-----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, OgLTu3CVF1lZGjwKtCFrlQXlt6fhW2Tqe/tyMhPh99jMKv6cqj+UBRokNXrLdU/U p21QmWrfjxoGcBVc2R5lvA== 0000891618-98-002548.txt : 19980520 0000891618-98-002548.hdr.sgml : 19980520 ACCESSION NUMBER: 0000891618-98-002548 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980404 FILED AS OF DATE: 19980519 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: SEC FILE NUMBER: 000-19807 FILM NUMBER: 98627876 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 FOR THE PERIOD ENDED APRIL 4, 1998 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 April 4, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ______________ Commission file number: 0-19807 SYNOPSYS, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 56-1546236 - ------------------------------- ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 700 East Middlefield Road Mountain View, CA 94043 ------------------------------------------------------------ (Address of principal executive offices, including zip code) Registrant's Telephone No., including area code: (650) 962-5000 ----------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of May 9, 1998, there were approximately 66,060,000 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- March 31, 1998 and September 30, 1997 3 Condensed Consolidated Statements of Income- Three months and six months ended March 31, 1998 and 1997 4 Condensed Consolidated Statements of Cash Flows- Six months ended March 31, 1998 and 1997 5 Notes to Condensed Consolidated Financial Statements 6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-17 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 18 Item 6. Exhibits and Reports on Form 8-K 19 Signatures 20
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SYNOPSYS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, SEPTEMBER 30, 1998 1997 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 92,906 $ 126,414 Short-term investments 412,292 308,416 ------------ ------------ Cash and short-term investments 505,198 434,830 ------------ ------------ Accounts receivable, net of allowances of $11,962 and $8,213, respectively 112,969 119,030 Prepaid expenses, deferred taxes and other 29,511 36,580 ------------ ------------ Total current assets 647,678 590,440 ------------ ------------ Property and equipment, net 88,441 92,079 Capitalized software development costs, net of accumulated amortization of $6,951 and $10,888, respectively 4,150 7,297 Long-term investments 66,130 61,056 Other assets 23,395 17,717 ------------ ------------ Total assets $ 829,794 $ 768,589 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 115,622 $ 114,881 Current portion of long-term debt 7,910 8,964 Income taxes payable 19,323 33,282 Deferred revenue 114,994 97,523 ------------ ------------ Total current liabilities 257,849 254,650 ------------ ------------ Long-term debt 3,601 9,191 Deferred compensation 5,701 3,205 Stockholders' equity: Preferred stock, $.01 par value; 2,000,000 shares authorized; no shares outstanding -- -- Common stock, $.01 par value; 100,000,000 shares authorized; 65,271,000 and 63,844,000 shares outstanding, respectively 653 638 Additional paid-in capital 368,924 334,086 Retained earnings 170,791 151,664 Cumulative translation adjustment (2,711) (1,552) Net unrealized gain on investments 24,986 16,707 ------------ ------------ Total stockholders' equity 562,643 501,543 ------------ ------------ Total liabilities and stockholders' equity $ 829,794 $ 768,589 ============ ============
See accompanying notes 3 4 SYNOPSYS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED MARCH 31, MARCH 31, -------------------------- -------------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Revenue: Product $ 103,063 $ 98,960 $ 213,488 $ 199,432 Service 67,042 57,811 130,829 111,242 ---------- ---------- ---------- ---------- Total revenue 170,105 156,771 344,317 310,674 ---------- ---------- ---------- ---------- Cost of revenue: Product 8,282 8,433 17,093 17,988 Service 13,008 12,504 27,689 22,513 ---------- ---------- ---------- ---------- Total cost of revenue 21,290 20,937 44,782 40,501 ---------- ---------- ---------- ---------- Gross margin 148,815 135,834 299,535 270,173 ---------- ---------- ---------- ---------- Operating expenses: Research and development 36,118 37,268 76,335 73,121 Sales and marketing 57,293 58,548 123,454 116,074 General and administrative 11,257 11,793 24,544 22,907 Merger-related and other costs 11,888 11,400 47,888 11,400 In-process research and development -- 5,500 4,191 5,500 ---------- ---------- ---------- ---------- Total operating expenses 116,556 124,509 276,412 229,002 ---------- ---------- ---------- ---------- Operating income 32,259 11,325 23,123 41,171 Other income, net 6,419 6,191 11,360 13,789 ---------- ---------- ---------- ---------- Income before income taxes 38,678 17,516 34,483 54,960 Income tax provision 13,151 10,611 17,225 23,723 ---------- ---------- ---------- ---------- Income before extraordinary item 25,527 6,905 17,258 31,237 Extraordinary item - gain on extinguishment of debt, net of income tax expense -- -- 1,869 -- ---------- ---------- ---------- ---------- Net income $ 25,527 $ 6,905 $ 19,127 $ 31,237 ========== ========== ========== ========== Basic earnings per share: Income before extraordinary item $ .39 $ .11 $ .27 $ .51 Extraordinary item -- -- .03 -- ---------- ---------- ---------- ---------- Net income $ .39 $ .11 $ .30 $ .51 ========== ========== ========== ========== Weighted average common shares 65,004 62,039 64,673 61,833 ========== ========== ========== ========== Diluted earnings per share: Income before extraordinary item $ .38 $ .11 $ .25 $ .48 Extraordinary item -- -- .03 -- ---------- ---------- ---------- ---------- Net income $ .38 $ .11 $ .28 $ .48 ========== ========== ========== ========== Weighted average common shares and equivalents 67,316 65,091 67,652 65,005 ========== ========== ========== ==========
See accompanying notes 4 5 SYNOPSYS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED MARCH 31, ------------------------------ 1998 1997 ------------ ------------ Cash flows from operating activities: Net income $ 19,127 $ 31,237 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary gain on extinguishment of debt (1,869) -- Depreciation and amortization 21,887 19,196 Interest accretion on notes payable 196 290 Provision for doubtful accounts and sales returns 3,749 2,451 Tax benefit associated with stock options 6,482 18,162 Deferred revenue 17,471 5,754 Deferred taxes (304) (3,976) Noncash merger-related and other costs 8,023 3,084 In-process research and development 4,191 5,500 Gain on sale of long-term investments (4,000) (10,918) Net change in assets and liabilities: Accounts receivable 2,312 (16,118) Prepaid expenses and other 708 (4,123) Other assets (7,731) (399) Accounts payable and accrued liabilities (2,488) (10,040) Income taxes payable (10,730) (1,974) Deferred compensation 2,496 1,976 ------------ ------------ Net cash provided by operating activities 59,520 40,102 ------------ ------------ Cash flows from investing activities: Proceeds from sale of long-term investments 11,634 9,955 Purchases of long-term investments (901) (12,986) Purchases and maturities of short-term investments, net (103,348) (19,737) Purchases of property and equipment (19,426) (24,486) Acquisitions (net of cash acquired) (2,236) -- Capitalization of software development costs (1,050) (2,101) Decrease in deposits and other -- 148 ------------ ------------ Net cash used in investing activities (115,327) (49,207) ------------ ------------ Cash flows from financing activities: Principal payments on debt obligation (4,913) (5,034) Proceeds from sale of common stock, net 28,371 19,592 Purchases of treasury stock -- (13,026) Repayment of foreign tax grant -- (1,304) ------------ ------------ Net cash provided by financing activities 23,458 228 ------------ ------------ Effect of exchange rate changes on cash (1,159) (1,745) Net increase (decrease) in cash and cash equivalents (33,508) (10,622) Cash and cash equivalents, beginning of period 126,414 87,100 ------------ ------------ Cash and cash equivalents, end of period $ 92,906 $ 76,478 ============ ============ Supplemental Disclosure: Cash paid during the period for: Interest $ 409 $ 437 ============ ============ Income taxes$ $ 25,785 $ 11,207 ============ ============
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, 1997. For financial reporting purposes, the Company reports on a 13-week quarter and a 52 or 53-week year. Due to the fact that fiscal 1998 contains 53 weeks, the first quarter of fiscal 1998 contained 14 weeks, while the first quarter of fiscal 1997 contained 13 weeks. For presentation purposes, the consolidated financial statements refer to the quarter's calendar month end. The consolidated results of operations for the period ended March 31, 1998 are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year. 2. Software Revenue Recognition During the first quarter of fiscal 1998, the Company adopted Statement of Position (SOP) 97-2, "Software Revenue Recognition." The provisions of SOP 97-2 have been applied to transactions entered into beginning October 1, 1997. SOP 97-2 generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of the elements. The revenue allocated to software products, including time-based software licenses, generally is recognized upon delivery of the products. The revenue allocated to postcontract customer support (PCS) is recognized ratably over the term of the support and revenue allocated to service elements is recognized as the services are performed. In connection with the adoption of SOP 97-2, the Company analyzed all of the elements included in its multiple-element arrangements and determined that the Company has sufficient evidence to allocate revenue to the license and PCS components of certain of its time-based product licenses. Accordingly, the portion of the time-based license fee allocated to the license component is recognized upon delivery of the software product and the portion of the fee allocated to PCS is recognized ratably over the term of the support. Prior to the adoption of SOP 97-2, all revenue from time-based product licenses was recognized ratably over the term of the license. Software subscriptions continue to be recognized on a ratable basis. 3. Earnings Per Share On October 1, 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." In accordance with SFAS No. 128, basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common 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. The following is a reconciliation of the 6 7 numerators and denominators of the basic and diluted EPS computations for the periods presented:
(in thousands, except per share amounts) Income Shares Per-Share (Numerator) (Denominator) Amount ------------ ------------ ------------ Three months ending March 31, 1997: Basic EPS: Net income $ 6,905 62,039 $ 0.11 Effect of dilutive securities: Stock options outstanding -- 3,052 -- ------------ ------------ ------------ Diluted EPS: Net income $ 6,905 65,091 $ 0.11 ============ ============ ============ Three months ending March 31, 1998: Basic EPS: Net income $ 25,527 65,004 $ 0.39 Effect of dilutive securities: Stock options outstanding -- 2,312 (.01) ------------ ------------ ------------ Diluted EPS: Net income $ 25,527 67,316 $ 0.38 ============ ============ ============ Six months ending March 31, 1997: Basic EPS: Net income $ 31,237 61,833 $ 0.51 Effect of dilutive securities: Stock options outstanding -- 3,172 (.03) ------------ ------------ ------------ Diluted EPS: Net income $ 31,237 65,005 $ 0.48 ============ ============ ============ Six months ending March 31, 1998: Basic EPS: Income before extraordinary item $ 17,258 64,673 $ 0.27 Extraordinary item 1,869 -- .03 ------------ ------------ ------------ Net income $ 19,127 64,673 $ 0.30 Effect of dilutive securities: Stock options outstanding -- 2,979 (.02) ------------ ------------ ------------ Diluted EPS: Net income $ 19,127 67,652 $ 0.28 ============ ============ ============
4. Mergers On December 4, 1997, the Company issued approximately 11.3 million shares of its common stock in exchange for all the outstanding shares of common stock of Viewlogic Systems, Inc. (Viewlogic), a worldwide supplier of electronic design automation (EDA) software. In addition, options to acquire Viewlogic's common stock were exchanged for 7 8 options to acquire approximately 2.8 million 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 Viewlogic for all periods presented. The results of operations previously reported by the separate enterprises and the combined amounts presented in the accompanying consolidated financial statements are summarized below:
(in thousands) Synopsys Viewlogic Combined ---------- ---------- ---------- Three months ending December 31, 1996 Total revenue $ 116,710 $ 37,193 $ 153,903 Net income 19,076 5,256 24,332 Three months ending December 31, 1997 Total revenue 137,094 37,118 174,212 Extraordinary gain 1,869 -- 1,869 Net loss (4,627) (1,773) (6,400)
Adjustments to conform Viewlogic's method of accounting for sales commissions with that of the Company reduced combined net income by approximately $250,000 and $495,000 for the three and six months ended March 31, 1997, respectively. The Company incurred merger-related and other costs of $11.9 million and $47.9 million for the second quarter and first six months of fiscal 1998, respectively. The following table presents the components of merger related and other costs recorded for the six months ended March 31, 1998, along with charges against the reserves through March 31, 1998:
Noncash March 31, 1998 Writedown Reserve (in thousands) Total Charge Amounts Paid of Assets Balance ---------- ---------- ---------- ---------- Transaction costs 9,332 (7,856) 1,476 Employee termination and transition costs 11,735 (7,125) 4,610 Writedown of equipment and other assets 8,252 (8,023) 229 Legal and other settlements 6,811 (5,661) 1,150 Redundant facility and other costs 11,758 (5,160) 6,598 ---------- ---------- ---------- ---------- Total $ 47,888 $ (25,802) $ (8,023) $ 14,063 ========== ========== ========== ==========
The Company expects to record additional merger related and other costs in the third quarter of fiscal 1998 and anticipates that these will be the final charges incurred in connection with the merger with Viewlogic. The Company expects that all significant amounts included in the March 31, 1998 reserve balance will be paid within the next twelve months. 8 9 5. Acquisitions In October 1997, the Company acquired two privately-held companies in the EDA industry. The acquisitions were accounted for by the purchase method of accounting. The purchase price, acquisition costs and net liabilities assumed for these acquisitions totaled approximately $4.2 million, which was allocated to in-process research and development and taken as a one-time charge to operating expenses in the first quarter of fiscal 1998. 6. Extraordinary Item In fiscal 1996, the Company and International Business Machines Corporation ("IBM") entered into a six-year Joint Development and License Agreement Concerning EDA Software and Related Intellectual Property (the "Agreement"). In accordance with the Agreement, the Company issued $30.0 million in notes, which bear interest at 3%, and are payable to IBM upon the earlier of achievement of scheduled milestones or at maturity in 2006. In the first quarter of fiscal 1998, the Company and IBM modified the terms of one of the notes which has been accounted for as an extinguishment of debt. Accordingly, the Company recorded an extraordinary gain of $1.9 million, net of tax, related to the extinguishment of the note. As of March 31, 1998, the notes had a remaining balance of $9.9 million, of which $2.9 million is included in long-term obligations. 9 10 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," "anticipates" and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from those anticipated in such forward-looking statements as a result of certain factors, including those set forth under "Factors That May Affect Future Results." Results of Operations On December 4, 1997, the Company acquired Viewlogic Systems, Inc., a Delaware corporation ("Viewlogic"), by the merger (the "Merger") of a wholly-owned subsidiary of the Company, Post Acquisition Corp., a Delaware corporation ("Sub"), with and into Viewlogic. The Merger was accomplished pursuant to the Agreement and Plan of Merger, dated as of October 14, 1997, among the Company, Sub, and Viewlogic (the "Merger Agreement"). The Merger of Sub with and into Viewlogic occurred following the approval of the Merger Agreement by the stockholders of Viewlogic, and the approval of the issuance of the Company's Common Stock in connection with the Merger by the stockholders of the Company, at stockholders' meetings held on December 4, 1997, and the satisfaction of certain other closing conditions. As a result of the Merger, each outstanding share of Viewlogic Common Stock was converted into 0.6521 shares of the Company's Common Stock (the "Conversion Ratio"), and Viewlogic became a wholly-owned subsidiary of the Company. The terms of the Merger Agreements were the result of arm's-length negotiations among the parties. A total of approximately 11.3 million shares of the Company's Common Stock were issued in connection with the Merger. In addition, the Company assumed all outstanding Viewlogic options and warrants to purchase Viewlogic Common Stock, which were converted into options and warrants to purchase shares of the Company's Common Stock, subject only to adjustments to reflect the Conversion Ratio. The Company has reserved approximately 2.8 million shares of its Common Stock for issuance upon the exercise of the assumed Viewlogic stock options. Prior to the Merger, Viewlogic supplied electronic design automation software which is used to accelerate and automate the design and verification of advanced application specific integrated circuits, printed circuit boards and electronic systems, and provided related services. Viewlogic's ASIC and system-on-a-chip design products, people and facilities are being merged into the Synopsys organization. Simulation products of both companies have been consolidated under a newly created Simulation Tools Group, and timing products and test products have been grouped together in Synopsys' existing business units. The printed circuit board and systems portions of Viewlogic's business are being continued in a wholly-owned subsidiary of Synopsys, based in Marlboro, Massachusetts, Viewlogic's former headquarters. 10 11 Revenue for the second quarter of fiscal 1998 increased 9% to $170.1 million from $156.8 million in the second quarter of fiscal 1997. Revenue for the first half of fiscal 1998 increased 11% to $344.3 million from $310.7 million for the comparable period in fiscal 1997. The increase in revenue for both periods was primarily attributable to increased service revenue. Product revenue as a percentage of total revenue decreased to 61% in the second quarter of fiscal 1998, compared to 63% in the second quarter of fiscal 1997. Product revenue as a percentage of total revenue for the first half of fiscal 1998 was 62%, compared to 64% for the first six months of fiscal 1997. The decrease for both periods of fiscal 1998 was due in part to relatively faster growth in service revenue from training and consulting services and the renewal of maintenance and support contracts during fiscal 1998. During the first quarter of fiscal 1998, the Company adopted Statement of Position (SOP) 97-2, "Software Revenue Recognition." The provisions of SOP 97-2 have been applied to transactions entered into beginning October 1, 1997. SOP 97-2 generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of the elements. The revenue allocated to software products, including time-based software licenses, generally is recognized upon delivery of the products. The revenue allocated to postcontract customer support (PCS) is recognized ratably over the term of the support and revenue allocated to service elements is recognized as the services are performed. In connection with the adoption of SOP 97-2, the Company analyzed all of the elements included in its multiple-element arrangements and determined that the Company has sufficient evidence to allocate revenue to the license and PCS components of certain of its time-based product licenses. Accordingly, the portion of the time-based license fee allocated to the license component is recognized upon delivery of the software product and the portion of the fee allocated to PCS is recognized ratably over the term of the support. Prior to the adoption of SOP 97-2, all revenue from time-based product licenses was recognized ratably over the term of the license. Software subscriptions continue to be recognized on a ratable basis. International revenue as a percentage of total revenue decreased to 37% in the second quarter of fiscal 1998 from 45% in the second quarter of fiscal 1997. For the first half of fiscal 1998, international revenue was 39% of total revenue, compared to 43% for the first half of fiscal 1997. The decrease in international revenues for both fiscal 1998 periods was primarily due to lower revenue in Asia resulting from the decline in value of Asian currencies against the dollar, combined with weak economies in many Asian countries, particularly Korea. Cost of revenue as a percentage of total revenue remained relatively constant at 13% for all periods presented. 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. Total operating expenses as a percentage of revenue decreased to 69% in the second quarter of fiscal 1998 from 79% in the second quarter of fiscal 1997. The decrease is primarily attributable to lower spending levels obtained from reductions in personnel and other cost savings resulting from the integration of Viewlogic into Synopsys' operations. In addition, operating expenses in the second quarter of fiscal 1997 included a charge of $5.5 million for in-process research and development. For the first half of fiscal 1998, operating expenses 11 12 were 80% of revenue, compared to 74% of revenue for the first half of fiscal 1997. The increase in operating expenses for the first six months of fiscal 1998 was the result of several factors. The first quarter of fiscal 1998 was 14 weeks, compared to 13 weeks in the first quarter of fiscal 1997. In addition, merger-related and other costs associated with the merger with Viewlogic were 14% of revenue for the first half of fiscal 1998. Merger-related and other costs associated with the 1997 merger with EPIC Design Technology, Inc. were 4% of revenue for the comparable period in fiscal 1997. These higher levels of spending were partially offset by the expense reductions achieved in the second quarter of fiscal 1998 from the integration of Viewlogic into Synopsys' operations. Research and development expenses as a percentage of total revenue decreased to 21% in the second quarter of fiscal 1998 from 24% in the second quarter of fiscal 1997. In absolute dollars, research and development expenses decreased to $36.1 million in the second quarter of fiscal 1998 from $37.3 million in the second quarter of fiscal 1997. The decrease, both as a percentage of revenue and in absolute dollars, was primarily the result of expense reductions obtained in the second quarter of fiscal 1998 from the integration of Viewlogic into Synopsys' operations. For the first half of fiscal 1998, research and development expenses were 22% of revenue compared to 24% for the comparable period in fiscal 1997. In absolute dollars, research and development was $76.3 million for the first half of fiscal 1998, compared to $73.1 million for the first half of fiscal 1997. The decrease as a percentage of revenue was primarily the result of expense reductions obtained in the second quarter of fiscal 1998 from the integration of Viewlogic into Synopsys' operations. The increase in absolute dollar expenses was primarily due to higher expense levels in the first six months of fiscal 1998 caused by the fact that the first quarter of fiscal 1998 contained 14 weeks instead of the 13 weeks contained in the first quarter of fiscal 1997. Sales and marketing expenses as a percentage of total revenue decreased to 34% in the second quarter of fiscal 1998 from 37% in the second quarter of fiscal 1997. In absolute dollars, sales and marketing decreased to $57.3 million in the second quarter of fiscal 1998 from $58.5 million in the second quarter of fiscal 1997. The decrease, both as a percentage of revenue and in absolute dollars, was primarily the result of expense reductions obtained in the second quarter of fiscal 1998 from the integration of Viewlogic into Synopsys' operations. Sales and marketing expenses were 36% of revenue for the first half of fiscal 1998, compared to 37% for the first half of fiscal 1997. In absolute dollars, sales and marketing was $123.5 million for the first half of fiscal 1998, compared to $116.1 million for the first half of fiscal 1997. The decrease as a percentage of revenue was primarily the result of expense reductions obtained in the second quarter of fiscal 1998 from the integration of Viewlogic into Synopsys' operations. The increase in absolute dollar expenses was primarily due to higher expense levels in the first six months of fiscal 1998 caused by the fact that the first quarter of fiscal 1998 contained 14 weeks instead of the 13 weeks contained in the first quarter of fiscal 1997. In addition, bad debt expense increased in the first half of fiscal 1998 compared to the first half of fiscal 1997 as the result of reserves taken for potential accounts receivable write-offs in Asia. General and administrative expenses as a percentage of total revenue decreased to 7% in the second quarter of fiscal 1998 from 8% in the second quarter of fiscal 1997. In absolute dollars, general and administrative expenses were $11.3 million in the second quarter of fiscal 1998, compared to $11.8 million in the second quarter of fiscal 1997. The decrease, both as a percentage of revenue and in absolute dollars, was primarily the result of expense reductions obtained in the second quarter of fiscal 1998 from the integration of Viewlogic into 12 13 Synopsys' operations. General and administrative expenses as a percentage of total revenue remained relatively constant at 7% for the first six months of both fiscal 1998 and 1997. In absolute dollars, general and administrative expenses were $24.5 million for the first six months of fiscal 1998, compared to $22.9 million for the same period in fiscal 1997. The increase in absolute dollar expenses was primarily due to higher expense levels in the first six months of fiscal 1998 caused by the fact that the first quarter of fiscal 1998 contained 14 weeks instead of the 13 weeks contained in the first quarter of fiscal 1997. In connection with its merger with Viewlogic, the Company recorded an additional charge of $11.9 million for merger-related and other costs in the second quarter of fiscal 1998, resulting in $47.9 million of charges for the first half of fiscal 1998. The Company expects to record another charge between $3.0 million and $5.0 million in the third quarter of fiscal 1998 and anticipates that this will be the final charge incurred in connection with the merger. Charges for the first half of fiscal 1998 included direct transaction fees for investment bankers, attorneys, accountants, and other related costs of $9.3 million, employee termination and transition costs of $11.7 million, legal and other settlements of $6.8 million, writedown of equipment and other assets of $8.3 million, and redundant facility and other costs of $11.8 million. As of March 31, 1998, there was a balance of $14.1 million in accrued liabilities for expected future cash expenditures. The Company also incurred an in-process research and development charge of $4.2 million in the first half of fiscal 1998 in connection with the acquisitions of two privately-held companies in the EDA industry. The provision for income taxes was 34% of income before taxes in the second quarter of fiscal 1998. For the first half of fiscal 1998, the provision for income taxes was 34% of income before income taxes plus additional taxes of $5.5 million resulting from nondeductible expenses for merger-related costs incurred in the first quarter. This resulted in an overall income tax rate of 50% of income before taxes for the first half of fiscal 1998. In the first half of fiscal 1998, the Company recorded an extraordinary gain on extinguishment of debt of $1.9 million, net of income tax expense of $1.0 million, related to certain interest bearing notes issued by the Company to IBM. Net income was $25.5 million in the second quarter of fiscal 1998, compared to $6.9 million in the same period of fiscal 1997. For the first half of fiscal 1998, net income was $19.1 million, compared to $31.2 million for the first six months of fiscal 1997. In the absence of nonrecurring charges, primarily related to the Company's merger with Viewlogic Systems, Inc. and an extraordinary gain on retirement of debt, net income would have been $33.4 million in the second quarter of fiscal 1998 and $57.1 million for the first half of fiscal 1998. The Company's book-to-bill ratio for the second quarter of fiscal 1998 was above one. The book-to-bill ratio measures the ratio of accepted orders to revenue. Liquidity and Capital Resources For the first six months of fiscal 1998, cash and short-term investments increased $70.4 million to $505.2 million. The increase in cash and short-term investments was due primarily to cash generated from operations, proceeds from the sale of common stock, and proceeds 13 14 from the sale of long-term investments, partially offset by purchases of property and equipment, payments on debt obligations and acquisitions. The Company believes that the existing cash and short-term investments balance of $505.2 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 May Affect Future Results The Company expects that its revenue growth during fiscal year 1998 will be lower than it historically has been. Because of low growth in the printed circuit board and systems portion of Viewlogic's business, weakness in Asian currencies, especially the Japanese yen, and overall weakness in Asia-Pacific economies, for the rest of fiscal year 1998 the Company will emphasize earnings growth rather than revenue growth. The Company is seeking to manage expenses, although there is no assurance that cost savings will be achieved. In addition, the Company, which has a 53-week financial calendar in fiscal 1998, absorbed the additional week of expenses in the first quarter. To the extent that revenue growth exceeds the Company's current expectations, the Company will use the opportunity to build its backlog for future quarters. The Company attempts to manage its business to achieve quarter-to-quarter revenue and earnings growth. In recent years, achieving predictable revenue and earnings growth has become more difficult. Quarterly revenue and earnings are affected by a number of factors, including customer product demand, product license terms, the size of the Company's backlog, and the timing of revenue recognition on products and services sold. In recent years, the Company's orders have become more seasonal, with the first quarter of the Company's fiscal year typically being the weakest, having a book-to-bill ratio at or below one, and the fourth quarter the strongest. The Company increasingly receives a disproportionate volume of orders in the last week of the quarter. In addition, an increasing amount of the Company's orders involve products and services which yield revenue (or a significant portion thereof) over multiple quarters (often extending beyond the current fiscal year) or upon completion of performance rather than at the time of sale, including time-based product licenses, 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, and the Company is more vulnerable to delays in individual large orders, than it historically has been. 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 expects to continue to increase operating expenses in order to generate and support continued growth in revenue. If the Company is unsuccessful in generating such revenue, the Company's business, financial condition and results of operations are likely to 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 the Company's expenses varies with its revenue. 14 15 The EDA industry is highly competitive. The Company's products and services compete with similar products and services from other EDA vendors and with other EDA products and services for a share of the EDA budgets of their customers. The Company's products also compete with customers' internally-developed design tools and design capabilities. The Company's competitors include companies that offer a broad range of products and services, such as Cadence Design Systems, Inc. ("Cadence"), Mentor Graphics, Inc. ("Mentor") and Avant! Corporation ("Avant!"), as well as companies, including numerous start-up companies, that offer products focused on a discrete phase of the integrated circuit ("IC") design process. In order to remain successful against such competition, the Company will have to continue to enhance its current products and to develop and introduce new products on a timely and cost-effective basis that are based on industry-leading technology and that address the increasingly sophisticated needs of its customers. The Company also will have to expand its ability to offer consulting services. The failure to achieve such product enhancement and development or to expand its ability to offer such services would have a material adverse effect on the Company's business, financial condition and results of operations. Technology advances and customer requirements are fueling a change in the nature of competition among EDA vendors. Advances in semiconductor technology have created a need for tighter integration between logic design and physical design and for technologies which permit systematic reuse of design blocks in multiple ICs. As a result, the Company expects that competition will increasingly center on "design flows" involving a broad range of products (including both logic and physical design tools) and services rather than individual design tools. No single EDA company currently offers its customers industry-leading products for a complete design flow. The Company offers a wide range of logic design tools but currently offers a relatively limited range of physical design tools, a field which is dominated by Cadence and Avant! In addition, the Company has less capacity than Cadence to offer design consulting services. Historically, much of the Company's growth has been attributable to the strength of its logic synthesis products. Opportunities for growth in market share in this area are limited and overall growth in the market for such products has slowed. The Company is seeking to add new products to its portfolio through internal development and, where it deems appropriate, acquisition. Among the most important new products offered by the Company are its Cell-Based Array library, PrimeTime timing estimator, Cyclone simulation accelerator, Formality verification and Module Compiler datapath synthesis products. These products have achieved initial customer acceptance, but the Company will only derive significant revenue from these products if they are accepted by a broad range of customers. In addition, the Company is attempting to expand its capacity to offer consulting services. There can be no assurance that the Company will be successful in introducing new products or expanding its services business, and the failure to do so would have a material adverse effect on the Company's business, financial condition and results of operations. The Company's business has benefited from the rapid worldwide growth of the semiconductor industry. Purchases of the Company's products are largely dependent upon the commencement of new design projects by semiconductor manufacturers and their customers. The outlook for the semiconductor industry for the remainder of 1998 is uncertain, owing in part to adverse economic conditions in Asia. Slower growth in the semiconductor industry, 15 16 and/or a reduced number of design starts, could have a material adverse effect on the Company's business, financial condition and results of operations. In recent years, international revenue has accounted for almost half of the Company's revenue. The Company expects that international revenue will continue to account for a significant portion of its revenue in the future. As a result, changes in foreign currency exchange rates and changes in regional or worldwide economic or political conditions could have a material adverse effect on the Company's business, financial condition and results of operations. In particular, revenue from sales in Japan during the first half of fiscal 1998 were adversely affected by the weakness of the yen against the dollar and the deferral of investments in semiconductor facilities and technology by Japanese companies. Continued weakness of the yen and the Japanese economy are likely to adversely affect revenue from Japan during the remainder of fiscal 1998. In addition, recent significant declines in the value of the currencies of many countries in the Asia Pacific region have affected the Company's sales in the region. This is particularly true in Korea and Taiwan, which are important markets for the Company in the Asia Pacific region. Continued instability in Asian currency markets and economies would continue to have an adverse effect on the Company's results of operations. In February 1996, the Company entered into a six-year joint development and license agreement with IBM, pursuant to which the Company and IBM agreed to develop certain new products. Joint development of products is subject to risks and uncertainties over and above those affecting internal development. During fiscal year 1997, the first joint product resulting from the alliance, PrimeTime, was introduced, and the parties agreed to terminate efforts to develop a product in one of the product areas covered by the Agreement. There can be no assurance that the Company's joint development efforts will lead to new products or that such products will be successful. The Company's success is dependent on technical and other contributions of key employees. The Company participates in a dynamic industry, with significant start-up activity, and has its headquarters in Silicon Valley, where skilled technical, sales and management employees are in high demand. The Company has experienced, and may continue to experience, significant employee and management turnover. In addition, there is a limited number of qualified EDA engineers, and the competition for such individuals is intense. There can be no assurance that the Company can continue to recruit and retain key personnel. Failure to successfully recruit and retain such personnel could have a material adverse effect on the Company's business, financial condition and results of operations. The Company has adopted a number of provisions that could have antitakeover effects. In September 1997, the Board of Directors adopted a Preferred Shares Rights Plan, commonly referred to as a "poison pill." In addition, the Board of Directors has the authority, without further action by its stockholders, to fix the rights and preferences of, and issue shares of, authorized but undesignated shares of Preferred Stock. This provision and other provisions of the Company's Restated Certificate of Incorporation and Bylaws and the Delaware General Corporation Law may have the effect of deterring hostile takeovers or delaying or preventing changes in control or management of the Company, including transactions in which the stockholders of the Company might otherwise receive a premium for their shares over then current market prices. 16 17 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. Year 2000 Compliance There has been significant public discussion about the potential inability of computer programs and systems to adequately process date information after December 31, 1999. The Company has inspected or tested certain of its products to determine whether they will be affected by the change in the century. None of the Company's tested products experienced significant date-related failures. The Company anticipates achieving so-called "Year 2000 compliance", consistent with industry standards, with its active products and is developing a plan for meeting year 2000 compliance, of all products on an ongoing basis. The Company's prior inspecting and testing has not required, and its anticipated inspection, testing and compliance efforts are not expected to require, the Company to incur any material expense. In addition, the Company continues to implement the program, to be completed in 1999, to review the Year 2000 compliance status of the software and systems used in its internal business processes, to obtain appropriate assurances of compliance from the manufacturers of these products, and to modify or replace all non-compliant products. The Company relies on widely-available commercial products rather than proprietary software, and has received Year 2000 assurances from some of its main suppliers. Based on the information available to date, the Company believes that it will be able to complete its Year 2000 compliance review and make any necessary modifications prior to the end of 1999. The Company further believes that such review and modification, if any, will not require the Company to incur any material expense. However, the compliance of systems acquired from third parties is dependent on factors outside the Company's control. If key systems, or a significant number of systems were to fail as a result of Year 2000 problems, the Company could incur substantial cost and disruption, which would potentially have a material adverse effect on the Company's business. 17 18 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's 1997 annual meeting of stockholders was held on February 27, 1998. The following directors were elected by the stockholders: Chi-Foon Chan Deborah A. Coleman Aart J. de Geus Harvey C. Jones, Jr. William W. Lattin A. Richard Newton Steven C. Walske The following additional matters were submitted to the stockholders for vote at the meeting: 1. Approval of an amendment to the Company's Employee Stock Purchase Plan and International Employee Stock Purchase Plan to increase the number of shares of Common Stock reserved for issuance thereunder by 1,400,000 shares. Of the total shares voting on the foregoing resolution, 47,189,284 voted in favor, 11,958,971 against and 38,374 abstained. 2. Approval of an amendment to the Company's 1994 Non-Employee Directors Stock Option Plan to (i) increase the number of options to purchase shares of Common Stock granted to non-employee directors who are re-elected to the Board of Directors from 8,000 shares per year to 10,000 shares per year; (ii) provide an annual option grant to newly-elected or newly-appointed directors; (iii) provide an annual grant of options to purchase 5,000 shares of Common Stock as compensation for service on selected committees of the Board of Directors, subject to a limit of two such grants per non-employee director per year; and (iv) provide that annual option grants and committee-service grants vest immediately prior to the first Annual Meeting following the date of the grant. Of the total shares voting on the foregoing resolution, 49,759,437 voted in favor, 9,309,113 against and 118,079 abstained. 3. Ratification of the appointment of KPMG Peat Marwick LLP as independent auditors of the Company for the fiscal year ending September 30, 1998. Of the total shares voting on the foregoing resolution, 59,135,086 voted in favor, 20,934 against and 30,609 abstained. 18 19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a.) Exhibits 27 Financial Data Schedule (b.) Reports on Form 8-K None 19 20 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: May 18, 1998 SYNOPSYS, INC. (Registrant) By: /s/ Mark D. Nelson ------------------------------- Mark D. Nelson Vice President Finance and Controller (Principal Financial and Accounting Officer) 20 21 INDEX TO EXHIBITS
Exhibit Number Description - ------ ----------- 27 Financial Data Schedule
EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS SEP-30-1998 OCT-1-1997 MAR-31-1998 92,906 412,292 124,931 11,962 0 647,678 178,188 89,747 829,794 257,849 3,601 0 0 653 561,990 829,794 344,317 344,317 44,782 44,782 276,412 0 1,271 34,483 17,225 17,258 0 1,869 0 19,127 0.30 0.28 FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
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