<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 31, 2000
[ ] 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) 584-5000
(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.
64,890,666 shares of Common Stock as of September 2, 2000
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SYNOPSYS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JULY 31, 2000
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I...................................................................................................... 3
ITEM 1. FINANCIAL STATEMENTS............................................................................ 3
CONDENSED CONSOLIDATED BALANCE SHEETS.................................................................. 3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME............................................................ 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS........................................................ 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS................................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK........................................ 18
PART II. OTHER INFORMATION.................................................................................. 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................. 19
SIGNATURES............................................................................................... 20
</TABLE>
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PART I
ITEM 1. FINANCIAL STATEMENTS
SYNOPSYS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 450,967 $ 309,394
Short-term investments 195,103 399,995
----------- -----------
Cash, cash equivalents and short-term
investments 646,070 709,389
----------- -----------
Accounts receivable, net of allowances of
$9,522 and $10,563, respectively 178,499 130,253
Prepaid expenses, deferred taxes and other 47,281 66,814
----------- -----------
Total current assets 871,850 906,456
----------- -----------
Property and equipment, net 146,211 135,118
Long-term investments 121,048 57,651
Intangible assets, net 52,206 56,240
Other assets 32,403 22,818
----------- -----------
Total assets $ 1,223,718 $ 1,178,283
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 116,634 $ 98,976
Current portion of long-term debt 6,414 8,658
Accrued income taxes 64,821 50,146
Deferred revenue 148,040 126,758
----------- -----------
Total current liabilities 335,909 284,538
----------- -----------
Long-term debt 719 11,304
Deferred compensation 15,264 9,844
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized; no shares outstanding -- --
Common stock, $.01 par value; 400,000,000 shares
authorized; 67,919,000 and 70,750,000 shares
outstanding, respectively 679 708
Additional paid-in capital 558,146 542,052
Retained earnings 434,718 349,192
Treasury stock, at cost (164,017) (28,589)
Accumulated other comprehensive income 42,300 9,234
----------- -----------
Total stockholders' equity 871,826 872,597
----------- -----------
Total liabilities and stockholders' equity $ 1,223,718 $ 1,178,283
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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SYNOPSYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------- ---------------------
JULY 31, JUNE 30, JULY 31, JUNE 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Product $143,348 $131,945 $396,930 $358,584
Service 85,487 75,415 253,626 219,188
-------- -------- -------- --------
Total revenue 228,835 207,360 650,556 577,772
-------- -------- -------- --------
Cost of revenue:
Product 10,169 10,897 31,108 26,803
Service 21,851 19,389 59,723 49,881
-------- -------- -------- --------
Total cost of revenue 32,020 30,286 90,831 76,684
-------- -------- -------- --------
Gross margin 196,815 177,074 559,725 501,088
-------- -------- -------- --------
Operating expenses:
Research and development 50,323 41,861 140,552 121,979
Sales and marketing 73,709 59,145 211,100 173,199
General and administrative 15,973 12,450 42,255 34,415
Amortization of intangible assets 3,745 2,961 10,956 4,431
In-process research and development -- 4,909 1,750 21,176
-------- -------- -------- --------
Total operating expenses 143,750 121,326 406,613 355,200
-------- -------- -------- --------
Operating income 53,065 55,748 153,112 145,888
Other income, net 8,797 9,398 27,431 27,590
-------- -------- -------- --------
Income before provision for income taxes 61,862 65,146 180,543 173,478
Provision for income taxes 20,491 23,791 60,495 65,111
-------- -------- -------- --------
Net income $ 41,371 $ 41,355 $120,048 $108,367
======== ======== ======== ========
Basic earnings per share:
Net income $ .61 $ 0.58 $ 1.71 $ 1.55
======== ======== ======== ========
Weighted average common shares 68,278 70,738 70,026 70,046
======== ======== ======== ========
Diluted earnings per share:
Net income $ .59 $ 0.56 $ 1.65 $ 1.48
======== ======== ======== ========
Weighted average common shares
and equivalents 69,603 73,694 72,591 73,183
======== ======== ======== ========
</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)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
JULY 31, JUNE 30,
2000 1999
----------- -----------
<S> <C> <C>
Cash flows provided by operating activities:
Net income $ 120,048 $ 108,367
Adjustments to reconcile net income to cash flows
provided by operating activities:
Depreciation and amortization 46,583 37,357
Tax benefit associated with stock options 10,408 22,168
Provision for doubtful accounts and sales returns (1,041) 806
Interest accretion on notes payable 601 645
Deferred taxes (4,245) 705
Gain on sale of long-term investments (7,060) (14,260)
In-process research and development 1,750 21,176
Net changes in operating assets and liabilities:
Accounts receivable (46,285) (31,317)
Prepaid expenses and other current assets 468 (1,716)
Intangible assets, net 684 (750)
Other assets (10,492) (3,974)
Accounts payable and accrued liabilities 16,581 (20,608)
Accrued income taxes 14,497 (9,843)
Deferred revenue 20,576 (3,742)
Deferred compensation 5,420 4,297
----------- -----------
Net cash provided by operating activities 168,493 109,311
----------- -----------
Cash flows from investing activities:
Expenditures for property and equipment (45,232) (53,065)
Purchases of short-term investments (1,989,729) (4,181,867)
Sales and maturities of short-term investments 2,196,283 4,133,751
Proceeds from sale of long-term investments 11,515 16,350
Purchases of long-term investments (9,498) (25,089)
Acquisitions, net of cash acquired (8,592) (46,492)
Capitalization of software development costs (500) --
----------- -----------
Net cash provided by (used in) investing activities 154,247 (156,412)
----------- -----------
Cash flows from financing activities:
Payments of debt obligations (14,000) (12,575)
Issuances of long-term debt 727 --
Issuances of common stock 47,008 80,087
Purchases of treasury stock (211,301) (27,739)
----------- -----------
Net cash (used in) provided by financing activities (177,566) 39,773
----------- -----------
Effect of exchange rate changes on cash (3,601) (238)
Net increase (decrease) in cash and cash equivalents 141,573 (7,566)
Cash and cash equivalents, beginning of period 309,394 164,548
----------- -----------
Cash and cash equivalents, end of period $ 450,967 $ 156,982
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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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. 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
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, 1999, included in the Company's 1999 Annual
Report on Form 10-K.
On July 15, 1999, the Board of Directors changed the Company's fiscal
year to end on the Saturday nearest to October 31. As a result, fiscal 2000
commenced on October 31, 1999 and will end on October 28, 2000. The period from
October 3, 1999 through October 30, 1999 was accounted for as a transition
period, information on which was filed with the Company's quarterly report on
Form 10-Q for the first quarter of fiscal 2000. For presentation purposes, the
consolidated financial statements and notes refer to 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.
2. BUSINESS COMBINATIONS
Acquisitions
On June 29, 2000, the Company acquired The Silicon Group, Inc. (TSG), a
privately held provider of integrated circuit (IC) design and intellectual
property (IP) integration services, for a purchase price of approximately
$3 million, including cash payments of $1.8 million. The purchase price was
allocated to the acquired assets and liabilities based on their estimated fair
values at the time of the acquisition. Amounts allocated to intangible assets
and goodwill are being amortized on a straight-line basis over a four-year
period.
During the first quarter of fiscal 2000, the Company acquired Leda, S.A.
(Leda), a privately held provider of RTL coding-style-checkers, for a purchase
price of $7.7 million, including cash payments of $7.5 million. The purchase
price of the transaction was allocated to the acquired assets and liabilities
based on their estimated fair values as of the date of the acquisition. Amounts
allocated to developed technology, workforce and goodwill are being amortized on
a straight-line basis over a five-year period. Approximately $1.8 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.
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.
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3. STOCK REPURCHASE PROGRAMS
In June 1999, the Board of Directors authorized a stock repurchase
program of which $104.6 million remained available to spend at the beginning of
fiscal 2000. In February 2000, the Board of Directors authorized a second stock
repurchase program under which Synopsys' common stock with a market value of up
to $200 million could be acquired in the open market until December 31, 2000.
Repurchased shares were to be used for issuance under Synopsys' stock option and
employee stock plans and for other corporate purposes. During the third quarter
of fiscal 2000, the Company purchased 709,500 shares for an aggregate amount of
$28.4 million. During the first nine months of fiscal 2000, the Company
purchased 4,431,500 shares for an aggregate amount of $211.3 million, under all
share repurchase programs.
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
------------------------ ------------------------
JULY 31, JUNE 30, JULY 31, JUNE 30,
2000 1999 2000 1999
--------- --------- --------- ---------
(in thousands) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net income $ 41,371 $ 41,355 $ 120,048 $ 108,367
Foreign currency translation adjustment (1,120) (122) (3,601) (238)
Unrealized gain (loss) on investments 24,624 344 40,903 4,759
Reclassification adjustment for
(losses) included in net income (1,181) (2,308) (4,237) (7,149)
--------- --------- --------- ---------
Total comprehensive income $ 63,694 $ 39,269 $ 153,113 $ 105,739
========= ========= ========= =========
</TABLE>
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5. EARNINGS PER SHARE
Basic earnings per share is computed using the weighted-average number
of common shares outstanding. 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
----------------------------- ---------------------
JULY 31, JUNE 30, JULY 31, JUNE 30,
(in thousands, except per share amounts) 2000 1999 2000 1999
------------ ------------ -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
NUMERATOR:
Numerator for basic and diluted earnings per share -
Net income $ 41,371 $ 41,355 $120,048 $108,367
============ ============ ======== ========
DENOMINATOR:
Denominator for basic earnings per share -
weighted-average shares 68,278 70,738 70,026 70,046
Effect of dilutive securities:
Employee stock options 1,325 2,956 2,565 3,137
------------ ------------ -------- --------
Dilutive potential common shares 69,603 73,694 72,591 73,183
============ ============ ======== ========
Basic earnings per share:
Net income $ 0.61 $ 0.58 $ 1.71 $ 1.55
============ ============ ======== ========
Diluted earnings per share:
Net income $ 0.59 $ 0.56 $ 1.65 $ 1.48
============ ============ ======== ========
</TABLE>
6. EFFECT OF NEW ACCOUNTING STANDARDS
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 and supercedes SOP 98-4. The Company adopted SOP 98-9 in the first
quarter of fiscal 2000.
In June 1999, the Financial Accounting Standards Board (FASB) issued
SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities,
Deferral of the Effective Date of SFAS No. 133, which amends the effective date
of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities and requires the Company to recognize all
derivatives as either assets or liabilities on the balance sheet and measure
them at fair value. Gains and losses resulting from changes in fair value would
be accounted for based on the intended use of the derivative and whether it is
designated and qualifies for hedge accounting. The Company will adopt SFAS No.
133 for its first quarter of fiscal 2001. The Company believes that the impact
on its financial statements will not be significant.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements. The objective of SAB 101 is to provide further guidance on revenue
recognition issues in the absence of authoritative literature addressing a
specific arrangement or a specific industry. The Company is required to adopt
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the guidance in SAB 101 no later than the fourth quarter of its fiscal year
2001. Adoption of this guidance is not expected to have a material impact on the
Company's financial position or results of operations. The SEC has recently
indicated it intends to issue further guidance with respect to certain issues
addressed by SAB 101. Until such time as this additional guidance is issued, the
Company is unable to assess the impact, if any, it may have on its financial
position or results of operations.
In March 2000, the Emerging Issues Task Force (EITF) published their
consensus on EITF Issue No. 00-2, Accounting for Web Site Development Costs,
which requires that costs incurred during the development of web site
applications and infrastructure, involving developing software to operate the
web site, including graphics that affect the "look and feel" of the web page and
all costs relating to software used to operate a web site should be accounted
for under Statement of Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, (SOP 98-1). However, if a plan
exists or is being developed to market the software externally, the costs
relating to the software should be accounted for pursuant to FASB Statement No.
86, Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed (SFAS No. 86). The Company adopted EITF No. 00-2 in the third
quarter of fiscal 2000 and the adoption did not have a material effect on our
consolidated financial position or results of operations.
In March 2000, the EITF published their consensus on EITF Issue No.
00-3, Application of AICPA Statement of Position 97-2, Software Revenue
Recognition, to Arrangements That Include the Right to Use Software Stored on
Another Entity's Hardware. The Issue states that a software element covered by
SOP 97-2 is only present in a hosting arrangement if the customer has the
contractual right to take possession of the software at any time during the
hosting period without significant penalty and it is feasible for the customer
to either run the software on its own hardware or contract with another party
unrelated to the vendor to host the software. The Company recently introduced a
software hosting service. Synopsys hosting services agreements now in place do
not grant customers the right to take possession of hosted software without an
additional charge.
In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25. This Interpretation clarifies the application of Opinion 25 for
certain issues including: (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock exchange of stock option awards in a
business combination. The Company adopted Interpretation 44 in the third
quarter of fiscal 2000 and the adoption did not have a material effect on our
consolidated financial position or results of operations.
7. SEGMENT DISCLOSURE
In 1999, Synopsys adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 requires disclosures of certain
information regarding operating segments, products and services, geographic
areas of operation and major customers. The method for determining what
information to report under SFAS No. 131 is based upon the "management
approach," or the way that management organizes the operating segments within a
company, for which separate financial information is available that is evaluated
regularly by the Chief Operating Decision Maker (CODM) in deciding how to
allocate resources and in assessing performance. Synopsys' CODM is the Chief
Executive Officer and Chief Operating Officer.
The Company provides comprehensive design technology products and
consulting services in the electronic design automation software industry. The
CODM evaluates the performance of the Company based on profit or loss from
operations before income taxes not including amortization of intangible assets
and in-process research and development. For the purpose of making operating
decisions, the CODM primarily considers financial information presented on a
consolidated basis accompanied by disaggregated information about revenues by
geographic region. There are no differences between the accounting policies used
to measure profit and loss for the Company segments and those used on a
consolidated basis. Revenue is defined as revenues from external customers.
Prior period amounts have been restated to conform to the current composition of
the Company segments.
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The disaggregated financial information reviewed by the CODM is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------- ---------------------
JULY 31, JUNE 30, JULY 31, JUNE 30,
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue:
Product $143,348 $131,945 $396,930 $358,584
Service 85,487 75,415 253,626 219,188
-------- -------- -------- --------
Total revenue $228,835 $207,360 $650,556 $577,772
======== ======== ======== ========
Gross margin $196,815 $177,074 $559,725 $501,088
Operating income before amortization of intangible
assets and in-process research and development $ 56,810 $ 63,618 $165,818 $171,495
</TABLE>
Reconciliation of the Company's segment profit and loss to the Company's income
before provision for income taxes is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------- ---------------------
JULY 31, JUNE 30, JULY 31, JUNE 30,
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Operating income before amortization of intangible
assets and in-process research and development $ 56,810 $ 63,618 $165,818 $171,495
Amortization of intangible assets (3,745) (2,961) (10,956) (4,431)
In-process research and development -- (4,909) (1,750) (21,176)
-------- -------- -------- --------
Operating income $ 53,065 $ 55,748 $153,112 $145,888
======== ======== ======== ========
</TABLE>
8. SUBSEQUENT EVENTS
On July 31, 2000, the Company announced that its Board of Directors
authorized a stock repurchase program under which Synopsys common stock with a
market value up to $500 million may be acquired in the open market. The stock
repurchase program replaced the $200 million repurchase program authorized by
the Board in February 2000, under which $70 million remained available as of the
end of the third quarter. Under the program, share purchases may be made in the
open market at prevailing prices beginning on August 3, 2000 and ending when all
available funds have been spent, or upon termination of the program by the
Board. The purchases will be funded from available working capital. The
repurchased shares may be used for stock issuances arising from the Company's
employee stock option and purchase plans and from acquisitions, or for other
purposes.
On August 2, 2000, the Company acquired VirSim, a software product, from
Innoveda, Inc., for a purchase price of approximately $7.0 million in cash. The
purchase price of the transaction was allocated to the acquired assets based on
their estimated fair values as of the date of the acquisition. Amounts allocated
to intangible assets and goodwill are being amortized on a straight-line basis
over a three-year period.
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<PAGE> 11
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. Such
forward-looking statements include the statements concerning expected cash flows
from acquired technology, projections regarding acquired companies, effects of
foreign currency hedging, adequacy of the Company's cash as well as statements
including the words "projects," "expects," "believes," "anticipates" or similar
expressions. 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 Combinations. On June 29, 2000, the Company acquired The
Silicon Group, Inc. (TSG), a privately held provider of integrated circuit (IC)
design and intellectual property (IP) integration services, for a purchase price
of $3 million, including cash payments of $1.8 million. The purchase price was
allocated to the acquired assets and liabilities based on their estimated fair
values at the time of the acquisition. Amounts allocated to intangible assets
and goodwill are being amortized on a straight-line basis over a four-year
period.
During the first quarter of fiscal 2000, the Company acquired Leda, for
a purchase price of $7.7 million, including cash payments of $7.5 million. The
purchase price of the transaction was allocated to the acquired assets and
liabilities based on their estimated fair values as of the date of the
acquisition. Amounts allocated to developed technology, workforce and goodwill
are being amortized on a straight-line basis over a five-year period.
Approximately $1.8 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.
Revenue. Revenue for the third quarter of fiscal 2000 increased 10.4% to
$228.8 million from $207.4 million in the third quarter of fiscal 1999. Revenue
for the first nine months of fiscal 2000 increased 12.6% to $650.6 million from
$577.8 million for the comparable period in fiscal 1999. The increase in revenue
for both periods was primarily attributable to increased sales of physical
synthesis, test, timing analysis and verification software products, and
increased revenues from services. Product revenue as a percentage of total
revenue for the third quarter of fiscal 2000 decreased to 62.6% from 63.6% for
the comparable period in 1999. Product revenue as a percentage of total revenue
for the first nine months of fiscal 2000 was 61.0%, compared to 62.1% for the
comparable period in fiscal 1999. The decrease in product revenue as a
percentage of total revenue for both periods presented was primarily
attributable to relatively faster growth in maintenance revenue and consulting
services.
During the quarter, approximately 17% of product revenues was derived
from perpetual licenses, and approximately 83% from shorter term time-based or
term-licenses, compared with 56% from perpetual licenses and 44% from time based
licenses in third quarter of fiscal 1999. During fiscal 2000 time-based and term
licenses generally have had terms of three years. During the first three
quarters of fiscal 2000, Synopsys' licenses generally have been structured so
that product revenue on all types of licenses is recognized in the quarter of
booking and support revenue is recognized ratably over the term of the license.
On July 31, Synopsys introduced Technology Subscription Licenses (TSLs).
TSLs are time limited rights to use Synopsys software. The terms of TSLs, and
the payments due thereon, may be structured flexibly to meet the needs of the
customer. For creditworthy customers payments will often extend over the entire
term of the license. With minor exceptions, under TSLs customers cannot obtain
major new products developed or acquired during the term of their license
without making an additional purchase. TSLs will be structured so that both
product and service revenue will generally be recognized ratably over the term
of the license, or as payments become due. We expect that the average duration
of TSLs will be two and a half to three years.
Beginning in the fourth fiscal quarter, Synopsys will focus on selling
perpetual licenses and TSLs. Synopsys expects that approximately 75 percent of
its new product orders will be for TSLs and approximately 25 percent will be for
perpetual licenses, in each case plus or minus 5 percent. Synopsys believes that
the principal benefits of TSLs will be that Synopsys will (i) be able to offer
customers technology and terms that more closely match their needs; (ii) will
have greater visibility into our earnings stream; (iii) will see improvements
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<PAGE> 12
in the pricing environment for our products; and (iv) will be able to roll out
our new technology in a more planned manner.
The replacement of time-based licenses by subscription licenses will
impact our reported revenue, and we expect reported revenue to decline in the
fourth quarter of fiscal 2000, as compared to both the fourth quarter of fiscal
1999 and the third quarter of fiscal 2000. Under a subscription license,
relatively little revenue is recognized during the quarter it is shipped, and
the rest goes into backlog to be recognized over the term of the license.
Under the old form of time-based license, generally all license revenue has
been recognized in the quarter it is shipped, with relatively little going into
backlog. Therefore, an order for subscription licenses will result in much less
current-quarter revenue than an equal-sized order for the old form of
time-based license.
International revenue as a percentage of total revenue increased to
43.5% in the third quarter of fiscal 2000 from 28.1% in the third quarter of
fiscal 1999. For the first nine months of fiscal 2000, international revenue was
39.9% of total revenue, compared to 34.8% for the comparable period in fiscal
1999. The increase for both periods presented is primarily a result of
relatively greater revenue growth in Japan and Asia Pacific in fiscal 2000.
During the quarter, North America accounted for 56% of total revenue, Europe for
12%, Japan for 25% and Asia Pacific for 7%. During the third quarter of fiscal
1999, North America accounted for 72%, Europe for 12%, Japan for 11% and Asia
Pacific for 5% of revenue respectively. Over the past four quarters, North
America has accounted for 60% of total revenue, Europe for 17%, Japan for 16%
and Asia Pacific for 7%.
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 14.0% in
the third quarter of fiscal 2000, compared to 14.6% in the third quarter of
fiscal 1999. The decrease in cost of revenue resulted primarily from lower
royalty expense, which was partially offset by personnel costs relating to
maintenance and support. For the first nine months of fiscal 2000, cost of
revenue as a percentage of total revenue was 14.0%, compared to 13.3% for the
comparable period in fiscal 1999.
Research and Development. Research and development expenses as a
percentage of total revenue increased to 22.0% in the third quarter of fiscal
2000 from 20.2% in the third quarter of fiscal 1999, and increased in absolute
dollars to $50.3 million from $41.9 million. Research and development expenses
were $140.6 million for the first nine months of fiscal 2000 in absolute
dollars, compared to $122.0 million for the comparable period in fiscal 1999. As
a percentage of total revenue, research and development increased to 21.6% in
the first nine months of fiscal 2000, compared to 21.1% for the comparable
period in fiscal 1999. The increase in absolute dollars for both periods
reflects the Company's on-going research and development efforts. 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 increased to 32.2% in the third quarter of fiscal 2000 from 28.5%
in the third quarter of fiscal 1999, and increased in absolute dollars to $73.7
million from $59.1 million. The increase in absolute dollars was primarily the
result of increased personnel costs, consulting expenses, trade shows and costs
associated with sales functions. Sales and marketing expenses were 32.4% of
total revenue for the first nine months of fiscal 2000, compared to 30.0% for
the comparable period in fiscal 1999. In absolute dollars, sales and marketing
expenses were $211.1 million for the first nine months of fiscal 2000, compared
to $173.2 million for the comparable period in fiscal 1999. The increase as a
percentage of total revenue and absolute dollars for both periods presented was
primarily due to increases in personnel-related costs.
General and Administrative. General and administrative expenses as a
percentage of total revenue increased to 7.0% in the third quarter of fiscal
2000 from 6.0% in the third quarter of fiscal 1999, and increased in absolute
dollars to $16.0 million from $12.5 million. General and administrative expenses
were 6.5% of total revenue for the first nine months of fiscal 2000, compared to
6.0% for the comparable period in fiscal 1999 and increased in absolute dollars
to $42.3 million from $34.4 million. The increase, as a percentage of total
revenue and in absolute dollars for both periods presented, was primarily due to
increases in bad debt expense, personnel costs, facility expenditures and patent
and proxy services.
Amortization of Intangible Assets. Amortization of intangible assets
represents the excess of the aggregate purchase price over the fair value of the
tangible and identifiable intangible assets acquired by the Company. Under the
Company's accounting policies, intangible assets as of July 31, 2000, including
goodwill, are 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. Amortization of intangible assets charged
to operations in the third quarter of fiscal 2000 was $3.7 million and for the
first nine months of fiscal 2000 was $11.0 million. Amortization of intangible
assets for the third quarter fiscal 1999 was $3.0 million and for the first nine
months of fiscal 1999 was $4.4 million.
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<PAGE> 13
In-process Research and Development. The Company incurred in-process
research and development charges of $1.8 million in the first nine months of
fiscal 2000 related to the acquisition of Leda. The purchase price totaled $7.7
million, including cash payments of $7.5 million. The purchase price of the
transaction was allocated to the acquired assets and liabilities based on their
estimated fair values as of the date of the acquisition. Amounts allocated to
developed technology, workforce and goodwill are being amortized on a
straight-line basis over a five-year period. Approximately $1.8 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 71% complete in the aggregate, and the expected
aggregate cost to complete the projects was estimated at $0.6 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 20% 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 30% 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
rates 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.
As of July 31, 2000, the Company's research and development expenditures
since the acquisition of Leda in fiscal 2000 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 1999, 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
2000 decreased 6.4% to $8.8 million from $9.4 million in the third quarter of
fiscal 1999 and decreased as a percentage of total revenue to 3.8% from 4.5%.
For the first nine months of fiscal 2000, other income, net was $27.4 million,
compared to $27.6 million for the comparable period in fiscal 1999. Other
income, net decreased as a percentage of total revenue to 4.2% in the first nine
months of fiscal 2000 from 4.8% for the comparable period in fiscal 1999. The
decrease is due to less income generated from the sale of long-term investments,
which was partially offset by higher interest income for the fiscal 2000 periods
presented compared to fiscal 1999 periods.
Interest Rate Risk. The Company's exposure to market risk for changes in
interest rates relate primarily to its investment portfolio. The Company does
not use derivative financial instruments for speculative or trading purposes
with respect to its cash and short-term investments. The Company places its
investments in a mix of tax exempt and taxable 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.
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<PAGE> 14
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 July 31, 2000. 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>
Cash equivalents- fixed rate $ 61,802 6.00%
Short-term investments - fixed rate 195,103 4.60%
--------
Total investment securities $256,905 4.94%
Money market funds - variable rate 331,931 4.62%
--------
Total interest bearing instruments $588,836 4.76%
========
</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. Hedging activities are undertaken by the Company
and are intended to offset the impact of currency fluctuations on these
balances. The success of this activity depends upon estimations of intercompany
balances denominated in various currencies, primarily the Japanese yen and the
Euro. The Company had contracts for the sale and purchase of foreign currencies
with a notional value expressed in U.S. dollars of $52.9 million. These
contracts were denominated in currencies that approximated the fair value of
such contracts and their underlying transactions as of July 31, 2000. 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 July 31, 2000. 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 July 31, 2000. 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 $ 35,955 108.47
Euro 16,913 1.0643
</TABLE>
The unrealized gains/losses on the outstanding forward contracts at July
31, 2000 are expected to be substantially offset by the effect of the changes on
the underlying transactions.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments were $646.1 million, a
decrease of $63.3 million from October 31, 1999. The decrease is primarily a
result of cash outflows for investing and financing activities, mainly
repurchase of treasury stock of $211.3 million, capital expenditures of $45.2
million, purchases of long-term investments of $9.5 million and cash paid on
debt obligations of $14.0 million. These outflows were partially offset by cash
generated by operations of $168.5 million and through investing and financing
activities, mainly the exercise of stock options and purchases of stock through
the employee stock purchase plan of $47.0 million and proceeds from the sale of
long-term investments of $11.5 million.
Accounts receivable increased 37% from $130.3 million at October 31,
1999 to $178.5 million at July 31, 2000. Days sales outstanding in receivables
remained flat at 70 days as of July 31, 2000 compared to April 30, 2000.
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.
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<PAGE> 15
YEAR 2000 READINESS
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." The Company completed its project to address potential Year 2000
problems as scheduled. As a result, the possibility of significant interruptions
of normal operations has been reduced. As of July 31, 2000, to the Company's
knowledge, the Company's products and computing and communications
infrastructure systems have not experienced significant Year 2000 problems. The
Company is not aware that any of its major vendors or service providers have
experienced significant Year 2000 problems. Accordingly, the Company believes
its critical internal systems will not be subject to Year 2000 problems.
However, there is no guarantee that the Company has discovered all possible
failure points. Specific factors contributing to this uncertainty include
failure to identify all systems that might be affected by Year 2000 problems and
lack of certainty as to the Year 2000 compliance status of third parties whose
systems or operations could affect the Company.
EUROPEAN MONETARY UNIT
Synopsys sales to European customers are primarily U.S.-dollar based.
Given the growing role of the European Monetary Unit (EMU) to our customers
residing in the European union we have selected the Euro as the functional
currency for our European treasury center. Our information systems are capable
of functioning in multiple currencies.
FACTORS THAT MAY AFFECT FUTURE RESULTS
We have recently introduced a new type of license, and our product
license mix is changing. On July 31, 2000, we announced the introduction of
Technology Subscription Licenses (TSLs), and beginning in the fourth quarter of
fiscal 2000 we have focused on selling TSLs and perpetual licenses. TSLs
have replaced our Time-Based Licenses and Term-Value Licenses. Synopsys believes
that the introduction of TSLs will have significant benefits for the Company,
although it is possible that these will not materialize. There is a risk that
customers will find the introduction of a new form of license confusing, that
pricing will not improve as expected, that we will remain dependent upon large
end-of-the quarter transactions, that customers will change their purchasing
patterns in response to the new license type, that our selling efforts in coming
quarters could be disrupted, and that the transition to the new form of license
could cause us to incur unanticipated administrative and other costs. In any
such event, our revenue and earnings for a quarter could be below our
expectations.
Over the past three quarters our product license mix has shifted
significantly from perpetual licenses to time based licenses. Our current
expectation is that approximately 75 percent of our new product orders will be
for TSLs and approximately 25 percent will be for perpetual licenses, in each
case plus or minus 5 percent. Although TSLs represent a potential source of
renewable license revenue, there is also a risk that customers will not renew
their licenses at the end of the term. In addition, since a three year TSL
generally costs less than a perpetual license, there is a risk that customers
who purchase TSLs may spend less in the aggregate, over the term of the license,
than if they had been required to purchase perpetual licenses. Moreover, our
projection as to the 75-25 mix of TSLs and perpetual licenses may not turn out
to be accurate. If customers purchase fewer perpetual licenses than we
anticipate, our revenue from new license sales could be below our projections.
The replacement of time-based licenses by subscription licenses will
impact our reported revenue, and we expect reported revenue to decline in the
fourth quarter of fiscal 2000, as compared to both the fourth quarter of fiscal
1999 and the third quarter of fiscal 2000. Under a subscription license,
relatively little revenue is recognized during the quarter it is shipped, and
the rest goes into backlog to be recognized over the term of the license. Under
the old form of time-based license, generally all license revenue has been
recognized in the quarter it is shipped, with relatively little going into
backlog. Therefore, an order for subscription licenses will result in much less
current-quarter revenue than an equal-sized order for the old form of
time-based license.
Our Revenue and Earnings May Fluctuate. Many factors affect our revenue
and earnings, and as a result revenue and earnings may fluctuate. Among these
factors are customer product and service demand, product license terms, 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, with a book-to-bill ratio less than
1. The recent change in our fiscal year (see note 1 in accompanying
notes to consolidated financial statements) may affect the seasonal
pattern of our revenues.
- Our products are complex, and before buying them customers spend a
great deal of time reviewing and testing them. Our customers'
evaluation and purchase cycles do not necessarily match our
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
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<PAGE> 16
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.
- In May 2000 we released Physical Compiler, a new product that is
intended to address the design challenges of the most advanced ICs.
We expect that over a period of 3-5 years a significant portion of
licensees of Design Compiler, our principal logic synthesis
product, will upgrade to Physical Compiler. As a consequence of
this transition, revenue from Design Compiler will peak and then
decline, although the financial period of the peak and the rate of
decline are impossible to predict. In addition, the introduction of
Physical Compiler may lengthen the sales cycle, as customers take
time to evaluate the new product, and in the meantime may defer or
reduce their purchases of existing products.
- Accounting rules approved by the SEC dictate when we recognize
revenue from our product licenses and service engagements. The
specific terms agreed to with a customer may have the effect of
requiring revenue to be recognized ratably over the term of the
agreement, upon shipment of the product or at the end of the term
of the agreement. As a result, 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 even though orders are under plan,
because of revenue produced by backlog and deferred revenue. The
rules relating to software revenue recognition are frequently
modified or augmented by interpretations issued by the SEC or by
groups operating with its approval, sometimes without advance
notice. The effect of such modification and interpretations on our
revenue cannot be predicted, but could be significant.
Our Industry is Highly Competitive. The EDA industry is highly
competitive. Synopsys' competitors continue to offer aggressive discounts on
their products, in particular on synthesis and simulation products, and there is
significant price competition. As a result, in some cases the sales cycle has
lengthened, as customers evaluate the lower priced products, and in other cases
we have lowered prices in order to secure a sale.
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,
Mentor and Avant!, as well as companies, including numerous start-up companies,
that offer products focused on a discrete phase of the integrated circuit design
process.
In order to compete successfully, we must continue to enhance our
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
expand our ability to offer consulting services could have a material adverse
effect on our business, financial condition and results of operations. Moreover,
there is no guarantee that the expenditures required in connection with these
activities will yield additional revenues.
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. The need to offer products linking logic and
physical design will become increasingly important as IC complexity increases,
chip production moves increasingly to 0.18 micron and below, and
system-on-a-chip designs become more prevalent. We offer a wide range of logic
design tools but have only recently introduced our first physical design tools.
We are working on completing our design flow, although there is no assurance
that we will be able to do so. The market for physical design tools is dominated
by Cadence and Avant! Both companies have acquired logic synthesis technology
and are offering products linking synthesis to their physical design products.
If we are unsuccessful in developing a complete design flow on a timely basis or
in convincing customers to adopt our physical design products and methodology,
our competitive position could be significantly weakened.
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<PAGE> 17
Another area of potential competition is the internet. A number of
start-ups and established companies, including Synopsys, have begun to make EDA
software available via the internet or through other remote methods. The degree
to which Synopsys' competitors will succeed and their effects on our business
cannot be predicted.
Our Revenue Growth Depends on New Physical Synthesis and Non-Synthesis
Products. Historically, much of our growth and a significant portion of our
revenue has been attributable to the strength of Design Compiler and our related
traditional logic synthesis products. Opportunities for growth in market share
in this area are limited, and revenues from our traditional synthesis products
are expected to grow more slowly than our target for overall revenue growth. In
order to meet our revenue plan, revenue from our new physical synthesis products
(Physical Compiler, Chip Architect and FlexRoute), 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.
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 have introduced new products
that 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 achieving 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, Apteq, Leda and The Silicon Group, 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.
Our Business Depends on the Semiconductor and Electronics Businesses.
Our business has benefited from the rapid worldwide growth of the semiconductor
industry. Demand for our products is largely dependent upon the commencement of
new design projects by semiconductor manufacturers and their customers and the
increasing complexity of designs. Demand for EDA products may also be affected
by mergers in the semiconductor and systems industries, which may reduce the
aggregate level of purchases of our products and services by the combined
companies. Faltering growth in the semiconductor and systems industries, a
reduced number of design starts, shifts in the types of integrated circuits
manufactured, tightening of customers' operating budgets or consolidation among
our customers could have a material adverse effect on our business, financial
condition and results of operations.
Fluctuations in International Economies Could Adversely Affect Our
Performance. A significant portion of our revenue is derived from outside the
United States, and thus there is a risk that our revenue and earnings could be
reduced as a result of changes in foreign currency exchange rates and regional
or worldwide economic weakness or political instability. Although revenue from
Japan has strengthened recently, revenue from Japan and the rest of Asia could
decline if the Japanese economy remains weak. In addition, weakness or
significant fluctuations in the value of the yen could adversely affect revenue
from Japan.
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
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<PAGE> 18
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 and semiconductor industries, and our
employees are recruited aggressively by our competitors and by start-up
companies. Our salaries are competitive in the market, but under certain
circumstances, start-up companies can offer more attractive stock option
packages. As a result, we have experienced, and may continue to experience,
significant employee turnover. There can be no assurance that we will continue
to recruit and retain highly qualified technical and managerial personnel.
Failure to successfully recruit and retain such personnel could have a material
adverse effect on our business, financial condition and results of operations.
Dependence on Proprietary Technology. Our success is dependent, in part,
upon our proprietary technology and the intellectual property (IP) rights
relating thereto. There can be no assurance that our competitors will not
independently develop or acquire similar technology. We rely on license and
confidentiality agreements with customers, collaborators, employees, vendors and
consultants to protect our proprietary technology. There can be no assurance
that these agreements or relevant IP laws will not be breached, or that we would
have adequate remedies for any breach, or that our trade secrets will not
otherwise become known. Failure to obtain or maintain patent, copyright 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. We expect to continue to increase certain
operating expenses in an effort 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. 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.
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.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits
27.1 Financial Data Schedule
(b.) Reports on Form 8-K
The Company filed a report on Form 8-K on May 19, 2000 announcing its
financial results for the quarter-end and six months ended April 29,
2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYNOPSYS, INC.
By: /s/ Richard Rowley
-------------------------------------
Richard Rowley
Vice President and Controller
(Principal Accounting Officer)
Date: September 12, 2000
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INDEX TO EXHIBITS
(a.) Exhibits
27.1 Financial Data Schedule
