrease by a corresponding amount.
There have been no significant changes in the maturity dates and average interest rates for
our investment portfolio and debt obligations subsequent to June 30, 2006.
Foreign currency exchange risk
All of our revenue, cost of revenue, and expenses, except those expenses directly related to
our local operations in Asia/Pacific and Europe, are denominated in U.S. dollars. As a result, we
have relatively little exposure to foreign currency exchange risks and foreign exchange losses have
been immaterial to date. We do not currently enter into forward-exchange contracts to hedge
exposure denominated in foreign currencies or any other derivative financial instruments for
trading or speculative purposes. In the future, if our operations change and we determine that our
foreign exchange exposure has increased, we may consider entering into hedging transactions to
mitigate such risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, the reports of our independent registered
public accounting firm, and the notes thereto commencing at page F-1 of this report, which
financial statements, reports, and notes are incorporated herein by reference.
|
|
|
ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE |
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Conclusions Regarding Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of
the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer, as of June 30, 2006, concluded that our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934) are effective to ensure that information required to be disclosed by us in this report
was recorded, processed, summarized and reported within the time periods specified in Securities
and Exchange Commission rules and forms for this report.
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act
of 1934, as amended). Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the framework in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in Internal ControlIntegrated Framework,
our management concluded that our internal control over financial reporting was effective as of
June 30, 2006. Our assessment of the effectiveness of our internal control over financial reporting
as of June 30, 2006 has been audited by KPMG LLP, an independent registered public accounting firm,
as stated in its report included herein on page F-3.
49
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during our most recent
fiscal quarter that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not
expect that our disclosure controls and procedures or our internal controls will prevent all error
and all fraud. A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues, misstatements, errors, and instances of fraud, if any, within our company have
been or will be prevented or detected. Further, internal controls may become inadequate as a
result of changes in conditions, or through the deterioration of the degree of compliance with
policies or procedures.
ITEM 9B. OTHER INFORMATION
During the fourth quarter we entered into an Indemnification Agreement with Tom Tiernan when
he was hired as our Senior Vice President and General Manager. There were no other items requiring
reporting on Form 8-K that were not reported on Form 8-K during the fourth quarter of the year
covered by this Form 10-K.
50
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item relating to directors of our company is incorporated
herein by reference to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act for our 2006 Annual Meeting of Stockholders. The information required by this Item
relating to our executive officers is included in Item 1, Business Executive Officers.
We have adopted a code of ethics that applies to our principal executive officer, principal
financial officer, and other senior accounting personnel. The Code of Ethics for the CEO and
Senior Financial Officers is located on our website at www.synaptics.com in the Investor Relations
section under Corporate Governance.
We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding any
amendment to, or waiver from, a provision of this code of ethics by posting such information on our
website, at the address and location specified above.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the definitive
Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2006 Annual
Meeting of Stockholders.
|
|
|
ITEM 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS |
The information required by this Item is incorporated herein by reference to the definitive
Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2006 Annual
Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the definitive
Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2006 Annual
Meeting of Stockholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated herein by reference to the definitive
Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2006 Annual
Meeting of Stockholders.
51
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) |
|
Financial Statements and Financial Statement Schedules |
|
(1) |
|
Financial Statements are listed in the Index to Consolidated Financial
Statements on page F-1 of this report. |
|
|
(2) |
|
Financial Statement Schedules: Schedule II, Valuation and Qualifying Accounts
is set forth on page S-1 of this report. |
|
|
|
Exhibit |
|
|
Number |
|
Exhibit |
3.1
|
|
Certificate of Incorporation (1) |
|
|
|
3.2
|
|
Bylaws (1) |
|
|
|
3.3
|
|
Certificate of Amendment of Certificate of Incorporation of the registrant (6) |
|
|
|
4
|
|
Form of Common Stock Certificate (2) |
|
|
|
4.1
|
|
Indenture dated December 7, 2004 by and between the registrant and American Stock
Transfer & Trust Company (6) |
|
|
|
4.2
|
|
Registration Rights Agreement dated December 7, 2004 by and among the registrant, Bear,
Stearns & Co. Inc., and Credit Suisse First Boston LLC (6) |
|
|
|
10.1
|
|
1986 Incentive Stock Option Plan and form of grant agreement (3) |
|
|
|
10.2
|
|
1986 Supplemental Stock Option Plan and form of grant agreement (3) |
|
|
|
10.3(a)
|
|
1996 Stock Option Plan (3) |
|
|
|
10.3(b)
|
|
Form of grant agreements for 1996 Stock Option Plan (2) |
|
|
|
10.4
|
|
2000 U.K. Approved Sub-Plan to the 1996 Stock Option Plan and form of grant agreement (3) |
|
|
|
10.5
|
|
2000 Nonstatutory Stock Option Plan and form of grant agreement (3) |
|
|
|
10.6(a)
|
|
Amended and Restated 2001 Incentive Compensation Plan (4) |
|
|
|
10.6(b)
|
|
Form of grant agreements for Amended and Restated 2001 Incentive Compensation Plan (4) |
|
|
|
10.6(c)
|
|
Form of deferred stock award agreement for Amended and Restated 2001 Incentive Compensation
Plan * |
|
|
|
10.7(a)
|
|
Corrected Amended and Restated 2001 Employee Stock Purchase Plan (as amended through
February 20, 2002) (2) |
|
|
|
10.7(b)
|
|
2001 Employee Stock Purchase Sub-Plan for U.K. Employees (2) |
|
|
|
10.8
|
|
401(k) Profit Sharing Plan (3) |
|
|
|
10.12
|
|
Subordinated Secured Non-Recourse Promissory Note dated August 12, 1997 executed by the
registrant in favor of National Semiconductor Corporation (3) |
|
|
|
10.13
|
|
Form of Stock Option Grant and Stock Option Agreement between the registrant and Federico
Faggin (3) |
|
|
|
10.14
|
|
Form of Stock Option Grant and Stock Option Agreement between the registrant and Francis
F. Lee (3) |
|
|
|
10.15
|
|
Form of Stock Option Grant and Stock Option Agreement between the registrant and Russell
J. Knittel (3) |
|
|
|
10.16
|
|
Loan and Security Agreement dated as of August 30, 2001 between Silicon Valley Bank and
the registrant as amended through November 30, 2004 (7) |
|
|
|
10.17
|
|
Form of Indemnification Agreement entered into as of January 28, 2002 with the following
directors and executive officers: Federico Faggin, Francis F. Lee, Donald E. Kirby, Russell
J. Knittel, Shawn P. Day, David T. McKinnon, Thomas D. Spade, William T. Stacy, Keith B.
Geeslin, and Richard L. Sanquini, as of April 23, 2002 with W. Ronald Van Dell, as of June
26, 2004 with Clark F. Foy as of September 29, 2005 with Jeffrey D. Buchanan, and as of March
28, 2006 with Thomas J. Tiernan (1) |
|
|
|
10.18
|
|
Severance Policy for Principal Executive Officers (5) |
|
|
|
10.19
|
|
Change of Control and Severance Agreement entered into by Francis F. Lee as of April 22,
2003 (5) |
|
|
|
10.20
|
|
Form of Change of Control and Severance Agreement entered into by Donald E. Kirby and
Russell J. Knittel as of April 22, 2003 (5) |
|
|
|
10.21
|
|
Purchase Agreement dated December 1, 2004 by and among the registrant, Bear, Stearns & Co.
Inc., and Credit Suisse First Boston LLC (6) |
52
|
|
|
Exhibit |
|
|
Number |
|
Exhibit |
10.22
|
|
Settlement Agreement dated March 31, 2005 by and among the registrant, Alps Electric Co.
Ltd., and Cirque Corporation (8) ** |
|
|
|
10.23
|
|
Change of Control Severance Agreement entered into by Thomas Tiernan as of April 3, 2006 (10) |
|
|
|
12.1
|
|
Ratio of Earnings to Fixed Charges |
|
|
|
21
|
|
List of Subsidiaries |
|
|
|
23.1
|
|
Consent of KPMG LLP, independent registered public accounting firm |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) |
|
|
|
32.1
|
|
Section 1350 Certification of Chief Executive Officer |
|
|
|
32.2
|
|
Section 1350 Certification of Chief Financial Officer |
|
|
|
(1) |
|
Incorporated by reference to the registrants Form 10-Q for the quarter ended December 29,
2001, as filed with the SEC on February 21, 2002. |
|
(2) |
|
Incorporated by reference to the registrants Form 10-K for the fiscal year ended June 30,
2002, as filed with the SEC on September 12, 2002. |
|
(3) |
|
Incorporated by reference to the registrants registration statement on Form S-1
(Registration No. 333-56026) as filed with the SEC January 22, 2002 and declared effective
January 28, 2002. |
|
(4) |
|
Incorporated by reference to the registrants Form 10-Q for the quarter ended December 28,
2002, as filed with SEC on February 6, 2003. |
|
(5) |
|
Incorporated by reference to the registrants Form 10-K for the fiscal year ended June 30,
2002, as filed with the SEC on September 12, 2003. |
|
(6) |
|
Incorporated by reference to the registrants Current Report on Form 8-K as filed with the
SEC on December 7, 2004. |
|
(7) |
|
Incorporated by reference to the registrants Current Report on Form 8-K as filed with the
SEC on December 3, 2004. |
|
(8) |
|
Incorporated by reference to the registrants Current Report on Form 8-K as filed with the
SEC on April 1, 2005. |
|
(9) |
|
Incorporated by reference to the registrants Current Report on Form 8-K as filed with the
SEC on January 23, 2006. |
|
(10) |
|
Incorporated by reference to the registrants Current Report on Form 8-K as filed with the
SEC on April 3, 2006. |
|
* |
|
Filed herewith. |
|
** |
|
Portions of this exhibit have been omitted pursuant to a confidential treatment request that
was granted by the Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange
Act. |
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 September 6, 2006
|
|
By:
|
/s/ Francis F. Lee |
|
|
|
|
|
|
|
|
|
|
Francis F. Lee |
|
|
|
|
President and Chief Executive Officer |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ Francis F. Lee
|
|
President, Chief
Executive Officer,
and
Director (Principal Executive Officer)
|
|
September 6, 2006 |
|
|
|
|
|
|
|
|
|
/s/ Russell J. Knittel
|
|
Senior Vice President,
Chief Financial Officer,
Chief Administrative Officer, Secretary
and Treasurer (Principal Financial and Accounting
Officer)
|
|
September 6, 2006 |
|
|
|
|
|
|
|
|
|
/s/ Federico Faggin
|
|
Chairman of the Board
|
|
September 6, 2006 |
|
|
|
|
|
|
|
|
|
|
/s/ Jeffrey D. Buchanan
|
|
Director
|
|
September 6, 2006 |
|
|
|
|
|
|
|
|
|
|
/s/ Keith B. Geeslin
|
|
Director
|
|
September 6, 2006 |
|
|
|
|
|
|
|
|
|
|
/s/ Richard L. Sanquini
|
|
Director
|
|
September 6, 2006 |
|
|
|
|
|
|
|
|
|
|
/s/ W. Ronald Van Dell
|
|
Director
|
|
September 6, 2006 |
|
|
|
|
|
54
INDEX TO FINANCIAL STATEMENTS
F- 1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Synaptics Incorporated:
We have audited the accompanying consolidated balance sheets of Synaptics Incorporated and
subsidiaries (the Company) as of June 30, 2005 and 2006, and the related consolidated statements of
income, stockholders equity and comprehensive income, and cash flows for each of the years in the
three-year period ended June 30, 2006. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule listed in the Index at Item
15(a)(2). These consolidated financial statements and financial statement schedule are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Synaptics Incorporated and subsidiaries as of June 30,
2005 and 2006, and the results of their operations and their cash flows for each of the years in
the three-year period ended June 30, 2006, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As
discussed in Note 9 to the consolidated financial statements, the
Company adopted SFAS No. 123(R), "Share-Based Payment," applying the
modified prospective method at the beginning of fiscal year 2006.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Companys internal control over financial
reporting as of June 30, 2006, based on criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated September 6, 2006 expressed an unqualified opinion on managements assessment
of, and the effective operation of, internal control over financial reporting.
/s/ KPMG LLP
Mountain View, California
September 6, 2006
F- 2
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Synaptics Incorporated:
We have audited managements assessment, included in Managements Report on Internal Control
over Financial Reporting appearing under Item 9A, that Synaptics Incorporated (the Company)
maintained effective internal control over financial reporting as of June 30, 2006, based on
criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Companys management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the effectiveness of the Companys internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A companys internal control over financial reporting is a process designed 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. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Synaptics Incorporated maintained effective
internal control over financial reporting as of June 30, 2006, is fairly stated, in all material
respects, based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion,
Synaptics Incorporated maintained, in all material respects, effective internal control over
financial reporting as of June 30, 2006, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Synaptics Incorporated and
subsidiaries as of June 30, 2005 and 2006, and the related consolidated statements of income,
stockholders equity and comprehensive income, and cash flows for each of the years in the
three-year period ended June 30, 2006, and our report dated September 6, 2006 expressed an
unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Mountain View, California
September 6, 2006
F- 3
SYNAPTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and share amounts)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2005 |
|
|
2006 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
72,232 |
|
|
$ |
38,724 |
|
Short-term investments |
|
|
156,689 |
|
|
|
206,452 |
|
Accounts receivable, net of allowances of
$165 and $189 at June 30, 2005 and 2006,
respectively |
|
|
33,790 |
|
|
|
34,034 |
|
Inventories |
|
|
7,731 |
|
|
|
10,010 |
|
Prepaid expenses and other current assets |
|
|
3,046 |
|
|
|
3,407 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
273,488 |
|
|
|
292,627 |
|
Property and equipment, net |
|
|
14,615 |
|
|
|
16,038 |
|
Goodwill |
|
|
1,927 |
|
|
|
1,927 |
|
Other assets |
|
|
21,175 |
|
|
|
20,829 |
|
|
|
|
|
|
|
|
|
|
$ |
311,205 |
|
|
$ |
331,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
12,390 |
|
|
$ |
16,542 |
|
Accrued compensation |
|
|
5,638 |
|
|
|
4,842 |
|
Income taxes payable |
|
|
14,867 |
|
|
|
8,078 |
|
Other accrued liabilities |
|
|
5,353 |
|
|
|
5,377 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
38,248 |
|
|
|
34,839 |
|
|
|
|
|
|
|
|
Note payable to a related party |
|
|
1,500 |
|
|
|
1,500 |
|
Other liabilities |
|
|
1,797 |
|
|
|
3,040 |
|
Convertible senior subordinated notes |
|
|
125,000 |
|
|
|
125,000 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock;
|
|
|
|
|
|
|
|
|
$0.001 par value; 10,000,000 shares
authorized; no shares issued and
outstanding |
|
|
|
|
|
|
|
|
Common stock;
|
|
|
|
|
|
|
|
|
$0.001 par value; 60,000,000 shares
authorized; 26,419,447 and 27,462,125
shares issued at June 30, 2005 and
2006, respectively |
|
|
26 |
|
|
|
27 |
|
Additional paid-in capital |
|
|
106,686 |
|
|
|
134,217 |
|
Less: 1,139,000 and 2,306,100 common
treasury shares at June 30, 2005 and 2006,
respectively, at cost |
|
|
(21,180 |
) |
|
|
(39,999 |
) |
Deferred stock compensation |
|
|
(303 |
) |
|
|
|
|
Accumulated other comprehensive loss |
|
|
(129 |
) |
|
|
(464 |
) |
Retained earnings |
|
|
59,560 |
|
|
|
73,261 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
144,660 |
|
|
|
167,042 |
|
|
|
|
|
|
|
|
|
|
$ |
311,205 |
|
|
$ |
331,421 |
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F- 4
SYNAPTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended June 30, |
|
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
Net revenue |
|
$ |
133,276 |
|
|
$ |
208,139 |
|
|
$ |
184,557 |
|
Cost of revenue(1)(2) |
|
|
77,244 |
|
|
|
112,090 |
|
|
|
101,704 |
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
56,032 |
|
|
|
96,049 |
|
|
|
82,853 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development(1)(2) |
|
|
21,419 |
|
|
|
24,991 |
|
|
|
35,356 |
|
Selling, general, and administrative(1)(2) |
|
|
13,571 |
|
|
|
18,423 |
|
|
|
28,019 |
|
Other operating expense (income) |
|
|
|
|
|
|
(3,800 |
) |
|
|
|
|
Amortization of deferred stock compensation |
|
|
517 |
|
|
|
328 |
|
|
|
|
|
Restructuring |
|
|
432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
35,939 |
|
|
|
39,942 |
|
|
|
63,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
20,093 |
|
|
|
56,107 |
|
|
|
19,478 |
|
Interest income |
|
|
967 |
|
|
|
3,370 |
|
|
|
7,984 |
|
Interest expense |
|
|
(134 |
) |
|
|
(1,145 |
) |
|
|
(1,939 |
) |
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
20,926 |
|
|
|
58,332 |
|
|
|
25,523 |
|
Provision for income taxes |
|
|
7,934 |
|
|
|
20,347 |
|
|
|
11,822 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
12,992 |
|
|
$ |
37,985 |
|
|
$ |
13,701 |
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.53 |
|
|
$ |
1.48 |
|
|
$ |
0.55 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.48 |
|
|
$ |
1.30 |
|
|
$ |
0.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
24,418 |
|
|
|
25,736 |
|
|
|
24,708 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
27,108 |
|
|
|
29,761 |
|
|
|
29,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts include share-based compensation costs as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
$ |
|
|
|
$ |
|
|
|
$ |
682 |
|
Research and development |
|
$ |
|
|
|
$ |
|
|
|
$ |
4,799 |
|
Selling, general, and administrative |
|
$ |
|
|
|
$ |
|
|
|
$ |
7,719 |
|
|
|
|
(2) |
|
Amounts exclude amortization of deferred stock compensation as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
$ |
20 |
|
|
$ |
12 |
|
|
$ |
|
|
Research and development |
|
$ |
91 |
|
|
$ |
8 |
|
|
$ |
|
|
Selling, general, and administrative |
|
$ |
406 |
|
|
$ |
308 |
|
|
$ |
|
|
See notes to consolidated financial statements.
F- 5
SYNAPTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
(in thousands, except for share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes |
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Deferred |
|
|
Receivable |
|
|
Other |
|
|
|
|
|
|
Total |
|
|
|
Common Stock |
|
|
Paid-in |
|
|
Treasury |
|
|
Stock |
|
|
From |
|
|
Comprehensive |
|
|
Retained |
|
|
Stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Stock |
|
|
Compensation |
|
|
Stockholders |
|
|
Income/(Loss) |
|
|
Earnings |
|
|
Equity |
|
Balance at June 30, 2003 |
|
|
23,835,877 |
|
|
$ |
24 |
|
|
$ |
78,761 |
|
|
$ |
|
|
|
$ |
(1,184 |
) |
|
$ |
(20 |
) |
|
$ |
100 |
|
|
$ |
8,583 |
|
|
$ |
86,264 |
|
Components of comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,992 |
|
|
|
12,992 |
|
Net unrealized loss on available-for-sale
investments, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(260 |
) |
|
|
|
|
|
|
(260 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock from option
exercises and stock purchase plan |
|
|
1,151,521 |
|
|
|
1 |
|
|
|
5,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,370 |
|
Amortization of deferred stock
compensation, net of reversals |
|
|
|
|
|
|
|
|
|
|
(33 |
) |
|
|
|
|
|
|
550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
517 |
|
Tax benefit associated with stock options |
|
|
|
|
|
|
|
|
|
|
4,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,237 |
|
Repayment of notes receivable from
stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2004 |
|
|
24,987,398 |
|
|
|
25 |
|
|
|
88,334 |
|
|
|
|
|
|
|
(634 |
) |
|
|
|
|
|
|
(160 |
) |
|
|
21,575 |
|
|
|
109,140 |
|
Components of comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,985 |
|
|
|
37,985 |
|
Net unrealized gain on available-for-sale
investments, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 |
|
|
|
|
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock from option
exercises and stock purchase plan |
|
|
1,432,049 |
|
|
|
1 |
|
|
|
8,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,405 |
|
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,180 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,180 |
) |
Amortization of deferred stock
compensation, net of reversals |
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
328 |
|
Tax benefit associated with stock options |
|
|
|
|
|
|
|
|
|
|
9,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2005 |
|
|
26,419,447 |
|
|
|
26 |
|
|
|
106,686 |
|
|
|
(21,180 |
) |
|
|
(303 |
) |
|
|
|
|
|
|
(129 |
) |
|
|
59,560 |
|
|
|
144,660 |
|
Components of comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,701 |
|
|
|
13,701 |
|
Net unrealized loss on available-for-sale
investments, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(335 |
) |
|
|
|
|
|
|
(335 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock from option
exercises and stock purchase plan |
|
|
1,042,678 |
|
|
|
1 |
|
|
|
8,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,477 |
|
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,819 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,819 |
) |
Amortization of deferred stock
compensation, net of reversals |
|
|
|
|
|
|
|
|
|
|
(303 |
) |
|
|
|
|
|
|
303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit associated with stock options |
|
|
|
|
|
|
|
|
|
|
6,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,158 |
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
13,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2006 |
|
|
27,462,125 |
|
|
$ |
27 |
|
|
$ |
134,217 |
|
|
$ |
(39,999 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(464 |
) |
|
$ |
73,261 |
|
|
$ |
167,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F- 6
SYNAPTICS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended June 30, |
|
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
12,992 |
|
|
$ |
37,985 |
|
|
$ |
13,701 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation costs |
|
|
|
|
|
|
|
|
|
|
13,200 |
|
Depreciation and amortization of property and equipment |
|
|
1,013 |
|
|
|
1,061 |
|
|
|
1,649 |
|
Amortization of deferred stock compensation |
|
|
517 |
|
|
|
328 |
|
|
|
|
|
Amortization of debt issuance costs |
|
|
|
|
|
|
487 |
|
|
|
860 |
|
Tax benefit realized from stock options |
|
|
4,237 |
|
|
|
9,951 |
|
|
|
6,158 |
|
Excess tax benefit from share-based compensation |
|
|
|
|
|
|
|
|
|
|
(5,223 |
) |
Deferred taxes |
|
|
(519 |
) |
|
|
1,831 |
|
|
|
1,504 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(8,694 |
) |
|
|
(11,915 |
) |
|
|
(244 |
) |
Inventories |
|
|
(97 |
) |
|
|
(1,206 |
) |
|
|
(2,279 |
) |
Prepaid expenses and other current assets |
|
|
(61 |
) |
|
|
(293 |
) |
|
|
(507 |
) |
Other assets |
|
|
(147 |
) |
|
|
(12,838 |
) |
|
|
(794 |
) |
Accounts payable |
|
|
2,327 |
|
|
|
3,170 |
|
|
|
4,152 |
|
Accrued compensation |
|
|
1,786 |
|
|
|
1,044 |
|
|
|
(796 |
) |
Income taxes payable |
|
|
2,357 |
|
|
|
10,849 |
|
|
|
(6,789 |
) |
Other accrued liabilities |
|
|
(1,025 |
) |
|
|
2,055 |
|
|
|
24 |
|
Other liabilities |
|
|
96 |
|
|
|
36 |
|
|
|
165 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
14,782 |
|
|
|
42,545 |
|
|
|
24,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of short-term investments |
|
|
(21,199 |
) |
|
|
(221,387 |
) |
|
|
(250,936 |
) |
Proceeds from sales and maturities of short-term investments |
|
|
19,718 |
|
|
|
101,539 |
|
|
|
200,838 |
|
Purchases of property and equipment |
|
|
(908 |
) |
|
|
(13,847 |
) |
|
|
(3,072 |
) |
Investment in Foveon, Inc. |
|
|
|
|
|
|
(4,000 |
) |
|
|
|
|
Decrease in restricted cash |
|
|
240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(2,149 |
) |
|
|
(137,695 |
) |
|
|
(53,170 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of convertible senior subordinated notes |
|
|
|
|
|
|
125,000 |
|
|
|
|
|
Debt issuance costs |
|
|
|
|
|
|
(4,304 |
) |
|
|
|
|
Purchase of treasury stock |
|
|
|
|
|
|
(21,180 |
) |
|
|
(18,819 |
) |
Proceeds from issuance of common stock upon exercise of
options and stock purchase plan |
|
|
5,370 |
|
|
|
8,405 |
|
|
|
8,477 |
|
Excess tax benefit from share-based compensation |
|
|
|
|
|
|
|
|
|
|
5,223 |
|
Payments on capital leases and equipment financing obligations |
|
|
(231 |
) |
|
|
(28 |
) |
|
|
|
|
Repayment of notes receivable from stockholders |
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
5,159 |
|
|
|
107,893 |
|
|
|
(5,119 |
) |
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
17,792 |
|
|
|
12,743 |
|
|
|
(33,508 |
) |
Cash and cash equivalents at beginning of year |
|
|
41,697 |
|
|
|
59,489 |
|
|
|
72,232 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
59,489 |
|
|
$ |
72,232 |
|
|
$ |
38,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
7 |
|
|
$ |
456 |
|
|
$ |
938 |
|
|
|
|
|
|
|
|
|
|
|
Cash paid for taxes |
|
$ |
1,854 |
|
|
$ |
10,595 |
|
|
$ |
11,494 |
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
F- 7
SYNAPTICS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization and Basis of Presentation
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,
communications, entertainment, and other electronic devices. Founded in March 1986, we began
shipping our TouchPad product in 1995, which incorporates our core capacitive technology. Today,
our core capacitive technology is incorporated into all of the products we sell, which are designed
into products offered by most of the major notebook computer and hard-disk drive music player
original equipment manufactures (OEMs) throughout the world.
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. For ease of
presentation, the accompanying consolidated financial statements have been shown as ending on June
30, 2004, 2005, and 2006 and each of those years consisted of 52 weeks.
Reclassifications
Certain reclassifications have been made to prior year balances in order to conform to the
current year presentation.
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, intangible
assets, and contingencies. We base our estimates on historical experience, applicable laws, 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.
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. A
decline in the market value of a security below cost that is deemed other than temporary is charged
to earnings, resulting in the establishment of a new cost basis for the security. 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.
F- 8
The following is a summary of investments in marketable securities and cash equivalents (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Money market |
|
$ |
67,471 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
67,471 |
|
Auction rate preferred |
|
|
47,325 |
|
|
|
|
|
|
|
|
|
|
|
47,325 |
|
U.S. agencies |
|
|
8,000 |
|
|
|
|
|
|
|
|
|
|
|
8,000 |
|
Asset backed securities |
|
|
5,400 |
|
|
|
|
|
|
|
|
|
|
|
5,400 |
|
Municipal securities |
|
|
96,093 |
|
|
|
|
|
|
|
129 |
|
|
|
95,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities |
|
$ |
224,289 |
|
|
$ |
|
|
|
$ |
129 |
|
|
$ |
224,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2006 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Money market |
|
$ |
31,273 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
31,273 |
|
Commercial paper |
|
|
3,992 |
|
|
|
|
|
|
|
1 |
|
|
|
3,991 |
|
Auction rate preferred |
|
|
35,000 |
|
|
|
|
|
|
|
|
|
|
|
35,000 |
|
U.S. agencies |
|
|
16,000 |
|
|
|
|
|
|
|
189 |
|
|
|
15,811 |
|
Asset backed securities |
|
|
21,700 |
|
|
|
|
|
|
|
|
|
|
|
21,700 |
|
Municipal securities |
|
|
134,215 |
|
|
|
|
|
|
|
274 |
|
|
|
133,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available-for-sale securities |
|
$ |
242,180 |
|
|
$ |
|
|
|
$ |
464 |
|
|
$ |
241,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of weighted average interest rates, amortized costs, and estimated
fair values of available-for-sale securities by contractual maturity (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005 |
|
|
June 30, 2006 |
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Estimated |
|
|
Average |
|
|
|
|
|
|
Estimated |
|
|
|
Interest |
|
|
Amortized |
|
|
Fair |
|
|
Interest |
|
|
Amortized |
|
|
Fair |
|
|
|
Rate |
|
|
Cost |
|
|
Value |
|
|
Rate |
|
|
Cost |
|
|
Value |
|
Less than one year |
|
|
2.6 |
% |
|
$ |
199,515 |
|
|
$ |
199,424 |
|
|
|
4.1 |
% |
|
$ |
212,583 |
|
|
$ |
212,363 |
|
Due in 1 - 2 years |
|
|
3.0 |
% |
|
|
24,774 |
|
|
|
24,736 |
|
|
|
3.8 |
% |
|
|
29,597 |
|
|
|
29,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
224,289 |
|
|
$ |
224,160 |
|
|
|
|
|
|
$ |
242,180 |
|
|
$ |
241,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values of Financial Instruments
The fair values of our cash equivalents, short-term investments, accounts receivable, accounts
payable, and accrued liabilities approximate their carrying values due to the short-term nature of
those instruments. The fair value of the note payable to related party also approximates its
carrying value as the associated interest rate of 6% approximates the interest rate we would expect
to be charged on a loan under similar circumstances with similar terms. The fair
value of our convertible senior subordinated notes is based on trading values as of the end of our
fiscal year.
F- 9
Concentration of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist
primarily of cash equivalents, short-term investments, and trade accounts receivable. Our
investment policy, which is predicated on capital preservation and liquidity, limits investments to
U.S. government treasuries and agency issues, taxable securities, and municipal issued securities
with a minimum rating of A1 (Moodys) or P1 (Standard and Poors) or equivalent. We sell our
products primarily to contract manufacturers that provide manufacturing services to OEMs. Credit
is extended based on an evaluation of a customers financial condition, and we generally do not
require collateral. To date, credit losses have been insignificant, and we believe that an
adequate allowance for doubtful accounts has been provided. At June 30, 2005 and 2006,
the following customers accounted for more than 10% of our accounts receivable balance:
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
2006 |
Customer A |
|
|
4 |
% |
|
|
18 |
% |
Customer B |
|
|
2 |
% |
|
|
11 |
% |
Customer C |
|
|
|
* |
|
|
11 |
% |
Customer D |
|
|
12 |
% |
|
|
9 |
% |
Customer E |
|
|
41 |
% |
|
|
7 |
% |
Other Concentrations
Our products include certain components that are currently single sourced. We believe other
vendors would be able to provide similar components; however, the qualification of such vendors may
require start-up time. In order to mitigate any adverse impacts from a disruption of supply, we
attempt to maintain an adequate supply of critical single-sourced components.
Revenue Recognition
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
collectibility 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 assured.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability
of customers to meet their financial obligations. On an ongoing basis, we evaluate the
collectibility of accounts receivable based on a combination of factors. In circumstances in which
we are aware of a specific customers potential inability to meet its financial obligation, we
record a specific reserve of the bad debt against amounts due. In addition, we make judgments and
estimates on the collectibility of accounts receivable based on our historical bad debt experience,
customers creditworthiness, current economic trends, recent changes in customers payment trends,
and deterioration in the customers operating results or financial position. If circumstances
change adversely, additional bad debt allowances may be required.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or market (estimated
net realizable value), and at June 30, 2005 and 2006 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
Raw materials |
|
$ |
7,618 |
|
|
$ |
9,743 |
|
Finished goods |
|
|
113 |
|
|
|
267 |
|
|
|
|
|
|
|
|
|
|
$ |
7,731 |
|
|
$ |
10,010 |
|
|
|
|
|
|
|
|
F-10
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.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. We
compute depreciation using the straight-line method over the estimated useful lives of the assets.
We apply estimated useful life of three years to our computer equipment and software; estimated
useful lives ranging from one to five years to our manufacturing equipment; an estimated useful
life of three years to our furniture and fixtures; and an estimated useful life of 35 years to our
building. Depreciation expense includes the amortization of assets recorded under capital leases.
We amortize leasehold improvements and assets recorded under capital leases over the shorter of the
lease term or the useful life of the asset. During the years ended June 30, 2004 and 2005, we
retired fully depreciated equipment and furniture at an original cost of $506,000 and $170,000,
respectively.
Foreign Currency Translation
The U.S. dollar is our functional and reporting currency. We translate our monetary assets
and liabilities not denominated in the functional currency into U.S. dollar equivalents at the rate
of exchange in effect on the balance sheet date. Non-monetary balance sheet accounts are measured
and recorded at the historical rate in effect at the date of translation. We translate revenue and
expenses at the weighted average exchange rate in the month that the transaction occurred.
Remeasurement of monetary assets and liabilities that are not denominated in the functional
currency are included currently in operating results. Translation gains (losses) included in
operating results for the years ended June 30, 2004, 2005, and 2006 totaled ($42,000), $77,000, and
$37,000, respectively. To date, we have not undertaken hedging transactions related to foreign
currency exposure.
Goodwill and Other Intangible Assets
We do not amortize goodwill and other intangible assets with indefinite lives. Instead, we
review the carrying value of goodwill and other intangible assets with indefinite lives at least
annually for impairment as of the fiscal year end balance sheet date. The frequency of our review
is dictated by events or changes in circumstances indicating that the carrying value may be
impaired. Based on our latest review, we determined there was no impairment of the carrying value
of goodwill or other intangible assets.
Impairment of Long-Lived Assets
In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-lived Assets,
we evaluate long-lived assets, such as property and equipment and intangible assets subject to
amortization, for impairment whenever events or changes in circumstances indicate that the carrying
value of an asset may not be recoverable. We measure recoverability of assets to be held and used
by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated
undiscounted future cash flows, we recognize an impairment charge in an amount by which the
carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would
be separately presented in the consolidated balance sheet and reported at the lower of the carrying
amount or fair value less costs to sell, and would no longer be depreciated. The assets and
liabilities of a disposed group classified as held for sale would be presented separately in the
appropriate asset and liability sections of the consolidated balance sheet.
Investment in Foveon, Inc.
We have an investment in convertible preferred stock in a privately held development-stage
company. As our initial voting interest exceeded 20%, we accounted for the investment under the
equity method in accordance with Accounting Principles Board Opinion No. 18, The Equity Method of
Accounting for Investments in Common Stock (APB 18), and the Emerging Issues Task Force (EITF)
topic D-68 and Issue No. 98-13 Accounting by an Equity Method Investor for Investee Losses When
the Investor Has Loans to and
F-11
Investments in Other Securities of the Investee and Issue No. 99-10
Percentage Used to Determine the Amount of Equity Method Losses. We considered our ownership of
preferred stock and advances made to the affiliated company in determining the amount of equity
losses to be recognized (see Note 2). We reduced the balance of our investment in this company to
zero in fiscal 2000, pursuant to equity method accounting.
During fiscal 2005, our investee issued additional preferred stock and we made an incremental
investment in the amount of $4.0 million. As a result of the preferred stock issuance, our voting
interest in the investee was reduced to approximately 15%. In addition, two of our board members
also serve on the board of the investee. Our incremental investment will be accounted for under
the cost method in accordance with APB 18 and EITF Issues No. 02-14 Whether an Investor Should
Apply the Equity Method of Accounting to Investments Other than Common Stock and No. 03-1 The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments because the
investment is not in-substance common stock and will be reviewed at least annually for impairment
as of the fiscal year end balance sheet date. The frequency of our review is dictated by events or
changes in circumstances indicating that the carrying value may be impaired. Based on our latest
review, we determined there was no impairment of the carrying value of our investment in our
investee.
Segment Information
We have adopted SFAS 131, Disclosure About Segments of an Enterprise and Related
Information. We operate in one segment: the development, marketing, and sale of intuitive user
interface solutions for electronic devices and products.
Share-Based Compensation Costs
We adopted SFAS 123R, Share-Based Payment on a modified prospective basis beginning with
fiscal 2006 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 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.
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,
rework, and 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 warranty liability (included in other accrued liabilities) for the years ended
June 30, 2005 and 2006 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
Beginning accrued warranty |
|
$ |
704 |
|
|
$ |
369 |
|
Provision for product warranties |
|
|
505 |
|
|
|
897 |
|
Cost of warranty claims and settlements |
|
|
(840 |
) |
|
|
(909 |
) |
|
|
|
|
|
|
|
Ending accrued warranty |
|
$ |
369 |
|
|
$ |
357 |
|
|
|
|
|
|
|
|
F-12
Advertising Expense
We expense all advertising costs as incurred. Advertising costs were not material to any of
the periods presented.
Comprehensive Income
Our comprehensive income includes net income and net unrealized gains and losses on
available-for-sale investments, net of tax.
Income Taxes
We account for income taxes under the asset and liability method. We recognize deferred tax
assets and liabilities for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. We measure deferred tax assets and
liabilities using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. We recognize the effect on deferred
tax assets and liabilities of a change in tax rates in income in the period that includes the
enactment date. We establish valuation allowances when necessary to reduce deferred tax assets to
the amounts expected to be realized. We consider the operating earnings of our foreign
subsidiaries to be indefinitely invested outside the United States. Accordingly, no provision has
been made for the U.S. federal, state, or foreign taxes that may result from future remittances of
undistributed earnings of our foreign subsidiaries.
Research and Development
We expense costs to develop our products, which include the costs incurred to design interface
solutions for customers prior to the customers incorporating those solutions into their products,
as incurred in accordance with SFAS 2 Accounting for Research and Development Costs, which
establishes accounting and reporting standards for research and development costs.
We account for software development costs in accordance with SFAS 86, Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed, which requires
capitalization of certain software development costs once technological feasibility for the
software component is established, and research and development activities for the hardware
component are completed. Under our development process, the time period between the establishment
of technological feasibility and the release of the product is short and capitalization of internal
development costs has not been material to date.
Net Income Per Share
We present basic and diluted net income per share amounts in conformity with the SFAS 128,
Earnings Per Share, (SFAS 128) for all periods presented. In accordance with SFAS 128, basic net
income per share amounts for each period presented have been computed using the weighted average
number of shares of common stock outstanding. Diluted net income per share amounts for each period
presented have been computed (1) using the weighted average number of potentially dilutive shares
issuable in connection with our share-based compensation plans 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.
Recent Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board issued SFAS No. 154, Accounting Changes
and Error Corrections, (SFAS 154). SFAS 154, which replaces APB Opinion No. 20, Accounting
Changes, (APB 20) and SFAS No. 3 Reporting Accounting Changes in Interim Financial Statements,
applies to all voluntary changes in accounting principle and changes the requirements for
accounting for and reporting of a change in accounting principle. APB 20 previously required that
most voluntary changes in accounting principle be recognized by including in net income of the
period of change a cumulative effect of changing to the new accounting principle, while SFAS 154
requires retrospective application to prior periods financial statements of a voluntary change in
accounting principle, unless it is impracticable. SFAS 154 enhances the consistency of financial
information between periods. SFAS 154 will be effective beginning the first quarter of our fiscal
2007.
F-13
The adoption of SFAS 154 will not have a material impact on our financial position, results of
operations, or cash flows.
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.
2. Ownership Interest in Foveon, Inc. and Note Payable to Related Party
During fiscal 1998, we entered into agreements with National Semiconductor Corporation
(National), then a related party, with respect to the formation of a development-stage company,
Foveonics, Inc. (now known as Foveon, Inc.), which was formed to develop and produce digital
imaging products. We contributed technology for which we had no accounting basis for a 30%
interest in Foveon in the form of voting convertible preferred stock. Under the agreements, we had
the right to acquire additional shares of convertible preferred stock at a specified price in
exchange for a limited-recourse loan from National. National loaned us $1.5 million under a
limited-recourse note, which we utilized to purchase additional preferred shares of Foveon, which
increased our ownership interest in Foveon to 43%. The note matures in August 2007 and bears
interest at 6.0% per annum. If the note and related accrued interest are not repaid, Nationals
sole remedy under the loan is to require us to return to National a portion of Foveon shares
purchased with the proceeds of the loan and held by us.
During fiscal 1998, we recorded our share of losses incurred by Foveon under the equity
accounting method on the basis of our proportionate ownership of voting convertible preferred stock
and reduced the carrying value of this equity investment to zero as our share of losses incurred by
Foveon exceeded the carrying value of the investment. No equity losses were recorded during fiscal
1999, as we did not have any carrying value associated with the investment.
During fiscal 2000, we advanced to Foveon a total of $2.7 million in return for convertible
promissory notes. The notes were convertible into shares of Foveon preferred stock in accordance
with the defined terms, had a term of 10 years, and bore interest at rates ranging from 6.5% to
6.85%, payable at maturity. During fiscal 2000, we recorded our share of losses incurred by Foveon
on the basis of our proportionate share of funding provided to Foveon by us and National and
recorded additional equity losses limited to the then maximum carrying value of our total
investment, which was $2.7 million, including the ownership of convertible debt securities issued
by Foveon. Accordingly, the carrying value of our investment in Foveon was reduced to zero during
fiscal 2000 as our share of losses incurred by Foveon exceeded the carrying value of the
investment.
In August 2000, the convertible promissory notes we held and related accrued interest were
automatically converted into 443,965 shares of Foveon preferred stock in connection with an equity
financing completed by Foveon.
In connection with the issuance of the convertible promissory notes, we also received warrants
to purchase 106,718 shares of Foveon Series B preferred stock and warrants to purchase 22,918
shares of Foveon Series C preferred stock at exercise prices of $5.88 and $6.76 per share,
respectively. These warrants expired unexercised during fiscal 2005.
During fiscal 2005, we participated in an equity financing, receiving 3,943,217 shares of
Foveon Series E preferred for a cash investment of $4.0 million. The Series E preferred shares are
convertible into common shares on a one-for-one basis at any time at our option, upon a firm
underwritten public offering of Foveon common stock of not less than $20 million at a price per
share of not less than three times the original issue price, or upon the written agreement of the
holders of at least 60% of the outstanding preferred shares voting as a single class. The Series E
preferred shares are also entitled to liquidation preference up to two times the original issue
price over the non-Series E preferred and common shares. As of June 30, 2006, our voting interest
in Foveon was approximately 15% and two of our board members also serve on the board of Foveon. We
are not obligated to provide additional funding to Foveon.
F-14
The Series E preferred investment in Foveon is accounted for under the cost method in
accordance with APB Opinion No. 18 and EITF Issues No. 02-14 and No. 03-1 because the investment is
not in-substance common stock and will be reviewed at least annually for impairment as of the
fiscal year end balance sheet date. Based on our latest review, we determined there was no
impairment of the carrying value of our investment in Foveon. As of June 30, 2006, the carrying
value of our investment in Foveon was $4.0 million and is included in other assets in the
accompanying consolidated balance sheets.
3. Net Income Per Share
The following table presents the computation of basic and diluted net income per share (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended June 30, |
|
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income |
|
$ |
12,992 |
|
|
$ |
37,985 |
|
|
$ |
13,701 |
|
Interest expense and amortization of debt issuance costs on
convertible notes, net of tax |
|
|
|
|
|
|
602 |
|
|
|
1,064 |
|
|
|
|
|
|
|
|
|
|
|
Diluted net income |
|
$ |
12,992 |
|
|
$ |
38,587 |
|
|
$ |
14,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Shares, basic |
|
|
24,418 |
|
|
|
25,736 |
|
|
|
24,708 |
|
Effect of dilutive stock options |
|
|
2,690 |
|
|
|
2,666 |
|
|
|
1,893 |
|
Effect of convertible notes |
|
|
|
|
|
|
1,359 |
|
|
|
2,474 |
|
|
|
|
|
|
|
|
|
|
|
Shares, diluted |
|
|
27,108 |
|
|
|
29,761 |
|
|
|
29,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.53 |
|
|
$ |
1.48 |
|
|
$ |
0.55 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.48 |
|
|
$ |
1.30 |
|
|
$ |
0.51 |
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share does not include the effect of the following share-based awards (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
2005 |
|
2006 |
Share-based awards |
|
|
226 |
|
|
|
259 |
|
|
|
2,136 |
|
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.
F-15
4. Property and Equipment
As of June 30, 2005 and 2006, property and equipment consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life |
|
|
2005 |
|
|
2006 |
|
Land |
|
|
|
|
|
$ |
2,500 |
|
|
$ |
2,500 |
|
Building and improvements |
|
35 years |
|
|
6,003 |
|
|
|
10,144 |
|
Equipment and tooling |
|
1 year to 5 years |
|
|
7,426 |
|
|
|
9,063 |
|
Furniture |
|
3 years |
|
|
503 |
|
|
|
986 |
|
Construction in progress |
|
|
|
|
|
|
3,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,621 |
|
|
|
22,693 |
|
Accumulated depreciation and amortization |
|
|
|
|
|
|
(5,006 |
) |
|
|
(6,655 |
) |
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
|
|
|
$ |
14,615 |
|
|
$ |
16,038 |
|
|
|
|
|
|
|
|
|
|
|
|
5. Other Assets
As of June 30, 2005 and 2006, other assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note |
|
|
2005 |
|
|
2006 |
|
Non-current deferred tax |
|
|
11 |
|
|
$ |
280 |
|
|
$ |
|
|
Investment in Foveon, Inc |
|
|
2 |
|
|
|
4,000 |
|
|
|
4,000 |
|
Non-current prepaid tax |
|
|
11 |
|
|
|
12,579 |
|
|
|
13,142 |
|
Debt issuance costs, net |
|
|
7 |
|
|
|
3,817 |
|
|
|
2,957 |
|
Deposits and other long-term assets |
|
|
|
|
|
|
499 |
|
|
|
730 |
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets |
|
|
|
|
|
$ |
21,175 |
|
|
$ |
20,829 |
|
|
|
|
|
|
|
|
|
|
|
|
6. Leases and Other Commitments and Contingencies
Leases
Prior to relocating in July 2005 to our current principal domestic facility, which we
purchased in January 2005, we leased our previous domestic facility under an operating lease that
expired on May 31, 2005 and converted to a month-to-month rental arrangement through July 2005. We
lease our UK facility under an operating lease that expires in fiscal 2010; our Hong Kong facility
under an operating lease that expires in fiscal 2008; and our other facilities under operating
leases that expire in fiscal 2007. Total rent expense, recognized on a straight-line basis, was
approximately $1.1 million, $1.2 million, and $786,000 for the years ended June 30, 2004, 2005, and
2006, respectively.
The aggregate future minimum rental commitments as of June 30, 2006 for noncancelable
operating leases with initial or remaining terms in excess of one year are as follows (in
thousands):
|
|
|
|
|
|
|
Operating |
|
|
|
Lease |
|
Fiscal Year |
|
Payments |
|
2007 |
|
$ |
534 |
|
2008 |
|
|
496 |
|
2009 |
|
|
226 |
|
2010 |
|
|
188 |
|
|
|
|
|
Total minimum operating lease payments |
|
$ |
1,444 |
|
|
|
|
|
F-16
Contingencies
We may receive notices from third parties that claim our products infringe their rights. From
time to time, we receive notice from third parties of the intellectual property rights such parties
have obtained. We cannot be certain that our technologies and products do not and will not
infringe issued patents or other proprietary rights of third parties. Any infringement claims,
with or without merit, could result in significant litigation costs and diversion of management and
financial resources, including the payment of damages, which could have a material adverse effect
on our business, financial condition, and results of operations.
Intellectual Property Settlement
During fiscal 2005, we entered into a cross license agreement with a competitor. The cross
licenses are worldwide, non-exclusive, non-transferable, and royalty-free. The cross license
agreement settled certain intellectual property claims of the parties and contains mutual releases
of the intellectual property claims of the parties. In connection with the cross license
agreement, which does not provide for any future service obligations or commitments from us, we
received a one-time payment of $3.8 million included as other operating expense (income) in the
accompanying consolidated statement of income for the year ended June 30, 2005.
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.
Line of Credit
In August 2001, we entered into a $4.2 million revolving line of credit with a bank,
subsequently increased to $15.0 million on November 30, 2004. The revolving line of credit expires
on November 26, 2006, unless extended, and carries an interest rate equal to the banks prime
lending rate, which was 8.0% at June 30, 2006. Borrowings under this line of credit are subject to
certain financial and non-financial covenants and are limited to 75% of qualifying accounts
receivable as defined in the agreement with the bank. This line of credit agreement places
restrictions on the payment of any dividends. As of June 30, 2005 and 2006, we had not borrowed
any amounts under this facility.
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, but have expensed as incurred all legal fees associated with the legal
proceedings.
7. Convertible Senior Subordinated Notes
On December 7, 2004 and December 17, 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,
F-17
accounting, and printing, which will be 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 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 Securities and Exchange Commission 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 Securities and Exchange Commission.
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 EITF 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 June 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.
We recorded interest expense of $1.8 million on the Notes during fiscal 2006, which included
$860,000 of amortization of debt issuance costs. The fair value of the Notes as of June 30, 2006
was approximately $103 million based on trading values.
8. Stockholders Equity
We have a Stockholders Rights Plan that may have the effect of deterring, delaying, or
preventing a change in control that might otherwise be in the best interests of our stockholders.
In general, stock purchase rights issued under the Plan become exercisable when a person or group
acquires 15% or more of our common stock or a tender offer or exchange offer of 15% or more of our
common stock is announced or commenced. After any such event, our other stockholders may purchase
additional shares of our common stock at 50% of the then-current market price. The rights will
cause substantial dilution to a person or group that attempts to acquire
F-18
us on terms not approved by our board of directors. The rights should not interfere with any
merger or other business combination approved by our board of directors as the rights may be
redeemed by us at $0.01 per stock purchase right at any time before any person or group acquires
15% or more of our outstanding common stock. The rights expire in August 2012.
Preferred Stock
We are authorized, subject to limitations imposed by Delaware law, to issue up to a total of
10,000,000 shares of preferred stock in one or more series without stockholder approval. Our board
of directors is authorized to establish from time to time the number of shares to be included in
each series and to fix the rights, preferences, and privileges of the shares of each wholly
unissued series and any of its qualifications, limitations, or restrictions. Our board of
directors can also increase or decrease the number of shares of a series, but not below the number
of shares of that series then outstanding, without any further vote or action by the stockholders.
Our board of directors may authorize the issuance of preferred stock with voting or conversion
rights that could harm the voting power or other rights of the holders of our common stock. The
issuance of preferred stock, while providing flexibility in connection with possible acquisitions
and other corporate purposes, could, among other things, have the effect of delaying, deferring, or
preventing a change in control of our company and might harm the market price of our common stock
and the voting power and other rights of the holders of common stock. As of June 30, 2006, there
were no shares of preferred stock outstanding and we have no current plans to issue any shares of
preferred stock.
Deferred Compensation
Through fiscal 2003, we recorded total deferred stock compensation of $2.8 million,
representing the aggregate difference between the exercise prices of options granted to employees
and the deemed fair values for common stock subject to the options as of the respective measurement
dates. Through fiscal 2005, these amounts were being amortized by charges to operations, on a
straight-line basis over the vesting periods of the individual stock options. During the years
ended June 30, 2004 and 2005, we recorded $517,000 and $328,000, respectively, of amortization
expense related to deferred stock compensation. Also, we recorded reversals of $33,000 and $3,000
of deferred stock compensation and amortization expense for terminated employees during the years
ended June 30, 2004 and 2005, respectively. Upon our adoption of SFAS 123R in fiscal 2006, we
ceased amortizing deferred stock compensation, reversed the remaining unamortized deferred stock
compensation balance of $303,000 to additional paid-in capital, and now expense the grant date fair
value of share-based awards.
Shares Reserved for Future Issuance
As of June 30, 2006, we had reserved shares of common stock for future issuance as follows:
|
|
|
|
|
Stock options outstanding |
|
|
5,808,011 |
|
Deferred stock units outstanding |
|
|
38,280 |
|
Total awards available for grant under all share-based award plans |
|
|
3,292,246 |
|
Convertible senior subordinated notes |
|
|
2,473,975 |
|
|
|
|
|
|
Reserved for future issuance |
|
|
11,612,512 |
|
|
|
|
|
|
Through November 30, 2009, upon the occurrence of a fundamental change as defined in the indenture
governing the Convertible Senior Subordinated Notes (Notes), we could potentially be obligated to
issue up to 27.7085 shares per $1,000 of principal amount of Notes, for a total of 3,463,562 shares
of common stock or an additional 989,587 shares rather than the 2,473,975 reflected in the
preceding table.
Treasury Stock
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, increasing the total cash
available under the stock repurchase program from $40 million to $80 million. 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 and through
F-19
June 30, 2006 purchases
under this program totaled 2,306,100 shares for an aggregate cost of $40 million or an average cost
of $17.34 per share.
9. 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 year ended June 30, 2006, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 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, 2005 |
|
|
3,271,529 |
|
|
|
224,881 |
|
|
|
35,667 |
|
|
|
2,304,590 |
|
|
|
706,391 |
|
Additional shares authorized |
|
|
1,483,420 |
|
|
|
|
|
|
|
|
|
|
|
1,483,420 |
|
|
|
|
|
Stock options granted |
|
|
(1,585,184 |
) |
|
|
|
|
|
|
|
|
|
|
(1,585,184 |
) |
|
|
|
|
Deferred stock units granted |
|
|
(38,680 |
) |
|
|
|
|
|
|
|
|
|
|
(38,680 |
) |
|
|
|
|
Purchases under employee
stock purchase plan |
|
|
(93,020 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(93,020 |
) |
Forfeited |
|
|
254,181 |
|
|
|
1,584 |
|
|
|
1,917 |
|
|
|
250,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2006 |
|
|
3,292,246 |
|
|
|
226,465 |
|
|
|
37,584 |
|
|
|
2,414,826 |
|
|
|
613,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At the beginning of fiscal 2006, we adopted SFAS 123R, Share-Based Payment (SFAS
123R), 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 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 are included in our
consolidated statements of income for any period presented in the accompanying condensed
consolidated financial statements prior to fiscal 2006.
Share-based compensation and the related tax benefit recognized in our consolidated statement
of income for the year ended June 30, 2006 are (in thousands):
|
|
|
|
|
|
|
Amount |
|
Cost of revenue |
|
$ |
682 |
|
Research and development |
|
|
4,799 |
|
Selling, general, and administrative |
|
|
7,719 |
|
|
|
|
|
Total |
|
$ |
13,200 |
|
|
|
|
|
Income tax
benefit on share-based compensation |
|
$ |
2,940 |
|
|
|
|
|
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
F-20
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
Emerging Issues Task Force 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.
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
currently for 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 fiscal ended June 30, 2006, we realized tax benefit from non-qualified
stock option exercises and disqualifying dispositions of qualified stock options totaling $6.6
million, of which $210,000 of the tax benefit was recognized as a reduction of the provision for
income taxes, $233,000 reduced deferred tax assets established after our adoption of SFAS 123R, and
the remaining tax benefit was recorded directly to additional paid-in capital.
Our pre-tax income, net income, and basic and diluted net income per share for the year ended
June 30, 2006 were reduced by $13.1 million, $10.2 million, and $0.42 and $0.34 per share,
respectively, under SFAS 123R more than they would have been had we continued to account for our
share-based awards in accordance with APB 25.
Application of SFAS 123R had no impact on our cash position, but did result in a change in
presentation on our consolidated statements of cash flows by classifying excess tax benefit on
share-based awards from cash flows from operating activities to cash flows from financing
activities. To determine excess tax benefit, we use 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 $5.2 million for the year ended June 30, 2006.
Historically, we have issued new shares in connection with our share-based compensation plans;
however, 2,306,100 treasury shares are also available for issuance as of the end of fiscal 2006.
As of June 30, 2006, we have $40 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.
F-21
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 fiscal 2006 and the balance and aggregate intrinsic value of DSUs as of June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
Aggregate |
|
Weighted |
|
|
Stock Unit |
|
Intrinsic |
|
Average |
|
|
Awards |
|
Value |
|
Grant Date |
|
|
Outstanding |
|
(thousands) |
|
Fair Value |
Balance at June 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
38,680 |
|
|
|
|
|
|
$ |
29.69 |
|
Delivered |
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(400 |
) |
|
|
|
|
|
$ |
30.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2006 |
|
|
38,280 |
|
|
$ |
834 |
|
|
$ |
29.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized share-based compensation costs for DSUs granted under the 2001 Plan are
approximately $891,000 as of June 30, 2006, to be recognized over a weighted average period of
approximately four years.
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 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.
F-22
The following table summarizes stock option activity and weighted average exercise prices
for stock options granted, exercised, and forfeited during fiscal 2006 and the balance of
outstanding and exercisable stock options as of June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
Stock |
|
|
Weighted |
|
|
|
Option |
|
|
Average |
|
|
|
Awards |
|
|
Exercise |
|
|
|
Outstanding |
|
|
Price |
|
Balance at June 30, 2005 |
|
|
5,426,266 |
|
|
$ |
10.94 |
|
Granted |
|
|
1,585,184 |
|
|
|
22.88 |
|
Exercised |
|
|
(949,658 |
) |
|
|
7.19 |
|
Forfeited |
|
|
(253,781 |
) |
|
|
17.04 |
|
|
|
|
|
|
|
|
|
Balance at June 30, 2006 |
|
|
5,808,011 |
|
|
|
14.55 |
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2006 |
|
|
3,130,138 |
|
|
|
8.92 |
|
|
|
|
|
|
|
|
|
As of June 30, 2006, the number of stock options outstanding and exercisable by range of
exercise prices, the weighted average exercise prices, the intrinsic value and for options
outstanding the weighted average remaining contractual life are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Average |
|
|
Intrinsic |
|
|
|
|
|
|
Average |
|
|
Intrinsic |
|
Range of |
|
Number |
|
|
Contractual |
|
|
Exercise |
|
|
Value |
|
|
Number |
|
|
Exercise |
|
|
Value |
|
Exercise Prices |
|
Outstanding |
|
|
Term |
|
|
Price |
|
|
(thousands) |
|
|
Exercisable |
|
|
Price |
|
|
(thousands) |
|
$1.00 - $3.00 |
|
|
1,008,977 |
|
|
|
3.50 |
|
|
$ |
2.37 |
|
|
$ |
19,594 |
|
|
|
1,008,977 |
|
|
$ |
2.37 |
|
|
$ |
19,594 |
|
$3.50 - $7.37 |
|
|
734,346 |
|
|
|
6.17 |
|
|
|
6.34 |
|
|
|
11,346 |
|
|
|
633,647 |
|
|
|
6.24 |
|
|
|
9,853 |
|
$8.19 - $9.96 |
|
|
882,598 |
|
|
|
6.11 |
|
|
|
9.25 |
|
|
|
11,068 |
|
|
|
744,759 |
|
|
|
9.13 |
|
|
|
9,429 |
|
$10.91 - $16.40 |
|
|
509,684 |
|
|
|
7.52 |
|
|
|
15.05 |
|
|
|
3,435 |
|
|
|
263,527 |
|
|
|
14.93 |
|
|
|
1,808 |
|
$18.26 - $18.70 |
|
|
559,033 |
|
|
|
8.05 |
|
|
|
18.26 |
|
|
|
1,973 |
|
|
|
259,120 |
|
|
|
18.27 |
|
|
|
912 |
|
$19.56 - $20.33 |
|
|
267,959 |
|
|
|
9.16 |
|
|
|
19.81 |
|
|
|
531 |
|
|
|
24,213 |
|
|
|
20.33 |
|
|
|
35 |
|
$21.50 |
|
|
822,500 |
|
|
|
9.09 |
|
|
|
21.50 |
|
|
|
239 |
|
|
|
16,029 |
|
|
|
21.50 |
|
|
|
5 |
|
$21.88 - 25.78 |
|
|
363,520 |
|
|
|
9.43 |
|
|
|
22.90 |
|
|
|
|
|
|
|
34,346 |
|
|
|
24.93 |
|
|
|
|
|
$30.26 |
|
|
406,582 |
|
|
|
8.57 |
|
|
|
30.26 |
|
|
|
|
|
|
|
145,520 |
|
|
|
30.26 |
|
|
|
|
|
$30.71 |
|
|
252,812 |
|
|
|
9.56 |
|
|
|
30.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,808,011 |
|
|
|
7.07 |
|
|
|
14.55 |
|
|
$ |
48,186 |
|
|
|
3,130,138 |
|
|
|
8.92 |
|
|
$ |
41,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2006, we estimate fully vested options and options expected to vest to be
5,583,202 with an aggregate intrinsic value of $47.9 million having a weighted average exercise
price and a weighted average remaining contractual term of $14.23 per share and seven years,
respectively.
The following table summarizes cash received and the aggregate intrinsic value for stock
options exercised during the years ended June 30, 2004, 2005, and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended June 30, |
|
|
2004 |
|
2005 |
|
2006 |
Cash received |
|
$ |
4,271 |
|
|
$ |
7,014 |
|
|
$ |
6,832 |
|
Aggregate intrinsic value |
|
$ |
12,383 |
|
|
$ |
29,086 |
|
|
$ |
17,707 |
|
F - 23
The fair value of each award granted from our Plans during the year ended June 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 |
|
|
71.4% - 73.9% |
|
Expected life in years |
|
|
5.0 |
|
Risk-free interest rate |
|
|
4.1% - 4.9% |
|
Fair value per award |
|
|
$12.38-$19.14 |
|
The expected volatility is based on 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 $29.1 million as of June 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 two-year offering period will
commence.
The following table summarizes shares purchased, weighted average purchase price, cash
received, and the aggregate intrinsic value for ESPP purchases during the years ended June 30,
2004, 2005, and 2006 (in thousands, except for shares purchased and weighted average purchase
price):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended June 30, |
|
|
2004 |
|
2005 |
|
2006 |
Shares purchased |
|
|
165,833 |
|
|
|
198,251 |
|
|
|
93,020 |
|
Weighted average purchase price |
|
$ |
6.63 |
|
|
$ |
7.02 |
|
|
$ |
17.69 |
|
Cash received |
|
$ |
1,099 |
|
|
$ |
1,391 |
|
|
$ |
1,645 |
|
Aggregate intrinsic value |
|
$ |
1,253 |
|
|
$ |
3,636 |
|
|
$ |
488 |
|
Under the terms of our ESPP, the offering period that commenced on January 1, 2005 was
terminated on June 30, 2005 and a new offering period commenced on July 1, 2005. In accordance
with Technical Bulletin No. FTB 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. This modification affected 169 employees participating in the ESPP as of June 30, 2005 and
resulted in incremental compensation costs that will be recognized on a straight-line basis over
the two-year period ending June 30, 2007.
The fair value of each award granted under our ESPP during the year ended June 30, 2006 was
estimated using the Black-Scholes option pricing model, assuming no expected dividends and the
following weighted average assumptions:
|
|
|
|
|
Expected volatility |
|
|
49.3% - 75.7% |
|
Expected life in years |
|
|
0.5 - 2.0 |
|
Risk-free interest rate |
|
|
3.3% - 4.4% |
|
Fair value per award |
|
|
$7.40-$11.86 |
|
F - 24
The expected volatility is based on 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 $1.2 million as of June 30, 2006, to be recognized over a weighted average period of
approximately one year.
Pre-SFAS 123R Pro Forma Accounting Disclosures
The fair value of each share-based award granted during the years ended June 30, 2004 and 2005
was estimated at the date of grant using the Black-Scholes option pricing model, assuming no
expected dividends and the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Option Plan |
|
Employee Stock Purchase Plan |
|
|
Years ended June 30, |
|
Years ended June 30, |
|
|
2004 |
|
2005 |
|
2004 |
|
2005 |
Expected volatility |
|
|
74.5 |
% |
|
|
68.4 |
% |
|
|
65.0 |
% |
|
|
58.9 |
% |
Expected life in years |
|
|
5 |
|
|
|
5 |
|
|
|
0.5 |
|
|
|
1.1 |
|
Risk-free interest rate |
|
|
3.0 |
% |
|
|
3.5 |
% |
|
|
1.0 |
% |
|
|
2.6 |
% |
Fair value per award |
|
$ |
7.97 |
|
|
$ |
13.71 |
|
|
$ |
2.57 |
|
|
$ |
10.31 |
|
During the years ended June 30, 2004 and 2005, had compensation expense for stock options
been determined based on the fair value of the options at dates of grant consistent with the
provisions of SFAS 123, net income and net income per share would have been reduced to the pro
forma amounts indicated in the following table (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Years ended June 30, |
|
|
|
2004 |
|
|
2005 |
|
Net income as reported |
|
$ |
12,992 |
|
|
$ |
37,985 |
|
Add: Total stock-based compensation included
in reported net income, net of tax |
|
|
320 |
|
|
|
213 |
|
Deduct: Total stock-based compensation
determined under fair value based method for all
awards, net of tax |
|
|
(4,045 |
) |
|
|
(6,506 |
) |
|
|
|
|
|
|
|
Net income pro forma |
|
$ |
9,267 |
|
|
$ |
31,692 |
|
|
|
|
|
|
|
|
Net income per share basic: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.53 |
|
|
$ |
1.48 |
|
|
|
|
|
|
|
|
Pro forma |
|
$ |
0.38 |
|
|
$ |
1.23 |
|
|
|
|
|
|
|
|
Net income per share diluted: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.48 |
|
|
$ |
1.30 |
|
|
|
|
|
|
|
|
Pro forma |
|
$ |
0.34 |
|
|
$ |
1.09 |
|
|
|
|
|
|
|
|
10. Employee benefit plans
401(k) Plan
We have a 401(k) Retirement Savings Plan for full-time employees. Under the plan, eligible
employees may contribute a maximum of 25% of their net compensation or the annual limit of $15,000.
The annual limit for employees who are 50 years or older is $20,000. We provide matching funds of
20% of the employees contribution up to a maximum of $3,000. We made matching contributions of
$49,000, $183,000, and $305,000 in fiscal 2004, 2005, and 2006, respectively.
F - 25
11. Income Taxes
Income before provision for income taxes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended June 30, |
|
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
U.S |
|
$ |
20,340 |
|
|
$ |
35,148 |
|
|
$ |
18,949 |
|
Foreign |
|
|
586 |
|
|
|
23,184 |
|
|
|
6,574 |
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
$ |
20,926 |
|
|
$ |
58,332 |
|
|
$ |
25,523 |
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended June 30, |
|
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
Current tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
7,230 |
|
|
$ |
12,317 |
|
|
$ |
5,192 |
|
State |
|
|
1,188 |
|
|
|
1,778 |
|
|
|
1,602 |
|
Foreign |
|
|
35 |
|
|
|
4,421 |
|
|
|
3,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,453 |
|
|
|
18,516 |
|
|
|
10,318 |
|
|
|
|
|
|
|
|
|
|
|
Deferred tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(427 |
) |
|
|
1,611 |
|
|
|
1,144 |
|
State |
|
|
(115 |
) |
|
|
554 |
|
|
|
125 |
|
Foreign |
|
|
23 |
|
|
|
(334 |
) |
|
|
235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(519 |
) |
|
|
1,831 |
|
|
|
1,504 |
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
7,934 |
|
|
$ |
20,347 |
|
|
$ |
11,822 |
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes differs from the federal statutory rate as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended June 30, |
|
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
Provision at U.S. federal statutory rate |
|
$ |
7,324 |
|
|
$ |
20,416 |
|
|
$ |
8,933 |
|
State income taxes |
|
|
657 |
|
|
|
665 |
|
|
|
1,437 |
|
Foreign withholding taxes |
|
|
|
|
|
|
3,728 |
|
|
|
3,130 |
|
Unrecognized tax benefit on share-based compensation, net |
|
|
|
|
|
|
|
|
|
|
2,432 |
|
Research and development credit |
|
|
(328 |
) |
|
|
(226 |
) |
|
|
(2,129 |
) |
Foreign tax rate differential |
|
|
|
|
|
|
(4,081 |
) |
|
|
(844 |
) |
Tax exempt interest |
|
|
(261 |
) |
|
|
(436 |
) |
|
|
(1,065 |
) |
Other differences |
|
|
542 |
|
|
|
281 |
|
|
|
(72 |
) |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
$ |
7,934 |
|
|
$ |
20,347 |
|
|
$ |
11,822 |
|
|
|
|
|
|
|
|
|
|
|
The American Jobs Creation Act of 2004 (the Act) was signed into law in October 2004. The
Act created a temporary incentive for U.S. corporations to repatriate accumulated income earned
abroad by providing an 85% dividends received deduction for certain dividends from controlled
foreign corporations resulting in an approximate 5.25% federal tax rate on the repatriated
earnings. We did not repatriate any foreign accumulated income under the Act.
F - 26
As of June 30, 2005 and 2006, significant components of our deferred tax assets (liabilities)
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Investment writedowns |
|
$ |
1,105 |
|
|
$ |
1,102 |
|
Inventory writedowns |
|
|
74 |
|
|
|
129 |
|
Warranty reserve |
|
|
15 |
|
|
|
7 |
|
Depreciation and amortization |
|
|
629 |
|
|
|
875 |
|
Accrued compensation |
|
|
618 |
|
|
|
742 |
|
Accruals not currently deductible |
|
|
838 |
|
|
|
258 |
|
Share-based compensation |
|
|
|
|
|
|
2,491 |
|
Foreign loss carryforwards |
|
|
280 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,559 |
|
|
|
5,604 |
|
Valuation allowance |
|
|
(1,105 |
) |
|
|
(1,102 |
) |
|
|
|
|
|
|
|
|
|
|
2,454 |
|
|
|
4,502 |
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Interest deduction |
|
|
(1,878 |
) |
|
|
(5,450 |
) |
Other |
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,898 |
) |
|
|
(5,450 |
) |
|
|
|
|
|
|
|
Net deferred tax assets (liabilities) |
|
$ |
556 |
|
|
$ |
(948 |
) |
|
|
|
|
|
|
|
Realization of deferred tax assets depends on our generating sufficient U.S. and certain
foreign taxable income in future years to obtain benefit from the reversal of deferred tax assets.
Accordingly, the amount of deferred tax assets considered realizable may increase or decrease when
we reevaluate the underlying basis for our estimates of future U.S. and foreign taxable income. As
of June 30, 2006, a valuation allowance of $1.1 million had been established to reduce deferred tax
assets to levels that we believe are more likely than not to be realized through future taxable
income. The valuation allowance decreased by $332,000, $575,000, and $3,000 during the years ended
June 30, 2004, 2005, and 2006, respectively. As of June, 30, 2006, the remaining valuation
allowance relates to our investment writedowns. During fiscal 2005 and 2006, we recognized $1.2
million and $2.7 million of tax benefit, respectively, from the release of tax contingency accruals
associated with income tax issue settlements and statute expirations. No material tax benefit from
the release of tax contingency accruals was realized in fiscal 2004. The tax contingency accruals
released in fiscal 2005 and 2006 were established in earlier fiscal years.
As of June 30, 2005and 2006, net deferred tax assets (liabilities) consisted of the following
balances (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
Current deferred tax assets |
|
$ |
1,182 |
|
|
$ |
1,036 |
|
Non-current deferred tax assets |
|
|
280 |
|
|
|
|
|
Non-current deferred tax liabilities |
|
|
(906 |
) |
|
|
(1,984 |
) |
|
|
|
|
|
|
|
Net deferred tax assets (liabilities) |
|
$ |
556 |
|
|
$ |
(948 |
) |
|
|
|
|
|
|
|
Current deferred tax assets, non-current deferred tax assets, and non-current deferred tax
liabilities are included in prepaid expenses and other current assets, other assets, and other
liabilities, respectively, in the accompanying consolidated balance sheets.
Included in other assets as of June 30, 2006 is $13.1 million of non-current prepaid tax. The
non-current prepaid tax is associated with an intercompany royalty arrangement on the licensing of
intangibles
in connection with our international operating structure. The non-current prepaid tax will be
charged to tax expense over the weighted average life of the licensed intangibles or approximately
four years.
F - 27
12. 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 84%,
59%, and 85% of our net revenue in the years ended June 30, 2004, 2005, and 2006, respectively.
The following is a summary of net revenue within geographic areas based on our customers
location (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended June 30, |
|
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
China |
|
$ |
75,899 |
|
|
$ |
157,661 |
|
|
$ |
141,958 |
|
Taiwan |
|
|
37,211 |
|
|
|
23,370 |
|
|
|
23,558 |
|
Japan |
|
|
3,698 |
|
|
|
3,294 |
|
|
|
4,873 |
|
Singapore |
|
|
340 |
|
|
|
13,680 |
|
|
|
4,541 |
|
United States |
|
|
5,693 |
|
|
|
4,007 |
|
|
|
3,242 |
|
Korea |
|
|
4,307 |
|
|
|
1,498 |
|
|
|
2,176 |
|
Other |
|
|
6,128 |
|
|
|
4,629 |
|
|
|
4,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
133,276 |
|
|
$ |
208,139 |
|
|
$ |
184,557 |
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2005 and 2006, long-lived assets within geographic areas consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
2006 |
|
United States |
|
$ |
14,339 |
|
|
$ |
14,642 |
|
Asia/Pacific |
|
|
66 |
|
|
|
1,149 |
|
United Kingdom |
|
|
210 |
|
|
|
247 |
|
|
|
|
|
|
|
|
|
|
$ |
14,615 |
|
|
$ |
16,038 |
|
|
|
|
|
|
|
|
Major customers as a percentage of net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended June 30, |
|
|
2004 |
|
2005 |
|
2,006 |
Customer A |
|
|
25 |
% |
|
|
34 |
% |
|
|
14 |
% |
Customer B |
|
|
3 |
% |
|
|
2 |
% |
|
|
10 |
% |
Customer C |
|
|
10 |
% |
|
|
6 |
% |
|
|
9 |
% |
13. Subsequent Events
Subsequent to June 30, 2006, we repurchased 215,000 shares for $4.6 million, or an average
cost of $21.45 per share.
F - 28
SCHEDULE II
SYNAPTICS INCORPORATED AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Years Ending June 30, 2004, 2005, and 2006
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
Additions |
|
Adjustments |
|
Balance at |
|
|
beginning |
|
charged to |
|
to |
|
end of |
|
|
of year |
|
expense |
|
reserve |
|
year |
Reserve deducted from assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
$ |
160 |
|
|
|
|
|
|
|
(30 |
) |
|
|
130 |
|
2005 |
|
|
130 |
|
|
|
44 |
|
|
|
(9 |
) |
|
|
165 |
|
2006 |
|
|
165 |
|
|
|
52 |
|
|
|
(28 |
) |
|
|
189 |
|
S - 1
INDEX
TO EXHIBITS
|
|
|
Exhibit |
|
|
Number |
|
Exhibit |
3.1
|
|
Certificate of Incorporation (1) |
|
|
|
3.2
|
|
Bylaws (1) |
|
|
|
3.3
|
|
Certificate of Amendment of Certificate of Incorporation of the registrant (6) |
|
|
|
4
|
|
Form of Common Stock Certificate (2) |
|
|
|
4.1
|
|
Indenture dated December 7, 2004 by and between the registrant and American Stock Transfer &
Trust Company (6) |
|
|
|
4.2
|
|
Registration Rights Agreement dated December 7, 2004 by and among the registrant, Bear, Stearns
& Co. Inc., and Credit Suisse First Boston LLC (6) |
|
|
|
10.1
|
|
1986 Incentive Stock Option Plan and form of grant agreement (3) |
|
|
|
10.2
|
|
1986 Supplemental Stock Option Plan and form of grant agreement (3) |
|
|
|
10.3(a)
|
|
1996 Stock Option Plan (3) |
|
|
|
10.3(b)
|
|
Form of grant agreements for 1996 Stock Option Plan (2) |
|
|
|
10.4
|
|
2000 U.K. Approved Sub-Plan to the 1996 Stock Option Plan and form of grant agreement (3) |
|
|
|
10.5
|
|
2000 Nonstatutory Stock Option Plan and form of grant agreement (3) |
|
|
|
10.6(a)
|
|
Amended and Restated 2001 Incentive Compensation Plan (4) |
|
|
|
10.6(b)
|
|
Form of grant agreements for Amended and Restated 2001 Incentive Compensation Plan (4) |
|
|
|
10.6(c)
|
|
Form of deferred stock award agreement for Amended and Restated 2001 Incentive Compensation
Plan * |
|
|
|
10.7(a)
|
|
Corrected Amended and Restated 2001 Employee Stock Purchase Plan (as amended through
February 20, 2002) (2) |
|
|
|
10.7(b)
|
|
2001 Employee Stock Purchase Sub-Plan for U.K. Employees (2) |
|
|
|
10.8
|
|
401(k) Profit Sharing Plan (3) |
|
|
|
10.12
|
|
Subordinated Secured Non-Recourse Promissory Note dated August 12, 1997 executed by the
registrant in favor of National Semiconductor Corporation (3) |
|
|
|
10.13
|
|
Form of Stock Option Grant and Stock Option Agreement between the registrant and Federico Faggin
(3) |
|
|
|
10.14
|
|
Form of Stock Option Grant and Stock Option Agreement between the registrant and Francis F. Lee (3) |
|
|
|
10.15
|
|
Form of Stock Option Grant and Stock Option Agreement between the registrant and Russell J. Knittel
(3) |
|
|
|
10.16
|
|
Loan and Security Agreement dated as of August 30, 2001 between Silicon Valley Bank and the
registrant as amended through November 30, 2004 (7) |
|
|
|
10.17
|
|
Form of Indemnification Agreement entered into as of January 28, 2002 with the following directors
and executive officers: Federico Faggin, Francis F. Lee, Donald E. Kirby, Russell J. Knittel, Shawn
P. Day, David T. McKinnon, Thomas D. Spade, William T. Stacy, Keith B. Geeslin, and Richard L.
Sanquini, as of April 23, 2002 with W. Ronald Van Dell, as of June 26, 2004 with Clark F. Foy as of
September 29, 2005 with Jeffrey D. Buchanan, and as of March 28, 2006 with Thomas J. Tiernan (1) |
|
|
|
10.18
|
|
Severance Policy for Principal Executive Officers (5) |
|
|
|
10.19
|
|
Change of Control and Severance Agreement entered into by Francis F. Lee as of April 22, 2003 (5) |
|
|
|
10.20
|
|
Form of Change of Control and Severance Agreement entered into by Donald E. Kirby and Russell
J. Knittel as of April 22, 2003 (5) |
|
|
|
10.21
|
|
Purchase Agreement dated December 1, 2004 by and among the registrant, Bear, Stearns & Co. Inc.,
and Credit Suisse First Boston LLC (6) |
|
|
|
Exhibit |
|
|
Number |
|
Exhibit |
10.22
|
|
Settlement Agreement dated March 31, 2005 by and among the registrant, Alps Electric Co. Ltd.,
and Cirque Corporation (8) ** |
|
|
|
10.23
|
|
Change of Control Severance Agreement entered into by Thomas Tiernan as of April 3, 2006 (10) |
|
|
|
12.1
|
|
Ratio of Earnings to Fixed Charges |
|
|
|
21
|
|
List of Subsidiaries |
|
|
|
23.1
|
|
Consent of KPMG LLP, independent registered public accounting firm |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) |
|
|
|
32.1
|
|
Section 1350 Certification of Chief Executive Officer |
|
|
|
32.2
|
|
Section 1350 Certification of Chief Financial Officer |
|
|
|
(1) |
|
Incorporated by reference to the registrants Form 10-Q for the quarter ended December 29, 2001, as filed
with the SEC on February 21, 2002. |
|
(2) |
|
Incorporated by reference to the registrants Form 10-K for the fiscal year ended June 30, 2002, as filed with
the SEC on September 12, 2002. |
|
(3) |
|
Incorporated by reference to the registrants registration statement on Form S-1 (Registration No. 333-56026)
as filed with the SEC January 22, 2002 and declared effective January 28, 2002. |
|
(4) |
|
Incorporated by reference to the registrants Form 10-Q for the quarter ended December 28, 2002, as filed
with SEC on February 6, 2003. |
|
(5) |
|
Incorporated by reference to the regis trants Form 10-K for the fiscal year ended June 30, 2002, as filed with
the SEC on September 12, 2003. |
|
(6) |
|
Incorporated by reference to the registrants Current Report on Form 8-K as filed with the SEC on December
7, 2004. |
|
(7) |
|
Incorporated by reference to the registrants Current Report on Form 8-K as filed with the SEC on December
3, 2004. |
|
(8) |
|
Incorporated by reference to the registrants Current Report on Form 8-K as filed with the SEC on April 1, 2005.
|
|
(9) |
|
Incorporated by reference to the registrants Current Report on Form 8-K as filed with the SEC on January 23,
2006. |
|
(10) |
|
Incorporated by reference to the registrants Current Report on Form 8-K as filed with the SEC on April 3, 2006. |
|
* |
|
Filed herewith. |
|
** |
|
Portions of this exhibit have been omitted pursuant to a confidential treatment request that was granted by the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Exchange Act. |