<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 3, 1999
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 Number)
700 EAST MIDDLEFIELD ROAD
MOUNTAIN VIEW, CA 94043
(Address of principal executive offices)
TELEPHONE: (650) 962-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (l) 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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
70,844,636 shares of Common Stock as of August 2, 1999
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SYNOPSYS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - June 30, 1999
and September 30, 1998 3
Condensed Consolidated Statements of Income - Three Months
and Nine Months Ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows - Nine Months
Ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYNOPSYS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1999 1998
------------ ------------
<S> <C> <C>
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 156,982 $ 164,548
Short-term investments 488,198 440,082
------------ ------------
Cash and short-term investments 645,180 604,630
------------ ------------
Accounts receivable, net of allowances of
$14,016 and $13,210, respectively 157,557 126,336
Prepaid expenses, deferred taxes and other 48,840 42,461
------------ ------------
Total current assets 851,577 773,427
------------ ------------
Property and equipment, net 123,790 99,998
Long-term investments 53,469 38,265
Other intangibles, net 58,251 19,883
Other assets 25,313 20,060
------------ ------------
Total assets $ 1,112,400 $ 951,633
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 101,561 $ 117,412
Current portion of long-term debt 8,665 7,783
Accrued income taxes 40,470 50,313
Deferred revenue 89,689 93,160
------------ ------------
Total current liabilities 240,385 268,668
------------ ------------
Long-term debt 11,446 13,138
Deferred compensation 9,183 4,886
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized;
no shares outstanding -- --
Common stock, $.01 par value; 200,000,000 shares
authorized; 70,658,000 and 67,925,000 shares
outstanding, respectively 711 679
Additional paid-in capital 525,860 423,975
Retained earnings 344,176 240,465
Treasury stock, at cost (27,739) (11,184)
Accumulated other comprehensive income 8,378 11,006
------------ ------------
Total stockholders' equity 851,386 664,941
------------ ------------
Total liabilities and stockholders' equity $ 1,112,400 $ 951,633
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
SYNOPSYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(unaudited) (unaudited)
Revenue:
Product $131,945 $102,036 $358,584 $315,524
Service 75,415 77,570 219,188 208,399
-------- -------- -------- --------
Total revenue 207,360 179,606 577,772 523,923
-------- -------- -------- --------
Cost of revenue:
Product 10,897 8,898 26,803 25,991
Service 19,389 14,428 49,881 42,117
-------- -------- -------- --------
Total cost of revenue 30,286 23,326 76,684 68,108
-------- -------- -------- --------
Gross margin 177,074 156,280 501,088 455,815
-------- -------- -------- --------
Operating expenses:
Research and development 41,861 38,218 121,979 115,126
Sales and marketing 59,145 58,403 173,199 181,857
General and administrative 12,450 11,553 34,415 36,097
Amortization of goodwill 2,961 -- 4,431 --
Merger-related and other costs -- 3,121 -- 51,009
In-process research and development
and other costs 4,909 -- 21,176 4,191
-------- -------- -------- --------
Total operating expenses 121,326 111,295 355,200 388,280
-------- -------- -------- --------
Operating income 55,748 44,985 145,888 67,535
Other income, net 9,398 6,710 27,590 18,070
-------- -------- -------- --------
Income before provision for income taxes
and extraordinary item 65,146 51,695 173,478 85,605
Provision for income taxes 23,791 17,861 65,111 35,086
-------- -------- -------- --------
Net income before extraordinary item 41,355 33,834 108,367 50,519
Extraordinary item, net of income tax expense -- -- -- 1,869
-------- -------- -------- --------
Net income $ 41,355 $ 33,834 $108,367 $ 52,388
======== ======== ======== ========
Basic earnings per share:
Net income before extraordinary item $ 0.58 $ 0.50 $ 1.55 $ 0.76
Extraordinary item -- -- -- 0.03
-------- -------- -------- --------
Net income $ 0.58 $ 0.50 $ 1.55 $ 0.79
======== ======== ======== ========
Weighted average common shares 70,738 67,114 70,046 66,108
======== ======== ======== ========
Diluted earnings per share:
Net income before extraordinary item $ 0.56 $ 0.48 $ 1.48 $ 0.73
Extraordinary item -- -- -- 0.03
-------- -------- -------- --------
Net income $ 0.56 $ 0.48 $ 1.48 $ 0.76
======== ======== ======== ========
Weighted average common shares
and equivalents 73,694 70,349 73,183 69,173
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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SYNOPSYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
-----------------------------
1999 1998
--------- ---------
<S> <C> <C>
(unaudited)
Cash flows provided by operating activities:
Net income $ 108,367 $ 52,388
Adjustments to reconcile net income to cash flows
provided by operating activities:
Depreciation and amortization 37,357 32,686
Tax benefit associated with stock options 22,168 16,207
Provision for doubtful accounts and sales returns 806 3,886
Interest accretion on notes payable 645 297
Deferred taxes 705 (5,268)
Gain on sale of long-term investments (14,260) (5,965)
Non-cash merger-related and other costs -- 8,198
In-process research and development and other costs 21,176 4,191
Extraordinary gain on extinguishment of debt -- (1,869)
Changes in operating assets and liabilities:
Accounts receivable (31,317) 3,775
Prepaid expenses and other current assets (1,716) 2,528
Other assets (4,724) (8,050)
Accounts payable and accrued expenses (20,608) 7,117
Accrued income taxes (9,843) (18,591)
Deferred revenue (3,742) 20,635
Deferred compensation 4,297 2,666
--------- ---------
Cash flows provided by operating activities 109,311 114,831
--------- ---------
Cash flows used in investing activities:
Expenditures for property and equipment (53,065) (29,237)
Proceeds from sale of long-term investments 16,350 16,757
Purchases of long-term investments (25,089) (998)
Purchases and maturities of short-term investments, net (48,116) (111,122)
Acquisitions, net of cash (46,492) (2,236)
--------- ---------
Cash flows used in investing activities (156,412) (126,836)
--------- ---------
Cash flows provided by financing activities:
Payments of long-term debt (12,575) (6,535)
Issuances of common stock 80,087 64,098
Purchases of treasury stock (27,739) --
--------- ---------
Cash flows provided by financing activities 39,773 57,563
--------- ---------
Effect of exchange rate changes on cash (238) (1,729)
Net (decrease) increase in cash and cash equivalents (7,566) 43,829
Cash and cash equivalents, beginning of period 164,548 127,307
--------- ---------
Cash and cash equivalents, end of period $ 156,982 $ 171,136
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
SYNOPSYS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
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 the overall
design process and accelerate time-to-market.
The unaudited condensed consolidated financial statements have been prepared
by the Company and reflect all adjustments which are, in the opinion of
management, necessary for a fair presentation of the interim periods presented.
Such adjustments are of a normal recurring nature, except for merger-related and
other costs and in-process research and development charges. The consolidated
results of operations for the interim periods presented are not necessarily
indicative of the results for any future interim period 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, 1998, included in
the Company's 1998 Annual Report on Form 10-K.
The Company has a fiscal year that ends on the Saturday nearest September
30. Fiscal 1999 will be a 52-week year while fiscal 1998 was a 53-week year. For
presentation purposes, the condensed consolidated financial statements and notes
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. A change in the facts
and circumstances surrounding these estimates could result in a change to the
estimates and impact future operating results.
The Company is going through its annual review of goodwill and intangible
assets. An analysis of the amount by which the carrying value of the asset
exceeds the fair value of the asset, as well as the expected future cash flows
is being completed. The analysis is expected to be complete before the end of
fiscal year 1999.
2. BUSINESS COMBINATIONS
Acquisitions
During the third quarter of fiscal 1999, the Company acquired Stanza Systems
Inc. (Stanza) and Apteq, Inc. (Apteq) for a combined purchase price of $17.4
million, including cash payments of $11.9 million, notes payable of $0.6
million, the issuance of approximately 46,000 shares of Synopsys' common stock
and the assumption of approximately 21,000 shares of Synopsys' common stock for
issuance under Stanza's 1998 stock option plan. The purchase price of each
transaction was allocated to the acquired assets and liabilities based on their
estimated fair values as of the date of the respective acquisition. Amounts
allocated to developed technology, workforce and goodwill are being amortized on
a straight-line basis over a five-year period. Approximately $4.9 million was
allocated to in-process research and development and charged to operations
because the acquired technology had not reached technological feasibility and
had no alternative uses.
During the second quarter of fiscal 1999, the Company acquired Gambit
Automated Design, Inc. (Gambit), Smartech OY and the rights to CoverMeter, a
software product owned by Advanced Technology Center, for a combined purchase
price of $51.6 million, including cash payments of $37.3 million, notes payable
of $10.3 million and the assumption of approximately 78,000 shares of Synopsys'
common stock for issuance under Gambit's stock option plan. The purchase price
of each transaction was allocated to the acquired assets and liabilities based
on their estimated fair values as of the date of the respective acquisition
based on appraisals completed by independent third parties. Amounts allocated to
developed technology, workforce and goodwill are being amortized on a
straight-line basis over four to five-year periods. Approximately $16.3 million
was
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<PAGE> 7
allocated to in-process research and development and charged to operations
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.
On November 20, 1998, the Company exchanged approximately 1.4 million shares
of its common stock for all the outstanding stock of Everest Design Automation,
Inc. (Everest) and reserved approximately 120,000 shares of its common stock for
issuance under Everest's stock option plan, which the Company assumed in the
transaction. The business combination was accounted for as a
pooling-of-interests. The Board of Directors approved the rescission of the
Company's July 1998 stock repurchase program in order to comply with
pooling-of-interests accounting guidance provided in the Securities and Exchange
Commission (SEC) Staff Accounting Bulletin No. 96. The Company's condensed
consolidated financial statements have been restated to include the financial
position and results of Everest for all periods presented. The following table
sets forth the results of operations previously reported by the separate
enterprises and the combined amounts presented in the accompanying condensed
consolidated financial statements:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(in thousands) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Total revenue:
Synopsys $ 207,360 $ 179,606 $ 577,772 $ 523,923
Everest -- -- -- --
--------- --------- --------- ---------
Combined $ 207,360 $ 179,606 $ 577,772 $ 523,923
--------- --------- --------- ---------
Net income (loss):
Synopsys $ 41,355 $ 34,671 $ 109,128 $ 53,798
Everest -- (837) (761) (1,410)
--------- --------- --------- ---------
Combined $ 41,355 $ 33,834 $ 108,367 $ 52,388
========= ========= ========= =========
</TABLE>
3. STOCK REPURCHASE PROGRAM
In June 1999, the Board of Directors authorized a stock repurchase program
under which Synopsys' common stock with a market value of up to $200.0 million
may be acquired in the open market over a seven month period. The repurchased
shares are to be used for the issuance of Synopsys' employee stock plans and for
other corporate purposes. During the third quarter of fiscal 1999, the Company
purchased 501,000 shares for an aggregate amount of $27.7 million.
4. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, Reporting Comprehensive Income, as of the first quarter of fiscal 1999.
SFAS No. 130 has no impact on the Company's net income or total stockholders'
equity. The following table sets forth the components of comprehensive income,
net of income tax expense:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(in thousands) (unaudited) (unaudited)
Net income $ 41,355 $ 33,834 $ 108,367 $ 52,388
Cumulative translation adjustment (122) (570) (238) (1,729)
Change in unrealized loss on
available-for-sale investments (1,964) (10,695) (2,390) (2,416)
--------- --------- --------- ---------
Total comprehensive income $ 39,269 $ 22,569 $ 105,739 $ 48,243
========= ========= ========= =========
</TABLE>
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<PAGE> 8
5. EARNINGS PER SHARE
Basic earnings per share is computed using the weighted-average number of
common shares. Diluted earnings per share is computed using the weighted-average
number of common and dilutive potential common shares outstanding during the
period. Dilutive potential common shares consist of employee stock options using
the treasury stock method.
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
(in thousands, except per share amounts) 1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(unaudited) (unaudited)
NUMERATOR:
Numerator for basic and diluted earnings
per share -
Net income before extraordinary item $ 41,355 $ 33,834 $ 108,367 $ 50,519
Extraordinary item -- -- -- 1,869
---------- ---------- ---------- ----------
Net income $ 41,355 $ 33,834 $ 108,367 $ 52,388
========== ========== ========== ==========
DENOMINATOR:
Denominator for basic earnings per share -
weighted-average shares 70,738 67,114 70,046 66,108
Effect of dilutive securities:
Employee stock options 2,956 3,235 3,137 3,065
---------- ---------- ---------- ----------
Dilutive potential common shares 73,694 70,349 73,183 69,173
========== ========== ========== ==========
Basic earnings per share:
Net income before extraordinary item $ 0.58 $ 0.50 $ 1.55 $ 0.76
Extraordinary item -- -- -- 0.03
---------- ---------- ---------- ----------
Net income $ 0.58 $ 0.50 $ 1.55 $ 0.79
========== ========== ========== ==========
Diluted earnings per share:
Net income before extraordinary item $ 0.56 $ 0.48 $ 1.48 $ 0.73
Extraordinary item -- -- -- 0.03
---------- ---------- ---------- ----------
Net income $ 0.56 $ 0.48 $ 1.48 $ 0.76
========== ========== ========== ==========
</TABLE>
6. EFFECT OF NEW ACCOUNTING STANDARDS
During fiscal 1999, the Company early adopted Statement of Position (SOP)
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. This statement requires computer software costs incurred during
the application development stage to be capitalized and amortized to operations
over the software's estimated useful life. The effect of adopting SOP 98-1 for
the three and nine-month periods ended June 30, 1999 was not material to the
Company's consolidated financial position, results of operations or cash flows.
In December 1998, the American Institute of Certified Public Accountants
(AICPA) issued SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition,
With Respect to Certain Transactions, which amends SOP 97-2, Software Revenue
Recognition. and supercedes SOP 98-4. The Company will adopt SOP 98-9 in fiscal
2000. The Company intends to modify certain aspects of its business model such
that the impact of SOP 98-9 will not be significant.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131, Disclosures about Segments of an Enterprise and Related Information.
Readers are referred to the "Effect of New Accounting Standards" section of the
Company's 1998 Annual Report on Form 10-K for further discussion. The Company
will adopt SFAS No. 131 as required for its fiscal 1999 annual report.
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In June 1999, FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities, which amends the effective date of SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. Readers are
referred to the "Effect of New Accounting Standards" section of the Company's
1998 Annual Report on Form 10-K for further discussion. The Company will adopt
SFAS No. 137 as required for its fiscal 2001 annual report.
7. SUBSEQUENT EVENT
On July 15, 1999, the Board of Directors determined that Synopsys' fiscal
year 2000 and subsequent fiscal years shall end on the Saturday nearest to
October 31. As a result, fiscal year 2000 shall commence on October 31, 1999 and
end on October 28, 2000. The period from October 3, 1999 through October 30,
1999 shall be a transition period. Information for the transition period will be
filed with the SEC with Synopsys' quarterly report on Form 10-Q covering the
first quarter of fiscal year 2000.
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<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. For example,
statements including terms such as "projects," "expects," "believes,"
"anticipates" or "targets" are 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
Acquisitions. On November 20, 1998, the Company exchanged approximately 1.4
million shares of its common stock for all the outstanding stock of Everest
Design Automation, Inc. (Everest) and reserved approximately 120,000 shares of
its common stock for issuance under Everest's stock option plan, which the
Company assumed in the transaction. The business combination was accounted for
as a pooling-of-interests. The Board of Directors approved the rescission of the
Company's July 1998 stock repurchase program in order to comply with
pooling-of-interests accounting guidance provided in the SEC Staff Accounting
Bulletin No. 96. The Company's condensed consolidated financial statements have
been restated to include the financial position and results of Everest for all
periods presented.
Disposition of Viewlogic Systems' PCB/Systems Business - effect on
comparative financial information. The Company merged with Viewlogic Systems,
Inc. (Viewlogic) in December 1997 in a transaction accounted for as a
pooling-of-interests. On October 2, 1998, the Company sold the printed circuit
board and electronics systems business (PCB/Systems business) of Viewlogic. In
the discussion below, financial information for fiscal 1998 includes the results
of the PCB/Systems business, while financial information for fiscal 1999
excludes the PCB/systems business. Therefore, the comparative measures included
in the discussion, in particular with respect to absolute dollar amounts of
revenue or expenditure, are not necessarily valid with respect to the Company's
business as it is presently conducted. A pro forma unaudited condensed
consolidated statement of income, excluding the results of the PCB/Systems
business and certain unusual charges, was filed with the SEC on a Form 8-K on
July 23, 1999.
Revenue. Revenue for the third quarter of fiscal 1999 increased 15.5% to
$207.4 million from $179.6 million in the third quarter of fiscal 1998. Revenue
for the first nine months of fiscal 1999 increased 10.3% to $577.8 million from
$523.9 million for the comparable period in fiscal 1998. The increase in revenue
for both periods was primarily attributable to increased sales of physical
synthesis, verification and system level design software products given an
increased demand for complex chips driven by end-applications such as networking
and telecommunications. Product revenue as a percentage of total revenue for the
third quarter of fiscal 1999 increased to 63.6% from 62.0% for the comparable
period in 1998. Product revenue as a percentage of total revenue for the first
nine months of fiscal 1999 was 62.1%, compared to 60.2% for the comparable
period in fiscal 1998. This increase in percentage of total revenue for all
periods presented was primarily attributable to relatively faster growth of
physical synthesis, verification and system level design software products.
International revenue as a percentage of total revenue decreased to 28.1% in
the third quarter of fiscal 1999 from 40.7% in the third quarter of fiscal 1998
primarily as a result of decreased European sales and to a lesser extent,
decreased sales in Japan. For the first nine months of fiscal 1999,
international revenue was 34.8% of total revenue, compared to 39.8% for the
comparable period in fiscal 1998. Sales growth in the international markets has
been negatively impacted by various elements including weaker economic
conditions and a stronger dollar versus the local currencies.
Cost of Revenue. Cost of revenue includes personnel and related costs,
production costs, product packaging, documentation, amortization of capitalized
software development and purchased software costs, and costs of the Company's
system products. Cost of revenue as a percentage of total revenue was 15% in the
third quarter of fiscal 1999 compared to 13% in the third quarter of fiscal
1998. The increase in cost of revenue resulted primarily from increased
royalties and to a lesser extent, personnel costs relating to maintenance and
support. For the first nine months of fiscal 1999, cost of revenue as a
percentage of total revenue remained constant with the comparable period in
fiscal 1998 at 13%.
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<PAGE> 11
Research and Development. Research and development expenses as a percentage
of total revenue decreased to 20.2% in the third quarter of fiscal 1999 from
21.3% in the third quarter of fiscal 1998, and increased in absolute dollars to
$41.9 million from $38.2 million. Research and development expenses were $122.0
million for the first nine months of fiscal 1999 in absolute dollars, compared
to $115.1 million for the comparable period in fiscal 1998. As a percentage of
total revenue, research and development decreased to 21.1% in the first nine
months of fiscal 1999 compared to 22.0% for the comparable period in fiscal
1998. The increase in absolute dollars for both periods reflects the Company's
on-going research and development efforts in Systems on a Chip. A significant
portion of the increase was due to additional personnel, partly through
acquisitions.
Sales and Marketing. Sales and marketing expenses as a percentage of total
revenue decreased to 28.5% in the third quarter of fiscal 1999 from 32.5% in the
third quarter of fiscal 1998, and increased in absolute dollars to $59.1 million
from $58.4 million. The increase in absolute dollars was primarily the result of
increased personnel, additional spending in marketing and advertising costs,
trade shows and travel-related costs. Sales and marketing expenses were 30.0% of
total revenue for the first nine months of fiscal 1999, compared to 34.7% for
the comparable period in fiscal 1998. In absolute dollars, sales and marketing
expenses were $173.2 million for the first nine months of fiscal 1999, compared
to $181.9 million for the comparable period in fiscal 1998. The decrease as a
percentage of total revenue for both periods presented and in absolute dollars
for the first nine months of fiscal 1999 was primarily due to the Company
realizing expense reductions in connection with aligning Viewlogic operations
that began materializing in the second quarter of fiscal 1998.
General and Administrative. General and administrative expenses as a
percentage of total revenue decreased to 6.0% in the third quarter of fiscal
1999 from 6.4% in the third quarter of fiscal 1998, and increased in absolute
dollars to $12.5 million from $11.6 million. The increase in absolute spending
was primarily the result of increased personnel and personnel-related costs as
well as a slight increase in facilities expense. General and administrative
expenses were 6.0% of total revenue for the first nine months of fiscal 1999,
compared to 6.9% for the comparable period in fiscal 1998 and decreased in
absolute dollars to $34.4 million from $36.1 million. The decrease as a
percentage of total revenue and in absolute dollars for the first nine months of
fiscal 1999 was primarily due to the Company realizing expense reductions in
connection with aligning Viewlogic operations that began materializing in the
second quarter of fiscal 1998, partially offset by an increase in personnel and
personnel-related costs.
Amortization of Goodwill. Goodwill represents the excess of the aggregate
purchase price over the fair value of the tangible and intangible assets
acquired by the Company and, under the Company's accounting policies is being
amortized over the estimated useful life of four to five-year periods. The
Company assesses the recoverability of goodwill by determining whether the
amortized asset over its useful life may be recovered through estimated useful
cash flows. The Company is going through its annual review of goodwill and
intangible assets. An analysis of the amount by which the carrying value of the
asset exceeds the fair value of the asset, as well as the expected future cash
flows is being completed. The analysis is expected to be complete before the end
of fiscal year 1999. Amortization of goodwill charged to operations for the
third quarter of fiscal 1999 was $3.0 million and for the first nine months of
fiscal 1999 was $4.4 million. Amortization of goodwill was not material for the
third quarter of fiscal 1998.
In-process Research and Development. The Company incurred in-process
research and development charges of $21.2 million in the first nine months of
fiscal 1999 related to various acquisitions. During the course of the third
quarter of fiscal 1999, the Company completed two acquisitions. The Company
acquired Stanza Systems, Inc., a privately held company with physical layout
editor expertise and technology. The acquisition will provide the company with
layout editing technology to be used in delivering further comprehensive
physical verification flow solutions to its customers. The Company also acquired
Apteq Design Systems, Inc., with a leading technology expertise in analog
simulation and a Verilog-A product. The acquisition will provide the Company
with a significant time-to-market advantage with full-chip/co-simulation tools.
The combined purchase price totaled $17.4 million, including cash payments
of $11.9 million, notes payable of $0.6 million, an exchange of approximately
46,000 shares of Synopsys' common stock and the assumption of approximately
21,000 shares of Synopsys' common stock for issuance under Stanza's 1998 stock
option plan. The purchase price of each transaction was allocated to the
acquired assets and liabilities based on their estimated fair values as of the
date of the respective acquisition based on appraisals completed by independent
third parties. Amounts allocated to developed technology, workforce and goodwill
are being amortized on a
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<PAGE> 12
straight-line basis over a five year period. Approximately $4.9 million was
allocated to in-process research and development and charged to operations
because the acquired technology had not reached technological feasibility and
had no alternative uses. The in-process research and development projects were
estimated to be approximately 72% complete in the aggregate, and the expected
aggregate cost to complete the projects was estimated at $0.8 million. During
the valuation process, core developed technology was identified in addition to
the in-process research and development projects. The core developed technology
was valued separately using a discount rate of 15% and is being amortized over
its estimated useful life. The fair value of the in-process technology was based
on a discounted cash flow model, similar to the traditional "Income Approach",
which discounts expected future cash flows to present value, net of tax. In
discounting the estimated cash flows, a discount rate of 25% was used based on
the risks associated with achieving such projected cash flows upon successful
completion of the acquired projects, expected incremental revenues and expenses
associated with the projects utilizing the acquired technology, and risks and
uncertainties in incorporating the acquired technology into the Company's
development projects. In developing cash flow projections, revenues were
forecasted based on relevant factors, including aggregate revenue growth rates
for the business as a whole, characteristics of the potential market for the
technology and the anticipated life of the technology. Projected annual revenues
for the in-process research and development projects were assumed to ramp up
initially and decline significantly at the end of the in-process technology's
economic life. Operating expenses and resulting profit margins were forecasted
based on the characteristics and cash flow generating potential of the acquired
in-process technology. Gross profit percentage and tax rate were assumed to
approximate the Company's corporate gross profit percentage average and its
effective tax rate. Associated risks include the inherent difficulties and
uncertainties in completing each project and thereby achieving technological
feasibility, and risks related to the impact of potential changes in market
conditions and technology.
During the second quarter of fiscal 1999, the Company acquired Gambit
Automated Design, Inc., Smartech OY and the rights to CoverMeter, a software
product owned by Advanced Technology Center, for a combined purchase price of
$51.6 million, including cash payments of $37.3 million, notes payable of $10.3
million and the assumption of approximately 78,000 shares of Synopsys' common
stock for issuance under Gambit's stock option plan. The purchase price of each
transaction was allocated to the acquired assets and liabilities based on their
estimated fair values as of the date of the respective acquisition based on
appraisals completed by independent third parties. Amounts allocated to
developed technology, workforce and goodwill are being amortized on a
straight-line basis over four to five-year periods. Approximately $16.3 million
was allocated to in-process research and development and charged to operations
because the acquired technology had not reached technological feasibility and
had no alternative uses. The in-process research and development projects were
estimated to be approximately 75% complete in the aggregate, and the expected
aggregate cost to complete the projects was estimated at $3.2 million. The
Company used the same valuation process for the second quarter acquisitions as
described above.
As of June 30, 1999, the Company's research and development expenditures
since the acquisitions of fiscal 1999 have not differed materially from
expectations. The projections the Company used in performing its valuations with
respect to each acquisition are still valid, in all material respects, however,
there can be no assurance that the projected results will be achieved. With
respect to the Company's acquisitions completed in fiscal 1998, management
believes that the projections the Company used in performing its valuations with
respect to each acquisition are still valid, in all material respects, however,
there can be no assurance that the projected results will be achieved.
Management expects to continue the development of each project and believes that
there is a reasonable chance of successfully completing such development
efforts. However, there is risk associated with the completion of the in-process
projects and there can be no assurance that any project will meet with either
technological or commercial success. Failure to successfully develop and
commercialize these in-process projects would result in the loss of the expected
economic return inherent in the fair value allocation. Additionally, the value
of other intangible assets acquired may become impaired. The risks associated
with the research and development are still considered high and no assurance can
be made that upcoming products will meet market expectations.
Other Income, net. Other income, net for the third quarter of fiscal 1999
increased 40.1% to $9.4 million from $6.7 million in the third quarter of fiscal
1998 and increased as a percentage of total revenue to 4.5% from 3.7%. For the
first nine months of fiscal 1999, other income, net was $27.6 million, compared
to $18.1 million for the comparable period in fiscal 1998. Other income, net
increased as a percentage of total revenue to 4.8% in the first nine months of
fiscal 1999 from 3.4% for the comparable period in fiscal 1998. These increases
were primarily due to higher average invested cash and short-term investment
balances, which yielded more interest
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<PAGE> 13
income for the fiscal 1999 periods presented compared to the fiscal 1998
periods. The increase in the invested cash and short-term investments resulted
primarily from increased cash flow generated from the Company's operations and
cash proceeds from a relatively greater number of employee stock options
exercised during the first nine months of fiscal 1999, partially offset by cash
outlays of $53.1 million for capital expenditures, $46.5 million for
acquisitions, stock repurchase of $27.7 million, $13.3 million to exercise
warrants in strategic investments and cash paid on debt obligations of $12.6
million.
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 primarily in tax exempt
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
anticipate any material loss with respect to its investment portfolio.
The following table presents the carrying value and related weighted-average
interest rates for the Company's investment portfolio. The carrying value
approximates fair value at June 30, 1999. In accordance with the Company's
investment policy, all investments mature in fifteen months or less.
Principal (Notional) Amounts in U.S. Dollars:
<TABLE>
<CAPTION>
Carrying Average
(in thousands, except interest rates) Amount Interest Rate
-------- -------------
<S> <C> <C>
Short-term investments - fixed rate $488,198 3.55%
Money market funds - variable rate 128,047 3.34%
--------
Total interest bearing instruments $616,245 3.50%
========
</TABLE>
Foreign Currency Risk. At the present time, the Company hedges only those
currency exposures associated with certain assets and liabilities denominated in
nonfunctional currencies and does not generally hedge anticipated foreign
currency cash flows. The hedging activity undertaken by the Company is intended
to offset the impact of currency fluctuations on certain nonfunctional currency
assets and liabilities. The success of this activity depends upon estimations of
intercompany balances denominated in various currencies, primarily the Japanese
yen, British pound sterling, German mark, French franc and Italian lira. The
Company's accounting policy for these instruments is based on the Company's
designation of such instruments as hedging transactions. The Company had
contracts for the sale and purchase of foreign currencies with a notional value
expressed in U.S. dollars of $35.8 million. These contracts were denominated in
currencies which approximated the fair value of such contracts and their
underlying transactions as of June 30, 1999. Looking forward, 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. There can be no assurance in the future that these hedging
transactions will be effective.
The following table provides information about the Company's foreign exchange
forward contracts at June 30, 1999. 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 June 30, 1999. 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 Contract (Notional Value)
Japanese yen $23,447 120.87
British pound sterling 1,032 0.63
German mark 3,771 1.86
French franc 7,398 6.27
Italian lira 189 1,850.10
</TABLE>
The unrealized gain (loss) on the outstanding forward contracts at June 30, 1999
was immaterial to the Company's consolidated financial statements. The realized
gain (loss) on these contracts as they matured was
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<PAGE> 14
not material to the Company's consolidated financial position, results of
operations, or cash flows for the periods presented.
Income Taxes. The Company's effective income tax rate for the three and
nine-month periods ended June 30, 1999, was 32% compared to 34% for the
comparable periods in the prior year, respectively, excluding the effect of
unusual charges which were not deductible for income tax purposes. The Company
does not anticipate any material change to the effective tax rate for the
remainder of fiscal 1999.
ACCOUNTING PRONOUNCEMENTS
During fiscal 1999, the Company early adopted SOP 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use. This
statement requires computer software costs incurred during the application
development stage to be capitalized and amortized to operations over the
software's estimated useful life. The effect of adopting SOP 98-1 for the three
and nine-month periods ended June 30, 1999 was not material to the Company's
consolidated financial position, results of operations or cash flows.
In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions, which amends
SOP 97-2, Software Revenue Recognition and supercedes SOP 98-4. The Company will
adopt SOP 98-9 in fiscal 2000. The Company intends to modify certain aspects of
its license and pricing structure so that the impact of SOP 98-9 on its revenue
recognition practices will not be significant.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131, Disclosures about Segments of an Enterprise and Related Information.
Readers are referred to the "Effect of New Accounting Standards" section of the
Company's 1998 Annual Report on Form 10-K for further discussion. The Company
will adopt SFAS No. 131 as required for its fiscal 1999 annual report.
In June 1999, FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities, which amends the effective date of SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. Readers are
referred to the "Effect of New Accounting Standards" section of the Company's
1998 Annual Report on Form 10-K for further discussion. The Company will adopt
SFAS No. 137 as required for its fiscal 2001 annual report.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments were $645.2 million, an
increase of $40.5 million from September 30, 1998. The increase is primarily a
result of cash generated by operations of $109.3 million and through investing
and financing activities, mainly the exercise of stock options and purchases of
stock through the employee stock purchase plans of $80.1 million and the
proceeds on sale of long-term investments of $16.4 million. These cash flows
were partially offset by cash outflows for investing and financing activities,
capital expenditures of $53.1 million, acquisitions of $46.5 million, stock
repurchase of $27.7 million, $13.3 million to exercise warrants in strategic
investments and cash paid on debt obligations of $12.6 million.
Accounts receivable increased 24.7% during the nine months ended June 30,
1999. Days sales outstanding in receivables increased to 68 days as of June 30,
1999 from 59 days at September 30, 1998.
At December 31, 1998, the Company had two foreign exchange lines of credit
available totaling $70.0 million which expire in July 1999 and October 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
This section contains forward-looking statements. See "Factors That May
Affect Future Results."
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<PAGE> 15
Year 2000 Problem. The failure of a computer program to accurately recognize
and process date information beginning on January 1, 2000 is referred to as a
"Year 2000 problem." This may result in a system failure, miscalculation or
other malfunction.
Synopsys has potential Year 2000 problems both as a vendor of software and
as a user of software and other services. As a vendor, Synopsys could have Year
2000 issues either if our software were not Year 2000 compliant or our customers
had Year 2000 issues that interfered with their purchases of Synopsys' products.
Our business could also be disrupted if any of the many systems we use to
perform key corporate functions -- such as financial accounting, billing,
payroll or license control, or the telecommunications, power and other services
they depend on -- were interrupted or damaged as a result of Year 2000 problems.
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 problems. We have inspected or
tested all of our currently released products to determine whether they have
Year 2000 problems. None of our tested products experienced significant
date-related failures. In addition, we are operating a dedicated Year 2000 test
laboratory, which we use to test untested products and maintain Year 2000
compliance of future products.
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 1997. We
currently anticipate that they will be completed by September 30, 1999. As of
June 30, 1999, we had completed approximately 80% of the total effort for the
projects we believe are necessary to fully address potential Year 2000 issues
relating to our internal computer systems and software.
In addition to conducting an assessment of our products and internal systems
and software, we have conducted a survey of our most important vendors and
service providers. All such vendors have indicated that they are Year 2000
compliant or are targeted to be Year 2000 compliant by September 30, 1999.
Certain of the computer equipment and software we currently use has required
or will require replacement or modification as a result of Year 2000 issues,
including an upgrade to the Windows operating system, and related modifications,
affecting most of the desktop computers used in our business. In certain
instances, a replacement or modification anticipated in the ordinary course of
business has been accelerated due to Year 2000 issues.
Costs of Readiness. Synopsys has not incurred, and does not expect to incur,
material expense in connection with our Year 2000 Efforts. We currently estimate
that the total cost of our Year 2000 Efforts will not exceed $8.1 million,
consisting of approximately $5.1 million for hardware, software and external
consultants, (external costs), and approximately $3.0 million in direct costs of
employees working on our Year 2000 Efforts (internal costs). As of June 30, 1999
we had incurred costs of approximately $4.4 million related to our Year 2000
Efforts, including $2.9 million in external costs and $1.5 million in internal
costs. Should we encounter unforeseen Year 2000 problems, either in our products
or internal systems or in our customers' or vendors' operations, the amount we
spend on our Year 2000 Efforts number could increase, perhaps by a material
amount. The cost of our Year 2000 Efforts will be funded from operating cash
flows. These costs represent approximately 5.7% of our total actual and
anticipated IT expenditures for the period from the start of fiscal 1998 through
March 31, 2000 (including employee expenses of our IT department). 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 analyzed the operational problems that would
be reasonably likely to result from the failure by us or vendors to achieve Year
2000 compliance on a timely basis. The most reasonably
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<PAGE> 16
likely worst case scenario we have identified is a loss of power or other
power-related problems affecting our core operational functions for one week. We
are developing a contingency plan for this scenario, and expect to complete it
by September 30, 1999, in conjunction with our overall crisis planning efforts.
While we do not anticipate that this scenario will have a material adverse
effect on our business, we are not able to predict the effects of a worst case
scenario with certainty.
EUROPEAN MONETARY UNIT
Synopsys' sales to European customers are primarily U.S. dollar based.
However, we recognize the potential importance of the newly introduced European
Monetary Unit (EMU) to our customers residing in the European union. Our
information systems are capable of functioning in multiple currencies. We have
started to make the system changes to make all infrastructures capable of
operations in the EMU. We do not expect to incur significant expenses for these
system changes. We do not expect to have any disruptions in operations due to
the EMU implementation.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Our Revenue and Earnings May Be Subject to Fluctuation. Many unpredictable
factors affect our revenue and earnings, which makes it difficult to achieve
predictable revenue and earnings growth. Among these factors are customer
product and service demand, product license terms, the size of our backlog, and
the timing of revenue recognition on products and services sold. The following
specific factors could affect our revenues and earnings in a particular quarter
or over several quarterly or annual periods:
- - Our orders have been seasonal. Historically, our first fiscal quarter has
been our weakest. Our recently announced fiscal year change may affect the
seasonal pattern of our revenues and may make it difficult to compare fiscal
periods before and after the change.
- - Our products are complex, and before buying them customers spend a great
deal of time reviewing and testing them. The sales cycle does not
necessarily match quarterly periods, and if by the end of any quarter we
have not sold enough new licenses, our orders and revenues could be below
our plan.
- - Like many companies in the software industry, in the past we have received a
disproportionate volume of orders in the last week of a quarter, and
recognized a disproportionate amount of revenue in the last week of a
quarter. In addition, a large proportion of our business is attributable to
our largest customers. 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 below our plan.
- - The accounting rules we are required to follow permit us to recognize
revenue only when certain criteria are met. Orders for certain of our
products and services yield revenue over multiple quarters (often extending
beyond the current fiscal year) or upon completion of performance rather
than at the time of sale. In addition, the specific terms agreed to with a
customer may have the effect of requiring deferral of revenue in whole or in
part or, alternatively, of permitting us to accelerate the recognition of
revenue for products to be used over multiple years. A number of our recent
transactions have involved multi-year licenses with respect to which a
significant portion of the revenue was recognized in the initial quarter
(consistent with relevant accounting rules). Therefore, for a given quarter
it is possible for us to fall short in our revenue and/or earnings plan even
while orders and backlog remain on plan or, conversely, to meet our revenue
and/or earnings plan by drawing on backlog and deferred revenue while orders
are under plan.
- - We are making changes to the license and pricing structure for our software
products. Although we believe that these changes have benefits for both
Synopsys and our customers, if customer reaction is not favorable, the
transition to the new structure could be disruptive to business and result
in the deferral or loss of sales.
Our Industry is Highly Competitive. 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 potential customers. In general, competition is based on product
quality and features, post-sale support, price and, as discussed below, the
ability to offer a complete design flow. 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 design process. Synopsys'
competitors continue to offer aggressive discounts on their products, in
particular on synthesis and Verilog simulation products. If this behavior
continues, overall pricing
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<PAGE> 17
for EDA products may be affected. 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 needs of our customers. We also will have
to expand our consulting services business. The failure to enhance existing
products, develop and/or acquire new products or to expand our ability to offer
consulting services could 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 integrated logic and physical design tools
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 and have recently expanded our offerings of physical design
tools, but we do not offer a complete physical design flow. Cadence and Avant!,
which dominate the market for physical design tools, each have acquired logic
synthesis technology in an effort to complete their design flows. (In addition,
Cadence's acquisition of logic design products has led to significant reductions
in purchases of our logic design software by Cadence, which was one of our ten
largest customers in fiscal 1998.) If we are unsuccessful in developing a
complete design flow on a timely basis, our competitive position could be
significantly weakened.
Our Revenue Growth Depends on Our Non-Synthesis Products. Historically, much
of our growth has been attributable to the strength of our 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, although synthesis revenues were stronger than expected in the
third quarter. In order to meet our revenue plan, revenue from our non-synthesis
design creation products, certain high level verification products, deep
submicron products and professional services must grow faster than our overall
revenue growth target. During the third quarter of fiscal 1999, revenue from
design creation products and design verification products grew faster than the
overall corporate rate, revenue from deep submicron products grew more slowly
than the overall corporate growth rate and revenue from professional services
grew faster than the overall corporate growth rate, although below planned
growth. Among the products that we expect to be the most important contributors
to revenue growth are our PrimeTime timing analysis, Formality formal
verification, Module Compiler datapath synthesis, Chip Architect design
planning, FlexRoute top level routing, VCS Verilog simulation and EPIC deep
submicron analysis and verification products. If revenue growth for these
products fails to meet our goals, it is unlikely that we will meet our overall
revenue growth target.
In order to sustain revenue growth over the long term, we will have to
introduce new products that are accepted by a broad range of customers and to
significantly expand our consulting services business. Product success is
difficult to predict. The introduction of new products and growth of a market
for such products cannot be assured. In the past we, like all companies, have
had products that have failed to meet our revenue expectations. Expanding
revenue from consulting services will require us to recruit, hire and train a
large number of skilled employees, and to implement management controls on
bidding and executing on consulting engagements. The consulting business is
significantly different from the software business, however, and increasing
consulting orders and revenue while maintaining an adequate level of profit can
be difficult. There can be no assurance that we will be successful in expanding
revenue from existing or new products at the desired rate or in expanding our
services business, and the failure to do so would have a material adverse effect
on our business, financial condition and results of operations.
Businesses We Acquire May Not Perform as Projected. We have acquired or
merged with a number of companies in recent years, including EPIC Design
Technology, Inc., Viewlogic, Systems Science, Inc., Everest, Gambit, Smartech,
Stanza and Apteq, and as part of our efforts to increase revenue and expand our
product and services offerings we may acquire additional companies. In addition
to direct costs, acquisitions pose a number of risks, including potential
dilution of earnings per share, delays and other problems of integrating the
acquired products and employees into our business, the failure to realize
expected synergies or cost savings, the failure of acquired products to achieve
projected sales, 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 Synopsys, there is no assurance that any
individual acquisition will have the projected effect on our performance.
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<PAGE> 18
Our Business Depends on the Semiconductor and Electronics Businesses. 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. While
a number of market segments are growing at a healthy pace, the overall outlook
for the semiconductor industry remains uncertain. Over the past year, a number
of our customers have announced layoffs of their employees, restructurings or
the suspension of investment plans. The effect of such developments on demand
from these customers is difficult to predict, but, as a result of such actions,
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 combined companies. Slower growth in the
semiconductor and systems industries, a reduced number of design starts,
tightening of customers' operating budgets or continued consolidation among our
customers may have a material adverse effect on our business, financial
condition and results of operations.
Continued Stagnation of International Economies Will Adversely Affect Our
Performance. International revenue is vulnerable to changes in foreign currency
exchange rates and in regional or worldwide economic or political conditions.
Since the beginning of the Asian economic crisis, international revenue has
declined significantly as a percentage of overall revenue, as Asian customers
have deferred their investments in semiconductor facilities and technology. It
will be difficult to sustain our overall growth rate if revenue from Asia
remains stagnant or grows slowly. In particular:
- - If the Japanese economy remains weak, revenue from Japan and the rest of
Asia will be adversely affected. In addition, the yen-dollar exchange rate
remains subject to unpredictable fluctuations. Weakness of the yen could
adversely affect revenue from Japan during future quarters.
- - Korea's ongoing economic weakness has had, and is likely to continue to have
a significant adverse effect on our orders and revenue from Korea. In
addition, two of our four largest Korean customers have merged, which may
result in a lower level of orders from the combined company than we might
have received if the two companies remained separate.
- - Asian countries other than Japan and Korea also have experienced economic
and currency problems. If such conditions persist, orders and revenues from
the Asia Pacific region would be adversely affected.
Our Success Depends on Recruiting and Retaining 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, including those in
internet-related businesses. 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, 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.
Uncertainty Regarding Intellectual Property Rights. Our success is
dependent, in part, upon our proprietary technology and other intellectual
property rights. There can be no assurance that our competitors will not
independently develop or acquire similar techniques or gain access to our
proprietary technology or that we can protect our rights to our technology. We
rely on confidentiality agreements with collaborators, employees, vendors and
consultants to protect our proprietary technology. There can be no assurance
that these agreements will not be breached, that we would have adequate remedies
for any breach or that our trade secrets will not otherwise become known or be
independently developed by competitors. Failure to obtain or maintain patent or
trade secret protection, for any reason, could have a material adverse effect on
our business, financial condition and results of operations.
Fixed Operating Expenses. Our operating expenses are based in part on our
expectations of future revenue, and expense levels are generally committed in
advance of revenue. We expect to continue to increase operating expenses in
order to generate and support continued growth in revenue. If we were
unsuccessful in generating such revenue, our business, financial condition and
results of operations could be materially adversely affected.
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Net income in a given quarter or fiscal year may be disproportionately affected
by a reduction in revenue growth because only a small portion of our expenses
varies with revenue.
Anti-Takeover Provisions. We have 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 issue additional shares of Common Stock and to fix the rights
and preferences of, and to issue authorized but undesignated shares of Preferred
Stock. These and other provisions of Synopsys' 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 Synopsys, including transactions in which the
stockholders of the Company might otherwise receive a premium for their shares
over then current market prices.
Year 2000 Problems. We are uncertain as to the Year 2000 readiness of our
customers, and if one or more important customers were to experience Year
2000-related problems that interfered with their purchases of Synopsys products,
our revenues could be reduced. In addition, if 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, or if our telecommunications, power supply or another
important service or product were to malfunction due to Year 2000-related
problems, we could 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 AICPA, the SEC and various bodies
formed to interpret and create appropriate accounting policies. A change in
these policies could have a significant effect on our reported results, and
might even affect our reporting of transactions completed before a change is
announced.
For example, recent developments in the way the SEC views in-process
research and development (IPRD) charges has made it difficult to predict with
confidence the financial statement effects of acquisitions accounted for by the
purchase method of accounting. The FASB, an accounting standards group working
under the aegis of the SEC, is considering whether to recommend the elimination
of IPRD charges altogether. FASB also is planning to issue a proposal to
eliminate pooling-of-interests accounting treatment for acquisitions. Each of
these changes may affect the Company's future merger and acquisition activity by
affecting the Company's accounting for such transactions. Future mergers and
acquisitions (and, depending upon the effective date of any changes, perhaps
already-completed transactions) would result in a relatively greater amount of
goodwill on the Company's balance sheet, and of the corresponding amortization
expense in the Company's income statement. In response to these developments, we
have begun to report "earnings before goodwill" in addition to the other
measures of earnings required under GAAP.
Accounting policies affecting many other aspects of our business, including
rules relating to software revenue recognition, employee stock purchase plans
and stock option grants have recently been revised or are under review by one or
more accounting authorities. 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.
19
<PAGE> 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information relating to quantitative and qualitative disclosure about market
risk is set forth under the captions "Interest Rate Risk" and "Foreign Currency
Risk" in Item 2, Management's Discussion and Analysis of Financial Condition and
Results of Operations. Such information is incorporated herein by reference.
20
<PAGE> 21
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
The Company filed a report on Form 8-K on July 23, 1999 containing the
Company's press release announcing its financial results for the quarter
ended July 3, 1999, including condensed consolidated statements of
income and balance sheets.
21
<PAGE> 22
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.
SYNOPSYS, INC.
By: /s/ David M. Sugishita
--------------------------------------------
David M. Sugishita
Sr. Vice President, Finance & Operations
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: August 6, 1999
22
<PAGE> 23
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> APR-04-1999
<PERIOD-END> JUL-03-1999
<CASH> 156,982
<SECURITIES> 488,198
<RECEIVABLES> 171,573
<ALLOWANCES> 14,016
<INVENTORY> 0
<CURRENT-ASSETS> 851,577
<PP&E> 246,932
<DEPRECIATION> 123,142
<TOTAL-ASSETS> 1,112,400
<CURRENT-LIABILITIES> 240,385
<BONDS> 11,446
0
0
<COMMON> 711
<OTHER-SE> 850,675
<TOTAL-LIABILITY-AND-EQUITY> 1,112,400
<SALES> 577,772
<TOTAL-REVENUES> 577,772
<CGS> 76,684
<TOTAL-COSTS> 76,684
<OTHER-EXPENSES> 147,548
<LOSS-PROVISION> 38
<INTEREST-EXPENSE> 1,115
<INCOME-PRETAX> 173,478
<INCOME-TAX> 65,111
<INCOME-CONTINUING> 108,367
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108,367
<EPS-BASIC> 1.55
<EPS-DILUTED> 1.48
</TABLE>
