-----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, PvHeyFrwagVM7k+HUVPvCDJRO1KlCYayNwyN1gYKoshY/UA1VvqTA1b1idz+UMNN gASdxs7k+3oIbGv7G3bA7w== 0000891618-98-003958.txt : 19980818 0000891618-98-003958.hdr.sgml : 19980818 ACCESSION NUMBER: 0000891618-98-003958 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980704 FILED AS OF DATE: 19980817 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: 98693032 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 PERIOD ENDED JULY 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 July 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 August 8, 1998, there were approximately 66,801,421 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, 1998 and September 30, 1997 3 Condensed Consolidated Statements of Income- Three months and nine months ended June 30, 1998 and 1997 4 Condensed Consolidated Statements of Cash Flows- Nine months ended June 30, 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 10-15 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 16 Signature 17
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SYNOPSYS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data) (unaudited)
JUNE 30, SEPTEMBER 30, 1998 1997 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 166,094 $ 126,414 Short-term investments 422,645 308,416 --------- --------- Cash and short-term investments 588,739 434,830 --------- --------- Accounts receivable, net of allowances of $12,099 and $8,213, respectively 111,190 119,030 Prepaid expenses, deferred income taxes and other 38,659 36,580 --------- --------- Total current assets 738,588 590,440 --------- --------- Property and equipment, net 87,998 92,079 Capitalized software development costs, net of accumulated amortization of $7,293 and $10,888, respectively 4,017 7,297 Long-term investments 43,785 61,056 Other assets 22,010 17,717 --------- --------- Total assets $ 896,398 $ 768,589 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 121,938 $ 114,881 Current portion of long-term debt 6,034 8,964 Income taxes payable 14,691 33,282 Deferred revenue 117,978 97,523 --------- --------- Total current liabilities 260,641 254,650 --------- --------- Long-term debt 3,839 9,191 Deferred compensation 5,871 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; 66,687,000 and 63,844,000 shares outstanding, respectively 667 638 Additional paid-in capital 408,908 334,086 Retained earnings 205,462 151,664 Cumulative translation adjustment (3,281) (1,552) Net unrealized gain on investments 14,291 16,707 --------- --------- Total stockholders' equity 626,047 501,543 --------- --------- Total liabilities and stockholders' equity $ 896,398 $ 768,589 ========= =========
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, ------------------ ------------------ 1998 1997 1998 1997 ---- ---- ---- ---- Revenue: Product $ 102,036 $ 103,464 $ 315,524 $ 302,896 Service 77,570 59,146 208,399 170,388 --------- --------- --------- ---------- Total revenue 179,606 162,610 523,923 473,284 -------- -------- --------- ---------- Cost of revenue: Product 8,898 9,367 25,991 27,355 Service 14,428 13,676 42,117 36,189 -------- ------ ------- -------- Total cost of revenue 23,326 23,043 68,108 63,544 -------- ------ ------- -------- Gross margin 156,280 139,567 455,815 409,740 -------- ------- ------- ------- Operating expenses: Research and development 37,381 37,324 113,716 110,445 Sales and marketing 58,403 60,039 181,857 176,113 General and administrative 11,553 10,825 36,097 33,732 Merger-related and other costs 3,121 -- 51,009 11,400 In-process research and development -- -- 4,191 5,500 ---------- ------ ------- ------- Total operating expenses 110,458 108,188 386,870 337,190 ------- ------- ------- ------- Operating income 45,822 31,379 68,945 72,550 Other income, net 6,710 5,753 18,070 19,542 -------- --------- -------- -------- Income before income taxes 52,532 37,132 87,015 92,092 Income tax provision 17,861 13,012 35,086 36,735 ------- -------- -------- -------- Income before extraordinary item 34,671 24,120 51,929 55,357 Extraordinary item - gain on extinguishment of debt, net of income tax expense -- -- 1,869 -- ------------- ----------- --------- ------- Net income $ 34,671 $ 24,120 $ 53,798 $ 55,357 ======== ========= ======== ======== Basic earnings per share: Income before extraordinary item $ .52 $ .39 $ .80 $ .89 Extraordinary item -- -- .03 -- ---------- --------- --------- ---------- Net income $ .52 $ .39 $ .83 $ .89 ========= ======== ========= ========= Weighted average common shares 66,104 62,611 65,129 62,039 ====== ====== ====== ====== Diluted earnings per share: Income before extraordinary item $ .50 $ .37 $ .76 $ .85 Extraordinary item -- -- .03 -- ---------- ---------- -------- --------- Net income $ .50 $ .37 $ .79 $ .85 ========= ========= ======== ======== Weighted average common shares and equivalents 69,311 65,335 68,259 65,115 ====== ====== ====== ======
See accompanying notes 4 5 SYNOPSYS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
NINE MONTHS ENDED JUNE 30, -------- 1998 1997 --------- --------- Cash flows from operating activities: Net income $ 53,798 $ 55,357 Adjustments to reconcile net income to cash flows provided by operating activities: Extraordinary gain on extinguishment of debt (1,869) -- Depreciation and amortization 32,686 29,120 Interest accretion on notes payable 297 414 Provision for doubtful accounts and sales returns 3,886 1,360 Tax benefit associated with stock options 16,207 22,262 Deferred revenue 20,455 10,689 Deferred income taxes (5,268) (5,538) Noncash merger-related and other costs 8,198 3,084 In-process research and development 4,191 5,500 Gain on sale of long-term investments (5,965) (13,856) Net change in assets and liabilities: Accounts receivable 3,955 (24,668) Prepaid expenses and other 2,531 (6,247) Other assets (6,661) (81) Accounts payable and accrued liabilities 4,803 (5,601) Income taxes payable (16,320) 1,872 Deferred compensation 2,666 2,731 --------- --------- Net cash provided by operating activities 117,590 76,398 --------- --------- Cash flows from investing activities: Proceeds from sales of long-term investments 16,757 16,635 Proceeds from sale of business unit -- 3,000 Purchases of long-term investments (998) (22,124) Purchases and maturities of short-term investments, net (111,122) (20,340) Purchases of property and equipment (29,164) (38,729) Acquisitions (net of cash acquired) (2,236) -- Capitalization of software development costs (1,393) (3,102) Decrease in deposits and other -- (56) --------- --------- Net cash used in investing activities (128,156) (64,716) --------- --------- Cash flows from financing activities: Principal payments on debt obligation (6,670) (8,495) Proceeds from sale of common stock 58,645 33,297 Purchases of treasury common stock -- (13,026) Repayment of foreign tax grant -- (1,304) --------- --------- Net cash provided by financing activities 51,975 10,472 --------- --------- Effect of exchange rate changes on cash (1,729) (883) Net increase in cash and cash equivalents 39,680 21,271 Cash and cash equivalents, beginning of period 126,414 87,100 --------- --------- Cash and cash equivalents, end of period $ 166,094 $ 108,371 ========= ========= Supplemental Disclosure: Cash paid during the period for: Interest $ 568 $ 629 ========= ========= Income taxes $ 40,447 $ 18,942 ========= =========
See accompanying notes 5 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION Synopsys, Inc. (the Company or Synopsys) is a leading supplier of electronic design automation (EDA) solutions to the global electronics market. The Company provides comprehensive design technologies, consulting services and support to creators of advanced integrated circuits, electronic systems and systems on a chip. The unaudited financial information furnished herein reflects all adjustments, consisting only of normal adjustments, except for merger-related and other costs and in-process research and development charges, 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. The consolidated results of operations for the period ended June 30, 1998, are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been omitted, although the Company believes that the disclosures included are adequate to make the information presented not misleading. The unaudited condensed consolidated financial statements and notes included herein should be read in conjunction with the consolidated financial statements and notes for the fiscal year ended September 30, 1997, included in the Company's 1997 Annual Report on Form 10-K and the Company's Registration Statement on Form S-4 dated November 7, 1997, filed in connection with the Company's merger with Viewlogic Systems, Inc. (Viewlogic). 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 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. Actual results could differ from those estimates. 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 has 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. BUSINESS COMBINATIONS 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, a worldwide supplier of EDA software. In addition, options to acquire Viewlogic's common stock were exchanged for options to acquire approximately 2.8 million shares of the Company's common stock. The merger was accounted for as a 6 7 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 $745,000 for the three and nine months ended June 30, 1997, respectively. The Company incurred merger-related and other costs of $3.1 million and $51.0 million for the third quarter and first nine months of fiscal 1998, respectively. The following table presents the components of merger-related and other costs recorded for the nine months ended June 30, 1998, along with charges against the reserves through June 30, 1998:
Noncash June 30, 1998 Writedown Reserve (in thousands) Total Charge Amounts Paid of Assets Balance ------------ ------------ --------- ------- Transaction costs 9,245 (8,094) 1,151 Employee termination and transition costs 11,849 (10,537) 1,312 Writedown of equipment and other assets 8,198 (8,198) -- Legal and other settlements 7,063 (5,713) 1,350 Redundant facility and other costs 14,654 (9,925) 4,729 ------- --------- -------- ------- Total $51,009 $(34,269) $(8,198) $8,542 ======= ========= ======== ======
The Company expects that all significant amounts included in the June 30, 1998, reserve balance will be paid within the next nine months. The Company acquired two smaller privately held companies in the EDA industry in October 1997, each of which has been accounted for as a purchase. 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 charged to operations in the first quarter of fiscal 1998 because the acquired technology had not reached technological feasibility and had no alternative uses. 4. EARNINGS PER SHARE On October 1, 1997, the Company adopted Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share." In accordance with SFAS 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 shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of employee stock options using the treasury stock method. All earnings per share amounts for all periods presented have been restated to conform to SFAS 128 requirements. 7 8 The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- ------ Three months ending June 30, 1997: Basic EPS: Net income $24,120 62,611 $0.39 Effect of dilutive securities: Stock options outstanding -- 2,724 (.02) ------- ------- ----- Diluted EPS: Net income $24,120 65,335 $0.37 ======= ======= ===== Three months ending June 30, 1998: Basic EPS: Net income $34,671 66,104 $0.52 Effect of dilutive securities: Stock options outstanding -- 3,207 (.02) ------- ------- ----- Diluted EPS: Net income $34,671 69,311 $0.50 ======= ======= ===== Nine months ending June 30, 1997: Basic EPS: Net income $55,357 62,039 $0.89 Effect of dilutive securities: Stock options outstanding -- 3,076 (0.04) ------- ------- ----- Diluted EPS: Net income $55,357 65,115 $0.85 ======= ======= ===== Nine months ending June 30, 1998: Basic EPS: Income before extraordinary item $51,929 65,129 $0.80 Extraordinary item 1,869 -- 0.03 ------- ------- ----- Net income $53,798 65,129 $0.83 Effect of dilutive securities: Stock options outstanding -- 3,130 (0.04) ------- ------- ----- Diluted EPS: Net income $53,798 68,259 $0.79 ======= ======= =====
5. 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 June 1998, the notes had a remaining balance of $8.2 million, of which $3.1 million is included in long-term obligations. 6. SUBSEQUENT EVENTS In July 1998, the Company acquired Systems Science, Inc. (SSI) based in Palo Alto, California. SSI is a developer of advanced tools for electronic design verification and test. The acquisition will be accounted for as a purchase with the Company exchanging a combination of cash of $26.0 million and notes of $12.0 8 9 million, for all of the outstanding shares of SSI. In addition, the Company has reserved 318,411 shares of its common stock for issuance under SSI's outstanding stock options, which the Company assumed in the acquisition. Based on preliminary estimates, the Company expects that a substantial portion of the total purchase price will be allocated to in-process research and development and will be charged to operations during the quarter ended September 30, 1998 because the acquired technology has not reached technological feasibility and has no alternative future use. In July 1998, the Company announced that its Board of Directors authorized a systematic stock repurchase program under which up to 3.25 million shares of Synopsys' outstanding common stock may be acquired in the open market at prevailing prices over the next 24 months. The purchases will be funded from available working capital and will be used for ongoing stock issuances such as for existing employee stock plans. 7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board recently issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts. Under SFAS No. 133, entities are now required to carry all derivative instruments in the balance sheet at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. The Company must adopt SFAS No. 133 by October 1, 1999. 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 initial adoption. 9 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. 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 Business Combination. On December 4, 1997, the Company acquired Viewlogic, a Delaware corporation, 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. 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 integrated circuits, printed circuit boards and electronic systems, and provided related services. Viewlogic's IC and system-on-a-chip design products, people and facilities have been merged into the Synopsys organization. Simulation, modeling and hardware-software co-verification products of both companies have been consolidated under a newly created High Level Verification 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. Revenue. Revenue for the third quarter of fiscal 1998 increased 10% to $179.6 million from $162.6 million in the third quarter of fiscal 1997. Revenue for the first nine months of fiscal 1998 increased 11% to $523.9 million from $473.3 million for the comparable period in fiscal 1997. The growth in revenue for both periods was primarily attributable to increased service revenue for both EDA ASIC tools and PCB design systems. Product revenue as a percentage of total revenue decreased to 57% in the third quarter of fiscal 1998, compared to 64% in the third quarter of fiscal 1997. This decrease in product revenue is due to the decline of PCB design systems product revenue, partially offset by growth in EDA ASIC tools revenue. Product revenue as a percentage of total revenue for the first nine months of fiscal 1998 was 60%, compared to 64% for the comparable period in fiscal 1997. The decrease for both periods of fiscal 1998 was due in part to strong 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 has analyzed all of the elements included in its multiple-element arrangements and determined that the Company has sufficient evidence to allocate revenue to 10 11 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 was 41% in the third quarter of fiscal 1998, the same percentage as in the third quarter of fiscal 1997. Although international revenue was constant as a percentage of total revenue, Asia/Pacific revenue decreased as a percentage of revenue in the current quarter compared to the third quarter of fiscal 1997. This decrease was offset by an increase in European revenue in the third quarter of fiscal 1998 compared to the same quarter in fiscal 1997. For the first nine months of fiscal 1998, international revenue was 40% of total revenue, compared to 42% for the comparable period in fiscal 1997. The decrease in international revenue for the first nine months of 1998 was primarily due to a decline in Asia/Pacific revenue as a result of the economic turmoil in many Asia/Pacific markets. However, the year to date decrease was partially offset by growth in European revenue. Cost of Revenue. Cost of revenue was 13% of revenue in the third quarter of fiscal 1998, compared to 14% of revenue in the third quarter of fiscal 1997. The reduction in cost of revenue resulted from lower service costs as a percentage of revenue. Service cost as a percentage of revenue in the third quarter of fiscal 1997 reflects the Company's investment in the infrastructure required to build its training and consulting business. Cost of revenue as a percentage of total revenue remained relatively constant at 13% for the first nine months of fiscal 1998 and 1997. 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. Research and development expenses as a percentage of total revenue decreased to 21% in the third quarter of fiscal 1998 from 23% in the third quarter of fiscal 1997. In absolute dollars, research and development expenses increased slightly to $37.4 million in the third quarter of fiscal 1998 from $37.3 million in the same quarter of fiscal 1997. The increase in absolute dollar amounts was primarily the result of compensation costs resulting from the Company's annual employee performance evaluation in April, offset by expense reductions in the current quarter of fiscal 1998 obtained from the integration of Viewlogic into Synopsys' operations. For the first nine months of fiscal 1998, research and development expenses were 22% of total revenue compared to 23% for the same period in fiscal 1997. In absolute dollars, research and development was $113.7 million for the first nine months of fiscal 1998, compared to $110.4 million for the first nine months of fiscal 1997. The increase in absolute dollar amounts was primarily due to the additional week of operations in the current fiscal year to date compared to the comparable period in the prior year and compensation costs attributable to the Company's annual employee performance evaluation in April, partially offset by expense reductions in the second and third quarters of fiscal 1998 obtained from the integration of Viewlogic into Synopsys' operations. Sales and Marketing. Sales and marketing expenses as a percentage of total revenue decreased to 33% in the third quarter of fiscal 1998 from 37% in the third quarter of fiscal 1997. In absolute dollars, sales and marketing decreased to $58.4 million in the third quarter of fiscal 1998 from $60.0 million in the comparable 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 current quarter of fiscal 1998 from the integration of Viewlogic into Synopsys' operations, partially offset by compensation expenses resulting from the Company's annual employee performance evaluation in April. Sales and marketing expenses were 35% of total revenue for the first nine months of fiscal 1998, compared to 37% for the first nine months of fiscal 1997. In absolute dollars, sales and marketing was $181.9 million for the first nine months of fiscal 1998, compared to $176.1 million for the same period in fiscal 1997. The decrease as a percentage of total revenue was primarily the result of expense reductions in the second and third quarters of fiscal 1998 obtained from the integration of Viewlogic into Synopsys' operations. The increase in absolute dollar amounts was primarily due to an additional week of operations in the current fiscal year to date compared to the comparable period in the prior year; bad debt reserves taken for potential accounts receivable write-offs in Asia in the second quarter of fiscal 1998; and compensation costs attributable to the Company's annual employee performance evaluation in April. These expenditures were partially offset by cost reductions in the second and third quarters of fiscal 1998 obtained from the integration of Viewlogic into Synposys' operations. General and Administrative. General and administrative expenses as a percentage of total revenue decreased slightly to 6% in the third quarter of fiscal 1998 from 7% in the third quarter of fiscal 1997. In absolute dollars, 11 12 general and administrative expenses were $11.6 million in the third quarter of fiscal 1998, compared to $10.8 million in the third quarter of fiscal 1997. The increase in absolute dollar amounts was primarily due to compensation costs attributable to the Company's annual employee performance evaluation in April, partially offset by expense reductions in the current quarter of fiscal 1998 obtained from the integration of Viewlogic into Synopsys' operations. General and administrative expenses as a percentage of total revenue remained relatively constant at 7% for the first nine months of fiscal 1998 and fiscal 1997. In absolute dollars, general and administrative expenses were $36.1 million for the first nine months of fiscal 1998, compared to $33.7 million for the same period in fiscal 1997. The increase in absolute dollar amounts was primarily due to an additional week of operations in the current fiscal year to date compared to the comparable period of the prior year and compensation costs attributable to the Company's annual employee performance evaluation in April. These expenditures were partially offset by cost reductions in the second and third quarters of fiscal 1998 obtained from the integration of Viewlogic into Synopsys' operations. Merger-Related and Other Costs. Primarily in connection with its merger with Viewlogic, the Company recorded an additional charge of $3.1 million for merger-related and other costs in the third quarter of fiscal 1998, resulting in $51.0 million of charges for the first nine months of fiscal 1998. The Company has recorded all charges incurred in connection with the merger. Merger-related and other charges for the first nine months of fiscal 1998 included direct transaction fees for investment bankers, attorneys, accountants, and other related costs of $9.2 million, employee termination and transition costs of $11.8 million, legal and other settlements of $7.1 million, writedown of equipment and other assets of $8.2 million, and redundant facility and other costs of $14.7 million. As of June 30, 1998, there was a balance of $8.5 million in accrued liabilities for expected future cash expenditures. In-Process Research and Development. During the nine month period ended June 30, 1998, the Company acquired two privately held companies in the EDA industry for an aggregate total purchase price of $4.2 million, which was allocated to in-process research and development and charged to operations. Other Income, net. Other income, net increased 16.6% to $6.7 million for the third quarter of fiscal 1998, compared to $5.8 million for the comparable period of the prior year and increased as a percentage of total revenue to 3.7% in the third quarter of fiscal 1998 from 3.5% in the comparable period in the prior year. The increase was primarily due to higher average invested cash and short-term investment balances, which yielded more interest income in the third quarter of fiscal 1998 compared to the comparable period in the prior year. The increase in the invested cash and short-term investment balances during the third quarter and the first nine months of fiscal 1998 resulted primarily from increased profitability from the Company's operations. Other income, net decreased 7.5%, to $18.1 million, compared to $19.5 million for the comparable period of the prior year and decreased as a percentage of total revenue to 3.4% in the first nine months of fiscal 1998 from 4.1% in the first nine months of fiscal 1997. Income Tax Provision. For the first nine months 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 40% of income before taxes for the first nine months of fiscal 1998. The Company does not anticipate any material change to the effective tax rate for the remainder of fiscal 1998. Extraordinary Item. In the first nine months 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. Net income was $34.7 million in the third quarter of fiscal 1998, compared to $24.1 million in the same period of fiscal 1997. For the first nine months of fiscal 1998, net income was $53.8 million, compared to $55.4 million for the first nine months of fiscal 1997. In the absence of the merger-related charges, primarily related to the Company's merger with Viewlogic and the extraordinary gain on retirement of debt, net income would have been $36.7 million in the third quarter of fiscal 1998 and $93.9 million for the first nine months of fiscal 1998. The Company's book-to-bill ratio for the third quarter of fiscal 1998 was above one. The book-to-bill ratio measures the ratio of accepted orders to revenue. 12 13 LIQUIDITY AND CAPITAL RESOURCES For the first nine months of fiscal 1998, cash and short-term investments increased $153.9 million to $588.7 million. The increase in cash and short-term investments was due primarily to cash generated from operations, proceeds from the sale of common stock related to stock options exercised and stock sold under the employee stock purchase plan, and proceeds 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 it has the financial resources needed to meet business requirements, including capital expenditures, working capital requirements, debt obligations outstanding and operating lease commitments for facilities at least through the next twelve months. FACTORS THAT MAY AFFECT FUTURE RESULTS The Company expects that its revenue growth rate during fiscal year 1998 will be lower than it historically has been. Because of a contraction in revenues 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. 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. The Company's orders are seasonal, with the Company's first fiscal quarter typically being the weakest, having a book-to-bill ratio at or below one. 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, and consulting services. As a result, 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. In addition, the Company increasingly receives a disproportionate volume of orders in the last week of the quarter, which makes it more vulnerable to delays in individual orders. 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 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 its 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 bring to market, both by internal development and through acquisition, 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 enhance existing products, develop and/or acquire new products, 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 in a complete design flow. The Company offers a wide range of logic design tools but currently offers a relatively limited range of physical 13 14 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 and for 1999 is uncertain, owing in part to adverse economic conditions in Asia and to potential slowing of growth in the United States. A number of the Company's customers have announced layoffs of their employees, and the Company believes that their overall operating budgets will be more closely monitored, which could result in a lengthening of the sales cycle for EDA tools. In addition, there have been a number of mergers in the semiconductor and systems industries. Slower growth in the semiconductor and systems industries, a reduced number of design starts, or continued consolidation among the Company's customers may 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. Revenue from sales in Japan during fiscal 1998 has been 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 and into fiscal 1999. In addition, recent significant declines in the value of the currencies of many countries in the Asia Pacific region, particularly Korea and Taiwan, have affected the Company's sales in the region. The ongoing weakness in Japan's economy is expected to prolong and deepen the problems in the economies of the rest of Asia Pacific. 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 are 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, 14 15 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. 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. In general the Company's software is not date sensitive. The Company has inspected or tested approximately 80% of its products to determine whether they will be affected by the change in the century and is developing a plan to test all products. None of the Company's tested products experienced significant date-related failures. The Company does not expect that it will experience significant date-related failures with respect to products to be tested or that, if it does, that it will incur substantial costs to fix such failures. In addition, the Company is developing a plan for achieving and maintaining Year 2000 compliance of all current 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 a 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. Most of the Company's systems have been determined to be Year 2000 compliant, including the Company's main enterprise software package. 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 expects that it will spend approximately $5 million to complete its review of its internal business systems. Based on the information available to date, the Company expects that it will not incur material expense to complete its review and to modify or replace non-compliant systems. 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. EUROPEAN MONETARY UNIT The Company's sales to European customers are primarily U.S. dollar based. However, the Company does recognize the emergence of a new monetary unit and the potential importance of such a new monetary unit to its customers residing in the European union. The Company's information systems are capable of functioning in multiple currencies. The Company has already started to make system changes to make all infrastructures capable of operations in the European Monetary Unit. The Company does not expect to incur significant expenses for these system changes. The Company does not expect any disruption in operations due to the European Monetary Unit implementation. 15 16 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 16 17 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 14, 1998 SYNOPSYS, INC. (Registrant) By: /s/ Mark D. Nelson ------------------------------------ Mark D. Nelson Vice President Finance and Controller (Principal Accounting Officer) 17 18 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 27 Financial Data Schedule
EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS SEP-30-1998 OCT-01-1997 JUN-30-1998 166,094 422,645 123,289 12,099 0 738,588 182,591 94,593 896,398 260,641 3,839 0 0 667 625,380 896,398 523,923 523,923 68,108 68,108 382,842 4,028 1,669 87,015 35,086 51,929 0 1,869 0 53,798 .83 .79 FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
-----END PRIVACY-ENHANCED MESSAGE-----