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Exhibit 13.1
SYNOPSYS, INC.
FINANCIAL SUMMARY
As of or For The Year Ended September 30,
(In thousands, except per share data) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Revenue $717,940 $646,956 $525,599 $410,644 $328,644
Income before provision for income taxes and
extraordinary items (1) 119,117 133,029 40,228 59,126 31,319
Extraordinary items, net of income tax expense 28,404 -- -- -- --
Provision for income taxes 55,819 51,043 23,426 22,771 17,210
Net income 91,702 81,986 16,802 36,355 14,109
Earnings per share (2)
Basic 1.40 1.31 0.28 0.64 0.30
Diluted 1.34 1.25 0.27 0.59 0.24
Working capital 500,340 335,790 238,942 221,425 138,748
Total assets 946,627 768,589 584,853 446,443 336,897
Long-term debt 13,138 9,191 15,974 63 --
Stockholders' equity 660,387 501,543 350,547 287,362 195,297
(1) Includes charges of $33.1 million, $5.5 million, $64.5 million, $12.5
million and $5.9 million for the years ended September 30, 1998, 1997, 1996,
1995 and 1994, respectively, for in-process research and development and
other costs. Includes merger-related and other costs of $51.0 million, $11.4
million and $7.4 million for the years ended September 30, 1998, 1997 and
1994, respectively.
(2) The Company adopted Statement of Financial Accounting Standards No. 128
(SFAS 128) on October 1, 1997. Earnings per share amounts for all periods
presented have been restated to conform to SFAS 128 requirements.
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SYNOPSYS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and related notes included elsewhere herein as well as the
section entitled "Factors That May Affect Future Results." 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." In addition,
past results and trends should not be used by investors to anticipate future
results and trends.
RESULTS OF OPERATIONS
Mergers
Subsequent to fiscal 1998, the Company signed a definitive agreement to merge
with Everest Design Automation, Inc. (Everest), a developer of integrated
circuit routing software and related technology. The Company will exchange
approximately 1.4 million shares of its common stock for all the outstanding
stock of Everest and will reserve approximately 100,000 shares of its common
stock for issuance under Everest's stock option plan, which the Company will
assume in the transaction. The business combination will be accounted for as a
pooling-of-interests. The Board of Directors rescinded the Company's stock
repurchase program in order to comply with pooling-of-interests accounting
rules. Retained earnings will be restated as of October 1, 1998 to reflect the
pooling-of-interests combination.
In December 1997, the Company issued approximately 11.3 million shares of its
common stock in exchange for all the outstanding shares of common stock of
Viewlogic Systems, Inc. (Viewlogic), a worldwide supplier of electronic design
automation (EDA) software. In addition, options to acquire Viewlogic's common
stock were exchanged for options to acquire approximately 2.8 million shares of
the Company's common stock. The merger was accounted for as a
pooling-of-interests, and accordingly, the Company's consolidated financial
statements have been restated to include the financial position and results of
Viewlogic for all periods presented. On October 2, 1998, the Company sold
Viewlogic Systems, Inc. (VSI), the printed circuit board (PCB) /Systems design
segment of the Viewlogic business to a management-led buy-out group for $51.9
million in cash. As a result of the transaction, the Company recorded an
extraordinary gain of $26.5 million, net of income tax expense, in the fourth
quarter of fiscal 1998. The Company retained a minority investment of 14.9% of
the fully diluted equity in the new company (See Extraordinary Items).
In February 1997, the Company issued approximately 10.3 million shares of its
common stock in exchange for all the outstanding shares of common stock of EPIC
Design Technology, Inc. (EPIC), a developer of design automation tools for deep
submicron design in the area of integrated circuit power, timing, and
reliability analysis. In addition, options to acquire EPIC's common stock were
exchanged for options to acquire approximately 1.5 million shares of the
Company's common stock. The EPIC merger was accounted for as a
pooling-of-interests, and accordingly, the Company's consolidated financial
statements have been restated to include the financial position and results of
EPIC for all periods presented.
Acquisitions
In July 1998, the Company acquired Systems Science, Inc. (SSI), a developer of
advanced tools for electronic design verification and test. The acquisition was
accounted for as a purchase with the Company exchanging a combination of cash of
$26.0 million and notes of $12.0 million. In addition, the Company reserved
approximately 318,000 shares of its common stock for issuance under SSI's stock
option plan, which the Company assumed in the acquisition. The total purchase
price of $47.1 million was allocated to the acquired assets and liabilities
based on their estimated fair values as of the date of the acquisition. This
includes allocations of $18.2 million to goodwill and other intangible assets,
which are being amortized on a straight-line basis, generally over a five-year
period. Approximately $28.9 million was allocated to in-process research and
development and other costs and charged to operations.
In October 1997, the Company acquired two small privately held companies in the
EDA industry, 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 other costs and charged to operations.
Pro forma results of operations have not been presented since the effects of the
acquisitions were not material to the Company's consolidated financial position,
results of operations or cash flows for the periods presented.
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Revenue
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. The Company's revenue increased by 11% to $717.9
million in fiscal 1998 from $647.0 million in fiscal 1997 and by 23% from $525.6
million in fiscal 1996 compared to fiscal 1997. The percentage of the Company's
total revenue attributable to software and system products decreased to 60% in
fiscal 1998 from 63% in fiscal 1997 and 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.
Product revenue increased by 6% to $431.0 million in fiscal 1998 from $408.3
million in fiscal 1997 and by 18% from $346.1 million in fiscal 1996 compared to
fiscal 1997. For each of the years, these increases were primarily due to
increased worldwide licensing and sales of the Company's EDA software products.
Service revenue increased by 20% to $287.0 million in fiscal 1998 from $238.7
million in fiscal 1997 and by 33% from $179.5 million in fiscal 1996 compared to
fiscal 1997. For each of the years, these increases were primarily attributable
to the renewal of maintenance and support contracts for EDA products and growth
in customer training and consulting services.
In 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 (See Note 1 of Notes to
Consolidated Financial Statements). The effect of the adoption of SOP 97-2 was
not material.
Revenue from international operations was $279.8 million, $262.2 million and
$221.5 million, or 39%, 41% and 42% of total revenue in fiscal 1998, 1997 and
1996, respectively. The decrease in international revenue as a percentage of
total revenue in fiscal 1998 compared to fiscal 1997 was due primarily to
decreased revenue in Asia/Pacific and Japan as a result of the economic turmoil
in many Asia/Pacific markets. This decrease was partially offset by growth in
European revenue during fiscal 1998. The decrease in international revenue as a
percentage of total revenue in fiscal 1997 compared to fiscal 1996 was due
primarily to a decrease in revenue in Japan, which was attributable to a decline
in the value of the yen versus the U.S. dollar.
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 system 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 remained relatively flat at 5%
of total revenue in fiscal 1998 compared to 6% of total revenue in fiscal 1997
and 5% of total revenue in fiscal 1996. Cost of service revenue includes
personnel and the related costs associated with providing training and
consulting services. Cost of service revenue as a percentage of total revenue
was 8% of total revenue in both fiscal 1998 and 1997 and 7% in fiscal 1996. The
increase in cost of service from fiscal 1996 was due to the Company's investment
in the infrastructure required to expand its training and consulting business
during fiscal 1998 and 1997.
Research and Development
Research and development expenses increased by 5% to $154.4 million in fiscal
1998 from $146.6 million in fiscal 1997 and by 22% from $120.0 million in fiscal
1996 compared to fiscal 1997, net of capitalized software development costs.
Research and development expenses represented 22%, 23% and 23% of total revenue
in fiscal 1998, 1997 and 1996, respectively. The increase in absolute dollars
reflects the Company's ongoing research and development efforts in a wide
variety of areas, which the Company believes are essential to developing
best-in-class EDA solutions and maintaining technological leadership. A
significant portion of the increase for each fiscal year was due to the addition
of personnel and personnel-related costs. Also, fiscal 1998 included an
additional week of operations, which was partially offset by synergies realized
from the integration of Viewlogic into Synopsys' operations. The Company
anticipates that it will continue to commit substantial resources to research
and development in the future, provided that it is able to continue to hire and
retain a sufficient number of qualified personnel. If the Company believes that
it is unable to enter a particular market in a timely manner, it may license
technology from other businesses or acquire other businesses as an alternative
to internal research and development. For fiscal 1999, the Company expects that
research and development expenses as a percentage of total revenue will be at or
slightly below the fiscal 1998 level.
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Sales and Marketing
Sales and marketing expenses increased by 2% to $245.4 million in fiscal 1998
from $240.6 million in fiscal 1997 and by 17% from $204.9 million in fiscal 1996
compared to fiscal 1997. Sales and marketing expenses represented 34%, 37% and
39% of total revenue in fiscal 1998, 1997 and 1996, respectively. Total expenses
increased in absolute dollars in each fiscal year primarily from personnel and
personnel-related costs due to the continued growth of the Company's worldwide
sales and marketing organizations and an increase in professional services.
Also, fiscal 1998 included an additional week of operations, which was partially
offset by synergies realized from the integration of Viewlogic into Synopsys'
operations. The Company expects that for fiscal 1999, sales and marketing
expenses as a percentage of total revenue will be below the fiscal 1998 level.
General and Administrative
General and administrative expenses remained relatively constant at $47.2
million in fiscal 1998 compared to $47.3 million in fiscal 1997. General and
administrative expenses increased in absolute dollars by 13% from $42.0 million
in fiscal 1996 compared to fiscal 1997. As a percentage of total revenue,
general and administrative expenses were 7%, 7% and 8% in fiscal 1998, 1997 and
1996, respectively. In fiscal 1998, general and administrative expenses included
an additional week of operations; however, the associated expense increases were
offset by synergies realized from the integration of Viewlogic into Synopsys'
operations. In fiscal 1997, general and administrative expenses increased
primarily due to an increase in personnel and personnel-related costs necessary
to support the Company's infrastructure. The Company expects that for fiscal
1999, general and administrative expenses as a percentage of total revenue will
be slightly below the fiscal 1998 level.
Merger-Related and Other Costs
As a result of various business combinations accounted for as a
pooling-of-interests in fiscal 1998 and 1997, the Company incurred
merger-related and other costs of $51.0 million and $11.4 million, respectively.
These expenses related to transaction costs, employee termination and transition
costs, legal costs, write-off of equipment and other assets, and redundant
facility and other costs. As of September 30, 1998, there was a balance of $3.5
million in accrued liabilities for expected future cash expenditures, which are
expected to be paid in the next six months.
In-Process Research and Development and Other Costs
During fiscal 1998, the Company acquired three businesses for an aggregate total
of $51.3 million. Of the aggregate purchase price, $33.1 million was allocated
to in-process research and development and other costs and charged to
operations. Each of these business combinations was accounted for as a purchase.
Other Income, Net
Other income, net was $26.0 million, $24.4 million and $11.6 million, or 4%, 4%
and 2% of total revenue in fiscal 1998, 1997 and 1996, respectively. Other
income, net increased in each fiscal year primarily due to higher average
invested cash and short-term investment balances. In addition, in fiscal 1998
and 1997 other income, net increased due to gains realized on sales of equity
investments.
Interest Rate Risk
The Company's exposure to market risk for changes in interest rates relates
primarily to its investment portfolio and long-term debt. The Company does not
use derivative financial instruments for speculative or trading purposes. The
Company places its investments in instruments that meet high credit quality
standards, as specified in the Company's investment policy. The policy also
limits the amount of credit exposure to any one issue, issuer and type of
instrument. The Company does not expect any material loss with respect to its
investment portfolio.
The table below presents the carrying value and related weighted-average
interest rates for the Company's investment portfolio. The carrying value
approximates fair value at September 30, 1998. In accordance with the Company's
investment policy, all investments mature in fifteen months or less. All of the
long-term investments mature in December 1999.
Principal (Notional) Amounts in U.S. Dollars:
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Carrying Average
(in thousands, except interest rates) Amount Interest Rate
--------- -------------
Cash equivalents - fixed rate $ 23,806 3.47%
Short-term investments - fixed rate 440,082 3.83%
Long-term investments - variable rate 255 3.99%
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Total investment securities 464,143 3.81%
Money market funds - variable rate 37,699 3.69%
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Total interest bearing instruments $501,842 3.80%
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(See Note 3 in accompanying notes to consolidated financial statements for
additional information on investment maturity dates, long-term debt and equity
price risk related to the Company's long-term investments.)
Foreign Currency Risk
The Company entered into foreign exchange forward contracts to reduce its
exposure to currency fluctuations on intercompany foreign currency denominated
balance sheet positions during fiscal 1998. The objective of these contracts is
to neutralize the impact of the foreign currency exchange rate movements on the
Company's operating results. The Company's accounting policy for these
instruments is based on the Company's designation of such instruments as hedging
transactions. The Company does not use derivative financial instruments for
speculative or trading purposes. The Company had $38.4 million of short-term
foreign exchange forward contracts denominated in Japanese, Italian, German,
French, and British currencies which approximated the fair value of such
contracts and their underlying transactions as of September 30, 1998. Looking
forward, the Company does not expect any material adverse effect on its
consolidated financial position, results of operations, or cash flows resulting
from the use of these instruments. There can be no assurance that these
strategies will be effective or that transaction losses can be minimized or
forecasted accurately.
The following table provides information about the Company's foreign exchange
forward contracts at September 30, 1998. Due to the short-term nature of these
contracts, the contract rate approximates the weighted-average contractual
foreign currency exchange rate and the amount in U.S. dollars approximates the
fair value of the contract at September 30, 1998. These forward contracts mature
in approximately thirty days.
Short-Term Forward Contracts to Sell and Buy Foreign Currencies in
U.S. Dollars Related to Intercompany Balances:
Contract
(in thousands, except for average contract rates) Amount Rate
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Forward Contracts:
Japanese yen $23,143 135.72
British pound sterling 1,010 1.70
German mark 4,835 1.67
French franc 8,565 5.60
Italian lira 867 1,658.20
The unrealized gain (loss) on the outstanding forward contracts at September 30,
1998 was immaterial to the Company's consolidated financial statements. The
realized gain (loss) on these contracts as they matured was not material to the
Company's consolidated financial position, results of operations, or cash flows
for the periods presented.
Extraordinary Items
During the first quarter 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 the cancellation of certain interest bearing notes
issued by the Company to International Business Machines Corporation (IBM).
During the fourth quarter of fiscal 1998, Synopsys completed the partial
spin-off of Viewlogic Systems, Inc. (VSI), a company that owns the printed
circuit board (PCB)/Systems business of Viewlogic. Synopsys' merger with
Viewlogic in December 1997 was accounted for as a pooling-of-interests. The
spin-off was accounted for as an extraordinary item, as provided by paragraph 60
of Accounting Principles Board Opinion No. 16 (APB 16), and Synopsys recorded an
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extraordinary gain, net of income tax expense, of $26.5 million in fiscal 1998
in respect to the spin-off. Synopsys retained common stock equal to 14.9 percent
of the fully diluted equity in VSI.
The Company concluded that the disposition of VSI was consistent with its
treatment of the Synopsys-Viewlogic merger as a pooling-of-interests. APB 16
(paragraph 48(c)) states that a condition of pooling-of-interests treatment is
that at the time of the merger, management did not plan to dispose of any
significant part of the assets of the merged entity. The Company concluded that
this condition was met because, on the date of the Synopsys-Viewlogic merger,
the Company did not plan to dispose of the PCB/Systems business. The Company
believed that there would be synergies between the Company's "high-level"
integrated circuit design products and VSI's PCB design products. The ultimate
decision to spin-off VSI was based on changes in circumstances following the
Synopsys-Viewlogic merger.
During the months following the merger, the Company came to realize that certain
of its assumptions and expectations regarding the operation of the PCB/Systems
business as part of Synopsys were not being fulfilled. The Company's initial
intent to retain VSI altered due to changes in circumstances as follows:
- A number of engineers working in the PCB/Systems business were hired
by competitors, and management became concerned that it would lose
more if the business remained part of Synopsys.
- Certain synergies anticipated from operation of the PCB/Systems
business as part of Synopsys did not materialize.
- The revenues of the PCB/Systems business grew more slowly than those
of Synopsys' other businesses. Management concluded that the reduction
in the Company's overall growth rate caused by the PCB/Systems
business was contributing to a market discounting of the Company's
stock value.
- Managers of the PCB/Systems business concluded that the business could
grow faster if it was a stand-alone entity, which would allow them to
attract and retain key employees.
Accordingly, Synopsys has not changed its accounting for the Viewlogic merger
and has reported the gain on the VSI disposition as an extraordinary item.
Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS 130 establishes new standards for reporting and
displaying comprehensive income and its components. Synopsys will adopt SFAS 130
as required for its first quarterly filing of fiscal 1999. SFAS 131 requires
disclosure of certain information regarding operating segments, products and
services, geographic areas of operation, and major customers. Management is in
the process of evaluating the effects of this change on its reporting segments.
Synopsys will adopt SFAS 131 as required for its fiscal 1999 annual report.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
and requires the Company to recognize all derivatives as either assets or
liabilities on the balance sheet and measure them at fair value. Gains and
losses resulting from changes in fair value would be accounted for based on the
use of the derivative and whether it is designated and qualifies for hedge
accounting. The Company will be required to implement SFAS 133 for its fiscal
2000. The Company has not determined the impact that SFAS 133 will have on its
financial statements and believes that such determination will not be meaningful
until closer to the date of initial adoption.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments were $599.8 million at
September 30, 1998, an increase of $164.9 million from fiscal 1997. The increase
is primarily a result of cash generated by operations of $144.1 million, and to
a lesser extent, through financing and investing activities, mainly the exercise
of stock options and purchases of stock through the employee stock purchase plan
of $62.3 million, the sale of VSI for $51.9 million and the sale of long-term
investments of $15.2 million. These cash flows were partially offset by cash
outflows for investing and financing activities,
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mainly capital expenditures of $58.0 million, acquisitions of three businesses
of $30.4 million, the repurchase of common stock of $12.4 million and cash paid
on debt obligations of $7.8 million.
Accounts receivable increased 6% during fiscal 1998, while sales grew by 11%.
Days sales outstanding in receivables decreased to 59 days as of September 30,
1998 from 62 days at September 30, 1997. As of September 30, 1998, the Company
had sold $12.6 million of its accounts receivable to a financial institution.
At September 30, 1998, the Company had two foreign exchange lines of credit
available totaling $70.0 million, which expire in October 1998 and July 1999.
The Company's management believes that its current cash, cash equivalents,
short-term investments, lines of credit, and cash generated from operations will
satisfy its expected working capital and capital expenditure requirements for at
least the next twelve months.
YEAR 2000 READINESS
Year 2000 Problem
The failure of a computer program to accurately process date information
beginning on January 1, 2000 is referred to as the "Year 2000 problem." The
problem arises because many existing computer programs use two digits rather
than four to refer to a year. As a result, these programs may interpret a date
that begins with "20" (i.e., any date after December 31, 1999) as a date that
begins with a "19" (i.e., one hundred years earlier). This may result in a
system failure, miscalculation or other malfunction.
Synopsys has potential Year 2000 issues both as a vendor of software and as a
user of software. As a vendor, Synopsys could have Year 2000 issues either if
our software were not Year 2000 compliant or our customers have Year 2000 issues
that interfere with their purchases of Synopsys' products. As a user of
software, Synopsys could have Year 2000 issues if any of the many systems we use
to perform key corporate functions - such as financial accounting, billing,
payroll and license control - were not Year 2000 compliant.
For the purposes of the following discussion our efforts to identify, assess,
fix and test Year 2000 problems relating to our business are referred to as our
"Year 2000 Efforts."
State of Readiness
In general, Synopsys' products are not date-sensitive, and therefore are less
likely to have Year 2000 issues. We have inspected or tested approximately 80%
of our products to determine whether they have Year 2000 problems. None of our
tested products experienced significant date-related failures. In addition, we
recently opened a dedicated Year 2000 test laboratory, which we will use to test
all of our untested products and to maintain Year 2000 compliance of all future
products. We do not expect that we will experience significant date-related
failures with respect to the products to be tested or, if we do, that we will
incur substantial costs to fix such failures. To determine whether our
customers' purchases will be affected by Year 2000 issues we have held, and are
continuing to hold, discussions with a number of such customers to determine
whether our interfaces with such customers are vulnerable to Year 2000 issues.
Synopsys has taken a number of steps to determine whether the internal computer
systems and software we rely upon to run our business will have Year 2000
problems. Our efforts have covered both systems that are commonly thought of as
"information technology" (IT) systems, including accounting, data processing,
and telephone/PBX systems, as well as certain systems that are not commonly
thought of as IT systems, such as alarm systems and fax machines.
Our Year 2000 Efforts are being conducted primarily by Synopsys employees and in
Synopsys facilities. We began our Year 2000 Efforts in February of 1997. We
currently anticipate that they will be completed by June 30, 1999, prior to any
currently anticipated impact on our internal computer systems and software. As
of September 30, 1998, we had completed approximately 30% of the projects we
believe are necessary to fully address potential Year 2000 issues relating to
our internal computer systems and software. The remaining projects are in
process.
In addition to conducting an assessment of our products and internal systems and
software, we have mailed letters to our 200 most important vendors and service
providers. As of October 1, 1998, we had received responses from approximately
40% of such third parties. A follow-up phone survey will be conducted with each
such vendor and service
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provider, including those who responded to the initial survey, which we expect
to be completed by January 30, 1999. We have requested our third party vendors
to be Year 2000 compliant by April 30, 1999. Those suppliers who do not meet
this requirement will be replaced by alternate vendors.
In addition to assessing the Year 2000 readiness of our existing software and
systems, in the ordinary course of replacing computer equipment and software, we
attempt to obtain replacements that are Year 2000 compliant.
Based upon our efforts to date, we believe that certain of the computer
equipment and software we currently use will require replacement or
modification.
Costs of Readiness
Synopsys has not incurred, and does not expect to incur, material expense in
connection with our Year 2000 Efforts. We estimate that the cost of our Year
2000 Efforts, including the costs of our own employees who work on such Year
2000 Efforts, will not exceed $5.9 million. This number is a current estimate
based on our Year 2000 Efforts to date. Should we encounter significant
unforeseen Year 2000 problems, either in our products or internal systems, or in
our customers' operations, this number could increase, perhaps by a material
amount. These expenses will be funded from operating cash flows. Such amount
represents less than 4.9 percent of our total actual and anticipated IT
expenditures for fiscal 1998 through March 31, 2000 (including employee expenses
of our IT department). As of September 30, 1998, we had incurred costs of
approximately $1.0 million related to our Year 2000 Efforts. All of this amount
relates to analysis, repair or replacement of existing software, upgrades of
existing software, or evaluation of information received from significant
vendors, service providers, or customers. Expansion and upgrade of our internal
systems unrelated to our Year 2000 Efforts have not been materially delayed or
impacted by our Year 2000 Efforts.
Contingency Plans
Synopsys has begun, but not yet completed, a comprehensive analysis of the
operational problems and costs (including loss of revenues) that would be
reasonably likely to result from the failure by us and certain third parties to
complete efforts necessary to achieve Year 2000 compliance on a timely basis.
The most likely worst case scenario has not yet been clearly identified, nor has
a contingency plan been developed for dealing with such scenario. We currently
plan to complete such analysis and contingency planning by June 30, 1999.
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.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Potential Earnings Fluctuations
We attempt to plan our business to achieve quarter-to-quarter revenue and
earnings growth. Achieving predictable revenue and earnings growth is difficult.
Quarterly revenue and earnings are affected by many factors, including customer
product demand, product license terms, the size of our backlog, and the timing
of revenue recognition on products and services sold. The following factors
could affect our revenues and earnings per share in a particular quarter or over
several quarterly or annual periods:
- Our orders are seasonal. Historically, our first fiscal quarter ending
December 31 is our weakest, and may have a book-to-bill ratio below
one.
- Our products are complex, and before buying them potential customers
spend a great deal of time reviewing and testing them. This is
particularly true if they are new customers or current customers
purchasing a new product or switching from a competitor's product. The
sales cycle does not necessarily match quarterly periods, and if by
the end of any quarter our sales force has not sold enough new
licenses, our orders and revenues could be substantially reduced.
- Like many companies in the software industry, we receive a
disproportionate volume of orders in the last week of a quarter, and
recognize a disproportionate amount of revenue in the last week of a
quarter. In addition, the proportion
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of our business attributable to our largest customers is increasing.
As a result, if any order, and especially a large order, is delayed
beyond the end of a fiscal period, our orders and revenue for that
period could be substantially reduced.
- The accounting rules we are required to follow only permit us to
recognize revenue when certain criteria are met. Orders for certain of
the Company's products and services, including certain time-based
product licenses, consulting services, and software support, 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. In addition, in
negotiating a purchase order with a customer, we may agree to terms
that have the effect of requiring deferral of revenue in whole or in
part. As a result, it may be difficult for us to convert orders,
particularly those received late in a quarter, or backlog, to revenue
in any given quarter. 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.
Competition
The EDA industry is highly competitive. We compete against other EDA vendors,
and with customers' internally developed design tools and internal design
capabilities, for a share of the overall EDA budgets of our customers. Our
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, we must continue to enhance our current products and bring to
market new products that address the increasingly sophisticated needs of our
customers on a timely and cost-effective basis. We also will have to expand our
ability to offer consulting services. The failure to enhance existing products,
develop and/or acquire new products or to expand our ability to offer such
services would have a material adverse effect on our business, financial
condition and results of operations.
Technology advances and customer requirements are fueling a change in the nature
of competition among EDA vendors. Increasingly, EDA companies compete on the
basis of "design flows" involving a broad range of products (including both
logic and physical design tools) and services rather than on the basis of
individual "point" tools performing a discrete phase of the design process. No
single EDA company currently offers its customers industry-leading products in a
complete design flow. We offer a wide range of logic design tools but currently
offer a relatively limited range of physical design tools. In November 1998 we
acquired Everest, a private company developing physical design software. We will
need to develop or acquire additional physical design tools in order to offer a
complete design flow. We are also attempting to expand our capacity to offer
professional services, but for the foreseeable future will continue to have less
capacity than Cadence to provide such services. The market for physical design
tools is dominated by Cadence and Avant!, both of which are attempting to
complete their design flows. Cadence recently acquired Ambit Design Systems, a
private company offering synthesis and other logic design products, as well as
certain physical design verification products from Lucent Technologies, both of
which will increase the direct competition between Synopsys and Cadence. In
addition, Cadence's acquisition of logic design products may lead to reductions
in purchases of our logic design software by Cadence, which was one of Synopsys'
ten largest customers in fiscal 1998. Avant! also recently acquired a private
company offering logic synthesis software, which will increase the direct
competition between Synopsys and Avant!.
Success of Non-Synthesis Products
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 synthesis revenues are expected to grow more slowly
than our target for overall revenue growth. Synthesis and related "design
creation" products account for approximately 45-50% of our revenue. As a result,
in order to meet our revenue plan, non-synthesis design creation products, high
level verification products and deep submicron products and our services
business will have to grow faster than our overall revenue growth target.
Our PrimeTime(R) timing analysis, Formality(R) formal verification, Module
Compiler(TM) datapath synthesis and VCS(TM) Verilog simulation products are
expected to be among the most important contributors to product revenue growth.
These products have achieved initial customer acceptance, but we will only
derive significant revenue from these products if they are accepted by a broad
range of customers. Product success is difficult to predict. The introduction of
new products and growth of a market for such products cannot be assured in a
highly competitive environment like EDA. In the past we, like all companies,
have had products that despite initial successes, have failed to meet our
revenue expectations. Expanding our capacity to offer consulting services and
our revenues derived therefrom will require us to recruit, hire and train a
large number of talented people, and to implement management controls on bidding
and executing on services engagements. The consulting business is significantly
different than the software business, however, and as indicated by recent
layoffs announced by Cadence in its service business, increasing consulting
orders and revenue while maintaining an adequate level of profit can be
difficult. There can be no assurance that the Company will be successful in
expanding revenues from existing or new products at the desired rate 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.
9
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Integration of Acquired Businesses
We have acquired or merged with a number of companies in recent years,
including EPIC, Viewlogic, SSI and Everest, and as part of our efforts to
expand our product and services offerings we may acquire additional companies
in the future. In addition to direct costs, acquisitions pose a number of
risks, including potential dilution of earnings per share, problems of
integrating the acquired products and employees into our business, the failure
to realize expected synergies or cost savings, the drain on management time
for acquisition-related activities, possible adverse effects on customer buying
patterns due to uncertainties resulting from an acquisition, and assumption of
unknown liabilities. While we attempt to review proposed acquisitions carefully
and negotiate terms that are favorable to the Company, there is no assurance
that any individual acquisition will have the projected effect on the Company's
performance.
Dependence on Semiconductor and Electronics Business
Our business has benefited from the rapid worldwide growth of the semiconductor
industry. Purchases of our products are largely dependent upon the commencement
of new design projects by semiconductor manufacturers and their customers. The
outlook for the semiconductor industry for the remainder of calendar year 1998
and 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 or the suspension of
investment plans, and although the Company has not seen a significant drop-off
in demand from these customers, their EDA budgets could be reduced, alone or as
part of overall expense control efforts. In addition, there have been a number
of mergers in the semiconductor and systems industries, which may reduce the
aggregate level of purchases of our products and services by the merged
companies. Slower growth in the semiconductor and systems industries, a reduced
number of design starts, tightening of customers' operating budgets or continued
consolidation among the Company's customers may have a material adverse effect
on our business, financial condition and results of operations.
International Exposure
In fiscal 1998, international revenue accounted for 39% of our revenue, after
accounting for 41% and 42% of our revenue in fiscal 1997 and 1996, respectively.
We expect that international revenue will continue to account for a significant
portion of our revenue in the future. As a result, the Company's performance may
be negatively affected by 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 1998 was adversely affected
by the weakness of the yen against the dollar, overall weakness in the
Japanese economy, and the deferral of investments in semiconductor
facilities and technology by Japanese companies. Continued weakness of
the Japanese economy during fiscal 1999 is likely to adversely affect
revenue from Japan during the year. The yen has recently strengthened,
but the exchange rate for fiscal 1999 remains subject to unpredictable
fluctuations. Renewed weakness of the yen could adversely affect
revenue from Japan during fiscal 1999.
- Significant declines in the value of the Korean won during fiscal
1998, and the subsequent economic crisis had a significant adverse
affect on our business in Korea during the year, and is likely to
continue to affect our orders and revenue from Korea in fiscal 1999.
Declines in the currencies of other countries in the Asia Pacific
region, particularly Taiwan, have also negatively affected the
Company's sales in the region. Continued instability in Asian currency
markets and weaknesses in Asian economies would continue to have an
adverse effect on our orders and revenues from the Asia Pacific
region.
Risk of Joint Development
In February 1996, we entered into a six-year joint development and license
agreement with IBM, pursuant to which the two companies 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
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. A second joint product is
expected to be introduced in January 1999, and the fourth product to be
developed under the agreement has been suspended. Synopsys and IBM are currently
discussing the future of the alliance. There can be no assurance that joint
development will continue, or that the products developed by the alliance will
be successful.
Need to Recruit and Retain Key Personnel
Our success is dependent on technical and other contributions of key employees.
We participate in a dynamic industry, with significant start-up activity, and
our headquarters is in Silicon Valley, where skilled technical, sales and
management employees are in high demand. There are a limited number of qualified
EDA engineers, and the competition for such individuals is intense. Experience
at Synopsys is highly valued in the EDA industry, and our employees are
recruited aggressively by our competitors and by start-up companies. Our
salaries are competitive in the market, but under certain circumstances,
start-up companies can offer more attractive stock option packages. As a result,
we have experienced, and may continue to experience, significant employee
turnover. In addition,
10
11
there can be no assurance that we can continue to recruit and retain key
personnel. Failure to successfully recruit and retain such personnel could have
a material adverse effect on our business, financial condition and results of
operations.
Poison Pill Provisions
The Company has adopted a number of provisions that could have anti-takeover
effects. The Board of Directors has adopted a Preferred Shares Rights Plan,
commonly referred to as a "poison pill." In addition, the Board of Directors has
the authority, without further action by its stockholders, to fix the rights and
preferences 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
Synopsys presently believes that we will not experience significant operational
problems arising from the Year 2000 problem (i.e., the inability of certain
computer programs to correctly process date information on or after January 1,
2000). However, if unforeseen Year 2000 issues arise with respect to Synopsys
products, one or more important customers experiences Year 2000-related problems
that interferes with their purchases of Synopsys products, or we are not able to
identify and fix Year 2000 problems relating to the computer systems and
software we rely on to run our business, we may experience a disruption in our
business, which could have a material adverse impact on our business, financial
condition and results of operations.
Change in Financial Accounting Standards
We prepare our financial statements in conformity with generally accepted
accounting principles (GAAP). GAAP are subject to interpretation by the American
Institute of Certified Public Accountants (AICPA), the Securities and Exchange
Commission (SEC) and various bodies formed to interpret and create appropriate
accounting policies. A change in these policies can have a significant effect on
our reported results, and may even affect our reporting of transactions
completed before a change is announced. Accounting policies affecting many other
aspects of our business, including rules relating to software revenue
recognition, purchase and pooling-of-interests accounting for business
combinations, employee stock purchase plans and stock option grants have
recently been revised or are under review by one or more groups. Changes to
these rules, or the questioning of current practices, may have a significant
adverse effect on our reported financial results or in the way we conduct our
business.
In addition, the preparation of financial statements in conformity with GAAP
requires us 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.
11
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REPORT OF KPMG PEAT MARWICK LLP, 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, 1998 and 1997, 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, 1998. 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 did not audit the consolidated financial
statements of EPIC Design Technology, Inc., a company acquired by Synopsys, Inc.
in a business combination accounted for as a pooling-of-interests as described
in Note 2 to the consolidated financial statements, which statements reflect
total revenues constituting 8% in fiscal 1996, of the related consolidated
total. Those consolidated statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to the amounts
included for EPIC Design Technology, Inc., is based solely on the report of the
other auditors.
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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, 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, 1998 and 1997, and the results of their operations and their
cash flows for each of the years in the three-year period ended September 30,
1998 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Mountain View, California
October 26, 1998
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SYNOPSYS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
(in thousands, except share data) 1998 1997
- --------------------------------- --------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 159,687 $ 126,414
Short-term investments 440,082 308,416
--------- ---------
Cash and short-term investments 599,769 434,830
Accounts receivable, net of allowances of $13,210 and $8,213,
respectively 126,336 119,030
Prepaid expenses, deferred taxes and other 42,451 36,580
--------- ---------
Total current assets 768,556 590,440
Property and equipment, net 99,879 92,079
Long-term investments 38,265 61,056
Other assets 39,927 25,014
--------- ---------
Total assets $ 946,627 $ 768,589
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,921 $ 21,439
Accrued liabilities 102,354 93,442
Current portion of long-term debt 7,648 8,964
Income taxes payable 50,313 33,282
Deferred revenue 92,980 97,523
--------- ---------
Total current liabilities 268,216 254,650
--------- ---------
Long-term debt 13,138 9,191
Deferred compensation 4,886 3,205
Commitments
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;
66,534,000 and 63,844,000 shares outstanding, respectively 665 638
Additional paid-in capital 416,943 334,086
Retained earnings 242,957 151,664
Treasury stock, at cost, 318,000 shares outstanding (11,184) --
Cumulative translation adjustment (666) (1,552)
Net unrealized gain on investments 11,672 16,707
--------- ---------
Total stockholders' equity 660,387 501,543
--------- ---------
Total liabilities and stockholders' equity $ 946,627 $ 768,589
========= =========
See accompanying notes to consolidated financial statements.
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SYNOPSYS, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30,
(in thousands, except per share data) 1998 1997 1996
- ------------------------------------- -------- -------- --------
Revenue:
Product $430,979 $408,256 $346,133
Service 286,961 238,700 179,466
-------- -------- --------
Total revenue 717,940 646,956 525,599
-------- -------- --------
Cost of revenue:
Product 36,371 36,777 28,752
Service 57,396 50,108 36,794
-------- -------- --------
Total cost of revenue 93,767 86,885 65,546
-------- -------- --------
Gross margin 624,173 560,071 460,053
Operating expenses:
Research and development 154,407 146,613 120,005
Sales and marketing 245,376 240,606 204,920
General and administrative 47,179 47,284 41,999
Merger-related and other costs 51,009 11,400 --
In-process research and development
and other costs 33,069 5,500 64,529
-------- -------- --------
Total operating expenses 531,040 451,403 431,453
-------- -------- --------
Operating income 93,133 108,668 28,600
Other income, net 25,984 24,361 11,628
-------- -------- --------
Income before provision for income taxes
and extraordinary items 119,117 133,029 40,228
Provision for income taxes 55,819 51,043 23,426
-------- -------- --------
Net income before extraordinary items 63,298 81,986 16,802
Extraordinary items - gains on extinguishment of debt
and sale of business unit, net of income tax expense 28,404 -- --
-------- -------- --------
Net income $ 91,702 $ 81,986 $ 16,802
======== ======== ========
Basic earnings per share:
Net income before extraordinary items $ 0.97 $ 1.31 $ 0.28
Extraordinary items 0.43 -- --
-------- -------- --------
Net income $ 1.40 $ 1.31 $ 0.28
======== ======== ========
Weighted average common shares 65,501 62,413 60,162
======== ======== ========
Diluted earnings per share:
Net income before extraordinary items $ 0.93 $ 1.25 $ 0.27
Extraordinary items 0.42 -- --
-------- -------- --------
Net income $ 1.34 $ 1.25 $ 0.27
======== ======== ========
Weighted average common shares
and equivalents 68,427 65,486 62,991
======== ======== ========
See accompanying notes to consolidated financial statements.
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SYNOPSYS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Net
Additional Deferred Cumulative Unrealized
Common Stock Paid-in Retained Stock Translation Gain on Treasury
(in thousands) Shares Amount Capital Earnings Compensation Adjustment Investments Stock Total
- -------------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Balance at
September 30, 1995 59,140 $ 591 $ 218,875 $ 68,030 $ (203) $ (39) $ 108 $ -- $ 287,362
Acquisition of
treasury stock (778) (7) -- -- -- -- -- (14,817) (14,824)
Issuance of common
stock in connection
with acquisition 545 5 14,506 -- -- -- -- -- 14,511
Stock issued under
stock option and
stock purchase plans 2,663 27 20,793 (9,282) -- -- -- 14,817 26,355
Tax benefit associated
with exercise of
stock options -- -- 8,967 -- -- -- -- -- 8,967
Amortization of
deferred stock
compensation -- -- -- -- 93 -- -- -- 93
Translation adjustment -- -- -- -- -- (320) -- -- (320)
Adjustment to
unrealized gain on
investments, net -- -- -- -- -- -- 11,601 -- 11,601
Net income -- -- -- 16,802 -- -- -- -- 16,802
------- ------- --------- --------- ------- -------- --------- --------- ---------
Balance at
September 30, 1996 61,570 616 263,141 75,550 (110) (359) 11,709 -- 350,547
Acquisition of
treasury stock (440) (5) -- -- -- -- -- (9,489) (9,494)
Stock issued under
stock option and
stock purchase plans 2,714 27 40,921 (5,872) -- -- -- 9,489 44,565
Tax benefit associated
with exercise of
stock options -- -- 30,024 -- -- -- -- -- 30,024
Amortization of
deferred stock
compensation -- -- -- -- 110 -- -- -- 110
Translation adjustment -- -- -- -- -- (1,193) -- -- (1,193)
Adjustment to
unrealized gain on
investments, net -- -- -- -- -- -- 4,998 -- 4,998
Net income -- -- -- 81,986 -- -- -- -- 81,986
------- ------- --------- --------- ------- -------- --------- --------- ---------
Balance at
September 30, 1997 63,844 638 334,086 151,664 -- (1,552) 16,707 -- 501,543
Acquisition of
treasury stock (353) (4) -- -- -- -- -- (12,403) (12,407)
Stock options assumed
in connection with
acquisition -- -- 7,636 -- -- -- -- -- 7,636
Stock issued under
stock option and
stock purchase plans 3,043 31 61,454 (409) -- -- -- 1,219 62,295
Tax benefit associated
with exercise of
stock options -- -- 13,767 -- -- -- -- -- 13,767
Translation adjustment -- -- -- -- -- 886 -- -- 886
Adjustment to
unrealized gain on
investments, net -- -- -- -- -- -- (5,035) -- (5,035)
Net income -- -- -- 91,702 -- -- -- -- 91,702
------- ------- --------- --------- ------- -------- --------- --------- ---------
Balance at
September 30, 1998 66,534 $ 665 $ 416,943 $ 242,957 $ -- $ (666) $ 11,672 $ (11,184) $ 660,387
======= ======= ========= ========= ======= ======== ========= ========= =========
See accompanying notes to consolidated financial statements.
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\
SYNOPSYS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30,
(in thousands) 1998 1997 1996
- -------------- --------- --------- ---------
Cash flows from operating activities:
Net income $ 91,702 $ 81,986 $ 16,802
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary gains (28,404) -- --
Depreciation and amortization 44,152 39,826 28,947
Interest accretion on notes payable 510 526 470
Provision for doubtful accounts and sales returns 8,431 2,574 624
Tax benefit associated with stock options 13,767 30,024 8,967
Deferred taxes (6,617) (20,811) (13,015)
Non-cash merger-related and other costs 8,367 3,084 --
In-process research and development and other costs 33,069 5,500 64,529
Gain on sale of long-term investments (9,930) (15,856) (1,173)
Net changes in operating assets and liabilities:
Accounts receivable (25,754) (25,490) (20,138)
Prepaid expenses and other (689) (3,134) (7,085)
Other assets (6,009) (1,735) (2,175)
Accounts payable and accrued liabilities 9,432 10,337 32,531
Income taxes payable 1,147 16,424 3,307
Deferred revenue 9,197 7,020 13,958
Deferred compensation 1,681 3,205 --
--------- --------- ---------
Net cash provided by operating activities 144,052 133,480 126,549
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sales of long-term investments 15,158 22,503 8,460
Proceeds from sale of business unit 51,900 5,000 --
Purchases of long-term investments (1,998) (25,342) (34,154)
Purchases and maturities of short-term investments (127,849) (52,886) (91,971)
Purchases of property and equipment (58,001) (61,308) (50,006)
Purchase of technology -- (335) (10,900)
Acquisitions (net of cash acquired) (30,354) -- 67
Capitalization of software development costs (2,122) (4,211) (3,696)
--------- --------- ---------
Net cash used in investing activities (153,266) (116,579) (182,200)
--------- --------- ---------
Cash flows from financing activities:
Principal payments on debt obligations (7,762) (11,568) (8,396)
Proceeds from sale of common stock, net 62,295 44,565 26,355
Purchases of treasury stock (12,407) (9,494) (14,824)
--------- --------- ---------
Net cash provided by financing activities 42,126 23,503 3,135
--------- --------- ---------
Effect of exchange rate changes on cash 361 (1,090) (287)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 33,273 39,314 (52,803)
Cash and cash equivalents, beginning of year 126,414 87,100 139,903
--------- --------- ---------
Cash and cash equivalents, end of year $ 159,687 $ 126,414 $ 87,100
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 770 $ 769 $ 704
Income taxes $ 46,206 $ 25,215 $ 21,181
Non-cash transactions:
Purchase of technology for notes -- -- $ 28,500
Notes payable issued in connection with acquisition $ 12,000 -- --
See accompanying notes to consolidated financial statements.
17
SYNOPSYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations. Synopsys, Inc. (Synopsys or the Company) is a leading
supplier of electronic design automation (EDA) solutions to the global
electronics market. The Company provides comprehensive design technologies to
creators of advanced integrated circuits, electronic systems, and systems on a
chip. The Company also provides consulting services and support to its customers
to streamline overall design process and accelerate time-to-market.
Fiscal Year End. The Company has a fiscal year that ends on the Saturday nearest
September 30. Fiscal 1998 was a 53-week year. Fiscal 1997 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.
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 revenues, assets and
liabilities, disclosure of 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.
Cash Equivalents, Fair Values of Financial Instruments and Concentration of
Credit Risk. Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents,
investments and trade receivables.
All of the Company's cash equivalents and investments are classified as
available-for-sale and are reported at fair value with material unrealized gains
and losses, if any, included in stockholders' equity. The fair value of
investments is based on quoted market prices. Realized gains and losses are
included in other income, net. Cash equivalents have original maturities of
three months or less. The Company has cash equivalents and investments with
various high quality institutions and, by policy, limits the amount of credit
exposure to any one institution.
The Company sells its products worldwide primarily to customers in the
semiconductor industry. The Company performs on-going credit evaluations of its
customers' financial condition and generally does not require collateral. The
Company maintains reserves for potential credit losses, and such losses have
been within management's expectations and have not been material in any year. As
of September 30, 1998, the Company had sold approximately $12.6 million of its
accounts receivable to a financial institution.
The fair value of the Company's cash, accounts receivable, long-term
investments, put and call and forward contracts relating to certain of the
Company's equity securities, accounts payable, long-term debt and foreign
currency contracts, approximates the carrying amount, which is the amount the
instrument could be exchanged in a current transaction between willing parties.
Foreign Currency Translation. The functional currency of each of the Company's
international subsidiaries is the foreign subsidiary's local currency. Assets
and liabilities of the Company's international operations are translated into
U.S. dollars at exchange rates in effect at the balance sheet date. Income and
expense items are translated at average exchange rates for the period.
Accumulated net translation adjustments are reported as a separate component of
stockholders' equity. Foreign exchange transaction gains and losses were not
material for all periods presented and are included in the results of
operations.
Synopsys' international business is an important contributor to the Company's
revenue and net profits. However, the majority of Synopsys' international sales
are denominated in the U.S. dollar, and an increase in the value of the U.S.
dollar relative to foreign currencies could make products sold internationally
less competitive. The operating expenses of Synopsys' overseas offices are paid
in local currencies and are subject to the effect of fluctuations in foreign
currency exchange rates as compared to their respective local currency. The
effect of foreign exchange rate fluctuations did not
16
18
significantly impact the Company's operating results. Financial exposure may
nonetheless result, primarily from the timing of transactions and the movement
of foreign exchange rates.
Foreign Exchange Hedging. The Company operates internationally and thus is
exposed to potentially adverse movements in foreign currency rate changes. In
fiscal 1998, the Company entered into foreign exchange forward contracts to
reduce its exposure to foreign currency rate changes on intercompany foreign
currency denominated balance sheet positions. The objective of these contracts
is to neutralize the impact of foreign currency exchange rate movements on the
Company's operating results.
These contracts require the Company to exchange currencies at rates agreed upon
at the inception of the contracts. The hedge contracts reduce the exposure to
fluctuations in exchange rate movements because the gains and losses associated
with foreign currency balances and transactions are generally offset with the
gains and losses of the hedge contracts. Because the impact of movements in
currency exchange rates on forward contracts offsets the related impact on the
underlying items being hedged, these financial instruments help alleviate the
risk that might otherwise result from changes in currency exchange rate
fluctuations.
The Company's accounting policies for these instruments are based on the
Company's designation of such instruments as hedging transactions. The criteria
the Company uses for designating an instrument as a hedge includes the
instrument's effectiveness in risk reduction. Gains and losses on these
contracts, all of which are designated and effective as hedges of existing
transactions, are recognized in operations in the period in which gains and
losses on the underlying transactions occur. The Company does not use derivative
financial instruments for speculative or trading purposes. In the event of
termination or extinguishment of a contract, associated gains and losses would
be recognized in operations in the period in which the contract was terminated
or extinguished.
These contracts contain credit risk in that the counterparty may be unable to
meet the terms of the agreements. The Company has limited these agreements to
major financial institutions to reduce such credit risk. Furthermore, the
Company monitors the potential risk of loss with any one financial institution
and does not expect any material loss as a result of default by the
counterparties.
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.
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. 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. Cost of
service revenue includes personnel and the related costs associated with
providing such service.
Accounts receivable include amounts due from customers for which revenue has
been recognized. Deferred revenue includes amounts received from customers for
which revenue has not been recognized.
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).
Leasehold improvements are recorded at cost and are amortized using the
straight-line method over the remaining lease term or the economic useful life
of the related asset, whichever is shorter. Property and equipment detail is as
follows:
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SEPTEMBER 30,
(in thousands) 1998 1997
- ------------- --------- ---------
Computer and other equipment $ 126,915 $ 125,702
Furniture and fixtures 15,341 18,792
Land 29,414 10,450
Leasehold improvements 23,579 19,743
--------- ---------
195,249 174,687
Less accumulated depreciation
and amortization (95,370) (82,608)
--------- ---------
$ 99,879 $ 92,079
========= =========
Software Development Costs. Capitalization of computer software development
costs begins upon the establishment of technological feasibility, which is
generally the completion of a working prototype. Software development costs
capitalized were $2.1 million, $4.2 million and $3.7 million in fiscal 1998,
1997 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 $2.2 million,
$3.7 million and $3.2 million in fiscal 1998, 1997 and 1996, respectively.
Goodwill. Goodwill represents the excess of the aggregate purchase price over
the fair value of the tangible and intangible assets acquired in various
acquisitions and is being amortized over the estimated useful life of five
years. The Company assesses the recoverability of goodwill by determining
whether the amortized asset over its useful life may be recovered through
estimated future cash flows. Amortization of goodwill charged to operations was
not material in fiscal 1998, 1997 and 1996, respectively.
Accrued Liabilities. Accrued liabilities consist of:
SEPTEMBER 30,
(in thousands) 1998 1997
- -------------- -------- --------
Payroll and related benefits $ 63,865 $ 55,723
Accrued merger and acquisition costs 3,513 1,237
Other accrued liabilities 34,976 36,482
-------- --------
Total $102,354 $ 93,442
======== ========
Income Taxes. The Company accounts for income taxes using 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 has been
established.
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.
Stock-Based Compensation. As permitted under Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," the
Company has elected to follow Accounting Principles Board Opinion No. 25 (APB
25), "Accounting for Stock Issued to Employees," in accounting for stock-based
awards to employees.
Effect of New Accounting Standards. In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS 130 establishes new
standards for reporting and
18
20
displaying comprehensive income and its components. Synopsys will adopt SFAS 130
as required for its first quarterly filing of fiscal 1999. SFAS 131 requires
disclosure of certain information regarding operating segments, products and
services, geographic areas of operation, and major customers. Management is in
the process of evaluating the effects of this change on its reporting segments.
Synopsys will adopt SFAS 131 as required for its fiscal 1999 annual report.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
and requires the Company to recognize all derivatives as either assets or
liabilities on the balance sheet and measure them at fair value. Gains and
losses resulting from changes in fair value would be accounted for based on the
use of the derivative and whether it is designated and qualifies for hedge
accounting. The Company will be required to implement SFAS 133 for its fiscal
2000. The Company has not determined the impact that SFAS 133 will have on its
financial statements and believes that such determination will not be meaningful
until closer to the date of initial adoption.
Reclassifications. Certain amounts reported in previous years have been
reclassified to conform to the fiscal 1998 presentation.
NOTE 2. BUSINESS COMBINATIONS
Mergers
In December 1997, the Company issued approximately 11.3 million shares of its
common stock in exchange for all the outstanding shares of common stock of
Viewlogic Systems, Inc. (Viewlogic), a worldwide supplier of 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. In
February 1997, the Company issued approximately 10.3 million shares of its
common stock in exchange for all the outstanding shares of common stock of EPIC
Design Technology, Inc. (EPIC), a developer of design automation tools for deep
submicron design in the area of integrated circuit power, timing, and
reliability analysis. In addition, options to acquire EPIC's common stock were
exchanged for options to acquire approximately 1.5 million shares of the
Company's common stock. These mergers were accounted for as
pooling-of-interests, and accordingly, the Company's consolidated financial
statements have been restated to include the financial position and results of
EPIC and Viewlogic for all periods presented.
The following information shows revenue and net income of the separate
enterprises through the periods preceding the business combinations and the
combined results following the business combinations.
YEARS ENDED SEPTEMBER 30,
(in thousands) 1998 1997 1996
- --------------- --------- --------- ---------
Total revenue:
Synopsys $ 639,658 $ 469,277 $ 353,500
Viewlogic 78,282 147,811 128,180
Epic -- 29,868 43,919
--------- --------- ---------
Combined $ 717,940 $ 646,956 $ 525,599
========= ========= =========
Net income:
Synopsys (1) $ 90,157 $ 69,490 $ 23,700
Viewlogic 1,545 9,592 2,780
Epic -- 2,904 (9,678)
--------- --------- ---------
Combined $ 91,702 $ 81,986 $ 16,802
========= ========= =========
(1) Includes extraordinary gains of $28.4 million, net of income tax
expense, in fiscal 1998.
The Company recorded merger-related and other costs of $51.0 million during
fiscal 1998. The following table presents the components of merger-related and
other costs recorded in fiscal 1998, along with charges against the reserves
through September 30, 1998:
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NON-CASH
WRITE-OFF RESERVE
(in thousands) TOTAL CHARGE AMOUNTS PAID OF ASSETS BALANCE
-------------- ------------ ------------ --------- --------
Transaction costs $ 9,245 $ (8,292) $ -- $ 953
Employee termination and
transition costs 10,975 (10,593) -- 382
Write-off of equipment and
other assets 8,367 -- (8,367) --
Legal and other settlements 6,894 (6,869) -- 25
Redundant facility and other costs 15,528 (13,375) -- 2,153
-------- -------- -------- --------
Total $ 51,009 $(39,129) $ (8,367) $ 3,513
======== ======== ======== ========
In connection with the EPIC merger, the Company recorded merger-related costs of
$11.4 million, which included transaction costs of $4.7 million, and costs
associated with integrating the operations of the two companies of $6.7 million.
Included in integration charges were redundant facility costs of $0.7 million,
computer and other equipment abandonment and removal costs of $5.2 million,
contract termination charges and other related expenses of $0.3 million and
other expenses of $0.5 million. Of the $11.4 million of merger-related expenses,
$8.3 million related to cash expenditures while $3.1 million related to non-cash
write-off of assets. As of September 30, 1998, all cash expenditures associated
with this merger had been paid, and there was no remaining balance in the
accrual.
During fiscal 1998, the Company sold VSI, the PCB/Systems design segment of the
Viewlogic business to a management-led buy-out group for $51.9 million in cash.
As a result of the transaction, the Company recorded an extraordinary gain of
$26.5 million, net of income tax expense, in the fourth quarter of fiscal 1998.
The Company retained a minority investment of 14.9% (fully diluted) in the new
company.
Acquisitions
In July 1998, the Company acquired Systems Science, Inc. (SSI). The acquisition
was accounted for as a purchase with the Company exchanging a combination of
cash of $26.0 million and notes of $12.0 million. In addition, the Company
reserved approximately 318,000 shares of its common stock for issuance under
SSI's stock option plan, which the Company assumed in the acquisition. The total
purchase price of $47.1 million was allocated to the acquired assets and
liabilities based on their estimated fair values as of the date of the
acquisition. This includes allocations of $18.2 million to goodwill and other
intangible assets, which are being amortized on a straight-line basis, generally
over a five-year period. Approximately $28.9 million was allocated to in-process
research and development and other costs and charged to operations because the
acquired technology had not reached technological feasibility and had no
alternative uses.
The Company acquired two small 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 $4.2 million, which was allocated to in-process research and development
and other costs 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.
Pro forma results of operations have not been presented since the effects of the
acquisitions were not material to the Company's consolidated financial position,
results of operations or cash flows for the periods presented.
NOTE 3. FINANCIAL INSTRUMENTS
Cash, cash equivalents and investments. All cash equivalents, short-term
investments, and non-current investments have been classified as
available-for-sale securities and consist of the following:
SEPTEMBER 30, 1998
UNREALIZED UNREALIZED ESTIMATED
(in thousands) COST GAINS LOSSES FAIR VALUE
- -------------- --------- --------- --------- ----------
Classified as current assets:
Tax-exempt commercial paper $ 23,806 $ -- $ -- $ 23,806
Money market funds 37,699 -- -- 37,699
Tax-exempt municipal obligations 282,542 26 -- 282,568
Money market preferred stock 122,975 -- -- 122,975
Municipal auction rate preferred stock 34,078 -- -- 34,078
Certificate of deposit 461 -- -- 461
--------- --------- --------- ---------
501,561 26 -- 501,587
Classified as non-current assets:
Tax-exempt municipal obligations 253 2 -- 255
Equity securities 19,820 22,111 (3,921) 38,010
--------- --------- --------- ---------
20,073 22,113 (3,921) 38,265
--------- --------- --------- ---------
Total securities $ 521,634 $ 22,139 $ (3,921) $ 539,852
========= ========= ========= =========
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SEPTEMBER 30, 1997
UNREALIZED UNREALIZED ESTIMATED
(in thousands) COST GAINS LOSSES FAIR VALUE
- -------------- -------- -------- -------- --------
Classified as current assets:
Tax-exempt commercial paper $ 37,673 $ -- $ -- $ 37,673
Tax-exempt municipal obligations 210,123 49 -- 210,172
Money market preferred stock 49,823 -- -- 49,823
Municipal auction rate preferred stock 43,418 -- -- 43,418
U.S. government obligations 1,996 7 -- 2,003
Certificate of deposit 2,000 -- -- 2,000
Corporate annuity 1,000 -- -- 1,000
-------- -------- -------- --------
346,033 56 -- 346,089
Classified as non-current assets:
Tax-exempt municipal obligations 6,209 17 -- 6,226
Equity securities 28,797 26,033 -- 54,830
-------- -------- -------- --------
35,006 26,050 -- 61,056
-------- -------- -------- --------
Total securities $381,039 $ 26,106 $ -- $407,145
======== ======== ======== ========
Short-term investments include tax-exempt municipal obligations 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, 1998, the underlying maturities of the short-term investments are
$172.1 million within one year, $6.5 million within five to ten years and $261.5
million after ten years.
At September 30, 1998, $61.5 million and $440.1 million are classified as cash
equivalents and short-term investments, respectively. At September 30, 1997,
$37.7 million and $308.4 million are classified as cash equivalents and
short-term investments, respectively. Realized gains and losses on sales of
short-term investments have not been material. During fiscal 1998, the Company
realized gains on sales of long-term investments of $13.9 million, which is
included in other income, net.
Strategic investments. In May 1996, the Company purchased 1,207,000 shares,
approximately 9.9 percent of the outstanding shares of Cooper and Chyan
Technology, Inc. (CCT), for $14.50 per share, pursuant to a strategic
relationship between the companies. In April 1997, the Company purchased an
additional 86,000 shares for $15.00 per share and the investment was classified
as available-for-sale. In May 1997, CCT and Cadence Design Systems, Inc.
(Cadence) consummated a merger, whereby each share of CCT was converted to 0.85
shares of Cadence stock. During fiscal year 1998, the Company sold 469,000
shares of Cadence stock and realized a gain of $10.0 million. As of September
30, 1998, the Company owns 823,000 shares of Cadence stock.
The Company entered into a put and call contract in the fourth quarter of fiscal
1998 for the sale of 425,000 Cadence shares with prices and expiration dates as
follows:
Date Shares Put Strike Call Strike
- ------------------ ------- ---------- -----------
December 15, 1999 105,000 $ 27.31 $ 33.78
March 15, 2000 105,000 $ 27.31 $ 34.50
June 15, 2000 105,000 $ 27.31 $ 35.37
September 15, 2000 110,000 $ 26.60 $ 35.28
As of September 30, 1998, the fair market value of the puts and calls, based on
a quoted market price of $24.625, was $1.1 million, which has been recorded in
unrealized gains on investments.
21
23
As of September 30, 1998, the Company has an investment in Artisan Components
(Artisan) of 594,000 shares, which is included in long-term investments. The
Company entered into a forward contract for the sale of its Artisan shares in
the third quarter of fiscal 1998. The contract has remaining prices and
expiration dates as follows:
Date Shares Forward Price
---- ------ -------------
December 15, 1998 148,574 $17.01
May 4, 1999 148,574 $17.01
June 15, 1999 148,574 $17.01
September 15, 1999 148,578 $17.01
As of September 30, 1998, the fair market value of the forward contract, based
on a quoted market price of $7.00, was $5.9 million, which has been recorded in
unrealized gains on investments.
Foreign exchange hedging. The Company has two foreign exchange lines of credit
available totaling $70.0 million, which expire in October 1998 and July 1999.
The Company had $38.4 million of short-term foreign exchange forward contracts
outstanding which approximated the fair value of such contracts and their
underlying transactions at September 30, 1998. These contracts are denominated
in Japanese, Italian, German, French and British currencies. The outstanding
forward contracts have maturities that expire in approximately one month. The
gains and losses on forward exchange contracts are included in earnings when the
underlying foreign currency denominated transaction is recognized. Gains and
losses related to these instruments at September 30, 1998 were not material. In
addition, the Company has not terminated or extinguished any foreign exchange
forward contracts. The Company does not anticipate any material adverse effect
on its consolidated financial position, results of operations, or cash flows
resulting from the use of these instruments.
Long-term debt. During 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 IBM
Agreement). In accordance with the IBM Agreement, the Company paid IBM $11.0
million in cash and issued $30.0 million in notes, which bear interest at 3%,
and are payable to IBM upon the earlier of achievement of scheduled milestones
or at maturity in fiscal 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 IBM Agreement. As a result of the transaction, the Company
incurred an in-process research and development charge of $39.7 million in
fiscal 1996. 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 income tax expense, related to the extinguishment of the note.
As of September 30, 1998, the notes had a balance of $7.4 million, of which $3.2
million is included in long-term debt.
During fiscal 1998, in connection with the acquisition of SSI, the Company
issued $14.0 million in notes, which bear interest at 6.6%, and are payable upon
the earlier of achievement of certain milestones or at maturity in fiscal 2005.
The notes were recorded at fair value of $12.0 million, using a discount rate
commensurate with the risks involved. As of September 30, 1998, the notes had a
balance of $12.0 million, of which $9.3 million is included in long-term debt.
The fair value of the Company's long-term debt approximates the carrying amount.
NOTE 4. COMMITMENTS AND CONTINGENCIES
The Company leases its domestic and international facilities under cancelable,
non-cancelable and month-to-month operating leases and certain office equipment
under operating leases. Rent expense was $25.5 million, $25.2 million and $21.4
million in 1998, 1997 and 1996, respectively.
Future minimum lease payments as of September 30, 1998, of which $2.2 million
has been accrued as merger-related expenses, are as follows:
(in thousands)
Fiscal Years Ending
-------------------
1999 $18,383
2000 17,510
2001 16,046
2002 14,688
2003 8,521
Thereafter 15,401
-------
Total minimum payments required $90,549
=======
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NOTE 5. STOCKHOLDERS' EQUITY
Net Income Per Share. The following is a reconciliation of the weighted-average
common shares used to calculate basic net income per share to the
weighted-average common shares used to calculate diluted net income per share
for fiscal 1998, 1997 and 1996:
YEARS ENDED SEPTEMBER 30,
(in thousands) 1998 1997 1996
- -------------- ------ ------ ------
Weighted-average common shares used to
calculate basic net income per share 65,501 62,413 60,162
Stock options outstanding 2,926 3,073 2,829
------ ------ ------
Weighted-average common shares used to
calculate diluted net income per share 68,427 65,486 62,991
====== ====== ======
Stock Repurchase Program. In July 1998, the Board of Directors authorized the
repurchase of up to 3,250,000 shares of the Company's outstanding common stock
in the open market over the following 24 months. The repurchased shares were to
be used for issuance under the Company's employee stock plans and for other
corporate purposes. During fiscal 1998, the Company purchased approximately
353,000 shares at an average price of $35. In October 1998, the Company
announced that it had rescinded its stock repurchase program to comply with
pooling-of-interests accounting guidance provided in the Securities and Exchange
Commission Staff Accounting Bulletin No. 96 (See Note 9).
In May 1996, the Board of Directors authorized the repurchase of up to 2,000,000
shares of the Company's outstanding common stock in the open market over the
following 24 months. During fiscal 1996, the Company purchased approximately
361,000 shares at an average price of $41 per share. During fiscal 1997, the
Company purchased approximately 205,000 shares at an average price of $46 per
share. All shares repurchased during fiscal 1996 and 1997 were reissued prior to
the merger with EPIC in February 1997, at which time the Company announced that
it had rescinded this stock repurchase program in order to comply with
pooling-of-interests accounting guidance provided in the Securities and Exchange
Commission Staff Accounting Bulletin No. 96.
Preferred Shares Rights Plan. The Company has adopted a number of provisions
that could have anti-takeover effects. In September 1997, the Board of Directors
adopted a Preferred Shares Rights Plan. In addition, the Board of Directors has
the authority, without further action by its stockholders, to fix the rights and
preferences 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. The rights expire on October 24, 2007.
Employee Stock Purchase Plan. Under the Company's 1992 Employee Stock Purchase
Plan (ESPP), 3,150,000 shares have been authorized for issuance as of September
30, 1998. Under the ESPP, employees are granted the right to purchase shares of
common stock at a price per share that is 85% of the lesser of: the fair market
value of the shares at (i) the beginning of a rolling two-year offering period,
or (ii) the end of each semi-annual purchase period. During fiscal 1998, 1997
and 1996, shares totaling 433,036, 457,877 and 486,887, respectively, were
issued under the plan at average prices of $27.61, $26.96 and $16.95 per share,
respectively. As of September 30, 1998, 1,379,421 shares of common stock are
reserved for the ESPP.
Stock Option Plans. Under the Company's 1992 Stock Option Plan (the 1992 Plan),
the Board of Directors may grant either incentive or non-qualified stock options
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. The shares
and stock options issued to new employees
23
25
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. Options expire ten years from the date of grant. As of September
30, 1998, 823,537 shares of common stock are reserved for future grants.
In fiscal 1998, Synopsys established a Non-Statutory Stock Option Plan (the 1998
Plan) under which it authorized 566,736 shares of common stock for granting of
non-qualified stock options to employees excluding officers and directors.
Exercisibility, option price and other terms are determined by the Board of
Directors, but the option price shall not be less than the fair value of the
stock at the date of grant. Options currently expire no later than ten years and
generally vest at the rate of 25% after one year from the date of grant, and
then ratably over the following 36 months. At September 30, 1998, 2,149 shares
of common stock are reserved for future grants.
Under the Company's 1994 Non-Employee Directors Stock Option Plan (the Directors
Plan), a total of 275,000 shares have been reserved for issuance. Pursuant to
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, 10,000 shares
of the Company's stock upon reelection to the Board, and 5,000 shares of the
Company's stock annually for service on Board committees, subject to a limit of
two committee-service grants per year. Stock options are granted at not less
than 100% of the fair market value of those shares on the grant date. Stock
options granted upon appointment or election to the Board vest 25% annually.
Stock options granted upon reelection to the Board and committee-service grants
vest 100% after the first year of continuous service. As of September 30, 1998,
116,000 shares of common stock are reserved for future grants.
The Company has assumed certain option plans in connection with business
combinations (See Note 2). Generally, these options were granted under terms
similar to the terms of the Company's stock option plans at prices adjusted to
reflect the relative exchange ratios. All assumed plans were terminated as to
future grants upon completion of each of the business combinations.
Additional information concerning stock option activity under the various plans
is as follows:
OPTIONS OUTSTANDING
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
----------- --------------
Outstanding at October 1, 1995 10,634,285 $17.63
Granted 4,406,013 $30.52
Exercised (2,173,998) $11.60
Canceled (1,549,325) $27.37
-----------
Outstanding at September 30, 1996 11,316,975 $22.38
Granted and assumed 7,563,443 $31.03
Exercised (2,255,850) $15.86
Canceled (4,302,151) $34.34
-----------
Outstanding at September 30, 1997 12,322,417 $24.72
Granted and assumed 4,455,781 $33.80
Exercised (2,641,655) $19.16
Canceled (2,003,247) $26.48
-----------
Outstanding at September 30, 1998 12,133,296 $29.05
===========
Options Exercisable at:
September 30, 1996 3,849,289 $16.93
September 30, 1997 4,017,263 $20.53
September 30, 1998 5,144,762 $24.50
The following table summarizes information about stock options outstanding at
September 30, 1998:
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OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ---------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (IN YEARS) PRICE EXERCISABLE PRICE
- ------------------------ ----------- --------------- ---------- ----------- ---------
$ 0.11 - $23.19 2,627,020 5.85 $15.93 2,121,829 $15.52
$23.22 - $28.19 2,887,130 7.74 $27.15 1,316,841 $26.65
$28.25 - $33.69 2,617,690 8.64 $32.22 773,873 $31.20
$33.74 - $37.38 2,589,573 8.78 $35.35 785,248 $35.23
$37.44 - $45.75 1,411,883 9.37 $39.90 146,971 $42.43
---------- ---- ------ --------- ------
$ 0.11 - $45.75 12,133,296 7.94 $29.05 5,144,762 $24.50
========== ==== ====== ========= ======
Stock-Based Compensation. Under APB 25, the Company generally recognizes no
compensation expense with respect to stock-based awards to employees. Pro forma
information regarding net income and net income per share is required by SFAS
123 for awards granted after September 30, 1995, as if the Company had accounted
for its stock-based awards to employees under the fair value method of SFAS 123.
The fair value method of the Company's stock-based awards to employees was
estimated using the Black-Scholes option pricing model. The Black-Scholes option
valuation model was developed for use in estimating fair value of traded options
that have no vesting restrictions and are fully transferable. The Black-Scholes
model requires the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company's stock-based awards to
employees have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
stock-based awards to employees. The fair value of the Company's stock-based
awards to employees was estimated assuming no expected dividends and the
following weighted-average assumptions:
STOCK OPTION PLANS ESPP
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Expected life (in years) 5.3 5.4 5.4 1.25 0.9 0.9
Risk-free interest rate 5.3% 6.3% 6.0% 5.5% 5.8% 5.6%
Volatility 55.0% 55.1% 53.6% 55.0% 55.1% 53.6%
The weighted-average estimated fair value of stock options granted during fiscal
1998, 1997 and 1996 was $20.32, $12.87 and $17.49 per share, respectively. The
weighted-average estimated fair value of shares granted under the ESPP during
fiscal 1998, 1997 and 1996 was $11.70, $10.74 and $9.64 per share, respectively.
For pro forma purposes, the estimated fair value of the Company's stock-based
awards to employees is generally amortized over the options' vesting period of
four years (for options) and the six-month purchase period (for stock purchases
under the ESPP). The Company's pro forma information is as follows:
YEARS ENDED SEPTEMBER 30,
(in thousands, except per share amounts) 1998 1997 1996
- ---------------------------------------- ---------- ---------- ----------
Net income
As reported $ 91,702 $ 81,986 $ 16,802
Pro forma $ 46,936 $ 54,114 $ 5,239
Earnings per share - basic
As reported $ 1.40 $ 1.31 $ 0.28
Pro forma $ 0.72 $ 0.87 $ 0.09
Earnings per share - diluted
As reported $ 1.34 $ 1.25 $ 0.27
Pro forma $ 0.71 $ 0.83 $ 0.08
Because SFAS 123 is applicable only to awards granted subsequent to September
30, 1995, its pro forma effect will not be fully reflected until fiscal 1999.
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NOTE 6. INCOME TAXES
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.
The components of the provision for income taxes are as follows:
YEARS ENDED SEPTEMBER 30,
(in thousands) 1998 1997 1996
- -------------- -------- -------- --------
Current:
Federal $ 40,452 $ 26,998 $ 14,154
State 5,555 4,562 2,525
Foreign 2,662 5,875 5,083
-------- -------- --------
48,669 37,435 21,762
-------- -------- --------
Deferred:
Federal (6,003) (14,325) (6,636)
State (858) (2,062) (992)
Foreign 244 (29) 325
-------- -------- --------
(6,617) (16,416) (7,303)
-------- -------- --------
Charge equivalent to the federal and state tax benefit
related to employee stock options 13,767 30,024 8,967
-------- -------- --------
Provision for income taxes $ 55,819 $ 51,043 $ 23,426
======== ======== ========
The components of the Company's total income before provision for income taxes
are as follows:
YEARS ENDED SEPTEMBER 30,
(in thousands) 1998 1997 1996
- -------------- -------- -------- --------
United States $113,254 $122,520 $ 35,274
Foreign 5,863 10,509 4,954
-------- -------- --------
$119,117 $133,029 $ 40,228
======== ======== ========
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:
YEARS ENDED SEPTEMBER 30,
(in thousands) 1998 1997 1996
- -------------- -------- -------- --------
Statutory federal tax $ 41,691 $ 46,560 $ 14,080
State tax, net of federal benefit 6,121 6,712 2,231
Tax credits (1,665) (3,717) (993)
Tax benefit from foreign sales corporation (3,826) (2,920) (2,013)
Tax exempt income (5,911) (3,797) (3,239)
Equity method for investments -- 744 --
Foreign tax in excess of U.S. statutory tax 872 1,501 575
Non-deductible merger and acquisition expenses 7,379 6,884 1,500
In-process research and development expenses 9,888 1,921 8,694
Other 1,270 2,590 2,591
Valuation Allowance -- (5,435) --
-------- -------- --------
$ 55,819 $ 51,043 $ 23,426
======== ======== ========
A net deferred tax asset of $30.5 million and $23.8 million is included in
prepaid expenses, deferred taxes, and other at September 30, 1998 and 1997,
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:
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SEPTEMBER 30,
(in thousands) 1998 1997
- -------------- -------- --------
Deferred tax assets:
Tax credit carryovers $ 220 $ 672
Prepaid commissions -- 951
Accounts receivable -- 618
Deferred revenue 4,346 9,645
Joint venture and acquisition costs 4,882 7,912
Reserves and other expenses not currently deductible 23,333 18,601
Depreciation and amortization 4,187 599
Unrealized foreign exchange losses 269 --
Other 1,187 670
-------- --------
Deferred tax assets 38,424 39,668
Deferred tax liabilities:
Depreciation and amortization -- (932)
Unrealized gain on investments (7,287) (9,382)
Unrealized foreign exchange gains -- (212)
Net capitalized software development costs (674) (2,994)
Other -- (2,302)
-------- --------
Deferred tax liabilities (7,961) (15,822)
-------- --------
Net deferred tax asset $ 30,463 $ 23,846
======== ========
At September 30, 1998, the Company believes that it is more likely than not that
the results of future operations will generate sufficient taxable income to
realize the deferred tax assets.
At September 30, 1998, the Company had alternative minimum tax credit carryovers
of $0.2 million, which do not expire.
NOTE 7. GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMER INFORMATION
The Company operates in a single industry segment, the development, marketing,
and support of electronic design automation software and systems products. The
Company's foreign operations consist primarily of sales, marketing and service
activities in subsidiaries throughout the world. No one customer accounted for
more than ten percent of the Company's revenue in fiscal 1998, 1997 and 1996,
respectively.
Summarized financial information by major geographic area is as follows:
YEARS ENDED SEPTEMBER 30,
(in thousands) 1998 1997 1996
- -------------- --------- --------- ---------
Revenue:
North America $ 506,566 $ 456,669 $ 358,959
Europe 128,347 109,760 88,856
Pacific Rim 151,409 152,413 132,619
Transfers between geographic areas (68,382) (71,886) (54,835)
--------- --------- ---------
Consolidated $ 717,940 $ 646,956 $ 525,599
========= ========= =========
Operating income:
North America $ 95,040 $ 61,408 $ 50,567
Europe 30,995 17,110 8,483
Pacific Rim 51,176 42,545 28,790
Corporate and eliminations (84,078) (12,395) (59,240)
--------- --------- ---------
Consolidated $ 93,133 $ 108,668 $ 28,600
========= ========= =========
Identifiable assets:
North America $ 411,150 $ 351,398 $ 312,983
Europe 38,949 25,410 39,139
Pacific Rim 53,376 57,739 41,330
Corporate assets and eliminations 443,152 334,042 191,401
--------- --------- ---------
Consolidated $ 946,627 $ 768,589 $ 584,853
========= ========= =========
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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 1998,
identifiable assets in the Pacific Rim include $22.5 million of accounts
receivable from customers located in Japan. Management believes allowances are
adequate to cover any uncollectible amounts. Corporate assets consist primarily
of cash and investments.
NOTE 8. SELECTED QUARTERLY DATA (UNAUDITED)
THREE MONTHS ENDED
(in thousands, except per share data) DEC. 31 MAR. 31 JUN. 30 SEP. 30
- ------------------------------------- ----------- ----------- ----------- -----------
1998:
Revenue $ 174,212 $ 170,105 $ 179,606 $ 194,017
Gross margin 150,720 148,815 156,280 168,358
Income (loss) before provision for
income taxes and extraordinary items (1) (4,195) 38,678 52,532 32,102
Net income (loss) (6,400) 25,527 34,671 37,904
Earnings (loss) per share
Basic (0.10) 0.39 0.52 0.57
Diluted (0.10) 0.38 0.50 0.55
Market stock price range: (2)
High $ 46.06 $ 36.00 $ 45.81 $ 42.44
Low $ 35.06 $ 29.50 $ 30.97 $ 26.13
1997:
Revenue $ 153,903 $ 156,771 $ 162,610 $ 173,672
Gross margin 134,339 135,834 139,567 150,331
Income before provision for income taxes (3) 37,444 17,516 37,132 40,937
Net income 24,332 6,905 24,120 26,629
Earnings per share
Basic 0.39 0.11 0.39 0.42
Diluted 0.37 0.11 0.37 0.40
Market stock price range: (2)
High $ 50.00 $ 46.25 $ 38.00 $ 45.19
Low $ 39.75 $ 24.25 $ 21.75 $ 29.50
(1) Includes merger-related and other costs of $36.0 million, $11.9 million and
$3.1 million, for the first, second and third quarters of fiscal 1998,
respectively. Includes in-process research and development and other costs of
$4.2 million and $28.9 million in the first and fourth quarters of fiscal 1998,
respectively.
(2) The Company's common stock is traded on The Nasdaq Stock Market under the
symbol "SNPS." The stock prices shown represent quotations among dealers without
adjustments for retail markups, markdowns or commissions and may not represent
actual transactions. As of October 3, 1998, there were approximately 734
stockholders of record. To date, the Company has paid no cash dividends on its
capital stock, and has no current intention to do so.
(3) Includes merger-related and other costs of $11.4 million and in-process
research and development and other costs of $5.5 million for the second quarter
of fiscal 1997.
NOTE 9. SUBSEQUENT EVENT
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30
On October 26, 1998, the Company signed a definitive agreement to merge with
Everest Design Automation, Inc. (Everest). The Company will exchange
approximately 1.4 million shares of its common stock for all the outstanding
stock of Everest and will reserve approximately 100,000 shares of its common
stock for issuance under Everest's stock option plan, which the Company will
assume in the transaction. The business combination will be accounted for as a
pooling-of-interests. The Board of Directors approved the rescission of the
Company's stock repurchase program in order to comply with pooling-of-interests
accounting guidance provided in the Securities and Exchange Commission Staff
Accounting Bulletin No. 96. Retained earnings will be restated as of October 1,
1998 to reflect the pooling-of-interests combination.