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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 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: 0-45138
SYNOPSYS, INC.
(Exact name of registrant as specified in its charter)
Delaware 56-1546236
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
700 East Middlefield Road
Mountain View, California 94043-4033
(Address of Principal Executive Offices, including ZIP Code)
Registrant's telephone number, including area code: (650) 962-5000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Preferred Share Purchase Rights
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. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of December 4, 1998, was approximately $3,364,251,000.
On December 4, 1998, approximately 68,361,000 shares of the registrant's
Common Stock, $0.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the registrant's 1998 Annual Report to Stockholders for
the fiscal year ended September 30, 1998 are incorporated by reference into
Parts I, II and IV hereof.
(2) Portions of the registrant's Notice of Annual Meeting and Proxy
Statement for the registrant's annual meeting of stockholders to be held on
March 1, 1999 are incorporated by reference into Part III hereof.
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Except for the historical information presented, the matters discussed
in this Form 10-K include forward looking statements within the meaning of
Section 27A of the Securities Exchange Act of 1933 and Section 21E of the
Securities Exchange of 1934. The Company's actual results could differ
materially from those projected in the forward looking statements as a result of
risk factors that include, but are not limited to, those discussed under the
caption "Factors That May Affect Future Results" under "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Company's
1998 Annual Report to Stockholders, which is incorporated by reference in this
Form 10-K and is included in Exhibit 13.1 hereto, as well as factors discussed
elsewhere in this Form 10-K.
PART I
ITEM 1. BUSINESS
INTRODUCTION
Synopsys, Inc. ("Synopsys," or the "Company") is a leading supplier of
electronic design automation (EDA) solutions to the global electronics industry.
The Company develops, markets, and supports a wide range of integrated circuit
(IC) design, verification and analysis products that are used by designers of
advanced ICs, including system-on-a-chip ICs, and electronic systems. The
Company also provides consulting services to help its customers improve their IC
design processes and, where requested, to assist them with their IC designs. The
Company's products and services offer its customers the opportunity to improve
the productivity of their IC designers and enhance their design quality of
results, thereby lowering IC development and manufacturing costs and reducing
the time to market for new products. Synopsys also provides training and support
services for its customers. Synopsys was incorporated in Delaware in 1987.
ADDRESSING SEMICONDUCTOR CHALLENGES WITH EDA PRODUCTS
Over the past three decades the semiconductor industry has developed
technology that has dramatically increased the number of transistors that can be
placed on a chip while simultaneously reducing the cost of manufacturing each
chip. In addition to allowing a particular chip to do more than before, each
chip also runs faster. A state-of-the-art IC may have several million
transistors on it, many of which are smaller than one percent of the width of a
human hair, and run at 1 gigahertz, a speed that was unheard of even two years
ago. Increasingly, functions that formerly were performed by multiple ICs
attached to a printed circuit board are being combined in a single chip,
referred to as a system-on-a-chip. The increased capacity of ICs has fostered
the development of computers, communications networks, consumer electronics,
navigation systems, and many other goods and services with tremendous
capabilities at relatively low cost.
Exploiting this increased capacity presents challenges for the
semiconductor and electronics industries. It takes substantial skill, time and
effort on the part of chip designers to design a highly complex IC, running the
risk that the product design and development cycle for a new product will
lengthen while, at the same time, competition has shortened the life cycle of
the product.
The rapid pace of semiconductor technology advancement has created both
a "designer productivity gap" and a "silicon performance gap." EDA products play
a critical role in addressing these problems by providing IC designers with
tools and techniques to (a) reduce the time and manual effort required to
design, analyze and verify individual ICs, (b) improve the performance and
density of complex IC designs, and (c) enhance the reliability of the IC design
and manufacturing process.
The designer productivity gap occurs because chip capability is
increasing faster than the electronics industry is developing and deploying IC
designers with skills required to make use of that capability. "High level" EDA
tools help increase the productivity of designers by allowing them to specify
the desired chip behavior using higher levels of abstraction than transistors,
such as gates and Register-Transfer-Language descriptions, and deriving
automatically the detailed final design from the higher level description. EDA
tools also permit designers to analyze and verify the chip at these higher
levels of abstraction. Additionally, as the electronics industry increasingly
produces system-on-a-chip ICs, the EDA industry is developing tools and
techniques for reusing
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existing IC designs and integrating disparate IC blocks onto a single chip, both
of which offer the potential for significant time savings in the design cycle.
The silicon performance gap occurs because the design effort required to
develop a chip that fully exploits a new semiconductor technology increases as
the size of the transistors shrink. A gap has developed between potential
performance that can be provided by new semiconductor technology and what a
designer can readily take advantage of. As ICs have increased in complexity, the
problems faced by IC designers have changed. An IC designer has always had to
accommodate the effects of certain physical phenomena such as delay, power
consumption, cross-talk, and metal migration into an IC design. At larger
transistor sizes, designers could essentially ignore some phenomena until late
in the design process and use relatively simple approximations to estimate the
effects of others. As transistor size has dropped, these problems became more
acute. To help manage the silicon performance gap, the EDA industry has
developed more accurate physical analysis tools to provide the designer with
insight into a wide range of physical phenomena plaguing IC designs, and to help
them devise design techniques that avoid these obstacles. As system-on-a-chip
designs become more prevalent, the development of these types of tools will grow
more important in closing the silicon performance gap.
SYNOPSYS PRODUCT OVERVIEW
Synopsys provides products and services that help customers meet the
challenges of producing leading edge ICs and the products that incorporate them.
Synopsys' design tools include an extensive line of logic synthesis and system
design and analysis products that allow an IC designer to describe chip behavior
in a high-level language, convert that description into a gate-level
representation, and analyze the expected performance of the chip at the gate
level. Synopsys' design tools also include tools to facilitate testing of an IC
after the IC is built, as well as design reuse products that help reduce design
time by permitting the straight-forward reuse of previously-proven circuit
"blocks." Synopsys is also actively extending its product line to include
floor-planning, placement, and routing tools.
Synopsys' verification products are used in several stages of the system
and IC design process to ensure that the resulting IC performs the function that
the IC designer intended. Synopsys' simulation products permit IC designers to
simulate their designs at various levels of abstraction (behavioral, register
transfer, gate-level, and switch logic level) and to explore tradeoffs between
incorporating functionality in hardware or software. In addition, Synopsys is a
leading provider of software and hardware models, which are used to test an IC
design within the context of the system in which the IC will eventually be used.
Synopsys' EPIC Technology Group offers an extensive line of software
tools to analyze power, timing and reliability concerns in an IC design at the
transistor level. As semiconductor technology advances and IC complexity
increases, transistor-level tools are becoming increasingly important in helping
to close the silicon performance gap.
Synopsys offers its customers an extensive array of professional
services, which can be tailored to meet their specific needs. These services may
include methodology consulting, aimed at helping a customer improve its design
process; design reuse consulting, which helps a customer modify its inventory of
designs to facilitate their reuse in newer designs; and design assistance, which
helps a customer design, verify or test a discreet portion of a chip or an
entire chip. Synopsys' consulting services also include the provision of
semiconductor libraries for IC vendors and their customers.
The Company markets its products on a worldwide basis and offers
comprehensive customer service, education, consulting, and support as integral
components of its product offerings. Products primarily are marketed through its
direct sales force. The Company has licensed its products to many of the world's
leading semiconductor, computer, communications and electronics companies.
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STRATEGY
Synopsys' strategy is to develop and offer to its customers the tools
and methodologies required to enable large-scale deep submicron and
system-on-a-chip design. The Company is seeking to develop a balanced portfolio
of products that address both the designer productivity gap and the silicon
performance gap. While continuing to enhance the performance of its current
logic design products, Synopsys intends to enter the market for physical design
tools by introducing design planning and top level routing products, both of
which will be tightly linked with its logic synthesis tools. Synopsys also is
continuing to expand the range and performance of its verification and
transistor-level analysis products, and continuing its development of tools and
techniques for enhancing design reuse. Finally, the Company will expand its
ability to offer consulting services to its customers to assist them in taking
full advantage of advances in semiconductor technology.
MERGER WITH VIEWLOGIC SYSTEMS
In December 1997, the Company merged with Viewlogic Systems, Inc.
(Viewlogic). Viewlogic's product portfolio included both IC design software and
design and analysis software for printed circuit boards (PCBs) and electronic
systems. After the merger, the IC related business of Viewlogic was fully
integrated into the Synopsys business unit structure, with some products forming
the core of a new business unit and others becoming part of an existing Synopsys
business unit.
The PCB/Systems business of Viewlogic was operated as a separate
subsidiary for fiscal year 1998. On October 2, 1998, the Company sold the
PCB/Systems business to a group led by the management of that business. A
summary of the transaction terms and a more detailed explanation of the reasons
for the transaction can be found on pages 18 and 19 of the Synopsys 1998 Annual
Report to Stockholders, which has been filed as Exhibit 13.1 to this Form 10-K
report.
Although these changes took place over the course of the fiscal year,
for clarity the discussion in this section describes the Company's organization
as it existed at the end of the year.
Synopsys' merger with Viewlogic was accounted for as a
pooling-of-interests. Accordingly, the Company's consolidated financial
statements have been restated to include the financial position and results of
Viewlogic for all periods presented. As a result, financial information
presented in this Part I for fiscal years 1997 and 1996 may differ from the
amounts for such years that appeared in the Company's Form 10-K reports for
fiscal years 1997 and 1996.
ORGANIZATION AND PRODUCTS
Synopsys is currently organized into three tool development groups --
the Design Tools Group, the High-Level Verification Group and the EPIC
Technology Group -- and a services group -- the Professional Services Group.
Synopsys sells its products and services primarily through its direct sales
force, although some products are sold through distributors in limited
geographical areas, and some specific products are sold through OEM
relationships.
DESIGN TOOLS GROUP
The Design Tools Group (DTG) produces a variety of products focused on
the high-level aspects of designing an IC. In the fourth quarter of fiscal 1998,
DTG was divided into five business units.
Synthesis & Design Planning Business Unit
The Synthesis & Design Planning Business Unit maintains and extends
Synopsys' logic synthesis products. Logic synthesis is key technology that maps
a high-level description of desired chip behavior into a connected collection of
logic gates and other circuit elements that performs the desired behavior.
Design Compiler(TM) is the market-leading logic synthesis tool and is currently
used by a broad range of companies engaged in the design of
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ICs to optimize their designs for performance and chip area. Design Compiler was
introduced in 1988 and has been updated regularly since then. In fiscal year
1998, Synopsys released Design Compiler(TM) 98 as the latest generation in the
Design Compiler family. Design Compiler 98 provides customers with an average
13% improvement in circuit timing while running three times faster than previous
versions of Design Compiler. Design Compiler 98 also provides automated
techniques for developing time budgets for the design process -- customers
historically had to spend weeks for each design developing this type of
information manually.
The Synthesis & Design Planning Business Unit also offers other tools to
provide designers with a comprehensive design environment. RTL Analyzer(TM) lets
IC designers analyze and improve their source code before synthesis and
simulation runs. Power Compiler(TM) allows a designer to optimize their designs
for power consumption. Module Compiler(TM) generates optimized general-purpose
functions for an IC and permits optimization for size, performance and power
consumption.
The Synthesis & Design Planning Business Unit is also developing better
links between the logic synthesis process and the layout process, by enhancing
its floor-planning management product, and developing various new physical
design tools. As part of this development effort, in November 1998 Synopsys
merged with Everest Design Automation, Inc. which has developed new gridless
high-level routing technology. By mutual agreement, Synopsys and SEMATECH have
ended their relationship that began in fiscal year 1996.
In February 1996, Synopsys entered into a six-year joint development and
license agreement with International Business Machines Corporation (IBM),
pursuant to which the two companies agreed to develop certain new products.
During fiscal year 1997, the first joint product resulting from the alliance,
PrimeTime(R), was introduced, and the parties agreed to terminate efforts to
develop a product in one of the product areas covered by the Agreement. Synopsys
expects to introduce a second joint product in January 1999. The development of
the fourth product has been suspended. Synopsys and IBM are currently discussing
the future of the alliance. There can be no assurance that joint development
will continue, or that the products developed by the alliance will be
successful.
Test and Static Verification Business Unit
The Test and Static Verification Business Unit develops products for
developing test strategies for chips.
Accurate analysis of timing is critical to ensuring successful chip
design. PrimeTime is a full-chip static timing analysis tool that provides
customers with essential design verification capabilities. PrimeTime ensures
that as a design advances from synthesis (high-level design) to transistor-level
implementation, all timing-critical paths in the chip can be clearly understood
and verified. During fiscal 1998, the Company announced that it would phase out
Motive(TM), timing analysis software offered by Viewlogic, and Motive licensees
were offered incentives to migrate to PrimeTime. In addition, certain features
of Motive have been integrated into PrimeTime.
In fiscal year 1998, Synopsys introduced a new formal verification
product---Formality(TM). Formality lets IC designers compare a design at
different stages in the design process to determine whether they are
functionally equivalent. Thus, if the original design was functionally correct,
Formality permits the designer to detect errors introduced during implementation
of the design. Historically, such errors have been detected by simulating the
modified design using simulation test patterns validated with the functionally
correct design. This approach is time-consuming. Formality provides an
alternative method for detecting any functional differences without simulating
the design, permitting the detection of errors earlier in the design process.
Formality was designed to be tightly integrated with PrimeTime and Design
Compiler. When used together as part of a new verification methodology, these
tools can reduce the amount of gate-level simulation runs, thus enabling
designers to complete their designs faster and with a higher level of
confidence.
Synopsys provides software tools to help customers design into their ICs
features that will facilitate the testing of chips after manufacture. After
fabrication, an IC is typically subjected to time-consuming tests using
expensive automatic testers to determine if it is free of manufacturing defects.
Synopsys test synthesis software allows a designer to add circuitry to a design
that will facilitate the post-fabrication testing. Synopsys also provides
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software to generate and evaluate test patterns that are ultimately used by the
testers. Synopsys is currently integrating the Sunrise technology from the 1997
Viewlogic merger into the Synopsys test product line.
System Level Design Business Unit
The System-Level Design Business Unit offers three principal products:
COSSAP(R) is a digital signal processing (DSP) design system targeted at
designers of digital communications devices such as cellular telephones. COSSAP
can simulate large, complex, high-level systems that would be hard to model with
standard cycle-based or event-driven simulators, and includes a library of DSP
building blocks.
Behavioral Compiler(TM) permits designers to create complex circuits in
a high-level shorthand and then helps them explore design tradeoffs and pick the
best architecture, thereby permitting them to work at a higher level of
abstraction than does Design Compiler. In fiscal 1998, Synopsys added behavioral
clock gating capability to Behavioral Compiler. This allows designers to develop
and evaluate low power-consuming designs efficiently. Such low power designs are
particularly important in portable telecommunications systems.
Protocol Compiler(TM), introduced in fiscal year 1998, facilitates the
design and implementation of protocol control logic - a critical aspect of
asynchronous transfer mode (ATM), Synchronous Optical Network (SONET) and
Synchronous Digital Hierarchy (SDH) equipment for networking and
telecommunications applications. Protocol Compiler enables control logic design
at the behavioral level, generating output that is optimized for Synopsys'
flagship Design Compiler tool. By taking protocol control logic design up to the
behavioral level, Protocol Compiler greatly simplifies the process of designing
complex chips targeted at networking applications.
FPGA Business Unit
The FPGA Business Unit provides logic synthesis products for
high-density field programmable gate arrays (FPGAs) and complex programmable
logic devices (CPLDS). In fiscal year 1998, Synopsys announced new versions of
FPGA Compiler II(TM) and FPGA Express(TM). The new versions provide better
support of the VHDL '93 language, new visual analysis tools, improved circuit
timing, reduced circuit area, and support of fourteen new FPGA device families.
Design Reuse Business Unit
In June 1998, Synopsys and Mentor Graphics announced the publication of
the Reuse Methodology Manual. The Reuse Methodology Manual provides designers
with detailed guidelines on planning, specifications, design practices, coding,
testing and documentation for creating reusable intellectual property (IP)
blocks. The manual also provides users of third party design components
descriptions of the deliverables designers should look for in reusable designs.
The Design Reuse Business Unit offers a wide range of reusable design
modules, tools for creating reusable design blocks and, working through the
Professional Services Group, design reuse consulting services based on the
principles set forth in the Reuse Methodology Manual.
Synopsys' DesignWare(R) products provide IC designers with libraries of
pre-designed, pre-verified Synopsys synthesizable (i.e., usable by Synopsys'
design tools in optimizing a design), off-the-shelf design modules to
incorporate into their own designs. DesignWare foundation libraries include
commonly used functions. By the end of fiscal year 1998, 130 design modules were
available in DesignWare libraries. DesignWare Macrocells include two commonly
used but complex design components - an 8051 microcontroller block and a PCI 2.1
bus interface block. The reuse of these building blocks represents a significant
shift from traditional IC design, in which designs have been intimately tied to
a particular semiconductor process technology or design methodology and not
easily transferred from one chip design to the next. As IC designs get larger,
the use of reusable design blocks will be an important method for helping to
reduce overall design time.
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DesignWare(R) Developer helps customers develop their own DesignWare
components from which they can build an inventory of designs that can be used by
multiple development teams or in subsequent design cycles.
HIGH-LEVEL VERIFICATION GROUP
The High-Level Verification Group provides a range of products that
allow IC designers to determine, at different levels of design and at various
stages of the design process, whether an IC will perform as intended.
Verification is becoming increasingly important in the design process, because
as the complexity of chip design increases, the complexity of verification
increases exponentially. A verification bottleneck is developing, with designers
of complex chips spending half or more of their total design time performing
verification. Synopsys verification products are intended to provide an
integrated solution for customers that is accurate, exhaustive and fast.
Simulation Tools Group
In the simulation process, simulation software "exercises" an IC design
by running it through a series of tests and comparing the actual outputs from
the design with the expected output. The goal of simulation is to make sure that
the functionality and timing performance of the design meet the original
specifications of the chip. The Simulation Tools Group provides designers with
several products for high-level simulation, including VCS(TM) for designs
written in Verilog, VSS(TM) for designs written in VHDL, and Cyclone(R) for
evaluating designs on a clock-cycle basis. The Company believes that VCS,
acquired in connection with the acquisition of Viewlogic, is the fastest Verilog
simulator on the market. VCS has gained market share in recent years; sales of
VCS grew substantially in fiscal year 1998. VCS is supported by the all of the
major semiconductor manufactures. In fiscal 1998, Synopsys (as part of the
acquisition of Viewlogic) acquired Radiant Design Tools, a private company which
had developed an optimization tool for VCS, which has now been incorporated into
VCS to reduce the simulation time substantially for certain classes of designs.
VSS and Cyclone are optimized for use with Design Compiler and the Company's
other design tools.
VERA Group
The VERA Group was formed following Synopsys' acquisition of Systems
Science, Inc. (SSI) in July 1998. The Company estimates that approximately half
of the time spent in the verification phase of IC design is spent designing
testbenches, which are the set of test vectors that are used by simulation tools
in verifying that a chip design functions properly. The VERA Group provides
software that helps generate, manage, and evaluate the data flowing between the
simulator and the IC design. VERA(TM), the principal product of the Group,
automates the design of testbenches, thereby offering the IC designer
significant potential reductions in overall verification time. VERA is being
integrated into the rest of Synopsys' simulation, modeling and hardware/software
co-verification products.
Large Systems Technology Group
The Large Systems Technology Group provides high-level models and tools
to facilitate the modeling and verification of complex electronic systems. The
Group manages the Company's hardware and software modeling products as well as
the Eagle hardware/software co-design tools acquired in the Viewlogic merger.
Since Synopsys' February 1994 merger with Logic Modeling Corporation,
Synopsys has offered a full range of hardware and software modeling solutions.
Synopsys' ModelSource(TM) 3000 series is a family of hardware modeling systems
for ASIC and board level design which provide a flexible means for designers to
model complex devices. ModelSource 3000 systems use the actual integrated
circuit to model its own behavior. Synopsys' SmartModels(R) Libraries offer
models for more than 13,000 commercially available ICs, including a wide range
of microprocessors, controllers, DSPs, FPGAs, CPLDs, peripherals, memories and
standard logic. Synopsys' bus interface models are used to verify that designs
comply with established industry standards. Models are available for most
popular standards. In addition, Synopsys offers modeling technologies to allow
designers to create models
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of both standard and proprietary devices. These models support all major EDA
simulation environments and a wide range of EDA platforms, giving designers
access to a broad range of models to assist them with verification of their
designs.
Success in the modeling business depends, in part, upon making available
a wide range of models and model types. Synopsys continues to focus its modeling
development efforts on enhancing its ability to quickly and efficiently produce
and distribute new models to meet rising verification needs. Synopsys seeks to
maintain close relationships with leading semiconductor vendors to ensure model
accuracy and the earliest possible availability. Synopsys believes that future
design verification methodologies, including those for system-on-a-chip, will
require the availability of accurate, high performance models of complex
components and intellectual property blocks.
The Large Systems Technology Group's Eagle Design Automation tools help
shorten the development time of embedded systems through hardware/software
(HW/SW) co-development. The term "embedded systems" describes ICs or PCBs that
include a microprocessor or microcontroller. The use of embedded systems is
growing, in part due to the growth of system-on-a-chip designs, which include
logic, memory and at least one processor on the same chip. An important decision
in embedded system design is the allocation of functions between hardware and
software. An estimated 50% of the overall embedded systems design time is spent
in HW/SW design and debug, and prototype debug. As a result, hardware and
software development for embedded systems are becoming more interdependent, and
given the costs of design cycle iterations, there are advantages to consider
hardware and software interaction earlier in the design cycle. By helping IC
designers consider this interaction early in the design cycle, the Company's
Eaglei(TM) product, which is used for full system integration testing, and its
EagleV(TM) product, which is used for verification of embedded processors within
an ASIC, can help reduce the overall costs of embedded system designs.
EPIC TECHNOLOGY GROUP
Advanced electronics products -- most notably in the consumer
electronics and wireless communications markets -- require chips that operate at
very high speeds, use very little power and last for an extended period of time.
Designers of the complex ICs used in these devices rely heavily on analysis and
verification tools that operate at the transistor level. Since Synopsys'
February 1997 merger with EPIC Design Technology, Inc., Synopsys has offered its
customers a complete line of transistor-level tools -- characterization,
simulation, modeling, analysis, extraction and physical verification -- which
enable designers to address timing, power, and reliability requirements of mixed
signal, high performance and low power ICs.
Transistor level analysis and verification is important for two
principal reasons. First, speed, power consumption and reliability often require
tradeoffs - for example, fast chips tend to consume more power and produce more
heat (which hurts reliability) than slower chips. It is at the transistor level
that the designer has the last chance to optimize a design for speed, power and
reliability, and the last chance to analyze and correct design flaws that can
result in the failure of a chip to function as intended. Second, as ICs become
more powerful and more complex, the size of the transistors and wires contained
in those ICs shrinks below one quarter micron (250 nanometers), and the total
length of wire connecting the transistors lengthens, in some cases to as much as
one mile. At these dimensions, ICs exhibit unique electrical effects; having the
ability to analyze these effects is central to the success of an advanced IC
design.
The EPIC Technology Group's principal software tools include:
TimeMill(R) is a transistor-level simulator and dynamic timing analyzer.
Used interactively in the prelayout phase, TimeMill helps designers optimize the
performance of transistor-level blocks, memories and data paths. TimeMill allows
the designer to quickly explore changes in voltage levels, temperature or
process parameters to improve design quality. After layout, TimeMill detects
problems such as charge sharing and race conditions that are more prevalent in
advanced IC design.
PowerMill(R) simulates block and full chip current and power behavior,
providing fast and accurate current and power analysis and power diagnostics.
PowerMill offers static and dynamic diagnostics to identify design flaws
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that cause unnecessary power consumption. After layout, PowerMill helps
designers confirm that power consumption is acceptable before committing the
design to silicon.
The Analog Circuit Engine (ACE(TM)) is an analog simulation option
available for TimeMill and PowerMill tools. When used with TimeMill or
PowerMill, ACE provides a high speed, accurate, mixed analog/digital circuit
simulation solution.
PathMill(R) is a static timing tool that provides a detailed critical
path analysis and static timing verification capability. PathMill provides
accurate and flexible modeling for mixed level static timing analysis.
PathMill's behavioral-, gate- and transistor-level models allow accurate
analysis at each level of the design hierarchy, allowing the user to mix
top-down design and bottom-up implementation.
Arcadia(R) provides full chip and net-by-net resistance and capacitance
(RC) extraction, and thereby permits designers to focus design analysis effort
on critical paths and spend less time on the segments that do not require
in-depth analysis. Beginning in July 1998, Arcadia offers a distributed
processing capability that enables designers to extract and analyze data from
very large designs in a short amount of time.
AMPS(R) is the transistor-level tool that simultaneously optimizes
power, delay and area in digital CMOS circuits. AMPS automatically resizes
transistors, making individual transistors larger or smaller to find the
combination that will best meet user-defined power, speed and area goals without
changing the functionality of the design.
DelayMill(R) enables accurate timing verification at the transistor
level. DelayMill is an advanced delay calculation system for IC, which
calculates layout parasitics and interconnect delay effects, and is especially
useful for IC designers working with multi-million transistor designs in
nanometer silicon.
RailMill(R) evaluates the reliability of power, clock and signal
networks in a design. Evaluating reliability issues during the design process
helps prevent field failures by accurately locating EM and voltage-drop
violations on full-chip and block-level power networks. RailMill also pinpoints
potential failures on signal nets, performs what-if analysis for proper-pad
placement, and offers recommendations for correct bus widths.
PowerArc(TM) is a stand-alone cell library power characterization tool
that generates highly accurate gate-level power libraries in the Synopsys
Liberty(TM) library format. Very low power ASIC and cell-based designers seeking
longer battery life, proper package selection and lower system noise levels use
PowerArc.
PowerGate(TM) is a dynamic gate-level power analysis tool used in an
ASIC or structured custom design flow. It determines peak power consumption,
isolates excessive power dissipation problems, and identifies power-hungry
vectors and instructions.
The EPIC Technology Group also offers the Direct Silicon Access(TM)
silicon characterization services (DSA), which provides accurate models for
nanometer processes to customers. The DSA methodology correlates expected chip
behavior with measurements performed on actual silicon test circuits, which then
provides a reliable source of data for customers to create accurate technology
files for RC extraction and circuit simulation tools.
PROFESSIONAL SERVICES GROUP
The Professional Services Group (PSG) provides customized high-level
design support for IC and systems designs. Synopsys consultants are experienced
designers who provide customers with in-depth technical expertise in the use of
Synopsys' design tools, design methodology and Reuse Methodology Manual
principles. Synopsys offers both methodology and project consulting. Methodology
consulting is aimed at increasing customer productivity, promoting the adoption
of the Synopsys' design methodology and reuse principles and solving immediate
needs of customers' design teams. Project consulting involves Synopsys experts
working with customer design teams from design implementation through
simulation, synthesis and tape-out.
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<PAGE> 10
PSG also provides design reuse consulting services. Customers for this
service typically have many IC designs for performing a variety of functions.
Ideally, to decrease the time to get a new product to market, where feasible,
the customer would like to incorporate its existing older designs into the new
product. However, those designs may not currently be in a form that is
well-suited for redeployment. Based on the principles of the Reuse Methodology
Manual, the focus of a typical consulting engagement is to modify the customer's
designs and design techniques and to organize them into easily accessible
electronic libraries, in order to facilitate later reuse.
The Library Services Group within PSG develops and supports silicon
libraries of logic functions used in developing ICs. The Library Services Group
develops silicon libraries that are optimized to our customer's semiconductor
process. The silicon libraries contain the models that are required by the EDA
design tools in order to design an IC. Since Synopsys' acquisition of Silicon
Architects in May 1995, Synopsys has offered a proprietary gate array IC
architecture, known as Cell-Based Array (CBA(TM)). This includes Macrocell
Libraries which are collections of low level elements that are combined together
to make a complete IC. Synopsys has entered into CBA license agreements with
many of the world's leading ASIC vendors and vertically integrated semiconductor
companies. In addition to licensing semiconductor manufacturers, Synopsys also
licenses a CBA design system to independent design houses and end users in order
to facilitate and increase the number of designs that target CBA technology.
Synopsys has expanded its offering of silicon libraries to include standard
cells and memories. The libraries developed by the Library Services Group within
PSG are optimized to work with the Synopsys EDA tools.
CUSTOMER SERVICE AND SUPPORT
Synopsys devotes substantial resources to providing customers with
technical support, customer education, and consulting services. The Company
believes that a high level of customer service and support is critical to the
adoption and successful utilization of its high-level design automation
methodology.
As a result of the continued growth of Synopsys' installed base, as well
as customer requests for education, support and consulting services, Synopsys'
service revenue has increased as a percentage of total revenue, representing
40%, 37% and 34% of total revenue in fiscal 1998, 1997 and 1996, respectively.
TECHNICAL SUPPORT
Technical support for the Company's products is provided through both
field- and corporate-based technical application engineering groups. Synopsys
provides customers with software updates and a formal problem identification and
resolution process through the Synopsys Technical Support Center. Synopsys'
central entry point of all customer inquiries is SolvNET(SM), a direct-access
service available worldwide, 24 hours per day, through electronic mail and the
World Wide Web that lets customers quickly seek answers to design questions or
more insight into design problems. SolvNET combines Synopsys' complete design
knowledge database with sophisticated information retrieval technology. Updated
daily, it includes documentation, design tips, and answers to user questions.
CUSTOMER EDUCATION SERVICES
Synopsys offers a number of workshops focused on high-level design,
simulation, behavioral synthesis, logic synthesis, and test. Regularly scheduled
workshops are offered in Mountain View, California; Austin, Texas; Burlington,
Massachusetts; Reading, England; Rungis, France; Munich, Germany; Tokyo and
Osaka, Japan; and Seoul, Korea. On-site workshops are available on a worldwide
basis at customers' facilities. To date, over 24,000 design engineers have been
trained in the use of Synopsys' products through participation in Synopsys
workshops.
PRODUCT WARRANTIES
Synopsys generally warrants its products to be free from defects in
media and to substantially conform to material specifications for a period of 90
days. Synopsys has not experienced significant returns to date.
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SUPPORT FOR INDUSTRY STANDARDS
Synopsys actively supports standards that it believes will help its
customers increase productivity and solve design problems, including support for
key standards that promote system-on-a-chip design and facilitate
interoperability of tools from different vendors.
Synopsys' products support the two most commonly used hardware
description languages, VHDL and Verilog HDL, and industry standard data formats
for the exchange of data between Synopsys' tools and other EDA products.
Synopsys is a member of the Virtual Socket Interface Alliance (VSIA), an
industry group formed to promote standards that facilitate the integration and
reuse of functional blocks of intellectual property, and has representatives on
the VSIA's Steering Working Group and several Development Working Groups. A
representative of Synopsys is on the Board of Directors of the standards groups
Open Verilog International, VHDL International, Open Model Forum, and the
steering committee of the Electronics Industry Association/EDIF. Synopsys
participates in standards activities conducted by these and other leading EDA
industry bodies.
To enhance interoperability, in fiscal 1998, Synopsys launched the
Tap-In program to provide open access to selected interfaces for Synopsys tools.
Synopsys has made its text-based synthesis library format, Liberty, as well as
its timing constraint format, SDC, available to all, including the Company's
competitors, on reasonable terms.
Synopsys' products are written mainly in the C language and utilize the
Motif and X11 standards for graphical user interfaces. Synopsys' software runs
principally under the UNIX operating system and is offered on the most widely
used workstation platforms, including those from Sun Microsystems,
Hewlett-Packard, IBM, Digital Equipment Corporation and Sony. Many of Synopsys'
products now run on the Windows 95/98 and Windows NT operating systems.
SALES, DISTRIBUTION AND BACKLOG
Synopsys markets its products and services primarily through its direct
sales and service force in over 30 offices in the United States and principal
international markets. Synopsys employs highly skilled engineers and technically
proficient sales persons capable of serving the sophisticated needs of the
customers' engineering and management staffs.
For fiscal years 1998, 1997 and 1996, international sales represented
39%, 41% and 42%, respectively, of Synopsys' total revenue. Additional
information relating to domestic and foreign operations is contained in Note 7
of Notes to Synopsys' Consolidated Financial Statements.
The Company has 21 sales/support centers throughout the United States.
Internationally, the Company has sales/support offices in Canada, Finland,
France, Germany, Hong Kong, India, Israel, Italy, Japan, Korea, the People's
Republic of China, Singapore, Sweden, Taiwan and the United Kingdom, including
regional headquarters offices in Germany, Japan and Singapore. On a limited
basis, the Company also utilizes manufacturer's representatives and
distributors. The Company has established such relationships in Australia,
Brazil, Hong Kong, India, Korea, Malaysia and Singapore.
Synopsys' backlog on November 1, 1998 was approximately $241.1 million,
compared to approximately $213.9 million on November 1, 1997. Upon consummation
of Synopsys' merger with Viewlogic, Viewlogic's backlog was added to that of
Synopsys. Viewlogic orders received subsequent to the merger were accepted under
the Synopsys order acceptance policy. No adjustments have been made to the
November 1, 1997 backlog number to account for differences between Viewlogic's
and Synopsys' methods of calculating backlog.
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Backlog consists of orders for system and software products sold under
perpetual and time-based licenses with customer requested ship dates within
three months, orders for customer training and consulting services which are
expected to be completed within one year, and subscription services, maintenance
and support with contract periods extending up to fifteen months.
The Company has not historically experienced significant cancellations
of orders. Customers frequently reschedule or revise the requested ship dates of
orders, however, which can have the effect of deferring recognition of revenue
for these orders beyond the expected time period.
RESEARCH AND DEVELOPMENT
The Company believes that its future performance will depend in large
part on its ability to maintain and enhance its current product lines, develop
new products, maintain technological competitiveness, and meet an expanding
range of customer requirements. In addition to product development teams, the
Company maintains an advanced research group that is responsible for exploring
new directions and applications of its core technologies, migrating new
technologies into the existing product lines, and maintaining strong research
relationships outside the Company within both industry and academia.
During fiscal years 1998, 1997 and 1996, research and development
expenses, net of capitalized software development costs, were $154.4 million,
$146.6 million and $120.0 million, respectively. Synopsys capitalized software
development costs of approximately $2.1 million, $4.2 million and $3.7 million
in fiscal 1998, 1997 and 1996, respectively. The Company anticipates that it
will continue to commit substantial resources to research and development in the
future.
MANUFACTURING
Synopsys' manufacturing operations consist of assembling, testing,
packaging and shipping its system and software products and documentation needed
to fulfill each order. Manufacturing is currently performed in Synopsys'
Mountain View, California and Beaverton, Oregon, facilities. Outside vendors
provide tape and CD-ROM duplication, printing of documentation and manufacturing
of packaging materials. Synopsys employees manufacture and test the hardware
modeling system products, with some sub-assembly performed by outside vendors.
Synopsys typically ships its software products, with either a permanent or
temporary access key, within 10 days of acceptance of customer purchase orders
and execution of software license agreements, unless the customer has requested
otherwise. For its hardware modeling products, Synopsys buys components and
assemblies in anticipation of orders and configures units to match orders,
typically shipping within one to ten weeks of order acceptance, unless the
customer has requested otherwise.
COMPETITION
The EDA industry is highly competitive. Synopsys competes against other
EDA vendors, and with customers' internally developed design tools and internal
design capabilities, for a share of the overall EDA budgets of the customers.
Synopsys' 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 IC design process. In order to remain successful against such competition,
Synopsys must continue to enhance its current products and bring to market new
products that address the increasingly sophisticated needs of its customers on a
timely and cost-effective basis. Synopsys also will have to expand its ability
to offer consulting services. The failure to enhance existing products, develop
or acquire new products, or to expand Synopsys' ability to offer such services
would have a material adverse effect on Synopsys' business, financial condition
and results of operations.
Technology advances and customer requirements are causing a change in
the nature of competition among EDA vendors. Increasingly, EDA companies compete
on the basis of "design flows" involving a broad range of
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<PAGE> 13
products (including both logic and physical design tools) and services rather
than on the basis of individual "point" tools performing a discrete phase of the
design process. No single EDA company currently offers its customers
industry-leading products in a complete design flow, although the Company and
its principal competitors are taking steps to fill gaps in their respective
design flows.
Synopsys offers a wide range of logic design tools but currently offers
a relatively limited range of physical design tools. In November 1998, Synopsys
merged with Everest Design Automation, Inc., a private company developing
physical design software. Synopsys will need to develop or acquire additional
physical design tools in order to offer a complete design flow. Synopsys is also
attempting to expand its capacity to offer professional services, but for the
foreseeable future will continue to have less capacity than Cadence to provide
such services.
The market for physical design tools is dominated by Cadence and Avant!,
both of which are attempting to complete their design flows. Cadence recently
acquired a private company offering synthesis and other logic design products
and certain physical design verification products from Lucent Technologies, both
of which will increase the direct competition between Synopsys and Cadence. In
addition, Cadence's acquisition of logic design products may lead to reductions
in purchases of Synopsys' logic design software by Cadence, which was one of
Synopsys' largest customers in fiscal 1998. Avant! also recently acquired a
private company offering logic synthesis software, which will increase the
direct competition between Synopsys and Avant!.
To meet competition, Synopsys will continue to enhance its product line
and promote the adoption of new products and methodologies. However, there can
be no assurance that Synopsys will be able to compete successfully against
current and future competitors or that competitive pressure faced by Synopsys
will not materially adversely affect its business, operating results and
financial condition.
PRODUCT SALES AND LICENSING AGREEMENTS
Synopsys typically licenses its software to customers under
non-exclusive license agreements that transfer title to the media only and that
restrict use of the software to internal purposes at specified sites. The
Company currently licenses the majority of its software as a network license
that allows a number of individual users to access the software on a defined
network. Software is available under a perpetual license or a time-based
license, usually with a term of one year. License fees are dependent on the type
of license, product mix and number of copies of each product required. On
certain products and services, the Company will collect royalty payments in
addition to license fees.
Synopsys offers its system products for sale or lease.
PROPRIETARY RIGHTS
The Company primarily relies upon a combination of copyright, patent,
trademark and trade secret laws and license and nondisclosure agreements to
establish and protect proprietary rights in its products. The source code for
Synopsys' products is protected both as a trade secret and as an unpublished
copyrighted work. However, it may be possible for third parties to develop
similar technology independently, provided they have not violated any
contractual agreements or intellectual property laws. In addition, effective
copyright and trade secret protection may be unavailable or limited in certain
foreign countries. Because the EDA industry is characterized by rapid
technological change, the Company believes that factors such as the
technological and creative skills of its personnel, new product developments,
frequent product enhancements, name recognition and reliable product
maintenance, coupled with the various forms of legal protection that are
available for its technology, provide an effective means for the Company to
establish and maintain a technology leadership position. The Company currently
holds several U.S. and foreign patents on some of the technologies included in
its products and will continue to pursue additional patents in the future.
Although the Company believes that its products, trademarks and other
proprietary rights do not infringe on the proprietary rights of third parties,
there can be no assurance that infringement claims will not be asserted against
the Company in the future or that any such claims will not require the Company
to enter into royalty arrangements or result in costly and time-consuming
litigation.
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EMPLOYEES
As of September 30, 1998, Synopsys had a total of 2,592 employees, of
whom 2,040 were based in the United States and 552 were based internationally.
Synopsys' future financial results depend, in part, upon the continued service
of its key technical and senior management personnel and its continuing ability
to attract and retain highly qualified technical and managerial personnel.
Competition for such personnel is intense. Experience at Synopsys is highly
valued in the EDA industry, and the Company's employees are recruited
aggressively by competitors and by start-up companies. The Company's salaries
are competitive in the market, but under certain circumstances, start-up
companies can offer more attractive stock option packages. As a result, the
Company has experienced, and may continue to experience, significant employee
turnover. There can be no assurance that Synopsys can retain its key managerial
and technical employees or that it can attract, assimilate or retain other
highly qualified technical and managerial personnel in the future. None of
Synopsys' employees is represented by a labor union. Synopsys has not
experienced any work stoppages and considers its relations with its employees to
be good.
ITEM 2. PROPERTIES
Synopsys' principal offices are located in four adjacent buildings in
Mountain View, California, which together provide approximately 400,000 square
feet of available space. This space is leased through February 2003. Within one
half mile of these buildings, in Sunnyvale, California, Synopsys occupies
approximately 200,000 square feet of space in two adjacent buildings, which is
under lease through 2007, and approximately 70,000 square feet of space in a
third building, which is under lease until April 2002.
To meet the Company's foreseeable expansion needs, Synopsys has acquired
seven acres between its Sunnyvale and Mountain View campuses and twenty-four
acres of undeveloped land in San Jose, California. In November 1998, Synopsys
acquired an additional nine acres of undeveloped land in San Jose for $9.5
million.
The Company leases approximately 67,000 square feet of space in
Beaverton, Oregon for administrative, marketing, research and development and
support activities. This facility is leased through March 2002.
The Company currently leases 21 other domestic sales offices throughout
the United States, as well as three remote engineering locations. Synopsys
currently leases international sales and service offices in Canada, Finland,
France, Germany, Hong Kong, India, Israel, Italy, Japan, Korea, the People's
Republic of China, Singapore, Sweden, Taiwan, and the United Kingdom. The
Company also leases a research and development facility in India.
The Company believes that its existing facilities are adequate for its
current needs and that additional space will be available as needed on
commercially acceptable terms.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of security holders during the
fourth quarter of the fiscal year covered by this Report.
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EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company and their ages, as of September
30, 1998, are as follows:
<TABLE>
<CAPTION>
Name Age Position
- --------------- -- -----------------------------------------------------------------------------------------
<S> <C> <C>
Aart J. de Geus 44 Chief Executive Officer and Chairman of the Board of Directors
Chi-Foon Chan 48 President, Chief Operating Officer and Director
William W. Lattin 58 Executive Vice President and Director
David P. Burow 49 Senior Vice President, High Level Verification Group
Raul Camposano 43 Senior Vice President and General Manager, Design Tools Group and Chief Technical Officer
Ernst W. Hirt 58 Senior Vice President, Human Resources and Facilities
Gary A. Larsen 65 Senior Vice President and General Manager, EPIC Technology Group
Paul Lippe 40 Senior Vice President, Business and Market Development and Corporate Secretary
Edward Ross 56 Senior Vice President, Professional Services Group
Robert Russo 53 Senior Vice President, Worldwide Sales and Services
Faysal Sohail 34 Senior Vice President, Corporate Strategic Planning
David Sugishita 50 Senior Vice President, Finance and Operations and Chief Financial Officer
</TABLE>
Dr. Aart J. de Geus co-founded Synopsys and currently serves as Chief
Executive Officer and Chairman of the Board of Directors. Since the inception of
Synopsys in December 1986 he has held a variety of positions including Senior
Vice President of Engineering and Senior Vice President of Marketing. From 1986
to 1992 Dr. de Geus served as Chairman of the Board. He served as President from
1992 to 1998. Dr. de Geus has served as Chief Executive Officer since January
1994 and has held the additional title of Chairman of the Board since February
1998. He has served as a Director since 1986. From 1982 to 1986, Dr. de Geus was
employed by General Electric Corporation, where he was the Manager of the
Advanced Computer-Aided Engineering Group. Dr. de Geus holds an M.S.E.E. from
the Swiss Federal Institute of Technology in Lausanne, Switzerland and a Ph.D.
in electrical engineering from Southern Methodist University.
Dr. Chi-Foon Chan joined Synopsys as Vice President of Application
Engineering & Services in May 1990. Since April 1997 he has served as Chief
Operating Officer and since February 1998 he has held the additional title of
President. Dr. Chan also became a Director of the Company in February 1998. From
September 1996 to February 1998 he served as Executive Vice President, Office of
the President. From February 1994 until April 1997 he served as Senior Vice
President, Design Tools Group and from October 1996 until April 1997 as Acting
Senior Vice President, Design Reuse Group. Additionally, he has held the titles
of Vice President, Engineering and General Manager, DesignWare Operations and
Sr. Vice President, Worldwide Field Organization. From March 1987 to May 1990,
Dr. Chan was employed by NEC Electronics, where his last position was General
Manager, Microprocessor Division. From 1977 to 1987, Dr. Chan held a number of
senior engineering positions at Intel Corporation. Dr. Chan holds an M.S. and
Ph.D. in computer engineering from Case Western Reserve University.
Dr. William W. Lattin is an Executive Vice President of Synopsys and has
been a Director of Synopsys since July 1995. Dr. Lattin joined Synopsys in
February 1994 in connection with Synopsys' merger with Logic Modeling
Corporation (LMC). He has served as Executive Vice President since July 1995.
From October 1994 to July 1995 he served as Senior Vice President, Corporate
Marketing, and from February 1994 until October 1994 as Senior Vice President,
Logic Modeling Group. From December 1992 to February 1994, Dr. Lattin served as
President, Chief Executive Officer and Director of LMC, and from May 1992 to
December 1992 he served as Chairman of the Board and Chief Executive Officer of
LMC. From 1986 to 1992, Dr. Lattin served as Chairman of the Board of Directors,
President and Chief Executive Officer of Logic Automation Inc., a predecessor of
LMC. Dr. Lattin holds a B.S.E.E. and an M.S.E.E. from the University of
California at Berkeley, and a Ph.D. in electrical engineering from Arizona State
University. Dr. Lattin is a Director of RadiSys Corporation, a supplier of
embedded computers, as well as a Director of Easy Street Online Services, an
internet service provider and a Trustee of the Oregon Graduate Institute.
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David P. Burow joined Synopsys in connection with the Company's merger
with Viewlogic in December 1997 and currently serves as Senior Vice President,
High Level Verification Group. He served as Sr. Vice President, Simulation Tools
Group from December 1997 to August 1998. Mr. Burow had served as Vice President
of Viewlogic's ASIC Group since October 1996. He joined Viewlogic in August 1995
as Vice President of the High Level Design Group after serving in a number of
key management positions from October 1991 through August 1995 at Silicon
Architects, which was acquired by Synopsys in May 1995. Preceding Silicon
Architects, Mr. Burow held other management positions within the EDA and
semiconductor industries, including President of CrossCheck, a test company;
General Manager of the Analog division at Dazix; and President of Simucad, Inc.,
a simulation company. Mr. Burow holds a B.S. in Engineering from Purdue
University and an M.B.A. from the University of Chicago.
Dr. Raul Camposano joined Synopsys in January 1994 and currently serves
as Senior Vice President, General Manager of the Design Tools Group and Chief
Technical Officer. From January 1997 to December 1997 he served as Senior Vice
President and General Manager, Design Tools Group. From May 1996 until January
1997 he served as Vice President, Engineering, Design Tools Group. From January
1996 until May 1996 he served as General Manager and Senior Director, Design
Planning Group, and from January 1994 until January 1996 as Director of
Engineering, Design Environment Group. Prior to joining Synopsys, Dr. Camposano
concurrently served as the Design Technology Director for the German National
Research Center for Computer Science and as Professor of Computer Science at the
University of Paderborn, Germany. Between 1986 and 1991, Dr. Camposano led the
project on high-level synthesis at the IBM T.J. Watson Research Center. Active
in the EDA professional community, he also serves on various technical program
committees and editorial boards worldwide and has published over 70 articles and
three books on electronic design automation. Dr. Camposano holds a B.S.E.E. from
the University of Chile, and a Ph.D. in computer science from the University of
Karlsruhe.
Ernst W. Hirt joined Synopsys in November 1997 and serves as Senior Vice
President, Human Resources and Facilities. Mr. Hirt was Vice President of Human
Resources at VLSI Technology, Inc. from March 1984 until he joined Synopsys. He
has also worked in high level Human Resources positions at Intel, Siemens,
Honeywell and General Electric. Mr. Hirt holds a Masters Degree in Economics
from the University of Cincinnati.
Gary A. Larsen, Senior Vice President and General Manager, EPIC
Technology Group, joined Synopsys nearly two years ago when EPIC Design
Technology (EPIC) merged with Synopsys. Prior to his current position, from July
1997 to March 1998, he was the Senior Vice President and Co-General Manager of
the EPIC Technology Group. From February 1997, the time of the Synopsys/EPIC
merger, to July 1997, he was Vice President, Marketing of the EPIC Technology
Group. From August 1994 to February 1997, Mr. Larsen held the position of Vice
President, Worldwide Sales of EPIC. Prior to that he was Vice President of the
ASIC Solutions Group at Cadence where he held a variety of managerial positions
from 1984 to 1994. Mr. Larsen holds a B.A. in Economics from Stanford
University.
Paul Lippe joined Synopsys in October 1992 and currently serves as
Senior Vice President, Business and Market Development (since May 1997) and as
Corporate Secretary (since 1992). From November 1996 until May 1997 he served as
Senior Vice President, Business Development and Legal, and from January 1995
until November 1996 as Vice President, Business Development and Legal. Prior to
1992, Mr. Lippe was employed by Solbourne Computer as Vice President, Corporate
Development, General Counsel and Secretary, and also served as Chairman of the
Colorado Air Quality Control Commission. Mr. Lippe holds a B.A. from Yale
College and a J.D. from Harvard Law School.
Dr. Edward Ross joined Synopsys in July 1998 as Senior Vice President
and General Manager of the Professional Services Group. Prior to joining
Synopsys, Dr. Ross served as President of Technology and Manufacturing at Cirrus
Logic since 1995, and President and Chief Executive Officer of Power
Integrations, Inc. from 1989 to 1995. Dr. Ross holds a B.S. in electrical
engineering from Drexel University and an M.S., M.A., and Ph.D., also in
electrical engineering, from Princeton University.
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<PAGE> 17
Robert Russo joined Synopsys in April 1993 and currently serves as
Senior Vice President, Worldwide Sales and Services. From June 1997 to April
1998 he served as Senior Vice President, Sales and Services for the Americas and
Europe. From April 1993 until June 1997 Mr. Russo served as Vice President,
North America Sales. Prior to joining Synopsys Mr. Russo held senior-level
management positions in sales and marketing with Cray Research, Stardent
Computers and Votan. Mr. Russo holds degrees in mechanical and aeronautical
engineering from New York Institute of Technology.
Faysal Sohail serves as Senior Vice President of Corporate Strategic
Planning. He previously served as Senior Vice President and General Manager,
Design Architects Group from January 1997 to September 1998. From June 1996 to
January 1997 he served as Vice President and General Manager of the Design Reuse
Group. Mr. Sohail is one of the founders of Silicon Architects, acquired by
Synopsys in 1995. Prior to the acquisition, he was Director of Marketing for
Silicon Architects. Prior to founding Silicon Architects, Mr. Sohail held
various managerial positions in development and marketing at Actel from 1986 to
1990 and LSI Logic from 1985 to 1986. Mr. Sohail holds a B.S. in computer
engineering from the University of Illinois.
David Sugishita joined Synopsys in June 1997 and currently serves as
Senior Vice President, Finance and Operations and Chief Financial Officer. From
1995 to 1997 he served as Senior Vice President of Finance and Administration
and Chief Financial Officer for Actel, and from 1994 to 1995 Mr. Sugishita was
Senior Vice President of Finance and Administration, Chief Financial Officer and
Treasurer for Micro Component Technology. From 1991 to 1994, he was Vice
President and Corporate Controller and Chief Accounting Officer for Applied
Materials. From 1982 to 1991 he served as Vice President of Finance,
Semiconductor Group for National Semiconductor. He holds a B.S. in finance from
San Jose State University and an M.B.A. from Santa Clara University. Mr.
Sugishita currently serves as a Director for Micro Component Technology, as well
as being active in the community by serving on two school boards.
There are no family relationships among any executive officers of the
Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this item is set forth on page 46 of the
Synopsys 1998 Annual Report to Stockholders and is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
Information required by Item 201 of Regulation S-K is set forth on page
1 of the Synopsys 1998 Annual Report to Stockholders and is incorporated herein
by reference.
In November 1998, the Company acquired all of the outstanding shares of
Everest Design Automation, Inc. (Everest), pursuant to a merger of a newly
formed, wholly-owned subsidiary of the Company with and into Everest in exchange
for 1.4 million shares of the Company's common stock and the assumption of
options to purchase (after conversion) 100,000 shares of the Company's common
stock. Such shares were not registered under the Securities Act of 1933 as
amended (the 1933 Act) in reliance upon the exemptions provided by Section 4(2)
of the 1933 Act and/or Regulation D promulgated thereunder as a transaction by
an issuer not involving a public offering.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is set forth on pages 14 through
25 of the Synopsys 1998 Annual Report to Stockholders and is incorporated herein
by reference.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Information relating to quantitative and qualitative disclosure about
market risk is set forth in Synopsys' 1998 Annual Report to Stockholders under
the captions "Interest Rate Risk" and "Foreign Currency Risk" in Management's
Discussion and Analysis of Financial Condition and Results of Operations, and
"Foreign Exchange Hedging" in Note 1 of the Notes to Consolidated Financial
Statements. Such information is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements required by this item are included
on pages 27 through 46 of the Synopsys 1998 Annual Report to Stockholders and
are incorporated herein by reference. With the exception of the aforementioned
information and the information incorporated in Items 5, 6 and 7, the Synopsys
1998 Annual Report to Stockholders is not to be deemed filed as part of this
Annual Report on Form 10-K. The report of Synopsys' Independent Auditors on
Synopsys' consolidated financial statements is included on page 26 of the
Synopsys 1998 Annual Report to Stockholders and is incorporated herein by
reference. The report of Synopsys' Independent Auditors on the consolidated
financial statement schedule required by this item is included in Exhibit 23
hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to Directors is included under the caption
"Proposal One --Election of Directors" in Synopsys' Notice of Annual Meeting and
Proxy Statement for Synopsys' annual meeting of stockholders to be held on March
1, 1999 (the "Proxy Statement") and is incorporated herein by reference.
Information with respect to Executive Officers is included under the heading
"Executive Officers of the Company" in Part I hereof after Item 4.
Information regarding delinquent filers pursuant to Item 405 of
Regulation S-K is included under the heading "Section 16(a) Beneficial Ownership
Reporting Compliance" under the caption "Additional Information" in the Proxy
Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the heading
"Executive Compensation" under the caption "Proposal One -- Election of
Directors" in the Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the heading
"Security Ownership of Certain Beneficial Owners and Management" under the
caption "Proposal One --Election of Directors" in the Proxy Statement and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption
"Proposal One --Election of Directors" in the Proxy Statement and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K:
18
<PAGE> 19
1. FINANCIAL STATEMENTS
The following documents are included in the Synopsys 1998 Annual Report
to Stockholders and incorporated by reference in Item 8:
<TABLE>
<CAPTION>
Page No.
in Annual
Report
---------
<S> <C>
Report of Independent Auditors 26
Consolidated Balance Sheets at September 30, 1998 and 1997 27
Consolidated Statements of Income for the years
ended September 30, 1998, 1997 and 1996 28
Consolidated Statements of Stockholders' Equity for the years
ended September 30, 1998, 1997 and 1996 29
Consolidated Statements of Cash Flows for the years
ended September 30, 1998, 1997 and 1996 30
Notes to Consolidated Financial Statements 31-46
</TABLE>
2. FINANCIAL STATEMENT SCHEDULE
The following schedule of the Company is included herein:
Valuation and Qualifying Accounts and Reserves (Schedule II)
All other schedules are omitted because they are not applicable or the amounts
are immaterial or the required information is presented in the consolidated
financial statements or notes thereto.
The following documents are included in Exhibit 23 hereto:
Exhibit 23.1 Report on Financial Statement Schedule of Synopsys, Inc.
Exhibit 23.2 Report of Deloitte and Touche LLP, Independent Auditors
Exhibit 23.3 Consent of KPMG Peat Marwick LLP, Independent Auditors
Exhibit 23.4 Consent of Deloitte and Touche LLP, Independent Auditors
3. EXHIBITS
See Item 14(c) below. The following compensatory plans are required to
be filed as exhibits. Certain of such plans have been incorporated by reference
from prior filings, as indicated under Item 14(c):
Exhibit 99.1 -- 1992 Stock Option Plan as restated and amended
Exhibit 99.2 -- Employee Stock Purchase Program, as restated and amended
Exhibit 99.3 -- International Employee Stock Purchase Program, as restated and
amended
Exhibit 99.4 -- Synopsys deferred compensation plan dated September 30, 1996
Exhibit 99.5 -- 1994 Non-Employee Directors Stock Option Plan, as restated and
amended
Exhibit 99.6 -- Form of Executive Employment Agreement dated October 1, 1997
Exhibit 99.7 -- Schedule of Executive Employment Agreements
Exhibit 99.8 -- 1998 Nonstatutory Stock Option Plan
(b) Reports on Form 8-K
Report on Form 8-K, filed on November 16, 1998 for the purpose of filing
the Company's press release announcing its financial results for the quarter and
fiscal year ended September 30, 1998, including condensed consolidated
statements of income and balance sheets.
19
<PAGE> 20
(c) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- --------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Merger dated October 14, 1997, by the Company,
Post Acquisition Corp. and Viewlogic Systems, Inc.(10)
3.1 Third Amended and Restated Certificate of Incorporation(8)
3.2 Amendment to Restated Certificate of Incorporation(8)
3.3 Restated Bylaws of Synopsys, Inc.(13)
4.1 Preferred Shares Rights Agreement dated October 24, 1997(9)
4.3 Specimen Common Stock Certificate(1)
10.1 Form of Indemnification Agreement(1)
10.2 Director's and Officer's Insurance and Company Reimbursement Policy(1)
10.6 Lease Agreement, dated August 17, 1990, between the Company and John
Arrillaga, Trustee, or his successor trustee, UTA dated July 20,
1977 (John Arrillaga Separate Property Trust), as amended, and
Richard T. Peery, Trustee, or his successor trustee, UTA dated July
20, 1977 (Richard T. Peery Separate Property Trust), as amended(1)
10.7 Lease Agreement, dated March 29, 1991, between the Company and John
Arrillaga, Trustee, or his successor trustee, UTA dated July 20,
1977 (John Arrillaga Separate Property Trust), as amended, and
Richard T. Peery, Trustee, or his successor trustee, UTA dated July
20, 1977 (Richard T. Peery Separate Property Trust), as amended(1)
10.15 Lease Agreement, dated June 16, 1992, between the Company and John
Arrillaga, Trustee, or his successor trustee, UTA dated July 20,
1977 (John Arrillaga Separate Property Trust), as amended, and
Richard T. Peery, Trustee, or his successor trustee, UTA dated July
20, 1977 (Richard T. Peery Separate Property Trust), as amended(2)
10.16 Lease Agreement, dated June 23, 1993, between the Company and John
Arrillaga, Trustee, or his successor trustee, UTA dated July 20,
1977 (John Arrillaga Separate Property Trust), as amended, and
Richard T. Peery, Trustee, or his successor trustee, UTA dated July
20, 1977 (Richard T. Peery Separate Property Trust), as amended(3)
10.21 Lease Agreement, August 24, 1995, between the Company and John
Arrillaga, Trustee, or his successor trustee, UTA dated July 20,
1977 (John Arrillaga Separate Property Trust), as amended, and
Richard T. Peery, Trustee, or his successor trustee, UTA dated July
20, 1977 (Richard T. Peery Separate Property Trust), as amended(4)
10.25 Amendment No. 5 to Lease, dated October 4, 1995, to Lease Agreement
dated August 17, 1990, between the Company and John
Arrillaga,Trustee, or his successor trustee, UTA dated July 20, 1997
(Arrillaga Family Trust), and Richard T. Peery, Trustee, or his
successor trustee, UTA dated July 20, 1997 (Richard T. Peery
Separate Property Trust), as amended(5)
10.26 Amendment No. 3 to Lease, dated October 4, 1995, to Lease Agreement
dated June 16, 1992, between the Company and John Arrillaga,
Trustee, or his successor trustee, UTA dated July 20, 1997
(Arrillaga Family Trust), and Richard T. Peery, Trustee, or his
successor trustee, UTA dated July 20, 1997 (Richard T. Peery
Separate Property Trust), as amended(5)
10.27 Amendment No. 2 to Lease, dated October 4, 1995, to Lease Agreement
dated June 23, 1993, between the Company and John Arrillaga,
Trustee, or his successor trustee, UTA dated July 20, 1997
(Arrillaga Family Trust), and Richard T. Peery, Trustee, or his
successor trustee, UTA dated July 20, 1997 (Richard T. Peery
Separate Property Trust), as amended(5)
10.28 Lease dated January 2, 1996 between the Company and Tarigo-Paul, a
California Limited Partnership(6)
13.1 Portions of the Annual Report to Stockholders for fiscal year ended
September 30, 1998, expressly incorporated by reference herein
21.1 Subsidiaries of the Company
23.1 Report on Financial Statement Schedule
23.2 Report of Deloitte and Touche LLP, Independent Auditors (related to
the financial statements of EPIC Design Technology, Inc.)
23.3 Consent of KPMG Peat Marwick LLP, Independent Auditors
23.4 Consent of Deloitte and Touche LLP, Independent Auditors
</TABLE>
20
<PAGE> 21
<TABLE>
<S> <C>
24.1 Power of Attorney (see page 23)
27.1-
27.8 Financial Data Schedules
99.1 1992 Stock Option Plan, as amended and restated(7)
99.2 Employee Stock Purchase Program, as amended and restated(13)
99.3 International Employee Stock Purchase Plan, as amended and
restated(13)
99.4 Synopsys deferred compensation plan dated September 30, 1996(8)
99.5 1994 Non-Employee Directors Stock Option Plan, as amended and
restated(13)
99.6 Form of Executive Employment Agreement dated October 1, 1997(11)
99.7 Schedule of Executive Employment Agreements(12)
99.8 1998 Nonstatutory Stock Option Plan(14)
</TABLE>
- ---------------
(1) Incorporated by reference to an exhibit of the same number filed with the
Company's Registration Statement on Form S-1 (File No. 33-45138) which became
effective February 24, 1992
(2) Incorporated by reference to an exhibit of the same number filed with the
Company's Report on Form 10-K for the year ended September 30, 1992
(3) Incorporated by reference to an exhibit of the same number filed with the
Company's Report on Form 10-K for the year ended September 30, 1993
(4) Incorporated by reference to an exhibit of the same number filed with the
Company's Report on Form 10-K for the year ended September 30, 1995
(5) Incorporated by reference to an exhibit of the same number filed with the
Company's Report on Form 10-Q for the quarterly period ended December 31, 1995
(6) Incorporated by reference to an exhibit of the same number filed with the
Company's Report on Form 10-Q for the quarterly period ended March 31, 1996
(7) Incorporated by reference to the Company's Registration Statement on Form
S-8, filed on May 3, 1996
(8) Incorporated by reference to an exhibit to the Registration Statement on
Form S-4 (File No. 333-21129) of Synopsys, Inc. as filed with the Securities and
Exchange Commission on February 5, 1997
(9) Incorporated by reference to Exhibit 1 to the Company's Registration
Statement on Form 8-A (File No. 000-19807) of Synopsys, Inc. as filed with the
Securities and Exchange Commission on October 31, 1997
(10) Incorporated by reference to Annex A to the form of prospectus contained in
the Registration Statement on Form S-4 (File No. 333-39713) of Synopsys, Inc. as
filed with the Securities and Exchange Commission on November 7, 1997
(11) Incorporated by reference to Exhibit 10.29(a) in the Company's quarterly
report on Form 10-Q (File No. 000-19807) as filed with the Securities and
Exchange Commission on February 13, 1998
(12) Incorporated by reference to Exhibit 10.29(a) in the Company's quarterly
report on Form 10-Q (File No. 000-19807) as filed with the Securities and
Exchange Commission on February 13, 1998
(13) Incorporated by reference to an exhibit with the same number filed with the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1997 (File no. 000-198007)
(14) Incorporated by reference to Exhibit 10.3 in the Company's Registration
Statement on Form S-8 (File No. 333-50947) as filed with the Securities and
Exchange Commission on April 24, 1998
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SYNOPSYS, INC.
By /s/ AART J. DE GEUS
----------------------------------------------
Aart J. de Geus
Chief Executive Officer and Chairman
of the Board of Directors
(Principal Executive Officer)
By /s/ DAVID SUGISHITA
----------------------------------------------
David Sugishita
Senior Vice President, Finance and Operations,
and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: December 23, 1998
22
<PAGE> 23
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Aart J. de Geus and David Sugishita, and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Report on Form 10-K, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof. Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated:
<TABLE>
<S> <C> <C>
President, Chief Operating Officer
/s/ CHI-FOON CHAN and Director December 23, 1998
- ------------------------------
Chi-Foon Chan
/s/ WILLIAM W. LATTIN Executive Vice President and Director December 23, 1998
- ------------------------------
William W. Lattin
/s/ DEBORAH A. COLEMAN Director December 23, 1998
- ------------------------------
Deborah A. Coleman
/s/ HARVEY C. JONES, JR. Director December 23, 1998
- ------------------------------
Harvey C. Jones, Jr.
/s/ A. RICHARD NEWTON Director December 23, 1998
- ------------------------------
A. Richard Newton
/s/ STEVEN C. WALSKE Director December 23, 1998
- ------------------------------
Steven C. Walske
</TABLE>
23
<PAGE> 24
SCHEDULE II
SYNOPSYS, INC.
--------------------
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
<TABLE>
<CAPTION>
Balance at Additions Charged Balance at
Beginning Charged to to Other End of
of Period Expense(1) Accounts(2) Deductions(3) Period
---------- ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful
Accounts and Sales Returns:
1998 $ 8,213 $ 8,431 $(2,098) $ 1,336 $13,210
1997 $ 5,138 $ 5,242 $ (75) $ 2,092 $ 8,213
1996 $ 4,484 $ 1,813 $ (334) $ 825 $ 5,138
</TABLE>
- --------------------
(1) Includes $830 and $1,576 charged to other income in fiscal 1997 and 1996,
respectively.
(2) Fiscal 1998 includes a $2,049 reduction due to the sale of Viewlogic
Systems, Inc. Other amounts are translation and other adjustments.
(3) Accounts written off, net of recoveries.
24
<PAGE> 25
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- --------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Merger dated October 14, 1997, by the Company,
Post Acquisition Corp. and Viewlogic Systems, Inc.(10)
3.1 Third Amended and Restated Certificate of Incorporation(8)
3.2 Amendment to Restated Certificate of Incorporation(8)
3.3 Restated Bylaws of Synopsys, Inc.(13)
4.1 Preferred Shares Rights Agreement dated October 24, 1997(9)
4.3 Specimen Common Stock Certificate(1)
10.1 Form of Indemnification Agreement(1)
10.2 Director's and Officer's Insurance and Company Reimbursement
Policy(1)
10.6 Lease Agreement, dated August 17, 1990, between the Company and John
Arrillaga, Trustee, or his successor trustee, UTA dated July 20,
1977 (John Arrillaga Separate Property Trust), as amended, and
Richard T. Peery, Trustee, or his successor trustee, UTA dated July
20, 1977 (Richard T. Peery Separate Property Trust), as amended(1)
10.7 Lease Agreement, dated March 29, 1991, between the Company and John
Arrillaga, Trustee, or his successor trustee, UTA dated July 20,
1977 (John Arrillaga Separate Property Trust), as amended, and
Richard T. Peery, Trustee, or his successor trustee, UTA dated July
20, 1977 (Richard T. Peery Separate Property Trust), as amended(1)
10.15 Lease Agreement, dated June 16, 1992, between the Company and John
Arrillaga, Trustee, or his successor trustee, UTA dated July 20,
1977 (John Arrillaga Separate Property Trust), as amended, and
Richard T. Peery, Trustee, or his successor trustee, UTA dated July
20, 1977 (Richard T. Peery Separate Property Trust), as amended(2)
10.16 Lease Agreement, dated June 23, 1993, between the Company and John
Arrillaga, Trustee, or his successor trustee, UTA dated July 20,
1977 (John Arrillaga Separate Property Trust), as amended, and
Richard T. Peery, Trustee, or his successor trustee, UTA dated July
20, 1977 (Richard T. Peery Separate Property Trust), as amended(3)
10.21 Lease Agreement, August 24, 1995, between the Company and John
Arrillaga, Trustee, or his successor trustee, UTA dated July 20,
1977 (John Arrillaga Separate Property Trust), as amended, and
Richard T. Peery, Trustee, or his successor trustee, UTA dated July
20, 1977 (Richard T. Peery Separate Property Trust), as amended(4)
10.25 Amendment No. 5 to Lease, dated October 4, 1995, to Lease Agreement
dated August 17, 1990, between the Company and John Arrillaga,
Trustee, or his successor trustee, UTA dated July 20, 1997
(Arrillaga Family Trust), and Richard T. Peery, Trustee, or his
successor trustee, UTA dated July 20, 1997 (Richard T. Peery
Separate Property Trust), as amended(5)
10.26 Amendment No. 3 to Lease, dated October 4, 1995, to Lease Agreement
dated June 16, 1992, between the Company and John Arrillaga,
Trustee, or his successor trustee, UTA dated July 20, 1997
(Arrillaga Family Trust), and Richard T. Peery, Trustee, or his
successor trustee, UTA dated July 20, 1997 (Richard T. Peery
Separate Property Trust), as amended(5)
10.27 Amendment No. 2 to Lease, dated October 4, 1995, to Lease Agreement
dated June 23, 1993, between the Company and John Arrillaga,
Trustee, or his successor trustee, UTA dated July 20, 1997
(Arrillaga Family Trust), and Richard T. Peery, Trustee, or his
successor trustee, UTA dated July 20, 1997 (Richard T. Peery
Separate Property Trust), as amended(5)
10.28 Lease dated January 2, 1996 between the Company and Tarigo-Paul, a
California Limited Partnership(6)
13.1 Portions of the Annual Report to Stockholders for fiscal year ended
September 30, 1998, expressly incorporated by reference herein
21.1 Subsidiaries of the Company
23.1 Report on Financial Statement Schedule
23.2 Report of Deloitte and Touche LLP, Independent Auditors (related to
the financial statements of EPIC Design Technology, Inc.)
23.3 Consent of KPMG Peat Marwick LLP, Independent Auditors
23.4 Consent of Deloitte and Touche LLP, Independent Auditors
</TABLE>
<PAGE> 26
<TABLE>
<S> <C>
24.1 Power of Attorney (see page 23)
27.1-
27.8 Financial Data Schedules
99.1 1992 Stock Option Plan, as amended and restated(7)
99.2 Employee Stock Purchase Program, as amended and restated(13)
99.3 International Employee Stock Purchase Plan, as amended and
restated(13)
99.4 Synopsys deferred compensation plan dated September 30, 1996(8)
99.5 1994 Non-Employee Directors Stock Option Plan, as amended and
restated(13)
99.6 Form of Executive Employment Agreement dated October 1, 1997(11)
99.7 Schedule of Executive Employment Agreements (12)
99.8 1998 Nonstatutory Stock Option Plan(14)
</TABLE>
- ---------------
(1) Incorporated by reference to an exhibit of the same number filed with the
Company's Registration Statement on Form S-1 (File No. 33-45138) which became
effective February 24, 1992
(2) Incorporated by reference to an exhibit of the same number filed with the
Company's Report on Form 10-K for the year ended September 30, 1992
(3) Incorporated by reference to an exhibit of the same number filed with the
Company's Report on Form 10-K for the year ended September 30, 1993
(4) Incorporated by reference to an exhibit of the same number filed with the
Company's Report on Form 10-K for the year ended September 30, 1995
(5) Incorporated by reference to an exhibit of the same number filed with the
Company's Report on Form 10-Q for the quarterly period ended December 31, 1995
(6) Incorporated by reference to an exhibit of the same number filed with the
Company's Report on Form 10-Q for the quarterly period ended March 31, 1996
(7) Incorporated by reference to the Company's Registration Statement on Form
S-8, filed on May 3, 1996
(8) Incorporated by reference to an exhibit to the Registration Statement on
Form S-4 (File No. 333-21129) of Synopsys, Inc. as filed with the Securities and
Exchange Commission on February 5, 1997
(9) Incorporated by reference to Exhibit 1 to the Company's Registration
Statement on Form 8-A (File No. 000-19807) of Synopsys, Inc. as filed with the
Securities and Exchange Commission on October 31, 1997
(10) Incorporated by reference to Annex A to the form of prospectus contained in
the Registration Statement on Form S-4 (File No. 333-39713) of Synopsys, Inc. as
filed with the Securities and Exchange Commission on November 7, 1997
(11) Incorporated by reference to Exhibit 10.29(a) in the Company's quarterly
report on Form 10-Q (File No. 000-19807) as filed with the Securities and
Exchange Commission on February 13, 1998
(12) Incorporated by reference to Exhibit 10.29(a) in the Company's quarterly
report on Form 10-Q (File No. 000-19807) as filed with the Securities and
Exchange Commission on February 13, 1998
(13) Incorporated by reference to an exhibit with the same number filed with the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1997 (File no. 000-198007)
(14) Incorporated by reference to Exhibit 10.3 in the Company's Registration
Statement on Form S-8 (File No. 333-50947) as filed with the Securities and
Exchange Commission on April 24, 1998
<PAGE> 1
Exhibit 13.1
SYNOPSYS, INC.
FINANCIAL SUMMARY
<TABLE>
<CAPTION>
As of or For The Year Ended September 30,
(In thousands, except per share data) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue $717,940 $646,956 $525,599 $410,644 $328,644
Income before provision for income taxes and
extraordinary items (1) 119,117 133,029 40,228 59,126 31,319
Extraordinary items, net of income tax expense 28,404 -- -- -- --
Provision for income taxes 55,819 51,043 23,426 22,771 17,210
Net income 91,702 81,986 16,802 36,355 14,109
Earnings per share (2)
Basic 1.40 1.31 0.28 0.64 0.30
Diluted 1.34 1.25 0.27 0.59 0.24
Working capital 500,340 335,790 238,942 221,425 138,748
Total assets 946,627 768,589 584,853 446,443 336,897
Long-term debt 13,138 9,191 15,974 63 --
Stockholders' equity 660,387 501,543 350,547 287,362 195,297
</TABLE>
(1) Includes charges of $33.1 million, $5.5 million, $64.5 million, $12.5
million and $5.9 million for the years ended September 30, 1998, 1997, 1996,
1995 and 1994, respectively, for in-process research and development and
other costs. Includes merger-related and other costs of $51.0 million, $11.4
million and $7.4 million for the years ended September 30, 1998, 1997 and
1994, respectively.
(2) The Company adopted Statement of Financial Accounting Standards No. 128
(SFAS 128) on October 1, 1997. Earnings per share amounts for all periods
presented have been restated to conform to SFAS 128 requirements.
1
<PAGE> 2
SYNOPSYS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and related notes included elsewhere herein as well as the
section entitled "Factors That May Affect Future Results." Except for the
historical information presented, the following discussion contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed below in "Factors That May Affect Future Results." In addition,
past results and trends should not be used by investors to anticipate future
results and trends.
RESULTS OF OPERATIONS
Mergers
Subsequent to fiscal 1998, the Company signed a definitive agreement to merge
with Everest Design Automation, Inc. (Everest), a developer of integrated
circuit routing software and related technology. The Company will exchange
approximately 1.4 million shares of its common stock for all the outstanding
stock of Everest and will reserve approximately 100,000 shares of its common
stock for issuance under Everest's stock option plan, which the Company will
assume in the transaction. The business combination will be accounted for as a
pooling-of-interests. The Board of Directors rescinded the Company's stock
repurchase program in order to comply with pooling-of-interests accounting
rules. Retained earnings will be restated as of October 1, 1998 to reflect the
pooling-of-interests combination.
In December 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 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 consolidated financial
statements have been restated to include the financial position and results of
Viewlogic for all periods presented. On October 2, 1998, the Company sold
Viewlogic Systems, Inc. (VSI), the printed circuit board (PCB) /Systems design
segment of the Viewlogic business to a management-led buy-out group for $51.9
million in cash. As a result of the transaction, the Company recorded an
extraordinary gain of $26.5 million, net of income tax expense, in the fourth
quarter of fiscal 1998. The Company retained a minority investment of 14.9% of
the fully diluted equity in the new company (See Extraordinary Items).
In February 1997, the Company issued approximately 10.3 million 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 1.5 million shares of the
Company's common stock. The EPIC merger was accounted for as a
pooling-of-interests, and accordingly, the Company's consolidated financial
statements have been restated to include the financial position and results of
EPIC for all periods presented.
Acquisitions
In July 1998, the Company acquired Systems Science, Inc. (SSI), a developer of
advanced tools for electronic design verification and test. The acquisition was
accounted for as a purchase with the Company exchanging a combination of cash of
$26.0 million and notes of $12.0 million. In addition, the Company reserved
approximately 318,000 shares of its common stock for issuance under SSI's stock
option plan, which the Company assumed in the acquisition. The total purchase
price of $47.1 million was allocated to the acquired assets and liabilities
based on their estimated fair values as of the date of the acquisition. This
includes allocations of $18.2 million to goodwill and other intangible assets,
which are being amortized on a straight-line basis, generally over a five-year
period. Approximately $28.9 million was allocated to in-process research and
development and other costs and charged to operations.
In October 1997, the Company acquired two small privately held companies in the
EDA industry, each of which has been accounted for as a purchase. 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 other costs and charged to operations.
Pro forma results of operations have not been presented since the effects of the
acquisitions were not material to the Company's consolidated financial position,
results of operations or cash flows for the periods presented.
2
<PAGE> 3
Revenue
Revenue consists of fees for licenses and subscriptions of the Company's
software products, sales of system products, maintenance and support, customer
training, and consulting. The Company's revenue increased by 11% to $717.9
million in fiscal 1998 from $647.0 million in fiscal 1997 and by 23% from $525.6
million in fiscal 1996 compared to fiscal 1997. The percentage of the Company's
total revenue attributable to software and system products decreased to 60% in
fiscal 1998 from 63% in fiscal 1997 and 66% in fiscal 1996, primarily 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.
Product revenue increased by 6% to $431.0 million in fiscal 1998 from $408.3
million in fiscal 1997 and by 18% from $346.1 million in fiscal 1996 compared to
fiscal 1997. For each of the years, these increases were primarily due to
increased worldwide licensing and sales of the Company's EDA software products.
Service revenue increased by 20% to $287.0 million in fiscal 1998 from $238.7
million in fiscal 1997 and by 33% from $179.5 million in fiscal 1996 compared to
fiscal 1997. For each of the years, these increases were primarily attributable
to the renewal of maintenance and support contracts for EDA products and growth
in customer training and consulting services.
In 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 (See Note 1 of Notes to
Consolidated Financial Statements). The effect of the adoption of SOP 97-2 was
not material.
Revenue from international operations was $279.8 million, $262.2 million and
$221.5 million, or 39%, 41% and 42% of total revenue in fiscal 1998, 1997 and
1996, respectively. The decrease in international revenue as a percentage of
total revenue in fiscal 1998 compared to fiscal 1997 was due primarily to
decreased revenue in Asia/Pacific and Japan as a result of the economic turmoil
in many Asia/Pacific markets. This decrease was partially offset by growth in
European revenue during fiscal 1998. The decrease in international revenue as a
percentage of total revenue in fiscal 1997 compared to fiscal 1996 was due
primarily to a decrease in revenue in Japan, which was attributable to a decline
in the value of the yen versus the U.S. dollar.
Cost of Revenue
Cost of product revenue includes cost of production personnel, product
packaging, documentation, amortization of capitalized software development
costs, and costs of the Company's system products. The cost of internally
developed capitalized software is amortized based on the greater of the ratio of
current product revenue to the total of current and anticipated product revenue
or the straight-line method over the software's estimated economic life of
approximately two years. Cost of product revenue remained relatively flat at 5%
of total revenue in fiscal 1998 compared to 6% of total revenue in fiscal 1997
and 5% of total revenue in fiscal 1996. Cost of service revenue includes
personnel and the related costs associated with providing training and
consulting services. Cost of service revenue as a percentage of total revenue
was 8% of total revenue in both fiscal 1998 and 1997 and 7% in fiscal 1996. The
increase in cost of service from fiscal 1996 was due to the Company's investment
in the infrastructure required to expand its training and consulting business
during fiscal 1998 and 1997.
Research and Development
Research and development expenses increased by 5% to $154.4 million in fiscal
1998 from $146.6 million in fiscal 1997 and by 22% from $120.0 million in fiscal
1996 compared to fiscal 1997, net of capitalized software development costs.
Research and development expenses represented 22%, 23% and 23% of total revenue
in fiscal 1998, 1997 and 1996, respectively. The increase in absolute dollars
reflects the Company's ongoing research and development efforts in a wide
variety of areas, which the Company believes are essential to developing
best-in-class EDA solutions and maintaining technological leadership. A
significant portion of the increase for each fiscal year was due to the addition
of personnel and personnel-related costs. Also, fiscal 1998 included an
additional week of operations, which was partially offset by synergies realized
from the integration of Viewlogic into Synopsys' operations. The Company
anticipates that it will continue to commit substantial resources to research
and development in the future, provided that it is able to continue to hire and
retain a sufficient number of qualified personnel. If the Company believes that
it is unable to enter a particular market in a timely manner, it may license
technology from other businesses or acquire other businesses as an alternative
to internal research and development. For fiscal 1999, the Company expects that
research and development expenses as a percentage of total revenue will be at or
slightly below the fiscal 1998 level.
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<PAGE> 4
Sales and Marketing
Sales and marketing expenses increased by 2% to $245.4 million in fiscal 1998
from $240.6 million in fiscal 1997 and by 17% from $204.9 million in fiscal 1996
compared to fiscal 1997. Sales and marketing expenses represented 34%, 37% and
39% of total revenue in fiscal 1998, 1997 and 1996, respectively. Total expenses
increased in absolute dollars in each fiscal year primarily from personnel and
personnel-related costs due to the continued growth of the Company's worldwide
sales and marketing organizations and an increase in professional services.
Also, fiscal 1998 included an additional week of operations, which was partially
offset by synergies realized from the integration of Viewlogic into Synopsys'
operations. The Company expects that for fiscal 1999, sales and marketing
expenses as a percentage of total revenue will be below the fiscal 1998 level.
General and Administrative
General and administrative expenses remained relatively constant at $47.2
million in fiscal 1998 compared to $47.3 million in fiscal 1997. General and
administrative expenses increased in absolute dollars by 13% from $42.0 million
in fiscal 1996 compared to fiscal 1997. As a percentage of total revenue,
general and administrative expenses were 7%, 7% and 8% in fiscal 1998, 1997 and
1996, respectively. In fiscal 1998, general and administrative expenses included
an additional week of operations; however, the associated expense increases were
offset by synergies realized from the integration of Viewlogic into Synopsys'
operations. In fiscal 1997, general and administrative expenses increased
primarily due to an increase in personnel and personnel-related costs necessary
to support the Company's infrastructure. The Company expects that for fiscal
1999, general and administrative expenses as a percentage of total revenue will
be slightly below the fiscal 1998 level.
Merger-Related and Other Costs
As a result of various business combinations accounted for as a
pooling-of-interests in fiscal 1998 and 1997, the Company incurred
merger-related and other costs of $51.0 million and $11.4 million, respectively.
These expenses related to transaction costs, employee termination and transition
costs, legal costs, write-off of equipment and other assets, and redundant
facility and other costs. As of September 30, 1998, there was a balance of $3.5
million in accrued liabilities for expected future cash expenditures, which are
expected to be paid in the next six months.
In-Process Research and Development and Other Costs
During fiscal 1998, the Company acquired three businesses for an aggregate total
of $51.3 million. Of the aggregate purchase price, $33.1 million was allocated
to in-process research and development and other costs and charged to
operations. Each of these business combinations was accounted for as a purchase.
Other Income, Net
Other income, net was $26.0 million, $24.4 million and $11.6 million, or 4%, 4%
and 2% of total revenue in fiscal 1998, 1997 and 1996, respectively. Other
income, net increased in each fiscal year primarily due to higher average
invested cash and short-term investment balances. In addition, in fiscal 1998
and 1997 other income, net increased due to gains realized on sales of equity
investments.
Interest Rate Risk
The Company's exposure to market risk for changes in interest rates relates
primarily to its investment portfolio and long-term debt. The Company does not
use derivative financial instruments for speculative or trading purposes. The
Company places its investments in instruments that meet high credit quality
standards, as specified in the Company's investment policy. The policy also
limits the amount of credit exposure to any one issue, issuer and type of
instrument. The Company does not expect any material loss with respect to its
investment portfolio.
The table below presents the carrying value and related weighted-average
interest rates for the Company's investment portfolio. The carrying value
approximates fair value at September 30, 1998. In accordance with the Company's
investment policy, all investments mature in fifteen months or less. All of the
long-term investments mature in December 1999.
Principal (Notional) Amounts in U.S. Dollars:
4
<PAGE> 5
<TABLE>
<CAPTION>
Carrying Average
(in thousands, except interest rates) Amount Interest Rate
--------- -------------
<S> <C> <C>
Cash equivalents - fixed rate $ 23,806 3.47%
Short-term investments - fixed rate 440,082 3.83%
Long-term investments - variable rate 255 3.99%
--------
Total investment securities 464,143 3.81%
Money market funds - variable rate 37,699 3.69%
--------
Total interest bearing instruments $501,842 3.80%
========
</TABLE>
(See Note 3 in accompanying notes to consolidated financial statements for
additional information on investment maturity dates, long-term debt and equity
price risk related to the Company's long-term investments.)
Foreign Currency Risk
The Company entered into foreign exchange forward contracts to reduce its
exposure to currency fluctuations on intercompany foreign currency denominated
balance sheet positions during fiscal 1998. The objective of these contracts is
to neutralize the impact of the foreign currency exchange rate movements on the
Company's operating results. The Company's accounting policy for these
instruments is based on the Company's designation of such instruments as hedging
transactions. The Company does not use derivative financial instruments for
speculative or trading purposes. The Company had $38.4 million of short-term
foreign exchange forward contracts denominated in Japanese, Italian, German,
French, and British currencies which approximated the fair value of such
contracts and their underlying transactions as of September 30, 1998. Looking
forward, the Company does not expect any material adverse effect on its
consolidated financial position, results of operations, or cash flows resulting
from the use of these instruments. There can be no assurance that these
strategies will be effective or that transaction losses can be minimized or
forecasted accurately.
The following table provides information about the Company's foreign exchange
forward contracts at September 30, 1998. Due to the short-term nature of these
contracts, the contract rate approximates the weighted-average contractual
foreign currency exchange rate and the amount in U.S. dollars approximates the
fair value of the contract at September 30, 1998. These forward contracts mature
in approximately thirty days.
Short-Term Forward Contracts to Sell and Buy Foreign Currencies in
U.S. Dollars Related to Intercompany Balances:
<TABLE>
<CAPTION>
Contract
(in thousands, except for average contract rates) Amount Rate
-------- ---------
<S> <C> <C>
Forward Contracts:
Japanese yen $23,143 135.72
British pound sterling 1,010 1.70
German mark 4,835 1.67
French franc 8,565 5.60
Italian lira 867 1,658.20
</TABLE>
The unrealized gain (loss) on the outstanding forward contracts at September 30,
1998 was immaterial to the Company's consolidated financial statements. The
realized gain (loss) on these contracts as they matured was not material to the
Company's consolidated financial position, results of operations, or cash flows
for the periods presented.
Extraordinary Items
During the first quarter 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 the cancellation of certain interest bearing notes
issued by the Company to International Business Machines Corporation (IBM).
During the fourth quarter of fiscal 1998, Synopsys completed the partial
spin-off of Viewlogic Systems, Inc. (VSI), a company that owns the printed
circuit board (PCB)/Systems business of Viewlogic. Synopsys' merger with
Viewlogic in December 1997 was accounted for as a pooling-of-interests. The
spin-off was accounted for as an extraordinary item, as provided by paragraph 60
of Accounting Principles Board Opinion No. 16 (APB 16), and Synopsys recorded an
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<PAGE> 6
extraordinary gain, net of income tax expense, of $26.5 million in fiscal 1998
in respect to the spin-off. Synopsys retained common stock equal to 14.9 percent
of the fully diluted equity in VSI.
The Company concluded that the disposition of VSI was consistent with its
treatment of the Synopsys-Viewlogic merger as a pooling-of-interests. APB 16
(paragraph 48(c)) states that a condition of pooling-of-interests treatment is
that at the time of the merger, management did not plan to dispose of any
significant part of the assets of the merged entity. The Company concluded that
this condition was met because, on the date of the Synopsys-Viewlogic merger,
the Company did not plan to dispose of the PCB/Systems business. The Company
believed that there would be synergies between the Company's "high-level"
integrated circuit design products and VSI's PCB design products. The ultimate
decision to spin-off VSI was based on changes in circumstances following the
Synopsys-Viewlogic merger.
During the months following the merger, the Company came to realize that certain
of its assumptions and expectations regarding the operation of the PCB/Systems
business as part of Synopsys were not being fulfilled. The Company's initial
intent to retain VSI altered due to changes in circumstances as follows:
- A number of engineers working in the PCB/Systems business were hired
by competitors, and management became concerned that it would lose
more if the business remained part of Synopsys.
- Certain synergies anticipated from operation of the PCB/Systems
business as part of Synopsys did not materialize.
- The revenues of the PCB/Systems business grew more slowly than those
of Synopsys' other businesses. Management concluded that the reduction
in the Company's overall growth rate caused by the PCB/Systems
business was contributing to a market discounting of the Company's
stock value.
- Managers of the PCB/Systems business concluded that the business could
grow faster if it was a stand-alone entity, which would allow them to
attract and retain key employees.
Accordingly, Synopsys has not changed its accounting for the Viewlogic merger
and has reported the gain on the VSI disposition as an extraordinary item.
Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS 130 establishes new standards for reporting and
displaying comprehensive income and its components. Synopsys will adopt SFAS 130
as required for its first quarterly filing of fiscal 1999. SFAS 131 requires
disclosure of certain information regarding operating segments, products and
services, geographic areas of operation, and major customers. Management is in
the process of evaluating the effects of this change on its reporting segments.
Synopsys will adopt SFAS 131 as required for its fiscal 1999 annual report.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
and requires the Company to recognize all derivatives as either assets or
liabilities on the balance sheet and measure them at fair value. Gains and
losses resulting from changes in fair value would be accounted for based on the
use of the derivative and whether it is designated and qualifies for hedge
accounting. The Company will be required to implement SFAS 133 for its fiscal
2000. The Company has not determined the impact that SFAS 133 will have on its
financial statements and believes that such determination will not be meaningful
until closer to the date of initial adoption.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments were $599.8 million at
September 30, 1998, an increase of $164.9 million from fiscal 1997. The increase
is primarily a result of cash generated by operations of $144.1 million, and to
a lesser extent, through financing and investing activities, mainly the exercise
of stock options and purchases of stock through the employee stock purchase plan
of $62.3 million, the sale of VSI for $51.9 million and the sale of long-term
investments of $15.2 million. These cash flows were partially offset by cash
outflows for investing and financing activities,
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<PAGE> 7
mainly capital expenditures of $58.0 million, acquisitions of three businesses
of $30.4 million, the repurchase of common stock of $12.4 million and cash paid
on debt obligations of $7.8 million.
Accounts receivable increased 6% during fiscal 1998, while sales grew by 11%.
Days sales outstanding in receivables decreased to 59 days as of September 30,
1998 from 62 days at September 30, 1997. As of September 30, 1998, the Company
had sold $12.6 million of its accounts receivable to a financial institution.
At September 30, 1998, the Company had two foreign exchange lines of credit
available totaling $70.0 million, which expire in October 1998 and July 1999.
The Company's management believes that its current cash, cash equivalents,
short-term investments, lines of credit, and cash generated from operations will
satisfy its expected working capital and capital expenditure requirements for at
least the next twelve months.
YEAR 2000 READINESS
Year 2000 Problem
The failure of a computer program to accurately process date information
beginning on January 1, 2000 is referred to as the "Year 2000 problem." The
problem arises because many existing computer programs use two digits rather
than four to refer to a year. As a result, these programs may interpret a date
that begins with "20" (i.e., any date after December 31, 1999) as a date that
begins with a "19" (i.e., one hundred years earlier). This may result in a
system failure, miscalculation or other malfunction.
Synopsys has potential Year 2000 issues both as a vendor of software and as a
user of software. As a vendor, Synopsys could have Year 2000 issues either if
our software were not Year 2000 compliant or our customers have Year 2000 issues
that interfere with their purchases of Synopsys' products. As a user of
software, Synopsys could have Year 2000 issues if any of the many systems we use
to perform key corporate functions - such as financial accounting, billing,
payroll and license control - were not Year 2000 compliant.
For the purposes of the following discussion our efforts to identify, assess,
fix and test Year 2000 problems relating to our business are referred to as our
"Year 2000 Efforts."
State of Readiness
In general, Synopsys' products are not date-sensitive, and therefore are less
likely to have Year 2000 issues. We have inspected or tested approximately 80%
of our products to determine whether they have Year 2000 problems. None of our
tested products experienced significant date-related failures. In addition, we
recently opened a dedicated Year 2000 test laboratory, which we will use to test
all of our untested products and to maintain Year 2000 compliance of all future
products. We do not expect that we will experience significant date-related
failures with respect to the products to be tested or, if we do, that we will
incur substantial costs to fix such failures. To determine whether our
customers' purchases will be affected by Year 2000 issues we have held, and are
continuing to hold, discussions with a number of such customers to determine
whether our interfaces with such customers are vulnerable to Year 2000 issues.
Synopsys has taken a number of steps to determine whether the internal computer
systems and software we rely upon to run our business will have Year 2000
problems. Our efforts have covered both systems that are commonly thought of as
"information technology" (IT) systems, including accounting, data processing,
and telephone/PBX systems, as well as certain systems that are not commonly
thought of as IT systems, such as alarm systems and fax machines.
Our Year 2000 Efforts are being conducted primarily by Synopsys employees and in
Synopsys facilities. We began our Year 2000 Efforts in February of 1997. We
currently anticipate that they will be completed by June 30, 1999, prior to any
currently anticipated impact on our internal computer systems and software. As
of September 30, 1998, we had completed approximately 30% of the projects we
believe are necessary to fully address potential Year 2000 issues relating to
our internal computer systems and software. The remaining projects are in
process.
In addition to conducting an assessment of our products and internal systems and
software, we have mailed letters to our 200 most important vendors and service
providers. As of October 1, 1998, we had received responses from approximately
40% of such third parties. A follow-up phone survey will be conducted with each
such vendor and service
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<PAGE> 8
provider, including those who responded to the initial survey, which we expect
to be completed by January 30, 1999. We have requested our third party vendors
to be Year 2000 compliant by April 30, 1999. Those suppliers who do not meet
this requirement will be replaced by alternate vendors.
In addition to assessing the Year 2000 readiness of our existing software and
systems, in the ordinary course of replacing computer equipment and software, we
attempt to obtain replacements that are Year 2000 compliant.
Based upon our efforts to date, we believe that certain of the computer
equipment and software we currently use will require replacement or
modification.
Costs of Readiness
Synopsys has not incurred, and does not expect to incur, material expense in
connection with our Year 2000 Efforts. We estimate that the cost of our Year
2000 Efforts, including the costs of our own employees who work on such Year
2000 Efforts, will not exceed $5.9 million. This number is a current estimate
based on our Year 2000 Efforts to date. Should we encounter significant
unforeseen Year 2000 problems, either in our products or internal systems, or in
our customers' operations, this number could increase, perhaps by a material
amount. These expenses will be funded from operating cash flows. Such amount
represents less than 4.9 percent of our total actual and anticipated IT
expenditures for fiscal 1998 through March 31, 2000 (including employee expenses
of our IT department). As of September 30, 1998, we had incurred costs of
approximately $1.0 million related to our Year 2000 Efforts. All of this amount
relates to analysis, repair or replacement of existing software, upgrades of
existing software, or evaluation of information received from significant
vendors, service providers, or customers. Expansion and upgrade of our internal
systems unrelated to our Year 2000 Efforts have not been materially delayed or
impacted by our Year 2000 Efforts.
Contingency Plans
Synopsys has begun, but not yet completed, a comprehensive analysis of the
operational problems and costs (including loss of revenues) that would be
reasonably likely to result from the failure by us and certain third parties to
complete efforts necessary to achieve Year 2000 compliance on a timely basis.
The most likely worst case scenario has not yet been clearly identified, nor has
a contingency plan been developed for dealing with such scenario. We currently
plan to complete such analysis and contingency planning by June 30, 1999.
EUROPEAN MONETARY UNIT
The Company's sales to European customers are primarily U.S. dollar based.
However, the Company does recognize the emergence of a new monetary unit and the
potential importance of such a new monetary unit to its customers residing in
the European union. The Company's information systems are capable of functioning
in multiple currencies. The Company has already started to make system changes
to make all infrastructures capable of operations in the European Monetary Unit.
The Company does not expect to incur significant expenses for these system
changes. The Company does not expect any disruption in operations due to the
European Monetary Unit implementation.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Potential Earnings Fluctuations
We attempt to plan our business to achieve quarter-to-quarter revenue and
earnings growth. Achieving predictable revenue and earnings growth is difficult.
Quarterly revenue and earnings are affected by many factors, including customer
product demand, product license terms, the size of our backlog, and the timing
of revenue recognition on products and services sold. The following factors
could affect our revenues and earnings per share in a particular quarter or over
several quarterly or annual periods:
- Our orders are seasonal. Historically, our first fiscal quarter ending
December 31 is our weakest, and may have a book-to-bill ratio below
one.
- Our products are complex, and before buying them potential customers
spend a great deal of time reviewing and testing them. This is
particularly true if they are new customers or current customers
purchasing a new product or switching from a competitor's product. The
sales cycle does not necessarily match quarterly periods, and if by
the end of any quarter our sales force has not sold enough new
licenses, our orders and revenues could be substantially reduced.
- Like many companies in the software industry, we receive a
disproportionate volume of orders in the last week of a quarter, and
recognize a disproportionate amount of revenue in the last week of a
quarter. In addition, the proportion
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<PAGE> 9
of our business attributable to our largest customers is increasing.
As a result, if any order, and especially a large order, is delayed
beyond the end of a fiscal period, our orders and revenue for that
period could be substantially reduced.
- The accounting rules we are required to follow only permit us to
recognize revenue when certain criteria are met. Orders for certain of
the Company's products and services, including certain time-based
product licenses, consulting services, and software support, 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. In addition, in
negotiating a purchase order with a customer, we may agree to terms
that have the effect of requiring deferral of revenue in whole or in
part. As a result, it may be difficult for us to convert orders,
particularly those received late in a quarter, or backlog, to revenue
in any given quarter. 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.
Competition
The EDA industry is highly competitive. We compete against other EDA vendors,
and with customers' internally developed design tools and internal design
capabilities, for a share of the overall EDA budgets of our customers. Our
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, we must continue to enhance our current products and bring to
market new products that address the increasingly sophisticated needs of our
customers on a timely and cost-effective basis. We also will have to expand our
ability to offer consulting services. The failure to enhance existing products,
develop and/or acquire new products or to expand our ability to offer such
services would have a material adverse effect on our business, financial
condition and results of operations.
Technology advances and customer requirements are fueling a change in the nature
of competition among EDA vendors. Increasingly, EDA companies compete on the
basis of "design flows" involving a broad range of products (including both
logic and physical design tools) and services rather than on the basis of
individual "point" tools performing a discrete phase of the design process. No
single EDA company currently offers its customers industry-leading products in a
complete design flow. We offer a wide range of logic design tools but currently
offer a relatively limited range of physical design tools. In November 1998 we
acquired Everest, a private company developing physical design software. We will
need to develop or acquire additional physical design tools in order to offer a
complete design flow. We are also attempting to expand our capacity to offer
professional services, but for the foreseeable future will continue to have less
capacity than Cadence to provide such services. The market for physical design
tools is dominated by Cadence and Avant!, both of which are attempting to
complete their design flows. Cadence recently acquired Ambit Design Systems, a
private company offering synthesis and other logic design products, as well as
certain physical design verification products from Lucent Technologies, both of
which will increase the direct competition between Synopsys and Cadence. In
addition, Cadence's acquisition of logic design products may lead to reductions
in purchases of our logic design software by Cadence, which was one of Synopsys'
ten largest customers in fiscal 1998. Avant! also recently acquired a private
company offering logic synthesis software, which will increase the direct
competition between Synopsys and Avant!.
Success of Non-Synthesis Products
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 synthesis revenues are expected to grow more slowly
than our target for overall revenue growth. Synthesis and related "design
creation" products account for approximately 45-50% of our revenue. As a result,
in order to meet our revenue plan, non-synthesis design creation products, high
level verification products and deep submicron products and our services
business will have to grow faster than our overall revenue growth target.
Our PrimeTime(R) timing analysis, Formality(R) formal verification, Module
Compiler(TM) datapath synthesis and VCS(TM) Verilog simulation products are
expected to be among the most important contributors to product revenue growth.
These products have achieved initial customer acceptance, but we will only
derive significant revenue from these products if they are accepted by a broad
range of customers. Product success is difficult to predict. The introduction of
new products and growth of a market for such products cannot be assured in a
highly competitive environment like EDA. In the past we, like all companies,
have had products that despite initial successes, have failed to meet our
revenue expectations. Expanding our capacity to offer consulting services and
our revenues derived therefrom will require us to recruit, hire and train a
large number of talented people, and to implement management controls on bidding
and executing on services engagements. The consulting business is significantly
different than the software business, however, and as indicated by recent
layoffs announced by Cadence in its service business, increasing consulting
orders and revenue while maintaining an adequate level of profit can be
difficult. There can be no assurance that the Company will be successful in
expanding revenues from existing or new products at the desired rate 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.
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<PAGE> 10
Integration of Acquired Businesses
We have acquired or merged with a number of companies in recent years,
including EPIC, Viewlogic, SSI and Everest, and as part of our efforts to
expand our product and services offerings we may acquire additional companies
in the future. In addition to direct costs, acquisitions pose a number of
risks, including potential dilution of earnings per share, problems of
integrating the acquired products and employees into our business, the failure
to realize expected synergies or cost savings, the drain on management time
for acquisition-related activities, possible adverse effects on customer buying
patterns due to uncertainties resulting from an acquisition, and assumption of
unknown liabilities. While we attempt to review proposed acquisitions carefully
and negotiate terms that are favorable to the Company, there is no assurance
that any individual acquisition will have the projected effect on the Company's
performance.
Dependence on Semiconductor and Electronics Business
Our business has benefited from the rapid worldwide growth of the semiconductor
industry. Purchases of our 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 calendar year 1998
and 1999 is uncertain, owing in part to adverse economic conditions in Asia and
to potential slowing of growth in the United States. A number of the Company's
customers have announced layoffs of their employees or the suspension of
investment plans, and although the Company has not seen a significant drop-off
in demand from these customers, their EDA budgets could be reduced, alone or as
part of overall expense control efforts. In addition, there have been a number
of mergers in the semiconductor and systems industries, which may reduce the
aggregate level of purchases of our products and services by the merged
companies. Slower growth in the semiconductor and systems industries, a reduced
number of design starts, tightening of customers' operating budgets or continued
consolidation among the Company's customers may have a material adverse effect
on our business, financial condition and results of operations.
International Exposure
In fiscal 1998, international revenue accounted for 39% of our revenue, after
accounting for 41% and 42% of our revenue in fiscal 1997 and 1996, respectively.
We expect that international revenue will continue to account for a significant
portion of our revenue in the future. As a result, the Company's performance may
be negatively affected by 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 1998 was adversely affected
by the weakness of the yen against the dollar, overall weakness in the
Japanese economy, and the deferral of investments in semiconductor
facilities and technology by Japanese companies. Continued weakness of
the Japanese economy during fiscal 1999 is likely to adversely affect
revenue from Japan during the year. The yen has recently strengthened,
but the exchange rate for fiscal 1999 remains subject to unpredictable
fluctuations. Renewed weakness of the yen could adversely affect
revenue from Japan during fiscal 1999.
- Significant declines in the value of the Korean won during fiscal
1998, and the subsequent economic crisis had a significant adverse
affect on our business in Korea during the year, and is likely to
continue to affect our orders and revenue from Korea in fiscal 1999.
Declines in the currencies of other countries in the Asia Pacific
region, particularly Taiwan, have also negatively affected the
Company's sales in the region. Continued instability in Asian currency
markets and weaknesses in Asian economies would continue to have an
adverse effect on our orders and revenues from the Asia Pacific
region.
Risk of Joint Development
In February 1996, we entered into a six-year joint development and license
agreement with IBM, pursuant to which the two companies 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
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. A second joint product is
expected to be introduced in January 1999, and the fourth product to be
developed under the agreement has been suspended. Synopsys and IBM are currently
discussing the future of the alliance. There can be no assurance that joint
development will continue, or that the products developed by the alliance will
be successful.
Need to Recruit and Retain Key Personnel
Our success is dependent on technical and other contributions of key employees.
We participate in a dynamic industry, with significant start-up activity, and
our headquarters is in Silicon Valley, where skilled technical, sales and
management employees are in high demand. There are a limited number of qualified
EDA engineers, and the competition for such individuals is intense. Experience
at Synopsys is highly valued in the EDA industry, and our employees are
recruited aggressively by our competitors and by start-up companies. Our
salaries are competitive in the market, but under certain circumstances,
start-up companies can offer more attractive stock option packages. As a result,
we have experienced, and may continue to experience, significant employee
turnover. In addition,
10
<PAGE> 11
there can be no assurance that we can continue to recruit and retain key
personnel. Failure to successfully recruit and retain such personnel could have
a material adverse effect on our business, financial condition and results of
operations.
Poison Pill Provisions
The Company has adopted a number of provisions that could have anti-takeover
effects. The Board of Directors has 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 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.
Year 2000
Synopsys presently believes that we will not experience significant operational
problems arising from the Year 2000 problem (i.e., the inability of certain
computer programs to correctly process date information on or after January 1,
2000). However, if unforeseen Year 2000 issues arise with respect to Synopsys
products, one or more important customers experiences Year 2000-related problems
that interferes with their purchases of Synopsys products, or we are not able to
identify and fix Year 2000 problems relating to the computer systems and
software we rely on to run our business, we may experience a disruption in our
business, which could have a material adverse impact on our business, financial
condition and results of operations.
Change in Financial Accounting Standards
We prepare our financial statements in conformity with generally accepted
accounting principles (GAAP). GAAP are subject to interpretation by the American
Institute of Certified Public Accountants (AICPA), the Securities and Exchange
Commission (SEC) and various bodies formed to interpret and create appropriate
accounting policies. A change in these policies can have a significant effect on
our reported results, and may even affect our reporting of transactions
completed before a change is announced. Accounting policies affecting many other
aspects of our business, including rules relating to software revenue
recognition, purchase and pooling-of-interests accounting for business
combinations, employee stock purchase plans and stock option grants have
recently been revised or are under review by one or more groups. Changes to
these rules, or the questioning of current practices, may have a significant
adverse effect on our reported financial results or in the way we conduct our
business.
In addition, the preparation of financial statements in conformity with GAAP
requires us 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.
11
<PAGE> 12
REPORT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
To The Board of Directors and Stockholders of Synopsys, Inc.:
We have audited the accompanying consolidated balance sheets of Synopsys, Inc.
and subsidiaries as of September 30, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the years
in the three-year period ended September 30, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the consolidated financial
statements of EPIC Design Technology, Inc., a company acquired by Synopsys, Inc.
in a business combination accounted for as a pooling-of-interests as described
in Note 2 to the consolidated financial statements, which statements reflect
total revenues constituting 8% in fiscal 1996, of the related consolidated
total. Those consolidated statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to the amounts
included for EPIC Design Technology, Inc., is based solely on the report of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Synopsys, Inc. and subsidiaries as
of September 30, 1998 and 1997, and the results of their operations and their
cash flows for each of the years in the three-year period ended September 30,
1998 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Mountain View, California
October 26, 1998
12
<PAGE> 13
SYNOPSYS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
(in thousands, except share data) 1998 1997
- --------------------------------- --------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 159,687 $ 126,414
Short-term investments 440,082 308,416
--------- ---------
Cash and short-term investments 599,769 434,830
Accounts receivable, net of allowances of $13,210 and $8,213,
respectively 126,336 119,030
Prepaid expenses, deferred taxes and other 42,451 36,580
--------- ---------
Total current assets 768,556 590,440
Property and equipment, net 99,879 92,079
Long-term investments 38,265 61,056
Other assets 39,927 25,014
--------- ---------
Total assets $ 946,627 $ 768,589
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,921 $ 21,439
Accrued liabilities 102,354 93,442
Current portion of long-term debt 7,648 8,964
Income taxes payable 50,313 33,282
Deferred revenue 92,980 97,523
--------- ---------
Total current liabilities 268,216 254,650
--------- ---------
Long-term debt 13,138 9,191
Deferred compensation 4,886 3,205
Commitments
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;
66,534,000 and 63,844,000 shares outstanding, respectively 665 638
Additional paid-in capital 416,943 334,086
Retained earnings 242,957 151,664
Treasury stock, at cost, 318,000 shares outstanding (11,184) --
Cumulative translation adjustment (666) (1,552)
Net unrealized gain on investments 11,672 16,707
--------- ---------
Total stockholders' equity 660,387 501,543
--------- ---------
Total liabilities and stockholders' equity $ 946,627 $ 768,589
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE> 14
SYNOPSYS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
(in thousands, except per share data) 1998 1997 1996
- ------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Revenue:
Product $430,979 $408,256 $346,133
Service 286,961 238,700 179,466
-------- -------- --------
Total revenue 717,940 646,956 525,599
-------- -------- --------
Cost of revenue:
Product 36,371 36,777 28,752
Service 57,396 50,108 36,794
-------- -------- --------
Total cost of revenue 93,767 86,885 65,546
-------- -------- --------
Gross margin 624,173 560,071 460,053
Operating expenses:
Research and development 154,407 146,613 120,005
Sales and marketing 245,376 240,606 204,920
General and administrative 47,179 47,284 41,999
Merger-related and other costs 51,009 11,400 --
In-process research and development
and other costs 33,069 5,500 64,529
-------- -------- --------
Total operating expenses 531,040 451,403 431,453
-------- -------- --------
Operating income 93,133 108,668 28,600
Other income, net 25,984 24,361 11,628
-------- -------- --------
Income before provision for income taxes
and extraordinary items 119,117 133,029 40,228
Provision for income taxes 55,819 51,043 23,426
-------- -------- --------
Net income before extraordinary items 63,298 81,986 16,802
Extraordinary items - gains on extinguishment of debt
and sale of business unit, net of income tax expense 28,404 -- --
-------- -------- --------
Net income $ 91,702 $ 81,986 $ 16,802
======== ======== ========
Basic earnings per share:
Net income before extraordinary items $ 0.97 $ 1.31 $ 0.28
Extraordinary items 0.43 -- --
-------- -------- --------
Net income $ 1.40 $ 1.31 $ 0.28
======== ======== ========
Weighted average common shares 65,501 62,413 60,162
======== ======== ========
Diluted earnings per share:
Net income before extraordinary items $ 0.93 $ 1.25 $ 0.27
Extraordinary items 0.42 -- --
-------- -------- --------
Net income $ 1.34 $ 1.25 $ 0.27
======== ======== ========
Weighted average common shares
and equivalents 68,427 65,486 62,991
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE> 15
SYNOPSYS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
Additional Deferred Cumulative Unrealized
Common Stock Paid-in Retained Stock Translation Gain on Treasury
(in thousands) Shares Amount Capital Earnings Compensation Adjustment Investments Stock Total
- -------------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
September 30, 1995 59,140 $ 591 $ 218,875 $ 68,030 $ (203) $ (39) $ 108 $ -- $ 287,362
Acquisition of
treasury stock (778) (7) -- -- -- -- -- (14,817) (14,824)
Issuance of common
stock in connection
with acquisition 545 5 14,506 -- -- -- -- -- 14,511
Stock issued under
stock option and
stock purchase plans 2,663 27 20,793 (9,282) -- -- -- 14,817 26,355
Tax benefit associated
with exercise of
stock options -- -- 8,967 -- -- -- -- -- 8,967
Amortization of
deferred stock
compensation -- -- -- -- 93 -- -- -- 93
Translation adjustment -- -- -- -- -- (320) -- -- (320)
Adjustment to
unrealized gain on
investments, net -- -- -- -- -- -- 11,601 -- 11,601
Net income -- -- -- 16,802 -- -- -- -- 16,802
------- ------- --------- --------- ------- -------- --------- --------- ---------
Balance at
September 30, 1996 61,570 616 263,141 75,550 (110) (359) 11,709 -- 350,547
Acquisition of
treasury stock (440) (5) -- -- -- -- -- (9,489) (9,494)
Stock issued under
stock option and
stock purchase plans 2,714 27 40,921 (5,872) -- -- -- 9,489 44,565
Tax benefit associated
with exercise of
stock options -- -- 30,024 -- -- -- -- -- 30,024
Amortization of
deferred stock
compensation -- -- -- -- 110 -- -- -- 110
Translation adjustment -- -- -- -- -- (1,193) -- -- (1,193)
Adjustment to
unrealized gain on
investments, net -- -- -- -- -- -- 4,998 -- 4,998
Net income -- -- -- 81,986 -- -- -- -- 81,986
------- ------- --------- --------- ------- -------- --------- --------- ---------
Balance at
September 30, 1997 63,844 638 334,086 151,664 -- (1,552) 16,707 -- 501,543
Acquisition of
treasury stock (353) (4) -- -- -- -- -- (12,403) (12,407)
Stock options assumed
in connection with
acquisition -- -- 7,636 -- -- -- -- -- 7,636
Stock issued under
stock option and
stock purchase plans 3,043 31 61,454 (409) -- -- -- 1,219 62,295
Tax benefit associated
with exercise of
stock options -- -- 13,767 -- -- -- -- -- 13,767
Translation adjustment -- -- -- -- -- 886 -- -- 886
Adjustment to
unrealized gain on
investments, net -- -- -- -- -- -- (5,035) -- (5,035)
Net income -- -- -- 91,702 -- -- -- -- 91,702
------- ------- --------- --------- ------- -------- --------- --------- ---------
Balance at
September 30, 1998 66,534 $ 665 $ 416,943 $ 242,957 $ -- $ (666) $ 11,672 $ (11,184) $ 660,387
======= ======= ========= ========= ======= ======== ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE> 16
\
SYNOPSYS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
(in thousands) 1998 1997 1996
- -------------- --------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 91,702 $ 81,986 $ 16,802
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary gains (28,404) -- --
Depreciation and amortization 44,152 39,826 28,947
Interest accretion on notes payable 510 526 470
Provision for doubtful accounts and sales returns 8,431 2,574 624
Tax benefit associated with stock options 13,767 30,024 8,967
Deferred taxes (6,617) (20,811) (13,015)
Non-cash merger-related and other costs 8,367 3,084 --
In-process research and development and other costs 33,069 5,500 64,529
Gain on sale of long-term investments (9,930) (15,856) (1,173)
Net changes in operating assets and liabilities:
Accounts receivable (25,754) (25,490) (20,138)
Prepaid expenses and other (689) (3,134) (7,085)
Other assets (6,009) (1,735) (2,175)
Accounts payable and accrued liabilities 9,432 10,337 32,531
Income taxes payable 1,147 16,424 3,307
Deferred revenue 9,197 7,020 13,958
Deferred compensation 1,681 3,205 --
--------- --------- ---------
Net cash provided by operating activities 144,052 133,480 126,549
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sales of long-term investments 15,158 22,503 8,460
Proceeds from sale of business unit 51,900 5,000 --
Purchases of long-term investments (1,998) (25,342) (34,154)
Purchases and maturities of short-term investments (127,849) (52,886) (91,971)
Purchases of property and equipment (58,001) (61,308) (50,006)
Purchase of technology -- (335) (10,900)
Acquisitions (net of cash acquired) (30,354) -- 67
Capitalization of software development costs (2,122) (4,211) (3,696)
--------- --------- ---------
Net cash used in investing activities (153,266) (116,579) (182,200)
--------- --------- ---------
Cash flows from financing activities:
Principal payments on debt obligations (7,762) (11,568) (8,396)
Proceeds from sale of common stock, net 62,295 44,565 26,355
Purchases of treasury stock (12,407) (9,494) (14,824)
--------- --------- ---------
Net cash provided by financing activities 42,126 23,503 3,135
--------- --------- ---------
Effect of exchange rate changes on cash 361 (1,090) (287)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 33,273 39,314 (52,803)
Cash and cash equivalents, beginning of year 126,414 87,100 139,903
--------- --------- ---------
Cash and cash equivalents, end of year $ 159,687 $ 126,414 $ 87,100
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 770 $ 769 $ 704
Income taxes $ 46,206 $ 25,215 $ 21,181
Non-cash transactions:
Purchase of technology for notes -- -- $ 28,500
Notes payable issued in connection with acquisition $ 12,000 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 17
SYNOPSYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations. Synopsys, Inc. (Synopsys or the Company) is a leading
supplier of electronic design automation (EDA) solutions to the global
electronics market. The Company provides comprehensive design technologies to
creators of advanced integrated circuits, electronic systems, and systems on a
chip. The Company also provides consulting services and support to its customers
to streamline overall design process and accelerate time-to-market.
Fiscal Year End. The Company has a fiscal year that ends on the Saturday nearest
September 30. Fiscal 1998 was a 53-week year. Fiscal 1997 and 1996 were 52-week
years. For presentation purposes, the consolidated financial statements and
notes refer to the calendar month end.
Principles of Consolidation. The consolidated financial statements include the
accounts of the Company and all of its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Use of Estimates. 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 revenues, assets and
liabilities, disclosure of 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.
Cash Equivalents, Fair Values of Financial Instruments and Concentration of
Credit Risk. Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents,
investments and trade receivables.
All of the Company's cash equivalents and investments are classified as
available-for-sale and are reported at fair value with material unrealized gains
and losses, if any, included in stockholders' equity. The fair value of
investments is based on quoted market prices. Realized gains and losses are
included in other income, net. Cash equivalents have original maturities of
three months or less. The Company has cash equivalents and investments with
various high quality institutions and, by policy, limits the amount of credit
exposure to any one institution.
The Company sells its products worldwide primarily to customers in the
semiconductor industry. The Company performs on-going credit evaluations of its
customers' financial condition and generally does not require collateral. The
Company maintains reserves for potential credit losses, and such losses have
been within management's expectations and have not been material in any year. As
of September 30, 1998, the Company had sold approximately $12.6 million of its
accounts receivable to a financial institution.
The fair value of the Company's cash, accounts receivable, long-term
investments, put and call and forward contracts relating to certain of the
Company's equity securities, accounts payable, long-term debt and foreign
currency contracts, approximates the carrying amount, which is the amount the
instrument could be exchanged in a current transaction between willing parties.
Foreign Currency Translation. The functional currency of each of the Company's
international subsidiaries is the foreign subsidiary's local currency. Assets
and liabilities of the Company's international operations are translated into
U.S. dollars at exchange rates in effect at the balance sheet date. Income and
expense items are translated at average exchange rates for the period.
Accumulated net translation adjustments are reported as a separate component of
stockholders' equity. Foreign exchange transaction gains and losses were not
material for all periods presented and are included in the results of
operations.
Synopsys' international business is an important contributor to the Company's
revenue and net profits. However, the majority of Synopsys' international sales
are denominated in the U.S. dollar, and an increase in the value of the U.S.
dollar relative to foreign currencies could make products sold internationally
less competitive. The operating expenses of Synopsys' overseas offices are paid
in local currencies and are subject to the effect of fluctuations in foreign
currency exchange rates as compared to their respective local currency. The
effect of foreign exchange rate fluctuations did not
16
<PAGE> 18
significantly impact the Company's operating results. Financial exposure may
nonetheless result, primarily from the timing of transactions and the movement
of foreign exchange rates.
Foreign Exchange Hedging. The Company operates internationally and thus is
exposed to potentially adverse movements in foreign currency rate changes. In
fiscal 1998, the Company entered into foreign exchange forward contracts to
reduce its exposure to foreign currency rate changes on intercompany foreign
currency denominated balance sheet positions. The objective of these contracts
is to neutralize the impact of foreign currency exchange rate movements on the
Company's operating results.
These contracts require the Company to exchange currencies at rates agreed upon
at the inception of the contracts. The hedge contracts reduce the exposure to
fluctuations in exchange rate movements because the gains and losses associated
with foreign currency balances and transactions are generally offset with the
gains and losses of the hedge contracts. Because the impact of movements in
currency exchange rates on forward contracts offsets the related impact on the
underlying items being hedged, these financial instruments help alleviate the
risk that might otherwise result from changes in currency exchange rate
fluctuations.
The Company's accounting policies for these instruments are based on the
Company's designation of such instruments as hedging transactions. The criteria
the Company uses for designating an instrument as a hedge includes the
instrument's effectiveness in risk reduction. Gains and losses on these
contracts, all of which are designated and effective as hedges of existing
transactions, are recognized in operations in the period in which gains and
losses on the underlying transactions occur. The Company does not use derivative
financial instruments for speculative or trading purposes. In the event of
termination or extinguishment of a contract, associated gains and losses would
be recognized in operations in the period in which the contract was terminated
or extinguished.
These contracts contain credit risk in that the counterparty may be unable to
meet the terms of the agreements. The Company has limited these agreements to
major financial institutions to reduce such credit risk. Furthermore, the
Company monitors the potential risk of loss with any one financial institution
and does not expect any material loss as a result of default by the
counterparties.
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 has 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.
Revenue consists of fees for licenses and subscriptions of the Company's
software products, sales of system products, maintenance and support, customer
training, and consulting. Cost of product revenue includes cost of production
personnel, product packaging, documentation, amortization of capitalized
software development costs, and costs of the Company's systems products. Cost of
service revenue includes personnel and the related costs associated with
providing such service.
Accounts receivable include amounts due from customers for which revenue has
been recognized. Deferred revenue includes amounts received from customers for
which revenue has not been recognized.
Property and Equipment. Property and equipment are recorded at cost.
Depreciation and amortization are provided using the straight-line method over
the estimated useful lives of property and equipment (three to five years).
Leasehold improvements are recorded at cost and are amortized using the
straight-line method over the remaining lease term or the economic useful life
of the related asset, whichever is shorter. Property and equipment detail is as
follows:
17
<PAGE> 19
<TABLE>
<CAPTION>
SEPTEMBER 30,
(in thousands) 1998 1997
- ------------- --------- ---------
<S> <C> <C>
Computer and other equipment $ 126,915 $ 125,702
Furniture and fixtures 15,341 18,792
Land 29,414 10,450
Leasehold improvements 23,579 19,743
--------- ---------
195,249 174,687
Less accumulated depreciation
and amortization (95,370) (82,608)
--------- ---------
$ 99,879 $ 92,079
========= =========
</TABLE>
Software Development Costs. Capitalization of computer software development
costs begins upon the establishment of technological feasibility, which is
generally the completion of a working prototype. Software development costs
capitalized were $2.1 million, $4.2 million and $3.7 million in fiscal 1998,
1997 and 1996, respectively.
Amortization of computer software development costs is computed as the greater
of the ratio of current product revenue to the total of current and anticipated
product revenue or the straight-line method over the software's estimated
economic life of approximately two years. Amortization amounted to $2.2 million,
$3.7 million and $3.2 million in fiscal 1998, 1997 and 1996, respectively.
Goodwill. Goodwill represents the excess of the aggregate purchase price over
the fair value of the tangible and intangible assets acquired in various
acquisitions and is being amortized over the estimated useful life of five
years. The Company assesses the recoverability of goodwill by determining
whether the amortized asset over its useful life may be recovered through
estimated future cash flows. Amortization of goodwill charged to operations was
not material in fiscal 1998, 1997 and 1996, respectively.
Accrued Liabilities. Accrued liabilities consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30,
(in thousands) 1998 1997
- -------------- -------- --------
<S> <C> <C>
Payroll and related benefits $ 63,865 $ 55,723
Accrued merger and acquisition costs 3,513 1,237
Other accrued liabilities 34,976 36,482
-------- --------
Total $102,354 $ 93,442
======== ========
</TABLE>
Income Taxes. The Company accounts for income taxes using the
asset-and-liability method. Under the asset and liability method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets are recognized for deductible temporary differences, net operating loss
carryforwards, and credit carryforwards if it is more likely than not that the
tax benefits will be realized. To the extent a deferred tax asset cannot be
recognized under the preceding criteria, a valuation allowance has been
established.
Earnings per Share. On October 1, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share." In
accordance with SFAS 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
shares and dilutive potential common shares outstanding during the period.
Dilutive potential common shares consist of employee stock options using the
treasury stock method. All earnings per share amounts for all periods presented
have been restated to conform to SFAS 128 requirements.
Stock-Based Compensation. As permitted under Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," the
Company has elected to follow Accounting Principles Board Opinion No. 25 (APB
25), "Accounting for Stock Issued to Employees," in accounting for stock-based
awards to employees.
Effect of New Accounting Standards. In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS 130 establishes new
standards for reporting and
18
<PAGE> 20
displaying comprehensive income and its components. Synopsys will adopt SFAS 130
as required for its first quarterly filing of fiscal 1999. SFAS 131 requires
disclosure of certain information regarding operating segments, products and
services, geographic areas of operation, and major customers. Management is in
the process of evaluating the effects of this change on its reporting segments.
Synopsys will adopt SFAS 131 as required for its fiscal 1999 annual report.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
and requires the Company to recognize all derivatives as either assets or
liabilities on the balance sheet and measure them at fair value. Gains and
losses resulting from changes in fair value would be accounted for based on the
use of the derivative and whether it is designated and qualifies for hedge
accounting. The Company will be required to implement SFAS 133 for its fiscal
2000. The Company has not determined the impact that SFAS 133 will have on its
financial statements and believes that such determination will not be meaningful
until closer to the date of initial adoption.
Reclassifications. Certain amounts reported in previous years have been
reclassified to conform to the fiscal 1998 presentation.
NOTE 2. BUSINESS COMBINATIONS
Mergers
In December 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 EDA software. In
addition, options to acquire Viewlogic's common stock were exchanged for options
to acquire approximately 2.8 million shares of the Company's common stock. In
February 1997, the Company issued approximately 10.3 million 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 1.5 million shares of the
Company's common stock. These mergers were accounted for as
pooling-of-interests, and accordingly, the Company's consolidated financial
statements have been restated to include the financial position and results of
EPIC and Viewlogic for all periods presented.
The following information shows revenue and net income of the separate
enterprises through the periods preceding the business combinations and the
combined results following the business combinations.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
(in thousands) 1998 1997 1996
- --------------- --------- --------- ---------
<S> <C> <C> <C>
Total revenue:
Synopsys $ 639,658 $ 469,277 $ 353,500
Viewlogic 78,282 147,811 128,180
Epic -- 29,868 43,919
--------- --------- ---------
Combined $ 717,940 $ 646,956 $ 525,599
========= ========= =========
Net income:
Synopsys (1) $ 90,157 $ 69,490 $ 23,700
Viewlogic 1,545 9,592 2,780
Epic -- 2,904 (9,678)
--------- --------- ---------
Combined $ 91,702 $ 81,986 $ 16,802
========= ========= =========
</TABLE>
(1) Includes extraordinary gains of $28.4 million, net of income tax
expense, in fiscal 1998.
The Company recorded merger-related and other costs of $51.0 million during
fiscal 1998. The following table presents the components of merger-related and
other costs recorded in fiscal 1998, along with charges against the reserves
through September 30, 1998:
19
<PAGE> 21
<TABLE>
<CAPTION>
NON-CASH
WRITE-OFF RESERVE
(in thousands) TOTAL CHARGE AMOUNTS PAID OF ASSETS BALANCE
-------------- ------------ ------------ --------- --------
<S> <C> <C> <C> <C>
Transaction costs $ 9,245 $ (8,292) $ -- $ 953
Employee termination and
transition costs 10,975 (10,593) -- 382
Write-off of equipment and
other assets 8,367 -- (8,367) --
Legal and other settlements 6,894 (6,869) -- 25
Redundant facility and other costs 15,528 (13,375) -- 2,153
-------- -------- -------- --------
Total $ 51,009 $(39,129) $ (8,367) $ 3,513
======== ======== ======== ========
</TABLE>
In connection with the EPIC merger, the Company recorded merger-related costs of
$11.4 million, which included transaction 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 of $0.7 million,
computer and other equipment abandonment and removal costs of $5.2 million,
contract termination charges and other related expenses of $0.3 million and
other expenses of $0.5 million. Of the $11.4 million of merger-related expenses,
$8.3 million related to cash expenditures while $3.1 million related to non-cash
write-off of assets. As of September 30, 1998, all cash expenditures associated
with this merger had been paid, and there was no remaining balance in the
accrual.
During fiscal 1998, the Company sold VSI, the PCB/Systems design segment of the
Viewlogic business to a management-led buy-out group for $51.9 million in cash.
As a result of the transaction, the Company recorded an extraordinary gain of
$26.5 million, net of income tax expense, in the fourth quarter of fiscal 1998.
The Company retained a minority investment of 14.9% (fully diluted) in the new
company.
Acquisitions
In July 1998, the Company acquired Systems Science, Inc. (SSI). The acquisition
was accounted for as a purchase with the Company exchanging a combination of
cash of $26.0 million and notes of $12.0 million. In addition, the Company
reserved approximately 318,000 shares of its common stock for issuance under
SSI's stock option plan, which the Company assumed in the acquisition. The total
purchase price of $47.1 million was allocated to the acquired assets and
liabilities based on their estimated fair values as of the date of the
acquisition. This includes allocations of $18.2 million to goodwill and other
intangible assets, which are being amortized on a straight-line basis, generally
over a five-year period. Approximately $28.9 million was allocated to in-process
research and development and other costs and charged to operations because the
acquired technology had not reached technological feasibility and had no
alternative uses.
The Company acquired two small privately held companies in the EDA industry in
October 1997, each of which has been accounted for as a purchase. The purchase
price, acquisition costs and net liabilities assumed for these acquisitions
totaled $4.2 million, which was allocated to in-process research and development
and other costs and charged to operations in the first quarter of fiscal 1998
because the acquired technology had not reached technological feasibility and
had no alternative uses.
Pro forma results of operations have not been presented since the effects of the
acquisitions were not material to the Company's consolidated financial position,
results of operations or cash flows for the periods presented.
NOTE 3. FINANCIAL INSTRUMENTS
Cash, cash equivalents and investments. All cash equivalents, short-term
investments, and non-current investments have been classified as
available-for-sale securities and consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
UNREALIZED UNREALIZED ESTIMATED
(in thousands) COST GAINS LOSSES FAIR VALUE
- -------------- --------- --------- --------- ----------
<S> <C> <C> <C> <C>
Classified as current assets:
Tax-exempt commercial paper $ 23,806 $ -- $ -- $ 23,806
Money market funds 37,699 -- -- 37,699
Tax-exempt municipal obligations 282,542 26 -- 282,568
Money market preferred stock 122,975 -- -- 122,975
Municipal auction rate preferred stock 34,078 -- -- 34,078
Certificate of deposit 461 -- -- 461
--------- --------- --------- ---------
501,561 26 -- 501,587
Classified as non-current assets:
Tax-exempt municipal obligations 253 2 -- 255
Equity securities 19,820 22,111 (3,921) 38,010
--------- --------- --------- ---------
20,073 22,113 (3,921) 38,265
--------- --------- --------- ---------
Total securities $ 521,634 $ 22,139 $ (3,921) $ 539,852
========= ========= ========= =========
</TABLE>
20
<PAGE> 22
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
UNREALIZED UNREALIZED ESTIMATED
(in thousands) COST GAINS LOSSES FAIR VALUE
- -------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Classified as current assets:
Tax-exempt commercial paper $ 37,673 $ -- $ -- $ 37,673
Tax-exempt municipal obligations 210,123 49 -- 210,172
Money market preferred stock 49,823 -- -- 49,823
Municipal auction rate preferred stock 43,418 -- -- 43,418
U.S. government obligations 1,996 7 -- 2,003
Certificate of deposit 2,000 -- -- 2,000
Corporate annuity 1,000 -- -- 1,000
-------- -------- -------- --------
346,033 56 -- 346,089
Classified as non-current assets:
Tax-exempt municipal obligations 6,209 17 -- 6,226
Equity securities 28,797 26,033 -- 54,830
-------- -------- -------- --------
35,006 26,050 -- 61,056
-------- -------- -------- --------
Total securities $381,039 $ 26,106 $ -- $407,145
======== ======== ======== ========
</TABLE>
Short-term investments include tax-exempt municipal obligations which have
underlying maturities of less than one year or contain put options that are
either supported by a letter of credit from a top-rated bank or insurance
company or are over-collateralized for redemption at par at the reset date.
Therefore, the underlying maturity for certain items may exceed one year. At
September 30, 1998, the underlying maturities of the short-term investments are
$172.1 million within one year, $6.5 million within five to ten years and $261.5
million after ten years.
At September 30, 1998, $61.5 million and $440.1 million are classified as cash
equivalents and short-term investments, respectively. At September 30, 1997,
$37.7 million and $308.4 million are classified as cash equivalents and
short-term investments, respectively. Realized gains and losses on sales of
short-term investments have not been material. During fiscal 1998, the Company
realized gains on sales of long-term investments of $13.9 million, which is
included in other income, net.
Strategic 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 and the investment was classified
as available-for-sale. In May 1997, CCT and Cadence Design Systems, Inc.
(Cadence) consummated a merger, whereby each share of CCT was converted to 0.85
shares of Cadence stock. During fiscal year 1998, the Company sold 469,000
shares of Cadence stock and realized a gain of $10.0 million. As of September
30, 1998, the Company owns 823,000 shares of Cadence stock.
The Company entered into a put and call contract in the fourth quarter of fiscal
1998 for the sale of 425,000 Cadence shares with prices and expiration dates as
follows:
<TABLE>
<CAPTION>
Date Shares Put Strike Call Strike
- ------------------ ------- ---------- -----------
<S> <C> <C> <C>
December 15, 1999 105,000 $ 27.31 $ 33.78
March 15, 2000 105,000 $ 27.31 $ 34.50
June 15, 2000 105,000 $ 27.31 $ 35.37
September 15, 2000 110,000 $ 26.60 $ 35.28
</TABLE>
As of September 30, 1998, the fair market value of the puts and calls, based on
a quoted market price of $24.625, was $1.1 million, which has been recorded in
unrealized gains on investments.
21
<PAGE> 23
As of September 30, 1998, the Company has an investment in Artisan Components
(Artisan) of 594,000 shares, which is included in long-term investments. The
Company entered into a forward contract for the sale of its Artisan shares in
the third quarter of fiscal 1998. The contract has remaining prices and
expiration dates as follows:
<TABLE>
<CAPTION>
Date Shares Forward Price
---- ------ -------------
<S> <C> <C>
December 15, 1998 148,574 $17.01
May 4, 1999 148,574 $17.01
June 15, 1999 148,574 $17.01
September 15, 1999 148,578 $17.01
</TABLE>
As of September 30, 1998, the fair market value of the forward contract, based
on a quoted market price of $7.00, was $5.9 million, which has been recorded in
unrealized gains on investments.
Foreign exchange hedging. The Company has two foreign exchange lines of credit
available totaling $70.0 million, which expire in October 1998 and July 1999.
The Company had $38.4 million of short-term foreign exchange forward contracts
outstanding which approximated the fair value of such contracts and their
underlying transactions at September 30, 1998. These contracts are denominated
in Japanese, Italian, German, French and British currencies. The outstanding
forward contracts have maturities that expire in approximately one month. The
gains and losses on forward exchange contracts are included in earnings when the
underlying foreign currency denominated transaction is recognized. Gains and
losses related to these instruments at September 30, 1998 were not material. In
addition, the Company has not terminated or extinguished any foreign exchange
forward contracts. The Company does not anticipate any material adverse effect
on its consolidated financial position, results of operations, or cash flows
resulting from the use of these instruments.
Long-term debt. During 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 IBM
Agreement). In accordance with the IBM 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 fiscal 2006. The notes were recorded at fair value of $28.5
million, using a discount rate commensurate with the risks involved. The Company
will also pay royalties on revenues from the sale of new products developed
pursuant to the IBM Agreement. As a result of the transaction, the Company
incurred an in-process research and development charge of $39.7 million in
fiscal 1996. 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 income tax expense, related to the extinguishment of the note.
As of September 30, 1998, the notes had a balance of $7.4 million, of which $3.2
million is included in long-term debt.
During fiscal 1998, in connection with the acquisition of SSI, the Company
issued $14.0 million in notes, which bear interest at 6.6%, and are payable upon
the earlier of achievement of certain milestones or at maturity in fiscal 2005.
The notes were recorded at fair value of $12.0 million, using a discount rate
commensurate with the risks involved. As of September 30, 1998, the notes had a
balance of $12.0 million, of which $9.3 million is included in long-term debt.
The fair value of the Company's long-term debt approximates the carrying amount.
NOTE 4. COMMITMENTS AND CONTINGENCIES
The Company leases its domestic and international facilities under cancelable,
non-cancelable and month-to-month operating leases and certain office equipment
under operating leases. Rent expense was $25.5 million, $25.2 million and $21.4
million in 1998, 1997 and 1996, respectively.
Future minimum lease payments as of September 30, 1998, of which $2.2 million
has been accrued as merger-related expenses, are as follows:
<TABLE>
<CAPTION>
(in thousands)
Fiscal Years Ending
-------------------
<S> <C>
1999 $18,383
2000 17,510
2001 16,046
2002 14,688
2003 8,521
Thereafter 15,401
-------
Total minimum payments required $90,549
=======
</TABLE>
22
<PAGE> 24
NOTE 5. STOCKHOLDERS' EQUITY
Net Income Per Share. The following is a reconciliation of the weighted-average
common shares used to calculate basic net income per share to the
weighted-average common shares used to calculate diluted net income per share
for fiscal 1998, 1997 and 1996:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
(in thousands) 1998 1997 1996
- -------------- ------ ------ ------
<S> <C> <C> <C>
Weighted-average common shares used to
calculate basic net income per share 65,501 62,413 60,162
Stock options outstanding 2,926 3,073 2,829
------ ------ ------
Weighted-average common shares used to
calculate diluted net income per share 68,427 65,486 62,991
====== ====== ======
</TABLE>
Stock Repurchase Program. In July 1998, the Board of Directors authorized the
repurchase of up to 3,250,000 shares of the Company's outstanding common stock
in the open market over the following 24 months. The repurchased shares were to
be used for issuance under the Company's employee stock plans and for other
corporate purposes. During fiscal 1998, the Company purchased approximately
353,000 shares at an average price of $35. In October 1998, the Company
announced that it had rescinded its stock repurchase program to comply with
pooling-of-interests accounting guidance provided in the Securities and Exchange
Commission Staff Accounting Bulletin No. 96 (See Note 9).
In May 1996, the Board of Directors authorized the repurchase of up to 2,000,000
shares of the Company's outstanding common stock in the open market over the
following 24 months. During fiscal 1996, the Company purchased approximately
361,000 shares at an average price of $41 per share. During fiscal 1997, the
Company purchased approximately 205,000 shares at an average price of $46 per
share. All shares repurchased during fiscal 1996 and 1997 were reissued prior to
the merger with EPIC in February 1997, at which time the Company announced that
it had rescinded this stock repurchase program in order to comply with
pooling-of-interests accounting guidance provided in the Securities and Exchange
Commission Staff Accounting Bulletin No. 96.
Preferred Shares Rights Plan. The Company has adopted a number of provisions
that could have anti-takeover effects. In September 1997, the Board of Directors
adopted a Preferred Shares Rights Plan. In addition, the Board of Directors has
the authority, without further action by its stockholders, to fix the rights and
preferences 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. The rights expire on October 24, 2007.
Employee Stock Purchase Plan. Under the Company's 1992 Employee Stock Purchase
Plan (ESPP), 3,150,000 shares have been authorized for issuance as of September
30, 1998. Under the ESPP, employees are granted the right to purchase shares of
common stock at a price per share that is 85% of the lesser of: the fair market
value of the shares at (i) the beginning of a rolling two-year offering period,
or (ii) the end of each semi-annual purchase period. During fiscal 1998, 1997
and 1996, shares totaling 433,036, 457,877 and 486,887, respectively, were
issued under the plan at average prices of $27.61, $26.96 and $16.95 per share,
respectively. As of September 30, 1998, 1,379,421 shares of common stock are
reserved for the ESPP.
Stock Option Plans. Under the Company's 1992 Stock Option Plan (the 1992 Plan),
the Board of Directors may grant either incentive or non-qualified stock options
to purchase shares of the Company's stock to eligible individuals at not less
than 100% of the fair market value of those shares on the grant date. The shares
and stock options issued to new employees
23
<PAGE> 25
typically vest 25% after one year with the remaining shares and options vesting
on a pro rata basis over the following 36 months, and shares and stock options
issued to existing employees typically vest on a pro rata basis over 48 months
or 16 quarters. Options expire ten years from the date of grant. As of September
30, 1998, 823,537 shares of common stock are reserved for future grants.
In fiscal 1998, Synopsys established a Non-Statutory Stock Option Plan (the 1998
Plan) under which it authorized 566,736 shares of common stock for granting of
non-qualified stock options to employees excluding officers and directors.
Exercisibility, option price and other terms are determined by the Board of
Directors, but the option price shall not be less than the fair value of the
stock at the date of grant. Options currently expire no later than ten years and
generally vest at the rate of 25% after one year from the date of grant, and
then ratably over the following 36 months. At September 30, 1998, 2,149 shares
of common stock are reserved for future grants.
Under the Company's 1994 Non-Employee Directors Stock Option Plan (the Directors
Plan), a total of 275,000 shares have been reserved for issuance. Pursuant to
the Directors Plan, each non-employee member of the Board of Directors (the
Board) is automatically granted an option to purchase 20,000 shares of the
Company's stock upon initial appointment or election to the Board, 10,000 shares
of the Company's stock upon reelection to the Board, and 5,000 shares of the
Company's stock annually for service on Board committees, subject to a limit of
two committee-service grants per year. Stock options are granted at not less
than 100% of the fair market value of those shares on the grant date. Stock
options granted upon appointment or election to the Board vest 25% annually.
Stock options granted upon reelection to the Board and committee-service grants
vest 100% after the first year of continuous service. As of September 30, 1998,
116,000 shares of common stock are reserved for future grants.
The Company has assumed certain option plans in connection with business
combinations (See Note 2). Generally, these options were granted under terms
similar to the terms of the Company's stock option plans at prices adjusted to
reflect the relative exchange ratios. All assumed plans were terminated as to
future grants upon completion of each of the business combinations.
Additional information concerning stock option activity under the various plans
is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
----------- --------------
<S> <C> <C>
Outstanding at October 1, 1995 10,634,285 $17.63
Granted 4,406,013 $30.52
Exercised (2,173,998) $11.60
Canceled (1,549,325) $27.37
-----------
Outstanding at September 30, 1996 11,316,975 $22.38
Granted and assumed 7,563,443 $31.03
Exercised (2,255,850) $15.86
Canceled (4,302,151) $34.34
-----------
Outstanding at September 30, 1997 12,322,417 $24.72
Granted and assumed 4,455,781 $33.80
Exercised (2,641,655) $19.16
Canceled (2,003,247) $26.48
-----------
Outstanding at September 30, 1998 12,133,296 $29.05
===========
Options Exercisable at:
September 30, 1996 3,849,289 $16.93
September 30, 1997 4,017,263 $20.53
September 30, 1998 5,144,762 $24.50
</TABLE>
The following table summarizes information about stock options outstanding at
September 30, 1998:
24
<PAGE> 26
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ---------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (IN YEARS) PRICE EXERCISABLE PRICE
- ------------------------ ----------- --------------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.11 - $23.19 2,627,020 5.85 $15.93 2,121,829 $15.52
$23.22 - $28.19 2,887,130 7.74 $27.15 1,316,841 $26.65
$28.25 - $33.69 2,617,690 8.64 $32.22 773,873 $31.20
$33.74 - $37.38 2,589,573 8.78 $35.35 785,248 $35.23
$37.44 - $45.75 1,411,883 9.37 $39.90 146,971 $42.43
---------- ---- ------ --------- ------
$ 0.11 - $45.75 12,133,296 7.94 $29.05 5,144,762 $24.50
========== ==== ====== ========= ======
</TABLE>
Stock-Based Compensation. Under APB 25, the Company generally recognizes no
compensation expense with respect to stock-based awards to employees. Pro forma
information regarding net income and net income per share is required by SFAS
123 for awards granted after September 30, 1995, as if the Company had accounted
for its stock-based awards to employees under the fair value method of SFAS 123.
The fair value method of the Company's stock-based awards to employees was
estimated using the Black-Scholes option pricing model. The Black-Scholes option
valuation model was developed for use in estimating fair value of traded options
that have no vesting restrictions and are fully transferable. The Black-Scholes
model requires the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company's stock-based awards to
employees have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
stock-based awards to employees. The fair value of the Company's stock-based
awards to employees was estimated assuming no expected dividends and the
following weighted-average assumptions:
<TABLE>
<CAPTION>
STOCK OPTION PLANS ESPP
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Expected life (in years) 5.3 5.4 5.4 1.25 0.9 0.9
Risk-free interest rate 5.3% 6.3% 6.0% 5.5% 5.8% 5.6%
Volatility 55.0% 55.1% 53.6% 55.0% 55.1% 53.6%
</TABLE>
The weighted-average estimated fair value of stock options granted during fiscal
1998, 1997 and 1996 was $20.32, $12.87 and $17.49 per share, respectively. The
weighted-average estimated fair value of shares granted under the ESPP during
fiscal 1998, 1997 and 1996 was $11.70, $10.74 and $9.64 per share, respectively.
For pro forma purposes, the estimated fair value of the Company's stock-based
awards to employees is generally amortized over the options' vesting period of
four years (for options) and the six-month purchase period (for stock purchases
under the ESPP). The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
(in thousands, except per share amounts) 1998 1997 1996
- ---------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Net income
As reported $ 91,702 $ 81,986 $ 16,802
Pro forma $ 46,936 $ 54,114 $ 5,239
Earnings per share - basic
As reported $ 1.40 $ 1.31 $ 0.28
Pro forma $ 0.72 $ 0.87 $ 0.09
Earnings per share - diluted
As reported $ 1.34 $ 1.25 $ 0.27
Pro forma $ 0.71 $ 0.83 $ 0.08
</TABLE>
Because SFAS 123 is applicable only to awards granted subsequent to September
30, 1995, its pro forma effect will not be fully reflected until fiscal 1999.
25
<PAGE> 27
NOTE 6. INCOME TAXES
The Company is entitled to a deduction for federal and state tax purposes with
respect to employees' stock option activity. The net reduction in taxes
otherwise payable arising from that deduction has been credited to additional
paid-in capital.
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
(in thousands) 1998 1997 1996
- -------------- -------- -------- --------
<S> <C> <C> <C>
Current:
Federal $ 40,452 $ 26,998 $ 14,154
State 5,555 4,562 2,525
Foreign 2,662 5,875 5,083
-------- -------- --------
48,669 37,435 21,762
-------- -------- --------
Deferred:
Federal (6,003) (14,325) (6,636)
State (858) (2,062) (992)
Foreign 244 (29) 325
-------- -------- --------
(6,617) (16,416) (7,303)
-------- -------- --------
Charge equivalent to the federal and state tax benefit
related to employee stock options 13,767 30,024 8,967
-------- -------- --------
Provision for income taxes $ 55,819 $ 51,043 $ 23,426
======== ======== ========
</TABLE>
The components of the Company's total income before provision for income taxes
are as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
(in thousands) 1998 1997 1996
- -------------- -------- -------- --------
<S> <C> <C> <C>
United States $113,254 $122,520 $ 35,274
Foreign 5,863 10,509 4,954
-------- -------- --------
$119,117 $133,029 $ 40,228
======== ======== ========
</TABLE>
The provision for income taxes differs from the amount obtained by applying the
statutory federal income tax rate to income before income taxes as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
(in thousands) 1998 1997 1996
- -------------- -------- -------- --------
<S> <C> <C> <C>
Statutory federal tax $ 41,691 $ 46,560 $ 14,080
State tax, net of federal benefit 6,121 6,712 2,231
Tax credits (1,665) (3,717) (993)
Tax benefit from foreign sales corporation (3,826) (2,920) (2,013)
Tax exempt income (5,911) (3,797) (3,239)
Equity method for investments -- 744 --
Foreign tax in excess of U.S. statutory tax 872 1,501 575
Non-deductible merger and acquisition expenses 7,379 6,884 1,500
In-process research and development expenses 9,888 1,921 8,694
Other 1,270 2,590 2,591
Valuation Allowance -- (5,435) --
-------- -------- --------
$ 55,819 $ 51,043 $ 23,426
======== ======== ========
</TABLE>
A net deferred tax asset of $30.5 million and $23.8 million is included in
prepaid expenses, deferred taxes, and other at September 30, 1998 and 1997,
respectively. The tax effects of temporary differences and carryforwards which
give rise to significant portions of the deferred tax assets and liabilities are
as follows:
26
<PAGE> 28
<TABLE>
<CAPTION>
SEPTEMBER 30,
(in thousands) 1998 1997
- -------------- -------- --------
<S> <C> <C>
Deferred tax assets:
Tax credit carryovers $ 220 $ 672
Prepaid commissions -- 951
Accounts receivable -- 618
Deferred revenue 4,346 9,645
Joint venture and acquisition costs 4,882 7,912
Reserves and other expenses not currently deductible 23,333 18,601
Depreciation and amortization 4,187 599
Unrealized foreign exchange losses 269 --
Other 1,187 670
-------- --------
Deferred tax assets 38,424 39,668
Deferred tax liabilities:
Depreciation and amortization -- (932)
Unrealized gain on investments (7,287) (9,382)
Unrealized foreign exchange gains -- (212)
Net capitalized software development costs (674) (2,994)
Other -- (2,302)
-------- --------
Deferred tax liabilities (7,961) (15,822)
-------- --------
Net deferred tax asset $ 30,463 $ 23,846
======== ========
</TABLE>
At September 30, 1998, the Company believes that it is more likely than not that
the results of future operations will generate sufficient taxable income to
realize the deferred tax assets.
At September 30, 1998, the Company had alternative minimum tax credit carryovers
of $0.2 million, which do not expire.
NOTE 7. GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMER INFORMATION
The Company operates in a single industry segment, the development, marketing,
and support of electronic design automation software and systems products. The
Company's foreign operations consist primarily of sales, marketing and service
activities in subsidiaries throughout the world. No one customer accounted for
more than ten percent of the Company's revenue in fiscal 1998, 1997 and 1996,
respectively.
Summarized financial information by major geographic area is as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
(in thousands) 1998 1997 1996
- -------------- --------- --------- ---------
<S> <C> <C> <C>
Revenue:
North America $ 506,566 $ 456,669 $ 358,959
Europe 128,347 109,760 88,856
Pacific Rim 151,409 152,413 132,619
Transfers between geographic areas (68,382) (71,886) (54,835)
--------- --------- ---------
Consolidated $ 717,940 $ 646,956 $ 525,599
========= ========= =========
Operating income:
North America $ 95,040 $ 61,408 $ 50,567
Europe 30,995 17,110 8,483
Pacific Rim 51,176 42,545 28,790
Corporate and eliminations (84,078) (12,395) (59,240)
--------- --------- ---------
Consolidated $ 93,133 $ 108,668 $ 28,600
========= ========= =========
Identifiable assets:
North America $ 411,150 $ 351,398 $ 312,983
Europe 38,949 25,410 39,139
Pacific Rim 53,376 57,739 41,330
Corporate assets and eliminations 443,152 334,042 191,401
--------- --------- ---------
Consolidated $ 946,627 $ 768,589 $ 584,853
========= ========= =========
</TABLE>
27
<PAGE> 29
Transfers between geographic areas represent both intercompany product and
service revenue accounted for at prices representative of unaffiliated party
transactions, and export shipments directly to customers. In fiscal 1998,
identifiable assets in the Pacific Rim include $22.5 million of accounts
receivable from customers located in Japan. Management believes allowances are
adequate to cover any uncollectible amounts. Corporate assets consist primarily
of cash and investments.
NOTE 8. SELECTED QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
(in thousands, except per share data) DEC. 31 MAR. 31 JUN. 30 SEP. 30
- ------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1998:
Revenue $ 174,212 $ 170,105 $ 179,606 $ 194,017
Gross margin 150,720 148,815 156,280 168,358
Income (loss) before provision for
income taxes and extraordinary items (1) (4,195) 38,678 52,532 32,102
Net income (loss) (6,400) 25,527 34,671 37,904
Earnings (loss) per share
Basic (0.10) 0.39 0.52 0.57
Diluted (0.10) 0.38 0.50 0.55
Market stock price range: (2)
High $ 46.06 $ 36.00 $ 45.81 $ 42.44
Low $ 35.06 $ 29.50 $ 30.97 $ 26.13
1997:
Revenue $ 153,903 $ 156,771 $ 162,610 $ 173,672
Gross margin 134,339 135,834 139,567 150,331
Income before provision for income taxes (3) 37,444 17,516 37,132 40,937
Net income 24,332 6,905 24,120 26,629
Earnings per share
Basic 0.39 0.11 0.39 0.42
Diluted 0.37 0.11 0.37 0.40
Market stock price range: (2)
High $ 50.00 $ 46.25 $ 38.00 $ 45.19
Low $ 39.75 $ 24.25 $ 21.75 $ 29.50
</TABLE>
(1) Includes merger-related and other costs of $36.0 million, $11.9 million and
$3.1 million, for the first, second and third quarters of fiscal 1998,
respectively. Includes in-process research and development and other costs of
$4.2 million and $28.9 million in the first and fourth quarters of fiscal 1998,
respectively.
(2) The Company's common stock is traded on The Nasdaq Stock Market under the
symbol "SNPS." The stock prices shown represent quotations among dealers without
adjustments for retail markups, markdowns or commissions and may not represent
actual transactions. As of October 3, 1998, there were approximately 734
stockholders of record. To date, the Company has paid no cash dividends on its
capital stock, and has no current intention to do so.
(3) Includes merger-related and other costs of $11.4 million and in-process
research and development and other costs of $5.5 million for the second quarter
of fiscal 1997.
NOTE 9. SUBSEQUENT EVENT
28
<PAGE> 30
On October 26, 1998, the Company signed a definitive agreement to merge with
Everest Design Automation, Inc. (Everest). The Company will exchange
approximately 1.4 million shares of its common stock for all the outstanding
stock of Everest and will reserve approximately 100,000 shares of its common
stock for issuance under Everest's stock option plan, which the Company will
assume in the transaction. The business combination will be accounted for as a
pooling-of-interests. The Board of Directors approved the rescission of the
Company's stock repurchase program in order to comply with pooling-of-interests
accounting guidance provided in the Securities and Exchange Commission Staff
Accounting Bulletin No. 96. Retained earnings will be restated as of October 1,
1998 to reflect the pooling-of-interests combination.
<PAGE> 1
Exhibit 21.1
Synopsys, Inc.
Subsidiaries
<TABLE>
<CAPTION>
Name Jurisdiction of Incorporation
- ---- -----------------------------
<S> <C>
Archer Systems, Inc. U.S.A.
Chronologic Simulation, Inc. U.S.A.
CIDA Technology, Inc. U.S.A.
CSW Land Development Corporation U.S.A.
Eagle Design Automation, Inc. U.S.A.
Electronic Design Automation Services Europe Netherlands
Epic International, Inc. U.S.A.
Maude Avenue Land Corporation U.S.A.
Nihon Synopsys K.K Japan
Quad Design Technology, Inc. U.S.A.
Radiant Design Tools, Inc. U.S.A.
Silerity, Inc. U.S.A.
Sunrise Test Systems, Inc. U.S.A.
Synopsys GmbH Germany
Synopsys Holding Co. U.S.A.
Synopsys (India) Pvte. Ltd. India
Synopsys International, Inc. Barbados
Synopsys Italia, SRL Italy
Synopsys Korea, Inc. Korea
Synopsys Leasing Company U.S.A.
Synopsys (Northern Europe) Ltd. United Kingdom
Synopsys SARL France
Synopsys Scandinavia AB Sweden
Synopsys Singapore Pte. Ltd. Singapore
Synthesis and Optimisation Systems Ltd. Israel
Systems Science, Inc. U.S.A.
The CAE Company Netherlands
Viewlogic Asia Corporation U.S.A.
Viewlogic Europe BV Netherlands
Viewlogic Foreign Sales Corporation U.S. Virgin Islands
Viewlogic India Private, Ltd. India
Viewlogic Security Corporation U.S.A.
Viewlogic Systems Europe BV Netherlands
Viewlogic Systems GmbH Germany
Viewlogic Systems, Ltd. United Kingdom
Viewlogic Systems SA France
</TABLE>
<PAGE> 1
Exhibit 23.1
REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors
Synopsys, Inc.:
Under the date of October 26, 1998, we reported on the consolidated balance
sheets of Synopsys, Inc. and subsidiaries as of September 30, 1998 and 1997, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the years in the three-year period ended September 30, 1998,
as incorporated by reference in the Annual Report on Form 10-K. In connection
with our audits of the aforementioned consolidated financial statements, we also
audited the related consolidated financial statement schedule as listed in the
accompanying index. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Mountain View, California
October 26, 1998
<PAGE> 1
Exhibit 23.2
REPORT OF DELOITTE AND TOUCHE LLP, INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of EPIC Design Technology, Inc.:
We have audited the consolidated statements of operations, shareholders' equity
and cash flows of EPIC Design Technology, Inc. and subsidiaries for the year
ended September 30, 1996 (none of which are presented herein). Those financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on those financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of EPIC Design
Technology, Inc. and subsidiaries for the year ended September 30, 1996 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
October 11, 1996
<PAGE> 1
Exhibit 23.3
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Synopsys, Inc.:
We consent to the incorporation by reference in registration statement Nos.
33-82804, 33-78560, 33-76206, 33-92144, 333-04410, 333-22663, 333-42069,
333-45181, 333-50947, 333-60783 and 333-68883 on Form S-8 of Synopsys, Inc. of
our reports dated October 26, 1998, relating to the consolidated balance sheets
of Synopsys, Inc. and subsidiaries as of September 30, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the years in the three-year period ended September 30, 1998, and the
related consolidated financial statement schedule, which reports appear or are
incorporated by reference in this Annual Report on Form 10-K of Synopsys, Inc.
KPMG Peat Marwick LLP
Mountain View, California
December 18, 1998
<PAGE> 1
Exhibit 23.4
CONSENT OF DELOITTE & TOUCHE LLP
We consent to the incorporation by reference in Registration Statement Nos.
33-82804, 33-78560, 33-76206, 33-92144, 333-04410, 333-22663, 333-42069,
333-45181, 333-50947, 333-60783 and 333-68883 of Synopsys, Inc. on Form S-8 of
our report dated October 11, 1996 (relating to the consolidated financial
statements of EPIC Design Technology, Inc. not presented separately herein),
appearing in this Annual Report on Form 10-K for the year ended September 30,
1998.
DELOITTE & TOUCHE LLP
San Jose, California
December 18, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 159,687
<SECURITIES> 440,082
<RECEIVABLES> 139,546
<ALLOWANCES> 13,210
<INVENTORY> 0
<CURRENT-ASSETS> 768,556
<PP&E> 195,249
<DEPRECIATION> 95,370
<TOTAL-ASSETS> 946,627
<CURRENT-LIABILITIES> 268,216
<BONDS> 13,138
0
0
<COMMON> 665
<OTHER-SE> 659,722
<TOTAL-LIABILITY-AND-EQUITY> 946,627
<SALES> 717,940
<TOTAL-REVENUES> 717,940
<CGS> 93,767
<TOTAL-COSTS> 93,767
<OTHER-EXPENSES> 531,040
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,975
<INCOME-PRETAX> 119,117
<INCOME-TAX> 55,819
<INCOME-CONTINUING> 63,298
<DISCONTINUED> 0
<EXTRAORDINARY> 28,404
<CHANGES> 0
<NET-INCOME> 91,702
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 1.34
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 126,414
<SECURITIES> 308,416
<RECEIVABLES> 127,243
<ALLOWANCES> 8,213
<INVENTORY> 0
<CURRENT-ASSETS> 590,440
<PP&E> 174,687
<DEPRECIATION> 82,608
<TOTAL-ASSETS> 768,589
<CURRENT-LIABILITIES> 254,650
<BONDS> 9,191
0
0
<COMMON> 638
<OTHER-SE> 500,905
<TOTAL-LIABILITY-AND-EQUITY> 768,589
<SALES> 646,956
<TOTAL-REVENUES> 646,956
<CGS> 86,885
<TOTAL-COSTS> 86,885
<OTHER-EXPENSES> 451,403
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,080
<INCOME-PRETAX> 133,029
<INCOME-TAX> 51,043
<INCOME-CONTINUING> 81,986
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 81,986
<EPS-PRIMARY> 1.31
<EPS-DILUTED> 1.25
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<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> 108,371
<SECURITIES> 273,604
<RECEIVABLES> 125,920
<ALLOWANCES> 6,498
<INVENTORY> 0
<CURRENT-ASSETS> 533,546
<PP&E> 155,688
<DEPRECIATION> 76,676
<TOTAL-ASSETS> 687,779
<CURRENT-LIABILITIES> 230,549
<BONDS> 10,634
0
0
<COMMON> 629
<OTHER-SE> 443,028
<TOTAL-LIABILITY-AND-EQUITY> 687,779
<SALES> 473,284
<TOTAL-REVENUES> 473,284
<CGS> 63,544
<TOTAL-COSTS> 63,544
<OTHER-EXPENSES> 337,190
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,339
<INCOME-PRETAX> 92,092
<INCOME-TAX> 36,735
<INCOME-CONTINUING> 55,357
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,357
<EPS-PRIMARY> 0.89
<EPS-DILUTED> 0.85
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 76,478
<SECURITIES> 272,652
<RECEIVABLES> 117,370
<ALLOWANCES> 7,589
<INVENTORY> 0
<CURRENT-ASSETS> 493,168
<PP&E> 147,576
<DEPRECIATION> 73,628
<TOTAL-ASSETS> 630,771
<CURRENT-LIABILITIES> 214,208
<BONDS> 12,260
0
0
<COMMON> 622
<OTHER-SE> 401,474
<TOTAL-LIABILITY-AND-EQUITY> 630,771
<SALES> 310,674
<TOTAL-REVENUES> 310,674
<CGS> 40,501
<TOTAL-COSTS> 40,501
<OTHER-EXPENSES> 229,002
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 745
<INCOME-PRETAX> 54,960
<INCOME-TAX> 23,723
<INCOME-CONTINUING> 31,237
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,237
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.48
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 93,375
<SECURITIES> 239,265
<RECEIVABLES> 112,284
<ALLOWANCES> 4,949
<INVENTORY> 0
<CURRENT-ASSETS> 465,407
<PP&E> 136,108
<DEPRECIATION> 61,620
<TOTAL-ASSETS> 607,650
<CURRENT-LIABILITIES> 206,447
<BONDS> 14,122
0
0
<COMMON> 617
<OTHER-SE> 384,440
<TOTAL-LIABILITY-AND-EQUITY> 607,650
<SALES> 153,903
<TOTAL-REVENUES> 153,903
<CGS> 19,564
<TOTAL-COSTS> 19,564
<OTHER-EXPENSES> 104,493
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 416
<INCOME-PRETAX> 37,444
<INCOME-TAX> 13,122
<INCOME-CONTINUING> 24,332
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,332
<EPS-PRIMARY> 0.39
<EPS-DILUTED> 0.37
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 87,100
<SECURITIES> 251,324
<RECEIVABLES> 100,542
<ALLOWANCES> 5,138
<INVENTORY> 0
<CURRENT-ASSETS> 457,274
<PP&E> 131,646
<DEPRECIATION> 62,158
<TOTAL-ASSETS> 584,853
<CURRENT-LIABILITIES> 218,332
<BONDS> 15,974
0
0
<COMMON> 616
<OTHER-SE> 349,931
<TOTAL-LIABILITY-AND-EQUITY> 584,853
<SALES> 525,599
<TOTAL-REVENUES> 525,599
<CGS> 65,546
<TOTAL-COSTS> 65,546
<OTHER-EXPENSES> 431,453
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,353
<INCOME-PRETAX> 40,228
<INCOME-TAX> 23,426
<INCOME-CONTINUING> 16,802
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,802
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.27
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 71,954
<SECURITIES> 258,434
<RECEIVABLES> 82,038
<ALLOWANCES> 4,324
<INVENTORY> 0
<CURRENT-ASSETS> 432,754
<PP&E> 125,163
<DEPRECIATION> 63,200
<TOTAL-ASSETS> 543,303
<CURRENT-LIABILITIES> 195,859
<BONDS> 17,818
0
0
<COMMON> 672
<OTHER-SE> 328,954
<TOTAL-LIABILITY-AND-EQUITY> 543,303
<SALES> 380,145
<TOTAL-REVENUES> 380,145
<CGS> 47,625
<TOTAL-COSTS> 47,625
<OTHER-EXPENSES> 311,004
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 958
<INCOME-PRETAX> 29,313
<INCOME-TAX> 12,899
<INCOME-CONTINUING> 16,414
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,414
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.26
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 133,550
<SECURITIES> 177,914
<RECEIVABLES> 86,259
<ALLOWANCES> 4,718
<INVENTORY> 0
<CURRENT-ASSETS> 418,748
<PP&E> 113,923
<DEPRECIATION> 57,761
<TOTAL-ASSETS> 497,786
<CURRENT-LIABILITIES> 182,892
<BONDS> 19,649
0
0
<COMMON> 662
<OTHER-SE> 294,583
<TOTAL-LIABILITY-AND-EQUITY> 497,786
<SALES> 245,227
<TOTAL-REVENUES> 245,227
<CGS> 29,971
<TOTAL-COSTS> 29,971
<OTHER-EXPENSES> 217,388
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,272
<INCOME-TAX> 3,701
<INCOME-CONTINUING> (429)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (429)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
