UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 1 to
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2001
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) 584-5000
(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.
59,302,014 shares of Common Stock as of September 8, 2001
EXPLANATORY NOTE
This amendment is being filed to add additional disclosures in Management's
Discussion and Analysis and Results of Operations and the Unaudited Condensed
Consolidated Financial Statements and notes thereto.
1
SYNOPSYS, INC.
QUARTERLY REPORT ON FORM 10-Q
JULY 31, 2001
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS .............................................. 3
CONDENSED CONSOLIDATED BALANCE SHEETS ............................. 3
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME ............. 4
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ......... 5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS .... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ............................................. 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK ......... 25
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .................................. 25
SIGNATURES ................................................................. 26
2
PART I
ITEM 1. FINANCIAL STATEMENTS
SYNOPSYS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
JULY 31, OCTOBER 31,
2001 2000
--------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 134,504 $ 153,120
Short-term investments 174,371 282,519
--------- -----------
Total cash and short-term investments 308,875 435,639
Accounts receivable, net of allowances of $8,660 and
$9,539, respectively 131,721 146,449
Prepaid expenses, deferred taxes and other 98,557 102,433
--------- -----------
Total current assets 539,153 684,521
Property and equipment, net 173,661 157,243
Long-term investments 88,222 126,741
Intangible assets, net 39,428 51,776
Other assets 53,570 30,712
--------- -----------
Total assets $ 894,034 $ 1,050,993
========= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 120,980 $ 139,290
Current portion of long-term debt 535 6,416
Accrued income taxes 36,690 56,304
Deferred revenue 250,752 150,654
--------- -----------
Total current liabilities 408,957 352,664
--------- -----------
Long-term debt 123 564
Deferred compensation 17,717 14,936
Other liability 7,161 --
Stockholders' equity:
Preferred stock, $.01 par value; 2,000 shares authorized;
no shares outstanding -- --
Common stock, $.01 par value; 400,000 shares authorized:
58,963 and 62,877 shares outstanding, respectively 590 629
Additional paid-in capital 573,787 558,716
Retained earnings 421,507 405,419
Treasury stock, at cost (552,174) (329,493)
Accumulated other comprehensive income 16,366 47,558
--------- -----------
Total stockholders' equity 460,076 682,829
--------- -----------
Total liabilities and stockholders' equity $ 894,034 $ 1,050,993
========= ===========
The accompanying notes are an integral part of these financial statements.
3
SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
---------------------- ------------------------
2001 2000 2001 2000
-------- -------- --------- --------
Revenue:
Product $ 44,858 $143,348 $ 117,152 $396,930
Service 81,430 85,487 259,900 253,626
Ratable license 49,822 -- 119,736 --
-------- -------- --------- --------
Total revenue 176,110 228,835 496,788 650,556
-------- -------- --------- --------
Cost of revenue:
Product 6,086 10,169 17,616 31,108
Service 19,158 21,851 58,427 59,723
Ratable license 7,476 -- 19,689 --
-------- -------- --------- --------
Total cost of revenue 32,720 32,020 95,732 90,831
-------- -------- --------- --------
Gross margin 143,390 196,815 401,056 559,725
-------- -------- --------- --------
Operating expenses:
Research and development 49,382 50,323 143,239 140,552
Sales and marketing 68,954 73,709 207,735 211,100
General and administrative 19,140 15,973 50,933 42,255
Amortization of intangible assets 4,163 3,745 12,514 10,956
In-process research and development -- -- -- 1,750
-------- -------- --------- --------
Total operating expenses 141,639 143,750 414,421 406,613
-------- -------- --------- --------
Operating income (loss) 1,751 53,065 (13,365) 153,112
Other income, net 19,499 8,797 66,901 27,431
-------- -------- --------- --------
Income before provision for income taxes 21,250 61,862 53,536 180,543
Provision for income taxes 6,800 20,491 17,132 60,495
-------- -------- --------- --------
Net income $ 14,450 $ 41,371 $ 36,404 $120,048
======== ======== ========= ========
Basic earnings per share $ 0.24 $ 0.61 $ 0.60 $ 1.71
======== ======== ========= ========
Weighted average common shares
outstanding 60,048 68,278 61,050 70,026
======== ======== ========= ========
Diluted earnings per share $ 0.22 $ 0.59 $ 0.56 $ 1.65
======== ======== ========= ========
Weighted average common shares
and dilutive stock options outstanding 64,887 69,603 65,362 72,591
======== ======== ========= ========
The accompanying notes are an integral part of these financial statements.
4
SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
NINE MONTHS ENDED
JULY 31,
-----------------------------
2001 2000
----------- -----------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 36,404 $ 120,048
Adjustments to reconcile net income to net cash flows provided by
operating activities:
Depreciation and amortization 48,149 46,583
Tax benefit associated with stock options 14,603 10,408
Provision for doubtful accounts and sales returns 2,237 1,788
Interest accretion on notes payable 306 601
Gain on sale of long-term investments (43,128) (7,060)
Write-down of long-term investments 4,348 --
Gain on sale of silicon libraries business (10,580) --
In-process research and development -- 1,750
Net changes in operating assets and liabilities:
Accounts receivable 12,491 (49,114)
Prepaid expenses and other current assets (2,366) 468
Other assets (414) (14,737)
Accounts payable and accrued liabilities (22,008) 16,581
Accrued income taxes (19,614) 14,497
Deferred revenue 100,153 20,576
Deferred compensation 2,781 5,420
----------- -----------
Net cash provided by operating activities 123,362 167,809
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (51,980) (45,232)
Purchases of short-term investments (1,656,744) (1,989,729)
Proceeds from sales and maturities of short-term investments 1,764,892 2,196,283
Purchases of long-term investments (11,000) (9,498)
Proceeds from sale of long-term investments 62,446 11,515
Proceeds from the sale of silicon libraries business 4,122 --
Acquisitions, net of cash acquired -- (8,592)
Capitalization of software development costs (750) (500)
Intangible assets, net (166) 684
----------- -----------
Net cash provided by investing activities 110,820 154,931
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of debt obligations (6,468) (14,000)
Issuances of long-term debt -- 727
Issuances of common stock 89,310 47,008
Purchases of treasury stock (331,878) (211,301)
----------- -----------
Net cash used in financing activities (249,036) (177,566)
----------- -----------
Effect of exchange rate changes on cash (3,762) (3,601)
----------- -----------
Net (decrease) increase in cash and cash equivalents (18,616) 141,573
Cash and cash equivalents, beginning of period 153,120 309,394
----------- -----------
Cash and cash equivalents, end of period $ 134,504 $ 450,967
=========== ===========
The accompanying notes are an integral part of these financial statements.
5
SYNOPSYS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF COMPANY AND BASIS OF PRESENTATION
Synopsys, Inc. (Synopsys or the Company) is a leading supplier of
electronic design automation (EDA) software to the global electronics industry.
The Company develops, markets, and supports a wide range of integrated circuit
(IC) design products that are used by designers of advanced ICs, including
system-on-a-chip ICs, and the electronic systems (such as computers, cell
phones, and internet routers) that use such ICs, to automate significant
portions of their design process. Synopsys' products offer its customers the
opportunity to design ICs that are optimized for speed, area, power consumption
and production cost, while reducing overall design time. The Company also
provides consulting services to help its customers improve their IC design
processes and, where requested, to assist them with their IC designs, as well as
training and support services.
The Company's fiscal year ends on the Saturday nearest October 31.
Fiscal year 2000 was a 52-week year and fiscal year 2001 will be a 53-week year
with the extra week added to the first quarter. For presentation purposes, the
unaudited condensed consolidated financial statements and notes refer to the
calendar month end.
The unaudited condensed consolidated financial statements include the
accounts of Synopsys and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the financial position and results of
operations of the Company have been made. Operating results for the interim
periods are not necessarily indicative of the results that may be expected for
any future period or the full fiscal year. The unaudited condensed consolidated
financial statements and notes included herein should be read in conjunction
with the consolidated financial statements and notes thereto for the fiscal year
ended October 31, 2000, included in the Company's 2000 Annual Report on Form
10-K.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the unaudited condensed
consolidated financial statements and accompanying notes. A change in the facts
and circumstances surrounding these estimates and assumptions could result in a
change to the estimates and assumptions and impact future operating results.
2. SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION AND COST OF REVENUE
Revenue consists of fees for perpetual and time-based licenses for the
Company's software products, sales of hardware system products, post-contract
customer support (PCS), customer training and consulting. The Company classifies
its revenues as product, service or ratable license. Product revenue consists
primarily of perpetual and non-ratable time-based license revenue. Service
revenue consists of PCS under perpetual and non-ratable time-based licenses and
fees for consulting services and training. Ratable license revenue is all fees
related to time-based licenses bundled with post-contract customer support (PCS)
and sold as a single package (commonly referred to by the Company as a
Technology Subscription License or TSL) and time-based licenses that include
extended payment terms or unspecified additional products.
Cost of product revenue includes cost of production personnel, product
packaging, documentation, amortization of capitalized software development costs
and purchased technology, and costs of the Company's systems products. Cost of
service revenue includes personnel and the related costs associated with
providing training, consulting and PCS. Cost of ratable license revenue includes
the cost of products and services related to time-based licenses bundled with
PCS and sold as a single package and to time-based licenses that include
extended payment terms or unspecified additional products.
6
The Company recognizes revenue in accordance with SOP 97-2, Software
Revenue Recognition (SOP 97-2), as amended by SOP 98-9, and generally recognizes
revenue when all of the following criteria are met as set forth in paragraph 8
of SOP 97-2:
- Persuasive evidence of an arrangement exists,
- Delivery has occurred,
- The vendor's fee is fixed or determinable, and
- Collectibility is probable.
The Company defines each of the four criteria above as follows:
Persuasive Evidence of an Arrangement Exists. It is the Company's
customary practice to have a written contract, which is signed by both
the customer and Synopsys, or a purchase order from those customers that
have previously negotiated a standard end-user license arrangement or
volume purchase agreement, prior to recognizing revenue on an
arrangement.
Delivery Has Occurred. The Company's software may be either physically or
electronically delivered to its customers. For those products that are
delivered physically, the Company's standard transfer terms are FOB
shipping point. For an electronic delivery of software, delivery is
considered to have occurred when the customer has been provided with the
access codes that allow the customer to take immediate possession of the
software on its hardware.
If undelivered products or services exist in an arrangement that are
essential to the functionality of the delivered product, delivery is not
considered to have occurred.
The Vendor's Fee is Fixed or Determinable. The fee the Company's
customers pay for its products is negotiated at the outset of an
arrangement, and is generally based on the specific volume of products to
be delivered. The Company's license fees are not a function of
variable-pricing mechanisms such as the number of units distributed or
copied by the customer, or the expected number of users in an
arrangement. Therefore, except in cases where the Company grants extended
payment terms to a specific customer, the Company's fees are considered
to be fixed or determinable at the inception of its arrangements.
The Company's customary payment terms are such that a minimum of 75% of
the arrangement revenue is due within one year or less. Arrangements with
payment terms extending beyond the customary payment terms are considered
not to be fixed or determinable. Revenue from such arrangements is
recognized at the lesser of the aggregate of amounts due and payable or
the amount of the arrangement fee that would have been recognized if the
fees had been fixed or determinable.
Collectibility is Probable. Collectibility is assessed on a
customer-by-customer basis. The Company typically sells to customers for
which there is a history of successful collection. New customers are
subjected to a credit review process, which evaluates the customers'
financial positions and ultimately their ability to pay. New customers
are typically assigned a credit limit based on a formulated review of
their financial position. Such credit limits are only increased after a
successful collection history with the customer has been established. If
it is determined from the outset of an arrangement that collectibility is
not probable based upon the Company's credit review process, revenue is
recognized on a cash-collected basis.
Multiple-Element Arrangements. The Company allocates revenue on software
arrangements involving multiple elements to each element based on the relative
fair values of the elements. The Company's determination of fair value of each
element in multiple-element arrangements is based on vendor-specific objective
evidence (VSOE). The Company limits its assessment of VSOE for each element to
the price charged when the same element is sold separately.
The Company has analyzed all of the elements included in its
multiple-element arrangements and determined that it has sufficient VSOE to
allocate revenue to the PCS components of its perpetual license products and
consulting. Accordingly, assuming all other revenue recognition criteria are
met, revenue from perpetual licenses is
7
recognized upon delivery using the residual method in accordance with SOP 98-9,
and revenue from PCS is recognized ratably over the PCS term. The Company
recognizes revenue from TSLs over the term of the ratable license period, as the
license and PCS portions of a TSL are bundled and not sold separately. Revenue
from contracts with extended payment terms are recognized as the lesser of
amounts due and payable or the amount of the arrangement fee that would have
been recognized if the fee were fixed or determinable.
Certain of the Company's time-based licenses include unspecified
additional products. The Company recognizes revenue from time-based licenses
that include unspecified additional software products and from licenses sold
with extended payment terms that are not considered to be fixed and determinable
in an amount that is the lesser of amounts due and payable or the ratable
portion of the entire fee. Revenue from contracts with unspecified additional
software products is recognized ratably over the contract term.
Consulting Services. The Company provides design methodology assistance,
specialized services relating to telecommunication systems design and turnkey
design services. The Company's consulting services generally are not essential
to the functionality of the software. The Company's software products are fully
functional upon delivery and implementation does not require any significant
modification or alteration. The Company's services to its customers often
include assistance with product adoption and integration and specialized design
methodology assistance. Customers typically purchase these professional services
to facilitate the adoption of the Company's technology and dedicate personnel to
participate in the services being performed, but they may also decide to use
their own resources or appoint other professional service organizations to
provide these services. Software products are billed separately and
independently from consulting services, which are generally billed on a
time-and-materials or milestone-achieved basis. The Company generally recognizes
revenue from consulting services as the services are performed.
Exceptions to the general rule above involve arrangements where the
Company has committed to significantly alter the features and functionality of
its software or build complex interfaces necessary for the Company's software to
function in the customer's environment. These types of services are considered
to be essential to the functionality of the software. Accordingly, contract
accounting is applied to both the software and service elements included in
these arrangements.
ADOPTION OF SFAS 133
On November 1, 2000, Synopsys adopted Statement of Financial Accounting
Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging
Activities, as amended. SFAS 133 establishes accounting and reporting standards
for derivative instruments and hedging activities. SFAS 133 requires that all
derivatives be recognized as either assets or liabilities at fair value.
Derivatives that are not designated as hedging instruments are adjusted to fair
value through earnings. If the derivative is designated as a hedging instrument,
depending on the nature of the exposure being hedged, changes in fair value will
either be offset against the change in fair value of the hedged asset,
liability, or firm commitment through earnings, or recognized in other
comprehensive income until the hedged anticipated transaction affects earnings.
The ineffective portion of the hedge is recognized in earnings immediately. Upon
adoption of SFAS 133, the cumulative transition adjustment was insignificant.
FOREIGN EXCHANGE CONTRACTS
The Company operates internationally and therefore is exposed to
potentially adverse movements in foreign currency rates. The Company has entered
into foreign exchange forward contracts to reduce its exposure to foreign
currency rate changes on non-functional currency denominated balance sheet
positions. The objective of these contracts is to neutralize the impact of
foreign currency rate movements on the Company's operating results.
Foreign exchange forward contracts require the Company to exchange
currencies at rates agreed upon at the inception of the contracts. These
contracts reduce the exposure to fluctuations in exchange rates 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 rates.
8
3. SALE OF SILICON LIBRARIES BUSINESS
On January 4, 2001, the Company sold the assets of its silicon libraries
business to Artisan Components, Inc. (Artisan) for a total sales price of $15.5
million, including common stock with a fair value on the date of sale of $11.4
million, and cash of $4.1 million. The net book value of the assets sold was
$1.4 million. In connection with the sale, the Company subcontracted certain
performance obligations under existing contracts to Artisan. The Company
estimated the costs associated with the completion of these subcontract
agreements to be approximately $750,000. Expenses incurred in connection with
the sale were $2.8 million. The Company recorded a gain on the sale of the
business of $10.6 million which is included in other income and expense on the
accompanying unaudited condensed consolidated statement of operations. The
subcontract agreements were completed during the third quarter of fiscal 2001 at
a total cost of $1.4 million. Direct revenue for the silicon libraries business
was $0.2 million and $3.9 million for the nine-month periods ended July 31, 2001
and 2000, respectively. Direct revenue for this business was $4.3 million in
fiscal 2000.
4. STOCK REPURCHASE PROGRAM
In August 2000, the Company established a stock repurchase program under
which Synopsys common stock with an aggregate market value up to $500 million
may be acquired in the open market. This program followed the completion of a
$200 million stock repurchase program authorized in June 1999. In July 2001, the
Company completed the August 2000 stock repurchase program and the Board of
Directors authorized a new stock repurchase program under which Synopsys common
stock with a market value up to $500 million could be acquired in the open
market through October 31, 2002. Common shares repurchased are intended to be
used for ongoing stock issuances under the Company's employee stock plans and
for other corporate purposes. Under the share repurchase programs, for the
three- and nine-month periods ended July 31, 2001, the Company purchased 2.4
million and 6.6 million shares, respectively, of Synopsys common stock in the
open market, at average prices of $53 per share and $50 per share, respectively.
For the three- and nine-month periods ended July 31, 2000, the Company purchased
0.7 million and 4.4 million shares, respectively, of Synopsys common stock in
the open market under the June 1999 share repurchase program, at average prices
of $40 per share and $48 per share, respectively. At July 31, 2001, $481.9
million remained available for repurchases under the July 2001 program.
5. COMPREHENSIVE INCOME
The following table sets forth the components of comprehensive income,
net of income tax expense:
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
----------------------- ------------------------
(in thousands) 2001 2000 2001 2000
-------- -------- -------- ---------
Net income $ 14,450 $ 41,371 $ 36,404 $ 120,048
Foreign currency
translation adjustment (936) (1,120) (3,763) (3,601)
Unrealized gain (loss) on
investments 1,803 24,624 (1,863) 40,903
Reclassification adjustment
for realized gains on
investments (7,967) (1,181) (25,566) (4,237)
-------- -------- -------- ---------
Total comprehensive income $ 7,350 $ 63,694 $ 5,212 $ 153,113
======== ======== ======== =========
6. EARNINGS PER SHARE
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
employee stock options outstanding during the period. The dilutive effect of the
weighted-average number of employee stock options outstanding is computed using
the treasury stock method.
9
The following table sets forth the computation of basic and diluted
earnings per share:
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
-------------------- ---------------------
2001 2000 2001 2000
------- ------- ------- --------
(in thousands, except per share amounts)
NUMERATOR:
Net income $14,450 $41,371 $36,404 $120,048
======= ======= ======= ========
DENOMINATOR:
Weighted-average common
shares outstanding 60,048 68,278 61,050 70,026
Effect of dilutive employee
stock options 4,839 1,325 4,312 2,565
------- ------- ------- --------
Diluted common shares 64,887 69,603 65,362 72,591
======= ======= ======= ========
Basic earnings per share $ 0.24 $ 0.61 $ 0.60 $ 1.71
======= ======= ======= ========
Diluted earnings per share $ 0.22 $ 0.59 $ 0.56 $ 1.65
======= ======= ======= ========
The effect of dilutive employee stock options excludes approximately
3,577,000 and 5,598,000 stock options for the three-month periods ended July 31,
2001 and 2000, respectively, and 3,513,000 and 3,366,000 for the nine-month
periods ended July 31, 2001 and 2000, respectively, which were anti-dilutive for
earnings per share calculations.
7. SEGMENT DISCLOSURE
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information (SFAS 131), requires
disclosures of certain information regarding operating segments, products and
services, geographic areas of operation and major customers. The method for
determining what information to report under SFAS 131 is based upon the
"management approach," or the way that management organizes the operating
segments of the Company that have separate financial information available that
is evaluated regularly by the Chief Operating Decision Maker (CODM) in deciding
how to allocate resources and in assessing performance. Synopsys' CODM is the
Chief Executive Officer and Chief Operating Officer.
The Company provides comprehensive design technology products and
consulting services in the EDA software industry and has determined that it
operates in only one segment. The CODM evaluates the performance of the Company
based on profit or loss from operations before income taxes and excluding
merger-related costs, in-process research and development and amortization of
intangible assets. For the purpose of making operating decisions, the CODM
primarily considers financial information presented on a consolidated basis
accompanied by disaggregated information about revenues by geographic region.
Because the Company operates in only one segment, there are no differences
between the accounting policies used to measure profit and loss for the Company
segment and those used on a consolidated basis. Revenue is defined as revenues
from external customers.
10
The disaggregated financial information reviewed by the CODM is as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
---------------------- ------------------------
(in thousands) 2001 2000 2001 2000
-------- -------- --------- --------
Revenue:
Product $ 44,858 $143,348 $ 117,152 $396,930
Service 81,430 85,487 259,900 253,626
Ratable license 49,822 -- 119,736 --
-------- -------- --------- --------
Total revenue $176,110 $228,835 $ 496,788 $650,556
======== ======== ========= ========
Gross margin $143,390 $196,815 $ 401,056 $559,725
Operating income (loss) before
amortization of intangible
assets, and in-process research
and development $ 5,914 $ 56,810 $ (851) $165,818
There were no merger related costs in the periods presented.
Reconciliation of the Company's segment profit and loss to the Company's
operating income (loss) before provision for income taxes is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
---------------------- ------------------------
(in thousands) 2001 2000 2001 2000
------- -------- -------- ---------
Operating income (loss) before
amortization of intangible
assets, and in-process research
and development $ 5,914 $ 56,810 $ (851) $ 165,818
Amortization of intangible assets (4,163) (3,745) (12,514) (10,956)
In-process research and development -- -- -- (1,750)
------- -------- -------- ---------
Operating income (loss) $ 1,751 $ 53,065 $(13,365) $ 153,112
======= ======== ======== =========
Revenue and long-lived assets related to operations in the United States
and other geographic areas are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
---------------------- ----------------------
(in thousands) 2001 2000 2001 2000
-------- -------- -------- --------
Revenue:
United States $110,770 $121,758 $306,650 $374,750
Europe 33,460 34,967 91,214 119,879
Japan 18,405 56,971 53,060 110,720
Other 13,475 15,139 45,864 45,207
-------- -------- -------- --------
Consolidated $176,110 $228,835 $496,788 $650,556
======== ======== ======== ========
JULY 31, OCTOBER 31,
(in thousands) 2001 2000
-------- --------
Long-lived assets:
United States $158,992 $140,923
Other 14,669 16,320
-------- --------
Consolidated $173,661 $157,243
======== ========
Geographic revenue data for multi-region, multi-product transactions
reflect internal allocations and is therefore subject to certain assumptions and
to the Company's methodology. Revenue is not reallocated among geographic
regions to reflect any re-mixing of licenses between different regions following
the initial product shipment.
11
The Company segregates revenue into five categories for purposes of
internal management reporting: IC Implementation, including both the Design
Compiler (DC) Family and Physical Synthesis; Verification and Test; Intellectual
Property (IP) and System Level Design; Transistor Level Design; and Professional
Services. Revenue for each of the categories is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
---------------------- ----------------------
(in thousands) 2001 2000 2001 2000
-------- -------- -------- --------
Revenue:
IC Implementation
DC Family $ 55,510 $ 85,985 $162,933 $227,856
Physical Synthesis 13,212 7,443 29,867 24,406
Verification and Test 52,013 66,973 141,556 198,300
IP and System Level Design 23,206 30,763 61,585 91,245
Transistor Level Design 14,203 17,789 38,398 48,601
Professional Services 17,966 19,882 62,449 60,148
-------- -------- -------- --------
Consolidated $176,110 $228,835 $496,788 $650,556
======== ======== ======== ========
No single customer accounted for more than ten percent of the Company's
consolidated revenue in the three-month periods ended July 31, 2001 and 2000 or
for the nine-month periods ended July 31, 2001 and 2000.
8. DERIVATIVE FINANCIAL INSTRUMENTS
The Company currently uses derivative instruments, designated as cash
flow hedges, to hedge the variability of cash flows attributable to the
forecasted sale of available-for-sale (AFS) securities accounted for under
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities (SFAS 115). In accounting for a
derivative designated as a cash flow hedge, the effective portion of the change
in fair value of the derivative is initially recorded in other comprehensive
income (OCI) and reclassified into earnings when the hedged anticipated
transaction affects earnings. The ineffective portion of the change in the fair
value of the derivative is recognized in earnings immediately.
AFS investments accounted for under SFAS 115 are subject to market price
risk. From time to time, the Company enters into and designates forward
contracts to hedge variable cash flows from anticipated sales of these
investments. The Company's objective for entering into derivative contracts is
to lock in the price of selected equity holdings while maintaining the rights
and benefits of ownership until the anticipated sale occurs. The forecasted sale
selected for hedging is determined by market conditions, up-front costs, and
other relevant factors. The Company has generally selected forward sale
contracts to hedge its market price risk.
Changes in the spot rate of the forward sale contracts designated and
qualifying as cash flow hedges of the forecasted sale of AFS investments
accounted for under SFAS 115 are reported in OCI. The notional amount of the
forward designated as the hedging instrument is equal to the AFS securities
being hedged. In addition, hedge effectiveness is assessed based on the changes
in spot prices. As such, the hedging relationship is perfectly effective, both
at inception of the hedge and on an on-going basis. The difference between the
contract price and the forward price, which is generally not material, is
reflected in other income.
During the three- and nine-month periods ended July 31, 2001, the
Company physically settled certain forward contracts. The net gain on the
forward contracts was offset by the net loss on the related AFS investment since
inception of the hedge, with any gain or loss reclassified from OCI to other
income.
The Company recorded a net realized gain on the sale of the
available-for-sale investments of $13.1 million and $41.9 million (net of
premium amortization), respectively, during the three- and nine-month periods
ending July 31, 2001. As of July 31, 2001, the Company has recorded a liability
of $7.2 million due to unrealized losses on forward contracts. As of July 31,
2001, the Company has recorded $30.7 million in long-term investments due to
locked-in unrealized gains on the AFS investments. As of July 31, 2001, the
maximum length of time over which the Company is hedging its exposure to the
variability in future cash flows associated with the forward sale contracts is
13 months.
12
9. PROPOSED ACQUISITION OF IKOS SYSTEMS, INC.
On July 2, 2001, the Company entered into an Agreement and Plan of
Merger with IKOS Systems, Inc. (IKOS). The Agreement provides for the
acquisition of all outstanding shares of IKOS common stock by Synopsys. The
merger is expected to be completed in August 2002, however, under certain
circumstances the merger may close prior to June 30, 2002. The Company will
account for the merger under the purchase method of accounting.
Upon completion of the merger, holders of IKOS common stock will be
entitled to receive Synopsys common stock with a value between $6 and $20 in
exchange for each share of IKOS common stock owned at the time of completion of
the merger. The exact amount per share will depend upon the financial
performance of IKOS during the 12-month measurement period ending June 30, 2002
and will be calculated based on formulas contained in the merger agreement. The
formulas contained in the merger agreement provide for proportionate increases
in the purchase price per IKOS share as IKOS' revenue, revenue plus change in
backlog, as defined, or profit (loss) before tax (PBT) increase from one level
to the next. If the merger closes before June 30, 2002, holders of IKOS common
stock on the closing date will receive Synopsys common stock with a value of $15
for each share of IKOS common stock, regardless of IKOS' financial performance
up to the date of closing. Regardless of when the merger closes, the purchase
price per IKOS share is subject to reduction if the number of outstanding IKOS
shares and options immediately before the effective time of the merger exceeds
an agreed-upon level. However, the purchase price per IKOS share will not be
less than $6.
The actual number of shares of Synopsys common stock to be issued in the
merger and the aggregate purchase price at the effective time of the merger
cannot be determined until the date on which the number of Synopsys shares to be
issued becomes fixed.
The merger is subject to certain conditions, including IKOS achieving
revenue of at least $50 million and losses before tax not exceeding $10 million
during the twelve-month period ending June 30, 2002, expiration or termination
of a Synopsys emulation non-compete agreement, IKOS stockholder approval,
retention of certain employees, compliance with regulatory requirements and
customary closing conditions.
10. OPERATING LEASES
In July 2001, the Company amended certain non-cancelable leases related
to its corporate office facilities. The leases, originally scheduled to expire
in February 2003 have been extended to February 2015. Monthly lease payments are
approximately $0.8 million per month in the first year of the extended term
escalating to $1.1 million per month in the last year of the extended term.
11. EFFECT OF NEW ACCOUNTING STANDARDS
During fiscal 2000, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB
101). The objective of SAB 101 is to provide further guidance on revenue
recognition issues in the absence of authoritative literature addressing a
specific arrangement or a specific industry. The Company is required to adopt
the guidance in SAB 101 no later than the fourth quarter of fiscal 2001.
Adoption of this guidance is not expected to have a material impact on the
Company's financial position or results of operations.
In July 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, Business Combinations, (SFAS 141) and
No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 and specifies criteria intangible assets acquired
in a purchase method business combination must meet to be recognized apart from
goodwill. SFAS 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS 142.
The Company is required to adopt the provisions of SFAS 141 immediately.
Under SFAS 141, goodwill and intangible assets determined to have indefinite
useful lives acquired in a purchase business combination completed after June
30, 2001, but before SFAS 142 is adopted will not be amortized, but will
continue to be evaluated for impairment in accordance with SFAS 121. Goodwill
and intangible assets acquired in business combinations
13
completed before July 1, 2001 will continue to be amortized and tested for
impairment in accordance with current accounting guidance until the date of
adoption of SFAS 142.
Upon adoption of SFAS 142, SFAS 141 requires that the Company evaluate
its existing intangible assets and goodwill that were acquired in prior purchase
business combinations, and make any necessary reclassifications in order to
conform with the new criteria in SFAS 141 for recognition apart from goodwill.
Upon adoption of SFAS 142, the Company will be required to reassess the useful
lives and residual values of all intangible assets acquired, and make any
necessary amortization period adjustments. In addition, the Company will be
required to test intangible assets with indefinite useful lives and goodwill for
impairment in accordance with the provisions of SFAS 142 within the six-month
period following adoption. Any impairment loss will be measured as of the date
of adoption and recognized immediately as the cumulative effect of a change in
accounting principle. Any subsequent impairment losses will be included in
operating activities.
The Company expects to adopt SFAS 142 on November 1, 2002. As of July
31, 2001, unamortized goodwill is $39.4 million which, in accordance with the
Statements, will continue to be amortized until the date of adoption of SFAS
142. Related amortization expense for the nine-month period ended July 31, 2001
is $12.5 million. Because of the extensive effort needed to comply with adopting
SFAS 141 and 142, it is not practicable to reasonably estimate the impact of
adopting these Statements on the Company's financial statements at the date of
this report, including whether the Company will be required to recognize any
transitional impairment losses.
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. Such
forward-looking statements include the statements concerning effects of foreign
currency hedging, adequacy of our cash as well as statements including the words
"projects," "expects," "believes," "anticipates" or similar expressions. 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
Sale of Silicon Libraries Business. On January 4, 2001, we sold the
assets of the our silicon libraries business to Artisan Components, Inc.
(Artisan) for a total sales price of $15.5 million, including common stock with
a fair value on the date of sale of $11.4 million, and cash of $4.1 million. The
net book value of the assets sold was $1.4 million. In connection with the sale,
we subcontracted certain performance obligations under existing contracts to
Artisan. We estimated the costs associated with the completion of these
subcontract agreements to be approximately $750,000. Expenses incurred in
connection with the sale were $2.8 million. On the date of sale, the Company
recorded a gain on the sale of the business of $10.6 million which is included
in other income and expense on the accompanying unaudited condensed consolidated
statement of operations. The subcontract agreements were completed during the
third quarter of fiscal 2001 at a total cost of $1.4 million. Direct revenue for
the silicon libraries business was $0.2 million and $3.9 million for the
nine-month periods ended July 31, 2001 and 2000, respectively. Direct revenue
for this business was $4.3 million in fiscal 2000.
Introduction of Technology Subscription Licenses (TSLs). On July 31,
2000, we introduced TSLs, which are time-limited rights to use our software.
Since TSLs include bundled product and services, both product and service
revenue is generally recognized ratably over the term of the license, or, if
later, as payments become due. The terms of TSLs, and the payments due thereon,
may be structured flexibly to meet the needs of the customer. With minor
exceptions, under TSLs, customers cannot obtain major new products developed or
acquired during the term of their license without making an additional purchase.
Overall, we believe that TSLs have enabled us to (i) offer customers technology
and terms that more closely match their needs; (ii) have greater visibility into
our earnings stream; (iii) resist customer requests for special
end-of-the-quarter discounts; and (iv) roll out our new technologies in a more
planned manner.
The replacement of the prior form of time-based licenses by TSLs has
impacted and will continue to impact our reported revenue. Under a ratable
license, relatively little revenue is recognized during the quarter the product
is delivered, and the remaining amount is recorded as deferred revenue, to the
extent that the license fee has been paid or invoiced, to be recognized over the
term of the license or will be considered backlog by the Company. Backlog is
14
not recorded on our balance sheet. Under the prior form of time-based licenses,
a high proportion of all license revenue was recognized in the quarter that the
product was delivered, with relatively little recorded as deferred revenue or as
backlog. Therefore, an order for a TSL will result in significantly lower
current-quarter revenue than an equal-sized order under the prior form of
time-based licenses.
We set revenue targets for any given quarter based, in part, upon an
assumption that we will achieve a certain license mix of perpetual licenses and
TSLs. The actual mix of licenses sold affects the revenue we recognize in the
period. If we are unable to achieve our target license mix, we may not meet our
revenue targets. Through the third quarter of 2001, our target license mix for
new orders included 20% to 30% perpetual licenses. Since the introduction of
TSLs, new product orders consisted of approximately 21% perpetual licenses and
79% TSLs. In the third quarter of 2001, the license mix was approximately 29%
perpetual licenses and 71% TSLs. Notwithstanding the license mix in the third
quarter, based on our experience in selling TSLs during the four quarter period
since their introduction, we believe that the demand for TSLs versus perpetual
license is stronger than originally anticipated, and have adjusted our target
license mix accordingly. We expect that for the fourth quarter of 2001 and for
fiscal 2002 perpetuals will comprise 15% to 20% of our license mix. Given the
difference in the revenue profile of TSLs and perpetuals, this shift in license
mix will reduce revenue in the short-term.
Revenue. Revenue consists of fees for perpetual and ratable licenses of
the Company's software products, sales of hardware system products,
post-contract customer support (PCS), customer training and consulting. We
classify revenues as product, service or ratable license. Product revenue
consists primarily of perpetual and non-ratable time-based license revenue
(there were no non-ratable time-based licenses in fiscal 2001). Service revenue
consists of PCS under perpetual and non-ratable time-based licenses and fees for
consulting services and training. Ratable license revenue consists of all fees
related to time-based licenses bundled with PCS and sold in a single package and
time-based licenses that include extended payment terms or unspecified
additional products.
As expected, revenue for the third quarter of fiscal 2001 decreased 23%
to $176.1 million as compared to $228.8 million for the third quarter of fiscal
2000. For the nine-month periods ended July 31, 2001 and 2000, revenue decreased
24% to $496.8 million from $650.6 million, respectively. The decrease in revenue
in 2001 compared to 2000 is due to the introduction and utilization for the full
2001 period of the ratable license model and the related inherent decrease in
revenue due to the timing of revenue recognition under this license model. Since
the introduction of the ratable license model, total revenues have increased
sequentially on a quarterly basis as follows: $133.2 million in the fourth
quarter of 2000, and $157.2 million, $163.5 million and $176.1 million for the
first, second and third quarters of 2001, respectively.
Product revenue was $44.9 million for the third quarter of fiscal 2001,
compared to $143.3 million for the third quarter of fiscal 2000, and $117.2
million and $396.9 million for the nine-month periods ended July 2001 and 2000,
respectively. The decrease in product revenue during fiscal 2001 compared to
fiscal 2000 is primarily due to the adoption of TSLs, which are reported
separately as ratable license revenue, and the inherent decrease in revenue due
to the timing of revenue recognition under this license model.
Ratable license revenue was $49.8 million for the third quarter of
fiscal 2001 and $119.7 million for the nine-month period ended July 31, 2001.
For the first three quarters of fiscal 2001, ratable revenue has increased, on a
sequential quarter-to-quarter basis, amounting to: $31.0 million, $38.9 million
and $49.8 million for the first, second and third quarters of 2001,
respectively.
Service revenue was $81.4 million and $85.5 million for the third
quarters of 2001 and 2000, respectively, and $259.9 million and $253.6 million
for the nine-month periods ended July 31, 2001 and 2000, respectively. Service
revenues have increased for the nine-month period ended July 31, 2001 compared
to the same period during fiscal 2000 as a result of greater utilization of the
our professional services consultants in the first two quarters of fiscal 2001.
During fiscal 2000, the Company made a concerted effort to hire more
professional services consultants in order to support the rollout of its
Physical Synthesis products. For the third quarter of 2001, service revenue
declined 5% compared to the third quarter of fiscal 2000. Service revenue was
not affected by the change in the license model because service revenue is
recognized ratably for maintenance or on the performance of services. The
decline in revenue from the third quarter of 2000 to the third quarter of 2001
is due to the softening economy. Cost-cutting efforts by customers led to
rescheduling of delivery dates on certain consulting projects and cancellation
of others. As a result, projects anticipated to produce revenue in the third
quarter of 2001 were not completed. Assuming no improvement in the current
economic climate, the Company anticipates that customers will continue to review
their engagements with outside consultants, and may eliminate or defer those
determined to be non-critical.
15
International Revenue. The following table summarizes the performance of
the various regions as a percent of total Company revenue:
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
----------------- -----------------
2001 2000 2001 2000
----- ----- ----- -----
North America 63% 53% 62% 58%
Europe 19% 15% 18% 18%
Japan 10% 25% 11% 17%
Other 8% 7% 9% 7%
----- ----- ----- -----
Total 100% 100% 100% 100%
===== ===== ===== =====
International revenue as a percentage of total revenue for the quarter
ended July 31, 2001 decreased to 37% from 47% for the quarter ended July 31,
2000. International revenues as a percentage of total revenue decreased to 38%
from 42% for the nine-month periods ended July 31, 2001 and 2000, respectively.
In any given period, the geographic mix of revenue is influenced by the
particular contracts closed during the quarter. There was a decline in the
revenue contribution from Japan in fiscal 2001 primarily as a result of an
exceptionally high revenue contribution from Japan for the third quarter of
fiscal 2000. The majority of our international sales are denominated in the U.S.
dollar. There were no foreign exchange gains or losses that were material to our
financial results during the three- and nine-month periods ended July 31, 2001
and 2000.
Revenue - Product Groups. For management reporting purposes, our
products have been organized into four distinct product groups -- IC
Implementation, Verification and Test, Intellectual Property and System Level
Design, Transistor Level Design -- and a services group -- Professional
Services. The following table summarizes the revenue attributable to the various
groups and as a percentage of total company revenue for the last five quarters:
Q3-2001 Q2-2001 Q1-2001 Q4-2000 Q3-2000
----------------- ----------------- ----------------- ----------------- --------------
Revenue
IC Implementation
DC Family $ 55,510 32% $ 53,578 33% $ 53,845 34% $ 44,657 33% $ 85,985 38%
Physical Synthesis 13,212 7 10,495 6 6,160 4 8,189 6 7,443 3
-------- ------ -------- ------ -------- ------ -------- ------ -------- ---
68,722 39 64,073 39 60,005 38 52,846 39 93,428 41
Verification and Test 52,013 30 45,321 28 44,222 28 34,685 26 66,973 29
IP and System Level
Design 23,206 13 19,938 12 18,441 12 18,729 14 30,763 13
Transistor Level Design 14,203 8 10,730 7 13,465 9 9,058 7 17,789 8
Professional Services 17,966 10 23,462 14 21,021 13 17,904 14 19,882 9
-------- ------ -------- ------ -------- ------ -------- ------ -------- ---
Total Company $176,110 100% $163,524 100% $157,154 100% $133,222 100% $228,835 100%
======== ====== ======== ====== ======== ====== ======== ====== ======== ===
IC Implementation. IC implementation includes two product categories,
the Design Compiler (DC) Family and Physical Synthesis. The DC Family includes
Design Compiler, our core logic synthesis product, Power Compiler, which
provides "push-button" power optimization and early analysis for the design of
low power circuits, and Module Compiler, which is used in the design of complex
datapaths.
Quarterly revenue from the DC Family has increased since the
introduction of our ratable license model, from $44.7 million in the fourth
quarter of 2000 to $55.5 million in the third quarter of 2001. This increase is
driven by a continued increase in revenues from the DC Compiler. The decrease in
revenue from the third quarter of 2000 to the fourth quarter of 2000 principally
reflects the impact of our change in license strategy. As a percentage of total
revenue, the DC Family has remained relatively flat over the last four quarters,
ranging from 32% to 34%. While we expect the relative revenue contribution from
the DC Family to decline over time as our customers transition from the DC
Family products to Physical Synthesis products, Design Compiler remains one of
our top-selling products.
Included in the Physical Synthesis family are Physical Compiler, a
product that unifies synthesis, placement and global routing, Chip Architect, a
chip floor-planning product, Flex Route, a high-level router, and our detailed
routing technology. This product group, introduced in fiscal 2000, has achieved
22% revenue growth for the nine-month period ended July 31, 2001 compared to the
same period in 2000. Quarterly revenue from this product family has increased
sequentially over the last five quarters with the exception of the first quarter
of 2001. The decrease in revenue in the first quarter of 2001 compared to the
fourth quarter of 2000 is due to the mix of license types sold in the quarter,
specifically; fewer perpetual licenses were sold in that quarter compared to the
preceding and following quarters. We expect to see continued increases in
revenue from this product group for the remainder of fiscal 2001.
16
Verification and Test. Verification and Test includes our simulation,
timing analysis, formal verification and test products. Revenue has increased in
each quarter since the introduction of our ratable license model. This increase
is primarily due to a growth in subscription revenue for our Verilog simulator,
VCS, our static verification tool, and Prime Time. The decrease in revenue from
the third quarter of 2000 to the fourth quarter of 2000 principally reflects the
impact of our change in license strategy. We expect demand for verification
products to increase as both semiconductor and systems companies encounter
increasingly difficult verification challenges as chipmaking technology advances
and ICs become more complex.
Intellectual Property and System Level Design (IP&SG). Our IP&SG
products include the DesignWare library of design components and verification
models, and system design products. Revenue has increased throughout fiscal
2001, primarily due to increased DesignWare revenue. We expect to see continued
increases in revenue for this product group over the remainder of fiscal year
2001. During the first quarter of fiscal 2001, we sold our silicon libraries
business, which had contributed direct revenue of $0.2 million, $0.5 million,
and $0.1 million, in the first quarter of 2001, and the fourth and third
quarters of fiscal 2000, respectively.
Transistor Level Design. Our transistor level design product group
includes tools that are used in transistor-level simulation and analysis.
Revenue from this product group has fluctuated since the introduction of TSLs as
a result of the mix of license types of orders received. Because this is a
relatively small product group, the revenue fluctuations have resulted in a
trend in revenue as a percent of total revenue that is relatively flat over the
last five quarters. We expect to see increases in revenue from this product
group for the remainder of fiscal 2001.
Professional Services. The Professional Services group includes
consulting and training. This group provides consulting services, including
design methodology assistance, specialized telecommunications systems design
services and turnkey design. Revenue from professional services increased
quarterly from the fourth quarter of 2000 to the second quarter of 2001 as a
result of increased sales of our turnkey design and wireless and broadband
consulting services. However, in the third quarter of 2001, revenue from
professional services declined 23% in comparison to the previous quarter. During
the quarter, certain consulting projects were not completed as delivery dates
were pushed out to future periods or canceled by customers which we believe to
have been caused by the tightening economy. We anticipate that this revenue
group will remain relatively flat for the remainder of fiscal 2001.
Cost of Revenue. Cost of product revenue includes personnel and related
costs, production costs, product packaging, documentation, amortization of
capitalized software development costs and purchased technology, and costs of
the components of our hardware 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 was 14% and 15% of total
product revenue for the three and nine months ended July 31, 2001, as compared
to 7% and 8% for the same periods during 2000. This increase is due to the
decrease in the Company's revenues as a result of the change in license
strategy. For the remainder of fiscal 2001, we expect the cost of product
revenue as a percentage of revenue to remain relatively flat.
Cost of service revenue includes personnel and related costs associated
with providing training and consulting services. Cost of service revenue as a
percentage of total service revenue was 24% and 26% for the third quarters of
fiscal 2001 and 2000, respectively, and 22% and 24% for each of the nine-month
periods ended July 31, 2001 and 2000, respectively. The decrease in overall
expense during fiscal 2001 is due to the replacement of contract personnel with
permanent employees. On a sequential quarter basis in fiscal 2001, employee
utilization declined in the third quarter due to the softening of demand for
consulting services caused by the tightening economy. We anticipate that cost of
service, as a percent of service revenue, will be flat or increase slightly for
the remainder of fiscal 2001.
Since TSLs include bundled product and services, cost of ratable license
revenue includes the costs of product and services related to our TSLs. Cost of
ratable license revenue was 15% in the third quarter of fiscal 2001 and 16% for
the nine-month period ended July 31, 2001. We do not expect significant
fluctuations in the cost of TSL revenue as a percentage of revenue in fiscal
2001.
Research and Development. Research and development expenses decreased by
2% to $49.4 million in the third quarter of fiscal 2001, from $50.3 million in
the same quarter of last year, both net of capitalized software development
costs. This decrease is due to the consolidation of certain remote facilities,
offset by an increase in
17
compensation and compensation-related costs, including recruiting costs, related
to higher levels of research and development staffing.
Research and development expenses were $143.2 million for the nine-month
period ended July 31, 2001 and $140.6 million for the nine-month period ended
July 31, 2000. The increase of $2.6 million is due to the increase in
compensation and compensation-related costs, including recruiting costs, related
to higher levels of research and development staffing, and, as a result of the
way in which we determine our fiscal calendar, to the effect of one extra week
of operations in fiscal 2001 compared to fiscal 2000. We believe that to
maintain our competitive position in a market characterized by rapid rates of
technological advancement, we must continue to invest significant resources in
new systems and software, and continue to enhance existing products. We
anticipate that we will continue to commit substantial resources to research and
development in the future. If we determine that we are unable to enter a
particular market in a timely manner, we may license technology from other
businesses or acquire other businesses as an alternative to internal research
and development. We expect research and development costs to remain relatively
flat for the remainder of fiscal 2001.
Sales and Marketing. Sales and marketing expenses decreased by 6% to
$69.0 million in the third quarter of fiscal 2001 from $73.7 million in the same
quarter last year. Sales and marketing expenses were $207.7 million and $211.1
million for the nine-month periods ended July 31, 2001 and 2000, respectively.
The decrease in the three-month and the nine-month periods in comparison to
fiscal 2000 resulted from decreases in communications costs, recruiting costs,
consulting expenses, and costs associated with sales functions, offset by
increases in compensation and compensation-related costs due to the additional
week of operations during the current fiscal year. In line with historical
results, we expect sales and marketing expenses to increase in the fourth
quarter of fiscal 2001, principally attributable to increased commissions.
Commission expense typically increases in the fourth quarter because we expense
sales commissions upon product shipment and the fourth quarter is historically
our largest quarter for shipments.
General and Administrative. General and administrative expenses
increased to $19.1 million in the third quarter of fiscal 2001, compared to
$16.0 million in the same quarter last year. For the nine-month periods ended
July 31, 2001 and 2000, general and administrative expenses were $50.9 million
and $42.3 million, respectively. The increase in the three-month and the
nine-month periods in comparison to fiscal 2000 is primarily due to increases in
personnel costs as a result of the additional week of operations in the first
quarter of fiscal 2001 and an increase in infrastructure costs due to upgrades
to current computer systems, offset by our efforts to contain general and
administrative costs. In the third quarter of 2001, we began a project to
upgrade the internal company-wide software system. During the third quarter, the
majority of the costs associated with this upgrade were expensed as our efforts
focused primarily on project planning and performance requirements. General and
administrative expenses are expected to remain relatively flat for the remainder
of fiscal 2001.
Amortization of Intangible Assets. Intangible assets represent the
excess of the aggregate purchase price over the fair value of the tangible and
identifiable intangible assets we have acquired, or goodwill. Intangible assets
are amortized over their estimated useful life of three to five years. We assess
the recoverability of goodwill by estimating whether the unamortized cost will
be recovered through estimated future undiscounted cash flows. Amortization of
intangible assets charged to operations in the third quarter of fiscal 2001 was
$4.2 million compared to $3.7 million for the same period last year. For the
nine-month periods ended July 31, 2001 and 2000, amortization of intangible
assets charged to operations was $12.5 million and $11.0 million, respectively.
The Financial Accounting Standards Board recently issued new guidance with
respect to the amortization and evaluation of goodwill. This new guidance is
discussed below under Effect of New Accounting Standards.
In-Process Research and Development. Purchased in-process research and
development (IPRD) of $1.7 million in the nine-month period ended July 31, 2000
represents the write-off of in-process technologies associated with our
acquisition of Leda, S.A. in January 2000. At the date of the acquisition, the
projects associated with the IPRD efforts had not yet reached technological
feasibility and the research and development in process had no alternative
future uses. Accordingly, this amount was expensed on the acquisition date.
Other Income, Net. Other income, net was $19.5 million in the third
quarter of fiscal 2001, as compared to $8.8 million in the same quarter in the
prior year. The quarter-over-quarter increase is due primarily to $13.1 million
of gains recognized on the sale of securities as compared to $2.0 for the same
period during 2000. Further, rental income was $2.5 million for the third
quarter of fiscal 2001 as compared to zero for the same period during 2000.
18
Interest income for the third quarter of 2001 was $2.7 million compared to $6.9
million for the third quarter of 2000. Our stock repurchase program has led to
lower cash balances, which resulted in the decrease in interest income.
Other income, net increased to $66.9 million for the nine months ended
July 31, 2001 from $27.4 million for the same period during 2000. The nine-month
increase is due in part to realized gains on investments, which were $43.1
million for fiscal 2001 as compared to $7.1 million for fiscal 2000 and in part
to the gain of $10.6 million on the sale of our silicon libraries business to
Artisan. These gains were partially offset by the write-down of certain assets
in our venture portfolio in the amount of $4.3 million for the nine months of
fiscal 2001. Further, rental income was $6.2 million and zero for the nine-month
periods ended July 31, 2001 and 2000, respectively. Interest income in the nine
months ended July 31, 2001 was $10.5 million, as compared to $22.0 million in
the same quarter last year. This decrease primarily reflects our lower cash
balances, which results from the continuation of our stock repurchase program.
For the fourth quarter of 2001, we expect gains from the sale of
investments held by the Company to be approximately $13.0 million.
During the nine months ended July 31, 2001, we determined that certain
of the assets held in our venture fund valued at $7.8 million were impaired and
that the impairment was other than temporary. Accordingly, we recorded a charge
of approximately $4.3 million to write down the carrying value of the
investments to the best estimate of net realizable value. This impairment charge
which is included in the accompanying condensed consolidated statements of
operations in other income, net. The impairment charge relates to certain
investments in non-public companies and represents management's estimate of the
impairment incurred during the period as a result of specific analysis of each
investment, considering the activities of and events occurring at each of the
underlying portfolio companies during the quarter. Our portfolio companies
operate in industries that are rapidly evolving and extremely competitive. For
equity investments in non-public companies for which there is not a market in
which their value is readily determinable, we review each investment for
indicators of impairment on a regular basis based primarily on achievement of
business plan objectives and current market conditions, among other factors. The
primary business plan objectives we consider include, among others, those
related to financial performance such as achievement of planned financial
results or completion of capital raising activities, and those that are not
primarily financial in nature such as the launching of technology or the hiring
of key employees. If it is determined that an impairment has occurred with
respect to an investment in a portfolio company, in the absence of quantitative
valuation metrics, management estimates the impairment and/or the net realizable
value of the portfolio investment based on public- and private-company market
comparable information and valuations completed for companies similar to our
portfolio companies.
Interest Rate Risk. Our exposure to market risk for a change in interest
rates relates to our investment portfolio. We place our investments in a mix of
short-term tax exempt and taxable instruments that meet high credit quality
standards, as specified in our investment policy. This policy also limits the
amount of credit exposure to any one issue, issuer and type of instrument. We do
not anticipate any material losses with respect to our investment portfolio.
The following table presents the carrying value and related
weighted-average interest rates for our investment portfolio. The carrying value
approximates fair value at July 31, 2001. In accordance with our investment
policy, the weighted-average duration of our invested funds portfolio does not
exceed one year.
Principal (Notional) Amounts in U.S. Dollars:
AVERAGE
CARRYING AFTER TAX
(IN THOUSANDS, EXCEPT INTEREST RATES) AMOUNT INTEREST RATE
-------- -------------
Short-term investments -- fixed rate 174,371 4.50%
Money market funds -- variable rate 68,601 2.71%
--------
Total interest bearing instruments $242,972 4.00%
========
Foreign Currency Risk. At the present time, we do not generally hedge
anticipated foreign currency cash flows but hedge only those currency exposures
associated with certain assets and liabilities denominated in nonfunctional
currencies. Hedging activities undertaken are intended to offset the impact of
currency fluctuations on these balances. The success of this activity depends
upon the accuracy of our estimates of balances denominated in various
currencies, primarily the euro, Japanese yen, Taiwan dollar, British pound
sterling, Canadian dollar, and
19
Singapore dollar. We had contracts for the sale and purchase of foreign
currencies with a notional value expressed in U.S. dollars of $63.7 million as
of July 31, 2001. Looking forward, we do not anticipate any material adverse
effect on our consolidated financial position, results of operations, or cash
flows resulting from the use of these instruments. There can be no assurance
that these hedging transactions will be effective in the future.
The following table provides information about our foreign exchange
forward contracts at July 31, 2001. Due to the short-term nature of these
contracts, the contract rate approximates the weighted-average contractual
foreign currency exchange rate at July 31, 2001. These forward contracts mature
in approximately thirty days.
Short-Term Forward Contracts to Sell and Buy Foreign Currencies in U.S.
Dollars:
USD AMOUNT CONTRACT RATE
---------- -------------
(IN THOUSANDS, EXCEPT FOR CONTRACT RATES)
Forward Net Contract Values:
Euro $42,611 1.1456
Japanese yen 6,541 124.5343
Taiwan Dollar 1,303 34.86
British pound sterling 2,805 0.7028
Canadian dollar 4,782 1.52894
Singapore dollar 1,223 1.8012
Euro/Japanese yen 4,469 107.50
-------
$63,734
=======
The unrealized gains/losses on the outstanding forward contracts at July
31, 2001 were immaterial to our consolidated financial statements. The realized
gain/losses on these contracts as they matured were not material to our
consolidated financial position, results of operations or cash flows for the
periods presented.
On November 1, 2000, we adopted Statement of Financial Accounting
Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging
Activities, as amended. SFAS 133 establishes accounting and reporting standards
for derivative instruments and hedging activities. SFAS 133 requires that all
derivatives be recognized as either assets or liabilities at fair value.
Derivatives that are not designated as hedging instruments are adjusted to fair
value through earnings. If the derivative is designated as a hedging instrument,
depending on the nature of the exposure being hedged, changes in fair value will
either be offset against the change in fair value of the hedged asset,
liability, or firm commitment through earnings, or recognized in other
comprehensive income until the hedged anticipated transaction affects earnings.
The ineffective portion of the hedge is recognized in earnings immediately. Upon
adoption of FAS 133, the cumulative transition adjustment was insignificant. We
do not believe that ongoing application of SFAS 133 will significantly alter our
hedging strategies. However, its application may increase the volatility of
other income and expense and other comprehensive income. Apart from our foreign
currency hedging and forward sales of certain equity investments, we do not use
derivative financial instruments. In particular, we do not use derivative
financial instruments for speculative or trading purposes.
Effect of New Accounting Standards. In July 2001, the Financial
Accounting Standards Board issued Statements of Financial Accounting Standards
No. 141, Business Combinations, (SFAS 141) and No. 142, Goodwill and Other
Intangible Assets (SFAS 142). SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001
and specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized apart from goodwill. SFAS 142 requires
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of SFAS 142.
The Company is required to adopt the provisions of SFAS 141 immediately.
Under SFAS 141, goodwill and intangible assets determined to have indefinite
useful lives acquired in a purchase business combination completed after June
30, 2001, but before SFAS 142 is adopted will not be amortized, but will
continue to be evaluated for impairment in accordance with SFAS 121. Goodwill
and intangible assets acquired in business combinations completed before July 1,
2001 will continue to be amortized and tested for impairment in accordance with
current accounting guidance until the date of adoption of SFAS 142.
Upon adoption of SFAS 142, SFAS 141 requires that the Company evaluate
its existing intangible assets and goodwill that were acquired in prior purchase
business combinations, and make any necessary reclassifications in order to
conform with the new criteria in SFAS 141 for recognition apart from goodwill.
Upon adoption of SFAS
20
142, the Company will be required to reassess the useful lives and residual
values of all intangible assets acquired, and make any necessary amortization
period adjustments. In addition, the Company will be required to test intangible
assets with indefinite useful lives and goodwill for impairment in accordance
with the provisions of SFAS 142 within the six-month period following adoption.
Any impairment loss will be measured as of the date of adoption and recognized
immediately as the cumulative effect of a change in accounting principle. Any
subsequent impairment losses will be included in operating activities.
The Company expects to adopt SFAS 142 on November 1, 2002. As of July
31, 2001, unamortized goodwill is $39.4 million which, in accordance with the
Statements, will continue to be amortized until the date of adoption of SFAS
142. Related amortization expense for the nine-month period ended July 31, 2001
is $12.5 million. Because of the extensive effort needed to comply with adopting
SFAS 141 and 142, it is not practicable to reasonably estimate the impact of
adopting these Statements on the Company's financial statements at the date of
this report, including whether the Company will be required to recognize any
transitional impairment losses.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments were $308.9 million at
July 31, 2001, a decrease of $126.8 million, or 29%, from October 31, 2000. Cash
provided by operating activities was $123.4 million for the nine months ended
July 31, 2001 compared to $167.8 million for the same period in the prior year.
Cash provided by investing activities was $110.8 million in the first
nine months of 2001 compared to $154.9 million provided by investing activities
during same period in 2000. The decrease in cash provided by investing
activities of $44.1 million is due to net proceeds from the sale of short- and
long-term investments totaling $159.6 million for the nine months ended July 31,
2001 as compared to net proceeds of investments totaling $208.6 million for the
same period during 2000. The cash received from the sales of investments during
fiscal 2001 was primarily used to purchase treasury stock. Capital expenditures
totaled $52.0 million in the first nine months of fiscal 2001 as we continue to
invest in fixed assets, primarily related to construction of our Oregon
facilities and computing equipment to support our growth and expand our
infrastructure.
We used $249.0 million in net cash for financing activities for the nine
months ended July 31, 2001 compared to $177.6 for the same period during fiscal
2000. The primary financing uses of cash during 2001 were for the repurchase of
6.6 million shares of common stock for approximately $50 per share and payments
on debt obligations totaling $6.5 million. Financing proceeds from the sale of
shares pursuant to our employee stock plans during the nine months ended July
31, 2001 were $89.3 million compared to $47.0 for the nine months ended July 31,
2000.
Accounts receivable decreased 10%, from $146.4 million at October 31,
2000 to $131.7 million at July 31, 2001. Days sales outstanding decreased to 68
days as of July 31, 2001 from 99 days at October 31, 2000 as a result of a
reduction in accounts receivable and an increase in revenues in the quarter
ended July 31, 2001 compared to the quarter ended October 31, 2000.
We believe that our current cash, cash equivalents, short-term
investments, lines of credit, and cash generated from operations will satisfy
our business requirements for at least the next twelve months.
FACTORS THAT MAY AFFECT FUTURE RESULTS
As used in this section, the terms "we," "us" and "our" refers to
Synopsys, Inc. and its subsidiaries at the date of this proxy
statement/prospectus.
Synopsys' revenue and earnings may fluctuate. Many factors affect our
revenue and earnings, which makes it difficult to achieve predictable revenue
and earnings growth. Among these factors are customer product and service
demand, product license terms, and the timing of revenue recognition on products
and services sold. The following specific factors could affect our revenue and
earnings in a particular quarter or over several quarterly or annual periods:
- Like all companies, our business is linked to the health of the
U.S. and international economies. Economic growth has slowed
significantly, and some commentators believe the U.S. economy
will experience a recession. The recent terrorist attacks in New
York and Washington may also have an adverse affect on the
21
economy, at least in the near term. Weakness in the U.S. and
world economy could have an adverse effect on our orders and
revenue.
- Our products are complex, and before buying them customers spend
a great deal of time reviewing and testing them. Our customers'
evaluation and purchase cycles do not necessarily match our
quarterly periods. In the past, we have received a
disproportionate volume of orders in the last week of a quarter.
In addition, a large proportion of our business is attributable
to our largest customers. As a result, if any order, and
especially a large order, is delayed beyond the end of a fiscal
period, our orders for that period could be below our plan and
our revenue could be below any targets we may have published.
- Accounting rules determine when revenue is recognized on our
products, TSLs and service contracts, and therefore impact how
much revenue we will report in any given fiscal period. The
authoritative literature under which Synopsys recognizes revenue
has been, and is expected to continue to be, the subject of much
interpretative guidance. In general, after the adoption of TSLs
in the fourth quarter of fiscal 2000, most orders for our
products and services yield revenue over multiple quarters or
years or upon completion of performance rather than at the time
the contract is executed. For any given order, however, the
specific terms agreed to with a customer may have the effect of
requiring deferral or acceleration of revenue in whole or in
part. Therefore, for any given fiscal period 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 or
exceed our revenue and/or earnings plan because of backlog and
deferred revenue, while orders are under plan.
- In fiscal 2000, we modified the license and pricing structure for
our software products, adopting TSLs, for which revenue is
recognized over multiple quarters or upon completion of
performance rather than at the time the contract is executed. Our
revenue target for any given quarter is based, in part, upon an
assumption that we will achieve a license mix of perpetual
licenses (on which revenue is generally recognized in the quarter
shipped) and TSLs that includes 15% to 20% perpetual licenses. If
we are unable to achieve a mix in this range our ability to
achieve short-term or long-term revenue growth targets may be
impaired.
Weakness in the semiconductor and electronics businesses may negatively
impact Synopsys' business. Synopsys' business depends on the semiconductor and
electronics businesses. Purchases of our products are largely dependent upon the
commencement of new design projects by semiconductor manufacturers and their
customers, the number of design engineers and the increasing complexity of
designs. Though we do not directly benefit from increases in the volume of chips
produced, our business has benefited from the rapid worldwide growth of the
semiconductor industry. Since the end of 2000, however, the semiconductor
industry has experienced a sharp decline in orders and revenue.
Many semiconductor manufacturers and vendors of products incorporating
semiconductors have announced earnings shortfalls and employee layoffs.
Customer spending has become more tightly controlled and spending
decisions, particularly relating to consulting services, are more carefully
scrutinized, and this have negatively affected our business. Demand for our
products and services may also be affected by mergers in the semiconductor and
systems industries, which may reduce the aggregate level of purchases of our
products and services by the combined company. Continuation or worsening of the
current conditions in the semiconductor industry, and the related impacts on
customers' operating budgets and spending decisions, and continued consolidation
among our customers, all could have a material adverse effect on our business,
financial condition and results of operations.
Synopsys' industry is highly competitive. 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 potential customers. In general, competition
is based on product quality and features, post-sale 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., Mentor Graphics Corporation and Avant!
Corporation, as well as companies, including numerous start-up companies, that
offer products focused on a discrete phase of the integrated circuit design
process. In certain situations, Synopsys' competitors have been offering
aggressive discounts on certain of their products, in particular simulation and
synthesis products. As a result, average prices for these products may fall.
22
Technology advances and customer requirements continue to fuel a change
in the nature of competition among EDA vendors. Increasingly, EDA companies
compete on the basis of "design flows" involving integrated logic and physical
design products (referred to as "physical synthesis" products) rather than on
the basis of individual "point" tools performing a discrete phase of the design
process. The need to offer physical synthesis products will become increasingly
important as ICs grow more complex. Our principal physical synthesis product was
fully released in June 2000, and has been well received by customers. We are
working on completing our design flow, and recently announced two additional
products addressing the physical design phase of IC design, but there is no
guarantee that we will be able to offer a competitive complete design flow to
customers. The market for physical design tools is dominated by Cadence and
Avant!, both of which offer products linking logic and physical design. If we
are unsuccessful in developing a complete design flow on a timely basis or in
convincing customers to adopt our integrated logical and physical design
products and methodology, our competitive position could be significantly
weakened.
Synopsys' revenue growth depends on new and non-synthesis products.
Historically, much of our growth has been attributable to the strength of our
logic synthesis products. These products accounted for 32.8% of revenue in the
second fiscal quarter of 2001. We believe that orders and revenue for our
flagship logic synthesis product, Design Compiler, and the DC Family have
peaked. Over the long term, we expect the contribution from the DC Family to
decline as our customers transition from the DC Family to Physical Synthesis
products. In order to meet our revenue plan, revenue from our physical synthesis
products, our non-synthesis products and professional services 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 Physical Compiler
physical synthesis, VCS Verilog simulation and DesignWare IP library products.
If revenue growth for these products fails to meet our goals, it is unlikely
that we will meet our overall revenue growth target.
In order to sustain revenue growth, we will have to enhance our existing
products and introduce new products that are accepted by a broad range of
customers, and to continue the growth in our consulting services business.
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 introduced new products that have failed to meet our revenue
expectations. Expanding revenue from consulting services may be difficult in the
current economic environment. It will also require us to continue to develop
effective management controls on bidding and executing on consulting
engagements. 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.
Businesses that Synopsys has acquired or may acquire in the future may
not perform as projected. We have acquired or merged with a number of companies
in recent years, and as part of our efforts to increase revenue and expand our
product and services offerings we may acquire additional companies. In addition
to direct costs, acquisitions pose a number of risks, including potential
dilution of earnings per share, problems in integrating the acquired products
and employees into our business, the failure to realize expected synergies or
cost savings, the failure of acquired products to achieve projected sales, the
drain on management time for acquisition-related activities, adverse effects on
customer buying patterns and assumption of unknown liabilities. While we attempt
to review proposed acquisitions carefully and negotiate terms that are favorable
to us, there is no assurance that any acquisition will have a positive effect on
our performance.
Stagnation of international economies would adversely affect our
performance. During the third quarter of fiscal 2001, 37% of our revenue was
derived from outside North America, as compared to 47% during fiscal 2000.
International sales are vulnerable to regional or worldwide economic or
political conditions and to changes in foreign currency exchange rates. Economic
conditions in Europe, Japan and the rest of Asia have deteriorated in recent
quarters, and the longer this weakness persists the more likely it is to have a
negative impact on our business. In particular, a number of our largest European
customers are in the telecommunications equipment business, which has weakened
considerably this year. The Japanese economy has been stagnant for several
years, and may now be entering a recession. If the Japanese economy remains
weak, revenue and orders from Japan, and perhaps the rest of Asia, could be
adversely affected. In addition, the yen-dollar and euro-dollar exchange rates
remain subject to unpredictable fluctuations. Weakness of the yen could
adversely affect revenue and orders from Japan during future quarters. Asian
countries other than Japan also have experienced economic and currency problems
in recent years, and in most cases they have not fully recovered. If such
conditions persist or worsen, orders and revenues from the Asia Pacific region
would be adversely affected.
23
Synopsys' success depends on recruiting and retaining 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 and IC
design engineers, and the competition for such individuals is intense.
Experience at Synopsys is highly valued in the EDA industry and the general
electronics industry, and our employees are recruited aggressively by our
competitors and by start-up companies in many industries. In the past, we have
experienced, and may continue to experience, significant employee turnover.
There can be no assurance that we can continue to recruit and retain the
technical and managerial personnel we need to run our business. Failure to do so
could have a material adverse effect on our business, financial condition and
results of operations.
Synopsys is dependent on its proprietary technology. Our success is
dependent, in part, upon our proprietary technology and other intellectual
property rights. We rely on agreements with customers, employees and others, and
intellectual property laws, to protect our proprietary technology. There can be
no assurance that these agreements will not be breached, that we would have
adequate remedies for any breach or that our trade secrets will not otherwise
become known or be independently developed by competitors. Moreover, effective
intellectual property protection may be unavailable or limited in certain
foreign countries. Failure to obtain or maintain appropriate patent, copyright
or trade secret protection, for any reason, could have a material adverse effect
on our business, financial condition and results of operations. In addition,
there can be no assurance that infringement claims will not be asserted against
us and any such claims could require us to enter into royalty arrangements or
result in costly and time-consuming litigation or could subject us to damages or
injunctions restricting our sale of products or could require us to redesign
products.
Our operating expenses do not fluctuate proportionately with
fluctuations in revenues. Our operating expenses are based in part on our
expectations of future revenue, and expense levels are generally committed in
advance of revenue. Since only a small portion of our expenses varies with
revenue, a shortfall in revenue translates directly into a reduction in net
income. For fiscal 2001, our target for total expenses is $663-666 million. If
we are unsuccessful in generating anticipated revenue or maintaining expenses
within this range, however, our business, financial condition and results of
operations could be materially adversely affected.
Synopsys has adopted anti-takeover provisions which may have the effect
of delaying or preventing changes of control or management. We have adopted a
number of provisions that could have anti-takeover effects. Our board of
directors has adopted a Preferred Shares Rights Plan, commonly referred to as a
"poison pill." In addition, our board of directors has the authority, without
further action by its stockholders, to issue additional shares of Common Stock
and to fix the rights and preferences of, and to issue authorized but
undesignated shares of Preferred Stock. These 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 Synopsys, including
transactions in which the stockholders of Synopsys might otherwise receive a
premium for their shares over then current market prices.
Synopsys is subject to changes in financial accounting standards. We
prepare our financial statements in conformity with accounting principles
generally accepted in the United States (GAAP). GAAP are subject to
interpretation by the Financial Accounting Standards Board, the American
Institute of Certified Public Accountants (AICPA), the SEC and various bodies
appointed by these organizations to interpret existing rules and create new
accounting policies. In particular, a task force of the Accounting Standards
Executive Committee, a subgroup of the AICPA, meets on a quarterly basis to
review various issues arising under the existing software revenue recognition
rules, and issues interpretations of these rules. Additional interpretations
issued by the task force may have an adverse effect on how we report revenue or
on the way we conduct our business in the future.
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 by
reference.
24
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits
10.1 1992 Stock Option Plan, as amended through May 25, 2001
(b.) Reports on Form 8-k
None.
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/ ROBERT B. HENSKE
--------------------------------------
Robert B. Henske
Senior Vice President, Finance and
Operations, and Chief Financial Officer
(Principal Financial Officer)
Date: December 20, 2001
25
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 1992 Stock Option Plan, as amended through May 25, 2001
26