1
EXHIBIT 13.1
Selected Five-Year Financial Data
(IN THOUSANDS,
EXCEPT PER SHARE AND EMPLOYEE DATA) YEAR ENDED SEPTEMBER 30,
1992 1993 1994 1995 1996
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INCOME STATEMENT DATA: (A)
Revenue:
Product $ 71,504 $104,777 $136,475 $180,873 $232,683
Service 20,185 37,926 62,725 84,627 120,817
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Total revenue 91,689 142,703 199,200 265,500 353,500
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Cost of revenue:
Product 12,257 13,617 14,374 15,570 16,510
Service 6,364 9,687 13,398 15,039 22,383
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Total cost of revenue 18,621 23,304 27,772 30,609 38,893
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Gross margin 73,068 119,399 171,428 234,891 314,607
Operating expenses:
Research and development 15,113 25,382 41,301 58,673 84,248
Sales and marketing 38,566 58,975 78,181 101,980 134,086
General and administrative 10,080 12,549 17,046 22,238 27,673
Merger-related costs 1,374 -- 7,400 -- --
In-process research and development -- -- 5,900 9,200 39,700
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Total operating expenses 65,133 96,906 149,828 192,091 285,707
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Operating income 7,935 22,493 21,600 42,800 28,900
Other income, net 781 956 2,054 4,908 6,950
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Income before income taxes 8,716 23,449 23,654 47,708 35,850
Income tax provision 4,118 8,448 9,449 17,408 12,150
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Net income $ 4,598 $ 15,001 $ 14,205 $ 30,300 $ 23,700
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Earnings per share (B) $ .13 $ .41 $ .36 $ .75 $ .57
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Weighted average common shares
and equivalents where dilutive (B) 34,508 36,854 39,038 40,416 41,553
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BALANCE SHEET DATA: (A)
Cash and short-term investments $ 49,814 $ 95,013 $141,213 $209,984 $236,567
Working capital 41,260 64,098 94,756 147,259 157,377
Total assets 101,536 144,389 211,949 297,571 408,967
Long-term obligations 778 -- -- -- 15,970
Total stockholders' equity 63,061 89,364 123,728 182,302 232,747
OTHER DATA:
Permanent employees 621 812 1,060 1,388 1,716
(A) SEE NOTE 3 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS REGARDING THE
COMPANY'S MERGERS WITH LOGIC MODELING CORPORATION AND SILICON ARCHITECTS.
(B) SHARE AND PER SHARE AMOUNTS HAVE BEEN RESTATED FOR ALL PERIODS PRESENTED TO
REFLECT THE TWO-FOR-ONE STOCK SPLIT EFFECTIVE SEPTEMBER 8, 1995.
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Selected Unaudited Quarterly Financial Data (A)
YEAR ENDED SEPTEMBER 30, 1995 YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Revenue:
Product $40,009 $43,707 $47,088 $50,069 $53,749 $56,980 $58,612 $63,342
Service 19,891 20,293 21,012 23,431 25,251 28,020 32,388 35,158
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Total revenue 59,900 64,000 68,100 73,500 79,000 85,000 91,000 98,500
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Cost of revenue:
Product 3,190 5,190 3,364 3,826 3,593 3,930 4,302 4,685
Service 3,408 3,081 3,994 4,556 4,741 5,263 6,240 6,139
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Total cost of revenue 6,598 8,271 7,358 8,382 8,334 9,193 10,542 10,824
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Gross margin 53,302 55,729 60,742 65,118 70,666 75,807 80,458 87,676
Operating expenses:
Research and development 13,232 13,505 15,261 16,675 18,202 20,441 21,921 23,684
Sales and marketing 23,447 24,632 26,202 27,699 30,323 32,599 34,032 37,132
General and administrative 4,923 5,492 5,779 6,044 6,341 6,467 7,005 7,860
In-process research and development -- -- 9,200 -- -- 39,700 -- --
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Total operating expenses 41,602 43,629 56,442 50,418 54,866 99,207 62,958 68,676
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Operating income (loss) 11,700 12,100 4,300 14,700 15,800 (23,400) 17,500 19,000
Other income, net 639 1,169 1,500 1,600 1,850 1,700 1,700 1,700
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Income (loss) before income taxes 12,339 13,269 5,800 16,300 17,650 (21,700) 19,200 20,700
Income tax provision (benefit) 4,533 4,951 2,088 5,836 6,000 (7,400) 6,528 7,022
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Net income (loss) $ 7,806 $ 8,318 $ 3,712 $ 10,464 $ 11,650 $(14,300) $12,672 $13,678
Earnings (loss) per share (B) $ 0.20 $ 0.21 $ 0.09 $ 0.25 $ 0.28 $ (0.36) $ 0.30 $ 0.32
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Weighted average common shares
and equivalents where dilutive (B) 39,554 40,050 40,760 41,299 41,632 39,494 42,556 42,530
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Market price range (B)
High $24.25 $27.38 $31.38 $34.50 $38.50 $37.75 $46.75 $50.50
Low $19.75 $21.38 $23.50 $28.13 $23.00 $27.50 $29.75 $30.75
AS A PERCENTAGE OF TOTAL REVENUE
Revenue:
Product 67% 68% 69% 68% 68% 67% 64% 64%
Service 33 32 31 32 32 33 36 36
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Total revenue 100 100 100 100 100 100 100 100
Cost of revenue:
Product 5 8 5 5 5 5 5 5
Service 6 5 6 6 6 6 7 6
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Total cost of revenue 11 13 11 11 11 11 12 11
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Gross margin 89 87 89 89 89 89 88 89
Operating expenses:
Research and development 22 21 22 23 23 24 24 24
Sales and marketing 39 38 38 38 38 38 37 38
General and administrative 8 9 9 8 8 8 8 8
In-process research and development -- -- 14 -- -- 47 -- --
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Total operating expenses 69 68 83 69 69 117 69 70
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Operating income (loss) 20 19 6 20 20 (28) 19 19
Other income, net 1 2 2 2 2 2 2 2
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Income (loss) before income taxes 21 21 8 22 22 (26) 21 21
Income tax provision (benefit) 8 8 3 8 7 (9) 7 7
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Net income (loss) 13% 13% 5% 14% 15% (17)% 14% 14%
(A) SEE NOTE 3 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS REGARDING THE
COMPANY'S MERGER WITH SILICON ARCHITECTS.
(B) THE COMPANY'S COMMON STOCK IS TRADED IN THE OVER-THE-COUNTER MARKET ON THE
NASDAQ NATIONAL MARKET SYSTEM UNDER THE SYMBOL "SNPS." AT OCTOBER 31, 1996,
THERE WERE APPROXIMATELY 277 OWNERS OF RECORD OF THE COMPANY'S COMMON STOCK. THE
COMPANY HAS NOT PAID CASH DIVIDENDS AND DOES NOT ANTICIPATE PAYING CASH
DIVIDENDS IN THE FORESEEABLE FUTURE. SHARE AND PER SHARE AMOUNTS HAVE BEEN
RESTATED FOR ALL PERIODS PRESENTED TO REFLECT THE TWO-FOR-ONE STOCK SPLIT
EFFECTIVE SEPTEMBER 8, 1995.
3
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
The following table sets forth operating results as a percentage of total
revenue for fiscal 1994, 1995, and 1996 and the percentage change of such
results compared to the prior year.
PERCENTAGE OF TOTAL REVENUE PERCENTAGE CHANGE
1994 1995 1996 1994-1995 1995-1996
Revenue:
Product 69% 68% 66% 33% 29%
Service 31 32 34 35 43
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Total revenue 100 100 100 33 33
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Cost of revenue:
Product 7 6 5 8 6
Service 7 6 6 12 49
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Total cost of revenue 14 12 11 10 27
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Gross margin 86 88 89 37 34
Operating expenses:
Research and development 21 22 24 42 44
Sales and marketing 39 38 38 30 31
General and administrative 8 8 8 30 24
Merger-related costs 4 -- -- (100) --
In-process research and development 3 4 11 56 332
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Total operating expenses 75 72 81 28 49
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Operating income 11 16 8 98 (32)
Other income, net 1 2 2 139 42
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Income before income taxes 12 18 10 102 (25)
Income tax provision 5 7 3 84 (30)
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Net income 7% 11% 7% 113% (22)%
Except for the historical information presented, the following discussion
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed below in "Factors That May Affect Future Results."
Corporate agreements, relationships, and acquisitions of complementary
businesses are part of the Company's overall business strategy. Technical
relationships and acquisitions accommodate the Company's focused strategic
requirements by filling gaps in existing products or technologies and providing
the Company with an avenue into new lines of business. The Company will continue
to evaluate potential alliances which could result in additional business
combinations and corporate relationships in the future. There can be no
assurance that the Company will be successful in these efforts.
CORPORATE AGREEMENTS AND RELATIONSHIPS
On February 1, 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). Pursuant to the
Agreement, the Company
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acquired certain in-process research and development technology and a
non-exclusive license to sublicense and to use certain existing IBM electronic
design automation (EDA) technology and the underlying intellectual property, and
licensed certain of its EDA-related intellectual property to IBM. In addition,
the Company and IBM are jointly developing new EDA products in the areas of
synthesis, test methodology, design planning, and static timing sign-off. The
Company will have sole ownership of synthesis products and the exclusive right
to market test, design planning, and static timing products (subject to certain
rights of IBM upon termination of the Agreement). In accordance with the
Agreement, the Company paid IBM $11.0 million in cash and issued $30.0 million
in notes, which bear interest at three percent, and are payable to IBM upon the
earlier of achievement of scheduled milestones or at maturity in 2006. The notes
were recorded at fair value of $28.5 million, using a discount rate commensurate
with the risks involved. The Company will also pay royalties on revenues from
the sale of new products developed pursuant to the Agreement. As a result of the
transaction, the Company incurred an in-process research and development charge
of $39.7 million in the second quarter of fiscal 1996.
On May 7, 1996, the Company and Cooper and Chyan Technology, Inc. (CCT), a
developer of routing technology for printed circuit boards and integrated
circuits, entered into a strategic relationship. As part of this strategic
relationship, the Company purchased 1.2 million shares, approximately 9.9
percent of the outstanding shares of CCT, for $14.50 per share. In accordance
with Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," the investment has been
classified as "available for sale," and an unrealized gain of $8.3 million, net
of taxes, was recorded as a separate component of stockholders' equity during
fiscal year 1996. CCT and Cadence Design Systems, Inc. recently announced that
they had reached an agreement to merge. The Company is evaluating the effect of
such a merger on its relationship with CCT.
MERGERS AND ACQUISITIONS
On February 16, 1994, the Company issued approximately 5.2 million shares of its
common stock in exchange for all the outstanding shares of capital stock, vested
stock options, and warrants of Logic Modeling Corporation (LMC), a developer of
simulation models and modeling technologies for the verification of electronic
designs. The merger was accounted for as a pooling of interests and,
accordingly, the Company's consolidated financial statements have been restated
for all periods.
On May 31, 1994, the Company acquired all the outstanding stock of Cadis GmbH
(Cadis) for approximately $3.6 million in cash and notes. Cadis was a software
developer specializing in digital signal processing design. On September 30,
1994, the Company acquired all the outstanding stock of Arcad SA (Arcad) for
approximately $1.5 million in cash and notes. Arcad was a software developer of
VHDL models specializing in telecommunications standards. These acquisitions
were accounted for by the purchase method of accounting, and the results of
operations of Cadis and Arcad are included in the Company's consolidated results
of operations since the dates of the acquisitions. The purchase price,
acquisition costs, and net liabilities assumed total $7.3 million, of which $5.9
million was allocated to in-process research and development expense.
On May 10, 1995, the Company issued approximately 1.4 million shares of its
common stock in exchange for all the outstanding shares of capital stock and
warrants of Silicon Architects, a developer of design technology for complex
application specific integrated circuits (ASICs) and application specific
standard products (ASSPs). Additionally, options to acquire shares of Silicon
Architects' common stock were exchanged for options to acquire approximately
148,000 shares of the Company's common stock. The merger was accounted for as a
pooling of interests and, accordingly, the Company's consolidated financial
statements have been restated for all periods.
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On June 28, 1995, the Company acquired all the outstanding securities of ARKOS
Design, Inc. (ARKOS) for approximately $9.3 million in cash and notes. The notes
had a balance of $3.1 million at September 30, 1996, mature at various dates
through 2005, contain certain provisions that could accelerate maturity, and are
included in current liabilities. The Company recently introduced a product based
on ARKOS technology that supports high-speed validation of integrated circuits
(ICs). The acquisition was accounted for by the purchase method of accounting,
and the results of operations of ARKOS are included in the Company's
consolidated results since the date of the acquisition. The purchase price,
acquisition costs, and net liabilities assumed total $9.7 million, of which $9.2
million was allocated to in-process research and development expense.
REVENUE
The Company's revenue increased by 33% from $199.2 million in fiscal 1994 to
$265.5 million in fiscal 1995 and by 33% from fiscal 1995 to $353.5 million in
fiscal 1996. The percentage of the Company's total revenue attributable to
software and systems products decreased from 69% in fiscal 1994 to 68% in fiscal
1995 and to 66% in fiscal 1996, primarily due to an increase in the Company's
base of installed software and the associated increase in maintenance and
support, customer training, and consulting revenue. To date, price increases
have not been a material factor in the Company's revenue growth.
Product revenue increased by 33% from $136.5 million in fiscal 1994 to $180.9
million in fiscal 1995 and by 29% from fiscal 1995 to $232.7 million in fiscal
1996. These increases were primarily due to increased worldwide licensing and
sales of the Company's software and systems products.
Service revenue increased by 35% from $62.7 million in fiscal 1994 to $84.6
million in fiscal 1995 and by 43% from fiscal 1995 to $120.8 million in fiscal
1996. These increases were primarily attributable to continued growth of the
installed customer base and the renewal of maintenance and support contracts.
Revenue from international operations was $94.5 million, $138.0 million, and
$173.2 million or 48%, 52%, and 49% of total revenue in fiscal 1994, 1995, and
1996, respectively. The 1996 decrease in international revenue as a percentage
of total revenue was primarily due to decreased revenue in Japan as a percentage
of total revenue, which was attributable to a decline in the value of the yen
versus the dollar.
Revenue consists of fees for licenses and subscriptions of the Company's
software products, sales of systems products, maintenance and support, customer
training, and consulting. License revenue is recognized upon shipment of
products and fulfillment of significant acceptance terms, if any. When the
Company receives advance payment for software products, such payments are
recorded as advances and recognized as revenue when products are actually
shipped. The Company has fulfilled certain orders by shipping the product and
providing a temporary access key for software usage. Revenue is deferred until
the Company provides a production key and collectability is reasonably assured.
Revenue from systems products is recognized upon shipment of products and
fulfillment of significant acceptance terms, if any. Revenue from subscriptions
is deferred and recognized ratably over the term that subscription services are
provided, generally twelve months. Maintenance and support revenue is deferred
and recognized ratably over the term of the maintenance agreement, which is
typically twelve months. Revenue from customer training and consulting is
recognized as the service is performed.
COST OF REVENUE
Cost of product revenue includes cost of production personnel, product
packaging, documentation, amortization of capitalized software development
costs, and costs of the Company's systems products. The cost of internally
developed capitalized software is amortized based on the greater of the ratio of
current product revenue to the total of current and anticipated product revenue
or the straight-line method over the software's estimated economic life of
approximately two years. Cost of product revenue was 7%, 6%, and 5% of total
revenue in fiscal 1994, 1995, and 1996,
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respectively. Cost of service revenue includes personnel and the related costs
associated with providing such service. Although service revenue increased as a
percentage of total revenue in each fiscal year presented, cost of service
revenue as a percentage of total revenue was 7% of total revenue in fiscal 1994
and declined to 6% of total revenue in fiscal 1995 and 1996. Cost of product
revenue and cost of service revenue as a percentage of total revenue both
decreased because personnel and related costs increased at a slower rate than
revenue.
RESEARCH AND DEVELOPMENT
The Company believes that significant investment for product research and
development is essential to product and technical leadership. Research and
development expenses increased by 42% from $41.3 million in fiscal 1994 to $58.7
million in fiscal 1995 and by 44% from fiscal 1995 to $84.2 million in fiscal
1996, net of capitalized software development costs. These increases were
primarily attributable to increases in personnel and personnel-related costs
associated with the development of new products and enhancement of existing
products. In addition, during fiscal 1996, the Company incurred hardware
prototype expenses associated with the development of the ARKOS emulation
product. Research and development expenses represented 21%, 22%, and 24% of
total revenue in fiscal 1994, 1995, and 1996, respectively, representing the
Company's ongoing commitment to invest substantial resources in research and
development. The Company expects continued growth in research and development
expenses, provided that the Company is able to continue to hire a sufficient
number of qualified personnel. The Company expects that for fiscal 1997,
research and development expenses as a percentage of total revenue will remain
approximately at the fiscal 1996 level.
The Company capitalizes software development costs after technological
feasibility of the product has been established in accordance with SFAS No. 86.
The Company capitalized software development costs of $1.5 million in fiscal
1994 and $1.0 million in fiscal years 1995 and 1996, which represented
approximately 4%, 2%, and 1% of total research and development expenses, in
fiscal 1994, 1995, and 1996, respectively. See Note 1 of Notes to Consolidated
Financial Statements.
SALES AND MARKETING
Sales and marketing expenses increased by 30% from $78.2 million in fiscal 1994
to $102.0 million in fiscal 1995 and by 31% from fiscal 1995 to $134.1 million
in fiscal 1996. Sales and marketing expenses represented 39% of total revenue in
1994 and 38% of total revenue in both fiscal years 1995 and 1996. Total expenses
increased in each fiscal year due to the expansion of the Company's worldwide
sales and marketing organizations, higher incentive compensation associated with
increased revenue, and participation in domestic and international conferences
and trade shows. The Company expects that for fiscal 1997, sales and marketing
expenses as a percentage of total revenue will be at or slightly lower than the
fiscal 1996 level.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased by 30% from $17.0 million in
fiscal 1994 to $22.2 million in fiscal 1995 and by 24% from fiscal 1995 to $27.7
million in fiscal 1996. General and administrative expenses represented 8% of
total revenue in each of the three years presented. Expenses increased primarily
due to an increase in personnel and the investment associated with the
implementation of an enterprise-wide database and management information system,
based principally on software from SAP AG. The Company expects that for fiscal
1997, general and administrative expenses as a percentage of total revenue will
be at or slightly lower than the fiscal 1996 level.
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MERGER-RELATED COSTS
In fiscal 1994, in connection with the LMC merger, the Company recorded related
costs of approximately $7.4 million, primarily for transaction costs and
elimination of duplicate facilities and equipment. These estimated costs were
reduced by $900,000 in fiscal 1995.
In fiscal 1995, in connection with the Silicon Architects merger, the Company
recorded related costs of approximately $900,000. These nonrecurring costs
primarily consisted of contract cancellation charges, transaction fees, and the
elimination of duplicate facilities and equipment.
OTHER INCOME
Other income consists of interest income, interest expense, and miscellaneous
income and expense items. Other income was $2.1 million, $4.9 million, and $7.0
million in fiscal 1994, 1995, and 1996, respectively. Other income increased in
each fiscal year primarily as a result of earnings on higher cash and short-term
investment balances. In fiscal 1996, interest expense increased due primarily to
the notes associated with the IBM Agreement.
INCOME TAX PROVISION
The provision for income taxes was $9.4 million, $17.4 million, and $12.2
million in fiscal 1994, 1995, and 1996, respectively. The provision for income
taxes as a percentage of pretax income was 40%, 36%, and 34% in fiscal 1994,
1995, and 1996, respectively. The tax rate in fiscal 1994 was higher than the
rates in fiscal 1995 and 1996 primarily due to items related to mergers and
acquisitions.
NET INCOME
The Company reported net income of $14.2 million, $30.3 million, and $23.7
million, or 7%, 11%, and 7% of total revenue in fiscal 1994, 1995, and 1996,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, Synopsys had $236.6 million of cash and short-term
investments available to finance future growth. In fiscal 1996, cash and
short-term investments increased by $26.6 million primarily attributable to cash
flows from operations of $88.3 million, and proceeds from the sale of common
stock of $28.0 million. These positive cash flows were partially off-set by
capital expenditures of $39.2 million, the investment in Cooper and Chyan
Technology of $17.5 million, cash paid in relation to the IBM Agreement of $11.5
million, and the repurchase of common stock of $14.8 million.
In May 1996, the Company announced that its Board of Directors had authorized
the repurchase of up to 2.0 million shares of its outstanding common stock in
the open market over the next 24 months. During fiscal 1996, the Company
purchased 361,494 shares at an average price of approximately $41.00 per share.
The repurchased shares are available for use under the Company's employee stock
plans and for other corporate purposes. All shares repurchased during fiscal
1996 were reissued by the end of the year.
The Company also had available three foreign exchange lines of credit totaling
$169.0 million to facilitate foreign currency transactions. The Company enters
into forward exchange contracts to hedge foreign currency denominated
intercompany balances. Gains and losses on contracts to hedge foreign currency
commitments are recognized during the periods in which the related instruments
are outstanding. At September 30, 1996, the Company had outstanding forward
contracts in yen and European currencies totaling approximately $4.1 million.
The forward exchange contracts are valued at prevailing market rates.
The Company believes that its current cash balances, anticipated cash flows from
operations and the existing credit facilities will be sufficient to fund the
Company's cash needs for at least the next twelve months.
8
FACTORS THAT MAY AFFECT FUTURE RESULTS
When used in the following discussion, the words "projects," "expects," and
similar expressions are intended to identify forward-looking statements. Such
statements, and the Company's results, are subject to certain risks and
uncertainties, including those discussed below, that could cause actual results
to differ materially from those projected or estimated.
The EDA industry is highly competitive. The Company's products compete with
similar products from other vendors and compete with other EDA products and
services for a share of the EDA budgets of their customers. Historically, much
of the Company's growth has been attributable to the strength of its synthesis
products, a market segment in which the Company is currently the leading
supplier. Opportunities for growth in market share in this segment are limited.
The EDA industry as a whole is experiencing rapid change. Technology advances
and market requirements are fueling a change in the nature of competition among
EDA vendors. Advances in semiconductor technology are expected to create a need
for tighter integration between logic design and physical design, and companies
will increasingly compete over "design flows" involving a broad range of
products and services rather than individual design tools.
No single EDA company currently offers its customers industry leading products
for a complete design flow. Presently, the Company does not offer physical
design tools, a market which is currently dominated by Cadence Design Systems,
Inc. and Avant! Corporation, and trails Cadence in its capacity to offer design
services. In May 1996, the Company entered into a strategic relationship with
Cooper & Chyan Technology, Inc. (CCT) to link the Company's existing synthesis
products and its design planning products under development with CCT's routing
technology. Cadence and CCT have announced their intention to merge. The Company
is evaluating the effect of such a merger on its relationship with CCT.
The Company is seeking to develop a balanced product portfolio. Among the most
important new products offered by the Company are its Behavioral Compiler,
Cell-Based Array, ARKOS hardware emulator, and Cyclone simulation accelerator
products. These products have achieved initial market acceptance, but the
Company will only derive significant revenue from these products if they are
accepted by a broad range of customers, which cannot be assured.
The Company's business has benefited from the rapid worldwide growth of the
semiconductor industry. The semiconductor industry grew relatively slowly for
most of 1996. Despite recent reports of improving conditions in the industry,
the outlook for 1997 remains uncertain. Slower growth in the semiconductor
industry could have an adverse effect on the Company's performance.
The Company attempts to manage its business to achieve quarter-to-quarter
revenue and earnings growth. The ability to manage such growth is affected by a
number of factors, including customer product demand, product license terms, the
size of the Company's backlog, and decisions regarding the timing of revenue
recognition. In recent years, the management of revenue and earnings growth has
become more difficult as a result of a number of factors. The Company's orders
have become more seasonal, with higher volumes in the second and fourth quarters
of the Company's fiscal year, and disproportionately weighted toward the latter
part of the quarter. The average order size has also increased. In addition, an
increasing amount of the Company's orders involve products and services which
yield revenue over multiple quarters (often extending beyond the current fiscal
year) or at the end of the contract rather than at the time of sale, including
time-based product licenses, consulting services, development contracts, and CBA
licenses and royalties. Because of these trends, the Company's ability to
convert backlog to revenue in any quarter is less certain than it historically
has been, despite an increase in overall backlog levels. It is possible for the
Company to experience historical levels of orders growth while experiencing a
slower rate of revenue and earnings growth. Conversely, for
9
a given quarter it is also possible for the Company to maintain steady revenue
and earnings growth while experiencing a slower rate of orders growth.
Ultimately, long-term revenue and earnings growth is dependent upon the
successful development and sale of the Company's products and services over a
sustained period of time.
The Company's operating expenses are based in part on its expectations of future
revenue, and expense levels are generally committed in advance of revenue. The
Company continues to expand and increase its operating expenses in order to
generate and support additional revenue in the future. If revenue does not
materialize as expected, the Company's results of operations are likely to be
adversely affected. Net income may be disproportionately affected by a reduction
in revenue because only a small portion of the Company's expenses varies with
its revenue.
In recent years, international revenue has accounted for approximately half of
the Company's revenue. As a result, the Company's financial performance could be
negatively affected by such factors as changes in foreign currency exchange
rates and changes in regional or worldwide economic or political conditions. In
particular, revenue from sales in Japan during fiscal 1996 was adversely
affected by a decline in the value of the yen against the dollar. Continued
weakness in the value of the yen could adversely affect revenue from Japan
during fiscal year 1997.
In February 1996, the Company entered into a six-year joint development and
license agreement with IBM, pursuant to which the Company and IBM will jointly
develop certain new products that the Company believes are important to the
long-term growth of its business. The Company has not previously entered into a
joint development agreement of this scope. Joint development of products is
subject to risks and uncertainties over and above those affecting internal
development, and there can be no assurance that the Company's joint development
efforts will be successful.
The Company's success is dependent on technical and other contributions of key
individuals, and there can be no assurance that the Company can continue to
recruit and retain such key personnel.
The Company's stock price, like that of other technology companies, is subject
to significant volatility. Past financial performance should not be considered a
reliable indicator of future performance, and investors should not use
historical trends to anticipate results or trends in future periods. If revenues
or earnings in any quarter fail to meet expectations of the investment
community, there could be an immediate and significant impact on the Company's
stock price. In addition, the Company's stock price may be affected by broader
market trends that may be unrelated to the Company's performance.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the recorded amounts of assets and liabilities, disclosure of those
assets and liabilities at the date of the financial statements and the recorded
amounts of expenses during the reporting period. A change in the facts and
circumstances surrounding these estimates could result in a change to the
estimates and impact future operating results.
10
Report of Independent Auditors
TO THE BOARD OF DIRECTORS
AND STOCKHOLDERS OF SYNOPSYS, INC.:
We have audited the accompanying consolidated balance sheets of Synopsys, Inc.
and subsidiaries as of September 30, 1995 and 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the years
in the three-year period ended September 30, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Synopsys, Inc. and subsidiaries as of September 30, 1995 and 1996,
and the results of their operations and their cash flows for each of the years
in the three-year period ended September 30, 1996, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Palo Alto, California
October 18, 1996
11
Consolidated Statements of Income
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1994 1995 1996
- -------------------------------------------------------------------------------------------------
Revenue:
Product $136,475 $180,873 $232,683
Service 62,725 84,627 120,817
-------------------------------------------
Total revenue 199,200 265,500 353,500
-------------------------------------------
Cost of revenue:
Product 14,374 15,570 16,510
Service 13,398 15,039 22,383
-------------------------------------------
Total cost of revenue 27,772 30,609 38,893
-------------------------------------------
Gross margin 171,428 234,891 314,607
Operating expenses:
Research and development 41,301 58,673 84,248
Sales and marketing 78,181 101,980 134,086
General and administrative 17,046 22,238 27,673
Merger-related costs 7,400 -- --
In-process research and development 5,900 9,200 39,700
-------------------------------------------
Total operating expenses 149,828 192,091 285,707
-------------------------------------------
Operating income 21,600 42,800 28,900
-------------------------------------------
Other income (expense):
Interest income 3,035 6,282 8,509
Interest and other expense (981) (1,374) (1,559)
-------------------------------------------
Total other income 2,054 4,908 6,950
-------------------------------------------
Income before income taxes 23,654 47,708 35,850
Income tax provision 9,449 17,408 12,150
-------------------------------------------
Net income $ 14,205 $ 30,300 $ 23,700
-------------------------------------------
Earnings per share $ .36 $ .75 $ .57
-------------------------------------------
Weighted average common shares
and equivalents where dilutive 39,038 40,416 41,553
See accompanying notes.
12
Consolidated Balance Sheets
SEPTEMBER 30,
(IN THOUSANDS, EXCEPT SHARE DATA) 1995 1996
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 91,193 $ 33,904
Short-term investments 118,791 202,663
--------------------------
Cash and short-term investments 209,984 236,567
Accounts receivable, net of allowances of $2,813 and $3,661, respectively 42,863 61,085
Prepaid expenses, deferred taxes and other 9,681 19,975
--------------------------
Total current assets 262,528 317,627
--------------------------
Property and equipment, net 28,720 51,537
Capitalized software development costs, net of accumulated amortization
of $1,680 and $2,805, respectively 1,271 1,146
Long-term investment -- 30,495
Other assets 5,052 8,162
--------------------------
Total assets $297,571 $408,967
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,563 $ 11,509
Accrued liabilities 40,181 59,072
Current portion of long-term debt 4,061 11,580
Income taxes payable 9,908 12,091
Deferred revenue 52,556 65,998
--------------------------
Total current liabilities 115,269 160,250
--------------------------
Long-term debt -- 15,970
Commitments
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized
and no shares outstanding -- --
Common stock, $.01 par value; 100,000,000 shares authorized;
38,970,504 and 40,434,563 shares outstanding, respectively 390 404
Additional paid-in capital 124,322 152,187
Retained earnings 57,838 72,257
Cumulative translation adjustment (248) (402)
Net unrealized gain on investment -- 8,301
--------------------------
Total stockholders' equity 182,302 232,747
--------------------------
Total liabilities and stockholders' equity $297,571 $408,967
==========================
SEE ACCOMPANYING NOTES.
13
Consolidated Statements of Stockholders' Equity
(IN THOUSANDS, ADDITIONAL CUMULATIVE UNREALIZED
EXCEPT SHARE DATA) COMMON STOCK PAID-IN RETAINED TRANSLATION GAIN ON TREASURY
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT INVESTMENT STOCK TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at
September 30, 1993 33,667,696 $ 337 $ 77,001 $ 12,786 $(760) $ -- $ -- $ 89,364
Merger with Silicon
Architects 1,095,995 11 602 547 -- -- -- 1,160
Issuance of Silicon
Architects' common stock
prior to the merger 247,476 3 2,981 -- -- -- -- 2,984
Net exercise of warrants 39,398 -- 173 -- -- -- -- 173
Stock issued under stock
option and stock purchase
plans 2,019,334 20 8,974 -- -- -- -- 8,994
Tax benefit associated with
exercise of stock options -- -- 6,700 -- -- -- -- 6,700
Translation adjustment -- -- -- -- 148 -- -- 148
Net income -- -- -- 14,205 -- -- -- 14,205
--------------------------------------------------------------------------------------------------
Balance at
September 30, 1994 37,069,899 371 96,431 27,538 (612) -- -- 123,728
Net exercise of warrants 7,432 -- 90 -- -- -- -- 90
Stock issued under stock
option and stock purchase
plans 1,893,173 19 19,701 -- -- -- -- 19,720
Tax benefit associated with
exercise of stock options -- -- 8,100 -- -- -- -- 8,100
Translation adjustment -- -- -- -- 364 -- -- 364
Net income -- -- -- 30,300 -- -- -- 30,300
--------------------------------------------------------------------------------------------------
Balance at
September 30, 1995 38,970,504 390 124,322 57,838 (248) -- -- 182,302
Acquisition of treasury
stock (361,494) -- -- -- -- -- (14,817) (14,817)
Stock issued under stock
option and stock purchase
plans 1,825,553 14 22,424 (9,281) -- -- 14,817 27,974
Tax benefit associated with
exercise of stock options -- -- 5,441 -- -- -- -- 5,441
Translation adjustment -- -- -- -- (154) -- -- (154)
Net unrealized gain on
investment -- -- -- -- -- 8,301 -- 8,301
Net income -- -- -- 23,700 -- -- -- 23,700
--------------------------------------------------------------------------------------------------
Balance at
September 30, 1996 40,434,563 $ 404 $152,187 $ 72,257 $(402) $8,301 $ -- $ 232,747
==================================================================================================
SEE ACCOMPANYING NOTES.
14
Consolidated Statements of Cash Flows
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS) 1994 1995 1996
- ---------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 14,205 $ 30,300 $ 23,700
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 12,213 15,548 18,721
Interest accretion on notes payable -- -- 470
Provision for doubtful accounts and sales returns 443 913 848
Tax benefit associated with stock options 6,700 8,100 5,441
Deferred revenue 16,635 10,731 13,442
Deferred taxes (900) (1,725) (11,944)
Merger-related costs 3,724 -- --
In-process research and development 5,900 9,200 39,700
Net changes in operating assets and liabilities:
Accounts receivable (13,343) (9,078) (19,070)
Prepaid expenses and other (2,148) (105) (3,019)
Other assets (1,967) 793 (3,129)
Accounts payable (594) 927 2,946
Accrued liabilities 12,290 4,156 17,993
Income taxes payable 624 6,960 2,183
-------------------------------------
Net cash provided by operating activities 53,782 76,720 88,282
-------------------------------------
Cash flows from investing activities:
Change in short-term investments (30,761) (29,519) (83,872)
Purchases of property and equipment (13,444) (20,858) (39,221)
Purchase of technology and related costs -- -- (11,500)
Purchase of long-term investment -- -- (17,500)
Capitalization of software development costs (1,539) (1,000) (1,000)
Purchase of businesses, net of cash acquired (4,512) (6,265) --
-------------------------------------
Net cash used in investing activities (50,256) (57,642) (153,093)
-------------------------------------
Cash flows from financing activities:
Principal payments under capital lease obligations (386) -- --
Principal payments under debt obligations -- -- (5,481)
Proceeds from sale of common stock, net 12,151 19,810 27,974
Purchases of treasury stock -- -- (14,817)
-------------------------------------
Net cash provided by financing activities 11,765 19,810 7,676
-------------------------------------
Effect of exchange rate changes on cash 148 364 (154)
-------------------------------------
Net increase (decrease) in cash and cash equivalents 15,439 39,252 (57,289)
Cash and cash equivalents, beginning of year 36,502 51,941 91,193
-------------------------------------
Cash and cash equivalents, end of year $ 51,941 $ 91,193 $ 33,904
=====================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ -- $ -- $ 685
Income taxes $ 1,218 $ 1,946 $ 16,400
Non-cash transactions:
Purchase of technology for notes $ -- $ -- $ 28,500
SEE ACCOMPANYING NOTES.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR END Synopsys, Inc. (Synopsys or the Company), has a fiscal year end
that ends on the Saturday nearest September 30. Fiscal 1994, 1995, and 1996 were
52-week years. For presentation purposes, the consolidated financial statements
and notes refer to the calendar month end.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of the Company and all of its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
FOREIGN CURRENCIES The functional currency of Synopsys' foreign subsidiaries is
the local currency. Synopsys translates all assets and liabilities to U.S.
dollars at the current exchange rates as of the applicable balance sheet date.
Revenue and expenses are translated at the average exchange rates prevailing
during the period. Gains and losses resulting from the translation of the
foreign subsidiaries' financial statements are reported as a separate component
of stockholders' equity. The net gains and losses resulting from hedging
intercompany balances were not significant.
REVENUE RECOGNITION Revenue consists of fees for licenses and subscriptions of
the Company's software products, sales of system products, maintenance and
support, customer training, and consulting. License revenue is recognized upon
shipment of products and fulfillment of significant acceptance terms, if any.
When the Company receives advance payment for software products, such payments
are recorded as advances and recognized as revenue when products are actually
shipped. The Company has fulfilled certain orders by shipping the product and
providing a temporary access key for software usage. Revenue is deferred until
the Company provides a production key and collectability is reasonably assured.
Revenue from systems products is recognized upon shipment of products and
fulfillment of significant acceptance terms, if any. Revenue from subscriptions
is deferred and recognized ratably over the term that subscription services are
provided, generally twelve months. Maintenance and support revenue is deferred
and recognized ratably over the term of the maintenance agreement, which is
typically twelve months. Revenue from customer training and consulting is
recognized as the service is performed.
PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation
and amortization are provided using the straight-line method over the estimated
useful lives of property and equipment (three to five years) or the term of the
applicable lease. Property and equipment detail is as follows:
SEPTEMBER 30,
-------------------
(IN THOUSANDS) 1995 1996
- -------------------------------------------------------
Computer and other equipment $ 46,801 $ 72,626
Furniture and fixtures 8,174 10,844
Leasehold improvements 4,518 9,025
-------------------
59,493 92,495
Less accumulated depreciation
and amortization (30,773) (40,958)
-------------------
$ 28,720 $ 51,537
===================
SOFTWARE DEVELOPMENT COSTS Capitalization of computer software development costs
begins upon the establishment of technological feasibility. Software development
costs capitalized were approximately $1,539,000, $1,000,000, and $1,000,000 in
fiscal 1994, 1995, and 1996, respectively.
Amortization of computer software development costs is computed as the greater
of the ratio of current product revenue to the total of current and anticipated
product revenue or the straight-line method over the software's estimated
economic life of approximately two years. Amortization amounted to approximately
$1,229,000, $879,000, and $1,125,000 in fiscal 1994, 1995, and 1996,
respectively.
STOCK SPLIT On August 14, 1995, the Company announced a two-for-one stock split
of its common stock payable in the form of a stock dividend which was
distributed on September 8, 1995, to holders of record on August 25, 1995. All
share, per share, authorized, common stock, and additional paid-in capital
amounts have been restated for all periods presented to reflect the stock split.
16
EARNINGS PER SHARE Earnings per share is computed using the weighted average
number of common and dilutive common equivalent shares outstanding during the
period. Dilutive common equivalent shares consist of common stock issuable upon
exercise of stock options and warrants using the treasury stock method.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers all highly
liquid investments with a maturity of less than three months at the time of
purchase to be cash equivalents. Short-term investments include tax-exempt
municipal securities which have underlying maturities of less than one year or
contain put options that are either supported by a letter of credit from a
top-rated bank or insurance company or are over collateralized for redemption at
par at the reset date. Therefore, the underlying maturity for certain items may
exceed one year. At September 30, 1996, the underlying maturities of the
short-term investments are as follows: $106,837,000 within one year, $2,080,000
within one to five years, $10,015,000 within five to ten years, and $83,731,000
after ten years.
The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." All cash equivalents, short-term
investments, and noncurrent investments have been classified as
available-for-sale securities and consisted of the following:
SEPTEMBER 30, 1995
UNREALIZED UNREALIZED ESTIMATED
(IN THOUSANDS) COST GAINS LOSSES FAIR VALUE
- --------------------------------------------------------------------------------------------
Classified as current assets:
Tax-exempt com-
mercial paper $ 34,533 $-- $-- $ 34,533
Tax-exempt
municipal
obligations 65,889 -- -- 65,889
Money market
preferred stock 43,384 -- -- 43,384
Municipal
auction rate
preferred stock 9,518 -- -- 9,518
----------------------------------------------------
Total securities $153,324 $-- $-- $153,324
====================================================
SEPTEMBER 30, 1996
UNREALIZED UNREALIZED ESTIMATED
(IN THOUSANDS) COST GAINS LOSSES FAIR VALUE
- ---------------------------------------------------------------------------------------------------
Classified as current assets:
Tax-exempt com-
mercial paper $ 6,000 $ -- $-- $ 6,000
Tax-exempt
municipal
obligations 107,712 -- -- 107,712
Money market
preferred stock 77,005 -- -- 77,005
Municipal
auction rate
preferred stock 17,946 -- -- 17,946
--------------------------------------------------------
208,663 -- -- 208,663
Classified as non-current assets:
Equity securities 17,500 12,995 -- 30,495
--------------------------------------------------------
Total securities $226,163 $12,995 $-- $239,158
========================================================
At September 30, 1995, $34,533,000 and $118,791,000 are classified as cash
equivalents and short-term investments, respectively. At September 30, 1996,
$6,000,000 and $202,663,000 are classified as cash equivalents and short-term
investments, respectively. The adjustment to unrealized holding gains on
available-for-sale securities included as a separate component of stockholders'
equity totaled $8,301,000, net of tax, in 1996. See Note 2 of Notes to
Consolidated Financial Statements. Gains and losses on sales of securities have
not been material.
CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the
Company to concentrations of credit risk consist principally of cash
equivalents, short and long-term investments, and trade receivables. The Company
invests its excess cash in municipal obligations, commercial paper, and in money
market preferred stock of companies with strong credit ratings. These
investments typically bear minimal risk. This diversification of risk is
consistent with the Company's policy to ensure safety of principal and maintain
liquidity.
The Company sells its products to a large number of customers in diversified
industries, primarily in the United States, Europe, and the Pacific Rim. The
Company performs
17
ongoing credit evaluations of its customers and generally does not require
collateral. Notes receivable of $2,740,000 have been discounted with a financial
institution, and the Company remains contingently liable for these notes. The
Company maintains reserves for potential credit losses and such losses have been
within management's expectations.
ACCRUED LIABILITIES The Company makes estimates and assumptions that affect the
reported amounts of accrued liabilities. Actual expenses could differ from these
estimates. Accrued liabilities are as follows:
SEPTEMBER 30,
(IN THOUSANDS) 1995 1996
- -------------------------------------------------------
Payroll and related benefits $ 21,918 $ 33,330
Other accrued liabilities 18,263 25,742
-------------------
$ 40,181 $ 59,072
===================
INCOME TAXES The Company accounts for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes," which uses the asset-and-liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets are recognized for deductible
temporary differences, net operating loss carryforwards, and credit
carryforwards if it is more likely than not that the tax benefits will be
realized. To the extent a deferred tax asset cannot be recognized under the
preceding criteria, a valuation allowance must be established.
USE OF ESTIMATES 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS The Financial Accounting Standards Board's
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," defines
the fair value of a financial instrument as the amount at which the instrument
could be exchanged in a current transaction between willing parties. The fair
value of the Company's cash, accounts receivable, accounts payable, long-term
debt and foreign currency contracts, approximates the carrying amount.
NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board recently
adopted SFAS No. 123, "Accounting for Stock-Based Compensation." This statement
establishes financial accounting and reporting standards for stock-based
employee compensation plans, including employee stock purchase plans and stock
option plans. SFAS No. 123 is effective for fiscal years beginning after
December 15, 1995 and provides an alternative to Accounting Principles Board's
Opinion (APB) No. 25, "Accounting for Stock Issued to Employees." Management
plans to continue to account for its employee stock plans under APB No. 25 for
purposes of measurement of compensation expense. Accordingly, adoption of SFAS
No. 123 will not have a material effect on the Company's consolidated results
of operations.
The Financial Accounting Standards Board recently adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" which is effective for fiscal years beginning after
September 1, 1996. This statement requires long-lived assets to be evaluated
for impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. The adoption of SFAS No. 121
is not expected to have a material impact on the Company's consolidated results
of operations.
RECLASSIFICATIONS Certain amounts reported in previous years have been
reclassified to conform to the fiscal 1996 presentation.
18
NOTE 2. PURCHASE OF TECHNOLOGY
AND STRATEGIC INVESTMENTS
On February 1, 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). Pursuant to the Agreement, the Company acquired certain in-process
research and development technology and a non-exclusive license to sublicense
and to use certain existing IBM electronic design automation (EDA) technology
and the underlying intellectual property, and licensed certain of its
EDA-related intellectual property to IBM. In addition, the Company and IBM are
jointly developing new EDA products in the areas of synthesis, test
methodology, design planning, and static timing sign-off. The Company will have
sole ownership of synthesis products and the exclusive right to market test,
design planning, and static timing products (subject to certain rights of IBM
upon termination of the Agreement). In accordance with the Agreement, the
Company paid IBM $11,000,000 in cash and issued $30,000,000 in notes, which
bear interest at three percent, and are payable to IBM upon the earlier of
achievement of scheduled milestones or at maturity in 2006. The notes were
recorded at fair value of $28,500,000, using a discount rate commensurate with
the risks involved. The Company will also pay royalties on revenues from the
sale of new products developed pursuant to the Agreement. As a result of the
transaction, the Company incurred an in-process research and development charge
of $39,700,000 in the second quarter of fiscal 1996. As of September 30, 1996,
the notes had a balance of $24,470,000, of which $15,970,000 is included in
long-term debt. The carrying amount of the debt, including the long-term
portion, approximates the fair value.
On May 7, 1996, the Company and Cooper and Chyan Technology, Inc. (CCT), a
developer of routing technology for printed circuit boards and integrated
circuits, entered into a strategic relationship. As part of this strategic
relationship, the Company purchased 1,206,542 shares, approximately 9.9 percent
of the outstanding shares of CCT, for $14.50 per share. In accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
the investment has been classified as "available for sale," and an unrealized
gain of $8,301,000, net of taxes, was recorded as a separate component of
stockholders' equity during fiscal year 1996. CCT and Cadence Design Systems,
Inc. recently announced that they had reached an agreement to merge. The
Company is evaluating the effect of such a merger on its relationship with CCT.
NOTE 3. MERGERS
LOGIC MODELING CORPORATION On February 16, 1994, the Company issued
approximately 5,200,000 shares of its common stock in exchange for all the
outstanding shares of capital stock, vested stock options, and warrants of Logic
Modeling Corporation (LMC), a developer of simulation models and modeling
technologies for the verification of electronic designs. The merger was
accounted for as a pooling of interests and, accordingly, the Company's
consolidated financial statements have been restated for all periods.
In fiscal 1994, in connection with the LMC merger, the Company recorded related
costs of approximately $7,400,000, primarily for transaction costs and
elimination of duplicate facilities and equipment. These estimated costs were
reduced by $900,000 in fiscal 1995.
SILICON ARCHITECTS On May 10, 1995, the Company issued approximately 1,400,000
shares of its common stock in exchange for all the outstanding shares of
capital stock and warrants of Silicon Architects, a developer of design
technology for complex application specific integrated circuits (ASICs) and
application specific standard products (ASSPs). Additionally, options to
acquire shares of Silicon Architects' common stock were exchanged for options
to acquire approximately 148,000 shares of the Company's common stock. The
merger was accounted for as a pooling of interests and, accordingly, the
Company's consolidated financial statements have been restated for all
19
periods. Total revenue and net income for the individual entities are as
follows:
SILICON
(IN THOUSANDS) SYNOPSYS ARCHITECTS COMBINED
- --------------------------------------------------------------------------------
Six months ended March 31, 1995:
Total revenue $120,500 $ 3,400 $123,900
Net income (loss) 16,140 (16) 16,124
Year ended September 30, 1994:
Total revenue 196,000 3,200 199,200
Net income (loss) 15,750 (1,545) 14,205
In connection with this merger, the Company recorded related costs of
approximately $900,000, primarily consisting of contract cancellation charges,
transaction fees, and the elimination of duplicate facilities and equipment.
NOTE 4. ACQUISITIONS
CADIS GmbH AND ARCAD SA On May 31, 1994, the Company acquired all the
outstanding stock of Cadis GmbH (Cadis) for approximately $3,600,000 in cash and
notes. Cadis was a software developer specializing in digital signal processing
design. On September 30, 1994, the Company acquired all the outstanding stock of
Arcad SA (Arcad) for approximately $1,500,000 in cash and notes. Arcad was a
software developer of VHDL models specializing in telecommunications standards.
These acquisitions were accounted for by the purchase method of accounting, and
the results of operations of Cadis and Arcad are included in the Company's
consolidated results of operations since the dates of the acquisitions. The
purchase price, acquisition costs, and net liabilities assumed total $7,300,000,
of which $5,900,000 was allocated to in-process research and development
expense.
ARKOS DESIGN, INC. On June 28, 1995, the Company acquired all the outstanding
securities of ARKOS Design, Inc. (ARKOS) for approximately $9,300,000 in cash
and notes. The notes had a balance of $3,100,000 at September 30, 1996, mature
at various dates through 2005, contain certain provisions that could accelerate
maturity, and are included in current liabilities. The Company recently
introduced a product based on ARKOS technology that supports high-speed
validation of integrated circuits (ICs). The acquisition was accounted for by
the purchase method of accounting, and the results of operations of ARKOS are
included in the Company's consolidated results since the date of the
acquisition. The purchase price, acquisition costs, and net liabilities assumed
total $9,700,000, of which $9,200,000 was allocated to in-process research and
development expense.
NOTE 5. COMMON STOCK
STOCK REPURCHASE PROGRAM In May 1996, the Company announced that its Board of
Directors had authorized the repurchase of up to 2,000,000 shares of its
outstanding common stock in the open market over the next 24 months. During
fiscal 1996, the Company purchased 361,494 shares at an average price of
approximately $41.00 per share. The repurchased shares are available for use
under the Company's employee stock plans and for other corporate purposes. All
shares repurchased during fiscal 1996 were reissued by the end of the year.
STOCK OPTIONS Under the Company's 1992 Stock Option Plan (the Plan) and its
predecessor, the 1988 Restricted Stock Plan, the Board of Directors may grant
options or rights to purchase shares of the Company's stock to eligible
individuals at not less than 100% of the fair market value of those shares on
the grant date. Under both plans, the shares and stock options issued to new
employees typically vest 25% after one year with the remaining shares and
options vesting on a pro rata basis over the following 36 months, and shares and
stock options issued to existing employees typically vest on a pro rata basis
over 48 months or 16 quarters.
20
In October 1994, the Company adopted the 1994 Non-Employee Directors Stock
Option Plan (the Directors Plan) and reserved 200,000 shares for issuance.
Under the Directors Plan, each non-employee member of the Board of Directors
(the Board) is automatically granted an option to purchase 20,000 shares of the
Company's stock upon initial appointment or election to the Board, and 5,000
shares of the Company's stock upon reelection to the Board at not less than
100% of the fair market value of those shares at the grant date. Stock options
granted upon appointment or election to the Board vest 25% annually. Stock
options granted upon reelection to the Board vest 100% after the fourth year of
continuous service.
Prior to the mergers, Silicon Architects had a stock option plan and LMC had a
separate set of stock option plans. Both the Silicon Architects and LMC plans
were terminated as to future grants upon completion of each of the mergers.
Each outstanding option to acquire Silicon Architects stock was converted to an
option to acquire approximately .18 share of the Company's common stock and
each outstanding option to acquire LMC stock was converted to an option to
acquire approximately .14 share of the Company's common stock, under terms
similar to the terms of the Plan.
The following table summarizes stock option activity for the three years ended
September 30, 1996. Stock option activity in fiscal 1994 includes LMC activity
prior to the merger. Stock option activity in fiscal 1994 and 1995 includes
Silicon Architects' activity prior to the merger.
SHARES OPTIONS OUTSTANDING
AVAILABLE SHARES PRICE PER SHARE
- --------------------------------------------------------------------------------------------------
Balances at September 30, 1993 918,448 5,530,710 $ .0625 - $24.375
Merger with Silicon Architects 185,498 56,026 $ .0140 - $ .7007
Additional shares authorized 2,544,298 --
Granted (2,520,958) 2,520,958 $ 1.205 - $25.000
Exercised -- (1,738,484) $ .0625 - $22.125
Canceled 382,026 (466,216) $ .1125 - $25.000
---------- ----------
Balances at September 30, 1994 1,509,312 5,902,994 $ .0140 - $25.000
Additional shares authorized 2,083,884 --
Granted (3,448,537) 3,448,537 $ 1.205 - $33.500
Exercised -- (1,645,817) $ .0140 - $29.875
Canceled 479,891 (538,338) $ .0140 - $32.750
---------- ----------
Balances at September 30, 1995 624,550 7,167,376 $ .1125 - $33.500
Additional shares authorized 2,089,937 --
Granted (2,228,133) 2,228,133 $ 29.125 - $47.281
Exercised -- (1,514,864) $ .1125 - $37.000
Canceled 614,791 (631,066) $ 1.205 - $37.000
---------- ----------
Balances at September 30, 1996 1,101,145 7,249,579 $ .1125 - $47.281
---------- ----------
At September 30, 1996, 2,629,140 options were exercisable at prices ranging from
$.1125 to $44.50 per share.
21
EMPLOYEE STOCK PURCHASE PLAN In January 1992, the Board of Directors and
stockholders adopted the Employee Stock Purchase Plan, under which a total of
1,750,000 shares have been reserved for issuance as of September 30, 1996. Under
the plan, employees are granted the right to purchase shares of common stock at
a price per share that is 85% of the lesser of: (i) the fair market value of the
shares at the beginning of a rolling two-year offering period, or: (ii) the end
of each semi-annual purchase period. During fiscal 1994, 1995, and 1996, shares
totaling 280,850, 247,356, and 310,689, respectively, were issued under the plan
at average prices of $9.57, $17.22, and $18.84 per share, respectively.
NOTE 6. LINES OF CREDIT AND COMMITMENTS
To facilitate foreign currency forward contracts, the Company has three foreign
exchange lines of credit totaling $169,000,000, which expire in October 1996,
May 1997, and June 1997. The Company enters into forward exchange contracts to
hedge foreign currency denominated intercompany balances. Gains and losses on
contracts to hedge foreign currency commitments are recognized during the
periods in which the related instruments are outstanding. At September 30, 1996,
the Company had outstanding forward contracts in yen and European currencies
totaling approximately $4,078,000. The forward exchange contracts are valued at
prevailing market rates. The net gains and losses resulting from hedging
intercompany balances were not significant.
The Company leases its facilities and certain office equipment under operating
lease agreements. The Company's current corporate facility lease expires in
February 2003 and provides for graduated rental payments. The Company has
entered into an additional corporate facility lease. The facility is under
construction and the lease expires ten years after occupancy. The Company is
amortizing the total rent payments over the lease term on a straight-line basis.
At September 30, 1996 future minimum lease payments under operating leases are:
1997 -- $12,443,000; 1998 -- $14,235,000; 1999 -- $14,112,000; 2000 --
$13,252,000; 2001 -- $12,963,000; and $34,802,000 thereafter. Total rent expense
under operating leases was approximately $9,517,000, $12,490,000, and
$14,441,000 in fiscal 1994, 1995, and 1996, respectively.
NOTE 7. INCOME TAXES
As discussed in Note 1, the Company accounts for income taxes in accordance with
SFAS No. 109.
The Company is entitled to a deduction for federal and state tax purposes with
respect to employees' stock option activity. The net reduction in taxes
otherwise payable arising from that deduction has been credited to additional
paid-in capital.
At September 30, 1996, the Company had net operating loss carryovers in foreign
jurisdictions of approximately $700,000 which are available to offset future
taxable income, if any, in those jurisdictions. For U.S. federal income tax
purposes, the Company had research tax credit carryforwards of approximately
$3,300,000 expiring in fiscal years 2009 through 2011, and alternative minimum
tax credit carryforwards of approximately $400,000, which do not expire. In
addition, the Company had research tax credit carryforwards for state income tax
purposes of approximately $1,200,000, which do not expire.
22
A net deferred tax asset of $2,625,000 and $9,900,000 is included in prepaid
expenses, deferred taxes, and other at September 30, 1995 and 1996,
respectively. The tax effects of temporary differences and carryforwards which
give rise to significant portions of the deferred tax assets and liabilities are
as follows:
SEPTEMBER 30,
(IN THOUSANDS) 1995 1996
- --------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryovers $ 816 $ 400
Tax credit carryovers 6,788 4,885
Deferred revenue 5,991 10,891
Joint venture and acquisition costs -- 12,985
Reserves and other expenses not
currently deductible 5,616 9,354
Depreciation and amortization 476 --
---------------------------
Total gross deferred tax asset 19,687 38,515
Less valuation allowance (15,896) (23,525)
---------------------------
Deferred tax asset 3,791 14,990
---------------------------
Deferred tax liabilities:
Unrealized foreign exchange gain (708) --
Unrealized gain on securities -- (4,669)
Net capitalized software
development costs (458) (421)
---------------------------
Deferred tax liability (1,166) (5,090)
---------------------------
Net deferred tax asset $ 2,625 $ 9,900
===========================
The change in the valuation allowance was a net decrease of $4,510,000 during
fiscal 1995 and a net increase of $7,629,000 during fiscal 1996. The valuation
allowance applies primarily to those U.S. federal and state timing items that
are expected to be deductible at a point in the future when taxable income is
uncertain.
Subsequently recognized tax benefits relating to the valuation allowance for
deferred tax assets as of September 30, 1996, will be allocated as follows:
(IN THOUSANDS)
- -------------------------------------------------------
Income tax benefit $ 5,435
Additional paid-in capital 18,090
--------
$ 23,525
========
Income before income taxes consisted of:
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS) 1994 1995 1996
- --------------------------------------------------------------------------------
United States $22,230 $42,178 $30,831
Foreign 1,424 5,530 5,019
-------------------------------------------
$23,654 $47,708 $35,850
===========================================
The significant components of the provision for income taxes are as follows:
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS) 1994 1995 1996
- --------------------------------------------------------------------------------
Current:
Federal $ 965 $ 3,730 $ 9,907
State 146 1,475 1,415
Foreign 928 2,420 2,662
-----------------------------------------
2,039 7,625 13,984
-----------------------------------------
Deferred:
Federal -- -- (6,650)
State -- -- (950)
Foreign (250) (21) 325
-----------------------------------------
(250) (21) (7,275)
-----------------------------------------
Reduction in goodwill
for the foreign tax
benefit from utilization
of acquired company's
tax attributes 960 1,704 --
Charge equivalent to
the federal and state
tax benefit related
to employee stock
options 6,700 8,100 5,441
-----------------------------------------
7,660 9,804 5,441
-----------------------------------------
Provision for
income taxes $ 9,449 $ 17,408 $ 12,150
=========================================
23
The provision for income taxes differs from the amount obtained by applying the
statutory federal income tax rate to income before income taxes as follows:
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS) 1994 1995 1996
- --------------------------------------------------------------------------------
Statutory federal tax $ 8,279 $ 16,698 $ 12,548
State tax, net of
federal benefit 524 1,086 1,237
Tax benefit from foreign
sales corporation (452) (971) (1,551)
Tax exempt income (789) (1,849) (2,579)
Research and
development
tax credits (666) (950) (503)
Foreign tax in excess
of U.S. statutory tax 753 370 377
Non-deductible
merger and acquisition
expenses and other 1,800 3,024 2,621
-------------------------------------------
$ 9,449 $ 17,408 $ 12,150
===========================================
NOTE 8. WORLDWIDE OPERATIONS
The Company operates in a single industry segment, the development, marketing,
and support of electronic design automation software and systems products. The
Company markets its products through several wholly-owned foreign subsidiaries.
The Company's operations by geographic area were as follows:
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS) 1994 1995 1996
- --------------------------------------------------------------------------------
Revenue
North America $ 184,977 $ 237,690 $ 325,346
Europe 41,480 52,342 64,805
Pacific Rim 53,010 85,671 108,397
Transfers between
geographic areas (80,267) (110,203) (145,048)
----------------------------------------------
Consolidated $ 199,200 $ 265,500 $ 353,500
----------------------------------------------
Operating income:
North America $ 16,992 $ 20,220 $ 31,653
Europe 7,686 9,606 9,765
Pacific Rim 10,222 22,174 27,182
Corporate and other (13,300) (9,200) (39,700)
----------------------------------------------
Consolidated $ 21,600 $ 42,800 $ 28,900
----------------------------------------------
Identifiable assets:
North America $ 67,841 $ 73,771 $ 138,813
Europe 16,586 20,061 24,216
Pacific Rim 27,193 31,962 27,903
Corporate assets
and eliminations 100,329 171,777 218,035
----------------------------------------------
Consolidated $ 211,949 $ 297,571 $ 408,967
==============================================
Transfers between geographic areas represent both intercompany product and
service revenue accounted for at prices representative of unaffiliated party
transactions, and export shipments directly to customers. In fiscal 1996,
identifiable assets in the Pacific Rim include $12,788,000 of accounts
receivable from customers located in Japan. Management believes allowances are
adequate to cover any uncollected amounts. Corporate assets consist primarily of
cash and investments. In 1994, 1995, and 1996, no customer accounted for more
than ten percent of revenue.