<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
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 April 4, 1998
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
------------------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's Telephone No., including area code: (650) 962-5000
-----------------------------
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 May 9, 1998, there were approximately 66,060,000 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-
March 31, 1998 and September 30, 1997 3
Condensed Consolidated Statements of Income-
Three months and six months ended
March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows-
Six months ended March 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-17
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
</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>
MARCH 31, SEPTEMBER 30,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 92,906 $ 126,414
Short-term investments 412,292 308,416
------------ ------------
Cash and short-term investments 505,198 434,830
------------ ------------
Accounts receivable, net of allowances of $11,962 and
$8,213, respectively 112,969 119,030
Prepaid expenses, deferred taxes and other 29,511 36,580
------------ ------------
Total current assets 647,678 590,440
------------ ------------
Property and equipment, net 88,441 92,079
Capitalized software development costs, net of accumulated
amortization of $6,951 and $10,888, respectively 4,150 7,297
Long-term investments 66,130 61,056
Other assets 23,395 17,717
------------ ------------
Total assets $ 829,794 $ 768,589
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 115,622 $ 114,881
Current portion of long-term debt 7,910 8,964
Income taxes payable 19,323 33,282
Deferred revenue 114,994 97,523
------------ ------------
Total current liabilities 257,849 254,650
------------ ------------
Long-term debt 3,601 9,191
Deferred compensation 5,701 3,205
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; 65,271,000 and 63,844,000 shares
outstanding, respectively 653 638
Additional paid-in capital 368,924 334,086
Retained earnings 170,791 151,664
Cumulative translation adjustment (2,711) (1,552)
Net unrealized gain on investments 24,986 16,707
------------ ------------
Total stockholders' equity 562,643 501,543
------------ ------------
Total liabilities and stockholders' equity $ 829,794 $ 768,589
============ ============
</TABLE>
See accompanying notes
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SYNOPSYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Product $ 103,063 $ 98,960 $ 213,488 $ 199,432
Service 67,042 57,811 130,829 111,242
---------- ---------- ---------- ----------
Total revenue 170,105 156,771 344,317 310,674
---------- ---------- ---------- ----------
Cost of revenue:
Product 8,282 8,433 17,093 17,988
Service 13,008 12,504 27,689 22,513
---------- ---------- ---------- ----------
Total cost of revenue 21,290 20,937 44,782 40,501
---------- ---------- ---------- ----------
Gross margin 148,815 135,834 299,535 270,173
---------- ---------- ---------- ----------
Operating expenses:
Research and development 36,118 37,268 76,335 73,121
Sales and marketing 57,293 58,548 123,454 116,074
General and administrative 11,257 11,793 24,544 22,907
Merger-related and other costs 11,888 11,400 47,888 11,400
In-process research and development -- 5,500 4,191 5,500
---------- ---------- ---------- ----------
Total operating expenses 116,556 124,509 276,412 229,002
---------- ---------- ---------- ----------
Operating income 32,259 11,325 23,123 41,171
Other income, net 6,419 6,191 11,360 13,789
---------- ---------- ---------- ----------
Income before income taxes 38,678 17,516 34,483 54,960
Income tax provision 13,151 10,611 17,225 23,723
---------- ---------- ---------- ----------
Income before extraordinary item 25,527 6,905 17,258 31,237
Extraordinary item - gain on extinguishment of
debt, net of income tax expense -- -- 1,869 --
---------- ---------- ---------- ----------
Net income $ 25,527 $ 6,905 $ 19,127 $ 31,237
========== ========== ========== ==========
Basic earnings per share:
Income before extraordinary item $ .39 $ .11 $ .27 $ .51
Extraordinary item -- -- .03 --
---------- ---------- ---------- ----------
Net income $ .39 $ .11 $ .30 $ .51
========== ========== ========== ==========
Weighted average common shares 65,004 62,039 64,673 61,833
========== ========== ========== ==========
Diluted earnings per share:
Income before extraordinary item $ .38 $ .11 $ .25 $ .48
Extraordinary item -- -- .03 --
---------- ---------- ---------- ----------
Net income $ .38 $ .11 $ .28 $ .48
========== ========== ========== ==========
Weighted average common shares
and equivalents 67,316 65,091 67,652 65,005
========== ========== ========== ==========
</TABLE>
See accompanying notes
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SYNOPSYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 19,127 $ 31,237
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary gain on extinguishment of debt (1,869) --
Depreciation and amortization 21,887 19,196
Interest accretion on notes payable 196 290
Provision for doubtful accounts and sales returns 3,749 2,451
Tax benefit associated with stock options 6,482 18,162
Deferred revenue 17,471 5,754
Deferred taxes (304) (3,976)
Noncash merger-related and other costs 8,023 3,084
In-process research and development 4,191 5,500
Gain on sale of long-term investments (4,000) (10,918)
Net change in assets and liabilities:
Accounts receivable 2,312 (16,118)
Prepaid expenses and other 708 (4,123)
Other assets (7,731) (399)
Accounts payable and accrued liabilities (2,488) (10,040)
Income taxes payable (10,730) (1,974)
Deferred compensation 2,496 1,976
------------ ------------
Net cash provided by operating activities 59,520 40,102
------------ ------------
Cash flows from investing activities:
Proceeds from sale of long-term investments 11,634 9,955
Purchases of long-term investments (901) (12,986)
Purchases and maturities of short-term investments, net (103,348) (19,737)
Purchases of property and equipment (19,426) (24,486)
Acquisitions (net of cash acquired) (2,236) --
Capitalization of software development costs (1,050) (2,101)
Decrease in deposits and other -- 148
------------ ------------
Net cash used in investing activities (115,327) (49,207)
------------ ------------
Cash flows from financing activities:
Principal payments on debt obligation (4,913) (5,034)
Proceeds from sale of common stock, net 28,371 19,592
Purchases of treasury stock -- (13,026)
Repayment of foreign tax grant -- (1,304)
------------ ------------
Net cash provided by financing activities 23,458 228
------------ ------------
Effect of exchange rate changes on cash (1,159) (1,745)
Net increase (decrease) in cash and cash equivalents (33,508) (10,622)
Cash and cash equivalents, beginning of period 126,414 87,100
------------ ------------
Cash and cash equivalents, end of period $ 92,906 $ 76,478
============ ============
Supplemental Disclosure:
Cash paid during the period for:
Interest $ 409 $ 437
============ ============
Income taxes$ $ 25,785 $ 11,207
============ ============
</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, 1997. For financial reporting purposes, the Company reports on a
13-week quarter and a 52 or 53-week year. Due to the fact that fiscal
1998 contains 53 weeks, the first quarter of fiscal 1998 contained 14
weeks, while the first quarter of fiscal 1997 contained 13 weeks. For
presentation purposes, the consolidated financial statements refer to
the quarter's calendar month end. The consolidated results of operations
for the period ended March 31, 1998 are not necessarily indicative of
the results to be expected for any subsequent quarter or for the entire
fiscal year.
2. Software Revenue Recognition
During the first quarter of fiscal 1998, the Company adopted Statement
of Position (SOP) 97-2, "Software Revenue Recognition." The provisions
of SOP 97-2 have been applied to transactions entered into beginning
October 1, 1997. SOP 97-2 generally requires revenue earned on software
arrangements involving multiple elements to be allocated to each element
based on the relative fair values of the elements. The revenue allocated
to software products, including time-based software licenses, generally
is recognized upon delivery of the products. The revenue allocated to
postcontract customer support (PCS) is recognized ratably over the term
of the support and revenue allocated to service elements is recognized
as the services are performed.
In connection with the adoption of SOP 97-2, the Company analyzed all of
the elements included in its multiple-element arrangements and
determined that the Company has sufficient evidence to allocate revenue
to the license and PCS components of certain of its time-based product
licenses. Accordingly, the portion of the time-based license fee
allocated to the license component is recognized upon delivery of the
software product and the portion of the fee allocated to PCS is
recognized ratably over the term of the support. Prior to the adoption
of SOP 97-2, all revenue from time-based product licenses was recognized
ratably over the term of the license. Software subscriptions continue to
be recognized on a ratable basis.
3. Earnings Per Share
On October 1, 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share." In accordance
with SFAS No. 128, basic earnings per share is computed using the
weighted average number of common shares outstanding during the period.
Diluted 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.
The following is a reconciliation of the
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numerators and denominators of the basic and diluted EPS computations for the
periods presented:
<TABLE>
<CAPTION>
(in thousands, except per share amounts) Income Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------ ------------
<S> <C> <C> <C>
Three months ending March 31, 1997:
Basic EPS:
Net income $ 6,905 62,039 $ 0.11
Effect of dilutive securities:
Stock options outstanding -- 3,052 --
------------ ------------ ------------
Diluted EPS:
Net income $ 6,905 65,091 $ 0.11
============ ============ ============
Three months ending March 31, 1998:
Basic EPS:
Net income $ 25,527 65,004 $ 0.39
Effect of dilutive securities:
Stock options outstanding -- 2,312 (.01)
------------ ------------ ------------
Diluted EPS:
Net income $ 25,527 67,316 $ 0.38
============ ============ ============
Six months ending March 31, 1997:
Basic EPS:
Net income $ 31,237 61,833 $ 0.51
Effect of dilutive securities:
Stock options outstanding -- 3,172 (.03)
------------ ------------ ------------
Diluted EPS:
Net income $ 31,237 65,005 $ 0.48
============ ============ ============
Six months ending March 31, 1998:
Basic EPS:
Income before extraordinary item $ 17,258 64,673 $ 0.27
Extraordinary item 1,869 -- .03
------------ ------------ ------------
Net income $ 19,127 64,673 $ 0.30
Effect of dilutive securities:
Stock options outstanding -- 2,979 (.02)
------------ ------------ ------------
Diluted EPS:
Net income $ 19,127 67,652 $ 0.28
============ ============ ============
</TABLE>
4. Mergers
On December 4, 1997, the Company issued approximately 11.3 million
shares of its common stock in exchange for all the outstanding shares of
common stock of Viewlogic Systems, Inc. (Viewlogic), a worldwide
supplier of electronic design automation (EDA) software. In addition,
options to acquire Viewlogic's common stock were exchanged for
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options to acquire approximately 2.8 million 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 Viewlogic for all periods presented.
The results of operations previously reported by the separate
enterprises and the combined amounts presented in the accompanying
consolidated financial statements are summarized below:
<TABLE>
<CAPTION>
(in thousands) Synopsys Viewlogic Combined
---------- ---------- ----------
<S> <C> <C> <C>
Three months ending December 31, 1996
Total revenue $ 116,710 $ 37,193 $ 153,903
Net income 19,076 5,256 24,332
Three months ending December 31, 1997
Total revenue 137,094 37,118 174,212
Extraordinary gain 1,869 -- 1,869
Net loss (4,627) (1,773) (6,400)
</TABLE>
Adjustments to conform Viewlogic's method of accounting for sales
commissions with that of the Company reduced combined net income by
approximately $250,000 and $495,000 for the three and six months ended
March 31, 1997, respectively.
The Company incurred merger-related and other costs of $11.9 million and
$47.9 million for the second quarter and first six months of fiscal
1998, respectively. The following table presents the components of
merger related and other costs recorded for the six months ended March
31, 1998, along with charges against the reserves through March 31,
1998:
<TABLE>
<CAPTION>
Noncash March 31, 1998
Writedown Reserve
(in thousands) Total Charge Amounts Paid of Assets Balance
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Transaction costs 9,332 (7,856) 1,476
Employee termination and
transition costs 11,735 (7,125) 4,610
Writedown of equipment and
other assets 8,252 (8,023) 229
Legal and other settlements 6,811 (5,661) 1,150
Redundant facility and other costs 11,758 (5,160) 6,598
---------- ---------- ---------- ----------
Total $ 47,888 $ (25,802) $ (8,023) $ 14,063
========== ========== ========== ==========
</TABLE>
The Company expects to record additional merger related and other costs
in the third quarter of fiscal 1998 and anticipates that these will be
the final charges incurred in connection with the merger with Viewlogic.
The Company expects that all significant amounts included in the March
31, 1998 reserve balance will be paid within the next twelve months.
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5. Acquisitions
In October 1997, the Company acquired two privately-held companies in
the EDA industry. The acquisitions were accounted for by the purchase
method of accounting. The purchase price, acquisition costs and net
liabilities assumed for these acquisitions totaled approximately $4.2
million, which was allocated to in-process research and development and
taken as a one-time charge to operating expenses in the first quarter of
fiscal 1998.
6. Extraordinary Item
In fiscal 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 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. In the first quarter of fiscal 1998,
the Company and IBM modified the terms of one of the notes which has
been accounted for as an extinguishment of debt. Accordingly, the
Company recorded an extraordinary gain of $1.9 million, net of tax,
related to the extinguishment of the note. As of March 31, 1998, the
notes had a remaining balance of $9.9 million, of which $2.9 million is
included in long-term obligations.
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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," "anticipates"
and similar expressions are intended to identify forward-looking statements.
Actual results could differ materially from those anticipated in such
forward-looking statements as a result of certain factors, including those set
forth under "Factors That May Affect Future Results."
Results of Operations
On December 4, 1997, the Company acquired Viewlogic Systems, Inc., a Delaware
corporation ("Viewlogic"), by the merger (the "Merger") of a wholly-owned
subsidiary of the Company, Post Acquisition Corp., a Delaware corporation
("Sub"), with and into Viewlogic. The Merger was accomplished pursuant to the
Agreement and Plan of Merger, dated as of October 14, 1997, among the Company,
Sub, and Viewlogic (the "Merger Agreement"). The Merger of Sub with and into
Viewlogic occurred following the approval of the Merger Agreement by the
stockholders of Viewlogic, and the approval of the issuance of the Company's
Common Stock in connection with the Merger by the stockholders of the Company,
at stockholders' meetings held on December 4, 1997, and the satisfaction of
certain other closing conditions. As a result of the Merger, each outstanding
share of Viewlogic Common Stock was converted into 0.6521 shares of the
Company's Common Stock (the "Conversion Ratio"), and Viewlogic became a
wholly-owned subsidiary of the Company. The terms of the Merger Agreements were
the result of arm's-length negotiations among the parties.
A total of approximately 11.3 million shares of the Company's Common Stock were
issued in connection with the Merger. In addition, the Company assumed all
outstanding Viewlogic options and warrants to purchase Viewlogic Common Stock,
which were converted into options and warrants to purchase shares of the
Company's Common Stock, subject only to adjustments to reflect the Conversion
Ratio. The Company has reserved approximately 2.8 million shares of its Common
Stock for issuance upon the exercise of the assumed Viewlogic stock options.
Prior to the Merger, Viewlogic supplied electronic design automation software
which is used to accelerate and automate the design and verification of advanced
application specific integrated circuits, printed circuit boards and electronic
systems, and provided related services. Viewlogic's ASIC and system-on-a-chip
design products, people and facilities are being merged into the Synopsys
organization. Simulation products of both companies have been consolidated under
a newly created Simulation Tools Group, and timing products and test products
have been grouped together in Synopsys' existing business units. The printed
circuit board and systems portions of Viewlogic's business are being continued
in a wholly-owned subsidiary of Synopsys, based in Marlboro, Massachusetts,
Viewlogic's former headquarters.
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Revenue for the second quarter of fiscal 1998 increased 9% to $170.1 million
from $156.8 million in the second quarter of fiscal 1997. Revenue for the first
half of fiscal 1998 increased 11% to $344.3 million from $310.7 million for the
comparable period in fiscal 1997. The increase in revenue for both periods was
primarily attributable to increased service revenue. Product revenue as a
percentage of total revenue decreased to 61% in the second quarter of fiscal
1998, compared to 63% in the second quarter of fiscal 1997. Product revenue as a
percentage of total revenue for the first half of fiscal 1998 was 62%, compared
to 64% for the first six months of fiscal 1997. The decrease for both periods of
fiscal 1998 was due in part to relatively faster growth in service revenue from
training and consulting services and the renewal of maintenance and support
contracts during fiscal 1998.
During the first quarter of fiscal 1998, the Company adopted Statement of
Position (SOP) 97-2, "Software Revenue Recognition." The provisions of SOP 97-2
have been applied to transactions entered into beginning October 1, 1997. SOP
97-2 generally requires revenue earned on software arrangements involving
multiple elements to be allocated to each element based on the relative fair
values of the elements. The revenue allocated to software products, including
time-based software licenses, generally is recognized upon delivery of the
products. The revenue allocated to postcontract customer support (PCS) is
recognized ratably over the term of the support and revenue allocated to service
elements is recognized as the services are performed.
In connection with the adoption of SOP 97-2, the Company analyzed all of the
elements included in its multiple-element arrangements and determined that the
Company has sufficient evidence to allocate revenue to the license and PCS
components of certain of its time-based product licenses. Accordingly, the
portion of the time-based license fee allocated to the license component is
recognized upon delivery of the software product and the portion of the fee
allocated to PCS is recognized ratably over the term of the support. Prior to
the adoption of SOP 97-2, all revenue from time-based product licenses was
recognized ratably over the term of the license. Software subscriptions continue
to be recognized on a ratable basis.
International revenue as a percentage of total revenue decreased to 37% in the
second quarter of fiscal 1998 from 45% in the second quarter of fiscal 1997. For
the first half of fiscal 1998, international revenue was 39% of total revenue,
compared to 43% for the first half of fiscal 1997. The decrease in international
revenues for both fiscal 1998 periods was primarily due to lower revenue in Asia
resulting from the decline in value of Asian currencies against the dollar,
combined with weak economies in many Asian countries, particularly Korea.
Cost of revenue as a percentage of total revenue remained relatively constant at
13% for all periods presented. 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.
Total operating expenses as a percentage of revenue decreased to 69% in the
second quarter of fiscal 1998 from 79% in the second quarter of fiscal 1997. The
decrease is primarily attributable to lower spending levels obtained from
reductions in personnel and other cost savings resulting from the integration of
Viewlogic into Synopsys' operations. In addition, operating expenses in the
second quarter of fiscal 1997 included a charge of $5.5 million for in-process
research and development. For the first half of fiscal 1998, operating expenses
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were 80% of revenue, compared to 74% of revenue for the first half of fiscal
1997. The increase in operating expenses for the first six months of fiscal 1998
was the result of several factors. The first quarter of fiscal 1998 was 14
weeks, compared to 13 weeks in the first quarter of fiscal 1997. In addition,
merger-related and other costs associated with the merger with Viewlogic were
14% of revenue for the first half of fiscal 1998. Merger-related and other costs
associated with the 1997 merger with EPIC Design Technology, Inc. were 4% of
revenue for the comparable period in fiscal 1997. These higher levels of
spending were partially offset by the expense reductions achieved in the second
quarter of fiscal 1998 from the integration of Viewlogic into Synopsys'
operations.
Research and development expenses as a percentage of total revenue decreased to
21% in the second quarter of fiscal 1998 from 24% in the second quarter of
fiscal 1997. In absolute dollars, research and development expenses decreased to
$36.1 million in the second quarter of fiscal 1998 from $37.3 million in the
second quarter of fiscal 1997. The decrease, both as a percentage of revenue and
in absolute dollars, was primarily the result of expense reductions obtained in
the second quarter of fiscal 1998 from the integration of Viewlogic into
Synopsys' operations. For the first half of fiscal 1998, research and
development expenses were 22% of revenue compared to 24% for the comparable
period in fiscal 1997. In absolute dollars, research and development was $76.3
million for the first half of fiscal 1998, compared to $73.1 million for the
first half of fiscal 1997. The decrease as a percentage of revenue was primarily
the result of expense reductions obtained in the second quarter of fiscal 1998
from the integration of Viewlogic into Synopsys' operations. The increase in
absolute dollar expenses was primarily due to higher expense levels in the first
six months of fiscal 1998 caused by the fact that the first quarter of fiscal
1998 contained 14 weeks instead of the 13 weeks contained in the first quarter
of fiscal 1997.
Sales and marketing expenses as a percentage of total revenue decreased to 34%
in the second quarter of fiscal 1998 from 37% in the second quarter of fiscal
1997. In absolute dollars, sales and marketing decreased to $57.3 million in the
second quarter of fiscal 1998 from $58.5 million in the second quarter of fiscal
1997. The decrease, both as a percentage of revenue and in absolute dollars, was
primarily the result of expense reductions obtained in the second quarter of
fiscal 1998 from the integration of Viewlogic into Synopsys' operations. Sales
and marketing expenses were 36% of revenue for the first half of fiscal 1998,
compared to 37% for the first half of fiscal 1997. In absolute dollars, sales
and marketing was $123.5 million for the first half of fiscal 1998, compared to
$116.1 million for the first half of fiscal 1997. The decrease as a percentage
of revenue was primarily the result of expense reductions obtained in the second
quarter of fiscal 1998 from the integration of Viewlogic into Synopsys'
operations. The increase in absolute dollar expenses was primarily due to higher
expense levels in the first six months of fiscal 1998 caused by the fact that
the first quarter of fiscal 1998 contained 14 weeks instead of the 13 weeks
contained in the first quarter of fiscal 1997. In addition, bad debt expense
increased in the first half of fiscal 1998 compared to the first half of fiscal
1997 as the result of reserves taken for potential accounts receivable
write-offs in Asia.
General and administrative expenses as a percentage of total revenue decreased
to 7% in the second quarter of fiscal 1998 from 8% in the second quarter of
fiscal 1997. In absolute dollars, general and administrative expenses were $11.3
million in the second quarter of fiscal 1998, compared to $11.8 million in the
second quarter of fiscal 1997. The decrease, both as a percentage of revenue and
in absolute dollars, was primarily the result of expense reductions obtained in
the second quarter of fiscal 1998 from the integration of Viewlogic into
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Synopsys' operations. General and administrative expenses as a percentage of
total revenue remained relatively constant at 7% for the first six months of
both fiscal 1998 and 1997. In absolute dollars, general and administrative
expenses were $24.5 million for the first six months of fiscal 1998, compared to
$22.9 million for the same period in fiscal 1997. The increase in absolute
dollar expenses was primarily due to higher expense levels in the first six
months of fiscal 1998 caused by the fact that the first quarter of fiscal 1998
contained 14 weeks instead of the 13 weeks contained in the first quarter of
fiscal 1997.
In connection with its merger with Viewlogic, the Company recorded an additional
charge of $11.9 million for merger-related and other costs in the second quarter
of fiscal 1998, resulting in $47.9 million of charges for the first half of
fiscal 1998. The Company expects to record another charge between $3.0 million
and $5.0 million in the third quarter of fiscal 1998 and anticipates that this
will be the final charge incurred in connection with the merger. Charges for the
first half of fiscal 1998 included direct transaction fees for investment
bankers, attorneys, accountants, and other related costs of $9.3 million,
employee termination and transition costs of $11.7 million, legal and other
settlements of $6.8 million, writedown of equipment and other assets of $8.3
million, and redundant facility and other costs of $11.8 million. As of March
31, 1998, there was a balance of $14.1 million in accrued liabilities for
expected future cash expenditures.
The Company also incurred an in-process research and development charge of $4.2
million in the first half of fiscal 1998 in connection with the acquisitions of
two privately-held companies in the EDA industry.
The provision for income taxes was 34% of income before taxes in the second
quarter of fiscal 1998. For the first half of fiscal 1998, the provision for
income taxes was 34% of income before income taxes plus additional taxes of $5.5
million resulting from nondeductible expenses for merger-related costs incurred
in the first quarter. This resulted in an overall income tax rate of 50% of
income before taxes for the first half of fiscal 1998.
In the first half of fiscal 1998, the Company recorded an extraordinary gain on
extinguishment of debt of $1.9 million, net of income tax expense of $1.0
million, related to certain interest bearing notes issued by the Company to IBM.
Net income was $25.5 million in the second quarter of fiscal 1998, compared to
$6.9 million in the same period of fiscal 1997. For the first half of fiscal
1998, net income was $19.1 million, compared to $31.2 million for the first six
months of fiscal 1997. In the absence of nonrecurring charges, primarily related
to the Company's merger with Viewlogic Systems, Inc. and an extraordinary gain
on retirement of debt, net income would have been $33.4 million in the second
quarter of fiscal 1998 and $57.1 million for the first half of fiscal 1998.
The Company's book-to-bill ratio for the second quarter of fiscal 1998 was above
one. The book-to-bill ratio measures the ratio of accepted orders to revenue.
Liquidity and Capital Resources
For the first six months of fiscal 1998, cash and short-term investments
increased $70.4 million to $505.2 million. The increase in cash and short-term
investments was due primarily to cash generated from operations, proceeds from
the sale of common stock, and proceeds
13
<PAGE> 14
from the sale of long-term investments, partially offset by purchases of
property and equipment, payments on debt obligations and acquisitions.
The Company believes that the existing cash and short-term investments balance
of $505.2 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 May Affect Future Results
The Company expects that its revenue growth during fiscal year 1998 will be
lower than it historically has been. Because of low growth in the printed
circuit board and systems portion of Viewlogic's business, weakness in Asian
currencies, especially the Japanese yen, and overall weakness in Asia-Pacific
economies, for the rest of fiscal year 1998 the Company will emphasize earnings
growth rather than revenue growth. The Company is seeking to manage expenses,
although there is no assurance that cost savings will be achieved. In addition,
the Company, which has a 53-week financial calendar in fiscal 1998, absorbed the
additional week of expenses in the first quarter. To the extent that revenue
growth exceeds the Company's current expectations, the Company will use the
opportunity to build its backlog for future quarters.
The Company attempts to manage its business to achieve quarter-to-quarter
revenue and earnings growth. In recent years, achieving predictable revenue and
earnings growth has become more difficult. Quarterly revenue and earnings are
affected by a number of factors, including customer product demand, product
license terms, the size of the Company's backlog, and the timing of revenue
recognition on products and services sold. In recent years, the Company's orders
have become more seasonal, with the first quarter of the Company's fiscal year
typically being the weakest, having a book-to-bill ratio at or below one, and
the fourth quarter the strongest. The Company increasingly receives a
disproportionate volume of orders in the last week of the quarter. In addition,
an increasing amount of the Company's orders involve products and services which
yield revenue (or a significant portion thereof) 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, and
the Company is more vulnerable to delays in individual large orders, than it
historically has been. 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 expects to continue to increase operating expenses in order to generate
and support continued growth in revenue. If the Company is unsuccessful in
generating such revenue, the Company's business, financial condition and results
of operations are likely to be materially adversely affected. Net income in a
given quarter or fiscal year may be disproportionately affected by a reduction
in revenue growth because only a small portion of the Company's expenses varies
with its revenue.
14
<PAGE> 15
The EDA industry is highly competitive. The Company's products and services
compete with similar products and services from other EDA vendors and with other
EDA products and services for a share of the EDA budgets of their customers. The
Company's products also compete with customers' internally-developed design
tools and design capabilities. The Company's competitors include companies that
offer a broad range of products and services, such as Cadence Design Systems,
Inc. ("Cadence"), Mentor Graphics, Inc. ("Mentor") and Avant! Corporation
("Avant!"), as well as companies, including numerous start-up companies, that
offer products focused on a discrete phase of the integrated circuit ("IC")
design process. In order to remain successful against such competition, the
Company will have to continue to enhance its current products and to develop and
introduce new products on a timely and cost-effective basis that are based on
industry-leading technology and that address the increasingly sophisticated
needs of its customers. The Company also will have to expand its ability to
offer consulting services. The failure to achieve such product enhancement and
development or to expand its ability to offer such services would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Technology advances and customer requirements are fueling a change in the nature
of competition among EDA vendors. Advances in semiconductor technology have
created a need for tighter integration between logic design and physical design
and for technologies which permit systematic reuse of design blocks in multiple
ICs. As a result, the Company expects that competition will increasingly center
on "design flows" involving a broad range of products (including both logic and
physical design tools) 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 offers a wide range of logic design tools
but currently offers a relatively limited range of physical design tools, a
field which is dominated by Cadence and Avant! In addition, the Company has less
capacity than Cadence to offer design consulting services.
Historically, much of the Company's growth has been attributable to the strength
of its logic synthesis products. Opportunities for growth in market share in
this area are limited and overall growth in the market for such products has
slowed. The Company is seeking to add new products to its portfolio through
internal development and, where it deems appropriate, acquisition. Among the
most important new products offered by the Company are its Cell-Based Array
library, PrimeTime timing estimator, Cyclone simulation accelerator, Formality
verification and Module Compiler datapath synthesis 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. In addition, the Company is attempting to expand its capacity to
offer consulting services. There can be no assurance that the Company will be
successful in introducing new products or expanding its services business, and
the failure to do so would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's business has benefited from the rapid worldwide growth of the
semiconductor industry. Purchases of the Company's products are largely
dependent upon the commencement of new design projects by semiconductor
manufacturers and their customers. The outlook for the semiconductor industry
for the remainder of 1998 is uncertain, owing in part to adverse economic
conditions in Asia. Slower growth in the semiconductor industry,
15
<PAGE> 16
and/or a reduced number of design starts, could have a material adverse effect
on the Company's business, financial condition and results of operations.
In recent years, international revenue has accounted for almost half of the
Company's revenue. The Company expects that international revenue will continue
to account for a significant portion of its revenue in the future. As a result,
changes in foreign currency exchange rates and changes in regional or worldwide
economic or political conditions could have a material adverse effect on the
Company's business, financial condition and results of operations. In
particular, revenue from sales in Japan during the first half of fiscal 1998
were adversely affected by the weakness of the yen against the dollar and the
deferral of investments in semiconductor facilities and technology by Japanese
companies. Continued weakness of the yen and the Japanese economy are likely to
adversely affect revenue from Japan during the remainder of fiscal 1998. In
addition, recent significant declines in the value of the currencies of many
countries in the Asia Pacific region have affected the Company's sales in the
region. This is particularly true in Korea and Taiwan, which are important
markets for the Company in the Asia Pacific region. Continued instability in
Asian currency markets and economies would continue to have an adverse effect on
the Company's results of operations.
In February 1996, the Company entered into a six-year joint development and
license agreement with IBM, pursuant to which the Company and IBM agreed to
develop certain new products. Joint development of products is subject to risks
and uncertainties over and above those affecting internal development. During
fiscal year 1997, the first joint product resulting from the alliance,
PrimeTime, was introduced, and the parties agreed to terminate efforts to
develop a product in one of the product areas covered by the Agreement. There
can be no assurance that the Company's joint development efforts will lead to
new products or that such products will be successful.
The Company's success is dependent on technical and other contributions of key
employees. The Company participates in a dynamic industry, with significant
start-up activity, and has its headquarters in Silicon Valley, where skilled
technical, sales and management employees are in high demand. The Company has
experienced, and may continue to experience, significant employee and management
turnover. In addition, there is a limited number of qualified EDA engineers, and
the competition for such individuals is intense. There can be no assurance that
the Company can continue to recruit and retain key personnel. Failure to
successfully recruit and retain such personnel could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company has adopted a number of provisions that could have antitakeover
effects. In September 1997, the Board of Directors adopted a Preferred Shares
Rights Plan, commonly referred to as a "poison pill." In addition, the Board of
Directors has the authority, without further action by its stockholders, to fix
the rights and preferences of, and issue shares of, authorized but undesignated
shares of Preferred Stock. This provision and other provisions of the Company's
Restated Certificate of Incorporation and Bylaws and the Delaware General
Corporation Law may have the effect of deterring hostile takeovers or delaying
or preventing changes in control or management of the Company, including
transactions in which the stockholders of the Company might otherwise receive a
premium for their shares over then current market prices.
16
<PAGE> 17
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.
Year 2000 Compliance
There has been significant public discussion about the potential inability of
computer programs and systems to adequately process date information after
December 31, 1999. The Company has inspected or tested certain of its products
to determine whether they will be affected by the change in the century. None of
the Company's tested products experienced significant date-related failures. The
Company anticipates achieving so-called "Year 2000 compliance", consistent with
industry standards, with its active products and is developing a plan for
meeting year 2000 compliance, of all products on an ongoing basis. The Company's
prior inspecting and testing has not required, and its anticipated inspection,
testing and compliance efforts are not expected to require, the Company to incur
any material expense.
In addition, the Company continues to implement the program, to be completed in
1999, to review the Year 2000 compliance status of the software and systems used
in its internal business processes, to obtain appropriate assurances of
compliance from the manufacturers of these products, and to modify or replace
all non-compliant products. The Company relies on widely-available commercial
products rather than proprietary software, and has received Year 2000 assurances
from some of its main suppliers. Based on the information available to date, the
Company believes that it will be able to complete its Year 2000 compliance
review and make any necessary modifications prior to the end of 1999. The
Company further believes that such review and modification, if any, will not
require the Company to incur any material expense. However, the compliance of
systems acquired from third parties is dependent on factors outside the
Company's control. If key systems, or a significant number of systems were to
fail as a result of Year 2000 problems, the Company could incur substantial cost
and disruption, which would potentially have a material adverse effect on the
Company's business.
17
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1997 annual meeting of stockholders was held on
February 27, 1998. The following directors were elected by the
stockholders:
Chi-Foon Chan
Deborah A. Coleman
Aart J. de Geus
Harvey C. Jones, Jr.
William W. Lattin
A. Richard Newton
Steven C. Walske
The following additional matters were submitted to the
stockholders for vote at the meeting:
1. Approval of an amendment to the Company's Employee Stock
Purchase Plan and International Employee Stock Purchase Plan
to increase the number of shares of Common Stock reserved for
issuance thereunder by 1,400,000 shares. Of the total shares
voting on the foregoing resolution, 47,189,284 voted in favor,
11,958,971 against and 38,374 abstained.
2. Approval of an amendment to the Company's 1994 Non-Employee
Directors Stock Option Plan to (i) increase the number of
options to purchase shares of Common Stock granted to
non-employee directors who are re-elected to the Board of
Directors from 8,000 shares per year to 10,000 shares per
year; (ii) provide an annual option grant to newly-elected or
newly-appointed directors; (iii) provide an annual grant of
options to purchase 5,000 shares of Common Stock as
compensation for service on selected committees of the Board
of Directors, subject to a limit of two such grants per
non-employee director per year; and (iv) provide that annual
option grants and committee-service grants vest immediately
prior to the first Annual Meeting following the date of the
grant. Of the total shares voting on the foregoing resolution,
49,759,437 voted in favor, 9,309,113 against and 118,079
abstained.
3. Ratification of the appointment of KPMG Peat Marwick LLP as
independent auditors of the Company for the fiscal year ending
September 30, 1998. Of the total shares voting on the
foregoing resolution, 59,135,086 voted in favor, 20,934
against and 30,609 abstained.
18
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits
27 Financial Data Schedule
(b.) Reports on Form 8-K
None
19
<PAGE> 20
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: May 18, 1998 SYNOPSYS, INC.
(Registrant)
By: /s/ Mark D. Nelson
-------------------------------
Mark D. Nelson
Vice President Finance and
Controller
(Principal Financial
and Accounting Officer)
20
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-1-1997
<PERIOD-END> MAR-31-1998
<CASH> 92,906
<SECURITIES> 412,292
<RECEIVABLES> 124,931
<ALLOWANCES> 11,962
<INVENTORY> 0
<CURRENT-ASSETS> 647,678
<PP&E> 178,188
<DEPRECIATION> 89,747
<TOTAL-ASSETS> 829,794
<CURRENT-LIABILITIES> 257,849
<BONDS> 3,601
0
0
<COMMON> 653
<OTHER-SE> 561,990
<TOTAL-LIABILITY-AND-EQUITY> 829,794
<SALES> 344,317
<TOTAL-REVENUES> 344,317
<CGS> 44,782
<TOTAL-COSTS> 44,782
<OTHER-EXPENSES> 276,412
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,271
<INCOME-PRETAX> 34,483
<INCOME-TAX> 17,225
<INCOME-CONTINUING> 17,258
<DISCONTINUED> 0
<EXTRAORDINARY> 1,869
<CHANGES> 0
<NET-INCOME> 19,127
<EPS-PRIMARY> 0.30<F1>
<EPS-DILUTED> 0.28
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
</FN>
</TABLE>
