<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 JANUARY 31, 2000
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)
<TABLE>
<S> <C>
DELAWARE 56-1546236
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
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.
70,099,051 shares of Common Stock as of March 1, 2000
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SYNOPSYS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED JANUARY 31, 2000 AND DECEMBER 31, 1998
AND ONE MONTH ENDED OCTOBER 31, 1999
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I..........................................................................3
ITEM 1. FINANCIAL STATEMENTS.................................................3
CONDENSED CONSOLIDATED BALANCE SHEETS.....................................3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS...........................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...........................................10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK...........17
PART II. OTHER INFORMATION.....................................................18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................18
SIGNATURES..................................................................19
</TABLE>
2
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PART I
ITEM 1. FINANCIAL STATEMENTS
SYNOPSYS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31, SEPTEMBER 30,
2000 1999 1999
----------- ----------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 222,242 $ 309,394 $ 285,314
Short-term investments 428,825 399,995 418,871
----------- ----------- -----------
Cash and short-term investments 651,067 709,389 704,185
----------- ----------- -----------
Accounts receivable, net of allowances of
$8,651, $10,563 and $10,523, respectively 156,899 130,253 155,885
Prepaid expenses, deferred taxes and other 66,445 66,814 54,663
----------- ----------- -----------
Total current assets 874,411 906,456 914,733
----------- ----------- -----------
Property and equipment, net 136,568 135,118 126,204
Long-term investments 80,920 57,651 53,277
Intangible assets, net 57,488 56,240 57,393
Other assets 28,467 22,818 22,311
----------- ----------- -----------
Total assets $ 1,177,854 $ 1,178,283 $ 1,173,918
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 80,870 $ 98,976 $ 118,595
Current portion of long-term debt 9,639 8,658 8,610
Accrued income taxes 52,964 50,146 50,036
Deferred revenue 136,833 126,758 110,285
----------- ----------- -----------
Total current liabilities 280,306 284,538 287,526
----------- ----------- -----------
Long-term debt 4,123 11,304 11,642
Deferred compensation 16,421 9,844 9,154
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; 70,284,000, 70,750,000 and
70,260,000 shares outstanding, respectively 703 708 703
Additional paid-in capital 555,123 542,052 530,528
Retained earnings 377,932 349,192 371,395
Treasury stock, at cost (75,248) (28,589) (43,657)
Accumulated other comprehensive income 18,494 9,234 6,627
----------- ----------- -----------
Total stockholders' equity 877,004 872,597 865,596
----------- ----------- -----------
Total liabilities and stockholders' equity $ 1,177,854 $ 1,178,283 $ 1,173,918
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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SYNOPSYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED ONE MONTH ENDED
------------------------- ---------------
JANUARY 31, DECEMBER 31, OCTOBER 31,
2000 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Product $130,549 $109,959 $ 4,150
Service 86,319 70,267 19,032
-------- -------- --------
Total revenue 216,868 180,226 23,182
-------- -------- --------
Cost of revenue:
Product 10,286 7,595 3,364
Service 18,599 14,111 4,016
-------- -------- --------
Total cost of revenue 28,885 21,706 7,380
-------- -------- --------
Gross margin 187,983 158,520 15,802
-------- -------- --------
Operating expenses:
Research and development 44,267 40,936 17,156
Sales and marketing 66,996 55,578 19,023
General and administrative 12,249 11,092 5,690
Amortization of intangible assets 3,521 -- 1,153
In-process research and development 1,750 -- --
-------- -------- --------
Total operating expenses 128,783 107,606 43,022
-------- -------- --------
Operating income (loss) 59,200 50,914 (27,220)
Other income, net 8,940 8,484 1,740
-------- -------- --------
Income (loss) before provision (benefit)
for income taxes 68,140 59,398 (25,480)
Provision (benefit) for income taxes 23,037 19,007 (9,937)
-------- -------- --------
Net income (loss) $ 45,103 $ 40,391 $(15,543)
======== ======== ========
Basic earnings (loss) per share:
Net income (loss) $ 0.64 $ 0.58 $ (0.22)
======== ======== ========
Weighted average common shares 70,785 69,166 70,400
======== ======== ========
Diluted earnings (loss) per share:
Net income (loss) $ 0.61 $ 0.56 $ (0.22)
======== ======== ========
Weighted average common shares
and equivalents 74,281 72,384 70,400
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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SYNOPSYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED ONE MONTH ENDED
---------------------------- ---------------
JANUARY 31, DECEMBER 31, OCTOBER 31,
2000 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 45,103 $ 40,391 $ (15,543)
Adjustments to reconcile net income (loss) to
cash flows provided by operating activities:
Depreciation and amortization 14,302 11,489 4,907
Tax benefit associated with stock options 8,800 13,519 2,618
Provision for doubtful accounts and
sales returns (1,912) (464) 40
Interest accretion on notes payable 198 252 66
Deferred taxes (4,359) 978 (11,087)
Gain on sale of long-term investments (1,969) (3,965) --
In-process research and development 1,750 -- --
Net changes in operating assets and liabilities:
Accounts receivable (23,869) (3,415) 25,592
Prepaid expenses and other current assets (1,700) 452 (2,728)
Intangible assets, net (212) 100 --
Other assets (5,861) (3,191) (668)
Accounts payable and accrued expenses (18,842) (24,551) (19,619)
Accrued income taxes 2,640 (13,406) 110
Deferred revenue 9,369 2,567 16,473
Deferred compensation 6,577 3,298 690
---------- ---------- ----------
Net cash provided by operating activities 30,015 24,054 851
---------- ---------- ----------
Cash flows from investing activities:
Expenditures for property and equipment (11,715) (17,791) (12,507)
Purchases of short-term investments (597,140) (1,309,855) (119,549)
Maturities of short-term investments 568,372 1,181,600 138,212
Proceeds from sale of long-term investments 2,868 5,545 --
Purchases of long-term investments (7,998) (1,850) --
Acquisitions, net of cash acquired (5,646) -- --
Capitalization of software development costs (250) (250) --
---------- ---------- ----------
Net cash (used in) provided by
investing activities (51,509) (142,601) 6,156
---------- ---------- ----------
Cash flows from financing activities:
Payments of debt obligations (7,125) (7,978) (356)
Purchase of treasury stock (82,975) -- --
Issuances of long-term debt 727 -- --
Issuances of common stock 24,219 47,823 17,319
---------- ---------- ----------
Net cash (used in) provided by
financing activities (65,154) 39,845 16,963
---------- ---------- ----------
Effect of exchange rate changes on cash (504) 369 110
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents (87,152) (78,333) 24,080
Cash and cash equivalents, beginning of period 309,394 164,548 285,314
---------- ---------- ----------
Cash and cash equivalents, end of period $ 222,242 $ 86,215 $ 309,394
========== ========== ==========
</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 determined that Synopsys' fiscal
year 2000 and subsequent fiscal years shall 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
represents a transition period. For presentation purposes, the unaudited
condensed consolidated financial statements refer to the calendar month end. The
condensed consolidated financial statements include the Condensed Consolidated
Balance Sheet as of October 31, 1999 and Statement of Operations and Cash Flows
for the one month period ended October 31, 1999. Total revenue and gross margin
for the one month ended October 31, 1998 were $28.2 million and $19.5 million,
respectively. In addition, benefit for income taxes and net loss for the one
month ended October 31, 1998 were $5.8 million and $10.3 million, respectively.
For the one month ended October 31, 1998, basic and diluted loss was $0.15 per
share computed using net loss of $10.3 million and shares of 68.4 million.
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
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 acquisition were not material to the Company's consolidated financial
position, results of operations or cash flows for the periods presented.
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. Repurchased
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<PAGE> 7
shares are to be used for issuance under Synopsys' stock option and employee
stock plans and for other corporate purposes. During the first quarter of fiscal
2000, the Company purchased 1,330,000 shares for an aggregate amount of
$83.0 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
--------------------------
JANUARY 31, DECEMBER 31,
(in thousands) 2000 1998
----------- ------------
(unaudited)
<S> <C> <C>
Net income $ 45,103 $ 40,391
Foreign currency translation adjustment (504) 369
Unrealized gain on investments 10,946 4,608
Reclassification adjustment on
unrealized loss on investments (1,182) (2,227)
-------- --------
Total comprehensive income $ 54,363 $ 43,141
======== ========
</TABLE>
Total comprehensive loss, for the one month transition period ended
October 31, 1999 was $12.9 million, consisting of a net loss of $15.5
million, cumulative translation adjustment of $0.1 million and unrealized
gain on investments of $2.5 million.
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
--------------------------
JANUARY 31, DECEMBER 31,
(in thousands, except per share amounts) 2000 1998
----------- ------------
(unaudited)
<S> <C> <C>
NUMERATOR:
Numerator for basic and diluted earnings per share -
Net income $ 45,103 $ 40,391
======== ========
DENOMINATOR:
Denominator for basic earnings per share -
weighted-average shares 70,785 69,166
Effect of dilutive securities:
Employee stock options 3,496 3,218
-------- --------
Dilutive potential common shares 74,281 72,384
======== ========
Basic earnings per share:
Net income $ 0.64 $ 0.58
======== ========
Diluted earnings per share:
Net income $ 0.61 $ 0.56
======== ========
</TABLE>
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<PAGE> 8
Basic and diluted loss for the one month transition period ended October
31, 1999 was $0.22 per share, computed using net loss of $15.5 million and
shares of 70.4 million. For the one month ended October 31, 1998, basic and
diluted loss was $0.15 per share computed using net loss of $10.3 million and
shares of 68.4 million.
6. EFFECT OF NEW ACCOUNTING STANDARDS
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 has not determined the impact that
SFAS No. 133 will have on its financial statements and believes that such
determination will not be meaningful until closer to the date of the initial
adoption.
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. The Company modified certain aspects of its license and
pricing structure so that the impact of SOP 98-9 on its revenue recognition
practices was not significant.
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.
The disaggregated financial information reviewed by the CODM is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
JANUARY 31, DECEMBER 31,
(in thousands) 2000 1998
----------- ------------
(unaudited)
<S> <C> <C>
Revenue:
Product $ 130,549 $ 109,959
Service 86,319 70,267
--------- ---------
Total revenue $ 216,868 $ 180,226
========= =========
Gross margin $ 187,983 $ 158,520
Operating income before amortization of intangible assets
and in-process research and development $ 64,471 $ 50,914
</TABLE>
8
<PAGE> 9
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
--------------------------
JANUARY 31, DECEMBER 31,
(in thousands) 2000 1998
----------- ------------
(unaudited)
<S> <C> <C>
Operating income before amortization of intangible
assets and in-process research and development $ 64,471 $ 50,914
Amortization of intangible assets (3,521) --
In-process research and development (1,750) --
-------- --------
Operating income $ 59,200 $ 50,914
======== ========
</TABLE>
Total revenue for the one month transition period ended October 31, 1999
was $23.2 million with product and service revenue of $4.2 million and
$19.0 million, respectively. Gross margin for the one month transition period
ended October 31, 1999 was $15.8 million. Operating loss and operating loss
before amortization of intangible assets for the one month transition period
ended October 31, 1999 were $27.2 million and $26.1 million, respectively.
8. SUBSEQUENT EVENT
In February 2000, 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 ten month period.
Repurchased shares are to be used for issuance under Synopsys' stock option and
employee stock plans and for other corporate purposes.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934. 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. 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 first quarter of fiscal 2000 increased 20% to
$216.9 million from $180.2 million in the first quarter of fiscal 1999. The
increase in product revenue was primarily attributable to increased sales in our
core synthesis business, FPGA business and system level design products as well
as from new product rollouts. The percentage of the Company's total revenue
attributable to products decreased slightly to 60% in the first quarter of
fiscal 2000, compared to 61% in the first quarter of fiscal 1999. This slight
decrease was due in part to relatively faster growth in our service revenue that
was primarily attributable to consulting revenue from our Professional Services
Group as well as increases in site service revenue and customer training during
the first quarter of fiscal 2000. Total revenue for the one month transition
period ended October 31, 1999 was $23.2 million with product and service revenue
of $4.2 million and $19.0 million, respectively. This is compared to the one
month ended October 31, 1998 with total revenue of $28.2 million with product
and service revenue of $9.9 million and $18.3 million, respectively. The
decrease in product revenue was primarily attributable to a lower volume of
October shipments year over year. Shipments are processed according to customer
requested dates.
Revenue from our international operations increased 25% to $80.7 million
for the first quarter of fiscal 2000, compared to $64.4 million for the first
quarter of fiscal 1999. International revenue represented approximately 37% and
36% of total revenue for the first quarter of fiscal 2000 and fiscal 1999,
respectively. This increase as a percentage of total revenue primarily occurred
in Europe and Asia Pacific. Revenue from our international operations decreased
31% to $8.7 million for the one month transition period ended October 31, 1999,
compared to $12.5 million for the one month ended October 31, 1998.
International revenue represented approximately 37% and 44% of total revenue for
the one month ended October 31, 1999 and 1998, respectively. The decrease in
product revenue was primarily attributable to a lower volume of October
shipments year over year.
Cost of Revenue. Cost of revenue as a percentage of total revenue was 13%
in the first quarter of fiscal 2000 compared to 12% in the first quarter of
fiscal 1999. The increase in cost of revenue resulted primarily from increased
royalties and personnel costs relating to maintenance and support. For the one
month transition period ended October 31, 1999, cost of revenue as a percentage
of total revenue was 32% compared to 31% for the one month ended
October 31, 1998. The increase in cost of revenue resulted primarily from
increased royalties and personnel costs relating to maintenance and support.
Research and Development. Research and development expenses as a percentage
of total revenue decreased to 20% the first quarter of fiscal 2000 as compared
to 23% in the first quarter of fiscal 1999, and increased in absolute dollars to
$44.3 million from $40.9 million. The increase in absolute dollars was primarily
attributable to increases in personnel and personnel-related costs associated
with the Company's ongoing research and development efforts in a wide variety of
areas such as tools for the design of systems-on-a-chip and physical design
tools. Research and development expenses for the one month transition period
ended October 31, 1999 were $17.2 million as compared to $14.9 million for the
one month ended October 31, 1998. This increase can be attributed to increases
in personnel and personnel related costs.
10
<PAGE> 11
Sales and Marketing. Sales and marketing expenses as a percentage of total
revenue remained flat at 31% in the first quarter of fiscal 2000 when compared
to the first quarter of fiscal 1999, and increased in absolute dollars to
$67.0 million from $55.6 million. The increase in sales and marketing spending
was primarily due to personnel and personnel related costs. These increases were
partially offset by the shift from consultants and contractors to full time
employees and reduced spending in advertising. Sales and marketing expenses for
the one month transition period ended October 31, 1999 were $19.0 million as
compared to $16.9 million for the one month ended October 31, 1998. This
increase primarily related to the higher costs associated with the 1999 annual
business planning events.
General and Administrative. General and administrative expenses as a
percentage of total revenue remained relatively constant at 6% in the first
quarter of fiscal 2000 when compared to the first quarter of fiscal 1999, and
increased in absolute dollars to $12.2 million from $11.1 million. The increases
in expenses were primarily due to personnel and personnel related costs along
with increased equipment maintenance expense associated with the increased
capital purchases of computer equipment. These costs were partially offset by
decreases in consulting and recruiting expenses. General and administrative
expenses for the one month transition period ended October 31, 1999 were
$5.7 million as compared to $4.9 million for the one month ended
October 31, 1998. This increase was primarily a result of higher professional
service fees.
Amortization of Intangible Assets. Goodwill 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 January 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 future
undiscounted cash flows. Amortization of intangible assets charged to operations
for the first quarter of fiscal 2000 was $3.5 million. Amortization of
intangible assets was not material for the first quarter of fiscal 1999.
Amortization of intangible assets charged to operations for the one month ended
October 31, 1999 was $1.2 million. There was no amortization of intangible
assets for the one month ended October 31, 1998.
In-process Research and Development. The Company incurred in-process
research and development charges of $1.8 million in the first three 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 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.
As of January 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
11
<PAGE> 12
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 increased 5% to $8.9 million for the
first quarter of fiscal 2000 compared to $8.5 million for the first quarter of
fiscal 1999 and decreased as a percentage of total revenue to 4% from 5%. The
increase in absolute dollars was primarily due to higher average invested cash
and short-term investments in taxable instruments, which yielded higher interest
income in the first quarter of fiscal 2000, compared to the first quarter of
fiscal 1999. Other income, net for the one month transition period ended
October 31, 1999 was $1.7 million as compared to $1.1 million for the one month
ended October 31, 1998.
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.
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 January 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 $ 110,149 3.50%
Short-term investments - fixed rate 428,825 4.10%
----------
Total investment securities $ 538,974 4.08%
Money market funds - variable rate 36,442 3.96%
----------
Total interest bearing instruments $ 575,416 4.04%
==========
</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, British pound
sterling, German mark, French franc and Italian lira. The Company had contracts
for the sale and purchase of foreign currencies with a notional value expressed
in U.S. dollars of $41.4 million. These contracts were denominated in currencies
which approximated the fair value of such contracts and their underlying
transactions as of January 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 January 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 January 31, 2000. These forward contracts mature
in approximately thirty days.
12
<PAGE> 13
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 $23,037 105.31
British pound sterling 2,921 0.61
German mark 5,125 1.95
French franc 10,291 6.54
</TABLE>
The unrealized gains/losses on the outstanding forward contracts at
January 31, 2000 were immaterial to the Company's consolidated financial
statements. The realized gains/losses on these contracts as they matured were
not material to the Company's consolidated financial position, results of
operations, or cash flows for the periods presented.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments were $651.1 million, a
decrease of $58.3 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 $83.0 million, capital expenditures of
$11.7 million, purchases of long-term investments of $8.0 million and cash paid
on debt obligations of $7.1 million. These cash outflows were partially offset
by cash generated by operations of $30.0 million and through investing and
financing activities, mainly the exercise of stock options and purchases of
stock through the employee stock purchase plan of $24.2 million and the proceeds
on sale of long-term investments of $2.9 million.
Accounts receivable increased 20% from $130.3 million at October 31, 1999
to $156.9 million at January 31, 2000. Days sales outstanding in receivables
increased to 65 days as of January 31, 2000 from 56 days at October 31, 1999.
At January 31, 2000, the Company had two foreign exchange lines of credit
available totaling $120.0 million which expire in July 2000 and October 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.
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 January 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. Year 2000 contingency plans are
complete.
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 and has
selected the Euro as the functional currency for its European treasury center.
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.
13
<PAGE> 14
FACTORS THAT MAY AFFECT FUTURE RESULTS
Our Revenue and Earnings May Fluctuate. Many 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, 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:
o 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.
o 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 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.
o We have recently introduced a new product that is intended to address the
design challenges of the most advanced ICs. This product is currently in
limited release and is being evaluated by many customers. The introduction
of a new product may have a negative effect on demand for existing
products, as customers evaluating, or anticipating evaluating, the new
product may defer or reduce their purchase of existing products.
o 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.
o We recently introduced a new license and pricing structure for our software
products. Although we believe that these changes have benefits for both
Synopsys and our customers, customer reaction to the new structure and
effects of the transition to the new structure over time cannot be
predicted.
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 price competition
appears to be increasing. As a result, in some cases the sales cycle has
lengthened, as customers evaluate the lower priced products. If this behavior
continues, average prices for our products may fall.
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.
14
<PAGE> 15
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 is increasing, 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.
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
revenues from our 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 non-synthesis design creation products, certain high level verification
products, physical design 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, 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, Apteq and Leda, 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. Purchases of our products are largely dependent upon the commencement
of new design projects by semiconductor manufacturers and their customers and
the increasing complexity of designs. Although the semiconductor industry is
currently strong, thus far, there has not been a strong effect on overall EDA
market growth. In addition, demand for EDA products may 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, 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.
15
<PAGE> 16
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:
o If the Japanese economy remains weak, revenue from Japan and the rest of
Asia could 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.
o Korea's ongoing economic weakness has had, and may 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.
o 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 could 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 or that it
can attract, assimilate or retain other highly qualified technical and
managerial personnel in the future. 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 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. 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
shareholders of the Company might otherwise receive a premium for their shares
over then current market prices.
16
<PAGE> 17
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.
17
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits
27 Financial Data Schedule
(b.) Reports on Form 8-K
None.
18
<PAGE> 19
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/ STEVEN K. SHEVICK
--------------------------------------
Steven K. Shevick
Vice President, Investor Relations and
Legal, Chief Financial Officer and
Corporate Secretary
Date: March 14, 2000
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-28-2000
<PERIOD-START> OCT-31-1999
<PERIOD-END> JAN-31-2000
<CASH> 222,242
<SECURITIES> 428,825
<RECEIVABLES> 165,550
<ALLOWANCES> 8,651
<INVENTORY> 0
<CURRENT-ASSETS> 874,411
<PP&E> 282,248
<DEPRECIATION> 145,680
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<BONDS> 4,123
0
0
<COMMON> 703
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<CGS> 28,885
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<OTHER-EXPENSES> 49,531
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