-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IwbrdcrjUUzDdA25vVITn9EdpuqnJHdL6zt6ER20SELtJs9xKpsRigjS2HLBKslX yF/GYr2AYFUsFjWiBVv7nw== 0000891618-97-003314.txt : 19970812 0000891618-97-003314.hdr.sgml : 19970812 ACCESSION NUMBER: 0000891618-97-003314 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970628 FILED AS OF DATE: 19970811 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYNOPSYS INC CENTRAL INDEX KEY: 0000883241 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 561546236 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19807 FILM NUMBER: 97655877 BUSINESS ADDRESS: STREET 1: 700 E MIDDLEFIELD RD CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043-4033 BUSINESS PHONE: 4159625000 MAIL ADDRESS: STREET 1: 700 E MIDDLEFIELD RD CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043-4033 10-Q 1 FORM 10-Q 1 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 June 28, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ______________ Commission file number: 0-19807 SYNOPSYS, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 56-1546236 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 700 East Middlefield Road Mountain View, CA 94043 ----------------------- (Address of principal executive offices, including zip code) Registrant's Telephone No., including area code: (415) 962-5000 ------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of August 1, 1997, there were approximately 52,301,000 shares of the Registrant's Common Stock outstanding. 1 2 SYNOPSYS, INC. INDEX
PART I. FINANCIAL INFORMATION PAGE NO. Item 1. Financial Statements Condensed Consolidated Balance Sheets- June 30, 1997 and September 30, 1996 3 Condensed Consolidated Statements of Income- Three months and nine months ended June 30, 1997 and 1996 4 Condensed Consolidated Statements of Cash Flows- Nine months ended June 30, 1997 and 1996 5 Notes to Condensed Consolidated Financial Statements 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-13 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SYNOPSYS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, SEPTEMBER 30, 1997 1996 --------- --------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 66,399 $ 47,163 Short-term investments 255,295 228,931 --------- --------- Cash and short-term investments 321,694 276,094 --------- --------- Accounts receivable, net of allowances of $4,737 and $3,877, respectively 89,487 67,385 Prepaid expenses, deferred taxes and other 31,874 22,648 --------- --------- Total current assets 443,055 366,127 --------- --------- Property and equipment, net 63,607 56,033 Capitalized software development costs, net of accumulated amortization of $3,576 and $2,805, respectively 1,125 1,146 Long-term investments 42,367 30,495 Other assets 12,108 9,957 --------- --------- Total assets $ 562,262 $ 463,758 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 85,639 $ 83,008 Current portion of long-term debt 8,908 11,580 Income taxes payable 15,501 13,629 Deferred revenue 76,957 69,770 --------- --------- Total current liabilities 187,005 177,987 --------- --------- Long-term debt 10,634 15,970 Deferred compensation 2,731 -- Stockholders' equity: Preferred stock, $.01 par value; 2,000,000 shares authorized; no shares outstanding -- -- Common stock, $.01 par value; 100,000,000 shares authorized; 52,049,000 and 50,646,000 shares outstanding, respectively 520 506 Additional paid-in capital 245,842 196,693 Retained earnings 108,637 64,833 Deferred stock compensation (25) (110) Cumulative translation adjustment (400) (402) Net unrealized gain on investment 7,318 8,281 --------- --------- Total stockholders' equity 361,892 269,801 --------- --------- Total liabilities and stockholders' equity $ 562,262 $ 463,758 ========= =========
See accompanying notes 3 4 SYNOPSYS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, ------------------- ------------------- 1997 1996 1997 1996 -------- -------- -------- -------- Revenue: Product $ 80,432 $ 67,872 $237,346 $194,421 Service 44,568 34,559 128,564 91,971 -------- -------- -------- -------- Total revenue 125,000 102,431 365,910 286,392 -------- -------- -------- -------- Cost of revenue: Product 6,375 4,849 18,322 13,132 Service 9,819 6,683 25,651 17,488 -------- -------- -------- -------- Total cost of revenue 16,194 11,532 43,973 30,620 -------- -------- -------- -------- Gross margin 108,806 90,899 321,937 255,772 -------- -------- -------- -------- Operating expenses: Research and development 29,356 24,757 87,178 67,930 Sales and marketing 44,686 37,285 129,612 106,584 General and administrative 8,264 7,859 26,956 22,187 Merger-related costs -- -- 11,400 -- In-process research and development -- -- -- 39,700 -------- -------- -------- -------- Total operating expenses 82,306 69,901 255,146 236,401 -------- -------- -------- -------- Operating income 26,500 20,998 66,791 19,371 Other income, net 4,100 1,970 12,154 6,082 -------- -------- -------- -------- Income before income taxes 30,600 22,968 78,945 25,453 Income tax provision 10,400 7,922 29,269 8,940 -------- -------- -------- -------- Net income $ 20,200 $ 15,046 $ 49,676 $ 16,513 ======== ======== ======== ======== Earnings per share $ .38 $ .28 $ .92 $ .32 ======== ======== ======== ======== Weighted average common shares and equivalents where dilutive 53,763 52,923 53,835 51,238
See accompanying notes 4 5 SYNOPSYS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS; UNAUDITED)
NINE MONTHS ENDED JUNE 30, 1997 1996 --------- --------- Cash flows from operating activities: Net income $ 49,676 $ 16,513 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 22,134 14,411 Interest accretion on notes payable 414 304 Provision for doubtful accounts and sales returns 860 (320) Tax benefit associated with stock options 22,262 5,883 Deferred revenue 7,187 16,061 Deferred taxes (5,540) (14,103) Disposition of assets related to the merger 3,084 -- In-process research and development -- 39,700 Gain on sale of long-term investment (6,000) -- Net change in assets and liabilities: Accounts receivable (22,962) (5,679) Prepaid expenses and other (9,674) (3,385) Other assets (2,651) (1,762) Accounts payable and accrued liabilities (1,456) 10,982 Income taxes payable 1,872 697 Deferred compensation 2,731 -- --------- --------- Net cash provided by operating activities 61,937 79,302 --------- --------- Cash flows from investing activities: Proceeds from sale of long-term investment 11,112 -- Proceeds from sale of business unit 3,000 -- Purchases of long-term investments (9,019) (17,500) Purchases and maturities of short-term investments (26,344) (99,723) Purchases of property and equipment (33,310) (30,803) Purchase of technology -- (11,500) Capitalization of software development costs (750) (750) --------- --------- Net cash used in investing activities (55,311) (160,276) --------- --------- Cash flows from financing activities: Principal payments on debt obligation (8,422) (2,990) Proceeds from sale of common stock, net 30,519 23,889 Purchases of treasury stock (9,489) (6,555) --------- --------- Net cash provided by financing activities 12,608 14,344 --------- --------- Effect of exchange rate changes on cash 2 (103) Net increase (decrease) in cash and cash equivalents 19,236 (66,733) Cash and cash equivalents, beginning of period 47,163 102,440 --------- --------- Cash and cash equivalents, end of period $ 66,399 $ 35,707 ========= ========= Supplemental Disclosure: Cash paid during the period for: Interest $ 600 $ 509 ========= ========= Income taxes $ 12,892 $ 13,226 ========= ========= Non-cash transactions: Purchase of technology $ -- $ 28,500 ========= =========
See accompanying notes 5 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The unaudited financial information furnished herein reflects all adjustments, consisting only of normal recurring adjustments which in the opinion of management are necessary to fairly state the Company's and its subsidiaries' condensed consolidated financial position, the results of their operations, and their cash flows for the periods presented. This report on Form 10-Q should be read in conjunction with the Company's Annual Report to Stockholders for the year ended September 30, 1996. For financial reporting purposes, the Company reports on a 13-week quarter and a 52 or 53-week year. For presentation purposes, the consolidated financial statements refer to the quarter's calendar month end. The consolidated results of operations for the period ended June 30, 1997 are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year. 2. New Accounting Standards The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No. 128 requires the presentation of basic earnings per share ("EPS") and for companies with complex capital structures or potentially dilutive securities, diluted EPS. SFAS No. 128 is effective for annual and interim periods ending after December 31, 1997. The Company expects that basic EPS will be higher than earnings per share as presented in the accompanying consolidated financial statements and that diluted EPS will not differ materially from earnings per share as presented in the accompanying consolidated financial statements. The Financial Accounting Standards Board has also issued SFAS No. 129, "Disclosure of Information about Capital Structure," SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." These new accounting standards are for disclosure purposes and the Company is analyzing the impact of these standards for future reporting. 3. Earnings Per Share Earnings per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of common stock issuable upon exercise of stock options using the treasury stock method. 4. Business Combination In February 1997, the Company issued approximately 10,346,000 shares of its common stock in exchange for all the outstanding shares of common stock of EPIC Design Technology, Inc. ("EPIC"), a developer of design automation tools for deep submicron design in the area of integrated circuit power, timing, and reliability analysis. In addition, options to acquire EPIC's common stock were exchanged for options to acquire approximately 1,517,000 shares of the Company's common stock. The merger was accounted for as a pooling of interests, and accordingly, the Company's condensed consolidated financial statements have been restated to include the financial position and results of EPIC for all periods presented. In February 1997, the Company announced that it had rescinded its stock repurchase program in connection with its merger with EPIC, in order to comply with pooling of interests accounting guidance provided in SEC Staff Accounting Bulletin No. 96. 6 7 Total revenue and net income for the individual entities are as follows:
(in thousands) Synopsys EPIC Combined -------- ---- -------- Six months ending March 31, 1996 Total revenue $ 164,000 $ 19,961 $ 183,961 Net income (loss) (2,650) 4,117 1,467 Six months ending March 31, 1997 Total revenue 211,042 29,868 240,910 Net income 26,572 2,904 29,476
5. Sale of Business Unit In June 1997, the Company sold its hardware emulation business to Quickturn Design Systems, Inc. Under the terms of the agreement, the Company provided Quickturn with the technology required to create a register-transfer level front-end for its current and future design verification products and the Synopsys ARKOS(TM) emulation technology in exchange for $3.0 million in cash, $2.0 million in escrow at the end of June, and $9.5 million in Quickturn warrants and common stock. There was no gain or loss recorded as a result of this transaction. The two companies will provide a support and transition plan for existing Synopsys customers using the ARKOS product. The Company did not recognize any revenue from the sale of ARKOS products during the third quarter of fiscal 1997. 6. Long-Term Investments In May 1996, the Company purchased 1,207,000 shares, approximately 9.9 percent of the outstanding shares of Cooper and Chyan Technology, Inc. (CCT), for $14.50 per share, pursuant to a strategic relationship between the companies. In April 1997, the Company purchased an additional 86,000 shares for $15.00 per share. In accordance with Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the investment has been classified as "available for sale." In May 1997, CCT and Cadence Design Systems, Inc. consummated a merger, whereby each share of CCT was converted to 0.85 shares of Cadence stock. It is currently the Company's intent to dispose of the investment over time, however, there can be no assurance that the Company will be successful in doing so. Accordingly, the investment has been classified as a long-term asset. During the third quarter of fiscal year 1997, the Company sold 114,000 shares of Cadence and realized a gain of approximately $2.0 million. See Note 5 above regarding the investment in Quickturn Design Systems. The securities are classified as "available for sale" in accordance with SFAS No. 115 and are included in long-term investments. In the first quarter of fiscal 1997, the Company made an investment of $3.2 million in a privately-held company. Additionally, during the third quarter of fiscal 1997, the Company made investments of $4.0 million and $0.6 million in two privately-held companies. All of these investments in privately-held companies are carried at cost and are included in long-term investments. The total unrealized gain on available-for-sale securities, recorded as a separate component of stockholders' equity, decreased by $0.7 million, net of tax, during the third quarter of fiscal 1997. 7 8 7. Long-Term Debt In February 1996, the Company and International Business Machines Corporation ("IBM") entered into a six-year Joint Development and License Agreement Concerning EDA Software and Related Intellectual Property (the "Agreement"). In accordance with the Agreement, the Company paid IBM $11.0 million in cash and issued $30.0 million in notes, which bear interest at 3%, and are payable to IBM upon the earlier of achievement of scheduled milestones or at maturity in 2006. The notes were recorded at fair value of $28.5 million, using a discount rate commensurate with the risks involved. As of June 30, 1997, the notes had a balance of $18.4 million, of which $10.6 million is included in long-term obligations. The carrying amount of the debt, including the long-term portion, approximates the fair value. 8. Deferred Compensation The Company has established the Synopsys Deferred Compensation Plan that allows certain eligible employees to defer a portion of their compensation. The deferred compensation and accumulated earnings are accrued but unfunded. Such deferred compensation amounts to $2.7 million and is included in long-term liabilities. 8 9 SYNOPSYS, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. When used in the following discussion, the words "projects," "expects," "believes," and similar expressions are intended to identify forward-looking statements. Such statements, and the Company's results, are subject to certain risks and uncertainties, including those discussed below, that could cause actual results to differ materially from those projected or estimated. Results of Operations Revenue for the third quarter of fiscal 1997 increased 22% to $125.0 million from $102.4 million in the third quarter of fiscal 1996. Revenue for the first nine months of fiscal 1997 increased 28% to $365.9 million from $286.4 million for the comparable period in fiscal 1996. The increase in revenue was attributable to increased worldwide licensing and sales of the Company's software products, the renewal of maintenance and support contracts, and increased consulting services. Product revenue as a percentage of total revenue decreased to 64% and 65% in the third quarter and first nine months of 1997, respectively, from 66% and 68% in the third quarter and first nine months of fiscal 1996, principally due to an increase in the Company's base of installed software and the associated increase in maintenance and support, customer training, and consulting revenue. International revenue as a percentage of total revenue decreased to 45% in the third quarter of fiscal 1997 from 51% in the third quarter of fiscal 1996. For the first nine months of fiscal 1997, international revenue as a percentage of total revenue decreased to 45% from 49% for the comparable period in fiscal 1996. The decrease in fiscal 1997 as a percentage of total revenue was primarily due to decreased revenue in Japan, mostly attributable to a decline in the value of the yen versus the dollar, and Europe. In June 1997, the Company sold its hardware emulation business to Quickturn Design Systems, Inc. Under the terms of the agreement, the Company provided Quickturn with the technology required to create a register-transfer level front-end for its current and future design verification products and the Synopsys ARKOS emulation technology in exchange for $3.0 million in cash, $2.0 million in escrow at the end of June, and $9.5 million in Quickturn warrants and common stock. There was no gain or loss recorded as a result of this transaction. The two companies will provide a support and transition plan for existing Synopsys customers using the ARKOS product. The Company did not recognize any revenue from the sale of ARKOS products during the third quarter of fiscal 1997. Cost of revenue as a percentage of total revenue increased to 13% in the third quarter of fiscal 1997 from 11% in the third quarter of fiscal 1996. For the first nine months of fiscal 1997, cost of revenue increased to 12% from 11% for the comparable period in fiscal 1996, primarily due to an increase in the cost of service revenue for training and consulting as a percentage of total 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. Research and development expenses as a percentage of total revenue decreased to 23% in the third quarter of fiscal 1997 from 24% in the third quarter of fiscal 1996, but increased in absolute dollars to $29.4 million from $24.8 million. Research and development expenses as a percentage of total revenue were 24% in the first nine months of both fiscal 1997 and fiscal 1996, and increased in absolute dollars to $87.2 million from $67.9 million. Increased 9 10 research and development expenses were attributable to increases in personnel and personnel-related costs associated with the continued development of new products and the enhancement of existing products. Sales and marketing expenses as a percentage of total revenue remained at 36% in the third quarter of fiscal 1997 and fiscal 1996, but increased in absolute dollars to $44.7 million from $37.3 million. For the first nine months of fiscal 1997, sales and marketing expenses as a percentage of revenue decreased to 35%, from 37% in the comparable period in fiscal 1996. In absolute dollars, sales and marketing expenses in the first nine months of fiscal 1997 increased to $129.6 million from $106.6 million in the first nine months of fiscal 1996. Total sales and marketing expenses increased as a result of continued expansion of the Company's worldwide sales and marketing organizations and participation in conferences, trade shows and promotional activities. General and administrative expenses as a percentage of total revenue decreased to 7% in the third quarter and first nine months of fiscal 1997 from 8% in the third quarter and first nine months of fiscal 1996. In absolute dollars, general and administrative expenses were $8.3 million in the third quarter of fiscal 1997, compared to $7.9 million in the third quarter of fiscal 1996. For the first nine months of fiscal 1997, general and administrative expenses increased to $27.0 million from $22.2 million in the first nine months of fiscal 1996. The increase in total expenses was due primarily to increases in personnel and operating expenses associated with the continued growth of the Company. In the second quarter of fiscal 1997, the Company recorded a charge of $11.4 million related to the merger and integration of Synopsys and EPIC. This charge included direct transaction fees for investment bankers, attorneys, accountants, and other related costs of $4.7 million, and costs associated with integrating the operations of the two companies of $6.7 million. Included in integration charges were redundant facility costs, computer and other equipment abandonment costs, contract termination charges and other related expenses. Of the $11.4 million of merger-related costs, approximately $8.3 million related to cash expenditures while approximately $3.1 million related to noncash reductions of recorded assets. As of June 30, 1997, there was a balance of $1.8 million in accrued liabilities for expected future cash expenditures. The Company anticipates that the majority of these expenditures will be made by the end of the year. There can be no assurance that the Company will not incur additional charges associated with the merger or that management will be successful in its efforts to integrate the operations of the two companies. The provision for income taxes as a percentage of income was 34% in the third quarter of both fiscal 1997 and 1996. For the first nine months of fiscal 1997, the provision for income taxes as a percentage of income was 37%, compared to 35% for the comparable period in fiscal 1996. The increase in the Company's tax rate in fiscal 1997 was due to nondeductible expenses for merger-related costs incurred in the second quarter of fiscal 1997. Net income of $20.2 million was recorded in the third quarter of fiscal 1997, compared to $15.0 million in the third quarter of fiscal 1996. For the first nine months of fiscal 1997, net income was $49.7 million, compared to net income of $16.5 million in the first nine months of fiscal 1996. The Company's book-to-bill ratio for the third quarter of fiscal 1997 was greater than one-to-one. The book-to-bill ratio measures the ratio of accepted orders to revenue. Liquidity and Capital Resources For the first nine months of fiscal 1997, cash and short-term investments increased $45.6 million to $321.7 million. The increase in cash and short-term investments was due primarily to cash generated from operations, proceeds from the issuance of common stock, 10 11 proceeds from the sale of the Arkos business to Quickturn, and proceeds from the sale of long-term investments, partially offset by purchases of property and equipment, repurchases of common stock, and payments on debt obligations. The Company believes that the existing cash and short-term investments balance of $321.7 million and anticipated cash flow from operations will be sufficient to meet its currently anticipated liquidity and capital expenditure requirements for at least the next twelve months. Factors that Could Cause Actual Results to Differ Materially from Those Projected Synopsys completed a merger with EPIC Design Technology, Inc. in February 1997, and the two companies' operations have been integrated. Successful integration requires, among other things, coordination of the companies' respective product offerings, sales and marketing efforts, and research and development efforts. Successful integration also requires the smooth integration of personnel with disparate business backgrounds and combining two different, although similar, corporate cultures. The failure of management to successfully manage the operations of the two companies as integrated could have a material adverse effect on Synopsys' business, financial condition and results of operations. The EDA industry is highly competitive. The Company's products compete with similar products from other vendors and compete with other EDA products and services for a share of the EDA budgets of their customers. Historically, much of the Company's growth has been attributable to the strength of its synthesis products, an area in which the Company is currently the leading supplier. Opportunities for growth in market share in this area are limited and overall rates of growth appear to be declining. Technology advances and customer requirements are fueling a change in the nature of competition among EDA vendors. Advances in semiconductor technology are expected to create a need for tighter integration between logic design and physical design, and companies will increasingly compete over "design flows" involving a broad range of products and services rather than individual design tools. No single EDA company currently offers its customers industry leading products for a complete design flow. The Company does not offer a full range of physical design tools, a field which is currently dominated by Cadence Design Systems, Inc. (Cadence) and Avant! Corporation. In addition, the Company trails Cadence in its capacity to offer design services. In May 1996, the Company entered into a strategic relationship with Cooper & Chyan Technology, Inc. (CCT) involving the acquisition of 9.9% of CCT's stock and a link between the Company's existing synthesis products and its design planning products under development and CCT's routing technology. CCT merged with Cadence, one of the Company's principal competitors, in May 1997. Cadence has informed the Company that it does not intend to comply with certain of CCT's obligations under Synopsys' agreements with CCT. The Company and Cadence are currently discussing the basis on which the two companies might continue to cooperate on linking Synopsys' synthesis/floorplanning tools with Cadence's routing technology. The Company is seeking to add new products to its portfolio. Among the most important new products offered by the Company are its Behavioral Compiler, Cell-Based Array, PrimeTime timing estimator and Cyclone simulation accelerator products. These products have achieved initial customer acceptance, but the Company will only derive significant revenue from these products if they are accepted by a broad range of customers. The development of new products involves significant risks and uncertainties and success cannot be assumed. In June 1997, the Company sold its hardware emulation business to Quickturn Design Systems, Inc. The Company's hardware emulation product, the ARKOS emulator, was based on technology acquired by the Company in June 1995 and was introduced in fiscal year 1996. 11 12 The decision to sell the business was a response to soft demand in the overall emulation market and uncertainties over the long-term competitiveness of the ARKOS technology. There can be no assurance that the Company's other new products will be competitive or gain customer acceptance. The Company's business has benefited from the rapid worldwide growth of the semiconductor industry. Purchases of the Company's products is largely dependent upon the commencement of new design projects by semiconductor manufacturers and users. The semiconductor industry has experienced moderate growth in 1997 and the outlook for the remainder of 1997 is uncertain. Slower growth in the semiconductor industry, and/or a reduced number of design starts, could have an adverse effect on the Company's performance. The Company attempts to manage its business to achieve quarter-to-quarter revenue and earnings growth. The ability to manage such growth is affected by a number of factors, including customer product demand, product license terms, the size of the Company's backlog, and decisions regarding the timing of revenue recognition. In recent years, the management of revenue and earnings growth has become more difficult as a result of a number of factors. The Company's orders have become more seasonal, with higher volumes in the second and fourth quarters of the Company's fiscal year, and the average order size has also increased. The Company increasingly receives a disproportionate volume of orders in the last month of the quarter. This trend has grown more pronounced in recent quarters. In addition, an increasing amount of the Company's orders involve products and services which yield revenue over multiple quarters (often extending beyond the current fiscal year) or upon completion of performance rather than at the time of sale, including time-based product licenses, consulting services, development contracts, and royalties. Because of these trends, the Company's ability to convert orders, particularly those received late in a quarter, or backlog to revenue in any quarter is less certain than it historically has been, and it is therefore possible for the Company to fall short in its revenue and/or earnings plan for a given quarter even while orders and backlog remain on plan. Ultimately, long-term revenue and earnings growth is dependent upon the successful development and sale of the Company's products and services over a sustained period of time. The Company's operating expenses are based in part on its expectations of future revenue, and expense levels are generally committed in advance of revenue. The Company continues to expand and increase its operating expenses in order to generate and support additional revenue in the future. If revenue does not materialize as expected, the Company's results of operations are likely to be adversely affected. Net income may be disproportionately affected by a reduction in revenue because only a small portion of the Company's expenses varies with its revenue. In recent years, international revenue has accounted for approximately half of the Company's revenue. The Company expects that international revenue will continue to account for a significant portion of its revenues in the future. As a result, the Company's financial performance could be negatively affected by such factors as changes in foreign currency exchange rates and changes in regional or worldwide economic or political conditions. In particular, revenue from sales in Japan during the first three quarters of fiscal 1997 was adversely affected by the weakness of the yen against the dollar. Continued weakness of the yen could adversely affect revenue from Japan during the fourth quarter of fiscal year 1997 and into fiscal year 1998. In February 1996, the Company entered into a six-year joint development and license agreement with IBM, pursuant to which the Company and IBM will jointly develop certain new products that the Company believes are important to the long-term growth of its business. The first joint product resulting from the alliance, PrimeTime, was introduced in June 1997. The Company has not previously entered into a joint development agreement of 12 13 this scope. Joint development of products is subject to risks and uncertainties over and above those affecting internal development, and there can be no assurance that the Company's joint development efforts will be successful. The Company's success is dependent on technical and other contributions of key individuals, including individuals who joined the Company in connection with the merger with EPIC. In particular, there are only a limited number of qualified EDA engineers, and the competition for such individuals is especially intense. There can be no assurance that the Company can continue to recruit and retain such key personnel. As of the end of the third quarter of fiscal 1997, the Company held 799,000 shares of Cadence common stock, which were acquired as a result of the Company's investments in CCT in May 1996 and April 1997 and CCT's subsequent merger with Cadence. The average basis of these shares is $17.11 per share. Following announcement of the Cadence-CCT merger, the Company commenced a program of selling its CCT (now Cadence) shares in an amount per quarter sufficient to generate a profit of $2.0 million per quarter. The number of Cadence shares the Company is required to sell in order to generate a profit of $2.0 million in any fiscal quarter, the number of quarters that the Company will be able to generate such profits, and the total gain that the Company may be able to realize on sales of its Cadence shares depends upon the price of Cadence stock at the time of sale, which is subject to significant fluctuation. In May 1996, the Company's Board of Directors authorized a program to repurchase up to 2.0 million shares of Synopsys Common Stock over two years, subject to a maximum expenditure of $80.0 million. In February 1997, the Company announced that it had rescinded the stock repurchase program in connection with its merger with EPIC, in order to comply with pooling of interests accounting guidance provided in SEC Staff Accounting Bulletin No. 96. Although the Company's purchases have been insignificant relative to the volume of trading in Synopsys Common Stock since May 1996, rescission of the repurchase program could have an adverse effect on the price of Synopsys Common Stock. The Company's stock price, like that of other technology companies, is subject to significant volatility. Past financial performance should not be considered a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. If revenues or earnings in any quarter fail to meet expectations, there could be an immediate and significant impact on the Company's stock price. In addition, the Company's stock price may be affected by broader market trends that may be unrelated to the Company's performance. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the recorded amounts of assets and liabilities, disclosure of those assets and liabilities at the date of the financial statements and the recorded amounts of expenses during the reporting period. A change in the facts and circumstances surrounding these estimates could result in a change to the estimates and impact future operating results. 13 14 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 14 15 SYNOPSYS, INC. 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. Date: August 12, 1997 SYNOPSYS, INC. (Registrant) By: /s/ David M. Sugishita ------------------------------- David M. Sugishita Sr. Vice President Chief Financial Officer (Principal Financial and Accounting Officer) 15 16 EXHIBIT INDEX
EXHIBIT # DESCRIPTION - --------- ----------- 27 Financial Data Schedule
EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS SEP-30-1997 OCT-01-1996 JUN-30-1997 66,399 255,295 94,224 4,737 0 443,055 123,178 59,571 562,262 187,005 10,634 0 0 520 361,372 562,262 365,910 365,910 43,973 43,973 255,146 0 1,339 78,945 29,269 49,676 0 0 0 49,676 .92 .92
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