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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 2, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _____
COMMISSION FILE NUMBER: 0-19807
SYNOPSYS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 56-1546236
-------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
700 EAST MIDDLEFIELD ROAD
MOUNTAIN VIEW, CA 94043
(Address of principal executive offices)
TELEPHONE: (650) 962-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (l) has filed all reports
required to be filed by Section 13, or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
70,213,616 shares of Common Stock as of February 1, 1999
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SYNOPSYS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 1998
INDEX
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - December 31, 1998
and September 30, 1998 3
Condensed Consolidated Statements of Operations - Three Months
Ended December 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows - Three Months
Ended December 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYNOPSYS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
DECEMBER 31, SEPTEMBER 30,
1998 1998
------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 86,215 $164,548
Short-term investments 566,986 440,082
---------- --------
Cash and short-term investments 653,201 604,630
---------- --------
Accounts receivable, net of allowances of
$12,746 and $13,210, respectively 130,215 126,336
Prepaid expenses, deferred taxes and other 40,931 42,461
---------- --------
Total current assets 824,347 773,427
---------- --------
Property and equipment, net 107,946 99,998
Long-term investments 42,267 38,265
Other assets 41,738 39,943
---------- --------
Total assets $1,016,298 $951,633
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 92,861 $117,412
Current portion of long-term debt 3,398 7,783
Accrued income taxes 36,907 50,313
Deferred revenue 95,727 93,160
---------- --------
Total current liabilities 228,893 268,668
---------- --------
Long-term debt 9,797 13,138
Deferred compensation 8,184 4,886
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; 69,886,000 and 67,925,000 shares
outstanding, respectively 699 679
Additional paid-in capital 478,769 423,975
Retained earnings 276,200 240,465
Treasury stock, at cost -- (11,184)
Accumulated other comprehensive income 13,756 11,006
---------- --------
Total stockholders' equity 769,424 664,941
---------- --------
Total liabilities and stockholders' equity $1,016,298 $951,633
========== ========
The accompanying notes are an integral part of these financial statements.
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SYNOPSYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
THREE MONTHS ENDED
DECEMBER 31,
1998 1997
---------- --------
(unaudited)
Revenue:
Product $109,959 $110,425
Service 70,267 63,787
------- -------
Total revenue 180,226 174,212
------- -------
Cost of revenue:
Product 7,595 8,811
Service 14,111 14,681
------- -------
Total cost of revenue 21,706 23,492
------- -------
Gross margin 158,520 150,720
------- -------
Operating expenses:
Research and development 40,936 40,437
Sales and marketing 55,578 66,161
General and administrative 11,092 13,287
Merger-related and other costs -- 36,000
In-process research and development
and other costs -- 4,191
------- -------
Total operating expenses 107,606 160,076
------- -------
Operating income (loss) 50,914 (9,356)
Other income, net 8,484 4,941
------- -------
Income (loss) before provision for income taxes
and extraordinary item 59,398 (4,415)
Provision for income taxes 19,007 4,074
------- -------
Net income (loss) before extraordinary item 40,391 (8,489)
Extraordinary item, net of income tax expense -- 1,869
------- -------
Net income (loss) $40,391 $(6,620)
======= ========
Basic earnings (loss) per share:
Net income (loss) before extraordinary item $ 0.58 $ (0.13)
Extraordinary item -- 0.03
------- -------
Net income (loss) $ 0.58 $ (0.10)
======= ========
Weighted average common shares 69,166 65,260
======= =======
Diluted earnings (loss) per share:
Net income (loss) before extraordinary item $ 0.56 $ (0.13)
Extraordinary item -- 0.03
------- -------
Net income (loss) $ 0.56 $ (0.10)
======= ========
Weighted average common shares
and equivalents 72,384 65,260
======= =======
The accompanying notes are an integral part of these financial statements.
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SYNOPSYS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
THREE MONTHS ENDED
DECEMBER 31,
1998 1997
------------ -------------
Cash flows provided by operating activities: (unaudited)
Net income (loss) $ 40,391 $ (6,620)
Adjustments to reconcile net income (loss) to cash flows
provided by operating activities:
Depreciation and amortization 11,489 11,382
Tax benefit associated with stock options 13,519 4,300
Provision for doubtful accounts and sales returns (464) 1,250
Interest accretion on notes payable 252 100
Deferred taxes 978 (107)
Gain on sale of long-term investments (3,965) (2,000)
Noncash merger-related and other costs -- 6,306
In-process research and development and other costs -- 4,191
Extraordinary gain on extinguishment of debt -- (1,869)
Changes in operating assets and liabilities:
Accounts receivable (3,415) (13,555)
Prepaid expenses and other current assets 552 1,964
Other assets (3,191) (2,044)
Accounts payable and accrued expenses (24,551) 11,831
Accrued income taxes (13,406) (21,045)
Deferred revenue 2,567 9,958
Deferred compensation 3,298 1,995
--------- ---------
Cash flows provided by operating activities 24,054 6,037
--------- ---------
Cash flows used in investing activities:
Expenditures for property and equipment (17,791) (6,614)
Proceeds from sale of long-term investments 5,545 4,220
Purchases of long-term investments (1,850) (712)
Purchases and maturities of short-term investments, net (128,255) (33,954)
Acquisitions, net of cash acquired -- (2,236)
Capitalization of software development costs (250) (601)
--------- ----------
Cash flows used in investing activities (142,601) (39,897)
--------- ---------
Cash flows provided by financing activities:
Payments of long-term debt (7,978) (2,665)
Issuances of common stock 47,823 18,527
--------- ---------
Cash flows provided by financing activities 39,845 15,862
--------- ---------
Effect of exchange rate changes on cash 369 (1,319)
--------- ----------
Net decrease in cash and cash equivalents (78,333) (19,317)
Cash and cash equivalents, beginning of period 164,548 127,307
--------- ---------
Cash and cash equivalents, end of period $ 86,215 $ 107,990
========= =========
The accompanying notes are an integral part of these financial statements.
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SYNOPSYS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
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 the overall
design process and accelerate time-to-market.
The unaudited condensed consolidated financial statements have been prepared
by the Company and reflect all adjustments which are, in the opinion of
management, necessary for a fair presentation of the interim periods presented.
Such adjustments are of a normal recurring nature, except for merger-related and
other costs and in-process research and development charges. The consolidated
results of operations for the interim periods presented are not necessarily
indicative of the results for any future interim period or for the entire fiscal
year. Certain information and footnote disclosures normally included in annual
consolidated financial statements prepared in accordance with generally accepted
accounting principles have been omitted, although the Company believes that the
disclosures included are adequate to make the information presented not
misleading. The unaudited condensed consolidated financial statements and notes
included herein should be read in conjunction with the consolidated financial
statements and notes for the fiscal year ended September 30, 1998, included in
the Company's 1998 Annual Report on Form 10-K.
The Company has a fiscal year that ends on the Saturday nearest September
30. Fiscal 1999 will be a 52-week year while fiscal 1998 was a 53-week year. For
presentation purposes, the condensed consolidated financial statements and notes
refer to the quarter's calendar month end.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the recorded amounts reported in the unaudited condensed
consolidated financial statements and accompanying notes. A change in the facts
and circumstances surrounding these estimates could result in a change to the
estimates and impact future operating results.
2.BUSINESS COMBINATIONS
On November 20, 1998, the Company exchanged approximately 1.4 million shares
of its common stock for all the outstanding stock of Everest Design Automation,
Inc. (Everest) and reserved approximately 100,000 shares of its common stock for
issuance under Everest's stock option plan, which the Company assumed in the
transaction. The business combination was 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. The Company's condensed consolidated financial
statements have been restated to include the financial position and results of
Everest for all periods presented. The results of operations previously reported
by the separate enterprises and the combined amounts presented in the
accompanying consolidated financial statements are summarized below:
THREE MONTHS ENDED
---------------------------------
(in thousands) DECEMBER 31, DECEMBER 31,
1998 1997
--------- ---------
Total revenue:
Synopsys $180,226 $174,212
Everest
--------- ---------
Combined $180,226 $174,212
========= =========
Net income (loss):
Synopsys $41,152 $(6,400)
Everest (761) (220)
--------- ---------
Combined $40,391 $(6,620)
========= =========
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3. LONG-TERM DEBT
In December 1998, Synopsys settled the remaining balance of the long-term
debt related to the modified International Business Machines Corporation (IBM)
Joint Development and License Agreement. In addition, the original agreement as
discussed in Note 3 in the Company's 1998 Annual Report on Form 10-K, was
dissolved.
4. COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 130, Reporting Comprehensive Income as of the first quarter of fiscal 1999.
SFAS 130 establishes new rules for the reporting and display of comprehensive
income and its components, however, it has no impact on the Company's net income
or total stockholders' equity.
The following table sets forth the components of comprehensive income
(loss), net of income tax expense:
THREE MONTHS ENDED
DECEMBER 31,
------------------------
(in thousands) 1998 1997
------- -------
Net income (loss) $40,391 $(6,620)
Cumulative translation adjustment 369 (1,319)
Change in unrealized gain (loss) on
available-for-sale investments 2,381 (4,386)
------- -------
Total comprehensive income (loss) $43,141 $(12,325)
======= =========
5. EARNINGS PER SHARE
Basic earnings per share is computed using the weighted-average number of
common shares. 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.
The following table sets forth the computation of basic and diluted earnings
per share:
INCOME SHARES PER SHARE
(in thousands, except per share amounts) (NUMERATOR) (DENOMINATOR) AMOUNT
---------- ------------ ----------
Three months ended December 31, 1998:
Basic earnings per share:
Net income $40,391 69,166 $0.58
Effect of dilutive securities:
Stock options outstanding -- 3,218 (0.02)
------ ------ ------
Diluted EPS:
Net income $40,391 72,384 $0.56
======= ====== =====
Three months ended December 31, 1997:
Basic and diluted loss per share:
Loss before extraordinary item $(8,489) 65,260 $(0.13)
Extraordinary item 1,869 -- 0.03
------ ------ ----
Net loss $(6,620) 65,260 $(0.10)
======== ====== =======
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7. EFFECT OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
Disclosures about Segments of an Enterprise and Related Information and in June
1998, issued SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. Readers are referred to the "Effect of New Accounting Standards"
section of the Company's 1998 Annual Report on Form 10-K for further discussion.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934. When used in the
following discussion, the words "projects," "expects," "believes," "anticipates"
and similar expressions are intended to identify forward-looking statements.
Actual results could differ materially from those anticipated in such
forward-looking statements as a result of certain factors, including those set
forth under "Factors That May Affect Future Results."
RESULTS OF OPERATIONS
Business Combinations. On November 20, 1998, the Company exchanged
approximately 1.4 million shares of its common stock for all the outstanding
stock of Everest Design Automation, Inc. (Everest) and reserved approximately
100,000 shares of its common stock for issuance under Everest's stock option
plan, which the Company assumed in the transaction. The business combination was
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. The Company's condensed
consolidated financial statements have been restated to include the financial
position and results of Everest for all periods presented.
Revenue. Revenue for the first quarter of fiscal 1999 increased 3% to $180.2
million from $174.2 million in the first quarter of fiscal 1998. The growth
resulted primarily from increased worldwide licensing and sales of Synopsys'
software products. On October 2, 1998, the Company sold the printed circuit
board/systems (PCB/Systems) business it acquired in its merger with Viewlogic
Systems, Inc. (Viewlogic). The results of first quarter of fiscal 1998 include
revenue from the PCB/Systems business, while the first quarter of fiscal 1999
does not. The PCB/Systems revenue represented 9% of total revenue in the first
quarter of fiscal 1998. The percentage of the Company's total revenue
attributable to products decreased to 61% in the first quarter of fiscal 1999,
compared to 63% in the first quarter of fiscal 1998. This decrease was due in
part to relatively faster growth in service revenue from training and consulting
services and the renewal of maintenance and support contracts during the first
quarter of fiscal 1999.
International revenue declined 11% to $64.4 million for the first quarter of
fiscal 1999, compared to $72.6 million for the comparable period of the prior
year. International revenue represented approximately 36% and 42% of total
revenue for the first quarter of fiscal 1999 and fiscal 1998, respectively. This
decline as a percentage of total revenue primarily occurred in Europe and Japan
and was related to seasonal fluctuations and continued weakness in the Japanese
economy.
Cost of Revenue. Cost of revenue as a percentage of total revenue was 12% in
the first quarter of fiscal 1999 compared to 13% in the first quarter of fiscal
1998. The reduction in cost of revenue resulted from the divestiture of the
PCB/Systems business.
Research and Development. Research and development expenses as a percentage
of total revenue remained at 23% in the first quarter of fiscal 1999 and fiscal
1998, and increased in absolute dollars to $40.9 million from $40.4 million. The
increase in absolute dollars was primarily attributable to increases in
personnel and personnel-related costs associated with the development of new
products, partially offset by a decrease in expenses because the first quarter
of fiscal 1998 contained 14 weeks and the operations of the PCB/Systems
business, while the first quarter of fiscal 1999 contained 13 weeks and reflects
divestiture of the PCB/Systems business.
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Sales and Marketing. Sales and marketing expenses as a percentage of total
revenue decreased to 31% in the first quarter of fiscal 1999 from 38% in the
first quarter of fiscal 1998, and decreased in absolute dollars to $55.6 million
from $66.2 million. The decrease in sales and marketing spending was primarily
due to the Company realizing expense reductions in connection with aligning
Viewlogic's operations that began to materialize in the second quarter of fiscal
1998. Also, the first quarter of fiscal 1998 included 14 weeks of operations and
the operations of the PCB/Systems business, while the first quarter of fiscal
1999 contained 13 weeks and reflects divestiture of the PCB/Systems business.
General and Administrative. General and administrative expenses as a
percentage of total revenue decreased to 6% in the first quarter of fiscal 1999
from 8% in the first quarter of fiscal 1998, and decreased in absolute dollars
to $11.1 million from $13.3 million. The decrease in spending was primarily due
to the Company realizing expense reductions in connection with aligning
Viewlogic's operations that began to materialize in the second quarter of fiscal
1998. Also, the decrease related to the inclusion of an additional week of
operations in the first quarter of fiscal 1998 and the operations of the
PCB/Systems business, partially offset by an increase in expenses for
compensation and benefits.
Other Income, net. Other income, net increased 72% to $8.5 million for the
first quarter of fiscal 1999, compared to $4.9 million for the comparable period
of the prior year and increased as a percentage of total revenue to 5% in the
first quarter of fiscal 1999 from 3% in the comparable period of the prior year.
The increase was primarily due to higher average invested cash and short-term
investment balances, which yielded more interest income in the first quarter of
fiscal 1999, compared to the first quarter of fiscal 1998 and increased sales of
long-term investments. The increase in the invested cash and short-term
investment balances resulted primarily from increased cash flow generated from
the Company's operations and cash proceeds from a relatively greater number of
employee stock options exercised during the first quarter of fiscal 1999.
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 anticipate any material loss with
respect to its investment portfolio.
The following table presents the carrying value and related weighted-average
interest rates for the Company's investment portfolio. The carrying value
approximates fair value at December 31, 1998. In accordance with the Company's
investment policy, all investments mature in fifteen months or less.
Principal (Notional) Amounts in U.S. Dollars:
Carrying Average
(in thousands, except interest rates) Amount Interest Rate
-------- -------------
Short-term investments - fixed rate $566,986 3.78%
Money market funds - variable rate 46,133 3.75%
--------
Total interest bearing instruments $613,119 3.78%
========
Foreign Currency Risk. The Company enters into foreign exchange forward
contracts to reduce its exposure to currency fluctuations on intercompany
foreign currency denominated balance sheet positions. 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 $26.6 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 December 31,
1998. Looking forward, 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. There can be no assurance
that these strategies will be effective or that transaction losses can be
minimized or forecasted accurately.
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The following table provides information about the Company's foreign exchange
forward contracts at December 31, 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 December 31, 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
-------- ----------
Forward Contracts:
Japanese yen $ 15,660 115.31
British pound sterling 1,023 0.60
German mark 3,734 1.67
French franc 5,699 5.60
Italian lira 456 1,653.45
The unrealized gain (loss) on the outstanding forward contracts at December
31, 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments were $653.2 million, an
increase of $48.6 million from September 30, 1998. The increase is primarily a
result of cash generated by operations of $24.1 million and through investing
and financing activities, mainly the exercise of stock options and purchases of
stock through the employee stock purchase plan of $47.8 million and the proceeds
on sale of long-term investments of $5.5 million. These cash flows were
partially offset by cash outflows for investing and financing activities, mainly
capital expenditures of $17.8 million and cash paid on debt obligations of $8.0
million.
Accounts receivable increased 3% during the three months ended December 31,
1998. Days sales outstanding in receivables increased to 65 days as of December
31, 1998 from 59 days at September 30, 1998.
At December 31, 1998, the Company had two foreign exchange lines of credit
available totaling $70.0 million which expire in July 1999 and October 1999.
The Company's management believes that is 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."
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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 over 90% 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 interactions 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 December 31, 1998, we had completed approximately 40% of the total effort for
the projects we believe are necessary to fully address potential Year 2000
issues relating to our internal computer systems and software.
In addition to conducting an assessment of our products and internal systems
and software, we have done a phone survey of our 200 most important vendors and
service providers. As of December 31, 1998, we had received responses from
approximately 60% of such third parties. A follow-up mail survey is being
conducted with each such vendor and service provider, including those who
responded to the initial survey, which we expect to be completed by February 28,
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 know that certain of the computer
equipment and software we currently use will require replacement or modification
as a result of Year 2000 issues. In certain instances, an anticipated
replacement or modification has been accelerated due to Year 2000 issues.
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, including $3.5 million
of incremental costs relating to hardware, software and consulting resources
with the balance representing the costs associated with reallocating internal
resources. 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 December 31, 1998, we
had incurred costs of approximately $1.4 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, in conjunction with the Company's overall crisis planning
efforts.
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EUROPEAN MONETARY UNIT
The Company's sales to European customers are primarily U.S. dollar based.
However, the Company recognizes the potential importance the newly introduced
European Monetary Unit (EMU) 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 EMU. 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 EMU 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:
o 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.
o 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.
o 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 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.
o The accounting rules we are required to follow only permit us to
recognize revenue when certain criteria are met. Orders for certain of
our 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. Therefore, for a given quarter,
it is possible for us to fall short in our revenue and/or earnings plan
even while orders and backlog remain on plan or, conversely, to meet our
revenue and/or earnings plan by drawing on backlog and deferred revenue
while orders are under 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. In
general, competition is based on product quality and features, post-sales
support, price and, as discussed below, the ability to offer a complete design
flow. 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 the first quarter of fiscal 1999,
Synopsys' competitors offered aggressive discounts on their products. If this
behavior continues, overall pricing for EDA products may be affected. 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 needs of our
customers. 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
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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 and Design Acceleration, Inc. Each of these acquisitions 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. In fiscal 1998 and the first quarter of fiscal 1999, synthesis and
related "design creation" products accounted for approximately 45-50% of our
revenue, with synthesis accounting for approximately 30% of revenue. In order to
meet our revenue plan, revenue from our non-synthesis design creation products,
certain high level verification products, and our deep submicron products must
grow faster than our overall revenue growth target. Among the products that we
expect to be the most important contributors to revenue growth are our
PrimeTime(R) timing analysis, Formality(R) formal verification, Module
Compiler(TM) datapath synthesis, VCS(TM) Verilog simulation and EPIC deep
submicron analysis and verification products. If revenue growth for these
products fails to meet our expectations, it is unlikely that we will meet our
overall revenue growth target.
In order to sustain revenue growth over the long term, we will have to
introduce new products that are accepted by a broad range of customers and to
significantly expand our capacity to offer consulting services. Product success
is difficult to predict. The introduction of new products and growth of a market
for such products cannot be assured. In the past we, like all companies, have
had products that have failed to meet our revenue expectations. Expanding
revenue from consulting services 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 from the software business, however, and increasing consulting orders
and revenue while maintaining an adequate level of profit can be difficult.
There can be no assurance that we will be successful in expanding revenue from
existing or new products at the desired rate or in expanding our services
business, and the failure to do so would have a material adverse effect on our
business, financial condition and results of operations.
Integration of Acquired Businesses. We have acquired or merged with a number
of companies in recent years, including EPIC Design Technology, Inc., Viewlogic,
Systems Science, Inc. 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. Despite
recent indications of a recovery in the semiconductor industry, the outlook for
fiscal 1999 is uncertain, owing in part to adverse economic conditions in Asia.
A number of our customers have announced layoffs of their employees or the
suspension of investment plans, and although we have 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
combined companies. Slower growth in the semiconductor and systems industries, a
reduced number of design starts, tightening of customers' operating
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budgets or continued consolidation among our customers may have a material
adverse effect on our business, financial condition and results of operations.
International Exposure. In the first quarter of fiscal 1999, international
revenue accounted for 36% of our total revenue, compared to 42% of total revenue
in the first quarter of fiscal 1998. 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:
o Revenue from sales in Japan during fiscal 1998 and the first quarter of
fiscal 1999 was adversely affected by 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 is likely to adversely affect revenue from Japan, and the rest
of Asia, during the rest of fiscal 1999. 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 the remainder of fiscal 1999.
o Significant declines in the value of the Korean won during fiscal 1998,
and the subsequent economic crisis had a significant adverse affect on
our orders and revenue from Korea during fiscal 1998, and is likely to
continue to affect our business in Korea in fiscal 1999. Other Asian
countries also experienced economic and currency problems. If such
conditions persist in fiscal 1999, orders and revenues from the Asia
Pacific region would be adversely affected.
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.
The first jointly developed product resulting from the alliance, PrimeTime, was
introduced in fiscal 1997; the second such product, Chip Architect, was
introduced in January 1999. In December 1998, Synopsys and IBM agreed to
terminate all further joint development efforts. There can be no assurance 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, 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. Synopsys 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 of, and to issue, authorized but
undesignated shares of Preferred Stock. This provision and other provisions of
Synopsys' 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. We presently believe 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
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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. For example, recent developments in the way the
SEC views in-process research and development charges has made it difficult to
predict with confidence the financial statement effects of acquisitions
accounted for by the purchase method of accounting. 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 accounting
authorities. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information relating to quantitative and qualitative disclosure about market
risk is set forth under the captions "Interest Rate Risk" and "Foreign Currency
Risk" in Item 2, Management's Discussion and Analysis of Financial Condition and
Results of Operations. Such information is incorporated herein.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits
27 Financial Data Schedule
(b.) Reports on Form 8-K
Report on Form 8-K, filed on November 16, 1998 for the purpose of
filing the Company's press release announcing its financial
results for the quarter and fiscal year ended September 30, 1998,
including condensed consolidated statements of income and balance
sheets.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYNOPSYS, INC.
By: /s/ David M. Sugishita
--------------------------------------------
David M. Sugishita
Sr. Vice President, Finance & Operations
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: February 10, 1999
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
27 Financial Data Schedule