<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 4, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission file number: 0-19807
SYNOPSYS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 56-1546236
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
700 East Middlefield Road
Mountain View, CA 94043
------------------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's Telephone No., including area code: (650) 962-5000
-----------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of August 8, 1998, there were approximately 66,801,421 shares of the
Registrant's Common Stock outstanding.
1
<PAGE> 2
SYNOPSYS, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets-
June 30, 1998 and September 30, 1997 3
Condensed Consolidated Statements of Income-
Three months and nine months ended
June 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows-
Nine months ended June 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYNOPSYS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 166,094 $ 126,414
Short-term investments 422,645 308,416
--------- ---------
Cash and short-term investments 588,739 434,830
--------- ---------
Accounts receivable, net of allowances of $12,099 and
$8,213, respectively 111,190 119,030
Prepaid expenses, deferred income taxes and other 38,659 36,580
--------- ---------
Total current assets 738,588 590,440
--------- ---------
Property and equipment, net 87,998 92,079
Capitalized software development costs, net of accumulated
amortization of $7,293 and $10,888, respectively 4,017 7,297
Long-term investments 43,785 61,056
Other assets 22,010 17,717
--------- ---------
Total assets $ 896,398 $ 768,589
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 121,938 $ 114,881
Current portion of long-term debt 6,034 8,964
Income taxes payable 14,691 33,282
Deferred revenue 117,978 97,523
--------- ---------
Total current liabilities 260,641 254,650
--------- ---------
Long-term debt 3,839 9,191
Deferred compensation 5,871 3,205
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized;
no shares outstanding -- --
Common stock, $.01 par value; 100,000,000 shares
authorized; 66,687,000 and 63,844,000 shares
outstanding, respectively 667 638
Additional paid-in capital 408,908 334,086
Retained earnings 205,462 151,664
Cumulative translation adjustment (3,281) (1,552)
Net unrealized gain on investments 14,291 16,707
--------- ---------
Total stockholders' equity 626,047 501,543
--------- ---------
Total liabilities and stockholders' equity $ 896,398 $ 768,589
========= =========
</TABLE>
See accompanying notes
3
<PAGE> 4
SYNOPSYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Product $ 102,036 $ 103,464 $ 315,524 $ 302,896
Service 77,570 59,146 208,399 170,388
--------- --------- --------- ----------
Total revenue 179,606 162,610 523,923 473,284
-------- -------- --------- ----------
Cost of revenue:
Product 8,898 9,367 25,991 27,355
Service 14,428 13,676 42,117 36,189
-------- ------ ------- --------
Total cost of revenue 23,326 23,043 68,108 63,544
-------- ------ ------- --------
Gross margin 156,280 139,567 455,815 409,740
-------- ------- ------- -------
Operating expenses:
Research and development 37,381 37,324 113,716 110,445
Sales and marketing 58,403 60,039 181,857 176,113
General and administrative 11,553 10,825 36,097 33,732
Merger-related and other costs 3,121 -- 51,009 11,400
In-process research and development -- -- 4,191 5,500
---------- ------ ------- -------
Total operating expenses 110,458 108,188 386,870 337,190
------- ------- ------- -------
Operating income 45,822 31,379 68,945 72,550
Other income, net 6,710 5,753 18,070 19,542
-------- --------- -------- --------
Income before income taxes 52,532 37,132 87,015 92,092
Income tax provision 17,861 13,012 35,086 36,735
------- -------- -------- --------
Income before extraordinary item 34,671 24,120 51,929 55,357
Extraordinary item - gain on extinguishment of
debt, net of income tax expense -- -- 1,869 --
------------- ----------- --------- -------
Net income $ 34,671 $ 24,120 $ 53,798 $ 55,357
======== ========= ======== ========
Basic earnings per share:
Income before extraordinary item $ .52 $ .39 $ .80 $ .89
Extraordinary item -- -- .03 --
---------- --------- --------- ----------
Net income $ .52 $ .39 $ .83 $ .89
========= ======== ========= =========
Weighted average common shares 66,104 62,611 65,129 62,039
====== ====== ====== ======
Diluted earnings per share:
Income before extraordinary item $ .50 $ .37 $ .76 $ .85
Extraordinary item -- -- .03 --
---------- ---------- -------- ---------
Net income $ .50 $ .37 $ .79 $ .85
========= ========= ======== ========
Weighted average common shares
and equivalents 69,311 65,335 68,259 65,115
====== ====== ====== ======
</TABLE>
See accompanying notes
4
<PAGE> 5
SYNOPSYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
--------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 53,798 $ 55,357
Adjustments to reconcile net income to cash flows
provided by operating activities:
Extraordinary gain on extinguishment of debt (1,869) --
Depreciation and amortization 32,686 29,120
Interest accretion on notes payable 297 414
Provision for doubtful accounts and sales returns 3,886 1,360
Tax benefit associated with stock options 16,207 22,262
Deferred revenue 20,455 10,689
Deferred income taxes (5,268) (5,538)
Noncash merger-related and other costs 8,198 3,084
In-process research and development 4,191 5,500
Gain on sale of long-term investments (5,965) (13,856)
Net change in assets and liabilities:
Accounts receivable 3,955 (24,668)
Prepaid expenses and other 2,531 (6,247)
Other assets (6,661) (81)
Accounts payable and accrued liabilities 4,803 (5,601)
Income taxes payable (16,320) 1,872
Deferred compensation 2,666 2,731
--------- ---------
Net cash provided by operating activities 117,590 76,398
--------- ---------
Cash flows from investing activities:
Proceeds from sales of long-term investments 16,757 16,635
Proceeds from sale of business unit -- 3,000
Purchases of long-term investments (998) (22,124)
Purchases and maturities of short-term investments, net (111,122) (20,340)
Purchases of property and equipment (29,164) (38,729)
Acquisitions (net of cash acquired) (2,236) --
Capitalization of software development costs (1,393) (3,102)
Decrease in deposits and other -- (56)
--------- ---------
Net cash used in investing activities (128,156) (64,716)
--------- ---------
Cash flows from financing activities:
Principal payments on debt obligation (6,670) (8,495)
Proceeds from sale of common stock 58,645 33,297
Purchases of treasury common stock -- (13,026)
Repayment of foreign tax grant -- (1,304)
--------- ---------
Net cash provided by financing activities 51,975 10,472
--------- ---------
Effect of exchange rate changes on cash (1,729) (883)
Net increase in cash and cash equivalents 39,680 21,271
Cash and cash equivalents, beginning of period 126,414 87,100
--------- ---------
Cash and cash equivalents, end of period $ 166,094 $ 108,371
========= =========
Supplemental Disclosure:
Cash paid during the period for:
Interest $ 568 $ 629
========= =========
Income taxes $ 40,447 $ 18,942
========= =========
</TABLE>
See accompanying notes
5
<PAGE> 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Synopsys, Inc. (the Company or Synopsys) is a leading supplier of
electronic design automation (EDA) solutions to the global electronics
market. The Company provides comprehensive design technologies, consulting
services and support to creators of advanced integrated circuits,
electronic systems and systems on a chip.
The unaudited financial information furnished herein reflects all
adjustments, consisting only of normal adjustments, except for
merger-related and other costs and in-process research and development
charges, which in the opinion of management are necessary to fairly state
the Company's and its subsidiaries' condensed consolidated financial
position, the results of their operations, and their cash flows for the
periods presented. The consolidated results of operations for the period
ended June 30, 1998, are not necessarily indicative of the results to be
expected for any subsequent quarter or for the entire fiscal year. Certain
information and footnote disclosures normally included in annual
consolidated financial statements prepared in accordance with generally
accepted accounting principles have been omitted, although the Company
believes that the disclosures included are adequate to make the information
presented not misleading. The unaudited condensed consolidated financial
statements and notes included herein should be read in conjunction with the
consolidated financial statements and notes for the fiscal year ended
September 30, 1997, included in the Company's 1997 Annual Report on Form
10-K and the Company's Registration Statement on Form S-4 dated November 7,
1997, filed in connection with the Company's merger with Viewlogic Systems,
Inc. (Viewlogic).
For financial reporting purposes, the Company reports on a 13-week quarter
and a 52 or 53-week year. Due to the fact that fiscal 1998 contains 53
weeks, the first quarter of fiscal 1998 contained 14 weeks, while the first
quarter of fiscal 1997 contained 13 weeks. For presentation purposes, the
consolidated financial statements refer to the quarter's calendar month
end.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the recorded amounts reported in the unaudited
condensed consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
2. SOFTWARE REVENUE RECOGNITION
During the first quarter of fiscal 1998, the Company adopted Statement of
Position (SOP) 97-2, "Software Revenue Recognition." The provisions of SOP
97-2 have been applied to transactions entered into beginning October 1,
1997. SOP 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair values of the elements. The revenue allocated to software
products, including time-based software licenses, generally is recognized
upon delivery of the products. The revenue allocated to postcontract
customer support (PCS) is recognized ratably over the term of the support
and revenue allocated to service elements is recognized as the services are
performed.
In connection with the adoption of SOP 97-2, the Company 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.
3. BUSINESS COMBINATIONS
On December 4, 1997, the Company issued approximately 11.3 million shares
of its common stock in exchange for all the outstanding shares of common
stock of Viewlogic, 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. The
merger was accounted for as a
6
<PAGE> 7
pooling of interests, and accordingly, the Company's condensed consolidated
financial statements have been restated to include the financial position
and results of Viewlogic for all periods presented.
The results of operations previously reported by the separate enterprises
and the combined amounts presented in the accompanying consolidated
financial statements are summarized below:
<TABLE>
<CAPTION>
(in thousands) Synopsys Viewlogic Combined
-------- --------- --------
<S> <C> <C> <C>
Three months ending December 31, 1996
Total revenue $ 116,710 $ 37,193 $ 153,903
Net income 19,076 5,256 24,332
Three months ending December 31, 1997
Total revenue $ 137,094 $ 37,118 $ 174,212
Extraordinary gain 1,869 -- 1,869
Net loss (4,627) (1,773) (6,400)
</TABLE>
Adjustments to conform Viewlogic's method of accounting for sales
commissions with that of the Company reduced combined net income by
approximately $250,000 and $745,000 for the three and nine months ended
June 30, 1997, respectively.
The Company incurred merger-related and other costs of $3.1 million and
$51.0 million for the third quarter and first nine months of fiscal 1998,
respectively. The following table presents the components of merger-related
and other costs recorded for the nine months ended June 30, 1998, along
with charges against the reserves through June 30, 1998:
<TABLE>
<CAPTION>
Noncash June 30, 1998
Writedown Reserve
(in thousands) Total Charge Amounts Paid of Assets Balance
------------ ------------ --------- -------
<S> <C> <C> <C> <C>
Transaction costs 9,245 (8,094) 1,151
Employee termination and
transition costs 11,849 (10,537) 1,312
Writedown of equipment and
other assets 8,198 (8,198) --
Legal and other settlements 7,063 (5,713) 1,350
Redundant facility and other costs 14,654 (9,925) 4,729
------- --------- -------- -------
Total $51,009 $(34,269) $(8,198) $8,542
======= ========= ======== ======
</TABLE>
The Company expects that all significant amounts included in the June 30,
1998, reserve balance will be paid within the next nine months.
The Company acquired two smaller 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 approximately $4.2 million, which was
allocated to in-process research and development 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.
4. 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.
7
<PAGE> 8
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Three months ending June 30, 1997:
Basic EPS:
Net income $24,120 62,611 $0.39
Effect of dilutive securities:
Stock options outstanding -- 2,724 (.02)
------- ------- -----
Diluted EPS:
Net income $24,120 65,335 $0.37
======= ======= =====
Three months ending June 30, 1998:
Basic EPS:
Net income $34,671 66,104 $0.52
Effect of dilutive securities:
Stock options outstanding -- 3,207 (.02)
------- ------- -----
Diluted EPS:
Net income $34,671 69,311 $0.50
======= ======= =====
Nine months ending June 30, 1997:
Basic EPS:
Net income $55,357 62,039 $0.89
Effect of dilutive securities:
Stock options outstanding -- 3,076 (0.04)
------- ------- -----
Diluted EPS:
Net income $55,357 65,115 $0.85
======= ======= =====
Nine months ending June 30, 1998:
Basic EPS:
Income before extraordinary item $51,929 65,129 $0.80
Extraordinary item 1,869 -- 0.03
------- ------- -----
Net income $53,798 65,129 $0.83
Effect of dilutive securities:
Stock options outstanding -- 3,130 (0.04)
------- ------- -----
Diluted EPS:
Net income $53,798 68,259 $0.79
======= ======= =====
</TABLE>
5. EXTRAORDINARY ITEM
In fiscal 1996, the Company and International Business Machines Corporation
(IBM) entered into a six-year Joint Development and License Agreement
Concerning EDA Software and Related Intellectual Property (the Agreement).
In accordance with the Agreement, the Company issued $30.0 million in
notes, which bear interest at 3%, and are payable to IBM upon the earlier
of achievement of scheduled milestones or at maturity in 2006. In the first
quarter of fiscal 1998, the Company and IBM modified the terms of one of
the notes which has been accounted for as an extinguishment of debt.
Accordingly, the Company recorded an extraordinary gain of $1.9 million,
net of tax, related to the extinguishment of the note. As of June 1998, the
notes had a remaining balance of $8.2 million, of which $3.1 million is
included in long-term obligations.
6. SUBSEQUENT EVENTS
In July 1998, the Company acquired Systems Science, Inc. (SSI) based in
Palo Alto, California. SSI is a developer of advanced tools for electronic
design verification and test. The acquisition will be accounted for as a
purchase with the Company exchanging a combination of cash of $26.0 million
and notes of $12.0
8
<PAGE> 9
million, for all of the outstanding shares of SSI. In addition, the Company
has reserved 318,411 shares of its common stock for issuance under SSI's
outstanding stock options, which the Company assumed in the acquisition.
Based on preliminary estimates, the Company expects that a substantial
portion of the total purchase price will be allocated to in-process
research and development and will be charged to operations during the
quarter ended September 30, 1998 because the acquired technology has not
reached technological feasibility and has no alternative future use.
In July 1998, the Company announced that its Board of Directors authorized
a systematic stock repurchase program under which up to 3.25 million shares
of Synopsys' outstanding common stock may be acquired in the open market at
prevailing prices over the next 24 months. The purchases will be funded
from available working capital and will be used for ongoing stock issuances
such as for existing employee stock plans.
7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 standardizes the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts. Under SFAS No.
133, entities are now required to carry all derivative instruments in the
balance sheet at fair value. The accounting for changes in the fair value
(i.e., gains or losses) of a derivative instrument depends on whether it
has been designated and qualifies as part of a hedging relationship and, if
so, on the reason for holding it. The Company must adopt SFAS No. 133 by
October 1, 1999. The Company has not determined the impact that SFAS No.
133 will have on its financial statements and believes that such
determination will not be meaningful until closer to the date of initial
adoption.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934. When used in the
following discussion, the words "projects," "expects," "believes," "anticipates"
and similar expressions are intended to identify forward-looking statements.
Actual results could differ materially from those anticipated in such
forward-looking statements as a result of certain factors, including those set
forth under "Factors That May Affect Future Results."
RESULTS OF OPERATIONS
Business Combination. On December 4, 1997, the Company acquired Viewlogic, a
Delaware corporation, by the merger (the Merger) of a wholly owned subsidiary of
the Company, Post Acquisition Corp., a Delaware corporation (Sub), with and into
Viewlogic. The Merger was accomplished pursuant to the Agreement and Plan of
Merger, dated as of October 14, 1997, among the Company, Sub, and Viewlogic (the
Merger Agreement). The Merger of Sub with and into Viewlogic occurred following
the approval of the Merger Agreement by the stockholders of Viewlogic, and the
approval of the issuance of the Company's Common Stock in connection with the
Merger by the stockholders of the Company, at stockholders' meetings held on
December 4, 1997, and the satisfaction of certain other closing conditions. As a
result of the Merger, each outstanding share of Viewlogic Common Stock was
converted into 0.6521 shares of the Company's Common Stock (the Conversion
Ratio), and Viewlogic became a wholly owned subsidiary of the Company.
A total of approximately 11.3 million shares of the Company's Common Stock were
issued in connection with the Merger. In addition, the Company assumed all
outstanding Viewlogic options and warrants to purchase Viewlogic Common Stock,
which were converted into options and warrants to purchase shares of the
Company's Common Stock, subject only to adjustments to reflect the Conversion
Ratio. The Company has reserved approximately 2.8 million shares of its Common
Stock for issuance upon the exercise of the assumed Viewlogic stock options.
Prior to the Merger, Viewlogic supplied electronic design automation software,
which is used to accelerate and automate the design and verification of advanced
integrated circuits, printed circuit boards and electronic systems, and provided
related services. Viewlogic's IC and system-on-a-chip design products, people
and facilities have been merged into the Synopsys organization. Simulation,
modeling and hardware-software co-verification products of both companies have
been consolidated under a newly created High Level Verification Group, and
timing products and test products have been grouped together in Synopsys'
existing business units. The printed circuit board and systems portions of
Viewlogic's business are being continued in a wholly-owned subsidiary of
Synopsys, based in Marlboro, Massachusetts, Viewlogic's former headquarters.
Revenue. Revenue for the third quarter of fiscal 1998 increased 10% to $179.6
million from $162.6 million in the third quarter of fiscal 1997. Revenue for the
first nine months of fiscal 1998 increased 11% to $523.9 million from $473.3
million for the comparable period in fiscal 1997. The growth in revenue for both
periods was primarily attributable to increased service revenue for both EDA
ASIC tools and PCB design systems. Product revenue as a percentage of total
revenue decreased to 57% in the third quarter of fiscal 1998, compared to 64% in
the third quarter of fiscal 1997. This decrease in product revenue is due to the
decline of PCB design systems product revenue, partially offset by growth in EDA
ASIC tools revenue. Product revenue as a percentage of total revenue for the
first nine months of fiscal 1998 was 60%, compared to 64% for the comparable
period in fiscal 1997. The decrease for both periods of fiscal 1998 was due in
part to strong growth in service revenue from training and consulting services
and the renewal of maintenance and support contracts during fiscal 1998.
During the first quarter of fiscal 1998, the Company adopted Statement of
Position (SOP) 97-2, "Software Revenue Recognition." The provisions of SOP 97-2
have been applied to transactions entered into beginning October 1, 1997. SOP
97-2 generally requires revenue earned on software arrangements involving
multiple elements to be allocated to each element based on the relative fair
values of the elements. The revenue allocated to software products, including
time-based software licenses, generally is recognized upon delivery of the
products. The revenue allocated to postcontract customer support (PCS) is
recognized ratably over the term of the support and revenue allocated to service
elements is recognized as the services are performed.
In connection with the adoption of SOP 97-2, the Company has analyzed all of the
elements included in its multiple-element arrangements and determined that the
Company has sufficient evidence to allocate revenue to
10
<PAGE> 11
the license and PCS components of certain of its time-based product licenses.
Accordingly, the portion of the time-based license fee allocated to the license
component is recognized upon delivery of the software product and the portion of
the fee allocated to PCS is recognized ratably over the term of the support.
Prior to the adoption of SOP 97-2, all revenue from time-based product licenses
was recognized ratably over the term of the license. Software subscriptions
continue to be recognized on a ratable basis.
International revenue as a percentage of total revenue was 41% in the third
quarter of fiscal 1998, the same percentage as in the third quarter of fiscal
1997. Although international revenue was constant as a percentage of total
revenue, Asia/Pacific revenue decreased as a percentage of revenue in the
current quarter compared to the third quarter of fiscal 1997. This decrease was
offset by an increase in European revenue in the third quarter of fiscal 1998
compared to the same quarter in fiscal 1997. For the first nine months of fiscal
1998, international revenue was 40% of total revenue, compared to 42% for the
comparable period in fiscal 1997. The decrease in international revenue for the
first nine months of 1998 was primarily due to a decline in Asia/Pacific revenue
as a result of the economic turmoil in many Asia/Pacific markets. However, the
year to date decrease was partially offset by growth in European revenue.
Cost of Revenue. Cost of revenue was 13% of revenue in the third quarter of
fiscal 1998, compared to 14% of revenue in the third quarter of fiscal 1997. The
reduction in cost of revenue resulted from lower service costs as a percentage
of revenue. Service cost as a percentage of revenue in the third quarter of
fiscal 1997 reflects the Company's investment in the infrastructure required to
build its training and consulting business. Cost of revenue as a percentage of
total revenue remained relatively constant at 13% for the first nine months of
fiscal 1998 and 1997. Cost of revenue includes personnel and related costs,
production costs, product packaging, documentation, amortization of capitalized
software development and purchased software costs, and costs of the Company's
system products.
Research and Development. Research and development expenses as a percentage of
total revenue decreased to 21% in the third quarter of fiscal 1998 from 23% in
the third quarter of fiscal 1997. In absolute dollars, research and development
expenses increased slightly to $37.4 million in the third quarter of fiscal 1998
from $37.3 million in the same quarter of fiscal 1997. The increase in absolute
dollar amounts was primarily the result of compensation costs resulting from the
Company's annual employee performance evaluation in April, offset by expense
reductions in the current quarter of fiscal 1998 obtained from the integration
of Viewlogic into Synopsys' operations. For the first nine months of fiscal
1998, research and development expenses were 22% of total revenue compared to
23% for the same period in fiscal 1997. In absolute dollars, research and
development was $113.7 million for the first nine months of fiscal 1998,
compared to $110.4 million for the first nine months of fiscal 1997. The
increase in absolute dollar amounts was primarily due to the additional week of
operations in the current fiscal year to date compared to the comparable period
in the prior year and compensation costs attributable to the Company's annual
employee performance evaluation in April, partially offset by expense reductions
in the second and third quarters of fiscal 1998 obtained from the integration of
Viewlogic into Synopsys' operations.
Sales and Marketing. Sales and marketing expenses as a percentage of total
revenue decreased to 33% in the third quarter of fiscal 1998 from 37% in the
third quarter of fiscal 1997. In absolute dollars, sales and marketing decreased
to $58.4 million in the third quarter of fiscal 1998 from $60.0 million in the
comparable quarter of fiscal 1997. The decrease, both as a percentage of revenue
and in absolute dollars, was primarily the result of expense reductions obtained
in the current quarter of fiscal 1998 from the integration of Viewlogic into
Synopsys' operations, partially offset by compensation expenses resulting from
the Company's annual employee performance evaluation in April. Sales and
marketing expenses were 35% of total revenue for the first nine months of fiscal
1998, compared to 37% for the first nine months of fiscal 1997. In absolute
dollars, sales and marketing was $181.9 million for the first nine months of
fiscal 1998, compared to $176.1 million for the same period in fiscal 1997. The
decrease as a percentage of total revenue was primarily the result of expense
reductions in the second and third quarters of fiscal 1998 obtained from the
integration of Viewlogic into Synopsys' operations. The increase in absolute
dollar amounts was primarily due to an additional week of operations in the
current fiscal year to date compared to the comparable period in the prior year;
bad debt reserves taken for potential accounts receivable write-offs in Asia in
the second quarter of fiscal 1998; and compensation costs attributable to the
Company's annual employee performance evaluation in April. These expenditures
were partially offset by cost reductions in the second and third quarters of
fiscal 1998 obtained from the integration of Viewlogic into Synposys'
operations.
General and Administrative. General and administrative expenses as a percentage
of total revenue decreased slightly to 6% in the third quarter of fiscal 1998
from 7% in the third quarter of fiscal 1997. In absolute dollars,
11
<PAGE> 12
general and administrative expenses were $11.6 million in the third quarter of
fiscal 1998, compared to $10.8 million in the third quarter of fiscal 1997. The
increase in absolute dollar amounts was primarily due to compensation costs
attributable to the Company's annual employee performance evaluation in April,
partially offset by expense reductions in the current quarter of fiscal 1998
obtained from the integration of Viewlogic into Synopsys' operations. General
and administrative expenses as a percentage of total revenue remained relatively
constant at 7% for the first nine months of fiscal 1998 and fiscal 1997. In
absolute dollars, general and administrative expenses were $36.1 million for the
first nine months of fiscal 1998, compared to $33.7 million for the same period
in fiscal 1997. The increase in absolute dollar amounts was primarily due to an
additional week of operations in the current fiscal year to date compared to the
comparable period of the prior year and compensation costs attributable to the
Company's annual employee performance evaluation in April. These expenditures
were partially offset by cost reductions in the second and third quarters of
fiscal 1998 obtained from the integration of Viewlogic into Synopsys'
operations.
Merger-Related and Other Costs. Primarily in connection with its merger with
Viewlogic, the Company recorded an additional charge of $3.1 million for
merger-related and other costs in the third quarter of fiscal 1998, resulting in
$51.0 million of charges for the first nine months of fiscal 1998. The Company
has recorded all charges incurred in connection with the merger. Merger-related
and other charges for the first nine months of fiscal 1998 included direct
transaction fees for investment bankers, attorneys, accountants, and other
related costs of $9.2 million, employee termination and transition costs of
$11.8 million, legal and other settlements of $7.1 million, writedown of
equipment and other assets of $8.2 million, and redundant facility and other
costs of $14.7 million. As of June 30, 1998, there was a balance of $8.5 million
in accrued liabilities for expected future cash expenditures.
In-Process Research and Development. During the nine month period ended June 30,
1998, the Company acquired two privately held companies in the EDA industry for
an aggregate total purchase price of $4.2 million, which was allocated to
in-process research and development and charged to operations.
Other Income, net. Other income, net increased 16.6% to $6.7 million for the
third quarter of fiscal 1998, compared to $5.8 million for the comparable period
of the prior year and increased as a percentage of total revenue to 3.7% in the
third quarter of fiscal 1998 from 3.5% in the comparable period in the prior
year. The increase was primarily due to higher average invested cash and
short-term investment balances, which yielded more interest income in the third
quarter of fiscal 1998 compared to the comparable period in the prior year. The
increase in the invested cash and short-term investment balances during the
third quarter and the first nine months of fiscal 1998 resulted primarily from
increased profitability from the Company's operations. Other income, net
decreased 7.5%, to $18.1 million, compared to $19.5 million for the comparable
period of the prior year and decreased as a percentage of total revenue to 3.4%
in the first nine months of fiscal 1998 from 4.1% in the first nine months of
fiscal 1997.
Income Tax Provision. For the first nine months of fiscal 1998, the provision
for income taxes was 34% of income before income taxes plus additional taxes of
$5.5 million resulting from nondeductible expenses for merger-related costs
incurred in the first quarter. This resulted in an overall income tax rate of
40% of income before taxes for the first nine months of fiscal 1998. The Company
does not anticipate any material change to the effective tax rate for the
remainder of fiscal 1998.
Extraordinary Item. In the first nine months of fiscal 1998, the Company
recorded an extraordinary gain on extinguishment of debt of $1.9 million, net of
income tax expense of $1.0 million, related to certain interest bearing notes
issued by the Company to IBM.
Net Income. Net income was $34.7 million in the third quarter of fiscal 1998,
compared to $24.1 million in the same period of fiscal 1997. For the first nine
months of fiscal 1998, net income was $53.8 million, compared to $55.4 million
for the first nine months of fiscal 1997. In the absence of the merger-related
charges, primarily related to the Company's merger with Viewlogic and the
extraordinary gain on retirement of debt, net income would have been $36.7
million in the third quarter of fiscal 1998 and $93.9 million for the first nine
months of fiscal 1998.
The Company's book-to-bill ratio for the third quarter of fiscal 1998 was above
one. The book-to-bill ratio measures the ratio of accepted orders to revenue.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
For the first nine months of fiscal 1998, cash and short-term investments
increased $153.9 million to $588.7 million. The increase in cash and short-term
investments was due primarily to cash generated from operations, proceeds from
the sale of common stock related to stock options exercised and stock sold under
the employee stock purchase plan, and proceeds from the sale of long-term
investments, partially offset by purchases of property and equipment, payments
on debt obligations and acquisitions.
The Company believes that it has the financial resources needed to meet business
requirements, including capital expenditures, working capital requirements, debt
obligations outstanding and operating lease commitments for facilities at least
through the next twelve months.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company expects that its revenue growth rate during fiscal year 1998 will be
lower than it historically has been. Because of a contraction in revenues in the
printed circuit board and systems portion of Viewlogic's business, weakness in
Asian currencies, especially the Japanese yen, and overall weakness in
Asia-Pacific economies, for the rest of fiscal year 1998 the Company will
emphasize earnings growth rather than revenue growth. The Company is seeking to
manage expenses, although there is no assurance that cost savings will be
achieved. To the extent that revenue growth exceeds the Company's current
expectations, the Company will use the opportunity to build its backlog for
future quarters.
The Company attempts to manage its business to achieve quarter-to-quarter
revenue and earnings growth. In recent years, achieving predictable revenue and
earnings growth has become more difficult. Quarterly revenue and earnings are
affected by a number of factors, including customer product demand, product
license terms, the size of the Company's backlog, and the timing of revenue
recognition on products and services sold. The Company's orders are seasonal,
with the Company's first fiscal quarter typically being the weakest, having a
book-to-bill ratio at or below one. An increasing amount of the Company's orders
involve products and services which yield revenue (or a significant portion
thereof) over multiple quarters (often extending beyond the current fiscal year)
or upon completion of performance rather than at the time of sale, including
time-based product licenses, and consulting services. As a result, the Company's
ability to convert orders, particularly those received late in a quarter, or
backlog, to revenue in any quarter is less certain than it historically has
been. In addition, the Company increasingly receives a disproportionate volume
of orders in the last week of the quarter, which makes it more vulnerable to
delays in individual orders. It is therefore possible for the Company to fall
short in its revenue and/or earnings plan for a given quarter even while orders
and backlog remain on plan. Ultimately, long-term revenue and earnings growth is
dependent upon the successful development and sale of the Company's products and
services over a sustained period of time.
The EDA industry is highly competitive. The Company's products and services
compete with similar products and services from other EDA vendors, and with
other EDA products and services, for a share of the EDA budgets of its
customers. The Company's products also compete with customers'
internally-developed design tools and design capabilities. The Company's
competitors include companies that offer a broad range of products and services,
such as Cadence Design Systems, Inc. ("Cadence"), Mentor Graphics, Inc.
("Mentor") and Avant! Corporation ("Avant!"), as well as companies, including
numerous start-up companies, that offer products focused on a discrete phase of
the integrated circuit ("IC") design process. In order to remain successful
against such competition, the Company will have to continue to enhance its
current products and to bring to market, both by internal development and
through acquisition, new products on a timely and cost-effective basis that are
based on industry-leading technology and that address the increasingly
sophisticated needs of its customers. The Company also will have to expand its
ability to offer consulting services. The failure to enhance existing products,
develop and/or acquire new products, or to expand its ability to offer such
services would have a material adverse effect on the Company's business,
financial condition and results of operations.
Technology advances and customer requirements are fueling a change in the nature
of competition among EDA vendors. Advances in semiconductor technology have
created a need for tighter integration between logic design and physical design
and for technologies which permit systematic reuse of design blocks in multiple
ICs. As a result, the Company expects that competition will increasingly center
on "design flows" involving a broad range of products (including both logic and
physical design tools) and services rather than individual design tools. No
single EDA company currently offers its customers industry-leading products in a
complete design flow. The Company offers a wide range of logic design tools but
currently offers a relatively limited range of physical
13
<PAGE> 14
design tools, a field which is dominated by Cadence and Avant! In addition, the
Company has less capacity than Cadence to offer design consulting services.
Historically, much of the Company's growth has been attributable to the strength
of its logic synthesis products. Opportunities for growth in market share in
this area are limited and overall growth in the market for such products has
slowed. The Company is seeking to add new products to its portfolio through
internal development and, where it deems appropriate, acquisition. Among the
most important new products offered by the Company are its Cell-Based Array
library, PrimeTime timing estimator, Cyclone simulation accelerator, Formality
verification and Module Compiler datapath synthesis products. These products
have achieved initial customer acceptance, but the Company will only derive
significant revenue from these products if they are accepted by a broad range of
customers. In addition, the Company is attempting to expand its capacity to
offer consulting services. There can be no assurance that the Company will be
successful in introducing new products or expanding its services business, and
the failure to do so would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's business has benefited from the rapid worldwide growth of the
semiconductor industry. Purchases of the Company's products are largely
dependent upon the commencement of new design projects by semiconductor
manufacturers and their customers. The outlook for the semiconductor industry
for the remainder of 1998 and for 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, and the Company believes that their overall operating budgets will be
more closely monitored, which could result in a lengthening of the sales cycle
for EDA tools. In addition, there have been a number of mergers in the
semiconductor and systems industries. Slower growth in the semiconductor and
systems industries, a reduced number of design starts, or continued
consolidation among the Company's customers may have a material adverse effect
on the Company's business, financial condition and results of operations.
In recent years, international revenue has accounted for almost half of the
Company's revenue. The Company expects that international revenue will continue
to account for a significant portion of its revenue in the future. As a result,
changes in foreign currency exchange rates and changes in regional or worldwide
economic or political conditions could have a material adverse effect on the
Company's business, financial condition and results of operations. Revenue from
sales in Japan during fiscal 1998 has been adversely affected by the weakness of
the yen against the dollar and the deferral of investments in semiconductor
facilities and technology by Japanese companies. Continued weakness of the yen
and the Japanese economy are likely to adversely affect revenue from Japan
during the remainder of fiscal 1998 and into fiscal 1999. In addition, recent
significant declines in the value of the currencies of many countries in the
Asia Pacific region, particularly Korea and Taiwan, have affected the Company's
sales in the region. The ongoing weakness in Japan's economy is expected to
prolong and deepen the problems in the economies of the rest of Asia Pacific.
Continued instability in Asian currency markets and economies would continue to
have an adverse effect on the Company's results of operations.
In February 1996, the Company entered into a six-year joint development and
license agreement with IBM, pursuant to which the Company and IBM agreed to
develop certain new products. Joint development of products is subject to risks
and uncertainties over and above those affecting internal development. During
fiscal year 1997, the first joint product resulting from the alliance,
PrimeTime, was introduced, and the parties agreed to terminate efforts to
develop a product in one of the product areas covered by the Agreement. There
can be no assurance that the Company's joint development efforts will lead to
new products or that such products will be successful.
The Company's success is dependent on technical and other contributions of key
employees. The Company participates in a dynamic industry, with significant
start-up activity, and has its headquarters in Silicon Valley, where skilled
technical, sales and management employees are in high demand. The Company has
experienced, and may continue to experience, significant employee and management
turnover. In addition, there are a limited number of qualified EDA engineers,
and the competition for such individuals is intense. There can be no assurance
that the Company can continue to recruit and retain key personnel. Failure to
successfully recruit and retain such personnel could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company has adopted a number of provisions that could have antitakeover
effects. In September 1997, the Board of Directors adopted a Preferred Shares
Rights Plan, commonly referred to as a "poison pill." In addition,
14
<PAGE> 15
the Board of Directors has the authority, without further action by its
stockholders, to fix the rights and preferences of, and issue shares of,
authorized but undesignated shares of Preferred Stock. This provision and other
provisions of the Company's Restated Certificate of Incorporation and Bylaws and
the Delaware General Corporation Law may have the effect of deterring hostile
takeovers or delaying or preventing changes in control or management of the
Company, including transactions in which the stockholders of the Company might
otherwise receive a premium for their shares over then current market prices.
YEAR 2000 COMPLIANCE
There has been significant public discussion about the potential inability of
computer programs and systems to adequately process date information after
December 31, 1999. In general the Company's software is not date sensitive. The
Company has inspected or tested approximately 80% of its products to determine
whether they will be affected by the change in the century and is developing a
plan to test all products. None of the Company's tested products experienced
significant date-related failures. The Company does not expect that it will
experience significant date-related failures with respect to products to be
tested or that, if it does, that it will incur substantial costs to fix such
failures. In addition, the Company is developing a plan for achieving and
maintaining Year 2000 compliance of all current products on an ongoing basis.
The Company's prior inspecting and testing has not required, and its anticipated
inspection, testing and compliance efforts are not expected to require, the
Company to incur any material expense.
In addition, the Company continues to implement a program, to be completed in
1999, to review the Year 2000 compliance status of the software and systems used
in its internal business processes, to obtain appropriate assurances of
compliance from the manufacturers of these products, and to modify or replace
all non-compliant products. The Company relies on widely-available commercial
products rather than proprietary software, and has received Year 2000 assurances
from some of its main suppliers. Most of the Company's systems have been
determined to be Year 2000 compliant, including the Company's main enterprise
software package. Based on the information available to date, the Company
believes that it will be able to complete its Year 2000 compliance review and
make any necessary modifications prior to the end of 1999. The Company expects
that it will spend approximately $5 million to complete its review of its
internal business systems. Based on the information available to date, the
Company expects that it will not incur material expense to complete its review
and to modify or replace non-compliant systems. However, the compliance of
systems acquired from third parties is dependent on factors outside the
Company's control. If key systems, or a significant number of systems were to
fail as a result of Year 2000 problems, the Company could incur substantial cost
and disruption, which would potentially have a material adverse effect on the
Company's business.
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.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits
27 Financial Data Schedule
(b.) Reports on Form 8-K
None
16
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 1998 SYNOPSYS, INC.
(Registrant)
By: /s/ Mark D. Nelson
------------------------------------
Mark D. Nelson
Vice President Finance and
Controller
(Principal Accounting Officer)
17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 166,094
<SECURITIES> 422,645
<RECEIVABLES> 123,289
<ALLOWANCES> 12,099
<INVENTORY> 0
<CURRENT-ASSETS> 738,588
<PP&E> 182,591
<DEPRECIATION> 94,593
<TOTAL-ASSETS> 896,398
<CURRENT-LIABILITIES> 260,641
<BONDS> 3,839
0
0
<COMMON> 667
<OTHER-SE> 625,380
<TOTAL-LIABILITY-AND-EQUITY> 896,398
<SALES> 523,923
<TOTAL-REVENUES> 523,923
<CGS> 68,108
<TOTAL-COSTS> 68,108
<OTHER-EXPENSES> 382,842
<LOSS-PROVISION> 4,028
<INTEREST-EXPENSE> 1,669
<INCOME-PRETAX> 87,015
<INCOME-TAX> 35,086
<INCOME-CONTINUING> 51,929
<DISCONTINUED> 0
<EXTRAORDINARY> 1,869
<CHANGES> 0
<NET-INCOME> 53,798
<EPS-PRIMARY> .83<F1>
<EPS-DILUTED> .79
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
</FN>
</TABLE>
