ITEM 1: FINANCIAL STATEMENTS
SYNPLICITY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
|
December 31,
2006
|
|
|
|
(unaudited)
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,883
|
|
|
$
|
9,237
|
|
Short-term investments
|
|
|
37,035
|
|
|
|
56,160
|
|
Restricted cash
|
|
|
2,700
|
|
|
|
|
|
Accounts receivable, net
|
|
|
11,234
|
|
|
|
10,323
|
|
Inventories
|
|
|
1,627
|
|
|
|
|
|
Prepaid expenses
|
|
|
2,049
|
|
|
|
1,314
|
|
Other current assets
|
|
|
340
|
|
|
|
915
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
61,868
|
|
|
|
77,949
|
|
Restricted cash
|
|
|
2,700
|
|
|
|
|
|
Property and equipment, net
|
|
|
2,995
|
|
|
|
2,390
|
|
Goodwill
|
|
|
8,876
|
|
|
|
1,272
|
|
Intangible assets, net
|
|
|
11,068
|
|
|
|
1,035
|
|
Other assets
|
|
|
1,265
|
|
|
|
1,163
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
88,772
|
|
|
$
|
83,809
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity:
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,516
|
|
|
$
|
1,299
|
|
Accrued liabilities
|
|
|
1,937
|
|
|
|
1,537
|
|
Accrued compensation
|
|
|
4,465
|
|
|
|
4,360
|
|
Deferred revenue
|
|
|
16,616
|
|
|
|
18,409
|
|
Deferred income taxes
|
|
|
1,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
26,555
|
|
|
|
25,605
|
|
Other liabilities
|
|
|
272
|
|
|
|
89
|
|
Deferred income taxes
|
|
|
2,279
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
61,276
|
|
|
|
62,699
|
|
Accumulated deficit
|
|
|
(1,509
|
)
|
|
|
(4,255
|
)
|
Accumulated other comprehensive loss
|
|
|
(101
|
)
|
|
|
(329
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
59,666
|
|
|
|
58,115
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
88,772
|
|
|
$
|
83,809
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
SYNPLICITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
License and systems
|
|
$
|
7,707
|
|
$
|
5,071
|
|
$
|
17,182
|
|
$
|
12,518
|
Maintenance
|
|
|
7,081
|
|
|
6,865
|
|
|
20,577
|
|
|
20,321
|
Bundled license and services
|
|
|
4,653
|
|
|
4,334
|
|
|
13,334
|
|
|
13,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
19,441
|
|
|
16,270
|
|
|
51,093
|
|
|
46,126
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of license and systems
|
|
|
1,014
|
|
|
80
|
|
|
1,443
|
|
|
115
|
Cost of maintenance
|
|
|
435
|
|
|
396
|
|
|
1,245
|
|
|
1,279
|
Cost of bundled license and services
|
|
|
96
|
|
|
65
|
|
|
289
|
|
|
294
|
Amortization of intangible assets
|
|
|
636
|
|
|
223
|
|
|
1,266
|
|
|
668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
2,181
|
|
|
764
|
|
|
4,243
|
|
|
2,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
17,260
|
|
|
15,506
|
|
|
46,850
|
|
|
43,770
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
6,434
|
|
|
5,661
|
|
|
18,261
|
|
|
18,120
|
Sales and marketing
|
|
|
6,646
|
|
|
6,388
|
|
|
19,857
|
|
|
18,593
|
General and administrative
|
|
|
2,198
|
|
|
1,944
|
|
|
6,459
|
|
|
5,930
|
Amortization of intangible assets from acquisition
|
|
|
323
|
|
|
|
|
|
371
|
|
|
|
Restructuring charge
|
|
|
|
|
|
|
|
|
|
|
|
854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
15,601
|
|
|
13,993
|
|
|
44,948
|
|
|
43,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1,659
|
|
|
1,513
|
|
|
1,902
|
|
|
273
|
Other income, net
|
|
|
363
|
|
|
763
|
|
|
2,025
|
|
|
1,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
2,022
|
|
|
2,276
|
|
|
3,927
|
|
|
2,190
|
Income tax provision
|
|
|
571
|
|
|
631
|
|
|
1,181
|
|
|
608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,451
|
|
$
|
1,645
|
|
$
|
2,746
|
|
$
|
1,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income per share
|
|
$
|
0.05
|
|
$
|
0.06
|
|
$
|
0.10
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in basic per share calculation
|
|
|
26,770
|
|
|
26,790
|
|
|
26,747
|
|
|
26,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in diluted per share calculation
|
|
|
27,830
|
|
|
27,421
|
|
|
27,730
|
|
|
27,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
SYNPLICITY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,746
|
|
|
$
|
1,582
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
1,294
|
|
|
|
1,293
|
|
Stock based compensation
|
|
|
2,440
|
|
|
|
2,842
|
|
Amortization of intangible assets and capitalized software costs
|
|
|
1,707
|
|
|
|
719
|
|
Impairment of capitalized software
|
|
|
|
|
|
|
335
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
296
|
|
|
|
2,233
|
|
Inventories
|
|
|
(608
|
)
|
|
|
|
|
Prepaid expenses
|
|
|
(183
|
)
|
|
|
307
|
|
Other current assets
|
|
|
575
|
|
|
|
369
|
|
Other assets
|
|
|
(172
|
)
|
|
|
(185
|
)
|
Accounts payable
|
|
|
(148
|
)
|
|
|
622
|
|
Accrued liabilities
|
|
|
222
|
|
|
|
(232
|
)
|
Accrued compensation
|
|
|
(311
|
)
|
|
|
(114
|
)
|
Deferred revenue
|
|
|
(1,793
|
)
|
|
|
788
|
|
Other liabilities
|
|
|
183
|
|
|
|
|
|
Deferred income taxes
|
|
|
(317
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
5,931
|
|
|
$
|
10,559
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
$
|
(1,701
|
)
|
|
$
|
(1,178
|
)
|
Purchase of technology
|
|
|
|
|
|
|
(500
|
)
|
Purchases of short-term investments
|
|
|
(52,153
|
)
|
|
|
(80,126
|
)
|
Proceeds from maturities of short-term investments
|
|
|
54,162
|
|
|
|
67,757
|
|
Proceeds from sales of short-term investments
|
|
|
17,120
|
|
|
|
2,180
|
|
Acquisition of a business, net of cash acquired
|
|
|
(16,674
|
)
|
|
|
|
|
Restricted cash
|
|
|
(5,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
$
|
(4,646
|
)
|
|
$
|
(11,867
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from exercise of employee stock options
|
|
$
|
2,655
|
|
|
$
|
2,138
|
|
Repurchases of common stock
|
|
|
(6,518
|
)
|
|
|
(5,099
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
$
|
(3,863
|
)
|
|
$
|
(2,961
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
$
|
224
|
|
|
$
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
$
|
(2,354
|
)
|
|
$
|
(4,282
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
9,237
|
|
|
|
13,941
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
6,883
|
|
|
$
|
9,659
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
SYNPLICITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Synplicity, Inc. and its wholly owned
subsidiaries (we, us, or the Company). Intercompany balances and transactions have been eliminated in consolidation. The balance sheet at September 30, 2007 and the statements of income for the three and nine
months ended September 30, 2007 and 2006 and the statements of cash flows for the nine months ended September 30, 2007 and 2006 are unaudited. In the opinion of management, these condensed consolidated financial statements reflect all
adjustments (consisting of normal recurring adjustments) that are necessary for a fair presentation of the results for and as of the periods shown. The condensed consolidated balance sheet at December 31, 2006 was derived from the audited
financial statements at that date. The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. Certain information or footnote disclosures normally
included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These financial statements should
be read in conjunction with the financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed with the Securities and Exchange Commission.
Acquisition
On June 1, 2007,
HARDI Electronics, AB (HARDI) and Synplicity entered into a Stock Purchase Agreement (the Agreement), pursuant to which all of the outstanding shares of HARDI were acquired by Synplicity. The acquisition was completed on
June 8, 2007. Upon completion of the acquisition, each share of HARDIs common stock issued and outstanding immediately prior to the effective date of acquisition was acquired by Synplicity in exchange for $18.8 million in cash.
The acquisition has been accounted for in accordance with Statement of Financial Accounting Standards No. 141,
Business
Combinations
(SFAS 141) using the purchase method of accounting. Under purchase accounting, HARDIs tangible assets and liabilities and intangible assets were recorded at fair value resulting in a new carrying basis for those
assets and liabilities and resulted in an amount for goodwill. Refer to Note 6 for details on the allocation of the purchase price.
Reclassifications
As of September 30, 2007, we changed the presentation of other current assets, our shareholders equity and accrued
compensation amounts in our condensed consolidated balance sheet. Additionally, during the three months ended September 30, 2007 we reclassified foreign exchange gains and losses from operating expenses to other income in our condensed
consolidated statements of income. Accordingly, the related amounts reported in the condensed consolidated financial statements in the prior periods have been reclassified to conform with the current period presentation.
Foreign Currency Translation
The functional currency
of our foreign subsidiaries is U.S. dollar, with the exception of our subsidiary in Japan and one of our subsidiaries in Sweden whose functional currency is the Yen and the Krona (SEK), respectively. For our foreign subsidiaries for
which the U.S. dollar is the functional currency, assets and liabilities denominated in foreign currencies are translated at the month-end exchange rates, except for non-monetary assets and liabilities such as property and equipment, are translated
at historical rates. Revenue and
6
expenses are translated at the average exchange rates for the period, except for expenses related to those balance sheet items that are translated using
historical rates. Foreign exchange gain/loss resulting from these translations is included in our results of operations. For our Japanese and Swedish subsidiaries, assets and liabilities are denominated in Yen or SEK and translated at the month-end
exchange rates, and equity balances are translated at historical rates. Revenue and expenses are translated at the average exchange rates for the period. Foreign exchange gain/loss resulting from these translations are included as cumulative
translation adjustments in our shareholders equity.
Revenue Recognition
We license our software products as perpetual licenses, term licenses and time-based licenses. On June 8, 2007, the company completed its acquisition
of HARDI, see Note 6, thereby adding High-performance ASIC Prototyping Systems (HAPS) to our product offerings. We generate revenue from direct sales, distributors and original equipment manufacturers (OEMs) and through
custom software development services.
Revenue recognition criteria
We recognize software revenue based upon the residual method, in accordance with American Institute of Certified Public Accountants AICPA Statement of Position (SOP) 97-2, Software Revenue
Recognition, as amended by SOP 98-4 and SOP 98-9. For non-software products, or HAPS systems, the company recognizes revenue in accordance with the provisions of Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial
Statement
(SAB 101) and Staff Accounting Bulletin No. 104,
Revenue Recognition
(SAB 104), and all related interpretations.
Revenue is recognized when all the conditions stated below are met:
|
|
|
Persuasive evidence of an arrangement exists;
|
|
|
|
delivery of the product and license key, when applicable, has occurred;
|
|
|
|
the fee is fixed or determinable; and
|
|
|
|
collection of the fee is probable.
|
We make judgments as to whether collection of the fee is probable based on our customer credit review analysis. Revenue on arrangements to customers who are not deemed creditworthy is deferred until cash is received. Revenue from sales to
distributors, who do not have a right to return, is considered to have met the probability of collection criterion when either (i) we have received payment for the product or (ii) we assess that we have a substantial and sustained history
of collections from the distributor.
Additionally, we assess whether the fee is fixed or determinable for sales with non-standard payment
terms by evaluating our history of collections from these customers and/or their current financial standing.
We also enter into
arrangements to deliver to our customers, multiple products and/or services. Revenue arrangements with multiple deliverables are evaluated to determine if the deliverables can be separated into more than one unit of accounting. An item can generally
be considered a separate unit of accounting if all of the following criteria are met:
|
|
|
The delivered item(s) has value to the customer on a standalone basis;
|
|
|
|
There is objective and reliable evidence of the fair value of the undelivered item(s); and
|
|
|
|
If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable
and substantially in the control of Synplicity.
|
7
Items which do not meet these criteria are combined into a single unit of accounting. If there is
objective and reliable evidence of fair value for all units of accounting, the arrangement consideration is allocated to the separate units of accounting based on their relative fair values. In cases where there is objective and reliable evidence of
the fair value of the undelivered item(s) in an arrangement but no such evidence for the delivered item(s), the residual method is used to allocate the arrangement consideration. For units of accounting which include more than one deliverable, we
generally defer all revenue for the unit of accounting until the last undelivered item is delivered.
License, systems and maintenance offerings
License and systems revenue
We offer
perpetual licenses for our products, whereby the customer receives the right to use the software license indefinitely. The first year of maintenance, which is renewable in subsequent years, is typically sold with the perpetual license.
We also offer two and three year term licenses for certain products, where the customer has rights to use the license for such periods. The first year
of maintenance, which is renewable in subsequent years during the term of the agreement, is typically sold with term licenses.
Perpetual
license and term license revenue is recognized upon delivery of the product as License and Systems Revenue in the Condensed Consolidated Statements of Income (Statements of Income). We also sell non-software products that we refer to as
systems. We recognize the revenue from systems sales upon transfer of title as License and Systems Revenue in the Statements of Income.
Maintenance
revenue
Maintenance revenue from perpetual and term licenses allows customers under maintenance agreements to receive unspecified
product updates, electronic, internet-based and telephone technical support throughout their maintenance period, which is typically one year. The majority of our customers renew their maintenance contracts annually, at or near the list price for
maintenance, which is 20% of the license list price, which establishes vendor specific objective evidence (VSOE) of the fair value of maintenance. Maintenance revenue from perpetual and term license sales is recognized on a straight-line
basis over the maintenance period as Maintenance Revenue in the Statements of Income.
For larger value contracts entered into subsequent
to March 31, 2006, we incorporated substantive contractual maintenance renewal rates into our agreements, at a consistent percentage of the net license fee, which establishes VSOE of fair value of maintenance for that class of arrangement per
SOP 97-2. This methodology can be applied to arrangements of either perpetual or multi-year term licenses, where the first years maintenance is generally purchased with the term or perpetual licenses and the subsequent years are optional and
can be purchased at the same percentage of the net license fee as the first years maintenance.
Bundled license and services revenue
We also generate revenue from time-based licenses, relationships with OEMs and custom software development. Time-based licenses include
maintenance services for the duration of their terms. Revenue from time-based licenses is recognized as Bundled License and Services Revenue in the Statements of Income, on a straight-line basis over the period of the maintenance, as we do not have
VSOE of the fair value of maintenance for time-based licenses.
In addition, we periodically sell perpetual and term licenses to OEMs for
incorporation into their products and distribution to their customers. As part of these arrangements we have certain maintenance and
8
support obligations to the OEMs. Since the maintenance associated with these types of arrangements is not sold separately, we do not have sufficient VSOE of
fair value to allocate revenue among the elements. Thus, we recognize revenue from these arrangements on a straight-line basis over the maintenance period.
In 2006, we entered into arrangements with certain OEMs to slightly modify our existing products to work with the individual OEMs products. For the customization services, we made estimates of progress towards
completion. Since the maintenance and customized services associated with these types of arrangement are not typically sold separately, we do not have sufficient VSOE of fair value to allocate revenue among the elements. Thus, we recognize revenue
from these arrangements on a straight-line basis over the longer period of either the maintenance or the customization services.
Prior to
2006, we entered into various custom software development agreements with semiconductor manufacturers to customize certain of our ASIC products. This work typically involved significant modifications to our products under a statement of work
negotiated with the customer. When time-based licenses were purchased as part of the agreement and delivery of the customized product had occurred, we recognized revenue from both the development and license fees on a straight-line basis over the
period of the maintenance, as we did not have VSOE of the fair value of maintenance for time-based licenses. When licenses were not being purchased as part of the agreement, we recognized revenue from these development fees on a percentage of
completion basis as determined by the relationship of the contract costs incurred to date and the estimated total contract costs, which were regularly reviewed during the life of the contract. Revenue recognized from these development agreements
represented less than 10% of total revenue for the three and nine months ended September 30, 2007 and years 2006 and 2005 and was recorded in Bundled License and Services Revenue in the Statement of Income.
On occasion, we may sell time-based licenses and perpetual or term licenses combined within a single order. For these transactions, we generally
recognize revenue from the entire transaction on a straight-line basis over the term of the longest period of maintenance, as generally we do not have VSOE of the fair value of maintenance for the time-based licenses.
Inventories
We record our inventory at the lower of
cost or market. We make adjustments to reduce the cost of inventory to its net realizable value, if required. Factors influencing these adjustments include changes in demand, rapid technological changes, product life cycle and development plans,
component cost trends, product pricing, physical deterioration and quality issues. Revisions to these adjustments would be required if these factors differ from our estimates.
Note 2. Stock-Based Compensation
In March 2007, our Board of Directors approved an amended and
restated 2000 Stock Plan. In May 2007, our shareholders also approved the amended Plan. Under this new Plan, we are permitted to award stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and
performance shares. No options were issued or outstanding as a result of the HARDI acquisition.
Employee stock-based compensation expense
was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(in thousands)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Cost of maintenance
|
|
$
|
77
|
|
$
|
37
|
|
$
|
121
|
|
$
|
85
|
Research and development
|
|
|
258
|
|
|
422
|
|
|
1,005
|
|
|
1,312
|
Sales and marketing
|
|
|
205
|
|
|
256
|
|
|
662
|
|
|
738
|
General and administrative
|
|
|
207
|
|
|
232
|
|
|
652
|
|
|
707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
747
|
|
$
|
947
|
|
$
|
2,440
|
|
$
|
2,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
Stock Options and Employee Stock Purchase Plan:
The fair value of stock options and shares under the employee stock purchase plan were estimated using the Black-Scholes model with the following
weighted-average assumptions for the three and nine months ended September 30, 2007 and 2006, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
Employee Stock
Purchase Plan
|
|
|
|
Three Months Ended
September 30,
|
|
|
Three Months Ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
Officers and
Directors
|
|
|
All Other
Employees
|
|
|
Officers and
Directors
|
|
|
All Other
Employees
|
|
|
All Employees
and Directors
|
|
Expected life (in years)
|
|
|
4.0
|
|
|
|
3.9
|
|
|
|
4.0
|
|
|
|
3.0
|
|
|
|
0.7
|
|
|
|
1.5
|
|
Interest rate
|
|
|
4.5
|
%
|
|
|
4.4
|
%
|
|
|
4.9
|
%
|
|
|
4.9
|
%
|
|
|
5.0
|
%
|
|
|
5.3
|
%
|
Volatility
|
|
|
0.42
|
|
|
|
0.41
|
|
|
|
0.53
|
|
|
|
0.48
|
|
|
|
0.28
|
|
|
|
0.47
|
|
Estimated forfeiture rate
|
|
|
9.7
|
%
|
|
|
15.9
|
%
|
|
|
6.0
|
%
|
|
|
12.8
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Weighted-average fair value at grant date
|
|
$
|
2.52
|
|
|
$
|
2.43
|
|
|
$
|
2.53
|
|
|
$
|
2.04
|
|
|
$
|
1.65
|
|
|
$
|
2.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
Employee Stock
Purchase Plan
|
|
|
|
Nine Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
Officers and
Directors
|
|
|
All Other
Employees
|
|
|
Officers and
Directors
|
|
|
All Other
Employees
|
|
|
All Employees
and Directors
|
|
Expected life (in years)
|
|
|
4.0
|
|
|
|
3.8
|
|
|
|
4.0
|
|
|
|
3.0
|
|
|
|
0.7
|
|
|
|
1.5
|
|
Interest rate
|
|
|
4.6
|
%
|
|
|
4.6
|
%
|
|
|
4.9
|
%
|
|
|
4.9
|
%
|
|
|
5.0
|
%
|
|
|
5.3
|
%
|
Volatility
|
|
|
0.43
|
|
|
|
0.43
|
|
|
|
0.56
|
|
|
|
0.49
|
|
|
|
0.28
|
|
|
|
0.47
|
|
Estimated forfeiture rate
|
|
|
9.7
|
%
|
|
|
15.9
|
%
|
|
|
6.0
|
%
|
|
|
12.8
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Weighted-average fair value at grant date
|
|
$
|
2.58
|
|
|
$
|
2.53
|
|
|
$
|
3.24
|
|
|
$
|
2.20
|
|
|
$
|
1.65
|
|
|
$
|
2.13
|
|
Our computations of expected volatility for the three and nine months ended September 30,
2007 and 2006 were based on our historical volatility. Our computation of expected life was based on historical exercise patterns. The interest rate for periods within the contractual life of the award was based on the U.S. Treasury yield curve in
effect at the time of grant.
10
As of September 30, 2007, $5.4 million of total unrecognized compensation expense related to
stock-options was expected to be recognized over the weighted-average vesting period of 2.4 years.
Restricted Stock Awards:
Restricted Stock awards vest 25% on first anniversary of the grant date and quarterly thereafter over four years. We use the straight
line attribution method for recognizing the expense associated with these grants.
As of September 30, 2007, 109,950 shares of
restricted stock were outstanding and unvested, with an aggregate intrinsic value of $717,000 and a weighted average remaining contractual life of approximately 3.86 years. The weighted average grant fair value price was $6.52. These shares are
scheduled to vest through 2011.
As of September 30, 2007, $696,000 of total unrecognized compensation expense related to non-vested
restricted stock awards was expected to be recognized over the weighted-average vesting period of 3.8 years.
Note 3. Net Income per Share
Basic net income per share has been computed using the weighted-average number of shares of common stock outstanding during the period.
For purposes of computing basic net income per share, the weighted average number of outstanding shares of common stock excludes unvested restricted stock awards. Diluted net income per share includes the impact of options to purchase common stock,
if dilutive and potential dilutive securities outstanding during the period. Potentially dilutive securities include stock options and unvested restricted stock units and awards, using the treasury stock method.
The following table presents the calculation of basic and diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(in thousands, except per share data)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Net income
|
|
$
|
1,451
|
|
$
|
1,645
|
|
$
|
2,746
|
|
$
|
1,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in computing basic net income per share
|
|
|
26,770
|
|
|
26,790
|
|
|
26,747
|
|
|
26,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per common share
|
|
$
|
0.05
|
|
$
|
0.06
|
|
$
|
0.10
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares (per above)
|
|
|
26,770
|
|
|
26,790
|
|
|
26,747
|
|
|
26,918
|
Add: Effect of dilutive stock options
|
|
|
1,058
|
|
|
631
|
|
|
982
|
|
|
745
|
Effect of dilutive restricted stock
|
|
|
2
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used in computing diluted net income per share
|
|
|
27,830
|
|
|
27,421
|
|
|
27,730
|
|
|
27,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common share
|
|
$
|
0.05
|
|
$
|
0.06
|
|
$
|
0.10
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average options outstanding to purchase 2,241,446 and 2,991,852 shares of common stock
for the three and nine months ended September 30, 2007, respectively, and weighted average options
11
outstanding to purchase 5,167,544 and 4,405,240 shares of common stock for the three and nine months ended September 30, 2006, respectively, were
excluded from the calculation of diluted net income per share as they were antidilutive.
Note 4. Comprehensive Income
Comprehensive income includes unrealized gains and losses on available-for-sale securities and foreign currency translation adjustments. The components of
comprehensive income for the three months and nine months ended September 30, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
(in thousands)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net income
|
|
$
|
1,451
|
|
$
|
1,645
|
|
$
|
2,746
|
|
$
|
1,582
|
|
Foreign currency translation adjustments
|
|
|
219
|
|
|
10
|
|
|
224
|
|
|
(13
|
)
|
Unrealized loss on available-for-sale investments, net of tax
|
|
|
21
|
|
|
59
|
|
|
4
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
1,691
|
|
$
|
1,714
|
|
$
|
2,974
|
|
$
|
1,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5. Stock Repurchase Program
In January 2007, our Board of Directors approved a new stock repurchase program which authorizes management to repurchase up to $10.0 million in 2007 for
common stock. From January 1, 2007 to September 30, 2007, we repurchased a total of 985,066 shares at an average price of $6.62 per share. During the three months ended September 30, 2007, we repurchased a total of 585,066 shares at
an average price of $6.71 per share.
Repurchased shares of our common stock are no longer deemed outstanding.
Note 6. Acquisition
On June 8, 2007, we
completed our acquisition of all of the common stock of HARDI, a company organized under the laws of Sweden. As discussed in Note 1, the acquisition was accounted for in accordance with SFAS 141 using the purchase method of accounting, from the date
of completion, June 8, 2007. In addition to tangible and other intangible assets, we acquired the HAPS product line which is a modular system with multi-FPGA motherboards and standard or custom-made daughter boards, which can be combined
together in a variety of ways. The HAPS products combined with our existing software products allow Synplicity to offer a comprehensive ASIC verification solution. The acquisition allows us to grow our ASIC Verification product line, particularly by
selling HAPS products in combination with our software products through our direct sales channel. HARDIs results of operations are included in our statement of income from the date of acquisition.
We acquired all the outstanding shares of the common stock of HARDI for cash consideration of $19.8 million, which comprised of the following:
(a) $18.8 million in cash and (b) $1.0 million of acquisition related costs. Pursuant to the Agreement, an additional $5.4 million is held in an escrow account which is discussed in the Contingent Consideration paragraph below.
12
The total purchase price was allocated based on the estimated fair value of net tangible and intangible
assets acquired and assumed liabilities. Intangible assets consist of existing technology, customer relationships, trademarks/trade names and non-competition agreements. The intangible assets subject to amortization are being amortized on a
straight-line basis during the useful lives below:
|
|
|
(in thousands)
|
|
Useful Life
(in years)
|
Existing techology
|
|
3
|
Trademarks/Trade Names
|
|
2
|
Customer relationships
|
|
5
|
Non-Competition agreements
|
|
5
|
The allocation of purchase price is summarized as follows:
|
|
|
|
|
(in thousands)
|
|
Fair Value
|
|
Tangible assets
|
|
$
|
4,185
|
|
Intangible assets
|
|
|
11,670
|
|
Deferred tax liability
|
|
|
(3,617
|
)
|
Goodwill
|
|
|
7,604
|
|
|
|
|
|
|
Total
|
|
$
|
19,842
|
|
|
|
|
|
|
Deferred Tax Liability
We recognized a deferred tax liability of $3.6 million for the aggregate difference between the assigned value of the intangible assets and the tax bases
of these assets. The deferred tax liability was computed at a tax rate of 31%, a combination of a Swedish rate of 28% and the California state tax rate, net of the federal benefit, of 3%.
Contingent Consideration
The
acquisition includes $5.4 million of contingent consideration currently held as restricted cash, which is payable in two equal increments, at the end of 13 and 25 months from June 1, 2007, subject to the achievement of certain revenue targets
from the sale of HAPS systems. Any payment made upon achievement of targets will increase the total purchase consideration and result in a corresponding increase in goodwill.
Pro Forma Financial Information
The
unaudited financial information in the table below summarizes the combined results of operations of Synplicity and HARDI on a pro forma basis, as though the companies had been combined as of the beginning of each of the periods presented. The pro
forma financial information is presented for informational purposes only and is not indicative of the results of operations for any subsequent quarter or for the fiscal year ending December 31, 2007.
The pro forma financial information for the three months ended September 30, 2007 represents our actual results for that period as the acquisition
closed on June 8, 2007. The pro forma financial information for the nine months ended September 30, 2007 combines our results for the nine months ended September 30, 2007 with HARDIs results for the period January 1, 2007
to June 7, 2007. The pro forma financial information for the three and nine months ended September 30, 2006 combines our historical results with the historical results of HARDI for those periods.
13
The following table summarizes the pro forma financial information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(in thousands, except per share data)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Total revenue
|
|
$
|
19,441
|
|
$
|
18,827
|
|
$
|
55,228
|
|
$
|
51,732
|
Net income
|
|
$
|
1,451
|
|
$
|
1,718
|
|
$
|
2,542
|
|
$
|
2,219
|
Basic net income per share
|
|
$
|
0.05
|
|
$
|
0.06
|
|
$
|
0.10
|
|
$
|
0.08
|
Diluted net income per share
|
|
$
|
0.05
|
|
$
|
0.06
|
|
$
|
0.09
|
|
$
|
0.08
|
Note 7. Goodwill and Intangible Assets
The following summarizes our intangible assets as of September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
|
Net Book
Value
|
Intangible assets from HARDI acquisition subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
Existing technology (3 years)
|
|
$
|
6,300
|
|
$
|
(653
|
)
|
|
$
|
5,647
|
Trademarks/Trade names (2 years)
|
|
|
400
|
|
|
(62
|
)
|
|
|
338
|
Customer realtionships (5 years)
|
|
|
4,600
|
|
|
(286
|
)
|
|
|
4,314
|
Non-competition agreements (5 years)
|
|
|
370
|
|
|
(23
|
)
|
|
|
347
|
Intangible assets from prior to 2007 acquisitions subject to amortization: (5 years):
|
|
|
|
|
|
|
|
|
|
|
Existing technology
|
|
|
3,500
|
|
|
(3,474
|
)
|
|
|
26
|
Core technology
|
|
|
750
|
|
|
(746
|
)
|
|
|
4
|
Maintenance agreements and related relationships
|
|
|
200
|
|
|
(200
|
)
|
|
|
|
Intangible assets from purchase of technology subject to amortization (5 years)
|
|
|
500
|
|
|
(108
|
)
|
|
|
392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,620
|
|
$
|
(5,552
|
)
|
|
$
|
11,068
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets from the HARDI acquisition reflects the intangible assets
acquired as part of our purchase of products, technology, and related intangible assets from HARDI. Intangible assets from the acquisition are expensed using the straight-line method over a period of two to five-years, reflecting their estimated
useful lives.
Amortization of intangible assets from acquisitions prior to 2007 reflects the intangible assets acquired as part of our
purchases of products and technology from IOTA and Bridges2Silicon in 2002. Intangible assets from those acquisitions are expensed using the straight-line method over five years.
Intangible assets from the purchase of technology for use in our products are expensed using the straight-line method over the remaining estimated
economic life of the product, which is five years.
14
The following summarizes our actual amortization expense of intangibles for the nine months ended
September 30, 2007 and 2006 and the estimated future amortization expense related to our intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
Estimated
|
|
|
Nine Months
Ended
September 30,
|
|
Remainder in
2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
(in thousands)
|
|
2006
|
|
2007
|
|
|
|
|
|
|
Amortization of intangible assets from acquisitions (in cost of sales)
|
|
$
|
668
|
|
$
|
1,191
|
|
$
|
555
|
|
$
|
2,100
|
|
$
|
2,100
|
|
$
|
922
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets from purchase of technology (in cost of sales)
|
|
$
|
|
|
$
|
75
|
|
$
|
25
|
|
$
|
100
|
|
$
|
100
|
|
$
|
100
|
|
$
|
67
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets from acquisitions (in operating expenses)
|
|
$
|
|
|
$
|
371
|
|
$
|
299
|
|
$
|
1,194
|
|
$
|
1,082
|
|
$
|
994
|
|
$
|
994
|
|
$
|
436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes in the carrying value of goodwill are as follows:
|
|
|
|
(in thousands)
|
|
As of September 30,
2007
|
Balance as of December 31, 2006
|
|
$
|
1,272
|
|
|
|
|
Goodwill related to acquisition of Hardi
|
|
|
7,604
|
|
|
|
|
|
|
$
|
8,876
|
|
|
|
|
To date, we have not recognized any impairment losses on goodwill.
Note 8. Segment Information
We follow Statement of
Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information
(SFAS 131). SFAS 131 establishes standards for the way that public business enterprises report information about
operating segments in interim financial reports. SFAS 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. We operate in only one industry segment, the development of software and
systems solutions for the design and verification of semiconductors that serve a wide range of communications, military/aerospace, consumer, semiconductor, computer, and other electronic systems markets. We market and sell our products throughout
North America, principally the United States, as well as in Europe, Japan and the rest of Asia.
The following table presents revenue from
external customers by geographic areas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
(in thousands)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Total revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
12,127
|
|
$
|
9,137
|
|
$
|
30,486
|
|
$
|
25,430
|
Japan
|
|
|
2,299
|
|
|
2,507
|
|
|
5,837
|
|
|
7,546
|
Europe, Middle East
|
|
|
2,799
|
|
|
2,433
|
|
|
8,209
|
|
|
7,957
|
Rest of Asia
|
|
|
2,216
|
|
|
2,193
|
|
|
6,561
|
|
|
5,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,441
|
|
$
|
16,270
|
|
$
|
51,093
|
|
$
|
46,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by geographic area is based on the location of the customer are attributed to geography
based on the country where the assets are located.
15
Note 9. Inventory
Inventory is comprised of the following:
|
|
|
|
(in thousands)
|
|
As of
September 30, 2007
|
Finished goods
|
|
$
|
1,187
|
Raw materials
|
|
|
440
|
|
|
|
|
|
|
$
|
1,627
|
|
|
|
|
The company does not typically maintain work-in-process inventory.
Note 10. Income Taxes
For the three and nine months
ended September 30, 2007 and 2006, the provision for income taxes was based on our estimated annual effective tax rate in compliance with SFAS 109 and other related guidance. We update our estimate of our annual effective tax rate at the end of
each quarterly period. These estimates and judgments occur in the calculation of tax credits and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and
financial statement purposes. Changes in these estimates may result in significant increases or decreases to our tax provision in a subsequent period, which in turn would affect net income.
A valuation allowance is recorded to reduce any deferred tax assets that at this time is more likely than not to be not realized. We perform assessments
of the realization of our deferred tax assets considering all available evidence, both positive and negative. These assessments require that management make significant judgments about many factors, including the amount and likelihood of future
taxable income. As a result of this assessment, we have concluded that it was more likely than not that our deferred tax assets would not be realized and have recorded a full valuation allowance against our deferred tax assets.
We will continue to evaluate the need for a valuation allowance. We may determine that some, or all, of our deferred tax assets will be realized, in
which case we will reduce our valuation allowance in the quarter in which such determination is made. If the valuation allowance is reduced, we would recognize a benefit from income taxes on our income statement in that period. If such a benefit is
recognized, subsequent periods may have higher tax provision expenses.
The following table presents the provision and benefit for income
taxes and the effective tax rates for the three and nine months ended September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
(in thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Income before income taxes
|
|
$
|
2,022
|
|
|
$
|
2,276
|
|
|
$
|
3,927
|
|
|
$
|
2,190
|
|
Income tax provision
|
|
$
|
571
|
|
|
$
|
631
|
|
|
$
|
1,181
|
|
|
$
|
608
|
|
Effective tax rate
|
|
|
28.2
|
%
|
|
|
27.7
|
%
|
|
|
30.1
|
%
|
|
|
27.8
|
%
|
The provision for income taxes for the three and nine months ended September 30, 2007 of
$571,000 and $1.2 million, respectively, related principally to the federal alternative minimum tax, state income taxes and tax on the earnings of certain foreign subsidiaries. The difference between the provision for income that would be derived by
applying the statutory rate to our income before tax for the three months and nine
16
months ended September 30, 2007 and the provision actually recorded was due to the use of tax credit carryforwards net of the impact of non-deductible
SFAS 123R stock option compensation expenses to arrive at the federal alternative minimum tax computations.
Effective January 1,
2007, we adopted Financial Accounting Standards Interpretation No.48,
Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No.109
(FIN 48). The two-step process involved our evaluation of whether our
income tax positions will more likely than not sustain on technical merits if audited by the Internal Revenue Service (IRS). In each of the steps, the more likely than not threshold is assessed assuming that the taxing authority will
examine the income tax position having full knowledge of all relevant information.
As a result of our assessment, we did not recognize any
adjustment to the liability for uncertain tax positions and therefore did not record any adjustment to the beginning balance of accumulated deficit on the balance sheet. As of January 1, 2007 and September 30, 2007, we had $3.3
million and $3.8 million of unrecognized tax benefits, which is netted against deferred tax assets and is fully offset by a valuation allowance.
We file income tax returns in the U.S. federal jurisdiction, California and various state and foreign tax jurisdictions in which we have a subsidiary or branch operation. Our United States federal corporation income tax returns, beginning
with the 2003 tax year, remain subject to examination by the IRS. Our California corporation income tax returns, beginning with the 2002 tax year (plus any amended tax returns), remain subject to examination by the California Franchise Tax Board.
Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the
date of adoption of FIN 48, we did not have any accrued interest or penalties associated with any unrecognized tax benefits. During the nine months ended September 30, 2007 we have not accrued any interest and penalty associated with
unrecognized tax benefits. Although the timing of the resolution and/or closure on audits is highly uncertain, the company does not believe it is reasonably possible that the unrecognized tax benefits would materially change in the next
12 months.
17
ITEM 2.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Certain statements in this Managements Discussion and Analysis of Financial Condition and Results of Operations are forward-looking
statements. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our or our industrys actual results, levels of activity, performance
or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by the forward-looking statements. These risks and other factors include those listed under Risk
Factors and elsewhere in this Quarterly Report on Form 10-Q. In some cases, you can identify forward-looking statements by terminology such as may, will, should, expects, plans,
anticipates, believes, estimates, predicts, potential, continue or the negative of these terms or other comparable terminology. Forward-looking statements include, but are not
limited to: the statements under Critical Accounting Estimates regarding the condensed consolidated financial statements included in this Quarterly Report, the statements under Three And Nine Months Ended September 30, 2007
and 2006 - Income Taxes regarding federal net operating loss and tax credit carry forwards; the statements under Liquidity and Capital Resources concerning the sufficiency of our available resources to meet cash requirements
and the factors which will determine our future cash requirements; and the statements in Risk Factors. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined under Risk Factors. These factors may cause our actual results to differ materially from any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. We are under no duty to update any of the forward-looking statements after
the date of this Quarterly Report on Form 10-Q to conform our prior statements to actual results. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these statements. These forward-looking
statements are made in reliance upon the safe harbor provision of The Private Securities Litigation Reform Act of 1995.
You should
read the following discussion and analysis in conjunction with our condensed consolidated financial statements and the related notes thereto included in this Quarterly Report on Form 10-Q.
Synplicity, Synplify, Synplify Pro, Certify, Amplify, Synplify ASIC, HAPS and Identify are registered trademarks of Synplicity, Inc. All other names
mentioned herein are trademarks or registered trademarks of their respective owners.
Company Overview
We are a leading provider of solutions that enable the rapid and effective design and verification of integrated circuits used in networking and
communications, semiconductor, military and aerospace, consumer, computer and peripheral, and other electronics systems. We operate in one segment, the development and sale of our products to these markets. We market and sell our products throughout
the world, principally through our own sales channel. In some parts of Asia and Europe, we sell through distributors. Distributor sales have been insignificant relative to total sales and we expect this to continue. Additionally, we periodically
have provided custom software development services to our customers or partners. This work typically involves modifications to an existing product negotiated with the customer.
18
Our geographic distribution of revenue for the three and nine months ended September 30, 2007 was
approximately 62% and 60% from North America, 12% and 11% from Japan, 14% and 16% from Europe and 11% and 13% from the rest of Asia, respectively.
Acquisition
On June 8, 2007, Synplicity acquired HARDI pursuant to an Agreement entered to purchase all the
outstanding shares of HARDI. Upon completion of the acquisition, each share of HARDIs common stock issued and outstanding immediately prior to the effective date of acquisition was acquired by Synplicity in exchange for $18.8 million in cash.
The acquisition has been accounted for in accordance with Statement of Financial Accounting Standards No. 141,
Business
Combinations
(SFAS 141) using the purchase method of accounting. Under purchase accounting, HARDIs tangible assets and liabilities and intangible assets were recorded at fair value resulting in a new carrying basis for those
assets and liabilities and resulted in an amount for goodwill. Refer to Note 6 for details on the allocation of the purchase price and the ASIC verification solutions for the details on the HAPS product.
Restricted Stock Awards
In March
2007, our Board of Directors amended and approved our 2000 Stock Plan. In May 2007, our shareholders also approved the amended Plan. Under this new Plan, we are permitted to award stock options, restricted stock, restricted stock units, stock
appreciation rights, performance units and performance shares.
Our products include FPGA implementation solutions, ASIC verification
solutions, ESL solutions and our expiring ASIC synthesis solutions. They are described in more detail as follows:
FPGA Implementation
Solutions:
Our FPGA Implementation solutions include FPGA logic synthesis and physical synthesis design tools as well as our RTL
debugging tool.
Synplify Pro
,
Synplify Premier
and
Identify
are used in both FPGA implementation and ASIC verification.
|
|
|
Synplify
and
Synplify Pro
: In 1995, we introduced
Synplify,
our logic synthesis product that enables customers to implement their designs in
FPGAs quickly and easily. In May 2000, we launched
Synplify Pro
, our advanced FPGA logic synthesis product incorporating improved productivity features and offering enhanced results.
|
|
|
|
Synplify Premier
: Introduced in October 2005,
Synplify Premier
builds upon our innovative synthesis technology and adds new graph-based physical
synthesis and real-time simulator-like visibility into operating FPGA devices. We invented graph-based physical synthesis to improve timing closure by means of a single-pass physical synthesis flow for 90nm and below FPGAs.
|
|
|
|
Identify
: In November 2002, we acquired an RTL debug product from Bridges2Silicon, Inc. which we introduced under a new Synplicity product name,
Identify.
This product allows engineers to debug their FPGAs directly within their RTL source code during chip operation.
|
In the three and nine months ended September 30, 2007, revenue from our
FPGA Implementation Solutions
accounted for 44% and 46% of total revenue, respectively. In the three and nine months ended September 30, 2006, revenue
from our
FPGA Implementation Solutions
accounted for 49% and 49% of total revenue, respectively.
19
ASIC Verification Solutions:
Our ASIC verification solutions, collectively called the
Confirma Platform
, includes software tools for implementation, prototyping and
debugging and the
High-Performance ASIC Prototyping System (HAPS).
|
|
|
Synplify Pro and Synplify Premier
. ASIC designers frequently use our synthesis tools to implement ASIC designs into an FPGA for prototyping. For single FPGAs
they will use Synplify Pro or Synplify Premier.
|
|
|
|
Certify
: In 1999, we introduced
Certify
, a software product for the verification of ASICs using prototypes consisting of multiple FPGAs. Our
Certify
product enables design teams to create hardware prototypes early in the design process when design changes are easier and less costly.
|
|
|
|
HAPS
: The
HAPS
product is a highly flexible and high capacity FPGA-based ASIC prototyping system that enables high performance functional verification
and software development.
HAPS
allows ASIC development and verification teams to shorten their design and verification time by months.
|
In the three and nine months ended September 30, 2007, revenue from our ASIC Verification Solutions was 50% and 48% of total revenue, respectively. In the three and nine months ended September 30, 2006,
revenue from our ASIC Verification Solutions was 42% and 41% of total revenue, respectively.
ESL Solutions:
|
|
|
Synplify DSP
: In July 2004, we introduced
Synplify DSP
, our first system level synthesis product created to bridge system level DSP design and
analysis and semiconductor hardware design.
Synplify DSP
performs high-level DSP optimizations from a Simulink specification.
|
|
|
|
Synplify DSP, ASIC Editi
on: In March 2007, we introduced
Synplify DSP
,
ASIC Edition
. This product performs high-level DSP optimizations from a
Simulink specification and targets ASIC technologies as well as FPGA devices. It rapidly creates technology-independent DSP algorithm models saving the time previously spent in hand coding.
|
In the three and nine months ended September 30, 2007, revenue from our ESL Solutions accounted for 3% and 3% of total revenue, respectively. In the
three and nine months ended September 30, 2006, revenue from our ESL Solutions was 2% and 2% of total revenue, respectively.
Structured ASIC and ASIC Synthesis Solutions:
|
|
|
Synplify ASIC
is our logic synthesis product for ASIC designs.
Amplify RapidChip, Amplify ISSP
and
Amplify AccelArray
are physical synthesis
products developed specifically for LSI Logics RapidChip, NEC Electronics ISSP and Fujitsu Microelectronics AccelArrays Structured ASIC architectures, respectively.
|
In the three and nine months ended September 30, 2007, revenue from our Structured ASIC and ASIC Synthesis Solutions accounted for 3% and 3% of
total revenue, respectively. In the three and nine months ended September 30, 2006, revenue from our Structured ASIC and ASIC Synthesis Solutions was 7% and 9% of total revenue, respectively.
In March 2006, we decided to exit the Structured ASIC and ASIC synthesis markets and to refocus our efforts on our core competencies in our FPGA
implementation, ESL and ASIC verification product lines. We have ceased to offer the ASIC products to customers while we continue to support existing customers who had previously purchased our products. We anticipate customer support will be
required on a declining basis though the middle of 2008.
20
Sources of Revenue:
Our total revenue is comprised of perpetual and term license revenue, HAPS systems revenue, maintenance revenue and bundled license and services revenue. Customers who buy perpetual licenses will typically purchase
one year maintenance agreements which provide electronic, internet-based technical support and telephone support as well as unspecified product updates when and if available. We also offer two-year and three-year term licenses for certain products
under which the customer purchases the first year of maintenance with the license and can renew maintenance in each of the following one or two years. Time-based licenses include maintenance services for the duration of their respective terms. When
we sell a HAPS system we record revenue upon transfer of title and we also provide the customer with a twelve month warranty. Over the history of HARDI sales of HAPS systems warranty expense has been negligible and, therefore, we do not currently
have a warranty reserve as we believe that HARDIs history is a reasonable indicator of future results. We will determine the requirement for any warranty reserve based on future results. Revenue from OEM relationships and custom software
development services revenue is recorded in bundled license and services revenue.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities,
revenue, expenses and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, and we evaluate these
estimates on an on-going basis. Actual results may differ from these estimates under different assumptions or conditions.
During the nine
months ended September 30, 2007, we believe there have been no significant changes to the items that we disclosed as our critical accounting policies and estimates in our discussion and analysis of financial condition and results of operations
in our 2006 Form 10-K except for the following.
Revenue Recognition
As discussed in Note 1 to our Consolidated Financial Statements, we enter into agreements to sell systems, software, services and multiple deliverable arrangements that include combinations of products and/or
services. Additionally, while the majority of our sales transactions contain standard business terms and conditions, there are some transactions that contain non-standard business terms and conditions. As a result, significant contract
interpretation is sometimes required to determine the appropriate accounting including:
|
|
|
whether an arrangement exists;
|
|
|
|
how the arrangement consideration should be allocated among the deliverables if there are multiple deliverables;
|
|
|
|
when to recognize revenue on the deliverables; and
|
|
|
|
whether undelivered elements are essential to the functionality of delivered elements.
|
In addition, our revenue recognition policy requires an assessment as to whether collectibility is reasonably assured, which requires us to evaluate the
creditworthiness of our customers. Changes in judgments on these assumptions and estimates could materially impact the timing of revenue recognition.
21
Inventory
We state our inventory at the lower of cost or market. We make adjustments to reduce the cost of inventory to its net realizable value, if required. Factors influencing these adjustments include changes in demand, rapid technological
changes, product life cycle and development plans, component cost trends, product pricing, physical deterioration and quality issues. Revisions to these adjustments would be required if these factors differ from our estimates.
Results of Operations
The following discussion
compares our results of operations for the three and nine months ended September 30, 2007 with the three and nine months ended September 30, 2006. There is no assurance that our historical operating results are indicative of our future
results.
Three and Nine Months Ended September 30, 2007 and 2006
Total revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Change
|
|
|
Nine Months Ended
September 30,
|
|
Change
|
|
(in millions, except percentages)
|
|
2007
|
|
2006
|
|
$
|
|
%
|
|
|
2007
|
|
2006
|
|
$
|
|
%
|
|
Revenue
|
|
$
|
19.4
|
|
$
|
16.3
|
|
$
|
3.1
|
|
19
|
%
|
|
$
|
51.1
|
|
$
|
46.1
|
|
$
|
5.0
|
|
11
|
%
|
For the three months ended September 30, 2007, our total revenue increased 19% over the three
months ended September 30, 2006. FPGA implementation revenue increased by 9%, ASIC verification revenue, which include revenue from the HAPS product line, increased by 44%, ESL revenue increased by 53% and ASIC revenue decreased, as expected,
from $1.2 million in 2006 to $496,000 in 2007.
In the three months ended September 2007 license and systems revenue was 40% of total
revenue, maintenance revenue was 37% of total revenue and bundled license and service revenue was 24%. In the three months ended September 2006 license and systems revenue was 31% of total revenue, maintenance revenue was 42% of total revenue and
bundled license and service revenue was 26%. This mix will vary depending on the proportion of time-based licenses compared to total licenses booked, however, we anticipate that the sale of HAPS products will cause the license and systems revenue to
increase relative to our other revenue sources.
For the nine months ended September 30, 2007 total revenue increased 11% from the
nine months ended September 30, 2006. FPGA implementation revenue increased 5%, ASIC verification revenue increased 31%, ESL revenue increased 83% and ASIC revenue decreased, as expected, from $4.2 million in 2006 to $1.7 million in 2007.
In the nine months ended September 2007 license and systems revenue was 34% of total revenue, maintenance revenue was 40% of total revenue
and bundled license and service revenue was 26%. In the nine months ended September 2006 license and systems revenue was 27% of total revenue, maintenance revenue was 44% of total revenue and bundled license and service revenue was 29% of total
revenue.
22
For the three and nine months ended September 30, 20007, percentage of the Synplify Pro, Synplify
Premier and Identify revenue from FPGA implementation and ASIC verification product lines to total revenue was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
FPGA
Implementation
|
|
|
ASIC
verification
|
|
|
FPGA
Implementation
|
|
|
ASIC
verification
|
|
Synplify Pro revenue
|
|
27
|
%
|
|
30
|
%
|
|
17
|
%
|
|
24
|
%
|
|
31
|
%
|
|
29
|
%
|
|
20
|
%
|
|
23
|
%
|
Synplify Premier revenue
|
|
8
|
%
|
|
7
|
%
|
|
6
|
%
|
|
3
|
%
|
|
7
|
%
|
|
4
|
%
|
|
7
|
%
|
|
3
|
%
|
Identify revenue
|
|
1
|
%
|
|
1
|
%
|
|
1
|
%
|
|
2
|
%
|
|
1
|
%
|
|
1
|
%
|
|
2
|
%
|
|
2
|
%
|
License and systems revenue.
License and systems revenue includes revenue from perpetual
and term license and systems sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Change
|
|
|
Nine Months Ended
September 30,
|
|
|
Change
|
|
(in millions, except percentages)
|
|
2007
|
|
|
2006
|
|
|
$
|
|
%
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
%
|
|
License and systems revenue
|
|
$
|
7.7
|
|
|
$
|
5.1
|
|
|
$
|
2.6
|
|
51
|
%
|
|
$
|
17.2
|
|
|
$
|
12.5
|
|
|
$
|
4.7
|
|
38
|
%
|
As a percentage of total revenue
|
|
|
40
|
%
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
34
|
%
|
|
|
27
|
%
|
|
|
|
|
|
|
License and systems revenue increased 51% from the three months ended September 30, 2006 over
the three months ended September 30, 2007, driven principally by the sales of HAPS products. Perpetual and term license revenue from FPGA implementation increased 3%, ESL revenue increased 24%, ASIC verification revenue, including HAPS,
increased 119% and, as expected, ASIC synthesis revenue declined by 55%.
For the nine months ended September 30, 2007, license and
systems revenue increased by 38% over the nine months ended September 30, 2006. Perpetual and term license revenue from FPGA implementation was flat, ESL revenue increased 75%, ASIC verification revenue, including HAPS, increased 12% and, as
expected, ASIC synthesis revenue declined by 17%.
Maintenance revenue.
Maintenance revenue is derived from contracts associated
with perpetual and term license sales. Our customers purchase the first year of maintenance with the perpetual or term license and a substantial number of them renew their maintenance in the years that follow. As a percentage of total revenue,
maintenance revenue will vary depending on our mix of perpetual, term and time-based licenses as well as our cancellation rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Change
|
|
|
Nine Months Ended
September 30,
|
|
|
Change
|
|
(in millions, except percentages)
|
|
2007
|
|
|
2006
|
|
|
$
|
|
%
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
%
|
|
Maintenance revenue
|
|
$
|
7.1
|
|
|
$
|
6.9
|
|
|
$
|
0.2
|
|
3
|
%
|
|
$
|
20.6
|
|
|
$
|
20.3
|
|
|
$
|
0.3
|
|
1
|
%
|
As a percentage of total revenue
|
|
|
37
|
%
|
|
|
42
|
%
|
|
|
|
|
|
|
|
|
40
|
%
|
|
|
44
|
%
|
|
|
|
|
|
|
23
The following table represents the increases and decreases of maintenance revenue by product line.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Change
|
|
|
Nine Months Ended
September 30,
|
|
Change
|
|
(in thousands, except percentages)
|
|
2007
|
|
2006
|
|
$
|
|
|
%
|
|
|
2007
|
|
2006
|
|
$
|
|
|
%
|
|
FPGA implementaion revenue
|
|
$
|
4,297
|
|
$
|
4,032
|
|
$
|
265.0
|
|
|
7
|
%
|
|
$
|
12,349
|
|
$
|
12,001
|
|
$
|
348.0
|
|
|
3
|
%
|
ASIC verification revenue
|
|
|
2,632
|
|
|
2,623
|
|
|
9.0
|
|
|
0
|
%
|
|
|
7,847
|
|
|
7,582
|
|
|
265.0
|
|
|
3
|
%
|
ESL revenue
|
|
|
100
|
|
|
62
|
|
|
38.0
|
|
|
61
|
%
|
|
|
258
|
|
|
172
|
|
|
86.0
|
|
|
50
|
%
|
Structured ASIC and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASIC synthesis revenue
|
|
|
52
|
|
|
150
|
|
|
(98.0
|
)
|
|
(65
|
%)
|
|
|
123
|
|
|
567
|
|
|
(444.0
|
)
|
|
(78
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total maintenance revenue
|
|
$
|
7,081
|
|
$
|
6,867
|
|
|
|
|
|
|
|
|
$
|
20,577
|
|
$
|
20,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table represents the percentage of maintenance revenue by product line to total
maintenance revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
FPGA implementaion revenue
|
|
61
|
%
|
|
59
|
%
|
|
60
|
%
|
|
59
|
%
|
ASIC verification revenue
|
|
37
|
%
|
|
38
|
%
|
|
38
|
%
|
|
37
|
%
|
ESL revenue
|
|
1
|
%
|
|
1
|
%
|
|
1
|
%
|
|
1
|
%
|
Structured ASIC and ASIC synthesis revenue
|
|
1
|
%
|
|
2
|
%
|
|
1
|
%
|
|
3
|
%
|
In the three and nine months ended September 2007, maintenance revenue increased modestly over the
comparable periods of 2006. While our renewal rate remained the same in all periods, the mix of applicable licenses generating maintenance revenue was more heavily weighted to time-based licenses which are booked in bundled license and services
revenue. In all periods presented about 60% of our maintenance revenue is derived from FPGA implementation licenses and about 37% is derived from ASIC verification licenses. ASIC verification licenses include HAPS sales which do not carry a
maintenance contract.
Bundled license and services revenue.
Bundled license, systems and services revenue includes revenue from
time-based licenses which include maintenance, development and OEM agreements, and revenue from other services such as consulting, technical support, and user guides.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Change
|
|
|
Nine Months Ended
September 30,
|
|
|
Change
|
|
(in millions, except percentages)
|
|
2007
|
|
|
2006
|
|
|
$
|
|
%
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
%
|
|
Bundled license and services revenue
|
|
$
|
4.7
|
|
|
$
|
4.3
|
|
|
$
|
0.4
|
|
9
|
%
|
|
$
|
13.3
|
|
|
$
|
13.3
|
|
|
$
|
|
|
0
|
%
|
As a percentage of total revenue
|
|
|
24
|
%
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
26
|
%
|
|
|
29
|
%
|
|
|
|
|
|
|
24
The following table represents the increases and decreases of bundled license and services revenue by
product line.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Change
|
|
|
Nine Months Ended
September 30,
|
|
Change
|
|
(in thousands, except percentages)
|
|
2007
|
|
2006
|
|
$
|
|
|
%
|
|
|
2007
|
|
2006
|
|
$
|
|
|
%
|
|
FPGA implementaion revenue
|
|
$
|
1,239
|
|
$
|
1,125
|
|
$
|
114.0
|
|
|
10
|
%
|
|
$
|
3,615
|
|
$
|
3,160
|
|
$
|
455.0
|
|
|
14
|
%
|
ASIC verification revenue
|
|
|
1,298
|
|
|
1,074
|
|
|
224.0
|
|
|
21
|
%
|
|
|
3,658
|
|
|
3,062
|
|
|
596.0
|
|
|
19
|
%
|
ESL revenue
|
|
|
100
|
|
|
20
|
|
|
80.0
|
|
|
400
|
%
|
|
|
207
|
|
|
60
|
|
|
147.0
|
|
|
245
|
%
|
Structured ASIC and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASIC synthesis revenue
|
|
|
388
|
|
|
906
|
|
|
(518.0
|
)
|
|
(57
|
%)
|
|
|
1,394
|
|
|
2,806
|
|
|
(1,412.0
|
)
|
|
(50
|
%)
|
Custom software development services revenue
|
|
|
1,628
|
|
|
1,209
|
|
|
419.0
|
|
|
35
|
%
|
|
|
4,460
|
|
|
4,199
|
|
|
261.0
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total bundled license and services revenue
|
|
$
|
4,653
|
|
$
|
4,334
|
|
|
|
|
|
|
|
|
$
|
13,334
|
|
$
|
13,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table represents the percentage of bundled license and services revenue by product
line to the total bundled license and services revenue.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
FPGA implementaion revenue
|
|
27
|
%
|
|
26
|
%
|
|
27
|
%
|
|
24
|
%
|
ASIC verification revenue
|
|
28
|
%
|
|
25
|
%
|
|
27
|
%
|
|
23
|
%
|
ESL revenue
|
|
2
|
%
|
|
0
|
%
|
|
2
|
%
|
|
0
|
%
|
Structured ASIC and ASIC synthesis revenue
|
|
8
|
%
|
|
21
|
%
|
|
10
|
%
|
|
21
|
%
|
Custom software development services revenue
|
|
35
|
%
|
|
28
|
%
|
|
34
|
%
|
|
32
|
%
|
In the three months ended September 2007, bundled license and services revenue increased by 9%
over the same period in 2006. Higher OEM revenues offset the expected decrease in ASIC synthesis revenues. In the nine months ended September 2007, bundled license and services revenue was flat compared to the same period in 2006. A higher
time-based license rate generated increases in FPGA implementation and ASIC verification software revenue, however, ASIC synthesis revenue was lower , as expected and OEM revenue was higher by 6%.
Cost of revenue
Cost of license
and systems revenue.
Cost of license and systems revenue includes the costs of systems sold (raw materials, contract manufacturing costs), royalties, product packaging costs, software documentation, licensing costs including amortization of
capitalized software development costs and other costs associated with shipping licenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Change
|
|
|
Nine Months Ended
September 30,
|
|
|
Change
|
|
(in thousands, except percentages)
|
|
2007
|
|
|
2006
|
|
|
$
|
|
%
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
%
|
|
Cost of license and systems revenue
|
|
$
|
1,014
|
|
|
$
|
80
|
|
|
$
|
934.0
|
|
1168
|
%
|
|
$
|
1,443
|
|
|
$
|
115
|
|
|
$
|
1,328.0
|
|
1155
|
%
|
As a percent of license revenue
|
|
|
13
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
8
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
As a percent of total revenue
|
|
|
5
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
3
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
25
For the three months ended September 30, 2007, cost of license and systems revenue increased
$934,000 from the three months ended September 30, 2006, due to the cost of sales associated with our HAPS systems sold.
For the nine
months ended September 30, 2007, cost of license and systems revenue increased $1.3 million over the nine months ended September 30, 2006, principally due to the cost of sales associated with our HAPS systems sold.
Cost of maintenance revenue.
Cost of maintenance revenue consists of the costs of personnel, including stock-based compensation, and other
expenses related to providing electronic, internet-based and phone technical support to our customers under active maintenance contracts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Change
|
|
|
Nine Months Ended
September 30,
|
|
|
Change
|
|
(in thousands, except percentages)
|
|
2007
|
|
|
2006
|
|
|
$
|
|
%
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
Cost of maintenance revenue
|
|
$
|
435
|
|
|
$
|
396
|
|
|
$
|
39.0
|
|
10
|
%
|
|
$
|
1,245
|
|
|
$
|
1,279
|
|
|
$
|
(34.0
|
)
|
|
(3
|
)%
|
As a percent of maintenance revenue
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
6
|
%
|
|
|
6
|
%
|
|
|
|
|
|
|
|
As a percent of total revenue
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
2
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
|
For the three months ended September 30, 2007, cost of maintenance revenue increased 10% from
the three months ended September 30, 2006, principally due to higher stock-based compensation expense.
For the nine months ended
September 30, 2007, cost of maintenance revenue decreased 3% from the nine months ended September 30, 2006, due to lower customer support expenses, offset by higher stock-based compensation expense.
Cost of bundled license and services revenue.
Cost of bundled license and services revenue consists of engineering costs directly associated with
our custom software development service contracts, and time-based licenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Change
|
|
|
Nine Months Ended
September 30,
|
|
|
Change
|
|
(in thousands, except percentages)
|
|
2007
|
|
|
2006
|
|
|
$
|
|
%
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
Cost of bundled license and services revenue
|
|
$
|
96
|
|
|
$
|
65
|
|
|
$
|
31.0
|
|
48
|
%
|
|
$
|
289
|
|
|
$
|
294
|
|
|
$
|
(5.0
|
)
|
|
(2
|
)%
|
As a percent of bundled license and services revenue
|
|
|
2
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
As a percent of total revenue
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
For the three months ended September 30, 2007, cost of bundled license and services revenue
increased 48% from the three months ended September 30, 2006, due to an increase in development contracts.
For the nine months ended
September 30, 2007, cost of bundled license and services revenue decreased 2% from the nine months ended September 30, 2006, as a result of a reduction in the time-based license rate, offset by increased costs associated with development
work.
Amortization of intangible assets.
Amortization of intangible assets reflects the amortization of intangible assets acquired
as part of our purchases of products and technology from IOTA and Bridges2Silicon in 2002, as well as a purchase of technology for use in our products in 2006. In addition, amortization of intangible assets also reflects the amortization of
intangible assets acquired as a result of the HARDI acquisition. Intangible assets are expensed over two to five-year useful lives.
26
The following summarizes our actual expense and estimated future amortization expense related to the
above intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
Nine Months
Ended
September 30,
|
|
Estimated
|
(in thousands)
|
|
2006
|
|
2007
|
|
Remainder
in 2007
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
Amortization of intangible assets from acquisitions (in cost of sales)
|
|
$
|
668
|
|
$
|
1,191
|
|
$
|
555
|
|
$
|
2,100
|
|
$
|
2,100
|
|
$
|
922
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets from purchase of technology (in cost of sales)
|
|
$
|
|
|
$
|
75
|
|
$
|
25
|
|
$
|
100
|
|
$
|
100
|
|
$
|
100
|
|
$
|
67
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets from acquisitions (in operating expenses)
|
|
$
|
|
|
$
|
371
|
|
$
|
299
|
|
$
|
1,194
|
|
$
|
1,082
|
|
$
|
994
|
|
$
|
994
|
|
$
|
436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
Research and development.
Research and development expenses include compensation, stock-based compensation expenses, outside services, equipment and software costs and allocated overhead expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Change
|
|
|
Nine Months Ended
September 30,
|
|
|
Change
|
|
(in millions, except percentages)
|
|
2007
|
|
|
2006
|
|
|
$
|
|
%
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
%
|
|
Research and development
|
|
$
|
6.4
|
|
|
$
|
5.7
|
|
|
$
|
0.7
|
|
12
|
%
|
|
$
|
18.3
|
|
|
$
|
18.1
|
|
|
$
|
0.2
|
|
1
|
%
|
As a percent of total revenue
|
|
|
33
|
%
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
36
|
%
|
|
|
39
|
%
|
|
|
|
|
|
|
For the three months ended September 30, 2007, research and development expenses increased
12% from the three months ended September 30, 2006, primarily due to higher compensation cost resulting from our acquisition of HARDI in June 2007 and increased headcount in our India office. Expenses were also higher due to an increased
overhead expenses and purchases of software and equipment. These increases were partially offset by lower stock-based compensation expenses.
For the nine months ended September 30, 2007, research and development expenses increased 1% from the nine months ended September 30, 2006, primarily due to higher compensation cost, overhead expenses and recruiting expenses.
These increases were partially offset by lower stock-based compensation expenses.
Sales and marketing.
Sales and marketing expenses
include compensation, commissions and stock-based compensation expenses, promotional activities, tradeshows, seminars and allocated overhead expenses.
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Change
|
|
|
Nine Months Ended
September 30,
|
|
|
Change
|
|
(in millions, except percentages)
|
|
2007
|
|
|
2006
|
|
|
$
|
|
%
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
%
|
|
Sales and marketing
|
|
$
|
6.6
|
|
|
$
|
6.4
|
|
|
$
|
0.2
|
|
3
|
%
|
|
$
|
19.9
|
|
|
$
|
18.6
|
|
|
$
|
1.3
|
|
7
|
%
|
As a percent of total revenue
|
|
|
34
|
%
|
|
|
39
|
%
|
|
|
|
|
|
|
|
|
39
|
%
|
|
|
40
|
%
|
|
|
|
|
|
|
For the three months ended September 30, 2007, sales and marketing expenses increased 3%
compared to the three months ended September 30, 2006, primarily due to higher compensation cost, and increased travel expenses. These increases were partially offset by lower marketing communication expenses.
For the nine months ended September 30, 2007, sales and marketing expenses increased 7% compared to the nine months ended September 30, 2006,
primarily due to higher compensation cost, travel expenses and marketing communication expenses. Expenses were also higher due to recruiting fees and outside services. These increases were offset by lower commission expense and lower stock-based
compensation expenses.
General and administrative.
General and administrative expenses include compensation and stock-based
compensation expenses, accounting and legal expenses, outside services and allocated overhead expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Change
|
|
|
Nine Months Ended
September 30,
|
|
|
Change
|
|
(in millions, except percentages)
|
|
2007
|
|
|
2006
|
|
|
$
|
|
%
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
%
|
|
General and administrative
|
|
$
|
2.2
|
|
|
$
|
1.9
|
|
|
$
|
0.3
|
|
16
|
%
|
|
$
|
6.5
|
|
|
$
|
5.9
|
|
|
$
|
0.6
|
|
10
|
%
|
As a percent of total revenue
|
|
|
11
|
%
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
13
|
%
|
|
|
13
|
%
|
|
|
|
|
|
|
For the three months ended September 30, 2007, general and administrative expenses increased
16% compared to the three months ended September 30, 2006, due to higher compensation cost, increased consulting and recruiting expenses and higher outside services expense.
For the nine months ended September 30, 2007, general and administrative expenses increased 10% compared to the nine months ended September 30,
2006, due to higher compensation costs, increased consulting and accounting expenses and purchases of equipment and software. The increases were partially offset by lower insurance expenses and lower stock-based compensation expenses.
Other income, net.
Other income, net includes interest income earned on cash and investments, foreign exchange gains and losses, and other
miscellaneous items. Our cash equivalents and investments are classified as available-for-sale and are reported at fair value. These investments are short-term, maturing within 12 months of the purchase date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Change
|
|
|
Nine Months Ended
September 30,
|
|
|
Change
|
|
(in thousands, except percentages)
|
|
2007
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
2007
|
|
|
2006
|
|
|
$
|
|
%
|
|
Other income, net
|
|
$
|
363.0
|
|
|
$
|
763.0
|
|
|
$
|
(400.0
|
)
|
|
52
|
%
|
|
$
|
2,025.0
|
|
|
$
|
1,917.0
|
|
|
$
|
108.0
|
|
6
|
%
|
As a percent of total revenue
|
|
|
2
|
%
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
4
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
For the three months ended September 30, 2007, the decrease in other income, net was
primarily due to net foreign exchange losses of $251,000 and lower investable cash as a result of the HARDI acquisition in June 2007 and stock repurchases.
28
For the nine months ended September 30, 2007, the increase in other income, net was due to higher
interest rates on a higher level of investments and a gain from an early termination of a facility lease, offset by net foreign exchange losses of $258,000.
Income Taxes.
We recorded a provision for income taxes of $571,000 and $1.2 million for the three and nine months ended September 30, 2007, respectively, and a provision of $631,000 and $608,000 for the
three and nine months ended September 30, 2006, respectively. For both periods, the provision for income taxes was based on our estimated annual effective tax rate in compliance with SFAS 109. The annual effective tax rate was calculated on the
basis of our expected level of profitability and includes the utilization of tax credit carryforwards, federal alternative minimum tax, miscellaneous state income taxes and income taxes on earnings of our foreign subsidiaries. To the extent our
expected profitability changes during the year, the effective tax rate would be revised accordingly. The difference between the provision for income tax that would be derived by applying the statutory rate to our income before tax and the provision
actually recorded was due to the use of tax credit carryforwards that are allowable under the federal alternative minimum tax computations offset by the impact of non-deductible SFAS 123R stock option compensation expenses.
A valuation allowance is recorded to reduce any deferred tax assets that at this time is more likely than not to be not realized. We perform assessments
of the realization of our deferred tax assets considering all available evidence, both positive and negative. These assessments require that management make significant judgments about many factors, including the amount and likelihood of future
taxable income. As a result of this assessment, we have concluded that it was more likely than not that our deferred tax assets would not be realized and have recorded a full valuation allowance against our deferred tax assets.
The income tax provision for the three and nine months ended September 30, 2007 and 2006 was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
$ change
|
|
|
Nine Months Ended
September 30,
|
|
$ change
|
(in thousands)
|
|
2007
|
|
2006
|
|
|
2007
|
|
2006
|
|
Income tax provision
|
|
$
|
571.0
|
|
$
|
631.0
|
|
$
|
(60.0
|
)
|
|
$
|
1,181.0
|
|
$
|
608.0
|
|
$
|
573.0
|
Liquidity and Capital Resources
As of September 30, 2007, we had cash and cash equivalents of $6.9 million, short-term investments of $37.0 million, an accumulated deficit of
$1.5 million and working capital of $35.3 million.
Net cash provided by operating activities was $5.9 million for the nine months
ended September 30, 2007, compared to $10.6 million for the nine months ended September 30, 2006. The decrease in cash provided by operating activities was primarily due to (i) higher accounts receivable at September 30, 2007
than at December 31, 2006 as a result of increased revenue and lower collections, (ii) the acquisition of inventories in June 2007 as a result of the acquisition of HARDI, (iii) lower deferred revenue resulting from lower time-based
license revenue in 2007 and (iv) the increase in deferred income taxes booked in 2007 relating to the acquisition; offset by (v) higher amortization of intangible assets.
Net cash used in investing activities was $4.6 million for the nine months ended September 30, 2007, compared to $11.9 million for the nine months
ended September 30, 2006. The decrease in cash used in investing was due to (i) sales of short-term investments, (ii) lower purchases of short term investments; offset by (iii) the cash used for acquisition of HARDI. See
Note 6 of notes to our unaudited condensed consolidated financial statements included elsewhere in this report for additional information relating to acquisition related activities that have affected our liquidity.
29
Net cash used in financing activities was $3.9 million for the nine months ended September 30, 2007,
compared to $3.0 million for the nine months ended September 30, 2006. The increase was due to an increase in repurchases of common stock in 2007 offset by proceeds from exercises of stock options by employees under our stock option plan.
Our future liquidity and capital requirements will depend on numerous factors, including:
|
|
|
the amount, type and timing of product license sales;
|
|
|
|
the extent to which our existing and new products gain market acceptance;
|
|
|
|
the extent to which customers continue to renew annual maintenance contracts;
|
|
|
|
the timing of customer payments and the collection of outstanding receivables;
|
|
|
|
the cost and timing of product development efforts and the success of these efforts;
|
|
|
|
the cost and timing of sales and marketing activities;
|
|
|
|
any acquisitions of products, technologies or businesses;
|
|
|
|
any stock repurchases if our stock repurchase program is extended; and
|
|
|
|
the availability of financing.
|
We
believe that our cash and short-term investments balance of $43.9 million as of September 30, 2007 will be sufficient to meet our operating and capital requirements through at least the next 12 months. However, it is possible that we may
require additional financing during this period. We intend to continue to invest in the development of new products and enhancements to our existing products. In addition, even if we have sufficient funds to meet our anticipated cash needs in the
next twelve months, we may choose to raise additional funds during this time. We may be required to raise those funds through public or private financings, strategic relationships or other arrangements. We cannot provide assurance that such funding,
if needed, will be available on terms attractive to us, or at all. Furthermore, any additional equity financings may be dilutive to shareholders, and debt financing, if available, may involve restrictive covenants. If we fail to raise capital when
needed, our failure could have a negative impact on our profitability and our ability to pursue our business strategy.
Contingent
Consideration
Related to our acquisition of HARDI, we have placed $5.4 million in an escrow account to be delivered to
three former HARDI shareholders subject to attainment of specified revenue targets from the sales of HAPS systems. Any payment made upon achievement of targets will increase the total purchase consideration and result in a corresponding increase in
goodwill.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors.