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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 June 28, 1997
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.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 56-1546236
(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 August 1, 1997, there were approximately 52,301,000 shares of the
Registrant's Common Stock outstanding.
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SYNOPSYS, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets-
June 30, 1997 and September 30, 1996 3
Condensed Consolidated Statements of Income-
Three months and nine months ended
June 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows-
Nine months ended June 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
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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>
JUNE 30, SEPTEMBER 30,
1997 1996
--------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 66,399 $ 47,163
Short-term investments 255,295 228,931
--------- ---------
Cash and short-term investments 321,694 276,094
--------- ---------
Accounts receivable, net of allowances of $4,737 and
$3,877, respectively 89,487 67,385
Prepaid expenses, deferred taxes and other 31,874 22,648
--------- ---------
Total current assets 443,055 366,127
--------- ---------
Property and equipment, net 63,607 56,033
Capitalized software development costs, net of accumulated
amortization of $3,576 and $2,805, respectively 1,125 1,146
Long-term investments 42,367 30,495
Other assets 12,108 9,957
--------- ---------
Total assets $ 562,262 $ 463,758
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 85,639 $ 83,008
Current portion of long-term debt 8,908 11,580
Income taxes payable 15,501 13,629
Deferred revenue 76,957 69,770
--------- ---------
Total current liabilities 187,005 177,987
--------- ---------
Long-term debt 10,634 15,970
Deferred compensation 2,731 --
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; 52,049,000 and 50,646,000 shares
outstanding, respectively 520 506
Additional paid-in capital 245,842 196,693
Retained earnings 108,637 64,833
Deferred stock compensation (25) (110)
Cumulative translation adjustment (400) (402)
Net unrealized gain on investment 7,318 8,281
--------- ---------
Total stockholders' equity 361,892 269,801
--------- ---------
Total liabilities and stockholders' equity $ 562,262 $ 463,758
========= =========
</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 NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Product $ 80,432 $ 67,872 $237,346 $194,421
Service 44,568 34,559 128,564 91,971
-------- -------- -------- --------
Total revenue 125,000 102,431 365,910 286,392
-------- -------- -------- --------
Cost of revenue:
Product 6,375 4,849 18,322 13,132
Service 9,819 6,683 25,651 17,488
-------- -------- -------- --------
Total cost of revenue 16,194 11,532 43,973 30,620
-------- -------- -------- --------
Gross margin 108,806 90,899 321,937 255,772
-------- -------- -------- --------
Operating expenses:
Research and development 29,356 24,757 87,178 67,930
Sales and marketing 44,686 37,285 129,612 106,584
General and administrative 8,264 7,859 26,956 22,187
Merger-related costs -- -- 11,400 --
In-process research and development -- -- -- 39,700
-------- -------- -------- --------
Total operating expenses 82,306 69,901 255,146 236,401
-------- -------- -------- --------
Operating income 26,500 20,998 66,791 19,371
Other income, net 4,100 1,970 12,154 6,082
-------- -------- -------- --------
Income before income taxes 30,600 22,968 78,945 25,453
Income tax provision 10,400 7,922 29,269 8,940
-------- -------- -------- --------
Net income $ 20,200 $ 15,046 $ 49,676 $ 16,513
======== ======== ======== ========
Earnings per share $ .38 $ .28 $ .92 $ .32
======== ======== ======== ========
Weighted average common shares
and equivalents where dilutive 53,763 52,923 53,835 51,238
</TABLE>
See accompanying notes
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SYNOPSYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 49,676 $ 16,513
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 22,134 14,411
Interest accretion on notes payable 414 304
Provision for doubtful accounts and sales returns 860 (320)
Tax benefit associated with stock options 22,262 5,883
Deferred revenue 7,187 16,061
Deferred taxes (5,540) (14,103)
Disposition of assets related to the merger 3,084 --
In-process research and development -- 39,700
Gain on sale of long-term investment (6,000) --
Net change in assets and liabilities:
Accounts receivable (22,962) (5,679)
Prepaid expenses and other (9,674) (3,385)
Other assets (2,651) (1,762)
Accounts payable and accrued liabilities (1,456) 10,982
Income taxes payable 1,872 697
Deferred compensation 2,731 --
--------- ---------
Net cash provided by operating activities 61,937 79,302
--------- ---------
Cash flows from investing activities:
Proceeds from sale of long-term investment 11,112 --
Proceeds from sale of business unit 3,000 --
Purchases of long-term investments (9,019) (17,500)
Purchases and maturities of short-term investments (26,344) (99,723)
Purchases of property and equipment (33,310) (30,803)
Purchase of technology -- (11,500)
Capitalization of software development costs (750) (750)
--------- ---------
Net cash used in investing activities (55,311) (160,276)
--------- ---------
Cash flows from financing activities:
Principal payments on debt obligation (8,422) (2,990)
Proceeds from sale of common stock, net 30,519 23,889
Purchases of treasury stock (9,489) (6,555)
--------- ---------
Net cash provided by financing activities 12,608 14,344
--------- ---------
Effect of exchange rate changes on cash 2 (103)
Net increase (decrease) in cash and cash equivalents 19,236 (66,733)
Cash and cash equivalents, beginning of period 47,163 102,440
--------- ---------
Cash and cash equivalents, end of period $ 66,399 $ 35,707
========= =========
Supplemental Disclosure:
Cash paid during the period for:
Interest $ 600 $ 509
========= =========
Income taxes $ 12,892 $ 13,226
========= =========
Non-cash transactions:
Purchase of technology $ -- $ 28,500
========= =========
</TABLE>
See accompanying notes
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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 June 30, 1997 are not
necessarily indicative of the results to be expected for any subsequent
quarter or for the entire fiscal year.
2. New Accounting Standards
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS
No. 128 requires the presentation of basic earnings per share ("EPS") and
for companies with complex capital structures or potentially dilutive
securities, diluted EPS. SFAS No. 128 is effective for annual and interim
periods ending after December 31, 1997. The Company expects that basic EPS
will be higher than earnings per share as presented in the accompanying
consolidated financial statements and that diluted EPS will not differ
materially from earnings per share as presented in the accompanying
consolidated financial statements.
The Financial Accounting Standards Board has also issued SFAS No. 129,
"Disclosure of Information about Capital Structure," SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." These new accounting
standards are for disclosure purposes and the Company is analyzing the
impact of these standards for future reporting.
3. 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 using the treasury stock method.
4. Business Combination
In February 1997, the Company issued approximately 10,346,000 shares of its
common stock in exchange for all the outstanding shares of common stock of
EPIC Design Technology, Inc. ("EPIC"), a developer of design automation
tools for deep submicron design in the area of integrated circuit power,
timing, and reliability analysis. In addition, options to acquire EPIC's
common stock were exchanged for options to acquire approximately 1,517,000
shares of the Company's common stock. The merger was accounted for as a
pooling of interests, and accordingly, the Company's condensed consolidated
financial statements have been restated to include the financial position
and results of EPIC for all periods presented. In February 1997, the
Company announced that it had rescinded its stock repurchase program in
connection with its merger with EPIC, in order to comply with pooling of
interests accounting guidance provided in SEC Staff Accounting Bulletin No.
96.
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Total revenue and net income for the individual entities are as follows:
<TABLE>
<CAPTION>
(in thousands) Synopsys EPIC Combined
-------- ---- --------
<S> <C> <C> <C>
Six months ending March 31, 1996
Total revenue $ 164,000 $ 19,961 $ 183,961
Net income (loss) (2,650) 4,117 1,467
Six months ending March 31, 1997
Total revenue 211,042 29,868 240,910
Net income 26,572 2,904 29,476
</TABLE>
5. Sale of Business Unit
In June 1997, the Company sold its hardware emulation business to Quickturn
Design Systems, Inc. Under the terms of the agreement, the Company provided
Quickturn with the technology required to create a register-transfer level
front-end for its current and future design verification products and the
Synopsys ARKOS(TM) emulation technology in exchange for $3.0 million in
cash, $2.0 million in escrow at the end of June, and $9.5 million in
Quickturn warrants and common stock. There was no gain or loss recorded as
a result of this transaction. The two companies will provide a support and
transition plan for existing Synopsys customers using the ARKOS product.
The Company did not recognize any revenue from the sale of ARKOS products
during the third quarter of fiscal 1997.
6. Long-Term Investments
In May 1996, the Company purchased 1,207,000 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 April 1997, the Company purchased an additional 86,000
shares for $15.00 per share. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," the investment has been classified as
"available for sale." In May 1997, CCT and Cadence Design Systems, Inc.
consummated a merger, whereby each share of CCT was converted to 0.85
shares of Cadence stock. 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 third quarter of fiscal
year 1997, the Company sold 114,000 shares of Cadence and realized a gain
of approximately $2.0 million.
See Note 5 above regarding the investment in Quickturn Design Systems. The
securities are classified as "available for sale" in accordance with SFAS
No. 115 and are included in long-term investments.
In the first quarter of fiscal 1997, the Company made an investment of $3.2
million in a privately-held company. Additionally, during the third quarter
of fiscal 1997, the Company made investments of $4.0 million and $0.6
million in two privately-held companies. All of these investments in
privately-held companies are carried at cost and are included in long-term
investments.
The total unrealized gain on available-for-sale securities, recorded as a
separate component of stockholders' equity, decreased by $0.7 million, net
of tax, during the third quarter of fiscal 1997.
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7. 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 June 30, 1997, the notes had a balance of $18.4 million, of which
$10.6 million is included in long-term obligations. The carrying amount of
the debt, including the long-term portion, approximates the fair value.
8. 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 amounts to $2.7 million and is
included in long-term liabilities.
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SYNOPSYS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion 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, that could cause actual results
to differ materially from those projected or estimated.
Results of Operations
Revenue for the third quarter of fiscal 1997 increased 22% to $125.0 million
from $102.4 million in the third quarter of fiscal 1996. Revenue for the first
nine months of fiscal 1997 increased 28% to $365.9 million from $286.4 million
for the comparable period in fiscal 1996. The increase in revenue was
attributable to increased worldwide licensing and sales of the Company's
software products, the renewal of maintenance and support contracts, and
increased consulting services. Product revenue as a percentage of total revenue
decreased to 64% and 65% in the third quarter and first nine months of 1997,
respectively, from 66% and 68% in the third quarter and first nine months of
fiscal 1996, principally due to an increase in the Company's base of installed
software and the associated increase in maintenance and support, customer
training, and consulting revenue.
International revenue as a percentage of total revenue decreased to 45% in the
third quarter of fiscal 1997 from 51% in the third quarter of fiscal 1996. For
the first nine months of fiscal 1997, international revenue as a percentage of
total revenue decreased to 45% from 49% for the comparable period in fiscal
1996. The decrease in fiscal 1997 as a percentage of total revenue was primarily
due to decreased revenue in Japan, mostly attributable to a decline in the value
of the yen versus the dollar, and Europe.
In June 1997, the Company sold its hardware emulation business to Quickturn
Design Systems, Inc. Under the terms of the agreement, the Company provided
Quickturn with the technology required to create a register-transfer level
front-end for its current and future design verification products and the
Synopsys ARKOS emulation technology in exchange for $3.0 million in cash, $2.0
million in escrow at the end of June, and $9.5 million in Quickturn warrants and
common stock. There was no gain or loss recorded as a result of this
transaction. The two companies will provide a support and transition plan for
existing Synopsys customers using the ARKOS product. The Company did not
recognize any revenue from the sale of ARKOS products during the third quarter
of fiscal 1997.
Cost of revenue as a percentage of total revenue increased to 13% in the third
quarter of fiscal 1997 from 11% in the third quarter of fiscal 1996. For the
first nine months of fiscal 1997, cost of revenue increased to 12% from 11% for
the comparable period in fiscal 1996, primarily due to an increase in the cost
of service revenue for training and consulting as a percentage of total revenue.
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 decreased to
23% in the third quarter of fiscal 1997 from 24% in the third quarter of fiscal
1996, but increased in absolute dollars to $29.4 million from $24.8 million.
Research and development expenses as a percentage of total revenue were 24% in
the first nine months of both fiscal 1997 and fiscal 1996, and increased in
absolute dollars to $87.2 million from $67.9 million. Increased
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research and development expenses were attributable to increases in personnel
and personnel-related costs associated with the continued development of new
products and the enhancement of existing products.
Sales and marketing expenses as a percentage of total revenue remained at 36% in
the third quarter of fiscal 1997 and fiscal 1996, but increased in absolute
dollars to $44.7 million from $37.3 million. For the first nine months of fiscal
1997, sales and marketing expenses as a percentage of revenue decreased to 35%,
from 37% in the comparable period in fiscal 1996. In absolute dollars, sales and
marketing expenses in the first nine months of fiscal 1997 increased to $129.6
million from $106.6 million in the first nine months of fiscal 1996. Total sales
and marketing expenses increased as a result of continued expansion of the
Company's worldwide sales and marketing organizations and participation in
conferences, trade shows and promotional activities.
General and administrative expenses as a percentage of total revenue decreased
to 7% in the third quarter and first nine months of fiscal 1997 from 8% in the
third quarter and first nine months of fiscal 1996. In absolute dollars, general
and administrative expenses were $8.3 million in the third quarter of fiscal
1997, compared to $7.9 million in the third quarter of fiscal 1996. For the
first nine months of fiscal 1997, general and administrative expenses increased
to $27.0 million from $22.2 million in the first nine months of fiscal 1996. The
increase in total expenses was due primarily to increases in personnel and
operating expenses associated with the continued growth of the Company.
In the second quarter of fiscal 1997, the Company recorded a charge of $11.4
million related to the merger and integration of Synopsys and EPIC. This charge
included direct transaction fees for investment bankers, attorneys, accountants,
and other related costs of $4.7 million, and costs associated with integrating
the operations of the two companies of $6.7 million. Included in integration
charges were redundant facility costs, computer and other equipment abandonment
costs, contract termination charges and other related expenses. Of the $11.4
million of merger-related costs, approximately $8.3 million related to cash
expenditures while approximately $3.1 million related to noncash reductions of
recorded assets. As of June 30, 1997, there was a balance of $1.8 million in
accrued liabilities for expected future cash expenditures. The Company
anticipates that the majority of these expenditures will be made by the end of
the year. There can be no assurance that the Company will not incur additional
charges associated with the merger or that management will be successful in its
efforts to integrate the operations of the two companies.
The provision for income taxes as a percentage of income was 34% in the third
quarter of both fiscal 1997 and 1996. For the first nine months of fiscal 1997,
the provision for income taxes as a percentage of income was 37%, compared to
35% for the comparable period in fiscal 1996. The increase in the Company's tax
rate in fiscal 1997 was due to nondeductible expenses for merger-related costs
incurred in the second quarter of fiscal 1997.
Net income of $20.2 million was recorded in the third quarter of fiscal 1997,
compared to $15.0 million in the third quarter of fiscal 1996. For the first
nine months of fiscal 1997, net income was $49.7 million, compared to net income
of $16.5 million in the first nine months of fiscal 1996.
The Company's book-to-bill ratio for the third quarter of fiscal 1997 was
greater than one-to-one. The book-to-bill ratio measures the ratio of accepted
orders to revenue.
Liquidity and Capital Resources
For the first nine months of fiscal 1997, cash and short-term investments
increased $45.6 million to $321.7 million. The increase in cash and short-term
investments was due primarily to cash generated from operations, proceeds from
the issuance of common stock,
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proceeds from the sale of the Arkos business to Quickturn, and proceeds from the
sale of long-term investments, partially offset by purchases of property and
equipment, repurchases of common stock, and payments on debt obligations.
The Company believes that the existing cash and short-term investments balance
of $321.7 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
Synopsys completed a merger with EPIC Design Technology, Inc. in February 1997,
and the two companies' operations have been integrated. Successful integration
requires, among other things, coordination of the companies' respective product
offerings, sales and marketing efforts, and research and development efforts.
Successful integration also requires the smooth integration of personnel with
disparate business backgrounds and combining two different, although similar,
corporate cultures. The failure of management to successfully manage the
operations of the two companies as integrated could have a material adverse
effect on Synopsys' business, financial condition and results of operations.
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 growth in market share in this area are limited and overall
rates of growth appear to be declining.
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. The Company does not offer a full range of
physical design tools, a field which is currently dominated by Cadence Design
Systems, Inc. (Cadence) and Avant! Corporation. In addition, the Company 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. CCT merged
with Cadence, one of the Company's principal competitors, in May 1997. Cadence
has informed the Company that it does not intend to comply with certain of CCT's
obligations under Synopsys' agreements with CCT. The Company and Cadence are
currently discussing the basis on which the two companies might continue to
cooperate on linking Synopsys' synthesis/floorplanning tools with Cadence's
routing technology.
The Company is seeking to add new products to its portfolio. Among the most
important new products offered by the Company are its Behavioral Compiler,
Cell-Based Array, PrimeTime timing estimator 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. The development of new products involves
significant risks and uncertainties and success cannot be assumed. In June 1997,
the Company sold its hardware emulation business to Quickturn Design Systems,
Inc. The Company's hardware emulation product, the ARKOS emulator, was based on
technology acquired by the Company in June 1995 and was introduced in fiscal
year 1996.
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The decision to sell the business was a response to soft demand in the overall
emulation market and uncertainties over the long-term competitiveness of the
ARKOS technology. There can be no assurance that the Company's other new
products will be competitive or gain customer acceptance.
The Company's business has benefited from the rapid worldwide growth of the
semiconductor industry. Purchases of the Company's products is largely dependent
upon the commencement of new design projects by semiconductor manufacturers and
users. The semiconductor industry has experienced moderate growth in 1997 and
the outlook for the remainder of 1997 is uncertain. Slower growth in the
semiconductor industry, and/or a reduced number of design starts, 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 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.
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. The Company expects that international revenue will
continue to account for a significant portion of its revenues in the future. 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 the first three quarters of fiscal 1997 was adversely
affected by the weakness of the yen against the dollar. Continued weakness of
the yen could adversely affect revenue from Japan during the fourth quarter of
fiscal year 1997 and into fiscal year 1998.
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 first joint product resulting from the
alliance, PrimeTime, was introduced in June 1997. The Company has not previously
entered into a joint development agreement of
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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, including individuals who joined the Company in connection with the
merger with EPIC. In particular, there are only a limited number of qualified
EDA engineers, and the competition for such individuals is especially intense.
There can be no assurance that the Company can continue to recruit and retain
such key personnel.
As of the end of the third quarter of fiscal 1997, the Company held 799,000
shares of Cadence common stock, which were acquired as a result of the Company's
investments in CCT in May 1996 and April 1997 and CCT's subsequent merger with
Cadence. The average basis of these shares is $17.11 per share. Following
announcement of the Cadence-CCT merger, the Company commenced a program of
selling its CCT (now Cadence) shares in an amount per quarter sufficient to
generate a profit of $2.0 million per quarter. The number of Cadence shares the
Company is required to sell in order to generate a profit of $2.0 million in any
fiscal quarter, the number of quarters that the Company will be able to generate
such profits, and the total gain that the Company may be able to realize on
sales of its Cadence shares depends upon the price of Cadence stock at the time
of sale, which is subject to significant fluctuation.
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 February 1997, the Company announced
that it had rescinded the stock repurchase program in connection with its merger
with EPIC, in order to comply with pooling of interests accounting guidance
provided in SEC Staff Accounting Bulletin No. 96. Although the Company's
purchases have been insignificant relative to the volume of trading in Synopsys
Common Stock since May 1996, rescission 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, 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.
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits
27 Financial Data Schedule
(b.) Reports on Form 8-K
None
14
<PAGE> 15
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: August 12, 1997 SYNOPSYS, INC.
(Registrant)
By: /s/ David M. Sugishita
-------------------------------
David M. Sugishita
Sr. Vice President
Chief Financial Officer
(Principal Financial and Accounting
Officer)
15
<PAGE> 16
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT # DESCRIPTION
- --------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 66,399
<SECURITIES> 255,295
<RECEIVABLES> 94,224
<ALLOWANCES> 4,737
<INVENTORY> 0
<CURRENT-ASSETS> 443,055
<PP&E> 123,178
<DEPRECIATION> 59,571
<TOTAL-ASSETS> 562,262
<CURRENT-LIABILITIES> 187,005
<BONDS> 10,634
0
0
<COMMON> 520
<OTHER-SE> 361,372
<TOTAL-LIABILITY-AND-EQUITY> 562,262
<SALES> 365,910
<TOTAL-REVENUES> 365,910
<CGS> 43,973
<TOTAL-COSTS> 43,973
<OTHER-EXPENSES> 255,146
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,339
<INCOME-PRETAX> 78,945
<INCOME-TAX> 29,269
<INCOME-CONTINUING> 49,676
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49,676
<EPS-PRIMARY> .92
<EPS-DILUTED> .92
</TABLE>
