UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2003
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, including zip code)
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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.
77,659,063 shares of Common Stock as of June 6, 2003
SYNOPSYS, INC.
QUARTERLY REPORT ON FORM 10-Q
APRIL 30, 2003
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS................................................2
CONDENSED CONSOLIDATED BALANCE SHEETS...............................2
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME...............3
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS........................................................4
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS......5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK..........34
ITEM 4. CONTROLS AND PROCEDURES............................................35
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...................................................35
ITEM 5. OTHER INFORMATION...................................................35
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................39
SIGNATURES....................................................................41
CERTIFICATIONS................................................................42
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYNOPSYS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value data)
APRIL 30, OCTOBER 31,
2003 2002
---------------- -----------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 268,822 $ 312,580
Short-term investments 123,277 102,153
---------------- -----------------
Total cash and short-term investments 392,099 414,733
Accounts receivable, net of allowances of $10,760 and
$11,565, respectively 246,006 207,206
Deferred taxes 270,058 282,867
Prepaid expenses and other 22,202 24,509
---------------- -----------------
Total current assets 930,365 929,315
Property and equipment, net 180,122 185,040
Long-term investments 25,567 39,386
Goodwill, net 548,746 434,554
Intangible assets, net 345,403 355,334
Other assets 34,149 35,085
---------------- -----------------
Total assets $ 2,064,352 $ 1,978,714
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 168,516 $ 246,789
Current portion of long-term debt 28 1,423
Accrued income taxes 153,780 169,912
Deferred revenue 445,189 359,245
---------------- -----------------
Total current liabilities 767,513 777,369
Deferred compensation and other liabilities 65,946 36,387
Long-term deferred revenue 32,053 51,477
Stockholders' equity:
Common stock, $0.01 par value; 400,000 shares
authorized; 73,967 and 73,562 shares
outstanding, respectively 740 735
Additional paid-in capital 1,063,828 1,039,386
Retained earnings 236,114 198,863
Treasury stock, at cost (101,573) (116,499)
Deferred stock compensation (10,844) (8,858)
Accumulated other comprehensive income (loss) 10,575 (146)
---------------- -----------------
Total stockholders' equity 1,198,840 1,113,481
---------------- -----------------
Total liabilities and stockholders' equity $ 2,064,352 $ 1,978,714
================ =================
See accompanying notes to unaudited condensed consolidated financial statements.
2
SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
-------------------------------- ------------------------------
2003 2002 2003 2002
---------------- --------------- -------------- ---------------
Revenue:
Product $ 82,000 $ 52,293 $ 136,520 $ 91,848
Service 61,967 65,765 134,354 134,858
Ratable license 148,061 67,580 289,290 134,477
---------------- --------------- -------------- ---------------
Total revenue 292,028 185,638 560,164 361,183
Cost of revenue:
Product 3,845 3,221 7,598 7,287
Service 17,750 17,391 39,770 38,075
Ratable license 13,472 13,780 26,258 24,220
Amortization of intangible assets and
deferred stock compensation 24,309 -- 45,102 --
---------------- --------------- -------------- ---------------
Total cost of revenue 59,376 34,392 118,728 69,582
---------------- --------------- -------------- ---------------
Gross margin 232,652 151,246 441,436 291,601
Operating expenses:
Research and development 68,612 46,649 135,881 95,355
Sales and marketing 80,970 63,201 152,208 123,000
General and administrative 24,240 17,537 46,791 36,245
In-process research & development 18,250 -- 18,250 --
Amortization of goodwill, intangible
assets and deferred stock compensation 9,169 4,356 17,159 8,400
---------------- --------------- -------------- ---------------
Total operating expenses 201,241 131,743 370,289 263,000
---------------- --------------- -------------- ---------------
Operating income 31,411 19,503 71,147 28,601
Other income, net 7,515 11,213 16,725 22,294
---------------- --------------- -------------- ---------------
Income before provision for income taxes 38,926 30,716 87,872 50,895
Provision for income taxes 16,637 9,336 31,198 15,463
---------------- --------------- -------------- ---------------
Net income $ 22,289 $ 21,380 $ 56,674 $ 35,432
================ =============== ============== ===============
Basic earnings per share:
Net income per share $ 0.30 $ 0.35 $ 0.76 $ 0.58
Weighted-average common shares 74,351 61,232 74,220 60,670
================ =============== ============== ===============
Diluted earnings per share:
Net income per share $ 0.29 $ 0.33 $ 0.74 $ 0.55
Weighted-average common shares and dilutive
stock options outstanding 76,517 64,934 76,551 64,956
================ =============== ============== ===============
See accompanying notes to unaudited condensed consolidated financial statements.
3
SYNOPSYS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
SIX MONTHS ENDED
APRIL 30,
----------------------------------
2003 2002
----------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 56,674 $ 35,432
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
In-process research and development 18,250 --
Amortization and depreciation 90,874 34,266
Provision for doubtful accounts and sales returns 2,423 1,767
Write-down of long-term investments 2,065 3,500
Gain on sale of long-term investments (12,310) (11,062)
Net change in unrecognized gains and losses on
foreign exchange contracts 18,874 (1,353)
Deferred taxes 39,994 (3,191)
Deferred rent 1,351 1,736
Tax benefit associated with stock options 3,226 12,222
Net changes in operating assets and liabilities:
Accounts receivable (41,565) (7,426)
Prepaid expenses and other current assets 3,132 (11,506)
Other assets 3,259 (5,993)
Accounts payable and accrued liabilities (65,433) (26,931)
Accrued income taxes (36,823) (54,805)
Deferred revenue 62,893 18,458
Deferred compensation 4,623 5,256
----------------- ----------------
Net cash provided by (used in) operating activities 151,507 (9,630)
----------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of short-term
investments 112,621 659,931
Purchases of short-term investments (135,940) (504,788)
Proceeds from sale of long-term investments 18,497 20,024
Purchases of long-term investments (800) (3,205)
Purchases of property and equipment (19,705) (26,542)
Cash paid for acquisitions, net of cash received (162,461) --
Capitalization of software development costs (1,308) (796)
----------------- ----------------
Net cash (used in) provided by investing activities (189,096) 144,624
----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuances of common stock 63,419 76,395
Purchases of treasury stock (67,795) --
----------------- ----------------
Net cash (used in) provided by financing
activities (4,376) 76,395
Effect of exchange rate changes on cash (1,793) 485
----------------- ----------------
Net (decrease) increase in cash and cash equivalents (43,758) 211,874
Cash and cash equivalents, beginning of period 312,580 271,696
----------------- ----------------
Cash and cash equivalents, end of period $ 268,822 $ 483,570
================= ================
See accompanying notes to unaudited condensed consolidated financial statements.
4
SYNOPSYS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Synopsys, Inc. (Synopsys or the Company) has prepared the accompanying
unaudited condensed consolidated financial statements pursuant to the Securities
and Exchange Commission's (SEC) rules and regulations. Pursuant to such rules
and regulations, the Company has condensed or omitted certain information and
footnote disclosures normally included in consolidated financial statements
prepared in accordance with generally accepted accounting principles. In
management's opinion, the Company has made all adjustments (consisting only of
normal, recurring adjustments) necessary to fairly present the financial
position, results of operations and cash flows. Interim period operating results
do not necessarily indicate the results that may be expected for any other
interim period or for the full fiscal year. These financial statements and
accompanying notes should be read in conjunction with the consolidated financial
statements and notes thereto in Synopsys' Annual Report on Form 10-K, as
amended, for the fiscal year ended October 31, 2002.
To prepare financial statements in conformity with generally accepted
accounting principles, management must make estimates and assumptions that
affect the amounts reported in the unaudited condensed consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Synopsys' fiscal year and second quarter end on the Saturday nearest October
31 and April 30, respectively. Fiscal 2003 and 2002 are both 52-week years. For
presentation purposes, the unaudited condensed consolidated financial statements
and accompanying notes refer to the applicable calendar month end.
Accounting for Stock-Based Compensation
In accordance with Accounting Principles Board Opinion No. 25 (APB 25),
Accounting for Stock Issued to Employees, the Company applies the intrinsic
value method in accounting for employee stock options. Accordingly, the Company
generally recognizes no compensation expense with respect to stock-based awards
to employees. The Company has determined unaudited pro forma information
regarding net income and earnings per share as if the Company had accounted for
employee stock options under the fair value method as required by Statement of
Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based
Compensation, and Statement of Financial Accounting Standards No. 148 (SFAS
148), Accounting for Stock-Based Compensation Transition and Disclosure. The
weighted-average expected life, risk-free interest rate and volatility for the
three- and six-month periods ended April 30, 2003 and for the same periods in
fiscal 2002 are comparable to that for the year ended October 31, 2002.
5
The Company's unaudited pro forma net income and earnings per share data
under SFAS No. 123 is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
----------------------------------- -----------------------------------
2003 2002 2003 2002
----------------- ----------------- ---------------- ------------------
(in thousands, except per share amounts)
Net income, as reported $ 22,289 $ 21,380 $ 56,674 $ 35,432
Add: Stock-based employee
compensation included in net income 1,288 -- 2,615 --
Deduct: Stock-based employee
compensation expense determined
under the fair value based method for all
awards, net of related tax effects 30,643 22,605 61,906 44,997
Pro forma net (loss) under SFAS 123 $ (7,066) $ (1,225) $ (2,617) $ (9,565)
Earnings (loss) per share-- basic
As reported under APB 25 $ 0.30 $ 0.35 $ 0.76 $ 0.58
Pro forma under SFAS 123 $ (0.10) $ (0.02) $ (0.04) $ (0.16)
Earnings (loss) per share-- diluted
As reported under APB 25 $ 0.29 $ 0.33 $ 0.74 $ 0.55
Pro forma under SFAS 123 $ (0.10) $ (0.02) $ (0.04) $ (0.16)
Effect of New Accounting Standards
In May 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 150 (SFAS 150), Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity. SFAS 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS 150 is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. SFAS 150 is to be implemented by
reporting the cumulative effect of a change in an accounting principle for
financial instruments created before the issuance date of the statement and
still existing at the beginning of the interim period of adoption. The Company
does not expect the adoption of SFAS 150 to have a significant impact on its
financial position or results of operations.
In April 2003, the FASB issued Statements of Financial Accounting Standards
No. 149 (SFAS 149), Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. SFAS 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under FASB Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS 149 is generally effective for contracts entered
into or modified after June 30, 2003, and for hedging relationships designated
after June 30, 2003. The Company does not expect the adoption of SFAS 149 to
have a significant impact on its financial position or results of operations.
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards No. 141 (SFAS 141), Business
Combinations, and Financial Accounting Standards No. 142 (SFAS 142), Goodwill
and Other Intangible Assets. SFAS 141 requires issuers to use the purchase
method of accounting 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. Under SFAS
141, the Company must reclassify to goodwill any intangible assets it acquired
prior to July 1, 2001 that do not meet SFAS 141's criteria for recognition.
Applying SFAS 141, the Company was not required to make any such
reclassifications.
6
The Company adopted SFAS 142 on November 1, 2002 and pursuant to that
standard ceased amortizing goodwill recorded for business combinations the
Company consummated prior to July 1, 2001. In addition, as of November 1, 2002,
the Company assessed the useful lives and residual values of all acquired
intangible assets recorded on the balance sheet and also tested goodwill for
impairment per that standard. In the Company's impairment analysis, the Company
determined it has one reporting unit. The Company completed the goodwill
impairment review as of the beginning of fiscal 2003 and found no indicators of
impairment. This impairment review was based on the fair value of the Company as
determined by its market capitalization. As of April 30, 2003, unamortized
goodwill was $548.7 million, which, in accordance with SFAS 142, the Company
will no longer amortize.
Reclassification
Certain prior period amounts have been reclassified to conform to current
period presentation.
2. BUSINESS COMBINATIONS
Acquisition of Numerical Technologies, Inc. (Numerical)
On March 1, 2003, the Company completed its acquisition of Numerical.
Reasons for the Acquisition. In approving the merger agreement, management
considered a number of factors, including its opinion that combining Numerical's
sub-wavelength lithography-enabling solutions with Synopsys' leading design
solutions would enable Synopsys to further reduce costs and manufacturing risk
for its customers as they create smaller, faster and more power-efficient chips.
Purchase Price. The Company paid Numerical common stock holders $7.00 in
cash in exchange for each share of Numerical common stock owned as of the merger
date, or approximately $240.7 million. The total purchase consideration
consisted of:
(in thousands)
Cash paid for Numerical common stock $ 240,722
Acquisition related costs 10,044
Fair value of options to purchase Synopsys
common stock issued, less $5.2 million
representing the portion of the intrinsic value
of Numerical's unvested options applicable to the
remaining vesting period 16,500
----------------
$ 267,266
================
Acquisition-related costs of $10.0 million consist primarily of legal and
accounting fees of $2.7 million, and other directly related charges including
approximately $5.2 million in restructuring costs and approximately $1.6 million
in directors and officers insurance costs incurred to cover Numerical's former
officers and Board of Directors as required by the merger agreement. As of April
30, 2003, the Company had paid $5.1 million of the acquisition-related costs. Of
the balance remaining at April 30, 2003, $4.0 million represents outstanding
restructuring costs.
7
The Company has allocated total purchase consideration to the assets and
liabilities acquired, including identifiable intangible assets, based on their
respective fair values at the acquisition date, resulting in goodwill of $140.6
million. The following unaudited condensed balance sheet data presents the fair
value of the assets and liabilities acquired.
(in thousands)
Assets acquired
Cash, cash equivalents and short-term investments $ 79,461
Accounts receivable 4,904
Prepaid expenses and other current assets 3,368
Identifiable intangible assets 47,570
Goodwill 140,626
Other assets 4,827
----------------
Total assets acquired $ 280,756
================
Liabilities acquired
Accounts payable and accrued liabilities $ 17,432
Deferred revenue 3,627
Deferred tax liabilities 20,691
----------------
Total liabilities acquired $ 41,750
================
Goodwill and Intangible Assets. Goodwill, representing the excess of the
purchase consideration over the fair value of tangible and identifiable
intangible assets acquired in the merger, will not be amortized and is not
deductible for tax purposes. The Company allocated a portion of the purchase
price to the following identifiable intangible assets:
(in thousands)
Estimated
Intangible Asset Useful Life
- ------------------------------------ ------------- --------------
Core/developed technology $ 22,580 3
Customer relationships $ 20,120 6
Customer backlog $ 4,870 3
Except for amortization of the core/developed technology (which is included
in cost of revenue in the statement of operations for the period ended April 30,
2003), the Company included amortization of the intangible assets in operating
expenses in its statement of operations for the period ended April 30, 2003.
8
Unaudited Pro Forma Results of Operations. The following table presents
unaudited pro forma results of operations and gives effect to the Numerical
acquisition as if the acquisition was consummated at the beginning of each
fiscal period presented. The Company's results of operations may have been
different than those shown below if the Company had actually acquired Numerical
at the beginning of each fiscal period presented; further, the pro forma results
below do not necessarily indicate future operating results.
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
---------------------------------- -----------------------------------
2003 2002 2003 2002
----------------- ---------------- ---------------- ------------------
(in thousands, except per share amounts)
Revenue(1) $ 297,399 $ 198,732 $ 576,725 $ 388,462
Net income(2) $ 15,392 $ 19,814 $ 45,812 $ 30,545
Basic earnings per share $ 0.21 $ 0.32 $ 0.62 $ 0.50
Weighted average common
shares outstanding(3) 74,351 61,232 74,220 60,670
Diluted earnings per share $ 0.20 $ 0.31 $ 0.60 $ 0.47
Weighted average common
shares and dilutive stock
options outstanding(3) 76,517 64,839 76,551 64,874
(1) The 2002 unaudited pro forma results of operations and the 2003
unaudited pro forma results of operations for the period from
November 1, 2002 through February 28, 2003 include Numerical's
reported revenue in the periods Numerical recognized such revenues.
However, the purchase method of accounting requires Synopsys to
reduce Numerical's reported deferred revenue to an amount equal to
the fair value of the legal liability, resulting in lower revenue in
periods following the merger than Numerical would have achieved as a
separate company. Therefore, revenues from Numerical products for
the period from March 1, 2003 to April 30, 2003 included in the
unaudited pro forma results of operations reflect the lower
amortization of deferred revenue stemming from this purchase
accounting adjustment.
(2) Net income for the three and six months ended April 30, 2003 includes
in-process research and development costs from the Numerical
acquisition totaling $18, 250.
(3) The calculations of the weighted average common shares outstanding
and weighted average common shares and dilutive stock options
outstanding for the three and six months ended April 30, 2002 do not
include the impact of the shares issued in the acquisition of Avant!
as discussed below.
Acquisition of Avant!, inSilicon and Co-Design
Avant!. On June 6, 2002, the Company completed its merger with Avant!
Corporation (Avant!), a leading developer of software used in the physical
design and physical verification phases of chip design. The Company recorded
goodwill of $342.8 million as a result of the merger, which reflects a $31.6
million decrease in facilities closure costs during the second quarter of fiscal
2003 as described below. As reflected in Note 3, "Goodwill and Other Intangible
Assets, Net" below, the decrease in goodwill for the second quarter associated
with the Avant! merger was partially offset by a $4.3 million increase in
goodwill resulting from the reduction of unbilled receivables recorded in
connection with the Avant! acquisition. These amounts related to long-term
library business service contracts under which Avant! had not yet performed
services, and, as such, represent executory contracts rather than unbilled
receivables. The amount assigned to the intangible asset was not material.
During the first quarter of fiscal 2003, goodwill associated with the Avant!
acquisition increased $1.0 million for estimated costs of certain contract
termination liabilities. The Company included Avant!'s results of operations in
the accompanying unaudited condensed consolidated statement of income for the
period from November 1, 2002 through April 30, 2003.
9
The following table presents the components of acquisition-related costs
recorded in the Avant! transaction, along with amounts paid through the period
ended April 30, 2003.
Balance at Balance at
October 31, April 30,
(in thousands) 2002 Payments Reversals 2003
-------------- --------------- --------------- -------------
Acquisition related costs $ 3,840 $ 992 - $ 2,848
Facilities closure costs 57,261 24,734 31,578 949
Employee severance costs 290 155 - 135
-------------- --------------- --------------- -------------
Total $ 61,391 $ 25,881 $ 31,578 $ 3,932
============== =============== =============== =============
The remaining acquisition related costs of $2.8 million consist primarily of
legal and accounting fees.
Facilities closure costs at October 31, 2002 related primarily to Avant!'s
corporate headquarters. After the merger, the Company consolidated functions
performed in these buildings into Synopsys' corporate facilities and stopped
paying rent on such buildings, pending negotiation of lease terminations.
Synopsys settled claims of one of the two landlords of these buildings during
the three months ended January 31, 2003 for $7.4 million and settled the claims
of the other landlord during the three months ended April 30, 2003 for $15.0
million. Resolving these contingencies reduced the amount allocated to goodwill
by $31.6 million. The $0.9 million remaining facilities closure cost is the
present value of the future obligations under certain of Avant!'s other lease
agreements which the Company has or intends to terminate under an approved
facilities exit plan, plus additional costs the Company expects to incur
directly related to vacating such facilities.
inSilicon and Co-Design. In fiscal 2002, the Company also acquired inSilicon
Corporation (inSilicon) and Co-Design Automation, Inc. (Co-Design). inSilicon
developed, marketed and licensed an extensive portfolio of complex "intellectual
property blocks." Co-Design developed simulation software used in the high level
verification stage of the chip design process and a new design language that
permits designers to describe the behavior of their chips more efficiently than
current standard languages. The Company has included inSilicon's and Co-Design's
results of operations in the accompanying unaudited condensed consolidated
statement of income for the period from November 1, 2002 through April 30, 2003.
In connection with the inSilicon acquisition, the Company incurred
acquisition-related costs of $6.2 million, consisting primarily of legal and
accounting fees of $1.8 million, other directly related charges including
contract termination costs of $3.3 million, and restructuring costs of
approximately $0.8 million. As of April 30, 2003, remaining accrued and unpaid
acquisition-related costs of $0.7 million consisted primarily of outstanding
contract termination costs. There are no remaining accrued or unpaid
acquisition-related costs for Co-Design.
10
Unaudited Pro Forma Results of Operations. The following table presents
unaudited pro forma results of operations and gives effect to the Avant! and
inSilicon acquisitions as if the mergers were consummated at the beginning of
each fiscal period presented. Amounts shown for the three and six month periods
ended April 30, 2003 are the combined Company's actual results of operations.
The Company has not included Co-Design in the 2002 pro forma results because the
effect was not material. The Company's results of operations may have been
different if the Company had actually acquired Avant! or inSilicon, or both, at
the beginning of each fiscal period presented. The pro forma results below do
not necessarily indicate future operating results.
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
------------------------------ -------------------------------
2003 2002 2003 2002
---------------- ------------- ---------------- --------------
(in thousands, except per share amounts)
Revenue(1) $ 292,028 $ 305,056 $ 560,164 $ 593,564
Net income $ 22,289 $ 36,242 $ 56,674 $ 64,298
Basic earnings per share $ 0.30 $ 0.48 $ 0.76 $ 0.86
Weighted average common
shares outstanding 74,351 75,763 74,220 75,201
Diluted earnings per share $ 0.29 $ 0.46 $ 0.74 $ 0.81
Weighted average common
shares and dilutive stock
options outstanding 76,517 79,284 76,551 79,329
(1) The 2002 unaudited pro forma results of operations include Avant!'s
and inSilicon's reported revenue in the periods Avant! and inSilicon
recognized such revenues. However, the purchase method of accounting
requires Synopsys to reduce Avant!'s and inSilicon's reported deferred
revenue subsequent to the merger, resulting in lower revenue in
periods following the merger than Avant! and inSilicon would have
achieved as separate companies. Therefore, revenues from Avant! and
inSilicon for the periods subsequent to the respective merger dates
reflect this reduction to revenue.
The unaudited pro forma results of operations for each of the periods
presented exclude non-recurring merger costs of $21.0 million for Avant!'s
pre-merger litigation settlements and other related costs Avant! incurred for
the six months ended April 30, 2002. The Company has, however, included these
expenses in its historical unaudited condensed consolidated statement of income.
11
3. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
The following table rolls forward the carrying value of goodwill and other
intangibles, net, from October 31, 2002 to April 30, 2003:
Amortization Balance at Balance at
Period October 31, April 30,
(in thousands) (Years) 2002 Additions(1) Reversals(2) Amortization 2003
------------- --------------- ------------- ------------ ------------- ---------------
Goodwill $ 434,554 $ 141,867 $ 27,675 $ -- $ 548,746
=============== ============= ============ ============= ===============
Intangibles:
Contract rights intangible 3 $ 44,519 $ -- $ -- $ 8,616 $ 35,903
Core/developed technology 3-10 186,766 23,194 -- 36,679 173,281
Covenant not-to-compete 4 8,152 154 -- 1,144 7,162
Customer backlog 3 3,267 4,870 -- 839 7,298
Customer relationship 6 95,782 20,581 -- 9,409 106,954
Trademark and tradename 3 15,242 307 -- 2,959 12,590
--------------- ------------- ------------ ------------- ---------------
Total intangible assets $ 353,728 $ 49,106 $ -- $ 59,646 $ 343,188
=============== ============= ============ ============= ===============
(1) Additions include goodwill and intangible assets acquired as part
of the Numercial acquisition, assets acquired as part of an
immaterial acquisition made during the quarter, contract
termination costs and amounts related to foreign currency
fluctuations for goodwill which are not denominated in US
dollars.
(2) Reversals primarily include $31.6 million related to Avant!
facilities discussed under "Acquisition of Avant!, inSilicon
and Co-Design" above, offset by the reduction of $4.3 million
in Avant! unbilled receivables.
Total amortization expense related to goodwill and other intangible
assets is set forth in the table below:
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
------------------------------- -------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
(in thousands)
Goodwill $ -- $ 3,892 $ -- $ 7,784
=============== =============== =============== ===============
Intangibles:
Contract rights intangible $ 4,308 $ -- $ 8,616 $ --
Core/developed technology 19,128 464 36,679 616
Covenants not-to-compete 575 -- 1,144 --
Customer backlog 681 -- 839 --
Customer relationships 5,133 -- 9,409 --
Trademark and tradename 1,484 -- 2,959 --
--------------- --------------- --------------- ---------------
Total intangible assets $ 31,309 $ 464 $ 59,646 $ 616
=============== =============== =============== ===============
The following table presents the estimated future amortization of the other
intangibles (in thousands):
Fiscal Year
2003 - remainder of fiscal year $ 63,219
2004 125,862
2005 90,065
2006 25,567
2007 21,173
2008 and thereafter 17,302
--------------
Total estimated future amortization of
other intangibles $ 343,188
==============
12
The following table reflects adjusted net income per share, excluding
amortization of goodwill, for fiscal 2002 periods as if the Company had adopted
SFAS 142 as of July 1, 2001. The Company's actual results of operations are
shown for the three- and six-month periods ended April 30, 2003.
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
2003 2002 2003 2002
------------------ ---------------- ------------------ ------------------
(in thousands, except per share amounts)
Net income $ 22,289 $ 21,380 $ 56,674 $ 35,432
Add: Amortization of goodwill -- 3,892 -- 7,784
------------------ ---------------- ------------------ ------------------
Adjusted net income $ 22,289 $ 25,272 $ 56,674 $ 43,216
================== ================ ================== ==================
$ 0.30 $ 0.41 $ 0.76 $ 0.71
Basic earnings per share
Weighted average common shares
outstanding 74,351 61,232 74,220 60,670
Diluted earnings per share $ 0.29 $ 0.39 $ 0.74 $ 0.67
Weighted average common shares
and dilutive stock options
outstanding 76,517 64,934 76,551 64,956
4. LEGAL PROCEEDINGS
Prior to the Avant! acquisition, Avant! leased five buildings in Fremont,
California for its headquarters. After the merger, Synopsys consolidated the
functions performed in the buildings into its Mountain View and Sunnyvale
facilities, the Fremont buildings were closed, and Avant! stopped paying rent on
the underlying leases, pending negotiation of lease terminations. In November
2002, Synopsys settled all claims of the landlord on two of the buildings.
Effective April 24, 2003, Synopsys and the landlord of the remaining facilities
settled all claims with respect to these facilities. Accordingly, all litigation
against Avant! with respect to landlord claims have been released with
prejudice.
On August 10, 2001, Silicon Valley Research, Inc. (SVR) filed an action
against Avant! in the United States District Court for the Northern District of
California. The complaint asserted claims for statutory unfair competition,
receipt, sale and concealment of stolen property, interference with prospective
economic advantage, conspiracy, false advertising, violation of the Lanham Act
and violation of 18 U.S.C.A. ss. 1962 (R.I.C.O.). In the complaint, SVR alleged
that Avant!'s use of trade secrets misappropriated by Avant! damaged SVR by
allowing Avant! to develop and market products more quickly and cheaply than it
could have otherwise. On May 7, 2003, the District Court granted Avant!'s motion
to dismiss and motion for summary judgment, thereby dismissing all of SVR's
claims. The Company has received notice that SVR has appealed this judgment in
the Ninth Circuit Court of Appeals. Avant! continues to believe the SVR claims
are without merit and intends to defend this appeal vigorously.
Part I, Item 3 of Synopsys' Annual Report on Form 10-K, as amended, for the
fiscal year ended October 31, 2002 includes a full discussion of each of the
legal proceedings listed above.
5. STOCK REPURCHASE PROGRAM
In December 2002, the Company's Board of Directors renewed its stock
repurchase program originally approved in July 2001. Under the renewed program,
the Company may acquire up to $500 million of Synopsys common stock in the open
market. This renewed stock repurchase program replaced all prior Board-approved
repurchase programs. The Company intends to use all common shares repurchased
for ongoing stock issuances such as existing employee stock option plans,
13
existing stock purchase plans and acquisitions. The Company purchased 1.5
million shares during the three months ended April 30, 2003 at an average price
of $44 per share. The Company did not repurchase any shares during the three-
and six-month periods ended April 30, 2002. At April 30, 2003, approximately
$432.2 million remained available for repurchase under the program.
6. COMPREHENSIVE INCOME
The following table sets forth the components of comprehensive income, net
of income tax expense:
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
----------------------------------- ----------------------------------
2003 2002 2003 2002
----------------- ----------------- ---------------- -----------------
(in thousands)
Net income $ 22,289 $ 21,380 $ 56,674 $ 35,432
Foreign currency translation adjustment (169) (2,113) (947) 454
Unrealized gain (loss) on investments (2,730) 1,032 7,065 6,704
Reclassification adjustment for realized
gains (loss) on investments 2,305 (2,873) 4,603 (5,842)
----------------- ----------------- ---------------- -----------------
Total comprehensive income $ 21,695 $ 17,426 $ 67,395 $ 36,748
================= ================= ================ =================
7. EARNINGS PER SHARE
The Company computes basic earnings per share using the weighted-average
number of common shares outstanding during the period. The Company computes
diluted earnings per share using the weighted-average number of common shares
and dilutive stock options outstanding during the period; the number of
weighted-average dilutive stock options outstanding is computed using the
treasury stock method.
The table below reconciles the weighted-average common shares used to
calculate basic net income per share with the weighted-average common shares
used to calculate diluted net income per share.
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
-------------------------------- ----------------------------------
2003 2002 2003 2002
--------------- ---------------- ----------------- ----------------
(in thousands)
Weighted-average common shares for
basic net income per share 74,351 61,232 74,220 60,670
Weighted-average dilutive stock
options outstanding under the
treasury stock method 2,166 3,702 2,331 4,286
-------------- ---------------- ----------------- ----------------
Weighted-average common shares for
diluted net income per share 76,517 64,934 76,551 64,956
============== ================ ================= ================
The effect of dilutive stock options outstanding excludes approximately 11.7
million and 5.5 million stock options for the three months ended April 30, 2003
and 2002, respectively, and 11.1 million and 4.6 million stock options for the
six months ended April 30, 2003 and 2002, respectively, which were anti-dilutive
for net income per share calculations.
8. SEGMENT DISCLOSURE
Statement of Financial Accounting Standards No. 131 (SFAS 131), Disclosures
about Segments of an Enterprise and Related Information, requires disclosures of
certain information regarding operating segments, products and services,
geographic areas of operation and major customers. SFAS 131 reporting is based
upon the "management approach": how management organizes the Company's operating
segments for which separate financial information (i) is available and (ii) is
evaluated regularly by the Chief Operating Decision Maker (CODM) in deciding how
to allocate resources and in assessing performance. Synopsys' CODMs are the
Company's Chief Executive Officer and Chief Operating Officer.
14
The Company provides comprehensive design software products and consulting
services in the electronic design automation software industry. In making
operating decisions, the CODMs primarily consider consolidated financial
information, accompanied by disaggregated information about revenues by
geographic region. The Company operates in a single segment. Revenue is defined
as revenues from external customers.
Revenue and long-lived assets related to operations in the United States
and other geographic areas were:
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
--------------------------------------- ------------------------------------
2003 2002 2003 2002
-------------------- ------------------ ----------------- ------------------
(in thousands)
Revenue:
United States $ 127,301 $ 127,319 $ 293,423 $ 236,028
Europe 42,692 29,524 84,981 63,592
Japan 102,139 17,007 135,035 34,025
Other 19,896 11,788 46,725 27,538
-------------------- ------------------ ----------------- ------------------
Consolidated $ 292,028 $ 185,638 $ 560,164 $ 361,183
==================== ================== ================= ==================
APRIL 30, OCTOBER 31,
2003 2002
---------------- -----------------
(in thousands)
Long-lived assets:
United States $ 157,061 $ 162,360
Other 23,061 22,680
---------------- -----------------
Consolidated $ 180,122 $ 185,040
================ =================
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. Beginning in fiscal 2003, geographic revenue reflects
reconfiguration. The Company had two customers that each accounted for more than
ten percent of the Company's total revenue for the three months ended April 30,
2003, and no customers that accounted for more than ten percent of the Company's
total revenue for the six months ended April 30, 2003. No single customer
accounted for more than ten percent of the Company's total revenue for the same
periods in the prior fiscal year.
15
The Company segregates revenue into five categories for purposes of internal
management reporting purposes: Design Implementation, Verification and Test,
Design Analysis, Intellectual Property (IP) and Professional Services. The
following table summarizes the revenue attributable to each category. Revenue
for the three and six months ended April 30, 2002 does not include revenue
attributable to products acquired from Numerical, Avant!, inSilicon and
Co-Design, since the acquisitions of these companies occurred after such date.
Revenue attributable to products acquired from these companies is included in
the three and six months ended April 30, 2003, limited in the case of Numerical
products to revenue attributable to the period from March 1, 2003 through April
30, 2003. Due to a business unit reorganization in the first quarter of fiscal
2003, the Company realigned certain of its products, with the majority of the
shift occurring between IP and Verification and Test. The Company has
reclassified prior period amounts to reflect this shift and to provide a
consistent presentation.
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
-------------------------------------- ------------------------------------
2003 2002 2003 2002
------------------- ------------------ ----------------- ------------------
(in thousands)
Revenue:
Design Implementation $ 141,672 $ 78,381 $ 258,057 $ 148,904
Verification and Test 68,834 64,320 139,514 130,085
Design Analysis 61,733 10,516 115,397 21,134
IP 13,208 16,161 28,980 30,958
Professional Services 6,581 16,260 18,216 30,102
------------------- ------------------ ----------------- ------------------
Consolidated $ 292,028 $ 185,638 $ 560,164 $ 361,183
=================== ================== ================= ==================
Beginning in fiscal 2003, product revenue reflects reconfiguration.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations as of April 30, 2003 and for the three- and six-month periods
ended April 30, 2003 and April 30, 2002, respectively, should be read in
conjunction with our financial statements included in this Quarterly Report on
Form 10-Q, and with Management's Discussion and Analysis of Financial Condition
and Results of Operations and our financial statements included in our Annual
Report on Form 10-K for the year ended October 31, 2002.
The following discussion contains "forward-looking statements" as defined
under Section 21E of the Securities Exchange Act of 1934. For example,
statements including terms such as "projects," "expects," "believes,"
"anticipates" or "targets," and similar such words denoting future events, are
forward-looking statements. Actual results could differ materially from those
anticipated in such forward-looking statements as a result of certain factors,
including those set forth under "Factors That May Affect Future Results" below.
The cautionary statements made in this report should be read as applying to all
related forward-looking statements wherever they appear in this report.
Overview
Synopsys is a leading supplier of electronic design automation (EDA)
software to the global electronics industry. We develop, market and support a
wide range of integrated circuit (IC) design software products that designers of
advanced ICs, and the electronic systems (such as computers, cell phones, and
internet routers) that incorporate such ICs, use to automate significant
portions of their IC design process. Our products enable our customers to
optimize their IC designs for speed, size, power consumption and production
cost, while reducing overall design time. We also provide consulting services to
help our customers improve their IC design processes and, where requested, to
assist them with their IC designs, as well as training and support services.
Acquisitions
On March 1, 2003, we completed our acquisition of Numerical Technologies,
Inc. (Numerical) to expand our offerings of design for manufacturing products.
We include Numerical's results of operations for the period from March 1, 2003
through April 30, 2003 in the accompanying unaudited condensed consolidated
statement of income for the three months ended April 30, 2003.
In fiscal 2002, we completed the acquisitions of: (i) Avant! Corporation
(Avant!), a leading developer of software used in the physical design and
physical verification phases of chip design; (ii) Co-Design Automation, Inc.
(Co-Design), a developer of simulation software used in the high level
verification stage of the chip design process; and (iii) inSilicon Corporation
(inSilicon), which developed, marketed and licensed an extensive portfolio of
complex "intellectual property blocks." We include the results of operations for
these acquisitions in the accompanying unaudited condensed consolidated
statements of income for the period from November 1, 2002 through April 30,
2003.
Critical Accounting Policies
We base the discussion and analysis of our financial condition and results
of operations upon our unaudited condensed consolidated financial statements,
which we prepare in accordance with accounting principles generally accepted in
the United States of America. In preparing these financial statements, we must
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to revenue recognition, valuation of strategic investments,
allowance for doubtful accounts, income taxes and valuation of intangible
assets. We base our estimates on historical experience and on various other
assumptions we believe are reasonable under the circumstances. Actual results
may differ from these estimates.
17
The accounting policies that most frequently require us to make estimates
and judgments, and that are therefore critical to understanding our results of
operations, are:
o Revenue recognition;
o Valuation of strategic investments;
o Allowance for doubtful accounts;
o Income taxes; and
o Valuation of intangible assets.
Revenue Recognition
Our revenue recognition policies have been designed and implemented in
accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition,
as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition,
With Respect to Certain Transactions, and SOP 98-4, Deferral of the Effective
Date of a Provision of SOP 97-2, Software Revenue Recognition.
We report revenue in three categories: ratable, product and services.
o Ratable license revenue consists primarily of fees for
Technology Subscription Licenses (TSLs) bundled with
post-contract customer support (we refer to post-contract
customer support as maintenance or PCS) and sold as a single
package. We refer to these licenses as TSLs. Assuming all
other revenue recognition criteria are met, we typically
recognize TSL revenue ratably over the term of the license and
maintenance period as the fair value of maintenance is not
known.
We recognize revenue from contracts with extended payment
terms 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. We recognize revenue from
contracts with the rights to unspecified additional software
products ratably over the contract term. We recognize revenue
from TSLs that include both extended payment terms and
unspecified additional software products, and that are not
considered to be fixed or determinable, in an amount that is
the lesser of amounts due and payable or the ratable portion
of the entire fee. In all of these cases, we recognize the
maintenance portion ratably over the contract term.
o Product revenue consists primarily of fees from sales of
perpetual licenses. Assuming all other revenue recognition
criteria are met, we recognize license revenue from perpetual
licenses upon delivery using the residual method.
o Services revenue consists of fees for consulting services,
training and maintenance associated with perpetual licenses. We
generally recognize revenue from consulting and training services
as they are performed. We generally recognize revenue from
maintenance associated with perpetual licenses ratably over the
maintenance term. Maintenance sold with perpetual licenses is
generally renewable, after any bundled maintenance period
expires, in one-year increments for a fixed percentage of the
perpetual list price. Since the second quarter of fiscal 2002, we
have calculated the price of maintenance as a percentage of the
net license fee for certain customers that purchase perpetual
licenses in excess of $2.0 million, resulting in different
maintenance charges for different customers. In general, under
this method, the price of maintenance for these customers, and
therefore the services revenue from arrangements with these
customers, has been substantially lower than it would have been
if we had calculated maintenance as a fixed percentage of the
perpetual price.
18
Customers occasionally request the right to convert their existing TSLs to
perpetual licenses. These requests generally occur toward the end of the TSL
term. Customers pay an incremental fee to convert the TSL to a perpetual
license, which we recognize upon contract signing, assuming all other revenue
recognition criteria have been met, in accordance with AICPA Technical Practice
Aid (TPA) 5100.74. In some situations, the contract converting the TSL to a
perpetual license is modified (e.g. new technology, a significant change in
total technology under license, a substantial increase or decrease in license
fees, modified reconfiguration rights, etc.) such that the TSL contract has in
substance been terminated and replaced with a new perpetual license. In these
situations, we account for all of the arrangement fees as a new sale and
recognize revenue when all other revenue recognition criteria have been met. We
have a policy that defines the circumstances under which such transactions are
accounted for as a new perpetual license sale. Our policy incorporates elements
such as length of the original TSL, the remaining TSL term, the extent of the
increase or decrease in the total technology under license, the change in
payment terms, and other pertinent factors.
We make significant judgments related to revenue recognition. Specifically,
in connection with each transaction involving our products (referred to as an
"arrangement" in the accounting literature), we must evaluate whether: (i)
persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii)
our fee is "fixed or determinable," and (iv) "collectibility is probable." We
apply these criteria as discussed below.
o Persuasive Evidence of an Arrangement Exists. Our customary
practice is to have a written contract, signed by both the
customer and us, 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.
o Delivery Has Occurred. We deliver software to our customers
physically or electronically. For physical deliveries, our
standard transfer terms are typically FOB shipping point. For
electronic deliveries, delivery occurs when we provide the
customer access codes that allow the customer to take immediate
possession of the software on its hardware.
o The Fee is Fixed or Determinable. Our determination that an
arrangement fee is fixed or determinable depends principally on
the arrangement's payment terms. Our historical, customary
payment terms require 75% or more of the arrangement fee to be
paid within one year or less. Where these terms apply, we regard
the fee as fixed or determinable and we recognize revenue upon
delivery of software (assuming other revenue recognition criteria
are met). Arrangements with payment terms extending beyond the
customary payment terms are considered not to be fixed or
determinable. We then recognize revenue in each quarter (subject
to application of other revenue recognition criteria) as 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. A determination of whether
the arrangement fee is fixed or determinable is particularly
relevant to revenue recognition on perpetual licenses.
o Collectibility is Probable. To recognize revenue, we must judge
collectibility of the arrangement fees, which we do on a
customer-by-customer basis pursuant to our credit review policy.
We typically sell to customers with whom we have a history of
successful collection. For a new customer, we evaluate the
customer's financial position and ability to pay, and typically
assign a credit limit based on that review. We increase the
credit limit only after we have established a successful
collection history with the customer. If we determine at any time
that collectibility is not probable based upon our credit review
process, we recognize revenue on a cash-collected basis.
19
Valuation of Strategic Investments
We review our investments in non-public companies on a quarterly basis and
estimate the amount of any impairment incurred during the current period based
on a 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 where
market value is not readily determinable, we assess each investment for
indicators of impairment at each quarter end based primarily on achievement of
business plan objectives and current market conditions, among other factors, and
information available to us at the time of assessment. The primary business plan
objectives we consider include achievement of planned financial results,
completion of capital raising activities, the launching of technology, the
hiring of key employees and the portfolio company's overall progress on its
business plan. If we determine an investment in a portfolio company is impaired,
absent 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. Future adverse changes in market
conditions, poor operating results of underlying investments and other
information obtained after our quarterly assessment could result in additional
losses or an inability to recover the current carrying value of the investments
thereby requiring a further impairment charge in the future.
Allowance For Doubtful Accounts
Management estimates the collectibility of accounts receivable on an
account-by-account basis, and establishes a specific reserve for any particular
receivable when we determine collectibility is not probable. In addition, we
provide a general reserve on all accounts receivable, which we calculate as a
percentage, determined within a specified range of percentages of the
outstanding balance in each aged group. In determining this percentage, we
specifically analyze accounts receivable and historical bad debt experience,
customer creditworthiness, current economic trends, international exposures
(such as currency devaluation), and changes in our customer payment terms to
evaluate the adequacy of the allowance for doubtful accounts. If the financial
condition of our customers deteriorates, impairing their ability to make
payments, we may need to establish additional allowances.
Income Taxes
The relative proportions of our domestic and foreign revenue and income
directly affect our effective tax rate. We are also subject to changing tax laws
in the multiple jurisdictions in which we operate. As of April 30, 2003, current
net deferred tax assets and long-term liabilities totaled $270.1 million and
$31.2 million, respectively. We believe it is more likely than not that our
results of future operations will generate sufficient taxable income to utilize
our net deferred tax assets. While we have considered future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need for
any valuation allowance, if we determine we would not be able to realize all or
part of our net deferred tax assets in the future, we would charge to income an
adjustment to the deferred tax assets in the period we make that determination.
Valuation of Goodwill and Intangible Assets
We periodically evaluate our intangible assets for indications of impairment
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. Intangible assets consist of purchased technology, contract
rights intangible, customer installed base/relationships, trademarks and
tradenames, covenants not to compete, customer backlog and capitalized software.
Factors we consider important which could trigger an impairment review include
significant under-performance relative to expected historical or projected
future operating results, significant changes in the manner of our use of the
acquired assets or the strategy for our overall business or significant negative
industry or economic trends. If this evaluation indicates that the value of the
intangible asset may be impaired, we make an assessment of the recoverability of
the net carrying value of the asset over its remaining useful life. If this
assessment indicates that the intangible asset is not recoverable, based on the
20
estimated undiscounted future cash flows of the acquired entity or technology
over the remaining amortization period, we will reduce the net carrying value of
the related intangible asset to fair value and may adjust the remaining
amortization period. Any such impairment charge could be significant and could
have a material adverse effect on our reported financial statements.
We periodically evaluate goodwill for an indication of impairment whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. At a minimum, we complete this evaluation on an annual basis in
accordance with Statement of Financial Standards No. 142 (SFAS 142), Goodwill
and Other Intangible Assets. If this evaluation indicates that the value of the
goodwill may be impaired, we make an assessment of the impairment of the
goodwill using the two step method prescribed by SFAS 142. Any such impairment
charge could be significant and could have a material adverse effect on our
reported financial statements.
Results of Operations
Adoption of Subscription Licenses; Impact on Revenue. Prior to the fourth
quarter of fiscal 2000, we principally licensed our software via perpetual
licenses and "term" licenses (a type of time-based license), with maintenance
purchased separately. We generally recognize revenue from these licenses in the
quarter we ship the product (or "up front"), and recognize revenue from
maintenance ratably over the support period.
In the fourth quarter of fiscal 2000, we discontinued term licenses and
introduced technology subscription licenses (TSLs). A TSL is a license to use
one or more of our software products for a specified period of time and to
receive support services (such as hotline support and updates) for a concurrent
period of time. Since products and maintenance are bundled in TSLs, we generally
recognize both product and service TSL revenue ratably over the term of the
license, or, if later, as payments become due. Accordingly, when a customer buys
a TSL, we recognize relatively little revenue during the quarter we initially
deliver the product. We either record the remaining amount not recognized as
deferred revenue on our balance sheet, or consider it operational or financial
backlog and do not record it on the balance sheet. The amount recorded as
deferred revenue is equal to the portion of the license fee invoiced or paid but
not recognized. The amount considered backlog moves out of backlog and is
recorded as deferred revenue when invoiced or as additional payments are made.
We reduce deferred revenue as we recognize revenue. Because under perpetual
licenses, we recognize a high proportion of all license revenue in the quarter
we deliver the product, a TSL order will result in significantly lower
current-period revenue than an equal-sized order for a perpetual or a term
license. Conversely, an order for a TSL will result in higher revenues
recognized in future periods than an equal-sized order for a perpetual or term
license. For example, a $120,000 order for a perpetual license will result in
$120,000 of revenue recognized in the quarter the product is shipped and no
revenue in future quarters. The same order for a 3-year TSL shipped at the
beginning of the quarter will result in $10,000 of revenue recognized in the
quarter the product is shipped and in each of the 11 succeeding quarters.
On an aggregate basis, introducing TSLs has had, and will continue to have,
a significant impact on our reported revenue. When we adopted TSLs in the fourth
quarter of fiscal 2000, our reported revenue dropped significantly. In each
quarter since adoption, our ratable revenue has grown as TSL orders received
each quarter contribute revenue that is "layered" over the revenue recognized
from TSL orders received in prior quarters. This effect will repeat itself each
quarter in varying degrees until the TSL model is fully phased in; during this
transition period ratable revenue will continue to grow even if the overall
level of TSL orders does not grow, and could grow even if the overall level of
TSL orders declines. The phase in period of the TSL model is difficult to
predict. Since our introduction of TSLs, the average TSL duration has been
approximately 13 quarters. Therefore, absent any acquisitions, the model would
have been substantially phased in by the end of fiscal 2003. The Avant!
acquisition extended the phase in period due to Avant!'s heavier weighting
towards perpetual licenses. The phase in could be further extended to some
extent by any future acquisitions we make of companies whose license mix is more
heavily weighted toward perpetual licenses than ours. Over the long term, as the
TSL model becomes more fully phased in, average revenue growth should closely
track average orders growth.
21
Synopsys' revenue in any given quarter depends upon the volume of perpetual
orders shipped during the quarter, the amount of TSL revenue amortized from
deferred revenue (or recognized out of backlog from TSL licenses shipped during
a prior quarter), and, to a small degree, the amount of revenue recognized on
TSL orders received during the quarter. We set our revenue targets for any given
period based, in part, upon an assumption that we will achieve a certain level
of orders and a certain license mix of perpetual licenses and TSLs. The actual
mix of licenses sold in any quarter, and more precisely, the amount of perpetual
licenses sold during the quarter, affects the revenue we recognize in the
period. If we achieve the target level of total orders but are unable to achieve
our target license mix, we may fall short of our revenue targets (if TSL orders
are higher than expected), or may exceed them (if perpetual licenses are higher
than expected). If we achieve the target license mix but the overall level of
orders is below the target level, then we will not meet our revenue targets.
The precise mix of orders is subject to substantial fluctuation in any given
quarter or multiple quarter periods. Our historical license order mix from our
adoption of TSLs in August 2000 to the present has been 23% perpetual licenses
and 77% ratable licenses, although the percentage of perpetual licenses in any
given quarter has been as high as 28% and as low as 13%. The license mix for the
three months ended April 30, 2003 was 26% perpetual licenses and 74% TSLs as
compared to 21% perpetual licenses and 79% TSLs for the same period in fiscal
2002. Our target license mix for new software orders for the third quarter of
fiscal 2003 is 20% to 25% perpetual licenses and 75% to 80% ratable licenses.
Our target license mix for new software orders for fiscal 2003 is 20% to 25%
perpetual licenses and 75% to 80% ratable licenses.
Revenue
Total revenue for the three months ended April 30, 2003 increased 57% to
$292.0 million as compared to $185.6 million for the same period in fiscal 2002.
Total revenue for the six months ended April 30, 2003 increased 55% to $560.2
million as compared to $361.2 million for the same period in fiscal 2002. The
increase in total revenue in the current periods is primarily due to the Avant!
acquisition in June 2002, to the additional quarters that the TSL license model
has been in effect and to significant product revenue from the our Japan
operations during the second quarter of fiscal 2003. For the three months ended
April 30, 2003 our operations in Japan contributed $102.1 million to total
revenue, as compared to $17.0 million for the same period in fiscal 2002. The
increased contribution from Japan was due principally to the renewal of our
license arrangements with many of our largest Japanese customers and the
relatively high proportion of Japanese customers who purchased perpetual
licenses. We expect the contribution from Japan to return to historical levels
in the third quarter and beyond.
Ratable license revenue for the three months ended April 30, 2003 increased
119% to $148.1 million as compared to $67.6 million for the same period in
fiscal 2002. Ratable license revenue for the six months ended April 30, 2003
increased 115% to $289.3 million as compared to $134.5 million for the same
period in fiscal 2002. The increase in ratable license revenue is due to the
additional quarters that the TSL license model has been used and to the
increased volume of ratable license sales resulting from the Avant! merger.
Product revenue for the three months ended April 30, 2003 increased 57% to
$82.0 million as compared to $52.3 million for the same period in fiscal 2002.
Product revenue for the six months ended April 30, 2003 increased 49% to $136.5
million as compared to $91.8 million for the same period in fiscal 2002. The
increase in product revenue is primarily due to the increased volume of
perpetual licenses resulting from the Avant! merger delivered during the three
and six month periods as compared to the same periods in fiscal 2002. During the
second quarter of fiscal 2002, we began offering variable maintenance
arrangements to certain customers that entered into perpetual license technology
arrangements in excess of $2.0 million. These arrangements accounted for
approximately 89% and 78% of our product sales for the three and six months
ended April 30, 2003, respectively, as compared to approximately 56% and 32% for
the same periods in fiscal 2002, respectively.
Service revenue for the three months ended April 30, 2003 decreased 6% to
$62.0 million as compared to $65.8 million for the same period in fiscal 2002.
Service revenue for the six months ended April 30, 2003 remained relatively flat
at $134.4 million as compared to $134.9 million for the same period in fiscal
2002. The decline in service revenue is due to several factors we believe will
22
result in a continued year-over-year decline in service revenue during the third
and fourth quarters of fiscal 2003. First, our new licenses are predominately
TSLs rather than perpetual licenses. With TSLs, maintenance is bundled with the
software and recognized as ratable license revenue, not service revenue.
Second, our introduction of variable maintenance in the second quarter of
fiscal 2002 for technology commitments in excess of $2.0 million has resulted in
substantially lower maintenance fees on these licenses than on perpetual
licenses with maintenance rates calculated as a fixed percentage of the list
price.
Third, economic conditions have negatively affected, and will continue to
negatively affect our service revenue. Some customers have sought to reduce
their costs by curtailing their use of outside consultants or by discontinuing
maintenance on their perpetual licenses. As a result, both new consulting orders
and maintenance renewal orders have been, and are expected to continue to be
lower in fiscal 2003 than they were in fiscal 2002. Customers have also reduced
expenditures on training, which has accordingly reduced revenue from training.
We expect these conditions to continue at least until research and development
spending by the semiconductor industry recovers.
Revenue Seasonality. Orders and revenue are typically lowest in our first
fiscal quarter and highest in our fourth fiscal quarter, with a material decline
between the fourth quarter of one fiscal year and the first quarter of the next
fiscal year. The difference in revenue is driven largely by the volume of
perpetual licenses we ship during the quarter, which, following the seasonal
pattern of overall orders, typically declines from the fourth quarter to the
first quarter.
Revenue - Product Groups. For management reporting purposes, we organize our
products into four distinct product groups - Design Implementation, Verification
and Test, Design Analysis, Intellectual Property (IP) and Professional Services.
The following table summarizes the license and associated maintenance revenue
attributable to these groups as a percentage of total Company revenue for the
last eight quarters. Revenue from companies or products acquired during the
periods covered are included from the original acquisition date through the end
of the period. As a result of the Avant! merger, we redefined our product
groups, effective in the third quarter of fiscal 2002. We have reclassified
prior period amounts to reflect this reclassification and provide a consistent
presentation.
Q2-2003 Q1-2003 Q4-2002 Q3-2002 Q2-2002 Q1-2002 Q4-2001 Q3-2001
---------- --------- ---------- --------- ---------- ---------- --------- ----------
Revenue
Design Implementation 49% 44% 46% 44% 42% 40% 42% 39%
Verification and Test 24 26 26 27 34 38 34 34
Design Analysis 21 20 19 17 6 6 6 6
IP 4 6 5 5 9 8 9 10
Professional Services 2 4 4 7 9 8 9 11
---------- --------- ---------- --------- ---------- ---------- --------- ----------
Total Company 100% 100% 100% 100% 100% 100% 100% 100%
========== ========= ========== ========= ========== ========== ========= ==========
Design Implementation. Design Implementation includes products used to
design a chip from a high level functional description to a complete description
of the transistors and connections that implement such functions that can be
delivered to a semiconductor company for manufacturing. Design Implementation
technologies include logic synthesis, physical synthesis, floor planning and
place-and-route products and technologies. Our principal products in this
category at April 30, 2003 were Design Compiler, Physical Compiler, Chip
Architect, Floorplan Compiler, Jupiter, Apollo and Astro. As a percentage of
total revenue, Design Implementation fluctuated between 39% and 49% in the
period from the third quarter of fiscal 2001 through the second quarter of
fiscal 2003. Between any two quarters, this percentage may fluctuate based on
the configuration of perpetual license orders received during the quarter.
During the eight quarter period, however, Design Implementation products
generally increased as a percentage of total revenue reflecting our growing
portfolio of Design Implementation products during the period, most notably with
the Avant! merger, the addition of Apollo and Astro to our product portfolio and
the introduction of Physical Compiler.
Verification and Test. Verification and Test includes products used for
verification and analysis performed at the system level, register transfer level
and gate level of design, including simulation, system level design and
23
verification, timing analysis, formal verification, test and related products.
Our principal products in this category are VCS, Polaris, Vera, PathMill,
CoCentric System Studio, PrimeTime, Formality, Design Verifyer, DFT Compiler,
TetraMax and SoCBIST, which are used in several different phases of chip design.
As a percentage of total revenue, revenue from this product family fluctuated
between 24% and 38% in the period from the third quarter of fiscal 2001 through
the second quarter of fiscal 2003, principally attributable to the mix of
perpetual versus TSL orders received for Verification and Test products during
any given quarter. Beginning in the third quarter of fiscal 2002, Verification
and Test revenues as a percent of total company revenue were lower, principally
because the former Avant! products included few verification products and may
also be due to price competition in the market for logic simulation products.
Design Analysis. Design Analysis includes products used for verification and
analysis performed principally during the physical verification phase of chip
design, including analog and mixed signal circuit simulation, design rule
checking, power analysis, customer design, semiconductor process modeling and
reliability analysis. Our principal products in this category are NanoSim,
StarSim, HSPICE, StarRC, Arcadia, TCAD, Hercules, Venus, Proteus, PrimePower and
Cosmos. The increase in revenue from this product group as a percentage of total
revenue increased from a steady level of 6% to 17% in the third quarter of
fiscal 2002 primarily due to the Avant! acquisition, as the products added to
our Design Analysis category represented the second largest portion of Avant!'s
revenue before the acquisition, after design implementation tools. We believe
that the continued increase in contribution from these products since that
quarter primarily reflects customers' growing acceptance of design analysis
technologies to address their design challenges.
Intellectual Property. Our IP products include the DesignWare library of IC
design components and verification models, and products acquired in the merger
with inSilicon in September 2002. As a percentage of total revenue, revenue from
this product group was relatively stable from the third quarter of fiscal 2001
through the second quarter of fiscal 2002, reflecting growth consistent with our
average. Beginning in the third quarter of fiscal 2002, IP revenue as a
percentage of total revenue decreased principally because the former Avant!
products included few IP offerings.
Professional Services. The Professional Services group includes consulting
and training activities. This group provides consulting services, including
design methodology assistance, specialized telecommunications systems design
services and turnkey design. As a percentage of total revenue, revenue from this
product group has declined from 11% in the third quarter of fiscal 2001 to 2% in
the second quarter of fiscal 2003, reflecting the fact that Avant! did not have
a significant professional services business and, as described above under
"Revenue," the impact of the economic environment.
Cost of Revenue
Total cost of revenue as a percentage of total revenue for the three months
ended April 30, 2003 was 20% as compared to 19% for the same period in fiscal
2002. Total cost of revenue as a percentage of total revenue for the six months
ended April 30, 2003 was 21% as compared to 19% for the same period in fiscal
2002. These results occurred even though amortization of intangible assets and
deferred stock compensation increased as a percentage of total revenue due to
the increase in quarterly amortization of deferred revenue and backlog, an
inherent result of the ratable license model; other cost of goods sold
components remained relatively stable. Our total product costs are relatively
fixed and do not fluctuate significantly with changes in revenue or changes in
revenue recognition methods.
The dollar increase in total cost of revenue for the three months ended
April 30, 2003 to $59.4 million as compared to $34.4 million for the same period
in fiscal 2002 is due to an increase in amortization of contract rights
intangible and core/developed technology recorded as a result of our
acquisitions in fiscal 2003 and 2002. The dollar increase in total cost of
revenue for the six months ended April 30, 2003 to $118.7 million as compared to
$69.6 million for the same period in fiscal 2002 is due to an increase in
amortization of contract rights intangible and core/developed technology
recorded as a result of our acquisitions in fiscal 2003 and 2002, additional
royalties of $1.5 million and other special termination benefits, as discussed
below under "Work Force Reduction," of $1.2 million.
24
Cost of revenue amortization of intangible assets and deferred stock
compensation includes the amortization of the contract rights intangible
associated with certain executory contracts related to the acquisitions of
Avant!, inSilicon and Numerical, and the amortization of core/developed
technology related to the acquisitions of Avant!, inSilicon and Co-Design. Total
amortization of intangible assets included in cost of revenues for the three
months ended April 30, 2003 was $24.3 million, which includes $19.2 million and
$5.0 million for core/developed technology and contract rights intangible,
respectively. Total amortization of intangible assets included in cost of
revenues for the six months ended April 30, 2003 was $45.1 million, which
includes $35.4 million and $9.4 million for core/developed technology and
contract rights intangible, respectively.
Work Force Reduction
We reduced our workforce during the first quarter of fiscal 2003 and the
second quarter of fiscal 2002. The purpose was to reduce expenses by decreasing
the number of employees in all departments in domestic and foreign locations. As
a result, we decreased our workforce by approximately 200 and 175 employees
during the first quarter of fiscal 2003 and the second quarter of fiscal 2002,
respectively. The associated charge for the six months ended April 30, 2003 was
$4.4 million as compared to $3.9 million for the same period in fiscal 2002. The
charge consists of severance and other special termination benefits and is
reflected in the unaudited condensed consolidated statement of income as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
----------------------------- ----------------------------
2003 2002 2003 2002
------------ --------------- -------------- -------------
(in thousands)
Cost of revenue $ -- $ 678 $ 1,167 $ 678
Research and development -- 1,081 1,388 1,081
Sales and marketing -- 1,078 1,239 1,078
General and administrative -- 1,033 630 1,033
------------- -------------- -------------- --------------
Total $ -- $ 3,870 $ 4,424 $ 3,870
============= ============== ============== ==============
Research and Development
Research and development expenses for the three months ended April 30, 2003
increased 47% to $68.6 million as compared to $46.6 million for the same period
in fiscal 2002. The increase consists primarily of $14.4 million in research and
development personnel and related costs as a result of acquisitions in fiscal
2002 and 2003, and $7.6 million in human resources, information technology and
facilities costs as a result of the increased research and development staffing.
Research and development expenses for the six months ended April 30, 2003
increased 43% to $135.9 million as compared to $95.4 million for the same period
in fiscal 2002. The increase consists primarily of $23.5 million in research and
development personnel and related costs as a result of acquisitions in fiscal
2002 and 2003, and $15.0 million in increased allocations of human resources,
information technology and facilities costs to research and development as a
result of the increase in research and development headcount as a percentage of
total headcount.
Sales and Marketing
Sales and marketing expenses for the three months ended April 30, 2003
increased 28% to $81.0 million as compared to $63.2 million for the same period
in fiscal 2002. The increase consists primarily of $18.4 million in additional
sales and marketing personnel and related costs as a result of acquisitions in
fiscal 2002 and 2003.
Sales and marketing expenses for the six months ended April 30, 2003
increased 24% to $152.2 million as compared to $123.0 million for the same
period in fiscal 2002. The increase consists primarily of $29.5 million in
25
additional sales and marketing personnel and related costs as a result of
acquisitions in fiscal 2002 and 2003.
General and Administrative
General and administrative expenses for the three months ended April 30,
2003 increased 38% to $24.2 million as compared to $17.5 million for the same
period in fiscal 2002. The increase consists primarily of $5.2 million in
additional general and administrative personnel and related costs as a result of
acquisitions in fiscal 2002 and 2003, $2.0 million in facilities costs, $1.9
million in bad debt expense and $1.5 million in depreciation on upgrades to our
information technology infrastructure. These increases were offset by a decrease
of $5.4 million in allocations of human resources, technology and facilities
costs to general and administrative expenses as a result of a decrease in
general and administrative headcount as a percentage of total headcount.
General and administrative expenses for the six months ended April 30, 2003
increased 29% to $46.8 million as compared to $36.2 million for the same period
in fiscal 2002. The increase consists primarily of $7.6 million in additional
general and administrative personnel and related costs as a result of
acquisitions since the last half of fiscal 2002, $3.8 million in depreciation on
upgrades to our information technology infrastructure, $2.8 million in
facilities costs, $1.9 million in maintenance agreements covering more software
and computing equipment due to acquisitions in fiscal 2002 and 2003 and an
increase in litigation expenses relating to certain legal actions. These
increases were offset by a decrease of $9.8 million in allocations of human
resources, technology and facilities costs to general and administrative
expenses as a result of a decrease in general and administrative headcount as a
percentage of total headcount.
In-Process Research and Development
Purchased in-process research and development (IPRD) for the three and six
months ended April 30, 2003 was $18.3 million and represents the write-off of
in-process technologies associated with our acquisition of Numerical. 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. There were no acquisitions during the same periods in
fiscal 2002.
Amortization of Intangible Assets and Deferred Stock Compensation
Amortization of intangible assets and deferred stock compensation includes
the amortization of trademarks, trade names, customer relationships and
covenants not-to-compete and is included in operating expenses as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------- --------------- -------------- --------------
(in thousands)
Intangible assets $ 8,016 $ 464 $ 14,816 $ 616
Deferred stock compensation 1,153 -- 2,343 --
Goodwill -- 3,892 -- 7,784
------------- -------------- -------------- --------------
Total $ 9,169 $ 4,356 $ 17,159 $ 8,400
============= ============== ============== ==============
The increase in amortization of intangible assets is due primarily to the
acquisitions since fiscal 2002 and 2003 and is offset by a decrease in goodwill
amortization as a result of the adoption of SFAS 142.
26
The following table presents the estimated future amortization of deferred
stock compensation (in thousands):
Fiscal Year
2003 - remainder of fiscal year $ 2,551
2004 4,141
2005 2,800
2006 1,057
2007 and thereafter 295
--------------
Total estimated future amortization of
deferred stock compensation $ 10,844
==============
Other Income, Net
Other income, net for the three months ended April 30, 2003 was $7.5 million
and consisted primarily of the following: (i) realized gain on investments of
$3.9 million; (ii) rental income of $2.7 million; (iii) interest income of $1.1
million; (iv) amortization of premium forwards and foreign currency forwards of
$1.0 million; and (v) impairment charges related to certain assets in our
venture portfolio of $1.1 million.
Other income, net for the three months ended April 30, 2002 was $11.2
million and consisted primarily of the following: (i) realized gain on
investments of $6.9 million; (ii) rental income of $2.4 million; (iii) interest
income of $2.3 million; (iv) a net gain of $3.1 million related to the
termination fee for the IKOS agreement net of costs incurred; and (v) impairment
charges related to certain assets in our venture portfolio of $3.5 million.
Other income, net for the six months ended April 30, 2003 was $16.7 million
and consisted primarily of the following: (i) realized gain on investments of
$11.5 million; (ii) rental income of $5.2 million; (iii) interest income of $2.3
million; (iv) amortization of premium forwards and foreign currency forwards of
$2.1 million; (v) impairment charges related to certain assets in our venture
portfolio of $2.1 million; and (vi) other miscellaneous expenses including
foreign exchange gains and losses recognized during the quarter of $2.3 million.
Other income, net for the six months ended April 30, 2002 was $22.3 million
and consisted primarily of the following: (i) realized gain on investments of
$13.5 million; (ii) rental income of $4.8 million; (iii) interest income of $4.5
million; (iv) a net gain of $3.1 million related to the termination fee for the
IKOS agreement net of costs incurred; and (v) impairment charges related to
certain assets in our venture portfolio of $3.5 million.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments decreased $22.6 million,
or 5%, to $392.1 million at April 30, 2003 from $414.7 million at October 31,
2002. Cash provided by operations was $151.5 million for the six months ended
April 30, 2003. Cash was provided by net income adjusted for non-cash related
items and for cash flows related to hedging activities, partially offset by cash
used for changes in working capital balances, including decreases in accounts
payables and accrued liabilities and increases in receivables partially offset
by deferred revenue. Accounts receivable and deferred revenue increased due to
the timing of installment billings to customers on long-term arrangements.
Accounts payable and accrued liabilities decreased as a result of payments of
merger-related accruals, commissions and year-end bonuses, partially offset by
year-to-date accruals.
Cash used in investing activities was $189.1 million for the six months
ended April 30, 2003 as compared to cash provided by investing activities of
$144.6 million for the same period in fiscal 2002. The decrease in cash provided
by investing activities of $333.7 million is primarily due to two factors.
During the six months ended April 30, 2003, we spent $162.5 million for
acquisitions, net of cash received from the acquired companies. There were no
acquisitions during the six months ended April 30, 2002. Net purchases of short-
and long-term investments totaled $5.6 million for the six months ended April
30, 2003 as compared to net proceeds from sales of short- and long-term
27
investments of $172.0 million for the same period in fiscal 2002. This decrease
in cash provided in investing activities was offset by a decrease in cash used
for capital expenditures. Capital expenditures totaled $19.7 million during the
six months ended April 30, 2003 as compared to $26.5 million for the same period
in fiscal 2002. The prior period included expenses for the construction of our
Oregon facilities and for computing equipment to upgrade our systems
infrastructure; these projects were completed in fiscal 2002.
Cash used in financing activities was $4.4 million for the six months ended
April 30, 2003 as compared to cash provided by financing activities of $76.4
million for the same period in fiscal 2002. The decrease of $80.8 million in
cash provided by financing activities is primarily due to the repurchase of
treasury stock of $67.8 million during the six months ended April 30, 2003, and
a decrease in proceeds from the sale of shares pursuant to our employee stock
option plans. We did not repurchase any treasury stock during the six months
ended April 30, 2002.
Accounts receivable, net of allowances, increased $38.8 million, or 19%, to
$246.0 million at April 30, 2003 from $207.2 million at October 31, 2002. Days
sales outstanding, calculated based on revenues for the most recent quarter and
accounts receivable at the balance sheet date, increased to 77 days at April 30,
2003 from 61 days at October 31, 2002. The increase in days sales outstanding is
due to a decrease in total revenue for the three months ended April 30, 2003 as
compared to the three months ended October 31, 2002 and an increase in accounts
receivable due to the timing of installment billings to customers on long-term
arrangements.
On March 1, 2003, we completed our acquisition of Numerical Technologies,
Inc. We paid Numerical common stock holders $7.00 in cash in exchange for each
share of Numerical common stock owned as of the merger date, or approximately
$240.7 million in total. We paid for Numerical common stock out of our cash,
cash equivalents and short-term investments.
Factors That May Affect Future Results
Continued weakness in the semiconductor and electronics businesses will
negatively impact our business.
Synopsys' business depends on the semiconductor and electronics industries.
During 2001 and 2002, these industries experienced steep declines in orders and
revenue. Although there have been some positive indicators in the semiconductor
and electronics industries in late 2002 and early 2003, recovery remains
uncertain and subject to significant risks. Continuation or worsening of the
current conditions in the semiconductor and electronics industries or continued
consolidation among our customers would have a material adverse effect on our
financial results.
Customers continue to report a significant lack of visibility in their
businesses, which has affected their buying behavior. Customers are scrutinizing
their purchases of electronic design automation (EDA) software very carefully.
In addition, they are increasingly demanding, and we have granted, extended
payment terms on their purchases, negatively affecting our cash flow.
Demand for EDA products depends largely upon new design starts by
semiconductor manufacturers and their customers, the increasing complexity of
designs and the number of design engineers. Since the beginning of 2001, several
developments have negatively impacted our orders and revenue: (i) many
semiconductor and electronics companies have cancelled or deferred design
projects and reduced their design engineering staffs; (ii) the formation of new
companies engaged in semiconductor design, traditionally an important source of
new business for us, has slowed significantly; and (iii) a small number of
existing customers have gone out of business, while others have had to
substantially curtail their operations. To the extent these conditions continue,
our business, operating results and financial condition will be materially and
adversely affected.
Further, partnerships and/or mergers in the semiconductor and electronics
industries may also negatively affect demand for our products and services.
28
Given current market conditions, the rate of mergers and acquisitions may
increase during the remainder of 2003, which could reduce the aggregate level of
purchases of our products and services by the companies involved.
Our revenue and earnings may fluctuate, which could cause our financial results
not to meet expectations.
Many factors affect our revenue and earnings, making it difficult to predict
revenue and earnings for any given fiscal period. Accordingly, our financial
results may not meet investor and analyst expectations, which could cause our
stock price to decline. Among these factors are customer demand, product license
terms, and the timing of revenue recognition on products and services sold.
The following are some of the specific factors that could affect our revenue
and earnings in a particular quarter or over several fiscal periods:
o Due to the complexity of our products, customers spend a great deal of time
reviewing and testing them before making a purchase decision. Accordingly,
our customers' evaluation and purchase cycles do not necessarily match our
quarterly periods. Further, sales of our products and services may be
delayed if customers delay project approval or project starts because of
budgetary constraints, internal review procedures or their budget cycles.
Also, we may receive a disproportionate volume of orders in the last weeks
of a quarter. As a result, if a customer delays any order, and especially a
large order, beyond the end of a fiscal period, our orders and revenue for
that period could be below our plan and any targets we may have published.
o Our business is seasonal. Our orders and revenue are typically lowest in
our first fiscal quarter and highest in our fourth fiscal quarter, with a
material decline between the fourth quarter of one fiscal year and the
first quarter of the next fiscal year.
o We base our revenue and earnings targets for any fiscal period, in part,
upon assumptions that we will achieve a certain volume of orders, and a mix
of perpetual licenses (on which revenue is recognized in the quarter
shipped) and TSLs (on which revenue is recognized over the term of the
license) within a specified range, which we adjust from time to time. If we
do not meet our overall orders targets, our revenue and earnings will
likely not meet expectations, though if perpetual orders are higher than
the expected range, our revenue and earnings for the period may be on or
above target, but revenue in future periods would be lower than expected.
Conversely, if we meet our overall orders target, but perpetual orders are
below the expected range, our revenue will be below our target for the
quarter (though the shortfall should be recognized in future quarters as
TSL revenue is recognized over the term of license booked during the
quarter).
o Accounting rules determine when we recognize revenue on our orders, and
therefore impact how much revenue we will report in any given fiscal
period. In general, we recognize TSL revenue ratably over the license term
and recognize perpetual license revenue upon product delivery. For any
given order, however, the specific terms we agree to with a customer may,
under applicable accounting rules, require revenue treatment different from
assumptions we have used in developing our financial plans. As a result,
our revenue for the fiscal period may be higher or lower than it otherwise
would have been, and different than our plan or any announced targets for
the period.
Competition may have a material adverse effect on our results of operations.
The EDA industry is highly competitive. As a result, average prices may fall
or we could lose customers to other vendors, which would harm our operating
results. We compete against other EDA vendors, and with customers' internally
developed design tools and internal design capabilities, for a share of our
customers' EDA budgets. In general, competition is based on product quality and
features, post-sale support, interoperability with other vendors' products,
price, payment terms 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. and Mentor Graphics
Corporation, as well as companies that offer products focused on a discrete
phase of the integrated circuit design process, such as Magma Design Automation,
29
Inc., Verisity Design, Inc., and Nassda Corporation. In the current economic
environment, price and payment terms have become increasingly important
competitive factors. Since early fiscal 2002, we have regularly agreed to
extended payment terms on our TSLs, negatively affecting cash flow from
operations. In addition, in certain situations our competitors are aggressively
discounting their products.
We may not compete effectively, if we do not develop an integrated design flow
product and other new products.
Increasingly, EDA companies compete on the basis of design flows involving
integrated logic and physical design products rather than on the basis of
individual point tools performing a discrete phase of the design process. If we
do not successfully and timely develop integrated design flow products, or if we
do not convince customers to adopt these products when developed, our
competitive position could be significantly weakened.
Offering an integrated design flow will become increasingly important as ICs
grow more complex. Our products compete principally with design flow products
from Cadence and Magma, which in some respects may be more integrated than our
products. In January 2003 we introduced our Galaxy Design Platform, which
partially integrates the full suite of Synopsys' design implementation products.
Our future success depends on our ability to further integrate our products in
the Galaxy Design Platform. This effort will continue to require significant
engineering and development work. We can provide no assurances that we will be
able to offer a competitive complete design flow to customers.
To increase our revenues over the long term, we will have to enhance our
existing products, introduce new products, gain broad customer acceptance of
those products and generate growth in our consulting services business. In
addition to the integration of our design implementation products in the Galaxy
Design Platform, in May 2003 we announced our plans to integrate our functional
verification products into the Discovery Verification Platform. Further, we are
expanding our intellectual property design components offerings, and with the
Numerical acquisition are attempting to bolster our suite of
design-for-manufacturing products. It is difficult for us to predict the success
of these product initiatives and the growth of the markets for these products.
In the past, we, like all companies, have introduced new products that failed to
meet our revenue expectations. Therefore, we can provide no assurances that we
will successfully expand revenue from our existing or new products at the
desired rate. If we fail to do so, it would materially and adversely affect our
business, financial condition and results of operations.
Businesses we have acquired or that we may acquire in the future may not perform
as projected.
We have acquired 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. During 2002, we acquired Avant!, inSilicon and
Co-Design, and during the second quarter of fiscal 2003, we acquired Numerical.
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, challenges in insuring acquired
products and the development practices of employees of acquired companies meet
our quality standards, 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, we can provide no assurances that any acquisition will have a positive
effect on our performance.
Customer payment defaults could adversely affect our financial condition and
results of operations.
Our backlog consists principally of customer payment obligations not yet due
that are attributable to software we have already delivered. These customer
obligations are not cancelable, but will not yield the expected revenue and cash
flow if the customer defaults and fails to pay amounts owed. In these cases, we
will generally take legal action to recover amounts owed. To date, we have not
30
experienced a material level of defaults, though in the current economic
environment the level of defaults may increase. Moreover, existing customers may
seek to renegotiate pre-existing contractual commitments due to adverse changes
in their own businesses. Any material payment default by our customers would
have a material adverse effect on our financial condition and results of
operations.
The impact of SARS, stagnation of foreign economies, foreign exchange rate
fluctuations or other international issues could adversely affect our
performance.
During the six months ended April 30, 2003, we derived 48% of our revenue
from outside North America as compared to 35% and 37% during fiscal 2002 and
2001, respectively. Recently, there have been indications that the outbreak of
Severe Acute Respiratroy Syndrome (SARS) is disrupting business operations,
sales activities and decision-making in our industry, primarily overseas, but in
some cases, domestically as well. If the SARS outbreak continues or worsens, it
would have an adverse effect on sales of our products.
Foreign sales are vulnerable to regional or worldwide economic or political
conditions, including the effects of international political conflict or
hostilities. The global electronics industry experienced steep declines in 2001
and 2002, and we do not expect material recovery in 2003. In particular, a
number of our largest European customers are in the telecommunications equipment
business, which has been disproportionately affected during this period. While
sales in Japan were strong during the second quarter, accounting for 35% of the
Company's revenue, we expect sales will return to historical levels in the third
quarter and beyond. Furthermore, achievement of our overall orders and revenue
plans assume growth in the Asia Pacific region, which may not be achieved and
could be difficult if growth in the rest of the world's economies does not
accelerate.
Fluctuations in the rate of exchange between the U.S. dollar and currencies
of other countries in which we conduct business, principally the Euro and the
Japanese yen, could materially and adversely affect our business, operating
results and financial condition. Fluctuations in foreign currency exchange rates
may make our products more expensive to foreign customers, increase the dollar
cost of expenses denominated in non-dollar currencies or reduce the revenue
realized from overseas sales. We attempt to hedge our risks related to certain
forecasted accounts receivable and accounts payable, but not expenses
denominated in foreign currencies. If a foreign currency increases in value
relative to the dollar, then the dollar value of expenses denominated in that
currency and forecasted accounts receivable increase. If a foreign currency
decreases in value relative to the dollar, then the dollar value of expenses
denominated in that currency and forecasted accounts receivable decrease.
Changes in the dollar value of forecasted accounts receivable of our foreign
subsidiaries would impact the revenue we recognize from such receivables. In
recent months, the Euro and the yen have increased in value relative to the
dollar, in effect increasing our foreign currency-denominated expenses. Exchange
rates are subject to significant and rapid fluctuations, and therefore we cannot
predict the prospective impact of exchange rate fluctuations on our business,
operating results and financial condition.
Terrorist acts and acts of war may seriously harm our financial condition and
results of operations.
Terrorist acts or acts of war (wherever located around the world) may damage
or disrupt Synopsys, our employees, facilities, partners, suppliers, or
customers, or cause unpredictable swings in foreign currency exchange rates, all
of which could significantly impact our results of operations and expenses and
financial condition. The potential for future terrorist attacks, the national
and international responses to terrorist attacks or perceived threats to
national security, and other acts of war or hostility have created many economic
and political uncertainties that could adversely affect our business and results
of operations in ways we cannot presently predict. We are predominantly
uninsured for losses and interruptions caused by acts of war.
A failure to recruit and retain key employees would have a material adverse
effect on our ability to compete.
To be successful, we must attract and retain key technical, sales and
managerial employees, including those who join Synopsys in connection with
acquisitions. Despite recent economic conditions, skilled technical, sales and
management employees remain in high demand. There are a limited number of
qualified EDA and IC design engineers, and competition for these individuals is
31
intense. Companies in the EDA industry and in the general electronics industry
value experience at Synopsys, and our employees, including employees who have
joined Synopsys in connection with acquisitions, are recruited aggressively. In
the past, we have had high employee turnover, which may recur in the future. We
can provide no assurances that we can continue to recruit and retain the
technical and managerial personnel we need to run our business successfully. Our
failure to do so could have a material adverse effect on our business, financial
condition and results of operations.
In addition, recently-proposed regulations of the Nasdaq National Market and
the New York Stock Exchange regarding shareholder approval of
equity-compensation plans could make it more difficult or more expensive for us
to grant stock options to employees in the future. As a result, we may incur
increased cash compensation costs, may lose top employees to non-public start-up
companies, or may generally find it more difficult to attract, retain and
motivate employees, any one of which could materially and adversely affect our
business.
Failing to protect our proprietary technology would have a material adverse
effect on our financial condition and results of operations.
Our success depends, in part, upon our proprietary technology and other
intellectual property rights. We rely on agreements with customers, employees
and others, and on intellectual property laws to protect our proprietary
technology. We can provide no assurances 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, from time to time we are subject to claims that our products,
or the use of our products by our customers, infringe on third party
intellectual property rights. These types of claims can result in costly and
time-consuming litigation, require us to enter into royalty arrangements,
subject us to damages or injunctions restricting our sale of products, or
require us to redesign certain of our products, anyone of which could materially
and adversely affect our business.
Our operating expenses do not fluctuate proportionately with fluctuations in
revenues, which could materially adversely affect our results of operations if
we have a revenue shortfall.
We base our operating expenses in part on our expectations of future
revenue, and generally must commit to expense levels in advance of revenue.
Since only a small portion of our expenses varies with revenue, a revenue
shortfall translates directly into a reduction in net income. If we do not
generate anticipated revenue or maintain expenses within expected ranges,
however, our business, financial condition and results of operations would be
materially and adversely affected.
We have adopted anti-takeover provisions, which may delay or prevent changes in
control of 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 deter hostile takeovers or delay or prevent
changes in control of management of Synopsys, including transactions in which
Synopsys stockholders might otherwise receive a premium for their shares over
then current market prices.
32
We are subject to changes in financial accounting standards, which may affect
our reported financial results, or the way we conduct business.
We prepare our financial statements in conformity with accounting principles
generally accepted in the United States of America (GAAP). These principles are
subject to interpretation by the Financial Accounting Standards Board (FASB),
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. Accounting policies affecting software revenue
recognition, in particular, have been the subject of frequent interpretations,
which have had a profound affect on the way we license our products. As a result
of the recent enactment of the Sarbanes-Oxley Act and the related scrutiny of
accounting policies by the SEC and by the various national and international
accounting industry bodies, we expect the frequency of accounting policy changes
to accelerate. Future changes in financial accounting standards, including
pronouncements relating to revenue recognition, may have a significant effect on
our reported results and may even affect our reporting of transactions completed
before the change is effective.
The FASB has proposed a change to GAAP that will require us in fiscal 2004
to begin accounting for options as a compensation expense commencing in the
period in which they are granted. Synopsys currently accounts for stock options
under Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting
for Stock-Based Compensation. As currently permitted by SFAS 123, we use the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, to measure compensation expense for
stock-based awards to our employees. Under this standard, we do not consider
stock option grants issued under our employee stock option plans to be
compensation, because the exercise price is equal to the fair market value on
the grant date, although we disclose the impact of "expensing" stock options in
the notes to our consolidated financial statements. If this proposal is adopted,
expensing stock options will significantly and adversely affect our reported
results of operations.
33
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily
to our short-term investment portfolio. We place our investments in a mix of
tax-exempt and taxable instruments that meet high credit quality standards, as
specified in our investment policy. None of our investments are held for trading
purposes. The policy also limits the amount of credit exposure to any one issue,
issuer and type of instrument. We do not anticipate any material losses due to
this risk with respect to our investment portfolio.
The following table presents the carrying value and related weighted-average
total return for our investment portfolio. The carrying value approximates fair
value at April 30, 2003. In accordance with our investment policy, the
weighted-average maturities of our total invested funds does not exceed one
year.
Weighted-Average
Carrying After Tax
Amount Return
----------------- ---------------
(in thousands)
Short-term investments-- fixed rate (US) $ 123,277 1.50%
Money market funds-- variable rate (US) 130,846 0.99%
Cash deposits and money market funds-- variable
rate (Ireland) 100,388 0.72%
-----------------
Total interest bearing instruments $ 354,511 1.09%
=================
Foreign Currency Risk
At the present time, we hedge only (i) those currency exposures associated
with certain assets and liabilities denominated in non-functional currencies and
(ii) forecasted accounts receivable and accounts payable denominated in
non-functional currencies. Our hedging activities are intended to offset the
impact of currency fluctuations on the value, as measured in the relevant
non-functional currency, of these balances. The success of these activities
depends upon the accuracy of our estimates of balances denominated in various
currencies and in fluctuations of foreign currencies, primarily the Euro,
Japanese yen, Taiwan dollar, British pound sterling, Canadian dollar, Singapore
dollar, Korean won and Israeli shekel. If a non-functional currency increases in
value relative to the functional currency, then the value of expenses, assets,
liabilities and forecasted accounts receivable denominated in that currency
increases. If a non-functional currency declines in value relative to the
functional currency, then the value of expenses, assets, liabilities and
forecasted accounts receivable denominated in that currency decreases. Looking
forward, to the extent our estimates of various balances denominated in foreign
currencies prove not to be accurate, then we will record a gain or loss,
depending upon the nature and extent of such inaccuracy. We can provide no
assurances that our hedging transactions will be effective.
Foreign currency contracts entered into in connection with our hedging
activities contain credit risk in that the counterparty may be unable to meet
the terms of the agreements. We have limited these agreements to major financial
institutions to reduce this credit risk. Furthermore, we monitor the potential
risk of loss with any one financial institution. We do not enter into forward
contracts for speculative purposes.
In May 2003, we changed the functional reporting currency of our principal
Irish subsidiary to the US dollar, based on a determination that a high
percentage of its sales, and the resulting accounts receivable, are denominated
in US dollars through its sales in Europe and Asia, while its expenditures in
local currency are relatively small.
The following table provides information about our foreign currency
contracts at April 30, 2003. Due to the short-term nature of these contracts,
the contract rates approximate the weighted-average currency exchange rates at
34
April 30, 2003. These forward contracts mature in approximately thirty days and
contracts are rolled-forward on a monthly basis to match firmly committed
transactions.
USD Amount Contract Rate
----------------- ----------------
(in thousands)
Forward Net Contract Values:
Japanese yen $ 158,722 119.8788
Euro 29,783 0.9075
Canadian dollar 4,312 1.4527
British pound sterling 5,873 0.6300
Israeli shekel 1,423 4.5587
Korean won 2,741 1225.7500
Singapore dollar 783 1.7767
Taiwan dollar 5,866 34.9700
-----------------
$ 209,503
=================
Net unrealized gains of approximately $21 million, net of tax on the
outstanding forward contracts, as of April 30, 2003 are included in other
comprehensive income on the unaudited condensed consolidated balance sheet as of
April 30, 2003. Net cash inflows on maturing forward contracts during the
quarter were $4.8 million.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. As of a date within
the 90 days prior to the date of this report (the "Evaluation Date"), the
Company carried out an evaluation under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-14(c) and 14d-14(c) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")). There are inherent limitations to the
effectiveness of any system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding of the controls
and procedures. Accordingly, even effective disclosure controls and procedures
can only provide reasonable assurance of achieving their control objectives.
Notwithstanding these limitations, based upon and as of the date of the
Company's evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the disclosure controls and procedures are effective in all
material respects to ensure that information required to be disclosed in the
reports the Company files and submits under the Exchange Act is recorded,
processed, summarized and reported as and when required.
(b) Changes in Internal Controls. Since the Evaluation Date, there have not
been any significant changes in the Company's internal controls or in other
factors that could significantly affect such controls.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 4, Legal Proceedings, of Notes to Unaudited Condensed Consolidated
Financial Statements.
ITEM 5. OTHER INFORMATION
Stock Option Plans
Under our 1992 Stock Option Plan (the 1992 Plan), 19,475,508 shares of
common stock have been authorized for issuance. Pursuant to the 1992 Plan, the
Board of Directors may grant either incentive or non-qualified stock options to
purchase shares of common stock to eligible individuals at not less than 100% of
the fair market value of those shares on the grant date. Stock options generally
vest over a period of four years and expire ten years from the date of grant. At
April 30, 2003, 5,547,075 stock options remain outstanding and 3,799,383 shares
of common stock are reserved for future grants under this plan.
35
Under our Non-Statutory Stock Option Plan (the 1998 Plan), 26,623,534 shares
of common stock have been authorized for issuance. Pursuant to the 1998 Plan,
the Board of Directors may grant non-qualified stock options to employees,
excluding executive officers. Exercisability, option price and other terms are
determined by the Board of Directors, but the option price shall not be less
than 100% of the fair market value of those shares on the grant date. Stock
options generally vest over a period of four years and expire ten years from the
date of grant. At April 30, 2003, 18,188,858 stock options remain outstanding
and 4,667,961 shares of common stock were reserved for future grants under this
plan.
Under our 1994 Non-Employee Directors Stock Option Plan (the Directors
Plan), 900,000 shares have been authorized for issuance. The Directors Plan
provides for automatic grants to each non-employee member of the Board of
Directors upon initial appointment or election to the Board, reelection and for
annual service on Board committees. The option price shall not be less than 100%
of the fair market value of those shares on the grant date. Under the Directors
Plan, new directors receive an option for 20,000 shares, vesting in equal
installments over four years. In addition, each continuing director who is
elected at an annual meeting of stockholders receives an option for 10,000
shares and an additional option for 5,000 shares for each Board committee
membership, up to a maximum of two committee service grants per year. The annual
and committee service option grants vest in full on the date immediately prior
to the date of the annual meeting following their grant. In the case of
directors appointed to the board between annual meetings, the annual and any
committee grants are prorated based upon the amount of time since the last
annual meeting. At April 30, 2003, 542,246 stock options remain outstanding and
195,173 shares of common stock were reserved for future grants under this plan.
We have assumed certain option plans in connection with business
combinations. Generally, these options were granted under terms similar to the
terms of our option plans at prices adjusted to reflect the relative exchange
ratios. We terminated all assumed plans as to future grants upon completion of
each of the business combinations.
We monitor dilution related to our option program by comparing net option
grants in a given year to the number of shares outstanding. The dilution
percentage is calculated as the new option grants for the year, net of options
forfeited by employees leaving the Company, divided by the total outstanding
shares at the end of the year. The option dilution percentages were (0.1)% and
3.4% for the six months ended April 30, 2003 and fiscal 2002, respectively. We
also have a share repurchase program where we regularly repurchase shares from
the open market to attempt to maintain the number of our common shares
outstanding.
A summary of the distribution and dilutive effect of options granted is as
follows:
---------------------- ---------------
SIX MONTHS ENDED YEAR ENDED
APRIL 30, OCTOBER 31,
2003 2002
---------------------- ---------------
Net grants during the period as percentage of outstanding
shares exclusive of options assumed in acquisitions (0.1)% 3.4%
Grants to Named Executive Officers, as defined below, during
the period as percentage of total options granted 15.8% 9.3%
Grants to Named Executive Officers during the period as
percentage of outstanding shares 0.3% 0.5%
Total outstanding options held by Named Executive Officers as
percentage of total options outstanding 14.5% 13.7%
36
A summary of our option activity and related weighted-average exercise
prices for fiscal 2002 through the six months ended April 30, 2003 is as
follows:
Options Outstanding
------------------------------
Weighted-
Shares Average
Available for Number Exercise
Options of Shares Price
------------------ -------------- ---------------
(in thousands, except per share amounts)
Balance at October 31, 2001 8,209 25,920 $ 40.10
Grants (4,081) 4,081 $ 47.88
Options assumed in acquisitions -- 2,511 $ 37.16
Exercises -- (2,851) $ 34.43
Cancellations 1,585 (1,681) $ 42.93
Additional shares reserved 2,700 -- --
------------------ --------------
Balance at October 31, 2002 8,413 27,980 $ 41.40
Grants (1,233) 1,233 $ 42.46
Options assumed in acquisitions -- 1,057 $ 49.59
Exercises -- (1,563) $ 32.01
Cancellations 1,332 (1,464) $ 46.21
Additional shares reserved 150 -- --
------------------ --------------
Balance at April 30, 2003 8,662 27,243 $ 42.04
================== ==============
At April 30, 2003, a total of 19.5 million, 26.6 million and 900,000 shares
were reserved for issuance under our 1992, 1998 and Directors Plans,
respectively, of which 8.7 million shares were available for future grants. For
additional information regarding our stock option activity during fiscal 2002
and 2001, please see Note 6 of Notes to Consolidated Financial Statements in our
2002 Annual Report on Form 10-K, as amended.
A summary of outstanding in-the-money and out-of-the-money options and
related weighted-average exercise prices at April 30, 2003 is as follows:
Exercisable Unexercisable Total
----------------------- ---------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- ----------- ----------- ---------- ---------- ----------
(in thousands, except per share amounts)
In-the-Money 12,977 $ 36.71 7,800 $ 38.15 20,777 $ 37.25
Out-of-the-Money (1) 3,864 $ 57.93 2,602 $ 56.63 6,466 $ 57.41
----------- ----------- ----------
Total Options Outstanding 16,841 $ 41.58 10,402 $ 42.78 27,243 $ 42.04
=========== =========== ==========
(1)Out-of-the-money options are those options with an exercise price
equal to or above the closing price of $49.84 on April 30, 2003, the
last trading day for the six months ended May 2, 2003.
37
The following table sets forth further information regarding individual
grants of options during the six months ended April 30, 2003 for the Chief
Executive Officer and each of the other four most highly compensated executive
officers whose compensation for fiscal 2002 exceeded $100,000 (the Named
Executive Officers).
Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term ($)
-------------------------------- ----------------------------
Number of Percent of
Securities Total Range of
Under-lying Options Exercise
Name Options Granted to Prices Expiration Date 5% 10%
Granted (1) Employees (2) ($/Share)
- --------------------- ----------------- -------------- --------------- ----------------- -------------- -------------
Aart J. de Geus 38,250 3.10% $40.92 - $43.45 12/09/12-02/25/13 $1,032,073 $2,615,475
Chi-Foon Chan 37,575 3.05% $40.92 - $43.45 12/09/12-02/25/13 $1,014,702 $2,571,454
Vicki L. Andrews 19,075 1.55% $40.92 - $43.45 12/09/12-02/25/13 $ 512,522 $1,298,832
Steven K. Shevick 46,675 3.79% $40.92 - $43.45 12/09/12-02/25/13 $1,225,018 $3,104,437
Sanjiv Kaul 23,775 1.93% $40.92 - $43.45 12/09/12-02/25/13 $ 639,042 $1,619,459
(1) Sum of all option grants made during the six months ended April 30,
2003 to such person. Options become exercisable ratably in a series of
monthly installments over a four-year period from the grant date,
assuming continued service to Synopsys, subject to acceleration under
certain circumstances involving a change in control of Synopsys. Each
option has a maximum term of ten years, subject to earlier termination
upon the optionee's cessation of service.
(2) Based on a total of 1,233,110 shares subject to options granted to
employees under Synopsys' option plans during the six months ended
April 30, 2003.
The following table provides the specified information concerning exercises
of options to purchase our common stock and the value of unexercised options
held by our Named Executive Officers during the six months ended April 30, 2003:
Number of Securities Value of In-the-Money
Shares Underlying Unexercised Options at
Acquired On Value Options at April 30, 2003 April 30, 2003 (2)
Name Exercise Realized (1) Exercisable/Unexercisable Exercisable/Unexercisable
- ----------------------- --------------- ------------- ---------------------------- -----------------------------
Aart J. de Geus -- -- 1,418,413 348,537 $15,322,564 $ 2,937,800
Chi-Foon Chan -- -- 926,537 298,938 $ 8,419,367 $ 2,429,888
Vicki L. Andrews -- -- 134,818 150,823 $ 923,008 $ 949,890
Steven K. Shevick -- -- 129,639 99,336 $ 1,251,695 $ 766,661
Sanjiv Kaul -- -- 247,810 156,527 $ 2,366,296 $ 785,702
(1) Market value at exercise less exercise price.
(2) Market value of underlying securities at May 2, 2003 ($49.84)
minus the exercise price.
38
The following table provides information regarding equity compensation plans
approved and not approved by security holders at April 30, 2003 (in thousands,
except price per share amounts):
Number of Number of Securities
Securities to be Weighted-Average Remaining Available
Issued Upon Exercise Price of for Future Issuance
Exercise of Outstanding Under Equity
Outstanding Options, Compensation Plans
Options, Warrants, Warrants, and (Excluding Securities
and Rights Rights Reflected in Column (a))
Plan Category (a) (b) (c)
- ------------------------------------------ --------------------- ------------------- ------------------------
Employee Equity Compensation Plans
Approved by Stockholders (1) 6,089,321 $ 40.54 6,493,339
Employee Equity Compensation Plans Not
Approved by Stockholders (2) 18,188,858 $ 42.78 4,667,961
--------------------- ------------------------
Total 24,278,179 (3) $ 42.22 11,161,300 (4)
===================== ========================
(1) Synopsys' stockholder approved equity compensation plans include
the 1992 Plan, the Directors Plan and the Employee Stock Purchase
Plans.
(2) Synopsys' only non-stockholder approved equity compensation plan is
the 1998 Plan.
(3) Does not include information for options assumed in connection with
mergers and acquisitions. As of April 30, 2003, a total of
2,964,744 shares of our common stock were issuable upon exercise
of such outstanding options.
(4) Comprised of (i) 3,799,383 shares remaining available for issuance
under the 1992 Plan, (ii) 4,667,961 shares remaining available
for issuance under the 1998 Plan, (iii) 195,173 shares remaining
available for issuance under the Directors Plan, and (iv) 2,498,783
shares remaining available for issuance under the Employee Stock
Purchase Plans as of April 30, 2003.
Pre-approvals of Non-Audit Services by Audit Committee
Pursuant to Section 10A(i)(1)(A) of the Exchange Act, during the fiscal
quarter ended April 30, 2003 the Audit Committee pre-approved the following
non-audit services to be performed by KPMG LLP, as its independent auditors:
1. Deliver consent for Form S-8 Registration Statement;
2. Perform potential acquisition due diligence;
3. Consultation related to income tax accounts for acquisition
completed during the quarter; and
4. Consultation related to Sarbanes-Oxley Act compliance matters.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits
3.1 Fourth Amended and Restated Certificate of Incorporation(1)
3.2 Certificate of Designation of Series A Participating Preferred Stock(2)
3.3 Certificate of Amendment of Fourth Amended and Restated Certificate of
Incorporation (3)
3.4 Restated Bylaws of Synopsys, Inc. (1)
4.1 Reference is made to Exhibits 3.1 through 3.3.
99.1 Certification of Chief Executive Officer and Chief Financial and
Principal Accounting Officer furnished pursuant to 18 U.S.C. Section
1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
-------------------------
(1) Incorporated by reference from exhibit to Synopsys' Quarterly Report on
Form 10-Q for the quarterly period ended April 3, 1999.
(2) Incorporated by reference from exhibit to Amendment No. 1 to Synopsys'
Registration Statement on Form 8-A filed with the Securities and Exchange
Commission on December 13, 1999.
(3) Incorporated herein by reference from exhibit to Synopsys' Quarterly
Report on Form 10-Q for the quarterly period ended April 30, 2000.
39
(b.) Reports on Form 8-K
The Registrant filed a Report on Form 8-K with the SEC on March 5, 2003
reporting under Item 5 the completion of its acquisition of Numerical
Technologies, Inc. on March 1, 2003.
40
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/ STEVEN K. SHEVICK
Steven K. Shevick
Senior Vice President, Finance
and Operations, and Chief
Financial Officer
(Principal Financial Officer)
Date: June 13, 2003
41
CERTIFICATIONS
I, Aart J. de Geus, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Synopsys,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 13, 2003
/s/ AART J. DE GEUS
Aart J. de Geus
Chief Executive Officer
(Principal Executive Officer)
42
I, Steven K. Shevick, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Synopsys,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 13, 2003
/s/ STEVEN K. SHEVICK
Steven K. Shevick
Chief Financial Officer
(Principal Financial Officer)
43
EXHIBIT INDEX
Exhibit No. Description
3.1 Fourth Amended and Restated Certificate of Incorporation(1)
3.2 Certificate of Designation of Series A Participating Preferred
Stock(2)
3.3 Certificate of Amendment of Fourth Amended and Restated
Certificate of Incorporation (3)
3.5 Restated Bylaws of Synopsys, Inc. (1)
4.1 Reference is made to Exhibits 3.1 through 3.3.
99.1 Certification of Chief Executive Officer and Chief Financial
and Principal Accounting Officer furnished pursuant to 18
U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
-------------------------
(1) Incorporated by reference from exhibit to Synopsys' Quarterly Report on
Form 10-Q for the quarterly period ended April 3, 1999.
(2) Incorporated by reference from exhibit to Amendment No. 1 to Synopsys'
Registration Statement on Form 8-A filed with the Securities and
Exchange Commission on December 13, 1999
(3) Incorporated herein by reference from exhibit to Synopsys' Quarterly
Report on Form 10-Q for the quarterly period ended April 30, 2000.
44