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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 28, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission file number: 0-19807
SYNOPSYS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 56-1546236
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
700 East Middlefield Road
Mountain View, CA 94043
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(Address of principal executive offices, including zip code)
Registrant's Telephone No., including area code: (415) 962-5000
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of January 31, 1997, there were 40,930,373 shares of the Registrant's Common
Stock outstanding.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYNOPSYS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1996
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(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 33,499 $ 33,904
Short-term investments 198,041 202,663
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Cash and short-term investments 231,540 236,567
Accounts receivable, net of allowances of $3,446 and $3,661 64,879 61,085
Prepaid expenses, deferred taxes and other 23,918 19,975
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Total current assets 320,337 317,627
Property and equipment, net 55,938 51,537
Capitalized software development costs, net of accumulated
amortization of $3,076 and $2,805 1,125 1,146
Long-term investments 38,305 30,495
Other assets 10,572 8,162
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Total assets $ 426,277 $ 408,967
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 58,301 $ 70,581
Current portion of long-term debt 10,962 11,580
Income taxes payable 12,881 12,091
Deferred revenue 64,147 65,998
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Total current liabilities 146,291 160,250
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Long-term debt 14,122 15,970
Deferred compensation 1,584 --
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized;
no shares outstanding -- --
Common stock, $.01 par value; 100,000,000 shares
authorized; 40,779,853 and 40,434,563 shares
outstanding 408 404
Additional paid-in capital 172,165 152,187
Retained earnings 87,398 72,257
Cumulative translation adjustment (353) (402)
Net unrealized gain on investment 12,401 8,301
Treasury stock, at cost (7,739) --
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Total stockholders' equity 264,280 232,747
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Total liabilities and stockholders' equity $ 426,277 $ 408,967
========= =========
</TABLE>
See accompanying notes
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SYNOPSYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
----------------------
1996 1995
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<S> <C> <C>
Revenue:
Product $ 66,160 $ 53,749
Service 36,340 25,251
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Total revenue 102,500 79,000
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Cost of revenue:
Product 5,811 3,593
Service 6,391 4,741
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Total cost of revenue 12,202 8,334
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Gross margin 90,298 70,666
Operating expenses:
Research and development 24,882 18,202
Sales and marketing 37,048 30,323
General and administrative 7,968 6,341
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Total operating expenses 69,898 54,866
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Operating income 20,400 15,800
Other income, net 3,700 1,850
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Income before income taxes 24,100 17,650
Provision for income taxes 7,950 6,000
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Net income $ 16,150 $ 11,650
======== ========
Earnings per share $ .38 $ .28
======== ========
Weighted average common shares 42,993 41,632
and equivalents ======== ========
</TABLE>
See accompanying notes
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SYNOPSYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
-----------------------
1996 1995
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 16,150 $ 11,650
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,324 3,455
Interest accretion on notes payable 152 --
Provision for doubtful accounts and sales returns (215) 70
Tax benefit associated with stock options 9,406 1,000
Deferred revenue (1,851) 7,694
Deferred taxes (4,406) --
Gain on sale of long-term investment (2,000) --
Net change in assets and liabilities:
Accounts receivable (3,579) (2,100)
Prepaid expenses and other (1,843) (243)
Other assets (2,410) 13
Accounts payable and accrued liabilities (12,578) (6,478)
Income taxes payable 790 (5,089)
Deferred compensation 1,584 --
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Net cash provided by operating activities 5,524 9,972
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Cash flows from investing activities:
Proceeds from sale of long-term investment 3,782 --
Purchase of long-term investment (3,186) --
Change in short-term investments 4,622 (1,856)
Purchases of property and equipment (10,155) (7,099)
Capitalization of software development costs (250) (250)
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Net cash used in investing activities (5,187) (9,205)
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Cash flows from financing activities:
Principal payments on debt obligations (2,618) --
Proceeds from sale of common stock, net 11,316 5,204
Purchases of treasury stock (9,489) --
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Net cash provided (used) by financing
activities (791) 5,204
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Effect of exchange rate changes on cash 49 (1)
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Net increase (decrease) in cash and cash equivalents (405) 5,970
Cash and cash equivalents, beginning of period 33,904 91,193
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Cash and cash equivalents, end of period $ 33,499 $ 97,163
======== ========
Supplemental Disclosure:
Cash paid during the period for:
Interest $ 214 $ --
======== ========
Income taxes $ 2,446 $ 10,123
======== ========
</TABLE>
See accompanying notes
5
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited financial information furnished herein reflects all
adjustments, consisting only of normal recurring adjustments which in the
opinion of management are necessary to fairly state the Company's and its
subsidiaries' condensed consolidated financial position, the results of
their operations, and their cash flows for the periods presented. This
report on Form 10-Q should be read in conjunction with the Company's Annual
Report to Stockholders for the year ended September 30, 1996. For financial
reporting purposes, the Company reports on a 13-week quarter and a 52 or
53-week year. For presentation purposes, the consolidated financial
statements refer to the quarter's calendar month end. The consolidated
results of operations for the period ended December 31, 1996 are not
necessarily indicative of the results to be expected for any subsequent
quarter or for the entire fiscal year.
2. EARNINGS PER SHARE
Earnings per share is computed using the weighted average number of common
and dilutive common equivalent shares outstanding during the period.
Dilutive common equivalent shares consist of common stock issuable upon
exercise of stock options and warrants using the treasury stock method.
3. LONG-TERM INVESTMENTS
In May 1996, the Company purchased 1,206,542 shares, approximately 9.9
percent of the outstanding shares of Cooper and Chyan Technology, Inc.
(CCT), for $14.50 per share, pursuant to a strategic relationship between
the companies. In accordance with FASB Statement No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," the investment has been
classified as "available for sale." In October 1996, CCT and Cadence Design
Systems, Inc. announced that they had reached an agreement to merge. It is
currently the Company's intent to dispose of the investment over time,
however, there can be no assurance that the Company will be successful in
doing so. Accordingly, the investment has been classified as a long-term
asset. During the first quarter of fiscal year 1997, the Company sold
122,889 shares of CCT and realized a gain of approximately $2.0 million. In
addition, the net unrealized gain recorded as a separate component of
stockholders' equity increased by $4.1 million during the first quarter.
In December 1996, the Company made an investment of $3.2 million in a
company which is not publicly traded. The investment is carried at cost and
is included in long-term investments.
4. LONG-TERM DEBT
In February 1996, the Company and International Business Machines
Corporation ("IBM") entered into a six-year Joint Development and License
Agreement Concerning EDA Software and Related Intellectual Property (the
"Agreement"). In accordance with the Agreement, the Company paid IBM $11.0
million in cash and issued $30.0 million in notes, which bear interest at
3%, and are payable to IBM upon the earlier of achievement of scheduled
milestones or at maturity in 2006. The notes were recorded at fair value of
$28.5 million, using a discount rate commensurate with the risks involved.
As of December 31, 1996, the notes had a balance of $22.4 million, of which
$14.1 million is included in long-term obligations. The carrying amount of
the debt, including the long-term portion, approximates the fair value.
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5. DEFERRED COMPENSATION
The Company has established the Synopsys Deferred Compensation Plan that
allows certain eligible employees to defer a portion of their compensation.
The deferred compensation and accumulated earnings are accrued but
unfunded. Such deferred compensation is included in long-term liabilities.
6. SUBSEQUENT EVENTS
On January 16, 1997, the Company announced a definitive agreement to merge
with EPIC Design Technology, Inc., a developer of design automation tools
for deep submicron design in the area of integrated circuit power, timing,
and reliability analysis. The transaction will result in 0.7485 shares of
Synopsys Common Stock being issued in exchange for each share of EPIC
Common Stock outstanding on the effective date of the merger. Additionally,
outstanding options to purchase EPIC Common Stock will be exchanged for
options to purchase Synopsys Common Stock, based on the same exchange
ratio. As of December 31, 1996, EPIC had 13.7 million shares of Common
Stock outstanding. The transaction is subject to stockholder approval. The
merger is intended to be accounted for as a pooling of interests.
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SYNOPSYS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Revenue for the first quarter of fiscal 1997 increased 30% to $102.5 million
from $79.0 million in the first quarter of fiscal 1996. This increase in revenue
was primarily attributable to increased worldwide licensing and sales of the
Company's software and systems products. Product revenue as a percentage of
total revenue decreased to 65% in the first quarter of fiscal 1997, compared to
68% in the first quarter of fiscal 1996. This decrease was due in part to an
increase in service revenue from training and consulting services during the
first quarter of fiscal 1997. In addition, the Company recognized revenue of
$4.0 million during the first quarter of fiscal 1997 related to an amended
license agreement which eliminated a further support obligation.
International revenue as a percentage of total revenue decreased to 45% in the
first quarter of fiscal 1997 from 46% in the first quarter of fiscal 1996, due
to decreased revenue in Europe and the Pacific Rim as a percent of total
revenue.
Cost of revenue as a percentage of total revenue was 12% in the first quarter of
fiscal 1997 compared to 11% in the first quarter of fiscal 1996. Cost of revenue
includes personnel and related costs, production costs, product packaging,
documentation, amortization of capitalized software development and purchased
software costs, and costs of the Company's system products.
Research and development expenses as a percentage of total revenue increased to
24% in the first quarter of fiscal 1997 from 23% in the first quarter of fiscal
1996, and increased in absolute dollars to $24.9 million from $18.2 million.
Increased research and development expenses were primarily attributable to
increases in personnel and personnel-related costs associated with the
development of new products and enhancement of existing products.
Sales and marketing expenses as a percentage of total revenue decreased to 36%
in the first quarter of fiscal 1997 from 38% in the first quarter of fiscal
1996, but increased in absolute dollars to $37.0 million from $30.3 million.
Total sales and marketing expenses increased as a result of continued expansion
of the Company's worldwide sales and marketing organizations and higher
incentive compensation associated with increased revenue.
General and administrative expenses as a percentage of total revenue remained
constant at 8% in the first quarter of fiscal 1997 and in the first quarter of
fiscal 1996, but increased in absolute dollars to $8.0 million from $6.3
million. The increase in total expenses was due principally to increases in
personnel and facilities costs.
The provision for income taxes as a percentage of income decreased to 33% in the
first quarter of fiscal 1997 from 34% in the first quarter of fiscal 1996. The
decrease in the Company's tax rate was primarily due to the reinstatement of the
U.S. federal research tax credit.
Net income increased to $16.2 million in the first quarter of fiscal 1997 from
$11.7 million in the first quarter of 1996. As a percentage of total revenue,
net income increased to 16% in the first quarter of fiscal 1997 from 15% in the
first quarter of fiscal 1996.
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The Company's book-to-bill ratio for the first quarter of fiscal 1997 was
slightly lower than one-to-one. The book-to-bill ratio measures the ratio of
accepted orders to revenue. In addition, the Company recently modified its order
acceptance policy. In connection with the change in policy, the Company
reviewed the backlog as of September 30, 1996 and removed from the February 1,
1997 backlog calculation certain items that it determined no longer met the
criteria for accepted orders.
Liquidity and Capital Resources
For the first three months of fiscal 1997, cash and short-term investments
decreased $5.0 million to $231.5 million. The decrease in cash and short-term
investments is due primarily to payments of payables and accruals, capital
expenditures and the repurchase of common stock, partially offset by cash
generated from operations and proceeds from the sale of common stock.
The Company believes that the existing cash and short-term investments balance
of $231.5 million and anticipated cash flow from operations will be sufficient
to meet its currently anticipated liquidity and capital expenditure requirements
for at least the next twelve months.
Factors that Could Cause Actual Results to Differ Materially from Those
Projected
The following discussion and the discussion under Item 5 of this Report contains
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934.
When used in the following discussion, the words "projects," "expects,"
"believes," and similar expressions are intended to identify forward-looking
statements. Such statements, and the Company's results, are subject to certain
risks and uncertainties, including those discussed below and under Item 5 of
this Report, that could cause actual results to differ materially from those
projected or estimated.
The EDA industry is highly competitive. The Company's products compete with
similar products from other vendors and compete with other EDA products and
services for a share of the EDA budgets of their customers. Historically, much
of the Company's growth has been attributable to the strength of its synthesis
products, an area in which the Company is currently the leading supplier.
Opportunities for share growth in this area are limited.
The EDA industry as a whole is experiencing rapid change. Technology advances
and customer requirements are fueling a change in the nature of competition
among EDA vendors. Advances in semiconductor technology are expected to create a
need for tighter integration between logic design and physical design, and
companies will increasingly compete over "design flows" involving a broad range
of products and services rather than individual design tools.
No single EDA company currently offers its customers industry leading products
for a complete design flow. Presently, the Company does not offer physical
design tools, a field which is currently dominated by Cadence Design Systems,
Inc. and Avant! Corporation, and trails Cadence in its capacity to offer design
services. In May 1996, the Company entered into a strategic relationship with
Cooper & Chyan Technology, Inc. (CCT) involving the acquisition of 9.9% of CCT's
stock and a link between the Company's existing synthesis products and its
design planning products under development and CCT's routing technology. Cadence
and CCT have announced their intention to merge. The Company has sold a portion
of its holdings of CCT stock and is evaluating the effect of such a merger on
its overall relationship with CCT.
The Company is seeking to develop a balanced product portfolio. Among the most
important new products offered by the Company are its Behavioral Compiler,
Cell-Based Array, ARKOS hardware emulator, and Cyclone simulation accelerator
products. These products have achieved initial customer acceptance, but the
Company will only derive significant revenue from these products if they are
accepted by a broad range of customers, which cannot be assured.
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The Company's business has benefited from the rapid worldwide growth of the
semiconductor industry. The semiconductor industry grew relatively slowly for
most of 1996. Despite recent reports of improving conditions in the industry,
the outlook for 1997 remains uncertain. Slower growth in the semiconductor
industry could have an adverse effect on the Company's performance.
The Company attempts to manage its business to achieve quarter-to-quarter
revenue and earnings growth. The ability to manage such growth is affected by a
number of factors, including customer product demand, product license terms, the
size of the Company's backlog, and decisions regarding the timing of revenue
recognition. In recent years, the management of revenue and earnings growth has
become more difficult as a result of a number of factors. The Company's orders
have become more seasonal, with higher volumes in the second and fourth quarters
of the Company's fiscal year, and the average order size has also increased. The
Company increasingly receives a disproportionate volume of orders in the last
month of the quarter. This trend has grown more pronounced in recent quarters.
In addition, an increasing amount of the Company's orders involve products and
services which yield revenue over multiple quarters (often extending beyond the
current fiscal year) or upon completion of performance rather than at the time
of sale, including time-based product licenses, consulting services, development
contracts, and CBA licenses and royalties. Because of these trends, the
Company's ability to convert orders, particularly those received late in a
quarter, or backlog to revenue in any quarter is less certain than it
historically has been, and it is therefore possible for the Company to fall
short in its revenue and/or earnings plan for a given quarter even while orders
and backlog remain on plan. In addition, the Company recently modified its order
acceptance policy, which has resulted in a reduction of its current backlog and
may have an adverse effect on future backlog calculations. Ultimately, long-term
revenue and earnings growth is dependent upon the successful development and
sale of the Company's products and services over a sustained period of time.
The Company's operating expenses are based in part on its expectations of future
revenue, and expense levels are generally committed in advance of revenue. The
Company continues to expand and increase its operating expenses in order to
generate and support additional revenue in the future. If revenue does not
materialize as expected, the Company's results of operations are likely to be
adversely affected. Net income may be disproportionately affected by a reduction
in revenue because only a small portion of the Company's expenses varies with
its revenue.
In recent years, international revenue has accounted for approximately half of
the Company's revenue. As a result, the Company's financial performance could be
negatively affected by such factors as changes in foreign currency exchange
rates and changes in regional or worldwide economic or political conditions. In
particular, revenue from sales in Japan during fiscal 1996 was adversely
affected by a decline in the value of the yen against the dollar. Continued
weakness in the value of the yen could adversely affect revenue from Japan
during fiscal year 1997.
In February 1996, the Company entered into a six-year joint development and
license agreement with IBM, pursuant to which the Company and IBM will jointly
develop certain new products that the Company believes are important to the
long-term growth of its business. The Company has not previously entered into a
joint development agreement of this scope. Joint development of products is
subject to risks and uncertainties over and above those affecting internal
development, and there can be no assurance that the Company's joint development
efforts will be successful.
The Company's success is dependent on technical and other contributions of key
individuals, and there can be no assurance that the Company can continue to
recruit and retain such key personnel.
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In May 1996, the Company acquired 9.9% of the outstanding shares of CCT at a
price of $14.50 per share. Following announcement of the Cadence-CCT merger, the
Company has commenced a program of selling its CCT shares (and, if the proposed
merger of CCT with Cadence is consummated, its Cadence shares) in an amount per
quarter sufficient to generate a profit of $2.0 million per quarter. If the
proposed Cadence-CCT merger is not consummated for any reason, or the stock
price of either company declines significantly, the total amount of gain, if
any, that the Company could realize on such sales and its ability to sell CCT
shares at regular intervals would be adversely affected.
In May 1996, the Company's Board of Directors authorized a program to repurchase
up to 2.0 million shares of Synopsys Common Stock over two years, subject to a
maximum expenditure of $80.0 million. In January 1997, the Board of Directors
suspended the stock repurchase program in order to comply with pooling of
interests accounting restrictions in connection with the proposed merger with
Epic Design Technology and will terminate such program if necessary to comply
with such restrictions. Although the Company's purchases have been insignificant
as a proportion of trading in Synopsys Common Stock since May 1996, suspension
or termination of the repurchase program could have an adverse effect on the
price of Synopsys Common Stock.
The Company's stock price, like that of other technology companies, is subject
to significant volatility. Past financial performance should not be considered a
reliable indicator of future performance, and investors should not use
historical trends to anticipate results or trends in future periods. If revenues
or earnings in any quarter fail to meet expectations of the investment
community, there could be an immediate and significant impact on the Company's
stock price. In addition, the Company's stock price may be affected by broader
market trends that may be unrelated to the Company's performance.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the recorded amounts of assets and liabilities, disclosure of those
assets and liabilities at the date of the financial statements and the recorded
amounts of expenses during the reporting period. A change in the facts and
circumstances surrounding these estimates could result in a change to the
estimates and impact future operating results.
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PART II. OTHER INFORMATION
Item 5.
PROPOSED MERGER WITH EPIC DESIGN TECHNOLOGY, INC.
On January 16, 1997, the Company announced a definitive agreement to merge with
EPIC Design Technology, Inc., a developer of design automation tools for deep
submicron design in the area of integrated circuit power, timing, and
reliability analysis (the "Merger"). Upon consummation of the Merger, each
outstanding share of EPIC Common Stock will be converted into the right to
receive 0.7485 (the "Exchange Ratio") of a share of Synopsys Common Stock, and
each outstanding option to purchase shares of EPIC Common Stock will be assumed
by Synopsys and will be converted, based on the Exchange Ratio, into an option
to acquire, on the same terms and conditions as were applicable under such EPIC
Option.
The issuance of Synopsys Common Stock in connection with the Merger is subject
to shareholder approval. Based upon the number of shares of Synopsys Common
Stock and EPIC Common Stock outstanding at January 31, 1997, an aggregate of
approximately 10,325,691 shares of Synopsys Common Stock would be issued in
connection with the Merger, representing approximately 20.2% of the total number
of shares of Synopsys Common Stock outstanding after giving effect to such
issuance. Based upon the number of EPIC Options outstanding at January 31,
1997, approximately 1,583,581 additional shares of Synopsys Common Stock would
be reserved for issuance to holders of EPIC Options in connection with Synopsys'
assumption of such EPIC Options.
On February 5, 1997, the Company filed a Registration Statement on Form S-4
(Reg. No. 333-21129) with the Commission.
Reasons for the Merger
After considering the Merger, the Board of Directors of Synopsys concluded that
(i) the goals and philosophies of the two companies are consistent, (ii) the
products of the two companies are complementary, (iii) the combined company has
the opportunity to offer customers a more comprehensive IC design flow than
either could offer independently, by integrating Synopsys' expertise in high
level design with EPIC's expertise in transistor level physical design, (iv)
the Merger would be positively received by customers and (v) the stockholders
of Synopsys would benefit by the enhanced ability of the combined company to
compete in the rapidly-changing EDA market.
In addition, the Synopsys Board believes that the Merger will be beneficial to
Synopsys and Synopsys' stockholders for the following reasons: (i) EPIC's
products are complementary to Synopsys' products, giving Synopsys an
opportunity to offer a more complete IC design solution to its customers and to
compete more successfully against its principal competitors in the face of
changing industry requirements; (ii) EPIC's technical management, research and
development, and applications teams have significant expertise in the
development of physical design tools, which may enhance Synopsys' efforts to
accelerate the integration of its current high-level design tools with physical
design tools; (iii) Synopsys' sales and marketing efforts may be enhanced by
the addition of EPIC's sales force of over 90 people, many of whom have
extensive experience and understanding of the sales channel for physical design
tools; (iv) Synopsys has identified power and timing analysis as fundamental
issues facing IC designers in deep submicron IC design, and believes that EPIC
is a leading provider of power and timing analysis tools at the transistor
level; (v) access to EPIC's expertise in transistor level analysis tools may
help Synopsys enhance its current range of design and verification tools; (vi)
EPIC's strong financial position, growth rate and operating margin may have
positive effects on the overall performance of the combined company; and (vii)
in an increasingly competitive and consolidating industry, Synopsys must
continue to invest in industry-leading technology, and the combined company may
be in an improved competitive position to effectively meet the industry's
technological challenges and customer demands.
Risks Relating to the Merger
The factors described below could cause the results of the Merger to differ
materially from those projected or estimated.
Potential Dilution of Interest. A number of shares equal to approximately
20.2% of Synopsys' outstanding Common Stock after giving effect to the Merger
will be issued to the shareholders of EPIC upon consummation of the Merger and
an additional approximately 1,583,581 shares of Synopsys Common Stock will be
reserved for issuance upon the exercise of options to purchase EPIC Common
Stock assumed by Synopsys in connection with the Merger. The issuance of
Synopsys Common Stock in the Merger and upon the exercise of EPIC Options
assumed by Synopsys may cause a dilution of earnings per share which may
negatively impact the price of Synopsys Common Stock. There can be no
assurance that Synopsys' stock price will not be negatively impacted, or that
the pro forma financial information presented herein will be indicative of
actual results.
Integration of EPIC Operations; Risk of Failure to Achieve Synergies. The
managements of Synopsys and EPIC have entered into the Merger Agreement with
the expectation that the Merger will result in beneficial synergies. Achieving
the anticipated benefits of the Merger will depend in part upon whether the
integration of the two companies' businesses is accomplished in an efficient
and effective manner, and there can be no assurance that this will occur. The
combination of the two companies will require, among other things, integration
of the companies' respective product offerings and coordination of their sales
and marketing and research and development efforts. There can be no assurance
that such integration will be accomplished smoothly or successfully. The
integration of certain operations following the Merger will require the
dedication of management resources, which may distract management's attention
from the day-to-day business of the combined company. The inability of
management to successfully integrate the operations of the two companies could
have a material adverse effect on the business, financial condition and results
of operations of the combined company. The difficulties of assimilation may be
increased by the necessity of integrating personnel with disparate business
backgrounds and combining two different, although similar, corporate cultures.
The retention by EPIC and Synopsys of key employees is critical to ensure
continued advancement, development and support of the companies' technologies
as well as on-going sales and marketing efforts. As commonly occurs with
mergers of technology companies, during the pre-merger and integration phases,
competitors may intensify their efforts to attract customers and to recruit key
employees through various incentives. There can be no assurance that the
combined company will be able to retain key technical, sales or marketing
personnel after the Merger.
Integration of Other Acquired Businesses. Synopsys and EPIC have consummated
several business combinations in recent years, and the Merger, if approved,
would be the largest such combination for either company. The difficulties of
integrating Synopsys' and EPIC's businesses may be exacerbated by the size and
number of prior business combinations. There can be no assurance that
products, technologies, distribution channels, key personnel and businesses of
acquired companies will be effectively integrated into the combined company's
business or product offerings, or that such integration will not adversely
affect the combined company's business, financial condition or results of
operations. There can also be no assurance that any acquired products,
technologies or businesses will contribute at anticipated levels to the
combined company's sales or earnings, or that the sales and earnings from
combined businesses will not be adversely affected by the integration process.
The failure to integrate such acquisitions successfully could have an adverse
impact on the financial results of the combined company.
Transaction Charges. Synopsys and EPIC estimate that they will incur direct
transaction costs of approximately $4.6 million associated with the Merger,
which will be charged to operations upon consummation of the Merger. In
addition, it is expected that after the Merger, the combined company will incur
an additional significant charge to operations, which is not currently
reasonably estimable, to reflect costs associated with integrating the two
companies. Although Synopsys expects that the elimination of duplicative
expenses as well as other efficiencies related to the integration of the
businesses may offset the direct transaction costs and other
integration-related charges over time, there can be no assurance that such net
benefit will be achieved in the near term, or at all.
Customers. There can be no assurance that present and potential customers of
Synopsys and EPIC will continue their current buying patterns without regard to
the announced Merger. Certain customers may defer purchasing decisions as they
evaluate Synopsys' future product strategy and competitive positioning. Any
such deferrals could have a material adverse effect upon the results of
operations of Synopsys, EPIC and/or the combined company both in the near-term
and the long-term.
Shares Eligible for Future Sale. If the Merger is consummated, Synopsys will
issue to shareholders of EPIC an aggregate of approximately 10,325,691 shares of
Synopsys Common Stock based on the number of shares of EPIC Common Stock
outstanding as of January 31, 1997. Immediately upon consummation of the
Merger, up to approximately 9,700,352 of such shares will be freely tradeable.
As a result, substantial sales of Synopsys Common Stock could occur after the
Merger. Following publication of financial results covering 30 days of
post-Merger combined operations, an additional approximately 625,339 shares
issued in the Merger to persons who may be deemed affiliates of EPIC could be
publicly sold pursuant to Rule 145 under the Securities Act, subject to the
volume and other limitations thereof. In addition, based on the number of EPIC
Options outstanding on January 31, 1997, approximately 1,583,581 additional
shares of Synopsys Common Stock will be reserved for issuance to holders of EPIC
Options to be assumed by Synopsys in the Merger. Future sales of a substantial
number of such shares of Synopsys Common Stock could adversely affect or cause
substantial fluctuations in the market price of Synopsys Common Stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Agreement and Plan of Merger dated as of January
16, 1997, among the Company, EPIC Merger Co.,
Inc. and EPIC Design Technology, Inc.(1)
10.14 Synopsys deferred compensation plan dated
September 30, 1996(1)
27 Financial Data Schedule
(b) Reports on Form 8-K
On October 28, 1996, the Company filed an amended report
on Form 8-K relating to the Joint Development and
License Agreement Concerning EDA Software and Related
Intellectual Property, executed on February 1, 1996,
between the Company and International Business Machines
Corporation.
- ----------------------
(1) Incorporated by reference to the Registration Statement on Form S-4
(Reg. No. 333-21129) of Synopsys, Inc. as filed with the Securities and
Exchange Commission on February 5, 1997.
12
<PAGE> 12
SYNOPSYS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 11, 1997 SYNOPSYS, INC.
---------------------------------
(Registrant)
By: /s/ Aart J. de Geus
------------------------------
Aart J. de Geus
President and Chief Executive Officer
(Acting Principal Financial and
Accounting Officer)
13
<PAGE> 13
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Agreement and Plan of Merger dated as of January
16, 1997, among the Company, EPIC Merger Co.,
Inc. and EPIC Design Technology, Inc.(1)
10.14 Synopsys deferred compensation plan dated
September 30, 1996(1)
27 Financial Data Schedule
- ----------------------
(1) Incorporated by reference to the Registration Statement on Form S-4
(Reg. No. 333-21129) of Synopsys, Inc. as filed with the Securities and
Exchange Commission on February 5, 1997.
14
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