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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 4 TO
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED OCTOBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-45138
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 NO.)
700 EAST MIDDLEFIELD ROAD, MOUNTAIN VIEW, CALIFORNIA 94043
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(650) 584-5000
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
----------------
PREFERRED SHARE PURCHASE RIGHTS
Indicate by check mark whether the registrant (1) 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. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ] Yes [X] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
[X] Yes [ ] No
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common equity,
as of the last business day of the registrant's most recently completed second
fiscal quarter: $1,699,717,300.
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of July 7, 2003 was approximately $3,038,579,800. On July 7, 2003
approximately 77,253,625 shares of the registrant's Common stock, $0.01 par
value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
EXPLANATORY NOTE
This Amendment No. 4 to the Registrant's Annual Report on Form 10-K for the
year ended October 31, 2002 is being filed in order to revise the pro forma
disclosure information that is required by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," for each of the
years ended October 31, 2000, 2001 and 2002. For ease of reference, the
Registrant has also incorporated the changes from Amendment Nos. 1-3. Except as
so indidated, the Registrant has made no other changes to its Annual Report on
Form 10-K for the fiscal year ended October 31, 2002.
SYNOPSYS, INC.
ANNUAL REPORT ON FORM 10-K
Year ended October 31, 2002
TABLE OF CONTENTS
Page No.
PART I
Item 1. Business..................................................... 1
Item 2. Properties................................................... 12
Item 3. Legal Proceedings............................................ 13
Item 4. Submission of Matters to a Vote of Security Holders.......... 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 16
Item 6. Selected Financial Data...................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
Item 7a. Quantitative and Qualitative Disclosure About Market Risk.... 45
Item 8. Financial Statements and Supplementary Data.................. 46
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 76
PART III
Item 10. Directors and Executive Officers of the Registrant........... 77
Item 11. Executive Compensation....................................... 80
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 82
Item 13. Certain Relationships and Related Transactions............... 83
Item 14. Controls and Procedures...................................... 83
PART IV
Item 15. Exhibits, Financial Statements, Schedules and Reports
on Form 8-K............................................... 84
SIGNATURES............................................................ 86
CERTIFICATIONS........................................................ 88
PART I
This Form 10-K, including "Item 1. Business," includes forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934. These statements include, but are not limited to, statements concerning:
the Company's business strategy; the Company's expansion into the market for
physical design tools; the Company's intentions regarding its system level
design and verification tools; the Company's intentions regarding development of
products that address signal integrity problems; the Company's intentions
regarding design reuse tools and techniques, including the Company's
expectations regarding expanding its inventory of IP cores; the Company's
intentions regarding its physical synthesis line of products; the Company's
expectations regarding research and development, sales and marketing, and
general and administrative expenses; the Company's efforts to enhance its
existing products and develop or acquire new products; the Company's
expectations regarding license mix; and the Company's requirements for working
capital. The Company's actual results could differ materially from those
projected in the forward-looking statements as a result of risks and
uncertainties that include, but are not limited to, those discussed under the
caption "Factors That May Affect Future Results" under Management's Discussion
and Analysis of Financial Condition and Results of Operations included in Part
II, Item 7 hereto, as well as factors discussed elsewhere in this Form 10-K.
ITEM 1. BUSINESS
INTRODUCTION
Synopsys, Inc. (Synopsys or the Company) is a leading supplier of electronic
design automation (EDA) software to the global electronics industry. The
Company's products are used by designers of integrated circuits (ICs), including
system-on-a-chip ICs, and the electronic products (such as computers, cell
phones, and internet routers) that use such ICs to automate significant portions
of their chip design process. ICs are distinguished by the speed at which they
run, their area, the amount of power they consume and the cost of production.
The Company's products offer its customers the opportunity to design ICs that
are optimized for speed, area, power consumption and production cost, while
reducing overall design time. Synopsys also provides consulting services to
assist customers with their IC designs, as well as training and support
services. Synopsys was incorporated in Delaware in 1987.
THE ROLE OF EDA IN THE ELECTRONICS INDUSTRY
Over the past three decades, technology advances in the semiconductor
industry have dramatically increased the size, speed and capacity of ICs:
o The number of transistors that can be placed on a chip has doubled
roughly every 18 months, a phenomenon known as "Moore's Law". A
state-of-the-art IC may hold over 50 million transistors. This is made
possible in large part because the width of the features on the chip is
steadily shrinking. Mainstream IC designs today are produced at a 0.18
micron process, with advanced chips being produced at a 0.13 micron
process. Over the next several years, it is expected that the bulk of
production will shift to 0.13 micron or below. Chip manufacturers are
beginning to design and/or produce chips at a 0.09 micron process.
o The speed at which chips operate has steadily increased. Microprocessors
operating at more than 2 gigahertz, a speed that was unheard of a few
years ago, are available today.
o Chips are also becoming more economical in their power consumption,
which is necessary to drive more and more powerful handheld devices.
o Increasingly, functions that formerly were performed by multiple ICs
attached to a printed circuit board are being combined in a single chip,
referred to as a system-on-a-chip.
Combined, these changes have fostered the development of computers, wireless
communications networks, hand-held personal digital assistants, Internet
routers, and many other goods and services with tremendous capabilities at
relatively low cost.
While the capabilities of ICs have increased, competition and continuing
innovation have shortened the life cycle of electronic products, so
time-to-market is crucial to the success of a product. Time-to-market for a
product is in part determined by the time it takes to design the chip that will
run such product. EDA software plays a critical role in reducing time-to-market
for new products by providing IC designers with tools and techniques to (a)
reduce the time and manual effort required to design, analyze and verify
individual ICs, (b) improve the performance and density of complex IC designs,
(c) enhance the reliability of the IC design and (d) improve the
manufacturability of the design.
1
THE DESIGN PROCESS
In simplified form, the design of an integrated circuit consists of five
basic steps:
SYSTEM DESIGN. First, a designer describes the functions that the chip is to
perform in a specialized high-level computer language. During this phase,
designers perform high level architectural design tradeoffs, to determine, for
example, which algorithms to use to implement the design, and the portions of
the functionality to implement in hardware versus software. At the completion of
this phase, the designer produces a "register transfer level" or "RTL"
description of the chip. Most of this process is completed manually, although
there is a small but growing market for products that help automate design and
verification at the system level.
LOGIC SYNTHESIS. After the designer is satisfied with the RTL code, a logic
synthesis program converts the RTL code into a logical diagram of the chip.
Related programs insert the circuitry that will be required to test the chip
after manufacture. A "gate level" (so called because it describes the various
groups of transistors, or "gates", required to implement the chip) data file, or
"net list", is produced. In addition, in a growing number of designs, the logic
synthesis phase is performed together with a portion of physical design. This
combined process, known as "physical synthesis", produces a file containing
"placed gates", which describes the logic blocks and includes information about
where they will be physically located, or "placed", on a chip. See discussion
below under "Current Issues Facing IC Designers". In a growing number of
system-on-a-chip ICs, in which multiple functions previously captured on
multiple chips are combined in a single chip, designers are increasingly
performing "design planning", either before or in conjunction with logic
synthesis. In design planning, the designer determines the location of the
functional "blocks" that will be captured on the system-on-a-chip and plans the
principal wire connections between the blocks. Logic synthesis is then
performed, more or less independently, on each block, before the blocks are
"stitched" back together.
FUNCTIONAL VERIFICATION. At this stage the designer uses simulation and
related programs to verify that the design successfully performed the functions
that the designer intended, by feeding an exhaustive array of potential inputs
into a specialized program, "simulating" the functioning of the chip as
designed, and checking to confirm that the outputs match what was expected.
Techniques that use advanced mathematical calculations rather than simulation
are also used. The designer also uses a timing analysis program to confirm that
the chip as designed will operate at the speed the designer intended.
PHYSICAL DESIGN. If the designer is satisfied with the results of high level
verification, the transistors, and all of the wires connecting each one of them,
are mapped out in a series of transformations that gradually gets more and more
detailed. First, the location on the chip die of each block of the chip is
finalized, and the location of each transistor within each block is determined
-- a process known as "placement" -- then all of the connections between the
transistors are determined -- a process known as "routing". The result is one or
more data files that can be read by physical verification programs (see below)
or by the equipment used to manufacture the chip.
PHYSICAL VERIFICATION. Before sending the design data file to a chip
manufacturer for fabrication, a series of further verification steps are
undertaken. The designer must confirm that the chip as placed and routed will
operate at the speed anticipated during the logic design phase. The designer
also must check for unintended electrical effects that may arise as a
consequence of placing certain portions of the chip, or routing certain of its
"wires", too close together or otherwise inefficiently. In addition, the
designer must verify that the final design complies with all of the design rules
set forth by the party that will manufacture the chip. Finally, the designer may
need to add features to the design to ensure that the chip can be manufactured
successfully.
The foregoing discussion has been greatly simplified. In the actual design
of a chip each of these steps has a number of different elements. The steps, or
the different elements within the steps, may be undertaken in a different order
or repeated multiple times. And, as described below, several of the steps,
especially logic design and physical design are becoming more integrated with
each other. In any event, if at any stage of the process the chip does not
perform as intended, then the designer must go back one or more steps to either
redesign the RTL, redesign the logic, re-run the verification or redo the
physical design of the chip. Each iteration takes time, and the more time the
process takes, the more expensive the process becomes, and the more difficult it
will be for the designer to meet his or her time-to-market goals.
2
CURRENT ISSUES FACING IC DESIGNERS
As chip technology continues to advance, and particularly as the
state-of-the-art in chip design moves to a 0.13 micron and below process,
Synopsys' customers are facing a number of difficult design challenges:
TIMING CLOSURE. Ensuring that a chip will run at the desired speed becomes
substantially more difficult when transistor sizes are 0.18 micron and below. At
larger transistor feature sizes, IC designers could use standard estimates of
chip timing during the logic design phase, and be confident that the timing
characteristics would be preserved through the physical design phase. At 0.18
micron and below, these estimates become increasingly unreliable. To address
this problem, designers will increasingly need products that integrate logic
design and physical design. As a result of Synopsys' merger with Avant!
Corporation, Synopsys now offers its customers a complete portfolio of logic and
physical design products. Synopsys is currently working to integrate these
products with a single chip implementation platform based on a common database,
common timing, constraints and libraries. Integration of logic and physical
design products will greatly improve the correlation between original timing
estimates after logic design and timing results after physical design.
SIGNAL INTEGRITY CLOSURE. Signal integrity refers to a variety of electrical
effects that can cause circuits to behave in undesirable ways. The electrical
characteristics of ICs of 0.13 micron and below cause previously insignificant
effects to become problematic. These effects include cross-talk, voltage drop,
and electro-migration. Cross-talk, in particular, is becoming a major problem
for advanced designs today. In order to address signal integrity problems
designers need products that help them analyze, prevent and repair errors caused
by signal integrity issues.
VERIFICATION. Verification is the process of ensuring, at various stages of
the design process, that a chip will perform as intended. As the number of
transistors on a chip grows, the verification problem grows geometrically. In
fact, with today's chips, verification often is the single most time consuming
and resource intensive aspect of the overall design process. Verification
products must offer customers a combination of speed, accuracy and the ability
to focus on the portions of the chip most likely to cause problems.
MANUFACTURING CLOSURE. As the features on a chip continue to shrink, it has
become more difficult to faithfully translate the design as produced by EDA
tools into the intricate pattern of wires and transistors on the chip. Chips are
produced by a process known as photolithography or optical lithography, which
consists of shining a light through a photomask (a template on which the design
has been drawn) onto the surface of the semiconductor. Beginning at 0.18
microns, the wavelength of light used is larger than the features on the chip,
resulting in degraded image quality. A number of EDA products help address this
and other manufacturability issues.
DESIGNER PRODUCTIVITY. Historically, finding, hiring and retaining qualified
design engineers has been one of the most difficult problems that our customers
face. Without enough designers it is difficult for a company to meet ambitious
development schedules, and to get its products to market in a timely manner.
Although hiring qualified designers has become less difficult in the current
economic environment, the increase in IC complexity and time to market pressures
have resulted in a continuing emphasis on designer productivity. For EDA
companies, this creates opportunities both in providing full-featured,
integrated design flows, that reduce the number of iterations required during
the design process, and in offering pre-designed, pre-verified design "building
blocks" that can be re-used in multiple designs.
SYNOPSYS OVERVIEW
Synopsys provides products and services that help customers meet the
challenges of designing leading edge ICs and the products that incorporate them.
As of the beginning of fiscal 2002, Synopsys offered customers a comprehensive
suite of products used in the logic synthesis and functional verification phases
of chip design, including a broad array of reusable design building blocks. We
also offered a growing set of physical synthesis and physical design products
and a number of physical verification products. As a result of our merger with
Avant!, which was completed in June 2002, Synopsys substantially filled out its
portfolio of physical design and physical verification products. Through our
acquisition of inSilicon, completed in September 2002, we significantly
augmented our portfolio of IP components. As of the end of fiscal 2002, we
offered customers all of the principal products required to design a chip from
concept to the point at which it is handed to the manufacturer for fabrication,
and the broadest array of design building blocks of any company in the EDA or
intellectual property (IP) industry.
Synopsys also offers a full range of professional services, including
turnkey design services, design assistance and methodology consulting.
Synopsys markets its products on a worldwide basis and offers comprehensive
customer service, education, consulting, and support as integral components of
its product offerings. Products are marketed primarily through its direct sales
force. Synopsys has licensed its products to most of the world's leading
semiconductor, computer, communications and electronics companies.
3
STRATEGY
Synopsys' strategy is to develop and offer to its customers a broad and
integrated array of tools and services required to enable design of complex ICs,
especially system-on-a-chip ICs. The Company is seeking to build and enhance
products that help customers address the most pressing problems of IC design at
0.13 micron and below: timing closure, signal integrity and closure,
verification, designer productivity and design for manufacturability. To that
end, Synopsys has organized its products into two distinct product "platforms" -
a "design implementation" platform and a "design verification" platform. The
design implementation platform includes all of the products required to design a
chip from concept down to the handoff from the designer to the manufacturer. The
design implementation platform incorporates Synopsys' intellectual property,
logic design, physical design, design analysis, timing analysis, and design rule
checking products. Many of these individual products, or "point tools", are the
leading products in their category. Synopsys' strategy is to integrate these
products tightly together through the use of a common database and a common
timing engine, among other things, and to develop new products that incorporate
technologies from multiple products. The design verification platform includes
products required to verify the functionality of a chip at each phase of the
design - at the system, RTL, gate and transistor levels. Many of the point tools
in the verification platform are also the leading products in their category.
Synopsys' strategy is to integrate its verification tools to provide a
comprehensive verification environment to its customers, with particular
emphasis on mixed-signal (analog and digital) chip verification.
ORGANIZATION
Synopsys is currently organized into four product development groups -- IC
Implementation; Verification Technology; Nanometer Analysis and Test; and
Intellectual Property and Design Services.
o The IC Implementation group develops the Company's logic design,
physical synthesis and place and route and related products;
o The Verification Technology group develops the Company's
logic verification, simulation and system level design and
verification tools;
o The Nanometer Analysis and Test group develops a variety of analysis
and verification products, including products for timing analysis,
formal and mixed signal verification, transistor-level design and
test;
o The Intellectual Property and Professional Services group develops and
markets pre-designed IP blocks for chip designers and provides
turnkey design services for design, verification and implementation
of IC's.
In addition to these groups, Synopsys maintains a Corporate Applications and
Marketing group, encompassing all product marketing functions and corporate
applications support for the Company, a World Wide Sales group, a World Wide
Application Services group, a Finance group, a Human Resources and Facilities
group and a Technology and Information Systems group.
PRODUCTS
Synopsys products and services are focused on the principal needs of
semiconductor designers and, at a business level, are divided into the four
categories specified above -- IC Implementation, Verification, Nanometer,
Analysis and Test and Intellectual Property and Professional Services. The
products and services included in these categories are discussed below.
Financial information regarding Synopsys' products and services is included
under Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations -- "Results of Operations -- Revenue -- Product Groups."
IC IMPLEMENTATION PRODUCTS
Synopsys' IC Implementation products include most of the products used in
the logic synthesis and physical design phases of IC design, including the
Company's logic synthesis, physical synthesis, design planning, place and route,
extraction and reliability analysis products. The Company's IC Implementation
products include the largest proportion of the products acquired from Avant!.
Historically, the key technologies for IC implementation were logic
synthesis and place-and-route. Logic synthesis is the process by which a
high-level description of desired chip functions is mapped into a connected
collection of logic gates and other circuit elements that perform the desired
functions. Place and route is the process by which an IC designer takes the
logical description of an IC design created by Design Compiler and translates it
into a physical design.
Design Compiler(TM) is the market-leading logic synthesis tool and is used
by a broad range of companies engaged in the design of ICs to optimize their
designs for performance and area. Design Compiler was introduced in 1988 and has
been updated regularly since then. Design Compiler 2002 features significant
enhancements, including improved optimization algorithms, run-times and
capacity. Design Compiler Expert is the Company's basic logic synthesis product.
Customers seeking additional features can purchase the higher-priced Design
Compiler Ultra. An upgrade path from Design Compiler Expert to Design Compiler
Ultra is also available.
4
Design Compiler has become a cornerstone of IC designers' design
methodology, and the Company expects that it will continue to be an important
element in designers' overall suite of design tools, especially for performing
logic synthesis on non-timing-critical portions of a design. As the size of the
transistors on a chip shrink and the number of transistors on a chip increase,
however, designers are increasingly faced with problems that are best addressed
by physical design tools, or by physical synthesis products, which combine
elements of logic and physical design. Consequently, the Company believes that
its orders and revenue from Design Compiler peaked in fiscal year 2001. Orders
for this product as a percentage of Synopsys orders declined from 29% to 18% in
2001 and 2002, respectively , and may decline further.
The Company released its first physical synthesis product, Physical
Compiler, in fiscal 2000. Physical Compiler unites logic synthesis and placement
functionality, and was designed to addresses the critical timing problems
encountered in designing advanced ICs and systems-on-a-chip. Prior to the Avant!
merger, the Company was developing routing and related physical design
technologies, and its Route Compiler and Clock Tree Compiler products had been
released to beta customers. The Company also offered separate point tools for
physical analysis (Arcadia), top level routing (FlexRoute) and floor planning
(Chip Architect and Floorplan Compiler). Our strategy was to transition
customers from Design Compiler to Physical Compiler and to introduce additional
physical design products integrated with Physical Compiler that enabled
customers to more efficiently complete the design of their system-on-a-chip
products.
In the merger with Avant!, the Company acquired Avant!'s full suite of
physical design products, including the place and route products Apollo and
Astro (Avant!'s successor place-and-route product), the floor planning product
Jupiter, the analysis product Star RC, the reliability testing product Mars Rail
and the chip finishing product Saturn. Based on a full technical evaluation, we
have decided to base the physical synthesis and physical design portions of our
Implementation Platform on Physical Compiler and Astro. During 2002 we made
progress on integrating these products, while beginning development of new
products that unify logic and physical design. Route Compiler is no longer being
sold to customers and we are determining how to integrate some of its features
into Astro. With respect to other products containing overlapping functions, we
determined the products on which to focus our efforts and began developing
smooth transition paths to these products for our customers.
Most of the products acquired from Avant! shared data through a common
proprietary database known as Milkyway. Milkyway enables these products to
exchange critical data, algorithms and language in a highly efficient manner.
The Milkyway database facilitates faster convergence of critical design
properties including timing, area, power and signal integrity by allowing
certain point tools to directly access critical data. Use of the Milkyway
database is a critical element in the integration plan for the Synopsys and
Avant! products. We are actively working on putting Milkyway functionality into
the core products of the Company's Implementation platform, and expect this
project to be completed during fiscal 2003.
The Company's IC Implementation products also include logic synthesis
products for field programmable gate arrays (FPGAs) and complex programmable
logic devices (CPLDs).
VERIFICATION PRODUCTS
The Company's Verification products consist of high level, or logic,
simulation and verification products and system level design and verification
tools. These products enable IC designers to quickly and reliably verify the
behavior of a design before it is committed to the expensive and time-consuming
process of gate level design and IC fabrication and also assist in the testing
of the chip after manufacturing.
SIMULATION AND RELATED PRODUCTS. Simulation software "exercises" an IC
design by running it through a series of tests and comparing the actual outputs
from the design with the expected output. The goal of simulation is to make sure
that the functionality of the design meets the original specifications of the
chip. Synopsys offers two products for high-level simulation: VCS(TM), for
designs written in Verilog (one of the two principal languages) and
Scirocco(TM), for designs written in VHDL (the other principal language).
Simulation products are distinguished principally by their runtime and capacity
-- i.e., how fast they can fully simulate a proposed design and how large a
design they can handle. The Company is focused on providing the industry's
fastest and highest-capacity simulation technology and believes that both VCS
and Scirocco are industry leaders in performance and capacity. VCS is supported
by all major semiconductor manufacturers and many third-party EDA software
providers. VCS 7.0, which is expected to be released during the first calendar
quarter of 2003, will increase VCS' capabilities by integrating significant new
functionality, including advanced assertion verification, testbench capability
and next generation coverage. These capabilities are integrated into a single
open platform that is also highly automated, which improves designer
productivity.
5
In addition to focusing on building the fastest simulator, Synopsys is
focused on developing a suite of products that help simulation products work
"smarter". The Company estimates that IC designers spend more time writing
verification "testbenches" than creating the design description. Testbenches,
which create stimuli for chips and check the results, are used in conjunction
with simulation tools to verify that a design functions as expected. Synopsys'
VERA(R) is a tool that automates the design of testbenches, thereby offering the
IC designer significant reductions in overall design and verification time. VERA
is integrated with the Company's other simulation products to provide increased
productivity benefits. In addition, Synopsys' acquisition of Co-Design
Automation, Inc. provides the company with next generation hardware language
verification technology that will be used in future releases of its verification
products. Synopsys has bundled verification tools such as VCS and VERA to
provide a comprehensive verification environment for its customers, with
particular emphasis on mixed signal (analog and digital) chip verification.
SYSTEMS DESIGN AND VERIFICATION PRODUCTS. Currently, automated design
generally begins at the register transfer level, with logic synthesis. The goal
of "system-level" products is to permit designers to design and verify their
products at a level of abstraction above RTL. Synopsys' systems products consist
of the CoCentric(TM) family of tools and methodologies for concurrent design,
validation, refinement and implementation of an electronic system.
The Company offers two principal products based on "SystemC, (TM)" a
standard language developed by Synopsys and now available under an open source
license. SystemC enables designers to create, validate and share system level
models of a complex IC or system incorporating the chip, and therefore can be
used to explore and verify design alternatives at an early stage of the design
process. CoCentric System Studio is a system-level design environment for the
rapid creation of executable system specifications that can be verified and
implemented as hardware and software functions. System Studio enables designers
to use hierarchical graphical and language modeling to capture system complexity
in a unified environment based on C, C++ and SystemC. CoCentric SystemC Compiler
is a synthesis tool that allows designers to implement complex circuits from
SystemC, enabling design to progress from an initial C/C++ executable
specification into a database readable by Synopsys' Design Compiler.
Through the acquisition of Avant!, Synopsys acquired its Saber product,
which offers mixed signal system level design tools for the power, test,
automotive, telecommunications and military/aerospace markets.
NANOMETER, ANALYSIS AND TEST PRODUCTS
Synopsys' Nanometer, Analysis and Test products include a broad range of
software tools in the areas of physical verification, timing analysis, gate
level circuit simulation, power management and parasitic extraction. These
products, which are used after the completion of physical design, help customers
analyze the increasingly important electrical effects resulting from designing
at 0.18 micron and below, and to locate implementation errors that can be costly
and time-consuming to correct during or after production. As the logic and
physical design phases of IC Implementation grow more and more integrated, the
Company is also integrating many of its nanometer, analysis and test products
with its high level verification products, particularly in the areas of
simulation, timing, and power analysis.
STATIC TIMING ANALYSIS. Synopsys provides a complete tool suite to help
designers perform static timing analysis at the gate and transistor levels and
analyze signal integrity issues such as cross talk. Synopsys' gate level
analysis tool is called PrimeTime(R). PrimeTime is a full-chip, gate-level
static timing analysis tool targeted for complex multimillion gate designs,
which is used by designers to verify, at various stages of the design process,
the speed at which a design will operate when it is fabricated. PrimeTime's
analysis of a design's speed is accepted as a "sign off" tool by virtually all
major semiconductor manufacturers, which means that they accept its analysis as
determinative. In fiscal 2001, Synopsys extended PrimeTime's capabilities with
the introduction of PrimeTime-SI, which analyzes the effect of cross talk on
timing, an increasingly important issue at chip geometries below 0.18 micron.
PrimeTime-SI is sold as an add-on to PrimeTime.
Synopsys' transistor level tools include PathMill(R), PathMill Plus and
AMPS(R). PathMill is a transistor-level static timing analysis tool for custom
microprocessor and DSP designs. PathMill's analysis provides SPICE-level
accuracy with 1000x performance improvement over traditional SPICE. PathMill
Plus extends PathMill to offer advanced modeling, model merging and verification
to speed characterization of custom IP blocks. The combination of PrimeTime and
PathMill offers full-chip static timing analysis that covers transistor- to
gate-level designs.
6
FORMAL VERIFICATION. Formal verification is a method for comparing two
versions of a design to determine if they are equivalent. Usually an RTL version
of the design is validated using simulation and other dynamic verification
tools, establishing it as the golden version. Subsequent versions (i.e., after
each step of the design process) are then compared to the golden version, using
mathematical algorithms, to determine if they are functionally equivalent. The
use of formal verification greatly reduces the need to perform simulation, which
is substantially more time-consuming, at each stage of the design process, thus
potentially saving a significant amount of time in the overall design process.
Synopsys' formal verification product is Formality(R). Formality was one of the
industry's first commercial equivalency checkers to employ a multi-solver
architecture, which enables the verification of complex multimillion-gate
system-on-a-chip designs in days or minutes.
CIRCUIT SIMULATION. While Synopsys' high level verification tools such as
VCS simulate an IC design at a logical or higher level of abstraction, Synopsys'
circuit simulation products perform simulation at the gate and transistor level.
These products include the Taurus and HSPICE tools acquired in the Avant! and
the NanoSim product, which Synopsys introduced during fiscal 2001. Taurus is a
TCAD tool used for new process simulation at semiconductor foundaries. The
HSPICE product is a highly accurate circuit simulation tool used to simulate
designs at transistor level. NanoSim is an advanced circuit simulator for memory
and mixed-signal verification, which offers circuit simulation, timing, and
power analysis in a single tool. NanoSim is tightly integrated with Synopsys'
VCS simulator to deliver high-speed, high-capacity verification of complex ICs.
NanoSim and VCS together address verification challenges at RTL, gate- and
transistor-levels, and enable mixed-signal multi-level verification of complex
ICs. In addition, through the acquisition of StarSim and StarSim XT from Avant!,
Synopsys' suite of circuit simulation tools has expanded to include simulators
for nanometer-level processes and applications such as graphics, memory,
communications and mixed-signal IC designs. Synopsys is offering customers a
smooth migration path from StarSim and StarSim XT to Nanosim while adding some
of the key features from StarSim into NanoSim.
POWER MANAGEMENT. Synopsys delivers a complete solution to help designers
manage and verify power consumption at different levels of the design process,
based principally on Power Compiler, which offers "push button" power
optimization and is fully integrated into the Design Compiler environment. In
addition, through the acquisition of StarMTB from Avant!, Synopsys extends its
solution in this area by offering library characterization capability with power
information complementing the existing Power Arc product.
TEST AUTOMATION. In order to meet today's stringent quality requirements,
chips must pass through rigorous testing after manufacturing. Synopsys'
design-for-test (DFT) tools offer a complete DFT solution. Synopsys' DFT
Compiler, the industry-standard 1-pass test synthesis product, inserts all
functional and test logic required to enable efficient, high-coverage testing of
the chip after manufacturing, while complying with the customer's design rules
and constraints (timing, area, power, etc.). Automatic test pattern generation
(ATPG) is the other component of Synopsys' complete DFT solution. TetraMAX(TM)
ATPG, the Company's ATPG product is optimized for ease-of-use, capacity, speed,
coverage and vector compaction. TetraMAX ATPG works in concert with DFT Compiler
to enable total automation of the DFT flow. Synopsys test methodology also
includes software to facilitate the failure diagnosis of chips after
manufacturing test, expediting the time-consuming and expensive post-fabrication
activities required to determine the cause of manufacturing defects.
PHYSICAL VERIFICATION. Synopsys offers class-leading physical verification
products that provide geometric and electrical verification of physical design
layouts in designs containing hundreds of millions of transistors. These
products verify a design at the gate level rather than at the higher, RTL level
of abstraction. Synopsys' physical verification product family is called
Hercules.
DESIGN FOR MANUFACTURING. Synopsys markets products for optical proximity
correction, circuit packaging and final design validation used in order to help
ensure the final IC design will be manufacturable by the semiconductor foundry.
Synopsys' OPC product family is called Proteus. In addition, in January 2003,
Synopsys entered into an agreement to acquire Numerical Technologies, Inc., a
developer of subwavelength lithography solutions. This acquisition is expected
to complement Synopsys' existing design for manufacturing tools.
INTELLECTUAL PROPERTY (IP) AND SYSTEMS LEVEL DESIGN
The Company's IP products include our DesignWare IP library and systems
design and verification products, as well as the physical library products
acquired from Avant! Synopsys also offers a full range of professional services
to help customers improve their internal design methodologies, as well as design
services ranging from specialized assistance to turnkey design.
7
INTELLECTUAL PROPERTY PRODUCTS. As IC designs continue to grow in size,
reusing design blocks is becoming a more important method for reducing overall
design cycle time. By reusing portions of a design, and particularly those that
implement basic or standardized functions, a company can let its IC design team
focus on designing the chip features that will give its product a competitive
advantage. It can also reduce its verification risk by ensuring that these
portions of the chip are of high quality. Enabling reuse of intellectual
property (IP) requires a significant methodology shift from traditional IC
design. In the past, designs were intimately tied to a particular semiconductor
process technology or design methodology, making reuse of design blocks from one
chip design to the next, both difficult and costly.
Synopsys' DesignWare(R) library products provide IC designers with a single
library of pre-designed and pre-verified synthesizable IP cores as well as over
22,500 verification IP models. Both groups of cores range in complexity from the
simple to the very complex, giving designers access to a broad range of models
to assist them with verification of their designs. During 2002, Synopsys
introduced a complete AMBA On-Chip-Bus to DesignWare, providing designers with
access to the most popular bus architecture for designers using microprocessor
cores from third party vendors.
Through the acquisition of inSilicon Corporation in September 2002, Synopsys
expanded its offering of standards-based connectivity IP to include USB, IEEE
1394, 802.11 and other products. These cores are sold on a per-use basis,
sometimes with a royalty based on the number of chips produced, rather than as
perpetual licenses or technology subscription licenses (TSLs), as DesignWare
foundation libraries are sold. The Company expects to expand its inventory of
cores sold on a per use basis during 2003.
In 2001 Synopsys announced its Star IP program in which DesignWare users can
gain access to popular microprocessors from MIPS Technologies, Infineon
Technologies, NEC and other providers.
PROFESSIONAL SERVICES
Synopsys Professional Services provides a comprehensive portfolio of
consulting services covering all critical phases of the system-on-a-chip
development process, as well as systems development in wireless and broadband
applications. Customers are offered a variety of engagement models ranging from
project assistance -- which helps a customer design, verify and/or test its
chips and improve its design process -- to full turn-key development. Fiscal
2002 was a challenging year for the professional services business, as customers
continued to reduce their use of outside consultants as part of their own
cost-cutting efforts.
CUSTOMER SERVICE AND SUPPORT
Synopsys devotes substantial resources to providing customers with technical
support, customer education, and consulting services. The Company believes that
a high level of customer service and support is critical to the adoption and
successful utilization of its products. In fiscal 2002, service revenue as a
percentage of total revenue decreased to 32% as compared to 50% in fiscal 2001,
and overall revenue from services declined from $341.8 million to $287.7
million. Factors contributing to the decrease in services revenue are discussed
in Management's Discussion and Analysis of Financial Condition and Results of
Operations - "Results of Operations - Revenue."
TECHNICAL SUPPORT
Technical support for the Company's products is provided through both field-
and corporate-based technical application engineering groups. Technical support
is bundled with the license fee when a customer purchases a TSL and may be
purchased separately when the customer purchases a perpetual license. Technical
support includes minor enhancements to the products developed during the year,
bug fixes and access to Synopsys application consultants, our worldwide network
of product experts, for problem resolution. Customers also have access via
electronic mail and the World Wide Web to SolvNet(R), a direct-access service
available worldwide, 24 hours per day, that lets customers quickly seek answers
to design questions or more insight into design problems. SolvNet combines
Synopsys' complete design knowledge database with sophisticated information
retrieval technology. Updated daily, it includes documentation, design tips, and
answers to user questions. During fiscal 2002, Synopsys introduced the
"DirectConnect" feature to its technical support offerings. Using DirectConnect,
Synopsys support engineers in a Synopsys facility can view a customer's computer
screen in the customer's facility to more rapidly and efficiently diagnose and
resolve the customer's product issues.
8
CUSTOMER EDUCATION SERVICES
Synopsys offers training workshops designed to increase customer design
productivity with the Company's products. An extensive curriculum covers the
tools and methodology required to successfully complete the full design
implementation and verification process. Areas covered include system design,
design synthesis, physical design, simulation and test. Regularly scheduled
workshops are offered in Mountain View, California; Austin, Texas; Burlington,
Massachusetts; Reading, England; Rungis, France; Munich, Germany; Tokyo and
Osaka, Japan; Seoul, Korea and other locations. On-site workshops are available
worldwide at customers' facilities or other locations. Over 6,800 design
engineers attended Synopsys workshops during fiscal 2002.
PRODUCT WARRANTIES
Synopsys generally warrants its products to be free from defects in media
and to substantially conform to material specifications for a period of 90 days.
Synopsys has not experienced significant returns to date.
SUPPORT FOR INDUSTRY STANDARDS
Synopsys actively creates and supports standards it believes will help its
customers increase productivity and solve design problems, including key
interfaces and modeling languages that promote system-on-a-chip design and
facilitate interoperability of tools from different vendors. Standards in the
EDA industry can be established by formal accredited committees, by licensing
made available to all, or through open source licensing.
Synopsys' products support many formal standards, including the two most
commonly used hardware description languages, VHDL and Verilog HDL, and numerous
industry standard data formats for the exchange of data between Synopsys' tools
and other EDA products.
Synopsys is a board member and/or participant in the following major EDA
standards organizations: Accellera, a not-for-profit formal standards
organization that drives language-based standards for systems, semiconductor,
and design tools companies; the interoperability committee of the EDA
Consortium, which helps promote interoperability among EDA products from
different vendors; and the Virtual Socket Interface Alliance (VSIA), an industry
group formed to promote standards that facilitate the integration and reuse of
functional blocks of intellectual property.
Synopsys' TAP-in program provides interface standards to all companies
through an open source licensing model. Interface formats and reference
implementations, such as parsers and screeners, are available to everyone at no
cost through the Internet. Synopsys manages changes and enhancements that come
from the community of licensees. The open source standards and reference
implementations are used by Synopsys, other EDA companies and EDA customers to
interface tools with each other to produce flexible design flows. The standards
provided by Synopsys as open sources include Liberty for library modeling, SDC
for design constraints, and OpenVera for hardware verification.
Synopsys is a member of the Board of Directors of the Open SystemC
Initiative (OSCI), a not-for-profit organization that manages SystemC, a
language developed by Synopsys and donated to OSCI. OSCI includes representation
from the systems, semiconductor, IP, embedded software and EDA industries. The
OSCI Board of Directors is composed of representatives from ARM Ltd., Cadence
Design Systems, CoWare, Fujitsu Microelectronics, Mentor Graphics, Motorola,
NEC, and Synopsys.
Synopsys' products are written mainly in the C and C++ languages and utilize
industry standards for graphical user interfaces. Synopsys' software runs under
UNIX operating systems, such as Solaris and HP-UX, and most products also run on
the open source Linux operating system. Synopsys' products are offered on the
most widely used hardware platforms, including those from Sun Microsystems,
Hewlett-Packard, IBM, and Intel microprocessor-based PCs.
SALES, DISTRIBUTION AND BACKLOG
Synopsys markets its products and services primarily through its direct
sales and application service forces in the United States and principal foreign
markets. Synopsys employs highly skilled engineers and technically proficient
sales persons in order to understand our customer's needs and to explain and
demonstrate the value of Synopsys' products.
9
For fiscal 2002, 2001 and 2000, foreign sales represented 35%, 37% and 42%,
respectively, of Synopsys' total revenue. Additional information relating to
domestic and foreign operations is contained in Note 8 of Notes to Synopsys'
Consolidated Financial Statements.
The Company has sales/support centers throughout the United States, in
addition to its Mountain View, California headquarters. Outside the United
States, the Company has sales/support offices in Canada, Denmark, Finland,
France, Germany, Hong Kong, India, Israel, Italy, Japan, Korea, the People's
Republic of China, Singapore, Sweden, Taiwan and the United Kingdom, including
foreign headquarters offices in Ireland. The Company's offices are further
described under "Item 2 - Properties."
The Company utilizes a distributor for sales of certain products in Korea.
See Part III, "Item 13 Certain Relationships and Related Transactions" below.
Synopsys' backlog on December 1, 2002 was approximately $1.3 billion,
compared to approximately $802.7 million on December 1, 2001.
This backlog consists of orders for system and software products sold under
perpetual licenses and TSLs with customer requested ship dates within three
months which have not been shipped, orders for customer training and consulting
services which are expected to be completed within one year, and subscription
services, maintenance and support with contract periods extending up to fifteen
months. In the case of a TSL, backlog includes the full amount of the committed
non-cancelable order, less any amount of revenue that has been recognized on
such TSL.
The Company has not historically experienced significant cancellations of
orders. Customers frequently reschedule or revise the requested service
performance dates for service orders, however, which can have the effect of
deferring recognition of service revenue for these orders beyond the expected
time period.
RESEARCH AND DEVELOPMENT
The Company's future performance depends in large part on its ability to
maintain and enhance its current product lines, develop new products, maintain
technological competitiveness and meet an expanding range of customer
requirements. In addition to research and development conducted within each
business unit, the Company maintains an advanced research group that is
responsible for exploring new directions and applications of its core
technologies, migrating new technologies into the existing product lines and
maintaining strong research relationships outside the Company within both
industry and academia.
During fiscal 2002, 2001 and 2000, research and development expenses, net of
capitalized software development costs, were $225.5 million, $189.8 million and
$189.3 million, respectively. Synopsys capitalized software development costs of
approximately $1.6 million, $1.0 million and $1.0 million in fiscal 2002, 2001
and 2000, respectively. The Company anticipates that it will continue to commit
substantial resources to research and development in the future.
MANUFACTURING
Synopsys' manufacturing operations consist of assembling, testing, packaging
and shipping its system and software products and documentation needed to
fulfill each order. Manufacturing is currently coordinated through contract
vendors located near Synopsys' Mountain View, California and Dublin, Ireland
facilities. The contract vendors provide the majority of CD-ROM replication and
on-demand printing and distribution of product media and documentation. Synopsys
delivers an increasing proportion of its software products by electronic means
rather than by shipping disks. When specified by the customer or required by
law, Synopsys delivers disks to the customer's site. Synopsys typically delivers
its software products within 10 days of acceptance of customer purchase orders
and execution of software license agreements unless the customer has requested
otherwise.
10
COMPETITION
The EDA industry is highly competitive. We compete against other EDA
vendors, and with customers' internally developed design tools and internal
design capabilities for a share of the overall EDA budgets of our potential
customers. 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. In the current economic environment, price and payment
terms have increased in importance as a basis for competition. During fiscal
2002, we have increasingly agreed to extended payment terms on our TSLs, which
has had a negative effect on cash flow from operations. In addition, in certain
situations our competitors are offering aggressive discounts on their products.
As a result, average prices may fall.
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. The
need to offer an integrated design flow will become increasingly important as
ICs grow more complex. After the acquisition of Avant!, we offer all of the
point tools required to design an IC, some of which integrate logic and physical
design capabilities. Our products compete principally with design flow products
from Cadence and Magma Design Automation, which in some respects may be more
integrated than our products. Our future success depends on our ability to
integrate Synopsys' logic design and physical synthesis products with the
physical design products acquired from Avant!, which will require significant
engineering and development work. Success in this project is especially
important as the Company believes that its orders and revenue from Design
Compiler, which has accounted for 29% and 18% of Synopsys orders in 2001 and
2002, respectively peaked in fiscal year 2001, as predicted, and are likely to
continue to decline over time. There can be no guarantee that we will be able to
offer a competitive complete design flow to customers. If we are unsuccessful in
developing integrated design flow products on a timely basis or if we are
unsuccessful in developing or convincing customers to adopt such products, our
competitive position could be significantly weakened.
In order to sustain revenue growth over the long term, we will have to
enhance our existing products, introduce new products that are accepted by a
broad range of customers and to generate growth in our consulting services
business. In addition to the development of integrated logic and physical design
products, Synopsys is attempting to integrate its verification products into a
comprehensive functional verification platform, and is expanding its offerings
of intellectual property design components. Product success is difficult to
predict. The introduction of new products and growth of a market for such
products cannot be assured. In the past we, like all companies, have introduced
new products that have failed to meet our revenue expectations. There can be no
assurance that we will be successful in expanding revenue from existing or new
products at the desired rate, and the failure to do so would have a material
adverse effect on our business, financial condition and results of operations.
PRODUCT SALES AND LICENSING AGREEMENTS
Synopsys typically licenses its software to customers under non-exclusive
license agreements that transfer title to the media only and that restrict use
of the software to specified purposes within specified geographical areas. The
Company currently licenses the majority of its software as a network license
that allows a number of individual users to access the software on a defined
network. License fees are dependent on the type of license, product mix and
number of copies of each product licensed.
Synopsys currently offers its software products under either a perpetual
license or a TSL. Under a perpetual license a customer pays a one-time license
fee for the right to use the software. The vast majority of customers buying
perpetual licenses also purchase annual software support services, under which
they receive minor enhancements to the products developed during the year, bug
fixes and technical assistance. During the past two years a number of customers
have discontinued software support on perpetual licenses. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Results of Operations -- Revenue". A TSL operates like a rental of software and
includes software support services for the TSL term. A customer pays a fee for
license and support over a fixed period of time, and at the end of the time
period the license expires unless the customer pays for a renewal. TSLs are
offered with a range of terms; the average length of TSLs sold during fiscal
2002 was approximately 3.3 years. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations --
Revenue".
During fiscal 2002, orders for TSLs accounted for 73% of total product
orders, compared to 80% in fiscal 2001.
11
During fiscal 2003, Synopsys has established a target for ratable license
orders as a proportion of total license orders of between 73% and 78%, and for
perpetual license orders as a proportion of total product orders of between 22%
to 27%. This range may be subject to change in market conditions during the
year.
Synopsys offers its hardware modeler products for sale or lease.
PROPRIETARY RIGHTS
The Company primarily relies upon a combination of copyright, patent,
trademark and trade secret laws and license and nondisclosure agreements to
establish and protect proprietary rights in its products. The source code for
Synopsys' products is protected both as a trade secret and as an unpublished
copyrighted work. However, it may be possible for third parties to develop
similar technology independently. In addition, effective copyright and trade
secret protection may be unavailable or limited in certain foreign countries.
The Company currently holds U.S. and foreign patents on some of the technologies
included in its products and will continue to pursue additional patents in the
future.
Although the Company believes that its products, trademarks and other
proprietary rights do not infringe on the proprietary rights of third parties,
there can be no assurance that infringement claims will not be asserted against
the Company in the future or that any such claims will not require the Company
to enter into royalty arrangements or result in costly and time-consuming
litigation.
EMPLOYEES
As of November 2, 2002, Synopsys had a total of 4,254 employees, of whom
2,849 were based in North America and 1,405 were based outside of North America.
Synopsys' future financial results depend, in part, upon the continued service
of its key technical and senior management personnel and its continuing ability
to attract and retain highly qualified technical and managerial personnel.
Competition for such personnel is intense. Our success is dependent on technical
and other contributions of key employees. We participate in a dynamic industry,
with significant start-up activity, and our headquarters is in Silicon Valley,
where skilled technical, sales and management employees are in high demand.
There are a limited number of qualified EDA and IC design engineers, and the
competition for such individuals is intense. Experience at Synopsys is highly
valued in the EDA industry and the general electronics industry, and our
employees are recruited aggressively by our competitors and by start-up
companies in many industries. In the past, we have experienced, and may continue
to experience, significant employee turnover. There can be no assurance that
Synopsys can retain its key managerial and technical employees or that it can
attract, assimilate or retain other highly qualified technical and managerial
personnel in the future. None of Synopsys' employees is represented by a labor
union. Synopsys has not experienced any work stoppages and considers its
relations with its employees to be good.
ITEM 2. PROPERTIES
Synopsys' principal offices are located in four adjacent buildings in
Mountain View, California, which together provide approximately 400,000 square
feet of available space. This space is leased through February 2015. Within one
half mile of these buildings, in Sunnyvale, California, Synopsys occupies
approximately 200,000 square feet of space in two adjacent buildings, which are
under lease through 2007, and approximately 85,000 square feet of space in a
third building, which is under lease until April 2007. In addition, Synopsys
leases 16,000 square feet of space in Pleasanton and Fremont, California as
telecommute centers.
The Company owns two buildings with approximately 236,000 square feet in
Hillsborough, Oregon, which are used for administrative, marketing, research and
development and support activities. In addition, the Company leases
approximately 82,000 square feet of space in Marlboro, Massachusetts for sales
and support, research and development and customer education activities. This
facility is leased through March 2009.
Synopsys owns a fourth building in Sunnyvale, with approximately 120,000
square feet, which is leased to a third party through June 2003. Synopsys also
owns thirty-four acres of undeveloped land held for sale in San Jose, California
and 13 acres of undeveloped land in Marlboro, Massachusetts
12
The Company currently leases 27 other offices throughout the United States
primarily for sales and support.
The Company leases approximately 45,000 square feet in Dublin, Ireland for
its foreign headquarters and for research and development purposes. This space
is leased through April 2025. In addition, Synopsys leases 32 foreign sales and
service offices in Canada, Denmark, Finland, France, Germany, Hong Kong, India,
Israel, Italy, Japan, Korea, the People's Republic of China, Singapore, Sweden,
Switzerland, Taiwan and the United Kingdom. The Company also leases research and
development facilities in France, Germany, India and the People's Republic of
China.
ITEM 3. LEGAL PROCEEDINGS
AVANT! LITIGATION
Avant!, which upon completion of the Synopsys-Avant! merger became a
wholly-owned subsidiary of Synopsys, is or was a party to a number of material
civil litigation matters.
On November 13, 2002, Synopsys entered into a settlement agreement by and
among Synopsys, Cadence Design Systems, Inc., Avant! Corporation LLC and the
individuals named in the litigation entitled Cadence Design Systems, Inc. et al.
v. Avant! Corporation et al. pursuant to which Cadence, Avant! and such
individuals agreed to dismiss all pending claims and counterclaims in such
litigation and to release all claims they made or could have made in the
litigation. Under the agreement, Cadence has been paid $265 million and the
litigation has been dismissed by all parties. In addition, under the settlement
agreement, Cadence, Avant! and Synopsys, as the acquirer of Avant!, have granted
each other reciprocal licenses covering the intellectual property that was at
issue in the litigation.
The payment was made by Illinois National Insurance Company, a subsidiary
of the American International Group (AIG), insurer for Synopsys, under an
insurance policy purchased by Synopsys upon the completion of its acquisition of
Avant!
As a result of the payment, Synopsys recorded expense in the fourth quarter
of its fiscal year 2002 of approximately $240.8 million, which is equal to the
contingently refundable portion of the insurance premium recorded as a long-term
restricted asset on the Company's balance sheet plus interest earned on the
restricted asset. The expense and the reversal of the restricted asset are
reflected in the financial statements included in this Annual Report on Form
10-K. See Note 3 of Notes to Synopsys' Consolidated Financial Statements.
Prior to the merger, Avant! leased five buildings in Fremont, California
for its headquarters. After the merger, the functions performed in the buildings
were consolidated into Synopsys' Mountain View and Sunnyvale facilities, the
Fremont buildings were closed, and Avant! stopped paying rent on the underlying
leases. In November 2002, Synopsys settled all claims of the landlord of two of
the buildings. The other three buildings, located at 46859, 46871 and 46897
Bayside Parkway and owned by Renco Investment Company, are the subject of
litigation. As of October 31, 2002, Synopsys maintained an accrual of $54.2
million with respect to closure of these three buildings. Synopsys believes that
the amount accrued will be sufficient to satisfy any current or future claims
relating to former Avant! facilities, but cannot assure stockholders that this
will be the case.
On February 7, 2002 Renco filed suit in Alameda County Superior Court
claiming damages against Avant! on account of rejection of the lease on the
premises at 46897 Bayside Parkway by Comdisco, Inc. Comdisco occupied the
premises pursuant to an assignment dated September 14, 2000 between Avant! and
Comdisco. Comdisco filed Chapter 11 bankruptcy in July 2001 and rejected the
lease in the bankruptcy proceeding in September 2001. Renco is alleging that
under the assignment, Avant! remained obligated to pay rent and common area
maintenance charges on its underlying lease with Renco; Renco is arguing that
the assignment documentation obligated Avant! to guarantee Renco's portion of
the additional rent to be owed by Comdisco. Accordingly, Renco's complaint asks
for rent damages in the sum of approximately $37.2 million and approximately
$5.9 million in build out damages. Avant! is vigorously defending these claims,
though no assurances can be given regarding the outcome of the litigation or the
amount that Avant! may ultimately be required to pay to Renco. The court in the
Comdisco bankruptcy proceeding has reserved $6.2 million in aggregate for rent
payable to Renco or Avant!. There is no assurance that Avant! and Renco will
ultimately be able to collect such amount in such proceeding, but the reserve
acts as a cap on their collective recovery from Comdisco.
13
Renco has declared a default on the Avant! leases on 46859 and 46871
Bayside Parkway based on the cross-default provisions in those leases and in
November 2002, Renco filed suit to recover unpaid rent on those buildings.
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 purports to state 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 alleges that Avant!'s use of Cadence trade secrets damaged SVR by allowing
Avant! to develop and market products more quickly and cheaply than it could
have otherwise. The complaint seeks an accounting, the imposition of a
constructive trust, and actual and exemplary damages. In September 2002, the
court granted motions to dismiss filed by Avant! and co-defendant Stephen Wuu
and in October 2002, SVR filed an amended complaint substantially repeating its
prior claims. Avant! has moved to dismiss the complaint and each of the claims
and each of the co-defendants has joined that motion. The motion to dismiss is
currently scheduled to be heard in February 2003.
Avant! believes it has defenses to SVR's claims and intends to defend
itself vigorously. These defenses include, but are not limited to, defenses
based on the authority granted to Avant! by the written release agreement signed
between Cadence and Avant! in 1994 and the Settlement Agreement signed in
November 2002, Avant!'s denial of any post-release misappropriation of Cadence
trade secrets, Avant!'s belief that any use by Avant! of Cadence trade secrets
did not confer any competitive advantage on Avant! over SVR, and Avant!'s belief
that SVR's loss of market share resulted from factors other than any use by
Avant! of Cadence trade secrets. Should SVR's claims succeed, however, Avant!
could be required to pay monetary damages to SVR. Accordingly, an adverse
judgment could seriously harm Avant!'s business, financial position and results
of operations.
Between July and October 2001, three derivative actions were filed against
Avant! and certain of its officers and directors: Scott v. Muraki, et al., No.
01-017548 (Cal. Superior Ct.); Louisiana School Employees' Retirement System v.
Muraki, et al., C.A. No. 19091 (Del. Chancery Ct.); and Peterson v. Hsu, et al.,
C.A. No. 19178 (Del. Chancery Ct.). The actions allege, in substance, that
certain present and former Avant! officers and directors caused damage to Avant!
by misappropriating trade secrets from competitors, making false representations
to investors and the public, and causing Avant! to award lucrative employment
contracts, bonuses, stock option grants, and valuable consulting contracts and
ownership interests in companies affiliated with Avant!. The Louisiana School
Employees' Retirement System case was dismissed in August 2002. Also in August
2002, the plaintiffs in the remaining actions have agreed to a settlement
involving payment of attorneys fees only for the plaintiffs.
OTHER LITIGATION
In July 2001, Synopsys entered into an agreement to acquire IKOS Systems,
Inc. In December 2001, Mentor Graphics, Inc. (Mentor) submitted an unsolicited
offer to acquire IKOS and, in connection therewith, filed a lawsuit in the Court
of Chancery of the State of Delaware (C.A. No. 19299) against IKOS, the members
of IKOS' board of directors, Synopsys and Synopsys' subsidiary Oak Merger
Corporation ("Oak"). The lawsuit claimed that certain provisions of the Synopsys
- IKOS Merger Agreement ("Merger Agreement"), were entered into in breach of the
IKOS directors' fiduciary duties, and that Synopsys and Oak aided and abetted
those breaches. A second lawsuit was filed by an alleged shareholder of IKOS on
essentially the same grounds. In March 2002, Synopsys and IKOS entered into a
termination agreement by which they mutually agreed to terminate the Merger
Agreement. Subsequently, Mentor acquired IKOS. As a result, the Company believes
this suit to be moot and expects it to be dismissed during the first half of
2003. A third lawsuit relating to this matter, filed in California Superior
Court in Santa Clara County, California, was dismissed with prejudice in August
2002.
There are no other material legal proceedings pending against the Company
or Avant!.
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company and their ages, as of January 1, 2003,
are as follows:
NAME AGE POSITION
---- --- --------
Aart J. de Geus.....48....Chief Executive Officer and Chairman of the Board
of Directors
Chi-Foon Chan.......52....President, Chief Operating Officer
Vicki L. Andrews....47....Senior Vice President, Worldwide Sales
Steven K. Shevick...46....Senior Vice President, Finance and Chief Financial
Officer
DR. AART J. DE GEUS co-founded Synopsys and currently serves as Chief
Executive Officer and Chairman of the Board of Directors. Since the inception of
Synopsys in December 1986, he has held a variety of positions including Senior
Vice President of Engineering and Senior Vice President of Marketing. From 1986
to 1992, Dr. de Geus served as Chairman of the Board. He served as President
from 1992 to 1998. Dr. de Geus has served as Chief Executive Officer since
January 1994 and has held the additional title of Chairman of the Board since
February 1998. He has served as a Director since 1986. From 1982 to 1986, Dr. de
Geus was employed by General Electric Corporation, where he was the Manager of
the Advanced Computer-Aided Engineering Group. Dr. de Geus holds an M.S.E.E.
from the Swiss Federal Institute of Technology in Lausanne, Switzerland and a
Ph.D. in electrical engineering from Southern Methodist University.
DR. CHI-FOON CHAN joined Synopsys as Vice President of Application
Engineering & Services in May 1990. Since April 1997 he has served as Chief
Operating Officer and since February 1998 he has held the additional title of
President. Dr. Chan also became a Director of the Company in February 1998. From
September 1996 to February 1998 he served as Executive Vice President, Office of
the President. From February 1994 until April 1997 he served as Senior Vice
President, Design Tools Group and from October 1996 until April 1997 as Acting
Senior Vice President, Design Reuse Group. Additionally, he has held the titles
of Vice President, Engineering and General Manager, DesignWare Operations and
Senior Vice President, Worldwide Field Organization. From March 1987 to May
1990, Dr. Chan was employed by NEC Electronics, where his last position was
General Manager, Microprocessor Division. From 1977 to 1987, Dr. Chan held a
number of senior engineering positions at Intel Corporation. Dr. Chan holds an
M.S. and Ph.D. in computer engineering from Case Western Reserve University.
VICKI L. ANDREWS joined Synopsys in May 1993 and currently serves as Senior
Vice President, Worldwide Sales. Before holding that position, she served in a
number of senior sales roles at Synopsys, including Vice President, Global and
Strategic Sales, Vice President, North America Sales and Director, Western
United States Sales. She has more than 18 years of experience in the EDA
industry. Ms. Andrews holds a B.S. in biology and chemistry from the University
of Miami.
STEVEN K. SHEVICK joined Synopsys in July 1995 and currently serves as
Senior Vice President, Finance and Chief Financial Officer, and as the Company
Secretary. Mr. Shevick was appointed Senior Vice President and Chief Financial
Officer in January 2003. From October 1999 to January 2003, he was Vice
President, Investor Relations and Legal and Secretary. From March 1998 to
October 1999, he was Vice President, Legal, General Counsel and Assistant
Corporate Secretary. From July 1995 to March 1998 he served as Deputy General
Counsel and Assistant Corporate Secretary. Mr. Shevick holds an A.B. from
Harvard College and a J.D. from Georgetown University Law Center.
There are no family relationships among any executive officers of the
Company.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this item is set forth on page 84 of this
Synopsys 2002 Annual Report on Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL SUMMARY
FISCAL YEAR ENDED (2)
-------------------------------------------------------------
OCTOBER 31, SEPTEMBER 30,
------------------------------------- -----------------------
2002 2001 2000 1999 1998 (1)
------------ ------------ ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue................................... $ 906,534 $ 680,350 $ 783,778 $ 806,098 $ 717,940
(Loss) income before income taxes and
extraordinary items (3)................ (288,940) 83,533 145,938 251,411 116,861
(Benefit) provision for income taxes...... (88,947) 26,731 48,160 90,049 55,819
Extraordinary items, net of income tax
expense (4)............................ -- -- -- -- 28,404
Net (loss) income......................... (199,993) 56,802 97,778 161,362 89,446
(Loss) earnings per share:
Basic.................................. (2.99) 0.94 1.43 2.30 1.34
Diluted................................ (2.99) 0.88 1.38 2.20 1.29
Working capital........................... 151,946 254,962 331,857 627,207 504,759
Total assets.............................. 1,978,714 1,128,907 1,050,993 1,173,918 951,633
Long-term debt............................ 6,547 73 564 11,642 13,138
Stockholders' equity...................... 1,113,481 485,656 682,829 865,596 664,941
----------
(1) Amounts and per share data for periods presented have been retroactively
restated to reflect the mergers accounted for under the pooling-of interests
method with Viewlogic Systems, Inc, effective December 4, 1997, and Everest
Automation, Inc., effective November 21, 1998.
(2) Synopsys has a fiscal year that ends on the Saturday nearest October 31.
Fiscal years 2002, 2000, and 1999 were 52-week years while fiscal years 2001
and 1998 were 53-week years. For presentation purposes, the consolidated
financial statements refer to the calendar month end. Prior to fiscal year
2000, Synopsys' fiscal year ended on the Saturday nearest to September 30.
The period from October 1, 1999 through October 31, 1999 was a transition
period. During the transition period, revenue, loss before income taxes,
benefit for income taxes and net loss were $23.2 million, $25.5 million,
$9.9 million, and $15.5 million, respectively, and basic and diluted loss
per share was $0.22. The net loss during the transition period is due to the
fact that sales in the first month following a quarter end are historically
weak. As of October 31, 1999, working capital, total assets, long-term debt,
and stockholders' equity were $621.9 million, $1.2 billion, $11.3 million
and $872.6 million, respectively.
(3) Includes charges of $87.7 million, $1.7 million, $21.2 million and $33.1
million for the fiscal years ended October 31, 2002 and 2000 and September
30, 1999 and 1998 respectively, for in-process research and development.
Includes merger-related and other costs of $128.5 million and $51.0 million
for the years ended October 31, 2002 and September 30, 1998, respectively.
Includes insurance premium costs of $335.8 million for the fiscal year
ended October 31, 2002 related to the Avant! merger.
(4) On October 2, 1998, Synopsys sold a segment of the Viewlogic business for
$51.9 million in cash. As a result of the transaction, Synopsys recorded an
extraordinary gain of $26.5 million, net of income tax expense, in the
fourth quarter of fiscal 1998.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934. For example,
statements including terms such as "projects," "expects," "believes,"
"anticipates" or "targets" 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."
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to 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, bad debts, investments, intangible assets
and income taxes. Our estimates are based on historical experience and on
various other assumptions we believe are reasonable under the circumstances.
Actual results may differ from these estimates.
The accounting policies described below are those that most frequently
require us to make estimates and judgments, and are therefore critical to
understanding our results of operations.
REVENUE RECOGNITION. Our revenue recognition policy is detailed in Note 2 of
the Notes to Consolidated Financial Statements. Management has made 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 our fee is "fixed or
determinable" and we must assess whether "collectibility is probable". These
judgments are discussed below.
THE FEE IS FIXED OR DETERMINABLE. With respect to each arrangement, we must
make a judgment as to whether the arrangement fee is fixed or determinable. If
the fee is fixed or determinable, then revenue is recognized upon delivery of
software (assuming other revenue recognition criteria are met). If the fee is
not fixed or determinable, then the revenue recognized in each quarter (subject
to application of other revenue recognition criteria) will be 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.
Except in cases where we grant extended payment terms to a specific
customer, we have determined that our fees are fixed or determinable at the
inception of our arrangements based on the following:
o The fee our customers pay for our products is negotiated at the outset
of an arrangement and is generally based on the specific volume of
products to be delivered.
o Our license fees are not a function of variable-pricing mechanisms such
as the number of units distributed or copied by the customer or the
expected number of users of the product delivered.
A determination that an arrangement fee is fixed or determinable also
depends upon the payment terms relating to such an arrangement. Our customary
payment terms - supported by historical practice - require that a minimum of 75%
of the arrangement fee is due within one year or less. Arrangements with payment
terms extending beyond the customary payment terms are considered not to be
fixed or determinable. A determination of whether the arrangement fee is fixed
or determinable is particularly relevant to revenue recognition on perpetual
licenses.
COLLECTIBILITY IS PROBABLE. In order to recognize revenue, we must make a
judgment of the collectibility of the arrangement fee. Our judgment of the
collectibility is applied on a customer-by-customer basis pursuant to our credit
review policy. We typically sell to customers for which there is a history of
successful collection. New customers are subjected to a credit review process,
which evaluates the customers' financial positions and ability to pay. New
customers are typically assigned a credit limit based on a formulated review of
their financial position. Such credit limits are only increased after a
successful collection history with the customer has been established. If it is
determined from the outset of an arrangement that collectibility is not probable
based upon our credit review process, revenue is recognized on a cash-collected
basis.
17
VALUATION OF STRATEGIC INVESTMENTS. As of October 31, 2002, the adjusted
cost of our strategic investments totaled $25.1 million, excluding unrealized
gains and losses. 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 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 there is not a market in which their value is 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 this quarterly 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 overall progress on the portfolio company's business plan. If it
is determined that an impairment has occurred with respect to an investment in a
portfolio company, in the absence of quantitative valuation metrics, management
estimates the impairment and/or the net realizable value of the portfolio
investment based on public- and private-company market comparable information
and valuations completed for companies similar to our portfolio companies. Based
on these measurements, impairment losses aggregating $11.3 million were recorded
during fiscal 2002. 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.
VALUATION OF INTANGIBLE ASSETS. Intangible assets, net of accumulated
amortization, totaled $355.3 million as of October 31, 2002. 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 goodwill, purchased technology,
contract rights intangibles (as defined under "Results of Operations -
Acquisition of Avant! Corporation - Contract Rights Intangible"), customer
installed base/relationship, 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, an assessment of the recoverability of the net carrying
value of the asset over its remaining useful life is made. If this assessment
indicates that the intangible asset is not recoverable, based on the estimated
undiscounted future cash flows of the entity or technology acquired over the
remaining amortization period, the net carrying value of the related intangible
asset will be reduced to fair value and the remaining amortization period may be
adjusted. Any such impairment charge could be significant and could have a
material adverse effect on our reported financial statements. Based on these
measurements, we recorded an impairment charge of approximately $0.1 million
during fiscal 2002 and an impairment charge of $3.7 million related to the
Avant! merger as described under "Integration Costs" below.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. As of October 31, 2002, our allowance for
doubtful accounts totaled $11.6 million. Management estimates the collectibility
of our accounts receivable on an account-by-account basis. In addition, we
provide for a general reserve on all accounts receivable, using a specified
percentage of the outstanding balance in each aged group. Management
specifically analyzes 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 when
evaluating the adequacy of the allowance for doubtful accounts. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required. During
the current year, write-offs (net of recoveries) and additional allowances
totaled $6.5 million and $7.0 million, respectively.
INCOME TAXES. Our effective tax rate is directly affected by the relative
proportions of our domestic and foreign revenue and income. We are also subject
to changing tax laws in the multiple jurisdictions in which we operate. As of
October 31, 2002, deferred tax assets and liabilities totaled $382.2 million and
$105.9 million, respectively. We believe that it is more likely than not that
the results of future operations will generate sufficient taxable income to
utilize these 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, should we determine that we would not be able
to realize all or part of our net deferred tax assets in the future, an
adjustment to the deferred tax assets would be charged to income in the period
such determination was made.
18
RESULTS OF OPERATIONS
MERGERS AND ACQUISITIONS. On June 6, 2002, we completed our merger with
Avant!. Avant! was a leader in the development of software used in the physical
design and physical verification phases of chip design. As a result of the
merger, we are now able to offer a comprehensive array of products for the
design and verification of chips. Products obtained in the merger are key
components of the implementation and verification platforms discussed above.
Under the terms of the merger agreement between Synopsys and Avant!, Avant!
merged with and into a wholly-owned subsidiary of Synopsys. The aggregate merger
consideration, including the fair value of stock issued, was approximately $1.0
billion, and was determined primarily as a result of competitive bidding with
other potential acquirors. As a result of the merger, we recorded goodwill of
$369.5 million, which is reflected on the consolidated balance sheet as of
October 31, 2002. We believe that the value of the products acquired from
Avant!, when combined with the pre-merger Synopsys products, justifies the price
paid. The results of operations of Avant! are included in the accompanying
consolidated financial statements for the period from June 6, 2002 through
October 31, 2002.
On September 6, 2002, we completed our acquisition of Co-Design, a private
company which was developing 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 aggregate purchase price for Co-Design was $32.3
million, which was determined principally by competitive bidding with another
potential acquiror. As a result of the merger we recorded goodwill of $27.7
million, which is reflected on the consolidated balance sheet as of October 31,
2002. We believe that we will derive a competitive advantage through the use of
Co-Design's new design language in our design and verification products and the
expertise of its employees, and therefore the price is justified. The results of
operations of Co-Design are included in the accompanying consolidated financial
statements for the period from September 6, 2002 through October 31, 2002.
On September 20, 2002, we completed our acquisition of inSilicon, a company
that developed, marketed and licensed an extensive portfolio of complex
"intellectual property blocks", or pre-designed, pre-verified subportions of a
chip that can be used as building blocks for complex systems-on-a-chip, and
therefore accelerate the development of such chips. The aggregate purchase price
for inSilicon was $74.6 million. As a result of the merger, we recorded goodwill
of $22.2 million which is reflected on the consolidated balance sheet as of
October 31, 2002. We believe that the combination of inSilicon's portfolio of
intellectual property with our own portfolio will provide us with a competitive
advantage over other providers of intellectual property blocks, and therefore
justifies the price. The results of operations of inSilicon are included in the
accompanying consolidated financial statements for the period from the September
20, 2002 through October 31, 2002.
REVENUE. Revenue consists of fees for perpetual and ratable licenses of our
software products, post-contract customer support (PCS), customer training and
consulting. We classify revenues as product, service or ratable license. Product
revenue consists primarily of perpetual software licenses. Service revenue
consists of PCS under perpetual licenses and fees for consulting services and
training. Ratable license revenue consists of all revenue from our TSLs and from
time-based licenses sold prior to the adoption of TSLs in August 2000 that
include extended payment terms or unspecified additional products.
ADOPTION OF SUBSCRIPTION LICENSES; IMPACT ON REVENUE. In the fourth quarter
of fiscal 2000 we introduced a new type of license called a technology
subscription license. A TSL is a license to use one or more of our software
products, and to receive support services (such as hotline support and updates)
for a limited period of time, usually one to three years. Since TSLs include
bundled products and services, both product and service revenue is generally
recognized ratably over the term of the license, or, if later, as payments
become due. The terms of TSLs, and the payments due thereon, may be structured
flexibly to meet the needs of the customer. In certain situations, customers
have limited rights to new technology through reconfiguration clauses under
their agreements.
Prior to the adoption of TSLs, we sold perpetual licenses and "term"
licenses (a type of time-based license). Under these types of licenses, software
support is purchased separately. Revenue from the license sale is generally
recognized in the quarter that the product is shipped (or "upfront") and revenue
from software support is recognized ratably over the support period. Term
licenses were discontinued when TSLs were introduced.
Due to the different treatment of TSLs and perpetual/term licenses under
applicable accounting rules, each type of license has a different impact on our
financial statements. When a customer buys a TSL, relatively little revenue is
recognized during the quarter the product is initially delivered. The remaining
amount not recognized will either be recorded as deferred revenue on our balance
sheet or considered backlog by us and not recorded on the balance sheet. The
amount recorded as deferred revenue is equal to the portion of the license fee
that has been invoiced or paid but not recognized. The amount considered backlog
moves out of backlog and is recorded as deferred revenue as invoiced or as
19
additional payments are made. Deferred revenue is reduced as revenue is
recognized. Under perpetual licenses (and term licenses), a high proportion of
all license revenue is recognized in the quarter that the product is delivered,
with relatively little recorded as deferred revenue or as backlog. Therefore, an
order for a TSL will result in significantly lower current-period revenue than
an equal-sized order under the prior form of time-based licenses. 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, the introduction of TSLs has had, and will continue
to have, a significant impact on our reported revenue and on our balance sheet.
In the quarter immediately following the adoption of TSLs, reported revenue
dropped significantly. In each quarter since adoption, ratable revenue has
grown, as TSL orders received in 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. Absent any acquisitions, the model
would be substantially phased in approximately 3.25 years following the adoption
of the model. The phase in period has been extended by the acquisition of
Avant!, and will be extended to some extent by any future acquisitions we make.
Over the long term, as the TSL model becomes more fully phased in, average
revenue growth will closely track average orders growth.
Synopsys' license revenue in any given quarter is dependent upon the volume
of perpetual orders shipped during the quarter and the amount of TSL revenue
amortized from deferred revenue, recognized out of backlog and, to a small
degree, 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 precise mix of orders is subject to substantial
fluctuation in any given quarter or multiple quarter periods, and the actual mix
of licenses sold 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 not meet our revenue targets (if we deliver more-than-expected TSLs)
or may exceed them (if we deliver more-than-expected perpetuals). 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.
Since our introduction of TSLs, the average TSL duration has been
approximately 13 quarters. Our historical license order mix from August 2000 to
the present (i.e., since our adoption of TSLs), has been 24% perpetual licenses
and 76% ratable licenses. Our target license mix for total new software license
orders for the first quarter of fiscal year 2003 is 18% to 23% perpetual
licenses and 77% to 82% ratable licenses. The precise mix of orders is subject
to substantial fluctuation in any given quarter or multiple quarter periods. In
the fourth quarter of fiscal 2002, the license mix was approximately 27%
perpetual licenses and 73% TSLs, in comparison to 14% perpetual licenses and 86%
TSLs in the fourth quarter of fiscal 2001. The license mix for full fiscal 2002
year was approximately 27% perpetual licenses and 73% TSLs, in comparison to 20%
perpetual licenses and 80% TSLs for fiscal 2001. Our target license mix for new
software license orders for fiscal 2003 is 22% to 27% perpetual licenses and 73%
to 78% ratable licenses. This range may be subject to change based on market
conditions during the year.
REVENUE. Total revenue for fiscal 2002 increased 33% to $906.5 million as
compared to $680.4 million for fiscal 2001. The increase in total revenue for
fiscal 2002 as compared to fiscal 2001 is due primarily to the Avant!
acquisition, and to the additional quarters that the TSL license model has been
used.
Total revenue for fiscal 2001 decreased 13% to $680.4 million as compared to
$783.8 million for fiscal 2000. The decrease in total revenue for fiscal 2001 as
compared to fiscal 2000 is due to the utilization for the full 2001 fiscal year
of the TSL license model and the related inherent decrease in current period
revenue due to the timing of revenue recognition under this license model.
Product revenue for fiscal 2002 increased 50% to $245.2 million as compared
to $163.9 million for fiscal 2001. The increase in product revenue for fiscal
2002 as compared to fiscal 2001 is due to an increase in perpetual licenses
delivered during the period, which resulted in large part from the increased
volume of perpetual licenses after the Avant! merger. During the second quarter
of 2002, we began offering variable maintenance arrangements (VMP) to certain
customers that entered into perpetual license technology arrangements in excess
of $2.0 million. Under these arrangements, the annual fee for PCS is calculated
as a percentage of the net license fee rather than a fixed percentage of the
list price.
20
Product revenue for fiscal 2001 decreased 62% to $163.9 million as compared
to $434.1 million for fiscal 2000. The decrease in product revenue for fiscal
2001 as compared to fiscal 2000 was due to the adoption of the TSL model (under
which, as explained above, revenue is recognized ratably) from a license model
under which virtually all license revenue was recognized in the quarter shipped.
Service revenue for fiscal 2002 decreased 16% to $287.7 million as compared
to $341.8 million for fiscal 2001. The decrease in service revenue for fiscal
2002 as compared to fiscal 2001 is due to economic factors and the impact of our
adoption of TSLs. Economic conditions have led our customers to reduce their
costs by curtailing their use of outside consultants and, in some cases,
discontinuing maintenance on their perpetual licenses. As a result, we received
a lower volume of new consulting orders and maintenance renewal orders than
expected. In addition, certain projects in our consulting backlog were deferred
or cancelled. Customer expenditures on training have also been reduced, which
has accordingly reduced revenue from training. These conditions are expected to
continue at least until research and development spending by the semiconductor
industry returns to historic levels of growth. The shift to TSLs has impacted
service revenue in two ways. First, new licenses structured as TSLs include
bundled PCS, which means that revenue attributable to PCS is recognized as
ratable license revenue. If such licenses were perpetual licenses or time-based
licenses similar to the type formerly offered, the PCS revenue relating to such
licenses would be recognized as service revenue. Second, customers with existing
perpetual licenses are entering into new TSLs rather than renewing the PCS on
the existing perpetual licenses. In each case, revenue attributable to PCS that
otherwise would have been reflected in service revenue is now reflected in
ratable license revenue.
The decline in service revenue was partly offset by revenue recognized from
services contracts acquired in the Avant! merger. Synopsys recognized less
revenue on these contracts than Avant! would have recognized due to the fact
that under purchase accounting rules the deferred revenue balance of these
contracts was significantly reduced upon acquisition.
Service revenue for fiscal 2001 remained relatively flat at $341.8 million
as compared to $340.8 million in fiscal 2000, as growth in consulting services
business in the first half of the year was offset by reduction in business
attributable to cost-cutting efforts by customers.
Ratable license revenue for fiscal 2002 increased 114% to $373.6 million as
compared to $174.6 million in fiscal 2001. The increase in ratable license
revenue for fiscal 2002 compared to fiscal 2001 is due to the additional
quarters that the TSL license model has been used.
Ratable license revenue for fiscal 2001 increased to $174.6 million as
compared to $8.9 million in fiscal 2000. The increase in ratable license revenue
for fiscal 2001 compared to fiscal 2002 is due to the fact that we introduced
TSLs in the fourth quarter of fiscal 2000 (August 2000) and therefore,
relatively little TSL revenue was recognized in fiscal 2000 because under the
TSL model relatively little revenue is recognized in the quarter the product is
initially delivered.
RELATED PARTY TRANSACTION. Approximately 8% of fiscal 2002 revenues were
derived from a company whose Chief Financial and Enterprise Officer serves on
the Synopsys Board of Directors. Management believes the transactions between
the two parties were carried out under the Company's normal terms and
conditions.
REVENUE SEASONALITY. Our revenue is seasonal. In general, revenue in the
first quarter of our fiscal year is the lowest of any quarter, and revenue in
the fourth quarter is the largest of any quarter, with revenue in the second and
third quarters roughly in the middle of the first and fourth quarters. This
seasonal pattern may be attributed to a variety of factors, including customer
buying patterns, the timing of major contract renewals and sales compensation
incentives.
REVENUE - PRODUCT GROUPS. For management reporting purposes, our products
have been organized into four distinct product groups -- Design Implementation,
Verification and Test, Design Analysis, Intellectual Property (IP) -- and a
services group -- Professional Services. The following table summarizes the
revenue attributable to the various groups as a percentage of total Company
21
revenue for the last eight quarters. Revenue attributable to products acquired
from Avant! that was recognized by Avant! prior to June 6, 2002 is not reflected
in the following tables. Revenue attributable to such products from June 6, 2002
through October 31, 2002 is included in fiscal 2002 revenue. As a result of the
Avant! merger, we redefined our product groups, effective in the third quarter
of fiscal 2002. Prior period amounts have been reclassified to conform to the
new presentation.
Q4-2002 Q3-2002 Q2-2002 Q1-2002 Q4-2001 Q3-2001 Q2-2001 Q1-2001
---------- --------- ---------- --------- ---------- ---------- --------- ----------
Revenue
Design Implementation 46% 45% 42% 40% 42% 39% 39% 38%
Verification and Test 25 26 34 37 33 34 32 31
Design Analysis 19 17 6 6 6 6 5 7
IP 6 6 9 9 10 10 9 10
Professional Services 4 6 9 8 9 11 15 14
---------- --------- ---------- --------- ---------- ---------- --------- ----------
Total Company 100% 100% 100% 100% 100% 100% 100% 100%
========== ========= ========== ========= ========== ========== ========= ==========
DESIGN IMPLEMENTATION. Design Implementation includes products used in the
logic design and physical design phases of chip design (as described above under
Business - Products - IC Implementation products) for the design of 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. The principal products in this category as of the end
of fiscal 2002 are Design Compiler, Physical Compiler, Chip Architect, Floorplan
Compiler, Jupiter, Apollo and Astro. As a percent of revenue, Design
Implementation fluctuated between 38% and 42% in the period from the first
quarter of fiscal 2000 through the second quarter of fiscal 2002, and exhibited
a generally increasing trend from the first quarter of fiscal 2001 through the
second quarter of fiscal 2002. This trend reflects the Company's growing
portfolio of Design Implementation products during the period, most notably the
introduction of Physical Compiler. The 3% increase from the second quarter of
fiscal 2002 to the third quarter of fiscal 2002 is due principally to the
addition of Avant! products to this category, since the largest portion of
Avant!'s revenue was derived from products (including its principal place and
route products) that were added to the Design Implementation category.
VERIFICATION AND TEST. Verification and Test includes products used for
verification and analysis performed at the system level, register transfer level
(RTL) and gate level of design, including simulation, system level design and
verification, timing analysis, formal verification, test and related products.
The principal products in this category are VCS, Polaris, Vera, PathMill,
CoCentric System Studio, PrimeTime, Formality, Design Verifyer, DFT Compiler and
TetraMax, which are used in several different phases of chip design. As a
percent of revenue, revenue from this product family fluctuated between 31% and
37% in the period from the first quarter of fiscal 2001 through the second
quarter of fiscal 2002, 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
Verification and Test product group does not include many products acquired from
Avant!.
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. The principal products in this category are NanoSim,
StarSim, HSPICE, StarRC, Arcadia, TCAD, Hercules, Venus, OPC, PrimePower and
Cosmos. Revenue from this product group as a percentage of total revenues has
ranged between 5% and 7% since the introduction of TSLs as a result of the mix
of perpetual versus time-based license orders received during a particular
quarter. During the third quarter of fiscal 2002, revenue from this product
group as a percentage of total revenues increased to 17%, due primarily to the
Avant! acquisition, as the second largest portion of Avant!'s revenue was
derived from products that were added to the Design Analysis category.
22
INTELLECTUAL PROPERTY. Our IP products include the DesignWare library of
design components and verification models, and the products acquired in the
inSilicon transaction (effective in the fourth quarter of 2002). IP revenue as a
percent of total revenue was relatively stable from the fourth quarter of fiscal
2000 to the second quarter of fiscal 2002, reflecting growth consistent with the
Company average. Beginning with the third quarter of fiscal 2002, IP revenues as
a percent of total Company revenue decreased principally because the IP product
group does not include many products acquired from Avant!
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. Revenue from professional services as a percentage
of total revenues has declined from 14% in the first quarter of fiscal 2001 to
6% in the third quarter of fiscal 2002, reflecting, as described above under
"Revenue", the impact of the economic environment.
COST OF REVENUE. Cost of revenue consists of the cost of product revenue,
cost of service revenue, cost of ratable license revenue and amortization of
intangible assets and deferred stock compensation. Cost of product revenue
includes personnel and related costs, production costs, product packaging,
documentation, and amortization of capitalized software development costs and
purchased technology. The cost of internally developed capitalized software is
amortized on the straight-line method over the software's estimated economic
life of approximately two years. Cost of service revenue includes consulting
services, personnel and related costs associated with providing training and PCS
on perpetual licenses. Cost of ratable license revenue includes the costs of
product and services related to our TSLs (TSLs include bundled product and
services). Cost of product revenue, cost of service revenue and cost of ratable
license revenue during any period are heavily dependent on the mix of software
orders received during such period.
Cost of revenue amortization of intangible assets and deferred stock
compensation includes the amortization of the contract rights intangible and
customer backlog assets associated with certain executory contracts, as
discussed under "ACQUISITION OF AVANT! CORPORATION" and "ACQUISITION OF
INSILICON CORPORATION", respectively, below, and the amortization of
core/developed technology acquired in the Avant!, inSilicon and Co-Design
mergers. Total amortization of intangible assets, which commenced on the date of
the respective acquisition, included in cost of revenues for fiscal 2002 was
$33.7 million which includes $26.5 million and $7.2 million for core developed
technology and contract rights intangible, respectively. Cost of revenue
amortization also includes the amortization of deferred stock compensation as
discussed below under "AMORTIZATION OF INTANGIBLE ASSETS" totaling $0.2 million
for the year ended October 2002.
Total cost of revenue as a percentage of total revenue for fiscal 2002
remained relatively flat at 19% as compared to fiscal 2001. Cost of goods sold
(which excludes amortization of intangible assets and deferred stock
compensation) as a percentage of total revenue decreased due to the increase in
quarterly amortization of deferred revenue and backlog, which is an inherent
result of the use of the ratable license model and due to the fact that other
cost of goods sold components remained relatively flat. However, the decrease in
cost of goods sold as a percentage of total revenue in fiscal 2002 was offset by
the commencement of amortization of the contract rights intangible and
core/developed technology recorded as a result of current year acquisitions.
Total cost of revenue as a percentage of total revenue for fiscal 2001
increased to 19% as compared to 16% in fiscal 2000. This 19% increase in cost of
revenue as a percentage of total revenue for fiscal 2001 as compared to fiscal
2000 is due to the write-off of intangible assets relating to a discontinued
product totaling $1.8 million and an increase in the inventory reserve totaling
$1.3 million related to our hardware modeling product.
WORK FORCE REDUCTION. During the first quarter of fiscal 2002, as part of an
overall cost reduction program, we implemented a workforce reduction affecting
all departments, both domestic and foreign. As a result, our workforce was
reduced by approximately 175 employees and a charge of approximately $3.9
million was included in operating expenses during the second quarter of fiscal
2002. This charge consists of severance and other special termination benefits.
These costs are reflected in the statement of operations as follows:
(IN THOUSANDS)
Cost of revenue $ 678
Research and development 1,081
Sales and marketing 1,078
General and administrative 1,033
-----------
Total $ 3,870
===========
23
RESEARCH AND DEVELOPMENT. Research and development expenses for fiscal 2002
increased 19% to $225.5 million as compared to $189.8 million for fiscal 2001.
The increase in expenses is due to increases of $28.7 million in compensation
and compensation-related costs as a result of an increase in research and
development headcount due to the Avant! acquisition, $11.3 million in human
resources, technology and facilities costs as a result of increased research and
development staffing and $4.2 million in depreciation expense. These increases
were offset by decreases of $5.4 million in consulting expenses and $4.3 million
of other expenses including facilities, travel, communications, supplies and
recruiting as a result of our cost reduction programs.
Research and development expenses for fiscal 2001 remained relatively flat
at $189.8 million as compared to $189.3 million in fiscal 2000. Research and
development expenses increased in fiscal 2001 as compared to fiscal 2000 due to
increases in personnel related costs, recruiting costs and depreciation expense.
These increases were offset by a decrease in facilities expense due to the fact
that during the fourth quarter of fiscal 2000 we closed certain facilities
acquired in the Gambit acquisition and to decreases in equipment repairs,
advertising expenses and travel and entertainment costs.
SALES AND MARKETING. Sales and marketing expenses for fiscal 2002 decreased
3% to $264.8 million as compared to $274.0 million in fiscal 2001. The overall
decrease is due to decreases of $8.4 million in human resources, technology and
facilities costs as a result of a decrease in sales and marketing headcount as a
percentage of total headcount, $1.3 million in employee functions, $1.4 million
in consulting expenses and $2.8 million in other expenses including
communications and supplies, charitable contributions, professional services,
subscriptions and memberships as a result of our cost reduction efforts. These
decreases are offset by increases of $4.8 million in compensation and related
costs attributable to an increase in sales and marketing headcount resulting
from the Avant! Merger and $1.9 million in travel relating to customer visits to
discuss the potential integration of Synopsys and Avant! products.
Sales and marketing expenses for fiscal 2001 decreased 5% to $274.0 million
as compared to $288.8 million in fiscal 2000. The decrease in fiscal 2001
compared to fiscal 2000 was due to decreases in annual commissions, bonuses,
travel, consulting expenses, recruiting, advertising and depreciation expense.
These decreases were offset in part by an increase in personnel-related costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for fiscal
2002 increased 13% to $78.5 million as compared to $69.7 million in fiscal 2001.
The overall increase is due to increases of $11.1 million in facilities costs as
a result of an increased number of sites due to the Avant! merger, $7.0 million
in compensation and compensation-related costs as a result of increased
headcount due to the Avant! merger, $5.6 million in professional service fees,
$2.2 million in communications costs, $1.6 million in equipment to update
licenses for our internal enterprise application systems, $1.4 million in
depreciation and $2.9 million in other expenses including travel and property
tax assessments. These increases were offset by decreases of $20.0 million as a
result of decreased general and administrative headcount as a percentage of
total headcount and $3.9 million in consulting costs as a result of our cost
reduction efforts.
General and administrative expenses for fiscal 2001 increased 18% to $69.7
as compared to $59.2 million. The increase in fiscal 2001 as compared to fiscal
2000 was due to increases in bad debt expense, facility expenditures and
consulting services related to the upgrade of our current computer systems.
These increases are offset by a decrease in personnel costs.
INTEGRATION COSTS. Non-recurring integration costs incurred relate to merger
activities which are not included in the purchase consideration under Emerging
Issues Task Force Number 95-3 (EITF 95-3), RECOGNITION OF LIABILITIES IN
CONNECTION WITH A PURCHASE BUSINESS COMBINATION. These costs are expensed as
incurred. During fiscal 2002, integration costs totaled $128.5 million. These
costs consisted primarily of (i) $95.0 million related to the premium for the
insurance policy acquired in conjunction with the Avant! merger, (ii) $14.7
million related to write-downs of Synopsys facilities and property under the
management approved facility exit plan for the Avant! merger, (iii) $10.0
million and $0.7 million related to severance costs for Synopsys employees who
were terminated and costs associated with transition employees as a result of
the Avant! and inSilicon mergers, respectively, (iv) $1.3 million related to the
write-off of software licenses owned by Synopsys which were originally purchased
from Avant!, (v) $3.7 million goodwill impairment charge related to a prior
Synopsys acquisition as a result of the acquisition of Avant! and (vi) $1.2
million and $1.9 million of other expenses including travel and certain
professional fees for the Avant! and Co-Design mergers, respectively.
IN-PROCESS RESEARCH AND DEVELOPMENT. The following paragraphs contain
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, including statements and assumptions regarding percentage
of completion, expected product release dates, dates for which we expect to
begin generating benefits from projects, expected product capabilities and
product life cycles, costs and efforts to complete projects, growth rates,
royalty rates and projected revenue and expense information used by us to
calculate discounted cash flows and discount rates. These forward-looking
statements involve risks and uncertainties, and the cautionary statements set
forth below and in "FACTORS THAT MAY AFFECT FUTURE RESULTS" identify important
factors that could cause actual results to differ materially from those
predicted in any such forward-looking statement.
24
Purchased in-process research and development (IPRD) of $87.7 million and
$1.7 million in fiscal 2002 and 2000, respectively, represents the write-off of
in-process technologies associated with our acquisitions of Avant! and inSilicon
in fiscal 2002 and Leda in fiscal 2000. There were no acquisitions during fiscal
2001. At the date of each 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, these
amounts were charged to expense on the respective acquisition dates of each of
the acquired companies. Also see Note 3, Business Combinations, of Notes to
Synopsys' Consolidated Financial Statements.
VALUATION OF IPRD. The value assigned to acquired in-process technology is
determined by identifying products under research in areas for which
technological feasibility had not been established. The value of in-process
technology is then segmented into two classifications: (i) developed technology
- completed and (ii) in-process technology - to-be-completed, giving explicit
consideration to the value created by the research and development efforts of
the acquired business prior to the date of acquisition and to be created by
Synopsys after the acquisition. These value creation efforts were estimated by
considering the following major factors: (i) time-based data, (ii) cost-based
data and (iii) complexity-based data.
The value of the in-process technology was determined using a discounted
cash flow model similar to the income approach, focusing on the income-producing
capabilities of the in-process technologies. Under this approach, the value is
determined by estimating the revenue contribution generated by each of the
identified products within the classification segments. Revenue estimates were
based on (i) individual product revenues, (ii) anticipated growth rates, (iii)
anticipated product development and introduction schedules, (iv) product sales
cycles and (v) the estimated life of a product's underlying technology. From the
revenue estimates, operating expense estimates, including costs of sales,
general and administrative, selling and marketing, income taxes and a use charge
for contributory assets, were deducted to arrive at operating income. Revenue
growth rates were estimated by management for each product and gave
consideration to relevant market sizes and growth factors, expected industry
trends, the anticipated nature and timing of new product introductions by us and
our competitors, individual product sales cycles, and the estimated life of each
product's underlying technology. Operating expense estimates reflect Synopsys'
historical expense ratios. Additionally, these projects will require continued
research and development after they have reached a state of technological and
commercial feasibility. The resulting operating income stream was discounted to
reflect its present value at the date of the acquisition. These estimates are
subject to change, given the uncertainties of the development process, and no
assurance can be given that deviations from these estimates will not occur or
that we will realize any anticipated benefits of the acquisition.
The rate used to discount the net cash flows from purchased in-process
technology is our weighted average cost of capital (WACC), taking into account
our required rates of return from investments in various areas of the
enterprise, and reflecting the inherent uncertainties in future revenue
estimates from technology investments including the uncertainty surrounding the
successful development of the acquired in-process technology, the useful life of
such technology, the profitability levels of such technology, if any, and the
uncertainty of technological advances, all of which are unknown at this time.
AVANT!. The IPRD expense related to the Avant! merger was $82.5 million. At
the date of the Avant! merger, the principal in-process technologies were
identified based on the following Avant! product families: Physical Products
Division (PPD), Verification Products Division (VPD), Analysis Products Division
(APD), Logical Products Division (LPD), MTB, Technology Computer-Aided Design
(TCAD) and Analogy. For purposes of valuing the IPRD in accordance with the
methodology discussed above, the following estimates were used: revenue growth
ranging from 16% beginning in year two to 10% in year nine; cost of sales -- 7%
of revenue in each year; general and administrative expenses -- 5% of revenue in
each year; and sales and marketing -- 28% of revenue in each year. In addition,
it was assumed there would be no expense reduction due to economic synergies as
a result of the acquisition. The rate used to discount the net cash flows from
the purchased in-process technology was in the range of 27%. The technologies
were approximately 40% to 90% complete at the acquisition date. The nature of
the efforts to complete these projects related, in varying degrees, to the
completion of all planning, designing, prototyping, verification, and testing
activities that are necessary to establish that the proposed technologies met
their design specifications, including functional, technical, and economic
performance requirements. Expenditures to complete the acquired in-process
technologies are expected to total approximately $17.5 million.
INSILICON. The IPRD expense related to the inSilicon acquisition was $5.2
million. At the date of the inSilicon merger, the principal in-process
technologies were identified based on the following inSilicon product lines:
Ethernet, Joint Photographic Experts Group (JPEG), Java Technology, Peripheral
Component Interconnect (PCI), PCI-X and Universal Serial Business (USB). For
purposes of valuing the IPRD in accordance with the methodology discussed above,
the following estimates were used: revenue growth ranging from 300% beginning in
year three for certain products to revenue decline of 50% in year ten; cost of
sales -- 8% of revenue in each year; and selling, general and administrative
expenses - ranging from 45% of revenue in year two to 30% of revenue in year
seven. In addition, it was assumed there would be no expense reduction due to
economic synergies as a result of the acquisition. The rates used to discount
25
the net cash flows from the purchased in-process technology range from 26% to
36%. The technologies were approximately 20% to 67% complete at the acquisition
date. The nature of the efforts to complete these projects related, in varying
degrees, to the completion of all planning, designing, prototyping,
verification, and testing activities that are necessary to establish that the
proposed technologies met their design specifications, including functional,
technical, and economic performance requirements. Expenditures to complete the
acquired in-process technologies are expected to total approximately $4.9
million.
During fiscal 2000, we made an acquisition resulting in aggregate IPRD
charges of $1.7 million which was not individually material to the results of
our operations in the respective year. The fair value of the related IPRD was
determined in a manner substantially similar to that described above.
The risks associated with acquired research and development are considered
high and no assurance can be made that these products will generate any benefit
to us or meet market expectations.
AMORTIZATION OF INTANGIBLE ASSETS. Goodwill represents the excess of the
aggregate purchase price over the fair value of the tangible and identifiable
intangible assets we have acquired. Goodwill for our pre-fiscal 2002
acquisitions and intangible assets are amortized over their estimated useful
lives of three to ten years. We assess the recoverability of goodwill by
estimating whether the unamortized cost will be recovered through estimated
future undiscounted cash flows. Amortization of intangible assets charged to
operating expenses for fiscal 2002 increased 68% to $28.6 million as compared to
$17.0 million for fiscal 2001. The increase in amortization of intangible assets
charged to operations for fiscal 2002 as compared to fiscal 2001 is due to the
amortization of intangible assets acquired in the Avant!, inSilicon and
Co-Design mergers during the current year. The Financial Accounting Standards
Board recently issued new guidance with respect to the amortization and
evaluation of goodwill. This new guidance is discussed below under "EFFECT OF
NEW ACCOUNTING STANDARDS".
In connection with the current year mergers, we also assumed unvested stock
options held by Avant!, inSilicon and Co-Design employees. We have recorded
deferred stock compensation totaling $8.1 million, $1.7 million and $0.7 million
based on the intrinsic value of these assumed unvested stock options for Avant!,
inSilicon and Co-Design, respectively. The deferred stock compensation is
amortized over the options' remaining vesting period of one to three years.
During fiscal 2002, we recorded amortization of deferred stock compensation in
each of the following expense classifications in the statement of operations:
(IN THOUSANDS)
Cost of revenue $ 207
Research and development 499
Sales and marketing 234
General and administrative 582
----------
Total $ 1,522
==========
Amortization of intangible assets charged to operating expenses for fiscal
2001 increased 13% to $17.0 million as compared to $15.1 million in fiscal 2000.
The increase in amortization of intangible assets charged to operations for
fiscal 2001 as compared to fiscal 2000 is due to the write-off of certain
technology totaling $1.8 million acquired from, and goodwill totaling $0.4
million related to, the acquisition of Eagle Design Automation, Inc. in 1997 and
to the fact that the goodwill and intangible assets related to certain
acquisitions completed during fiscal 2000 were amortized for the full year of
fiscal 2001.
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. If this evaluation indicates that the value of the
intangible asset may be impaired, an assessment of the recoverability of the net
carrying value of the asset over its remaining useful life is made. If this
assessment indicates that the intangible asset is not recoverable, based on the
estimated undiscounted future cash flows of the entity or technology acquired
over the remaining amortization period, the net carrying value of the related
intangible asset will be reduced to fair value and the remaining amortization
period may be adjusted. In fiscal 2002, we recognized an aggregate impairment
charge of $3.8 million to reduce the amount of certain intangible assets
associated with prior acquisitions to their estimated fair value. Approximately
$3.7 million and $0.1 million are included in integration expense and
amortization of intangible assets, respectively, on the statement of operations.
The impairment charge is primarily attributable to certain technology acquired
from, and goodwill related to, the acquisition of Stanza, Inc. in 1999. During
the fourth quarter of fiscal 2002, we determined that we would not allocate
future resources to assist in the market growth of this technology as products
acquired in the merger with Avant! provide customers with superior capabilities
and we do not anticipate any future sales of the product.
26
In fiscal 2001, we recognized an aggregate impairment charge of $2.2 million
to reduce the amount of certain intangible assets associated with prior
acquisitions to their estimated fair value. Approximately $1.8 million and $0.4
million are included in cost of revenues and amortization of intangible assets,
respectively, on the statement of operations. The impairment charge is
attributable to certain technology acquired from, and goodwill related to the
acquisition of Eagle Design Automation, Inc. in 1997. During the fourth quarter
of fiscal 2001, we determined that we would not allocate future resources to
assist in the market growth of this technology and we do not anticipate any
future sales of the product. There were no impairments of intangible assets in
fiscal 2000.
OTHER (EXPENSE) INCOME, NET. Other expense, net of other income is $208.6
million in fiscal 2002. The balance consists primarily of the following: (i)
$240.8 million expense due to the settlement of the Cadence litigation as
described under "Cadence Litigation", (ii) $11.3 million in impairment charges
related to certain assets in our venture portfolio, (iii) realized gains on
investments of $22.7 million, (iv) a gain of $3.1 million for the termination
fee on the IKOS agreement, (v) rental income of $10.0 million, (vi) interest
income of $8.3 million and (vii) and other miscellaneous expenses including
amortization of premium forwards and foreign exchange gains and losses
recognized during the fiscal year of $0.6 million.
In fiscal 2001, other income, net of other expense was $83.8 million. The
balance consists primarily of the following: (i) a gain of $10.6 million on the
sale of our silicon libraries business to Artisan (ii) $5.8 million in
impairment charges related to certain assets in our venture portfolio, (iii)
realized gains on investments of $55.3million, (iv) rental income of $8.6
million, (v) interest income of $12.8 million and (vi) and other miscellaneous
expenses including amortization of premium forwards and foreign exchange gains
and losses recognized during the fiscal year of $2.3 million.
In fiscal 2000, other income, net of other expense was $40.8 million. The
balance consists primarily of the following: (i) realized gains on investments
of $13.0 million, (ii) interest income of $28.2 million and (iii) and other
miscellaneous expenses including amortization of premium forwards and foreign
exchange gains and losses recognized during the fiscal year of $0.4 million.
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. 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 October 31, 2002. In accordance with our investment
policy, the weighted-average duration of our total invested funds does not
exceed one year.
Principal (Notional) Amounts in U.S. Dollars:
WEIGHTED-
AVERAGE
AFTER TAX
CARRYING AMOUNT RETURN
----------------- -------------
(IN THOUSANDS)
Short-term investments-- fixed rate $ 102,153 1.93%
Cash-equivalent investments-- variable rate 5,253 1.69
Money market funds-- variable rate 178,282 1.34
----------------- -------------
Total interest bearing instruments $ 285,688 1.56%
================= =============
See Note 4, Financial Instruments, in the accompanying Notes to Consolidated
Financial Statements for additional information on investment maturity dates,
long-term debt and equity price risk related to our long-term investments.
27
FOREIGN CURRENCY RISK. At the present time, we do not generally hedge
anticipated foreign currency cash flows but hedge only (i) those currency
exposures associated with certain assets and liabilities denominated in
nonfunctional currencies and (ii) forecasted accounts receivable generally
associated with sales contracts with extended payment terms and accounts payable
denominated in non-functional currencies. Hedging activities undertaken are
intended to offset the impact of currency fluctuations on these balances. The
success of this activity depends upon the accuracy of our estimates of balances
denominated in various currencies and in fluctuations in foreign currencies,
primarily the Euro, Japanese yen, Taiwan dollar, British pound sterling,
Canadian dollar, Singapore dollar, Korean won and Israeli shekel. At October 31,
2002, we had forward contracts for the sale and purchase of currencies with a
notional value expressed in U.S. dollars of $305.1 million. Looking forward, we
do not anticipate any material adverse effect on our consolidated financial
position, results of operations, or cash flows resulting from the use of these
instruments. There can be no assurance that these hedging transactions will be
effective in the future.
These foreign currency contracts 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 such 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.
The realized gain (loss) on these contracts as they matured have not been
material to our consolidated financial position, results of operations or cash
flows.
The following table provides information about our foreign currency
contracts at October 31, 2002. Due to the short-term nature of these contracts,
the contract rates approximate the weighted-average currency exchange rates at
October 31, 2002. These forward contracts mature in approximately thirty days
and contracts are rolled-forward on a monthly basis to match firmly committed
transactions.
Short-Term Forward Contracts to Sell and Buy Foreign
Currencies in U.S. Dollars
USD AMOUNT CONTRACT RATE
---------------- -----------------
(IN THOUSANDS)
Forward Net Contract Values:
Euro $250,272 1.0177
Japanese yen 35,974 122.9000
Taiwan dollar 4,508 34.7600
British pound sterling 1,856 0.6428
Korean won 2,204 1229.0000
Israeli shekel 651 4.8140
Canadian dollar 7,598 1.5636
Singapore dollar 2,084 1.7681
----------------
$305,147
================
The unrealized gains of approximately $10.0 million on the outstanding
forward contracts at October 31, 2002 are presented net of tax in accumulated
other comprehensive income. The realized gain/loss on these contracts as they
matured were not material to our consolidated financial position, results of
operations, or cash flows for the periods presented.
TERMINATION OF AGREEMENT TO ACQUIRE IKOS SYSTEMS, INC. On July 2, 2001, we
entered into an Agreement and Plan of Merger and Reorganization (the IKOS Merger
Agreement) with IKOS Systems, Inc. (IKOS). The IKOS Merger Agreement provided
for the acquisition of all outstanding shares of IKOS common stock by Synopsys.
On December 7, 2001, Mentor Graphics Corporation (Mentor) commenced a cash
tender offer to acquire all of the outstanding shares of IKOS common stock at
$11.00 per share, subject to certain conditions. On March 12, 2002, Synopsys and
IKOS executed a termination agreement by which the parties terminated the IKOS
Merger Agreement and pursuant to which IKOS paid Synopsys the $5.5 million
termination fee required by the IKOS Merger Agreement. This termination fee and
$2.4 million of expenses incurred in conjunction with the acquisition are
included in other income, net on the consolidated statement of operations for
the year ended October 31, 2002. Synopsys subsequently executed a revised
termination agreement with Mentor and IKOS in order to add Mentor as a party
thereto.
28
ACQUISITION OF AVANT! CORPORATION
On June 6, 2002 (the closing date), we completed the merger with Avant!.
REASONS FOR THE ACQUISITION. Our Board of Directors unanimously approved the
merger with Avant! at its December 1, 2001 meeting. In approving the merger
agreement, the Board of Directors consulted with legal and financial advisors as
well as with management and considered a number of factors. These factors
include the fact that the merger is expected to enable Synopsys to offer its
customers a complete end-to-end solution for system-on-chip design that includes
Synopsys' logic synthesis and design verification tools with Avant!'s advanced
place and route, physical verification and design integrity products, thus
increasing customers' design efficiencies. By increasing customer design
efficiencies, Synopsys expects to be able to better compete for customers
designing the next generation of semiconductors. Further, by gaining access to
Avant!'s physical design and verification products, as well as its broad
customer base and relationships, Synopsys will gain new opportunities to market
its existing products. The foregoing discussion of the information and factors
considered by our Board of Directors is not intended to be exhaustive but
includes the material factors considered by our Board of Directors.
PURCHASE PRICE. Holders of Avant! common stock received 0.371 of a share of
Synopsys common stock (including the associated preferred stock rights) in
exchange for each share of Avant! common stock owned as of the closing date,
aggregating 14.5 million shares of Synopsys common stock. The fair value of the
Synopsys shares issued was based on a per share value of $54.74, which is equal
to Synopsys' average last sale price per share as reported on the Nasdaq
National Market for the trading-day period two days before and after December 3,
2001, the date of the merger agreement.
The total purchase consideration consists of the following:
(IN THOUSANDS)
Fair value of Synopsys common stock issued $ 795,388
Acquisition related costs 37,397
Facilities closure costs 62,638
Employee severance costs 51,014
Fair value of options to purchase Synopsys
common stock issued, less $8.1 million
representing the portion of the intrinsic
value of Avant!'s unvested options applicable
to the remaining vesting period
63,033
-----------------
$ 1,009,470
=================
The acquisition-related costs of $37.4 million consist primarily of banking,
legal and accounting fees, printing costs, and other directly related charges
including contract termination costs of $6.3 million.
Facilities closure costs at the closing date include $54.2 million related
to Avant!'s corporate headquarters. After the merger, the functions performed in
the buildings were consolidated into Synopsys' corporate facilities. The lessors
have brought a claim against Avant! for the future amounts payable under the
lease agreements. The amount accrued at the closing date is equal to the future
amounts payable under the related lease agreements, without taking into
consideration in the accrual any defenses the Company may have to the claim.
Resolution of this contingency at an amount different from that accrued will
result in an increase or decrease in the purchase consideration and the amount
will be allocated to goodwill. Subsequent to October 31, 2002, Synopsys settled
all of the claims of the landlord of two of these buildings for $7.4 million.
The remaining facilities closure costs at the closing date totaling $8.4 million
represents the present value of the future obligations under certain of Avant!'s
lease agreements which the Company has or intends to terminate under an approved
facilities exit plan plus additional costs expected to be incurred directly
related to vacating such facilities.
Employee severance costs include (i) $39.6 million in cash paid to Avant!'s
Chairman of the Board, consisting of severance plus a cash payment equal to the
intrinsic value of his in-the-money stock options at the closing date, (ii) $5.1
million in cash severance payments paid to redundant employees (primarily sales
and corporate infrastructure personnel) terminated on or subsequent to the
consummation of the merger under an approved plan of termination and (iii) $6.3
million in termination payments to certain executives in accordance with their
respective pre-merger employment agreements. The total number of Avant!
employees terminated as a result of the merger was approximately 250.
29
As of October 31, 2002, $89.7 million of costs described in the three
preceding paragraphs have been paid and $61.4 million of these costs have not
yet been paid. The following table presents the components of
acquisition-related costs recorded, along with amounts paid during fiscal 2002.
PAYMENTS
THROUGH BALANCE AT
INITIAL OCTOBER 31, OCTOBER 31,
(IN THOUSANDS) TOTAL COST ADDITIONS SUBTOTAL 2002 2002
----------- ------------ --------------- --------------- -------------
Acquisition related costs $ 37,342 $ 55 $37,397 $33,557 $ 3,840
Facilities closure costs 62,638 -- 62,638 5,377 57,261
Employee severance costs 50,367 647 51,014 50,724 290
----------- ------------ --------------- --------------- -------------
Total $ 150,347 $ 702 151,049 $89,658 $ 61,391
=========== ============ =============== =============== =============
During the fourth quarter of fiscal 2002, additions were made to increase
the total acquisition related costs including an increase to employee severance
costs totaling $0.6 million for actual amounts paid to such employees.
The total purchase consideration has been allocated to the assets and
liabilities acquired, including identifiable intangible assets, based on their
respective fair values at the acquisition date and resulting in excess purchase
consideration over the net tangible and identifiable intangible assets acquired
of $369.5 million. The following unaudited condensed balance sheet data presents
the fair value of the assets and liabilities acquired (after certain adjustments
made during the fourth quarter to the preliminary fair values of the assets and
liabilities acquired).
(IN THOUSANDS)
Assets acquired
Cash, cash equivalents and short-term investments $ 241,313
Accounts receivable 65,971
Prepaid expenses and other current assets 18,082
Intangible assets 373,300
Goodwill 369,470
Other assets 3,875
----------------
Total assets acquired $ 1,072,011
================
Liabilities acquired
Accounts payable and accrued liabilities $ 173,998
Deferred revenue 30,080
Income taxes payable 89,274
Other liabilities 4,651
----------------
Total liabilities acquired $ 298,003
================
The initial allocation of the purchase price included certain assets and
liabilities that we recorded using preliminary estimates of fair value. During
the fourth quarter of 2002, the value assigned to Avant!'s investment in a
venture capital fund was reduced from the preliminary value of $12.8 million to
$5.0 million upon obtaining additional information on the venture fund's
non-public investments and subsequent sale of the investment to a third party.
The decrease in the fair value of the investment increased the consideration
allocated to goodwill by $7.8 million. During the fourth quarter of 2002, the
Company also increased the value of the acquired customs and use-tax liabilities
by $2.5 million, resulting in a corresponding increase in goodwill.
ASSET HELD FOR SALE. As a result of the merger, Synopsys acquired Avant!'s
physical libraries business, and was obligated to offer and sell such business
to Artisan Components, Inc. under the terms of a January 2001 non-compete
agreement, under which we agreed not to engage, directly or indirectly, in the
physical libraries business before January 3, 2003. As of the closing date, the
value allocated to the acquired libraries business had been recorded as net
assets held for sale, based on the estimated future net cash flows from the
libraries business in accordance with EITF 87-11, ALLOCATION OF PURCHASE PRICE
TO ASSETS TO BE SOLD. During the fourth quarter of fiscal 2002, management
determined that the libraries business would not be sold and, accordingly,
allocated the fair value of the libraries business as of the closing date to the
underlying tangible assets and intangible assets. The fair value allocated to
the tangible and intangible assets was $8.3 million, with the remaining fair
value allocated to goodwill. This allocation is reflected in the balance sheet
as of October 31, 2002.
30
GOODWILL AND INTANGIBLE ASSETS. Goodwill, representing the excess of the
purchase price over the fair value of tangible and identifiable intangible
assets acquired in the merger, will not be amortized, consistent with the
guidance in SFAS 142 as discussed under "Effect of New Accounting Standards"
below. The goodwill associated with the Avant! acquisition is not deductible for
tax purposes. In addition, a portion of the purchase price was allocated to the
following identifiable intangible assets:
INTANGIBLE ASSET (IN THOUSANDS) ESTIMATED USEFUL LIFE
-------------------------------------------- ----------------- --------------------------------
Core/developed technology $ 189,800 3 years
Contract rights intangible 51,700 3 years
Customer installed base/relationship 102,900 6 years
Trademarks and tradenames 17,700 3 years
Covenants not to compete 9,100 The life of the related
agreement (2 to 4 years)
Customer backlog 2,100 3 years
-----------------
Total $ 373,300
=================
CONTRACT RIGHTS INTANGIBLE. Avant! had executed signed license agreements
and delivered the initial configuration of licensed technologies under ratable
license arrangements and had executed signed contracts to provide PCS over a one
to three year period, for which Avant! did not consider the fees to be fixed or
determinable at the outset of the arrangement. There were no receivables or
deferred revenues recorded on Avant!'s historical financial statements at the
closing date as the related payments were not yet due under extended payment
terms and deliveries are scheduled to occur over the terms of the arrangements.
These ratable licenses and PCS arrangements require future performance by both
parties and, as such, represent executory contracts. The contract rights
intangible asset associated with these arrangements is being amortized to cost
of revenue over the related contract lives of three years.
The amortization of intangible assets, with the exception of the contract
rights intangible and core/developed technology, is included in operating
expenses in the statement of operations for the fiscal year ended October 31,
2002. Amortization of core/developed technology and contract rights intangible
is included in cost of revenue.
CADENCE LITIGATION. At the time of the acquisition of Avant!, Avant! was
engaged in civil litigation with Cadence regarding alleged misappropriation of
trade secrets, among other things, by Avant! and certain individuals.
In connection with the merger, Synopsys entered into a policy with a
subsidiary of American International Group, Inc., a AAA-rated insurance company,
whereby insurance was obtained for certain compensatory, exemplary and punitive
damages, penalties and fines and attorneys' fees arising out of pending
litigation between Avant! and Cadence. The policy did not provide coverage for
litigation other than the Avant!/Cadence litigation.
We paid a total premium of $335 million for the policy, of which $240
million was contingently refundable. The balance of the premium paid to the
insurer ($95 million) is included in integration expense for the year ended
October 31, 2002. Under the policy the insurer is obligated to pay covered loss
up to a limit of liability equaling (a) $500 million plus (b) interest accruing
at the fixed rate of 2%, compounded semi-annually, on $250 million (the interest
component), as reduced by previous covered losses. Interest earned on $250
million is included in other income, net in the post-merger statement of
operations.
On November 13, 2002, Cadence and Synopsys reached a settlement of the
litigation. Under the terms of the agreement, Cadence will be paid $265 million
in two installments--$20 million on November 22, 2002 and $245 million on
December 16, 2002. In addition, Cadence and Synopsys have entered into
reciprocal licenses arrangements covering the intellectual property at issue in
the litigation. As a result of the payment, Synopsys has recognized expense of
approximately $240.8 million, which is equal to the contingently refundable
portion of the insurance premium plus interest accrued on the restricted asset.
This expense is included in other income and expense on the statement of
operations.
31
ACQUISITION OF CO-DESIGN
On September 6, 2002, we completed the acquisition of Co-Design.
REASONS FOR THE ACQUISITION. In approving the merger agreement, management
considered a number of factors, including (i) the acquisition will help promote
the development and adoption of the Superlog language, which we believe can
increase designer productivity; (ii) the combination of Co-Design's technology
with our high-level verification and design implementation tools is expected to
improve the performance of our software products; and (iii) the acquisition
gives us access to Co-Design's highly-skilled employees who will help us improve
our existing products and facilitate the development of new products. The
foregoing discussion of the information and factors considered by Synopsys'
management is not intended to be exhaustive but includes the material factors
considered.
PURCHASE PRICE. Holders of Co-Design common stock received consideration
consisting of cash and notes totaling $32.7 million in exchange for all shares
of Co-Design common stock owned as of the merger date. The total purchase
consideration consists of the following:
(IN THOUSANDS)
Cash paid and notes issued of $2.9 million for
Co-Design common stock $ 32,651
Acquisition related costs 1,038
Fair value of options to purchase Synopsys
common stock issued, less $0.7 million
representing the portion of the intrinsic
value of Co-Design's unvested options
applicable to the remaining vesting period 593
-----------------
$ 34,282
=================
The acquisition-related costs of approximately $1.0 million consist
primarily of legal and accounting fees. As of October 31, 2002, substantially
all of these acquisition-related costs have been paid.
Total consideration for the acquisition and services provided has been
allocated to the total assets acquired of $8.8 million, total liabilities
assumed of $5.3 million and notes payable of $4.8 million, including
identifiable intangible assets, based on their respective fair values at the
acquisition date. The identifiable intangible assets consist of core/developed
technology totaling $6.2 million which is being amortized over an estimated
useful life of 10 years due to the fact that this technology is essentially a
programming language. The $4.8 million of notes are payable to former Co-Design
shareholders in 2007 of which $1.9 million has been included in integration
expense for services performed in the statement of operations. If certain
milestones are met, the notes may be prepaid in fiscal 2004 and upon prepayment,
an additional interest component totaling approximately $1.0 million is also
payable. The total purchase consideration has been allocated to the assets and
liabilities acquired, including identifiable intangible assets, based on their
respective fair values at the acquisition date and resulted in excess purchase
consideration over the net tangible and identifiable intangible assets acquired
of $27.7 million.
ACQUISITION OF INSILICON
On September 20, 2002, we completed the acquisition of inSilicon.
REASONS FOR THE ACQUISITION. In approving the merger agreement, management
considered a number of factors, including the complementary nature of
inSilicon's portfolio of intellectual property blocks and Synopsys' own
portfolio; the fact that inSilicon had established a per-use license model for
its IP products, which would accelerate Synopsys' adoption of a per-use model
for its new and development-stage IP, inSilicon's relationships with chip design
teams, inSilicon's positive reputation as a vendor of high-quality IP and
inSilicon's highly-skilled employee base. The foregoing discussion of the
information and factors considered by our management is not intended to be
exhaustive but includes the material factors considered.
PURCHASE PRICE. Holders of inSilicon common stock received $4.05 in
exchange for each share of inSilicon common stock owned as of the merger date,
or approximately $65.4 million. The total purchase consideration consists of the
following:
(IN THOUSANDS)
Cash paid for inSilicon common stock $ 65,386
Acquisition related costs 6,221
Fair value of options to purchase Synopsys
common stock issued, less $1.7 million
representing the portion of the intrinsic
value of inSilicon's unvested options
applicable to the remaining vesting period 2,975
---------------
$ 74,582
===============
32
The acquisition-related costs of $6.2 million consist primarily of legal and
accounting fees of $1.8 million, and other directly related charges including
contract termination costs of $3.3 million, and restructuring costs of
approximately $0.8 million. As of October 31, 2002, $3.4 million of
acquisition-related costs have been paid. Of the balance remaining at October
31, 2002, $2.2 million represents outstanding contract termination costs.
The total purchase consideration has been allocated to the assets and
liabilities acquired, including identifiable intangible assets, based on their
respective fair values at the acquisition date, resulting in goodwill of $22.2
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 $ 24,908
Accounts receivable 2,428
Prepaid expenses and other current assets 7,463
Core/developed technology 15,100
Customer backlog 1,200
Goodwill 22,160
Other assets 1,290
----------------
Total assets acquired $ 74,549
================
Liabilities acquired
Accounts payable and accrued liabilities $ 8,242
Deferred revenue 1,137
Income taxes payable 463
Other liabilities 1,736
----------------
Total liabilities acquired $ 11,578
================
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, consistent with
the guidance in SFAS 142 as discussed under "Effect of New Accounting Standards"
below. The goodwill associated with the inSilicon acquisition is not deductible
for tax purposes.
inSilicon had executed signed contracts with five of its major customers to
provide IP licenses, including significant modifications to the IP license in
order to meet unique customer requirements. The value associated with these
contracts was determined by quantifying the projected cash flow related to these
contracts, discounted to present value, and is recorded as customer backlog in
intangible assets in the consolidated balance sheets.
Intangible assets are being amortized over their estimated useful life of 3
years. The amortization of intangible assets is included in cost of revenue in
the statement of operations for the fiscal year ended October 31, 2002.
UNAUDITED PRO FORMA RESULTS OF OPERATIONS. The following table presents pro
forma results of operations and gives effect to the Avant! and inSilicon mergers
as if the mergers were consummated on November 1, 2000. The unaudited pro forma
results of operations are not necessarily indicative of the results of
operations had the Avant! and inSilicon mergers actually occurred at the
beginning of fiscal 2001, nor is it necessarily indicative of future operating
results:
YEAR ENDED OCTOBER 31,
-------------------------------------
2002 2001
----------------- -------------------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Revenues $ 1,186,916 $ 1,100,249
Net income $ 117,494 $ 78,909
Basic earnings per share $ 1.56 $ 1.05
75,311 75,131
Weighted average common shares outstanding
Diluted earnings per share $ 1.49 $ 0.98
Weighted average common shares and dilutive stock
options outstanding 78,656 80,180
33
The unaudited pro forma results of operations for each of the periods
presented exclude non-recurring merger costs of $335.8 million for the Avant!
insurance policy premium, $82.5 million for IPRD resulting from the Avant!
merger, $5.2 million for IPRD resulting from the inSilicon merger and $21.0
million and $268.1 million for Avant!'s pre-merger litigation settlement and
other related costs incurred in fiscal 2002 and 2001, respectively. These
expenses are included in the historical consolidated statement of operations.
PRIOR YEAR BUSINESS COMBINATIONs AND DIVESTITURES. On January 4, 2001, we
sold the assets of our silicon libraries business to Artisan Components, Inc.
for a total sales price of $15.5 million, including common stock with a fair
value on the date of sale of $11.4 million, and cash of $4.1 million. The net
book value of the assets sold was $1.4 million. Expenses incurred in connection
with the sale were $3.5 million. We recorded a gain on the sale of the business
of $10.6 million, which is included in other income, net in 2001. Direct revenue
for the silicon libraries business was $0.2 million and $4.3 million for the
fiscal years 2001 and 2000, respectively.
There were no business combinations completed in fiscal 2001.
In fiscal 2000, we acquired (i) VirSim, a software product, from Innoveda,
Inc., for a purchase price of approximately $7.0 million in cash, (ii) The
Silicon Group, Inc., a privately held provider of integrated circuit design and
intellectual property integration services, for a purchase price of $3.0
million, including cash payments of $1.8 million and a reserve of approximately
34,000 shares of common stock for issuance under The Silicon Group's stock
option plan which was assumed in the transaction, and (iii) Leda, S.A. (Leda), a
privately held provider of RTL coding-style-checkers, for a purchase price of
$7.7 million, including cash payments of $7.5 million. Approximately $1.7
million of the Leda purchase price was allocated to in-process research and
development and charged to operations because the acquired technology had not
reached technological feasibility and had no alternative uses. The purchase
price of each of these transactions was allocated to the acquired assets and
liabilities based on their estimated fair values as of the date of the
respective acquisition. Amounts allocated to developed technology, workforce and
goodwill have been amortized on a straight-line basis over periods ranging from
three to five years. Effective November 1, 2002, goodwill will no longer be
amortized in accordance with SFAS 142 as discussed below under "Effect of New
Accounting Standards".
SUBSEQUENT EVENTS
RENEWAL OF STOCK REPURCHASE PROGRAM. In December 2002, our Board of
Directors renewed our stock repurchase program originally approved in July 2001.
Under the renewed program, we may repurchase Synopsys common stock with a market
value up to $500 million (not including amounts purchased to date under the July
2001 program on the open market). Common shares repurchased are intended to be
used for ongoing stock issuances, such as for existing employee stock option and
stock purchase plans and acquisitions.
PROPOSED ACQUISITION OF NUMERICAL TECHNOLOGIES, INC. On January 13, 2003,
we entered into an Agreement and Plan of Merger with Numerical Technologies,
Inc. (Numerical) under which we commenced a cash tender offer to acquire all of
the outstanding shares of Numerical common stock at $7.00 per share, followed by
a second-step merger in which we would acquire any untendered Numerical shares
at the same price per share. The total transaction value is expected to be
approximately $250 million. Following the consummation of the cash tender offer,
Numerical will merge with and into a wholly owned subsidiary of Synopsys. The
acquisition is subject to certain conditions, including the tender of a majority
of the fully diluted shares of Numerical, compliance with regulatory
requirements and customary closing conditions.
WORKFORCE REDUCTION. During the first quarter of fiscal 2003, we
implemented a workforce reduction. The purpose was to reduce expenses by
decreasing the number of employees in all departments in domestic and foreign
locations. As a result, we expect to record a charge of between $4.8 million and
$5.3 million during the first quarter of fiscal 2003. The charge consists of
severance and other special termination benefits.
34
EFFECT OF NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards No. 141, BUSINESS COMBINATIONS
(SFAS 141), and Financial Accounting Standards No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS (SFAS 142). SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001
and specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized apart from goodwill. SFAS 142 requires
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually in accordance
with the provisions of SFAS 142.
We adopted SFAS 142 on November 1, 2002. As of October 31, 2002, unamortized
goodwill is $434.6 million, which will no longer be amortized subsequent to the
adoption of SFAS 142. Related goodwill amortization expense for fiscal 2002,
2001 and 2000 is $16.2 million, $17.0 million and $15.1 million, respectively.
We adopted the provisions of SFAS 141 on July 1, 2001. Under SFAS 141,
goodwill and intangible assets with indefinite useful lives acquired in a
purchase business combination completed after June 30, 2001, but before SFAS 142
is adopted, will not be amortized but will continue to be evaluated for
impairment in accordance with SFAS 121. Goodwill and intangible assets acquired
in business combinations completed before July 1, 2001 will continue to be
amortized and tested for impairment in accordance with current accounting
guidance until the date of adoption of SFAS 142.
Upon adoption of SFAS 142, we must evaluate our existing intangible assets
and goodwill acquired in purchase business combinations prior to July 1, 2001,
and make any necessary reclassifications in order to conform with the new
criteria in SFAS 141 for recognition apart from goodwill. Upon adoption of SFAS
142, we have assessed useful lives and residual values of all intangible assets
acquired. We have also tested goodwill for impairment in accordance with the
provisions of SFAS 142. In completing our impairment analysis, we have
determined that we have one reporting unit as the company operates in one
reportable segment. In conjunction with the implementation of SFAS No. 142, we
have completed a goodwill impairment review as of the beginning of fiscal 2003
and found no impairment. This impairment review was based on the fair value of
the Company as determined by its market capitalization.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS (SFAS 143). SFAS 143
requires that asset retirement obligations that are identifiable upon
acquisition, construction or development and during the operating life of a
long-lived asset be recorded as a liability using the present value of the
estimated cash flows. A corresponding amount would be capitalized as part of the
asset's carrying amount and amortized to expense over the asset's useful life.
We are required to adopt the provisions of SFAS 143 effective November 1, 2002.
The adoption of SFAS 143 will not have a significant impact on our financial
position and results of operations.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS (SFAS
144), which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supersedes SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, and
the accounting and reporting provisions of APB Opinion No. 30, REPORTING THE
RESULTS OF OPERATIONS FOR A DISPOSAL OF A SEGMENT OF A BUSINESS. We are required
to adopt the provisions of SFAS 144 no later than November 1, 2002. The adoption
of SFAS 144 will not have a significant impact on our financial position and
results of operations.
In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 (SFAS 146), ACCOUNTING FOR EXIT OR DISPOSAL ACTIVITIES. SFAS 146
addresses the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including costs related to
terminating a contract that is not a capital lease and termination benefits that
employees who are involuntarily terminated receive under the terms of a one-time
benefit arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS 146 supersedes Emerging Issues Task Force
Issue No. 94-3, LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS
AND OTHER COSTS TO EXIT AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED IN A
RESTRUCTURING) and requires liabilities associated with exit and disposal
activities to be expensed as incurred. SFAS 146 will be effective for exit or
disposal activities of ours that are initiated after December 31, 2002. We
believe that the adoption of SFAS 146 will not have a significant impact on our
financial position and results of operations.
35
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 (SFAS 148), ACCOUNTING FOR STOCK-BASED COMPENSATION -
TRANSITION AND DISCLOSURE. SFAS 148 amends FASB Statement No. 123 (SFAS 123),
ACCOUNTING FOR STOCK-BASED Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The transition guidance and annual disclosure provisions of SFAS 148
are effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. We are
currently evaluating the impact of adoption of SFAS 148 on our financial
position and results of operations.
In November 2002, the EITF reached a consensus on Issue No. 00-21 (EITF
00-21), REVENUE ARRANGEMENTS WITH MULTIPLE DELIVERABLES. EITF 00-21 addresses
certain aspects of the accounting by a vendor for arrangements under which the
vendor will perform multiple revenue generating activities. EITF 00-21 will be
effective for fiscal years beginning after June 15, 2003. We do not expect the
adoption of EITF 00-21 to have a material impact on our financial position and
results of operations.
In November 2002, the FASB Interpretation No. 45 (Interpretation 45),
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS, which clarifies disclosure and
recognition/measurement requirements related to certain guarantees. The
disclosure requirements are effective for financial statements issued after
December 15, 2002 and the recognition/measurement requirements are effective on
a prospective basis for guarantees issued or modified after December 31, 2002.
We are currently evaluating the impact of adoption of Interpretation 45 on our
financial position and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments were $414.7 million at
October 31, 2002, a decrease of $61.7 million, or 13%, from $476.4 million at
October 31, 2001. Cash used in operating activities was $181.0 million for
fiscal 2002 compared to cash provided by operating activities of $295.5 million
in fiscal 2001. The decrease in cash flows from operating activities is due
primarily to the insurance premium payments totaling $335.8 million related to
the Avant! acquisition and payments for income taxes and other liabilities made
during the year.
Cash provided by investing activities was $275.7 million in fiscal 2002
compared to $61.8 million provided by investing activities during fiscal 2001.
The increase of $213.9 million in 2002 in cash provided by investing activities
is due primarily to the cash acquired in the 2002 acquisitions, net of cash
received, of $168.3 million. Net proceeds from the sale of short- and long-term
investments totaled $157.8 million for fiscal 2002 as compared to net proceeds
of investments of $141.5 million for fiscal 2001. The cash received from the
sales of investments during fiscal 2002 was primarily used to purchase treasury
stock. Capital expenditures totaled $48.8 million during fiscal 2002 compared to
$82.5 million in fiscal 2001. During fiscal 2001, we invested in fixed assets,
primarily related to construction of our Oregon facilities and computing
equipment to upgrade our internal engineering and enterprise application
systems.
We used $51.8 million in net cash for financing activities during 2002
compared to $232.7 in fiscal 2001. The primary financing uses of cash during
2002 were the repurchase of 3.9 million shares of common stock at an average
price of $44.20 per share. Financing proceeds from the sale of shares pursuant
to our employee stock plans during fiscal 2002 were $119.9 million compared to
$105.4 million during fiscal 2001.
Accounts receivable increased $60.9 million, or 41%, to $207.2 million at
October 31, 2002 from $146.3 million at October 31, 2001 largely due to the
Avant! merger. Days sales outstanding, which is calculated based on revenues for
the most recent quarter and accounts receivable as of the balance sheet date
decreased to 61 days as of October 31, 2002 from 73 days at October 31, 2001.
The decrease in days sales outstanding is due in part to the timing of large
cash collections realized during the fourth quarter of fiscal 2002.
We believe that our current cash, cash equivalents, short-term investments
and cash generated from operations will satisfy our business requirements for at
least the next twelve months.
36
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. As
of October 31, 2002, 6,114,514 stock options remain outstanding and 3,523,486
shares of common stock are reserved for future grants under the 1992 Plan.
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 the stock at the grant date. Stock options
generally vest over a period of four years and expire ten years from the date of
grant. At October 31, 2002, 18,832,666 stock options remain outstanding and
4,817,722 shares of common stock were reserved for future grants.
Under our 1994 Non-Employee Directors Stock Option Plan (the Directors
Plan), a total of 750,000 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. Stock options are granted at not
less than 100% of the fair market value of those shares on the grant date. Stock
options granted upon appointment or election to the Board vest 25% annually but
may be exercised immediately. Stock options granted upon reelection to the Board
and for committee service vest 100% after the first year of continuous service.
As of October 31, 2002, 515,580 stock options remain outstanding and 71,839
shares of common stock were reserved for future grants.
We have assumed certain option plans in connection with business
combinations. Generally, these options were granted under terms similar to the
terms of our stock option plans at prices adjusted to reflect the relative
exchange ratios. All assumed plans were terminated as to future grants upon
completion of each of the business combinations.
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 3.4% and
6.3% for fiscal 2002 and 2001, respectively. We also have a share repurchase
program where we regularly repurchase shares from the open market to offset
dilution related to our option program.
37
A summary of the distribution and dilutive effect of options granted is as
follows:
YEAR ENDED OCTOBER 31,
---------------------------
2002 2001
------------ --------------
Net grants during the period as percentage
of outstanding shares 3.4% 6.3%
Grants to Named Executive Officers during
the period as percentage of total options granted 9.3% 5.1%
Grants to Named Executive Officers during the period
as percentage of outstanding shares 0.5% 0.5%
Total outstanding options held by Named Executive
Officers as percentage of total options outstanding 13.7% 13.6%
A summary of our stock option activity and related weighted-average exercise
prices for fiscal 2002 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
================== ==============
As of October 31, 2002, a total of 19.5 million, 26.6 million and 750,000
shares were reserved for issuance under our 1992, 1998 and Directors Plans,
respectively, of which 8.4 million shares were available for future grants. For
additional information regarding our stock option activity during fiscal 2001,
please see Note 6 of Notes to Consolidated Financial Statements.
A summary of outstanding in-the-money and out-of-the-money options and
related weighted-average exercise prices as of October 31, 2002 is as follows:
EXERCISABLE(2) UNEXERCISABLE TOTAL
----------------------- ---------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
PRICE PRICE PRICE
SHARES SHARES SHARES
----------- ----------- ---------- ----------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In-the-Money 9,061 $ 33.37 5,825 $ 33.56 14,886 $ 33.45
Out-of-the-Money (1) 6,034 $ 50.97 7,060 $ 49.97 13,094 $ 50.43
----------- ---------- ---------
Total Options Outstanding 15,095 $ 40.41 12,885 $ 42.56 27,980 $ 41.40
=========== ========== ==========
(1)Out-of-the-money options are those options with an exercise price
equal to or above the closing price of $39.64 on November 1, 2002, the
last trading day of the fiscal year.
(2)Exercisable shares represent those options that have vested and
exclude 135,000 options granted to Directors that are exercisable
prior to the vesting date.
38
The following table sets forth further information regarding individual
grants of options during fiscal 2002 for each of the Named Executive
Officers.
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
RATES OF STOCK PRICE
INDIVIDUAL GRANTS APPRECIATION FOR OPTION
TERM ($)
-------------------------------- ------------------------------
NUMBER OF PERCENT
SECURITIES OF TOTAL RANGE OF
UNDER-LYING OPTIONS EXERCISE
NAME OPTIONS GRANTED PRICES EXPIRATION DATE 5% 10%
GRANTED (1) TO ($/SHARE)
EMPLOYEES
(2)
----------------------- ----------------- -------------- ------------------- --------------------- -------------- ---------------
Aart J. de Geus 106,500 2.69% $44.56-- $56.17 12/17/11 -- 8/27/12 $3,533,394 $8,954,315
Chi-Foon Chan 91,700 2.32% $44.56-- $56.17 12/17/11 -- 8/27/12 $3,028,417 $7,674,603
Vicki L. Andrews 72,900 1.84% $44.56-- $56.17 12/17/11 -- 8/27/12 $2,417,345 $6,126,027
Robert B. Henske 73,300 1.85% $44.56-- $56.17 12/17/11 -- 8/27/12 $2,429,772 $6,157,520
Steven K. Shevick 25,300 0.64% $44.56-- $56.17 12/17/11 -- 8/27/12 $825,997 $2,093,239
(1)Sum of all option grants made during the fiscal year 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 10 years, subject to earlier termination upon
the optionee's cessation of service.
(2)Based on total of 3,960,661 shares subject to options granted to
employees under Synopsys' option plans during fiscal 2002.
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 at October 31, 2002:
NUMBER OF SECURITIES VALUE OF IN-THE-MONEY OPTIONS
SHARES UNDERLYING UNEXERCISED AT
ACQUIRED VALUE OPTIONS AT OCTOBER 31, OCTOBER 31, 2002 (2)
NAME ON REALIZED 2002 EXERCISABLE/UNEXERCISABLE
EXERCISE (1) EXERCISABLE/UNEXERCISABLE
----------------------- ------------ ------------ ---------------------------- ----------------------------------
Aart J. de Geus 447,606 $4,659,659 $1,236,025
-- -- 1,281,094
Chi-Foon Chan -- -- 810,462 377,438 $1,919,835 $ 945,044
Vicki L. Andrews 50,000 $ 962,700 93,908 172,658 $ 138,782 $ 389,438
Robert B. Henske -- -- 236,633 237,167 $ 607,275 $ 467,825
Steven K. Shevick 5,000 $ 132,725 109,082 73,218 $ 349,036 $ 163,144
(1)Market value at exercise less exercise price.
(2)Market value of underlying securities on November 1, 2002 ($39.64)
minus the exercise price.
39
The following table provides information regarding equity compensation plans
approved and not approved by security holders as of October 31, 2002 (in
thousands, except price per share amounts):
NUMBER OF
SECURITIES
NUMBER OF REMAINING AVAILABLE
SECURITIES TO BE WEIGHTED-AVERAGE FOR FUTURE ISSUANCE
ISSUED UPON EXERCISE PRICE UNDER EQUITY
EXERCISE OF OF OUTSTANDING COMPENSATION PLANS
OUTSTANDING OPTIONS, (EXCLUDING
OPTIONS, WARRANTS, AND SECURITIES
WARRANTS, AND RIGHTS REFLECTED IN COLUMN
RIGHTS (A))
PLAN CATEGORY (A) (B) (C)
----------------------------------------- --------------------- ------------------- ------------------------
Employee Equity Compensation Plans
Approved by Stockholders (1992 Stock
Option Plan) 6,114,514 $ 39.76 3,523,486
Employee Equity Compensation Plans Not
Approved by Stockholders (1998
Non-Statutory Stock Option Plan) 18,832,666 $ 42.64 4,817,722
--------------------- ------------------------
Total 24,947,180 (1)(2) $ 41.94 8,341,208 (2)
===================== ========================
(1) Does not include information for options assumed in connection with
mergers and acquisitions. As of October 31, 2002, a total of 2,516,779
shares of our common stock were issuable upon exercise of such
outstanding options.
(2) Does not include information for options under the Directors Plan. As
of October 31, 2002, a total of 515,580 shares of our common stock
were issuable upon exercise of such outstanding options and 71,839
were available for future issuance.
40
FACTORS THAT MAY AFFECT FUTURE RESULTS
WEAKNESS IN THE SEMICONDUCTOR AND ELECTRONICS BUSINESSES MAY NEGATIVELY
IMPACT SYNOPSYS' BUSINESS. Synopsys' business depends on the semiconductor and
electronics industries. During 2001 and 2002, these industries experienced steep
declines in orders and revenue. In February 2002, for example, semiconductor
sales (on a three month rolling average basis) were down approximately 45% from
their all-time peak, reached in October 2000. By October 2002, sales remained
33% below the peak. Despite this marginal improvement, customers report a
significant lack of visibility in their businesses, and this has affected their
buying behavior. Customers are scrutinizing their purchases of EDA software very
carefully. In addition, they are increasingly demanding, and we have granted,
extended payment terms on their purchases, which has affected our cash flow.
Based on our interactions with customers, Synopsys does not expect a material
recovery in the semiconductor and electronics industries in 2003; if recovery
continues we believe that it will be very gradual, at best. Consequently,
Synopsys is not expecting material growth in the EDA industry in 2003.
Demand for electronic design automation products is largely dependent upon
the commencement of new design projects by semiconductor manufacturers and their
customers, the increasing complexity of designs and the number of design
engineers. During 2001 and 2002 many semiconductor and electronic companies
cancelled or deferred design projects and reduced their design engineering
staffs; the formation of new companies engaged in semiconductor design,
traditionally an important source of new business for the Company, slowed
significantly; and a small number of existing customers went out of business.
Each of these developments negatively impacted our orders and revenue. Demand
for our products and services may also be affected by partnerships and/or
mergers in the semiconductor and systems industries. Given current market
conditions, the rate of mergers and acquisitions may increase during 2003. Such
combinations may reduce the aggregate level of purchases of our products and
services by the companies involved.
Continuation or worsening of the current conditions in the semiconductor
and electronics industries, and continued consolidation among our customers, all
could have a material adverse effect on our business, financial condition and
results of operations.
SYNOPSYS' REVENUE AND EARNINGS MAY FLUCTUATE. Many factors affect our
revenue and earnings, which makes it difficult to predict revenue and earnings
for any given fiscal period. Among these factors are customer product and
service demand, product license terms, and the timing of revenue recognition on
products and services sold. The following are some of the specific factors that
could affect our revenue and earnings in a particular quarter or over several
quarterly or annual periods:
o Our products are complex, and before buying them customers spend a great
deal of time reviewing and testing them. Our customers' evaluation and
purchase cycles do not necessarily match our quarterly periods. In the
past, we have received a disproportionate volume of orders in the last week
of a quarter. This trend has become more pronounced in recent quarters. In
addition, a large proportion of our business is attributable to our largest
customers. As a result, if any order, and especially a large order, is
delayed beyond the end of a fiscal period, our orders for that period could
be below our plan and our revenue for that period or future periods could
be below our plan and any targets we may have published.
o Our business is seasonal. 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. This difference is driven largely by
the volume of perpetual licenses shipped during the quarter, which,
following the seasonal pattern of overall orders, typically declines from
the fourth quarter to the first quarter.
o Our revenue and earnings targets for any fiscal period are based, in part,
upon an assumption that we will achieve a certain volume of overall 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
license) within a specified range, which is adjusted from time to time. If
we receive the targeted volume of overall orders but a lower-than expected
proportion of perpetual orders, then our revenue for the quarter will be
below our target for the quarter (though the shortfall will be recognized
in future quarters). Conversely, if we receive a lower-than-expected volume
of overall orders but the expected volume of perpetual orders, then our
revenue for the period may be on target, though revenue in future periods
will be lower than expected.
41
o Accounting rules determine when revenue is recognized on our orders, and
therefore impact how much revenue we will report in any given fiscal
period. In general, revenue is recognized on TSLs ratably over the term of
the license and on perpetual licenses upon delivery of the license. For any
given order, however, the specific terms agreed to with a customer may have
the effect under the accounting rules of requiring revenue treatment
different from the treatment we intended and, in developing our financial
plans, expected. As a result, 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 such period.
COMPETITION MAY HAVE A MATERIAL ADVERSE EFFECT ON SYNOPSYS' RESULTS OF
OPERATIONS. The EDA industry is highly competitive. We compete against other EDA
vendors, and with customers' internally developed design tools and internal
design capabilities for a share of the overall EDA budgets of our potential
customers. In general, competition is based on product quality and features,
post-sale support, 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. In the current economic environment price and payment
terms have increased in importance as a basis for competition. During fiscal
2002 we have increasingly agreed to extended payment terms on our TSLs, which
has had a negative effect on cash flow from operations. In addition, in certain
situations our competitors are offering aggressive discounts on their products.
As a result, average prices may fall.
IF WE ARE UNABLE TO DEVELOP AN INTEGRATED DESIGN FLOW PRODUCT AND OTHER NEW
PRODUCTS WE MAY BE UNABLE TO COMPETE EFFECTIVELY. 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. The need to offer an integrated design
flow will become increasingly important as ICs grow more complex. After the
acquisition of Avant!, we offer all of the point tools required to design an IC,
some of which integrate logic and physical design capabilities. Our products
compete principally with design flow products from Cadence and Magma Design
Automation, which in some respects may be more integrated than our products. Our
future success depends on our ability to integrate Synopsys' logic design and
physical synthesis products with the physical design products acquired from
Avant!, which will require significant engineering and development work. Success
in this project is especially important as the Company believes that its orders
and revenue from Design Compiler, which has accounted for 29% and 18% of
Synopsys orders in 2001 and 2002, respectively peaked in fiscal year 2001, as
predicted, and are likely to continue to decline over time. There can be no
guarantee that we will be able to offer a competitive complete design flow to
customers. If we are unsuccessful in developing integrated design flow products
on a timely basis or if we are unsuccessful in developing or convincing
customers to adopt such products, our competitive position could be
significantly weakened.
In order to sustain revenue growth over the long term, we will have to
enhance our existing products, introduce new products that are accepted by a
broad range of customers and to generate growth in our consulting services
business. In addition to the development of integrated logic and physical design
products, Synopsys is attempting to integrate its verification products into a
comprehensive functional verification platform, and is expanding its offerings
of intellectual property design components. Product success is difficult to
predict. The introduction of new products and growth of a market for such
products cannot be assured. In the past we, like all companies, have introduced
new products that have failed to meet our revenue expectations. There can be no
assurance that we will be successful in expanding revenue from existing or new
products at the desired rate, and the failure to do so would have a material
adverse effect on our business, financial condition and results of operations.
BUSINESSES THAT SYNOPSYS HAS ACQUIRED OR THAT SYNOPSYS MAY ACQUIRE IN THE
FUTURE MAY NOT PERFORM AS PROJECTED. We have acquired or merged with a number of
companies in recent years, and as part of our efforts to increase revenue and
expand our product and services offerings we may acquire additional companies.
During 2002, we acquired Avant!, inSilicon Corporation and Co-Design Automation,
Inc. In addition to direct costs, acquisitions pose a number of risks, including
potential dilution of earnings per share, problems in integrating the acquired
products and employees into our business, the failure to realize expected
synergies or cost savings, the failure of acquired products to achieve projected
sales, the drain on management time for acquisition-related activities, adverse
effects on customer buying patterns and assumption of unknown liabilities. While
we attempt to review proposed acquisitions carefully and negotiate terms that
are favorable to us, there is no assurance that any acquisition will have a
positive effect on our performance.
42
DELAYS OR CANCELLATION OF CONSULTING PROJECTS OR CUSTOMER PAYMENT DEFAULTS
COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. As of December 1, 2002, the Company had approximately
$1.3 billion in backlog, as defined in "Item 1 - Business - Sales, Distribution
and Backlog." The Company expects that this backlog will turn into revenue.
Orders for professional services, which constitute less than $100 million of the
total backlog, may be deferred or cancelled by the customer in the event that a
project is delayed or cancelled, though in some cases the company is paid a
cancellation fee. In the case of orders for the Company's software, backlog
includes only amounts subject to committed, non-cancelable orders. Such orders
are not subject to cancellation or delay by the customer; but may fail to yield
the expected revenue in the event that the customer defaults and fails to pay
amounts owed. In such cases the Company will generally institute legal
proceedings to recover amounts owed. To date, the Company has not experienced a
material level of defaults, though in the current economic environment it is
possible that the level of defaults will increase. See "Management's Discussion
and Analysis of Results of Operation and Financial Condition - Critical
Accounting Policies - Allowance for Doubtful Accounts". Any material payment
default by the Company's customers could have a material adverse effect on the
Company's financial condition and results of operations.
CONTINUED STAGNATION OF FOREIGN ECONOMIES WOULD ADVERSELY AFFECT OUR
PERFORMANCE. During fiscal 2002, 35% of our revenue was derived from outside
North America, as compared to 37% during fiscal 2001. Foreign sales are
vulnerable to regional or worldwide economic or political conditions. The global
electronics industry has experienced steep declines in 2001 and 2002, and the
Company does 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. The Japanese
economy has been stagnant for several years, and there is no expectation of
improvement in the near future. If the Japanese economy remains weak, revenue
and orders from Japan, and perhaps the rest of Asia, could be adversely
affected.
Foreign sales are also vulnerable to changes in foreign currency exchange
rates, either by making the Company's products more expensive to foreign
customers or by reducing the reported revenue realized from overseas sales. The
Company is particularly exposed to the Euro and the Japanese yen. Though the
Company attempts to hedge its risks related to forecasted accounts receivable
generally associated with sales contracts with extended payment terms and
accounts payable denominated in non-functional currencies, the yen-dollar and
Euro-dollar exchange rates remain subject to unpredictable fluctuations.
Weakness of either currency could adversely affect revenue and orders from those
regions. Conversely, if those currencies strengthen, our expenses denominated in
those currencies, which are not hedged, could increase. Asian countries other
than Japan also have experienced economic and currency problems in recent years,
and in some cases they have not fully recovered. Although the Asia Pacific
region is growing it is relatively small as a percentage of our business and it
could be difficult to sustain growth in the region if the rest of the world's
economies continue to stagnate. If economic conditions worsen orders and
revenues from the Asia Pacific region would be adversely affected.
A FAILURE TO RECRUIT AND RETAIN KEY EMPLOYEES WOULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR ABILITY TO COMPETE. Our success is dependent on our ability to
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 are in high
demand. There are a limited number of qualified EDA and IC design engineers, and
the competition for such individuals is intense. Experience at Synopsys is
highly valued in the EDA industry and the general electronics industry, and our
employees, including employees that have joined Synopsys in connection with
acquisitions, are recruited aggressively. In the past, we have experienced a
high rate of employee turnover, which may recur in the future. There can be no
assurance that we can continue to recruit and retain the technical and
managerial personnel we need to run our business successfully. Failure to do so
could have a material adverse effect on our business, financial condition and
results of operations.
In addition, new regulations proposed by The Nasdaq National Market
requiring shareholder approval for all stock option plans as well as new
regulations proposed by the New York Stock Exchange prohibiting NYSE member
organizations from giving a proxy to vote on equity-compensation plans unless
the beneficial owner of the shares has given voting instructions could make it
more difficult for us to grant options to employees in the future. To the extent
that new regulations make it more difficult or expensive to grant options to
employees, we may incur increased cash compensation costs or find it difficult
to attract, retain and motivate employees, either of which could materially and
adversely affect our business.
43
A FAILURE TO PROTECT OUR PROPRIETARY TECHNOLOGY WOULD HAVE A MATERIAL
ADVERSE EFFECT ON SYNOPSYS' FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Our
success is dependent, in part, upon our proprietary technology and other
intellectual property rights. We rely on agreements with customers, employees
and others, and intellectual property laws, to protect our proprietary
technology. There can be no assurance that these agreements will not be
breached, that we would have adequate remedies for any breach or that our trade
secrets will not otherwise become known or be independently developed by
competitors. Moreover, effective intellectual property protection may be
unavailable or limited in certain foreign countries. Failure to obtain or
maintain appropriate patent, copyright or trade secret protection, for any
reason, could have a material adverse effect on our business, financial
condition and results of operations. In addition, there can be no assurance that
infringement claims will not be asserted against us and any such claims could
require us to enter into royalty arrangements or result in costly and
time-consuming litigation or could subject us to damages or injunctions
restricting our sale of products or could require us to redesign products.
OUR OPERATING EXPENSES DO NOT FLUCTUATE PROPORTIONATELY WITH FLUCTUATIONS IN
REVENUES, WHICH COULD MATERIALLY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS IN
THE EVENT OF A SHORTFALL IN REVENUE. Our operating expenses are based in part on
our expectations of future revenue, and expense levels are generally committed
in advance of revenue. Since only a small portion of our expenses varies with
revenue, a shortfall in revenue translates directly into a reduction in net
income. If we are unsuccessful in generating anticipated revenue or maintaining
expenses within the expected range, however, our business, financial condition
and results of operations could be materially adversely affected.
SYNOPSYS HAS ADOPTED ANTI-TAKEOVER PROVISIONS, WHICH MAY HAVE THE EFFECT OF
DELAYING OR PREVENTING CHANGES OF CONTROL OR MANAGEMENT. We have adopted a
number of provisions that could have anti-takeover effects. Our Board of
Directors has adopted a Preferred Shares Rights Plan, commonly referred to as a
poison pill. In addition, our Board of Directors has the authority, without
further action by its stockholders, to issue additional shares of Common Stock
and to fix the rights and preferences of, and to issue authorized but
undesignated shares of Preferred Stock. These and other provisions of Synopsys'
Restated Certificate of Incorporation and Bylaws and the Delaware General
Corporation Law may have the effect of deterring hostile takeovers or delaying
or preventing changes in control or management of Synopsys, including
transactions in which the stockholders of Synopsys might otherwise receive a
premium for their shares over then current market prices.
SYNOPSYS IS SUBJECT TO CHANGES IN FINANCIAL ACCOUNTING STANDARDS, WHICH MAY
AFFECT OUR REPORTED REVENUE, 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). GAAP are subject to interpretation by
the Financial Accounting Standards Board, the American Institute of Certified
Public Accountants (AICPA), the SEC and various bodies appointed by these
organizations to interpret existing rules and create new accounting policies.
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 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 and other accounting bodies are currently considering a change to
US GAAP that, if implemented, would require us to account for options as a
compensation expense in the period in which they are granted. Synopsys currently
accounts for stock options under Statement of Financial Accounting Standards No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS 123). As permitted by SFAS
123, the Company has elected to use the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES (APB 25), to measure compensation expense for stock-based awards to
employees, under which the granting of a stock option is not considered
compensation, although the impact of "expensing" stock options is disclosed in
Note 6 of the Notes to the Consolidated Financial Statements. We cannot predict
whether such a requirement will be adopted, but if it is there would be a
significant negative effect on our reported results of operations.
44
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Information relating to quantitative and qualitative disclosure about market
risk is set forth in Synopsys' 2002 Annual Report on Form 10-K under the
captions "Interest Rate Risk" and "Foreign Currency Risk" in Management's
Discussion and Analysis of Financial Condition and Results of Operations, and
"Foreign Exchange Hedging" in Note 4 of Notes to Consolidated Financial
Statements.
45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF KPMG LLP, INDEPENDENT AUDITORS
To The Board of Directors and
Shareholders of Synopsys, Inc.:
We have audited the accompanying consolidated balance sheets of Synopsys,
Inc. and subsidiaries as of October 31, 2002 and 2001, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income and cash flows for each of the years in the three-year period ended
October 31, 2002. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Synopsys,
Inc. and subsidiaries as of October 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended October 31, 2002 in conformity with accounting principles generally
accepted in the United States of America.
\s\KPMG LLP
Mountain View, California November 20, 2002, except as to Note 13, which is as
of January 13, 2003
46
SYNOPSYS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE DATA)
ASSETS
OCTOBER 31,
----------------------------------
2002 2001
----------------- ----------------
Current assets:
Cash and cash equivalents...................................... $ 312,580 $ 271,696
Short-term investments......................................... 102,153 204,740
----------------- -----------------
Cash, cash equivalents and short-term investments......... 414,733 476,436
Accounts receivable, net of allowances of $11,565 and
$11,027, respectively....................................... 207,206 146,294
Deferred taxes ................................................ 282,867 149,239
Prepaid expenses and other..................................... 24,509 19,413
----------------- -----------------
Total current assets................................... 929,315 791,382
Property and equipment, net...................................... 185,040 192,304
Long-term investments............................................ 39,386 61,699
Goodwill, net.................................................... 434,554 35,077
Intangible assets, net........................................... 355,334 3,197
Long-term deferred taxes and other assets........................ 35,085 45,248
----------------- -----------------
Total assets........................................... $ 1,978,714 $ 1,128,907
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities....................... $ 246,789 $ 135,272
Current portion of long-term debt.............................. 1,423 535
Accrued income taxes........................................... 169,912 110,561
Deferred revenue............................................... 359,245 290,052
---------------- -----------------
Total current liabilities.............................. 777,369 536,420
Deferred compensation and other long-term liabilities............ 36,387 17,124
Long-term deferred revenue....................................... 51,477 89,707
Stockholders' equity:
Preferred stock, $.01 par value; 2,000 shares
authorized; no shares outstanding........................... -- --
Common stock, $.01 par value; 400,000 shares
authorized; 73,562 and 59,428 shares outstanding,
respectively 735 595
Additional paid-in capital..................................... 1,039,386 575,403
Retained earnings.............................................. 198,863 436,662
Treasury stock, at cost........................................ (116,499) (531,117)
Deferred stock compensation.................................... (8,858) --
Accumulated other comprehensive (loss) income.................. (146) 4,113
----------------- -----------------
Total stockholders' equity............................. 1,113,481 485,656
----------------- -----------------
Total liabilities and stockholders' equity............. $ 1,978,714 $ 1,128,907
See accompanying notes to consolidated financial statements.
47
SYNOPSYS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED OCTOBER 31,
----------------------------------------------
2002 2001 2000
-------------- --------------- ---------------
Revenue:
Product...................................... $ 245,193 $ 163,924 $ 434,077
Service...................................... 287,747 341,833 340,796
Ratable license.............................. 373,594 174,593 8,905
-------------- --------------- ---------------
Total revenue........................ 906,534 680,350 783,778
Cost of revenue:
Product...................................... 15,319 20,479 35,085
Service...................................... 78,167 79,747 80,442
Ratable license.............................. 45,737 29,896 8,947
Amortization of intangible assets and deferred
stock compensation........................... 33,936 -- --
-------------- --------------- ---------------
Total cost of revenue................ 173,159 130,122 124,474
-------------- --------------- ---------------
Gross margin................................... 733,375 550,228 659,304
Operating expenses:
Research and development..................... 225,545 189,831 189,280
Sales and marketing.......................... 264,809 273,954 288,762
General and administrative................... 78,461 69,682 59,248
Integration.................................. 128,528 -- --
In-process research and development.......... 87,700 -- 1,750
Amortization of intangible assets and deferred
stock compensation........................... 28,649 17,012 15,129
-------------- --------------- ---------------
Total operating expenses............. 813,692 550,479 554,169
-------------- --------------- ---------------
Operating (loss) income........................ (80,317) (251) 105,135
Other (expense) income, net.................... (208,623) 83,784 40,803
-------------- --------------- ---------------
(Loss) income before provision for
income taxes................................. (288,940) 83,533 145,938
(Benefit) provision for income taxes........... (88,947) 26,731 48,160
-------------- --------------- ---------------
Net (loss) income.............................. $ (199,993) $ 56,802 $ 97,778
============== =============== ===============
Basic earnings per share:
Net (loss) income per share.................. $ (2.99) $ 0.94 $ 1.43
Weighted average common shares............... 66,808 60,601 68,510
============== =============== ===============
Diluted earnings per share:
Net (loss) income per share.................. $ (2.99) $ 0.88 $ 1.38
Weighted average common shares and
dilutive stock options outstanding....... 66,808 64,659 70,998
============== =============== ===============
See accompanying notes to consolidated financial statements.
48
SYNOPSYS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(IN THOUSANDS)
ADDITIONAL
COMMON STOCK PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK
-------------------------------------------------------
BALANCE AT OCTOBER 31, 1999............ 70,750 $708 $542,052 $349,192 $ (28,589)
Comprehensive Income:
Net income........................... -- -- -- 97,778 --
Other comprehensive income (loss), net
of tax:
Unrealized gain on investments..... -- -- -- -- --
Reclassification adjustment on
unrealized gains on investments.. -- -- -- -- --
Foreign currency translation
adjustment....................... -- -- -- -- --
Other comprehensive income.........
Comprehensive income...................
Acquisition of treasury stock.......... (9,932) (99) 99 -- (397,466)
Stock options assumed in connection with
acquisition........................ -- -- 1,187 -- --
Stock issued under stock option and stock
purchase plans..................... 2,059 20 4,514 (41,551) 96,562
Tax benefits associated with exercise of
stock options...................... -- -- 10,864 -- --
--------------------------------------------------------
BALANCE AT OCTOBER 31, 2000............ 62,877 629 558,716 405,419 (329,493)
Comprehensive Income:
Net income........................... -- -- -- 56,802 --
Other comprehensive income (loss), net of tax:
Unrealized loss on investments. -- -- -- -- --
Reclassification adjustment on
unrealized gains on investments. -- -- -- -- --
Foreign currency translation
adjustment...................... -- -- -- -- --
Other comprehensive loss...........
Comprehensive income...................
Acquisition of treasury stock.......... (6,617) (66) 66 -- (331,882)
Stock issued under stock option and stock
purchase plans..................... 3,168 32 628 (25,559) 130,258
Tax benefits associated with exercise of
stock options...................... -- -- 15,993 -- --
----------------------------------------------------------
BALANCE AT OCTOBER 31, 2001............ 59,428 $595 $575,403 $436,662 $ (531,117)
49
SYNOPSYS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME - CONTINUED
(IN THOUSANDS)
ACCUMULATED
OTHER
DEFERRED COMPREHENSIVE COMPREHENSIVE
COMPENSATION INCOME(LOSS) INCOME(LOSS) TOTAL
------------ ------------- ---------------- --------
BALANCE AT OCTOBER 31, 1999............ -- $ 9,234 $872,597
Comprehensive Income:
Net income........................... -- 97,778 -- 97,778
Other comprehensive income (loss), net
of tax:
Unrealized gain on investments....... -- 50,689
Reclassification adjustment on
unrealized gains on investments.... -- (8,934)
Foreign currency translation
adjustment......................... -- (3,431)
-------------
Other comprehensive income......... 38,324 38,324 38,324
-------------
Comprehensive income................... $ 136,102
=============
Acquisition of treasury stock.......... -- -- (397,466)
Stock options assumed in connection with
acquisition.......................... -- -- 1,187
Stock issued under stock option and stock
purchase plans....................... -- -- 59,545
Tax benefits associated with exercise of
stock options.......................... -- -- 10,864
------------ ---------------------
BALANCE AT OCTOBER 31, 2000............ -- 47,558 682,829
Comprehensive Income:
Net income...................... .... -- 56,802 -- 56,802
Other comprehensive income (loss), net
of tax:
Unrealized loss on investments....... -- (4,063)
Reclassification adjustment on
unrealized gains on investments.... -- (33,713)
Foreign currency translation
adjustment......................... -- (5,669)
-------------
Other comprehensive loss........... (43,445) (43,445) (43,445)
-------------
Comprehensive income................... $13,357
=============
Acquisition of treasury stock.......... -- -- (331,882)
Stock issued under stock option and stock
purchase plans....................... -- -- 105,359
Tax benefits associated with exercise of
stock options........................ -- -- 15,993
------------ ---------------------
BALANCE AT OCTOBER 31, 2001........... $ -- $ 4,113 $485,656
50
SYNOPSYS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME - CONTINUED
(IN THOUSANDS)
ADDITIONAL
COMMON STOCK PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK
---------------------------- ----------- ----------
BALANCE FORWARD: $59,428 $ 595 $575,403 $ 436,662 $ (531,117)
BALANCE AT OCTOBER 31, 2001............
Comprehensive Income (Loss):
Net loss............................. -- -- -- (199,993) --
Other comprehensive income (loss), net of tax:
Unrealized loss on investments..... -- -- -- -- --
Unrealized gain on currency contracts -- -- -- -- --
Reclassification adjustment on
unrealized gains on investments.. -- -- -- -- --
Foreign currency translation
adjustment....................... -- -- -- -- --
Other comprehensive loss...........
Comprehensive loss.....................
Acquisition of Avant! Corporation...... 14,530 145 435,066 -- 431,312
Amortization of deferred stock
compensation related to acquisitions -- -- (83) -- --
Acquisition of treasury stock.......... (3,884) (39) 39 -- (171,678)
Stock options assumed in connection with
acquisition of inSilicon and Co-Design -- -- 5,929 -- --
Stock issued under stock option and stock
purchase plans...................... 3,488 34 3,572 (37,806) 154,984
Tax benefits associated with exercise of
stock options....................... -- -- 19,460 -- --
----------------- ------ ----------- ----------- ------------
BALANCE AT OCTOBER 31, 2002....... $ 73,562 $ 735 $ 1,039,386 $ 198,863 $(116,499)
=========== ====== ========= ========= ==========
See accompanying notes to the consolidated financial statements.
51
SYNOPSYS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME - CONTINUED
(IN THOUSANDS)
ACCUMULATED
OTHER
DEFERRED COMPREHENSIVE COMPREHENSIVE
COMPENSATION INCOME (LOSS) INCOME (LOSS) TOTAL
------------ -------------- --------------- ----------
BALANCE FORWARD:
BALANCE AT OCTOBER 31, 2001.......... $ -- $ 4,113 $ 485,656
Comprehensive Income (Loss):
Net loss............................. -- (199,993) -- (199,993)
Other comprehensive income (loss), net of tax:
Unrealized loss on investments..... -- (143)
Unrealized gain on currency contracts -- 6,482
Reclassification adjustment on
unrealized gains on investments.. -- (5,842)
Foreign currency translation
adjustment....................... -- (4,756)
--------------
Other comprehensive loss........... (4,259) (4,259) (4,259)
--------------
Comprehensive loss..................... $(204,252)
==============
Acquisition of Avant! Corporation...... (8,102) -- 858,421
Amortization of deferred stock
compensation related to acquisitions 1,605 -- 1,522
Acquisition of treasury stock.......... -- -- (171,678)
Stock options assumed in connection with
acquisition of inSilicon and Co-Design (2,361) -- 3,568
Stock issued under stock option and stock
purchase plans...................... -- -- 120,784
Tax benefits associated with exercise of
stock options....................... -- -- 19,460
--------------- ----------- ------------
BALANCE AT OCTOBER 31, 2002........... $ (8,858) $ (146) $1,113,481
=============== ============ ============
52
SYNOPSYS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED OCTOBER 31,
---------------------------------------------
2002 2001 2000
-------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income............................ $ (199,993) $ 56,802 $ 97,778
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Amortization and depreciation............. 116,100 65,162 63,770
Provision for doubtful accounts and sales
returns................................. 7,042 5,759 3,528
Write-down of long term investments....... 11,326 5,848 --
Write-down of land and property........... 14,712 -- --
Gain on sale of long-term investments..... (21,299) (57,080) (11,455)
Write-down of goodwill and intangible assets 3,785 2,200 --
Deferred taxes............................ (128,167) (58,831) (64,137)
Deferred rent............................. 2,804 -- --
In-process research and development....... 87,700 -- 1,750
Non-cash gain on sale of silicon libraries -- (10,580) --
Non-cash compensation expense............. 1,761 -- --
Tax benefit associated with stock options. 19,460 15,993 10,864
Net changes in operating assets and
liabilities:
Accounts receivable..................... 5,275 (5,190) (19,186)
Prepaid expenses and other current assets 2,930 (231) 4,316
Other assets............................ (14,814) (1,754) (8,787)
Accounts payable and accrued liabilities (77,546) (8,072) 39,180
Accrued income taxes.................... (20,974) 54,563 5,980
Deferred revenue........................ 5,993 229,160 23,190
Deferred compensation................... 2,856 1,771 5,092
-------------- --------------- ---------------
Net cash (used in) provided by operating
activities............................ (181,049) 295,520 151,883
-------------- -------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of
short-term investments.................... 876,298 2,003,589 2,782,613
Purchases of short-term investments.......... (769,102) (1,927,784) (2,667,112)
Proceeds from sales of long-term investments. 56,033 77,777 24,336
Purchases of long-term investments........... (5,472) (12,076) (13,998)
Proceeds from sale of silicon libraries
business.................................. -- 4,122 --
Purchases of property and equipment.......... (48,755) (82,490) (68,500)
Cash acquired in acquisitions (net of cash
paid)..................................... 168,311 -- (14,474)
Intangible assets, net....................... -- (313) 3,697
Capitalization of software development costs. (1,592) (1,000) (1,000)
-------------- --------------- ---------------
Net cash provided by investing activities.... 275,721 61,825 45,562
-------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt..... -- -- 727
Principal payments on debt obligations....... -- (6,162) (13,507)
Proceeds from sale of common stock........... 119,868 105,359 59,545
Purchases of treasury stock.................. (171,677) (331,882) (397,466)
-------------- --------------- -------------
Net cash used in financing activities........ (51,809) (232,685) (350,701)
Effect of exchange rate changes on cash...... (1,979) (5,669) (3,433)
-------------- --------------- ---------------
Net increase (decrease) in cash and cash 40,884 118,991 (156,689)
equivalents...............................
Cash and cash equivalents, beginning of year. 271,696 152,705 309,394
-------------- --------------- ---------------
Cash and cash equivalents, end of year....... $ 312,580 $ 271,696 $ 152,705
============== =============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Income taxes......................... $ 70,750 $ 25,262 $ 91,927
Non-cash transactions:
Issuance of stock and options in
exchange for net assets of Avant!... $ 858,421 $ -- $ --
Issuance of notes payable in Co-Design
acquisition......................... $ 4,770 $ -- $ --
See accompanying notes to consolidated financial statements.
53
SYNOPSYS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS
Synopsys, Inc. (Synopsys or the Company) is a leading supplier of EDA
software to the global electronics industry. The Company develops, markets, and
supports a wide range of integrated circuit (IC) design products that are used
by designers of advanced ICs, including system-on-a-chip ICs, and the electronic
systems (such as computers, cell phones, and internet routers) that use such
ICs, to automate significant portions of their design process. ICs are
distinguished by the speed at which they run, their area, the amount of power
they consume and their cost of production. Synopsys' products offer its
customers the opportunity to design ICs that are optimized for speed, area,
power consumption and production cost, while reducing overall design time. The
Company also provides consulting services to help its customers improve their IC
designs and, where requested, to assist them with their IC designs, as well as
training and support services.
CURRENT YEAR ACQUISITIONS. On June 6, 2002, the Company completed its
merger with Avant! Corporation (Avant!). Avant! was a leader in the development
of software used in the physical design and physical verification phases of chip
design. Under the terms of the merger agreement between Synopsys and Avant!,
Avant! merged with and into a wholly-owned subsidiary of Synopsys. The results
of operations of Avant! are included in the accompanying consolidated financial
statements for the period from June 6, 2002 through October 31, 2002.
On September 6, 2002, we completed our acquisition of Co-Design, a private
company which was developing 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 results of operations of Co-Design are included
in the accompanying consolidated financial statements for the period from
September 6, 2002 through October 31, 2002.
On September 20, 2002, we completed our acquisition of inSilicon, a company
that developed, marketed and licensed an extensive portfolio of complex
"intellectual property blocks", or pre-designed, pre-verified subportions of a
chip that can be used as building blocks for complex systems-on-a-chip, and
therefore, accelerate the development of such chips. The results of operations
of inSilicon are included in the accompanying consolidated financial statements
for the period from September 20, 2002 through October 31, 2002.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR END. The Company has a fiscal year that ends on the Saturday
nearest October 31. Fiscal 2002 and 2000 were 52-week years and fiscal 2001 was
a 53-week year. For presentation purposes, the consolidated financial statements
and notes refer to the calendar month end.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of the Company and all of its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
recorded in the financial statements and accompanying notes. Actual amounts
could differ from these estimates.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS. The Company classifies
investments with original maturities of three months or less when acquired as
cash equivalents. All of the Company's cash equivalents and short-term
investments are classified as available-for-sale and are reported at fair value,
with unrealized gains and losses included in stockholders' equity as a component
of accumulated other comprehensive income, net of tax. The fair value of
short-term investments is determined based on quoted market prices. The cost of
securities sold is based on the specific identification method and realized
gains and losses are included in other income, net. The Company has cash
equivalents and investments with various high quality institutions and, by
policy, limits the amount of credit exposure to any one institution.
CONCENTRATION OF CREDIT RISK. The Company sells its products worldwide
primarily to customers in the semiconductor industry. The Company performs
on-going credit evaluations of its customers' financial condition and generally
does not require collateral. The Company maintains reserves for potential credit
losses, and such losses have been within management's expectations and have not
been material in any year.
54
FAIR VALUES OF FINANCIAL INSTRUMENTS. The fair value of the Company's cash,
accounts receivable, long-term investments, forward contracts relating to
certain investments in equity securities, accounts payable, long-term debt and
foreign currency contracts, approximates the carrying amount, which is the
amount for which the instrument could be exchanged in a current transaction
between willing parties.
FOREIGN CURRENCY TRANSLATION. The functional currency of each of the
Company's foreign subsidiaries is the foreign subsidiary's local currency.
Assets and liabilities of the Company's foreign operations are translated into
U.S. dollars at exchange rates in effect at the balance sheet date. Income and
expense items are translated at average exchange rates for the period.
Accumulated net translation adjustments are reported in stockholders' equity,
net of tax, as a component of accumulated other comprehensive income (loss). The
associated tax benefit for cumulative translation adjustments was $3.0 million,
$3.6 million and $2.2 million in fiscal 2002, 2001 and 2000, respectively.
Foreign exchange transaction gains and losses were not material for all periods
presented and are included in the results of operations.
FOREIGN CURRENCY CONTRACTS. The Company operates internationally and
therefore is exposed to potentially adverse movements in currency exchange
rates. The Company has entered into foreign currency forward contracts to reduce
its exposure to foreign currency rate changes on non-functional currency
denominated balance sheet positions. The objective of these contracts is to
neutralize the impact of foreign currency rate movements on the Company's
operating results.
The Company also uses forward foreign currency contracts to hedge certain
cash flow exposures resulting from the impact of currency exchange rate
fluctuations on forecasted receivables denominated in non-functional currencies.
These foreign currency contracts, carried at fair value, have a duration of
approximately 30 days. Such cash flow exposures result from portions of the
Company's forecasted accounts receivable generally associated with sales
contracts with extended payment terms and accounts payable denominated in
non-functional currencies. As of October 31, 2002, the unrealized gain of
approximately $10.0 million on these forward contracts is recorded in
stockholders' equity, net of tax, as a component of accumulated other
comprehensive income. The Company enters into these foreign exchange contracts
to hedge only (i) those currency exposures associated with certain assets and
liabilities denominated in nonfunctional currencies and (ii) forecasted accounts
receivable and accounts payable denominated in non-functional currencies in the
normal course of business, and accordingly, they are not speculative in nature.
Foreign currency forward contracts require the Company to exchange
currencies at rates agreed upon at the inception of the contracts. These
contracts reduce the exposure to fluctuations in exchange rates because the
gains and losses associated with non-functional currency balances and
transactions are generally offset with the gains and losses of the hedge
contracts. Because the impact of movements in currency exchange rates on forward
contracts offsets the related impact on the underlying items being hedged, these
financial instruments help alleviate the risk that might otherwise result from
changes in currency exchange rates.
The realized gain/loss on these contracts as they matured were not material
to the consolidated financial position, results of operations or cash flows for
the periods presented.
REVENUE RECOGNITION AND COST OF REVENUE. Revenue consists of fees for
perpetual and time-based licenses for the Company's software products,
post-contract customer support (PCS), customer training and consulting. The
Company classifies its revenues as product, service or ratable license. Product
revenue consists primarily of sales of perpetual licenses.
Service revenue consists of fees for consulting services, training, and PCS
associated with non-ratable time-based licenses or perpetual licenses. PCS sold
with perpetual licenses is generally renewable, after any bundled PCS period
expires, in one-year increments for a fixed percentage of the perpetual list
price or, for perpetual license arrangements in excess of $2 million, as a
percentage of the net license fee.
Ratable license revenue is all fees related to time-based licenses bundled
with PCS and sold as a single package (commonly referred to by the Company as a
Technology Subscription License or TSL), and time-based licenses in which the
Company did not bundle PCS but has granted extended payment terms or under which
the customer has a right to receive unspecified future products.
Cost of product revenue includes cost of production personnel, product
packaging, documentation, amortization of capitalized software development
costs, and costs of the Company's systems products. Cost of service revenue
includes personnel and the related costs associated with providing training,
consulting and PCS. Cost of ratable license revenue includes the cost of
products and services related to time-based licenses bundled with PCS and sold
as a single package and to time-based licenses that include extended payment
terms or unspecified future products. Cost of revenue also includes the
amortization of the contract rights intangible, core technology and deferred
stock compensation.
55
The Company recognizes revenue in accordance with SOP 97-2, SOFTWARE REVENUE
RECOGNITION, as amended by SOP 98-9 and SOP 98-4 and generally recognizes
revenue when all of the following criteria are met as set forth in paragraph 8
of SOP 97-2:
o Persuasive evidence of an arrangement exists,
o Delivery has occurred,
o The vendor's fee is fixed or determinable, and
o Collectibility is probable.
The Company defines each of the four criteria above as follows:
PERSUASIVE EVIDENCE OF AN ARRANGEMENT EXISTS. It is the Company's customary
practice to have a written contract, which is signed by both the customer and
Synopsys, or a purchase order from those customers that have previously
negotiated a standard end-user license arrangement or volume purchase
agreement, prior to recognizing revenue on an arrangement.
DELIVERY HAS OCCURRED. The Company's software may be either physically or
electronically delivered to its customers. For those products that are
delivered physically, the Company's standard transfer terms are FOB shipping
point. For an electronic delivery of software, delivery is considered to have
occurred when the customer has been provided with the access codes that allow
the customer to take immediate possession of the software on its hardware.
If an arrangement includes undelivered products or services that are
essential to the functionality of the delivered product, delivery is not
considered to have occurred.
THE VENDOR'S FEE IS FIXED OR DETERMINABLE. The fee the Company's customers
pay for its products is negotiated at the outset of an arrangement, and is
generally based on the specific volume of product to be delivered. The
Company's license fees are not a function of variable-pricing mechanisms such
as the number of units distributed or copied by the customer, or the expected
number of users in an arrangement. Therefore, except in cases where the
Company grants extended payment terms to a specific customer, the Company's
fees are considered to be fixed or determinable at the inception of the
arrangements.
The Company's typical payment terms are such that a minimum of 75% of the
arrangement revenue is due within one year or less. Arrangements with payment
terms extending beyond the typical payment terms are not considered to be
fixed or determinable. Revenue from such arrangements is recognized at the
lesser of the aggregate of amounts due and payable or the amount of the
arrangement fee that would have been recognized if the fees had been fixed or
determinable.
COLLECTIBILITY IS PROBABLE. Collectibility is assessed on a
customer-by-customer basis. The Company typically sells to customers for
which there is a history of successful collection. New customers are
subjected to a credit review process that evaluates the customers' financial
positions and ultimately their ability to pay. New customers are typically
assigned a credit limit based on a formulated review of their financial
position. Such credit limits are only increased after a successful collection
history with the customer has been established. If it is determined from the
outset of an arrangement that collectibility is not probable based upon the
Company's credit review process, revenue is recognized on a cash-collected
basis.
MULTIPLE ELEMENT ARRANGEMENTS. The Company allocates revenue on software
arrangements involving multiple elements to each element based on the
relative fair values of the elements. The Company's determination of fair
value of each element in multiple element arrangements is based on
vendor-specific objective evidence (VSOE). The Company limits its assessment
of VSOE for each element to the price charged when the same element is sold
separately.
The Company has analyzed all of the elements included in its
multiple-element arrangements and determined that it has sufficient VSOE to
allocate revenue to the PCS components of its perpetual license products and
consulting. Accordingly, assuming all other revenue recognition criteria are
met, revenue from perpetual licenses is recognized upon delivery using the
residual method in accordance with SOP 98-9 and revenue from PCS is recognized
ratably over the PCS term. The Company recognizes revenue from TSLs over the
term of the ratable license period, as the license and PCS portions of a TSL are
bundled and not sold separately. Revenue from contracts with extended payment
terms is recognized as the lesser of amounts due and payable or the amount of
the arrangement fee that would have been recognized if the fee were fixed or
determinable.
Certain of the Company's time-based licenses include the rights to unspecified
additional products. Revenue from contracts with the rights to unspecified
additional software products is recognized ratably over the contract term. The
Company recognizes revenue from time-based licenses that include both
unspecified additional software products and extended payment terms 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.
56
CONSULTING SERVICES. The Company provides design methodology assistance,
specialized services relating to telecommunication systems design and
generalized turnkey design services. The Company's consulting services generally
are not essential to the functionality of the software. The Company's software
products are fully functional upon delivery and implementation does not require
any significant modification or alteration. The Company's services to its
customers often include assistance with product adoption and integration and
specialized design methodology assistance. Customers typically purchase these
professional services to facilitate the adoption of the Company's technology and
dedicate personnel to participate in the services being performed, but they may
also decide to use their own resources or appoint other professional service
organizations to provide these services. Software products are billed separately
and independently from consulting services, which are generally billed on a
time-and-materials or milestone-achieved basis. The Company generally recognizes
revenue from consulting services as the services are performed.
Exceptions to the general rule above involve arrangements where the Company
has committed to significantly alter the features and functionality of its
software or build complex interfaces necessary for the Company's software to
function in the customer's environment. These types of services are considered
to be essential to the functionality of the software. Accordingly, contract
accounting is applied to both the software and service elements included in
these arrangements.
PROPERTY AND EQUIPMENT. Property and equipment is recorded at cost.
Depreciation and amortization of assets is provided using the straight-line
method over estimated useful lives of the property or equipment ranging from
three to five years. Leasehold improvements are amortized using the
straight-line method over the remaining term of the lease or the economic useful
life of the asset whichever is shorter. The cost of repairs and maintenance is
charged to operations as incurred. A detail of property and equipment is as
follows:
OCTOBER 31,
----------------------------------
2002 2001
----------------- ---------------
(IN THOUSANDS)
Computer and other equipment...... $ 279,239 $ 271,264
Buildings......................... 21,821 22,092
Furniture and fixtures............ 26,446 23,160
Land.............................. 42,754 50,153
Leasehold improvements............ 61,796 35,775
----------------- ----------------
432,056 402,444
Less accumulated depreciation and
amortization. (247,016) (210,140)
----------------- ----------------
$ 185,040 $ 192,304
SOFTWARE DEVELOPMENT COSTS. Capitalization of software development costs
begins upon the establishment of technological feasibility, which is generally
the completion of a working prototype. Software development costs capitalized
were $1.6 million in fiscal 2002, $1.0 million in fiscal 2001, and $1.0 million
in fiscal 2000. Amortization of software development costs is computed based on
the straight-line method over the software's estimated economic life of
approximately two years. The Company recorded amortization of $1.1 million, $1.0
million, and $1.0 million in fiscal 2002, 2001 and 2000, respectively.
GOODWILL AND INTANGIBLE ASSETS. Goodwill represents the excess of the
aggregate purchase price over the fair value of the tangible and identifiable
intangible assets acquired by the Company. Intangible assets consist of
purchased technology, contract rights intangibles, customer installed
base/relationship, trademarks and tradenames, covenants not to compete, customer
backlog and capitalized software. Intangible assets are amortized on a
straight-line basis over their estimated useful lives which range from three to
ten years. Amortization of intangible assets was $61.1 million, $17.0 million
and $15.1 million in fiscal 2002, 2001 and 2000, respectively.
The Company periodically evaluates its intangible assets for indications of
impairment. If this evaluation indicates that the value of the intangible asset
may be impaired, an assessment of the recoverability of the net carrying value
of the asset over it remaining useful life is made. If this assessment indicates
that the intangible asset is not recoverable, based on the estimated
undiscounted future cash flows of the entity or technology acquired over the
remaining amortization period, the net carrying value of the related intangible
asset will be reduced to fair value and/or the remaining amortization period may
be adjusted. In fiscal 2002, the Company recognized an aggregate impairment
charge of $3.8 million to reduce the amount of certain intangible assets
associated with prior acquisitions to their estimated fair value. Approximately
$3.7 million and $0.1 million are included in integration expense and
amortization of intangible assets, respectively, on the statement of operations.
The impairment charge is primarily attributable to certain technology acquired
from, and goodwill related to the acquisition of Stanza, Inc. in 1999. During
the fourth quarter of fiscal 2002, the Company determined that it would not
allocate future resources to assist in the market growth of this technology as
products offered by Avant! provide customers with similar capabilities as well
as additional functionality and does not anticipate any future sales of the
product.
57
In fiscal 2001, the Company recognized an aggregate impairment charge of
$2.2 million to reduce the amount of certain intangible assets associated with
prior acquisitions to their estimated fair value. Approximately $1.8 million and
$0.4 million are included in cost of revenues and amortization of intangible
assets, respectively, on the statement of operations. The impairment charge is
attributable to certain technology acquired from, and goodwill related to the
acquisition of Eagle Design Automation, Inc. in 1997. During the fourth quarter
of fiscal 2001, the Company determined that it would not allocate future
resources to assist in the market growth of this technology and does not
anticipate any future sales of the product. There were no impairments of
intangible assets in fiscal 2000.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES. Accounts payable and accrued
liabilities consist of:
OCTOBER 31,
---------------------------------
2002 2001
--------------- ----------------
(IN THOUSANDS)
Payroll and related benefits........$ 106,155 $ 90,356
Other accrued liabilities........... 121,995 25,487
Accounts payable.................... 18,639 19,429
----------------- ----------------
Total.................... $ 246,789 $ 135,272
============== ===============
DEFERRED COMPENSATION PLAN. The Company maintains a deferred compensation
plan (the Plan) which permits certain employees to defer up to 50% of their
annual cash base compensation or 100% of their annual cash variable
compensation. Distributions from the Plan are generally payable upon cessation
of employment over five to 15 years or as a lump sum payment, at the option of
the employee. Undistributed amounts under the Plan are subject to the claims of
the Company's creditors. As of October 31, 2002 and 2001, the invested amounts
under the Plan total $22.8 million and $15.6 million respectively, and are
recorded as a long-term asset on the Company's balance sheet. As of October 31,
2002 and 2001, the Company has recorded $22.9 million and $16.7 million,
respectively, as a long-term liability to recognize undistributed amounts due to
employees.
INCOME TAXES. The Company accounts for income taxes using the asset and
liability method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
EARNINGS PER SHARE. Basic earnings per share is computed using the
weighted-average number of shares outstanding during the period. Diluted
earnings per share is computed using the weighted-average number of common
shares and dilutive stock options outstanding during the period. The
weighted-average dilutive stock options outstanding is computed using the
treasury stock method. Due to the net loss incurred for fiscal 2002, the effect
of employee stock options is anti-dilutive.
The following is a reconciliation of the weighted-average common shares used
to calculate basic net income per share to the weighted-average common shares
used to calculate diluted net income per share.
YEAR ENDED OCTOBER 31,
--------------------------------
2002 2001 2000
----------- ---------- ---------
(IN THOUSANDS)
Weighted-average common shares for
basic net income per share........ 66,808 60,601 68,510
Weighted-average stock options
outstanding....................... -- 4,058 2,488
----------- --------- --------
Weighted-average shares for diluted
net income per share.............. 66,808 64,659 70,998
=========== ========= ========
58
The effect of dilutive employee stock options excludes approximately 28.0
million, 3.8 million and 13.0 million stock options for fiscal 2002, 2001 and
2000, respectively, which were anti-dilutive for earnings per share
calculations.
STOCK-BASED COMPENSATION. As permitted by Statement of Financial Accounting
Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS 123), the
Company has elected to use the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB
25), to measure compensation expense for stock-based awards to employees.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified to
conform to current year presentation.
NOTE 3. BUSINESS COMBINATIONS AND DIVESTITURES
PURCHASE COMBINATIONS. During fiscal 2002 and 2000, the Company made a
number of purchase acquisitions. Pro forma results of operations have been
presented only for the inSilicon and Avant! mergers since the effects of the
remaining 2002 and 2000 acquisitions are not material to the Company's
consolidated financial position, results of operations or cash flows for the
periods presented. The consolidated financial statements include the operating
results of each business from the date of acquisition. There were no purchase
transactions during fiscal 2001.
For each acquisition, the excess of the purchase price over the estimated
value of the net tangible assets acquired was allocated to various intangible
assets, consisting primarily of developed technology, customer- and
contract-related assets and goodwill. The values assigned to developed
technologies related to each acquisition were based upon future discounted cash
flows related to the existing products' projected income streams.
The amounts allocated to purchased in-process research and development were
determined through established valuation techniques in the high-technology
industry and were expensed upon acquisition because technological feasibility
had not been established and no future alternative uses existed.
ACQUISITION OF AVANT! CORPORATION.
On June 6, 2002 (the closing date), the Company completed the merger with
Avant!.
REASONS FOR THE ACQUISITION. The Board of Directors unanimously approved the
merger with Avant! at its December 1, 2001 meeting. In approving the merger
agreement, the Board of Directors consulted with legal and financial advisors as
well as with management and considered a number of factors. These factors
include the fact that the merger is expected to enable Synopsys to offer its
customers a complete end-to-end solution for system-on-chip design that includes
Synopsys' logic synthesis and design verification tools with Avant!'s advanced
place and route, physical verification and design integrity products, thus
increasing customers' design efficiencies. By increasing customer design
efficiencies, Synopsys expects to be able to better compete for customers
designing the next generation of semiconductors. Further, by gaining access to
Avant!'s physical design and verification products, as well as its broad
customer base and relationships, Synopsys will gain new opportunities to market
its existing products. The foregoing discussion of the information and factors
considered by the Board of Directors is not intended to be exhaustive but
includes the material factors considered by the Board of Directors.
PURCHASE PRICE. Holders of Avant! common stock received 0.371 of a share of
Synopsys common stock (including the associated preferred stock rights) in
exchange for each share of Avant! common stock owned as of the closing date,
aggregating 14.5 million shares of Synopsys common stock. The fair value of the
Synopsys shares issued was based on a per share value of $54.74, which is equal
to Synopsys' average last sale price per share as reported on the Nasdaq
National Market for the trading-day period two days before and after December 3,
2001, the date of the merger agreement.
The total purchase consideration consists of the following:
(IN THOUSANDS)
Fair value of Synopsys common stock issued $ 795,388
Acquisition related costs 37,397
Facilities closure costs 62,638
Employee severance costs 51,014
Fair value of options to purchase Synopsys common
stock issued, less $8.1 million representing
the portion of the intrinsic value of Avant!'s
unvested options applicable to the remaining
vesting period 63,033
--------------
$ 1,009,470
==============
59
The acquisition-related costs of $37.4 million consist primarily of banking,
legal and accounting fees, printing costs, and other directly related charges
including contract termination costs of $6.3 million.
Facilities closure costs at the closing date include $54.2 million related
to Avant!'s corporate headquarters. After the merger, the functions performed in
the buildings were consolidated into Synopsys' corporate facilities. The lessors
have brought a claim against Avant! for the future amounts payable under the
lease agreements. The amount accrued at the closing date is equal to the future
amounts payable under the related lease agreements, without taking into
consideration in the accrual any defenses the Company may have to the claim.
Resolution of this contingency at an amount different from that accrued will
result in an increase or decrease in the purchase consideration and the amount
will be allocated to goodwill. Subsequent to October 31, 2002, Synopsys settled
all of the claims of the landlord of two of these buildings for $7.4 million.
The remaining facilities closure costs at the closing date totaling $8.4 million
represents the present value of the future obligations under certain of Avant!'s
lease agreements which the Company has or intend to terminate under an approved
facilities exit plan plus additional costs expected to be incurred directly
related to vacating such facilities.
Employee severance costs include (i) $39.6 million in cash paid to Avant!'s
Chairman of the Board, consisting of severance plus a cash payment equal to the
intrinsic value of his in-the-money stock options at the closing date, (ii) $5.1
million in cash severance payments paid to redundant employees (primarily sales
and corporate infrastructure personnel) terminated on or subsequent to the
consummation of the merger under an approved plan of termination and (iii) $6.3
million in termination payments to certain executives in accordance with their
respective pre-merger employment agreements. The total number of Avant!
employees terminated as a result of the merger was approximately 250.
As of October 31, 2002, $89.7 million of costs described in the three
preceding paragraphs have been paid and $61.4 million of these costs have not
yet been paid. The following table presents the components of
acquisition-related costs recorded, along with amounts paid during fiscal 2002.
PAYMENTS THROUGH BALANCE AT
INITIAL ADDITIONS OCTOBER 31, OCTOBER 31,
TOTAL COST SUBTOTAL 2002 2002
(IN THOUSANDS) ----------- -------- --------------- ------------ -------------
Acquisition related costs $ 37,342 $ 55 $37,397 $33,557 $ 3,840
Facilities closure costs 62,638 -- 62,638 5,377 57,261
Employee severance costs 50,367 647 51,014 50,724 290
----------- ------- --------------- ------------ ------------
Total $ 150,347 $ 702 151,049 $89,658 $ 61,391
=========== ======= =============== ============ ============
During the fourth quarter of fiscal 2002, additions were made to increase
the total acquisition related costs including an increase to employee severance
costs totaling $0.6 million for actual amounts paid to such employees.
The total purchase consideration has been allocated to the assets and
liabilities acquired, including identifiable intangible assets, based on their
respective fair values at the acquisition date and resulting in excess purchase
consideration over the net tangible and identifiable intangible assets acquired
of $369.5 million. The following unaudited condensed balance sheet data presents
the fair value of the assets and liabilities acquired (after certain adjustments
made during the fourth quarter to the preliminary fair values of the assets and
liabilities acquired).
(IN THOUSANDS)
Assets acquired
Cash, cash equivalents and short-term investments $ 241,313
Accounts receivable 65,971
Prepaid expenses and other current assets 18,082
Intangible assets 373,300
Goodwill 369,470
Other assets 3,875
----------------
Total assets acquired $ 1,072,011
================
Liabilities acquired
Accounts payable and accrued liabilities $ 173,998
Deferred revenue 30,080
Income taxes payable 89,274
Other liabilities 4,651
-----------------
Total liabilities acquired $ 298,003
=================
60
The initial allocation of the purchase price included certain assets and
liabilities recorded using preliminary estimates of fair value. During the
fourth quarter of 2002, the value assigned to Avant!'s investment in a venture
capital fund was reduced from the preliminary value of $12.8 million to $5.0
million upon obtaining additional information on the venture funds non-public
investments and subsequent sale of the investment to a third party. The decrease
in the fair value of the investment increased the consideration allocated to
goodwill by $7.8 million. During the fourth quarter of 2002, the Company also
increased the value of the acquired customs and use-tax liabilities by $2.5
million, resulting in a corresponding increase in goodwill.
ASSET HELD FOR SALE. As a result of the merger, Synopsys acquired Avant!'s
physical libraries business, and Synopsys was obligated to offer and sell such
business to Artisan Components, Inc. under the terms of a January 2001
non-compete agreement, under which Synopsys agreed not to engage, directly or
indirectly, in the physical libraries business before January 3, 2003. As of the
closing date, the value allocated to the acquired libraries business had been
recorded as net assets held for sale, based on the estimated future net cash
flows from the libraries business in accordance with EITF 87-11, ALLOCATION OF
PURCHASE PRICE TO ASSETS TO BE SOLD. During the fourth quarter of fiscal 2002,
management determined that the libraries business would not be sold and,
accordingly, allocated the fair value of the libraries business as of the
closing date to the underlying tangible assets and intangible assets. The fair
value allocated to the tangible and intangible assets was $8.3 million, with the
remaining fair value allocated to goodwill. This allocation is reflected in the
balance sheet as of October 31, 2002.
GOODWILL AND INTANGIBLE ASSETS. Goodwill, representing the excess of the
purchase price over the fair value of tangible and identifiable intangible
assets acquired in the merger, will not be amortized, consistent with the
guidance in SFAS 142 as discussed under Note 11 below. The goodwill associated
with the Avant! acquisition is not deductible for tax purposes. In addition, a
portion of the purchase price was allocated to the following identifiable
intangible assets:
INTANGIBLE ASSET (IN THOUSANDS) ESTIMATED USEFUL LIFE
------------------------------------ ---------------- ---------------------
Core/developed technology $189,800 3 years
Contract rights intangible 51,700 3 years
Customer installed base/relationship 102,900 6 years
Trademarks and tradenames 17,700 3 years
Covenants not to compete 9,100 The life of the
related agreement
(2 to 4 years)
Customer backlog 2,100 3 years
---------------
Total $373,300
===============
CONTRACT RIGHTS INTANGIBLE. Avant! had executed signed license agreements
and delivered the initial configuration of licensed technologies under ratable
license arrangements and had executed signed contracts to provide PCS over a one
to three year period, for which Avant! did not consider the fees to be fixed and
determinable at the outset of the arrangement. There were no receivables or
deferred revenues recorded on Avant!'s historical financial statements at the
closing date as the related payments were not yet due under extended payment
terms and deliveries are scheduled to occur over the terms of the arrangements.
These ratable licenses and PCS arrangements require future performance by both
parties and, as such, represent executory contracts. The contract rights
intangible asset associated with these arrangements is being amortized to cost
of revenue over the related contract lives of three years.
The amortization of intangible assets, with the exception of the contract
rights intangible and core/developed technology, is included in operating
expenses in the statement of operations for the fiscal year ended October 31,
2002. Amortization of core/developed technology and contract rights intangible
is included in cost of revenue.
CADENCE LITIGATION. As the time of the acquisition of Avant!, Avant! was
engaged in civil litigation with Cadence regarding alleged misappropriation of
trade secrets, among other things, by Avant! and certain individuals.
In connection with the merger, Synopsys entered into a policy with a
subsidiary of American International Group, Inc., a AAA-rated insurance company,
whereby insurance was obtained for certain compensatory, exemplary and punitive
damages, penalties and fines and attorneys' fees arising out of pending
litigation between Avant! and Cadence. The policy does not provide coverage for
litigation other than the Avant!/Cadence litigation.
The Company paid a total premium of $335 million for the policy, of which
$240 million was contingently refundable. The balance of the premium paid to the
insurer ($95 million) is included in integration expense for the year ended
October 31, 2002. Under the policy the insurer is obligated to pay covered loss
up to a limit of liability equaling (a) $500 million plus (b) interest accruing
at the fixed rate of 2%, compounded semi-annually, on $250 million (the interest
component), as reduced by previous covered losses. Interest earned on $250
million is included in other income, net in the post-merger statement of
operations.
61
On November 13, 2002, Cadence and Synopsys reached a settlement of the
litigation. Under the terms of the agreement, Cadence will be paid $265 million
in two installments--$20 million on November 22, 2002 and $245 million on
December 16, 2002. In addition, Cadence and Synopsys have entered into
reciprocal licenses arrangements covering the intellectual property at issue in
the litigation. As a result of the payment, Synopsys has recognized expense of
approximately $240.8 million, which is equal to the contingently refundable
portion of the insurance premium plus interest accrued on the restricted asset.
This expense is included in other income and expense on the statement of
operations.
ACQUISITION OF CO-DESIGN.
On September 6, 2002, the Company completed the acquisition of Co-Design.
REASONS FOR THE ACQUISITION. In approving the merger agreement, management
considered a number of factors, including (i) the acquisition will help promote
the development and adoption of the Superlog language, which Synopsys believes
can increase designer productivity; (ii) the combination of Co-Design's
technology with Synopsys' high-level verification and design implementation
tools is expected improve the performance Synopsys' products; and (iii) the
acquisition gives Synopsys access to Co-Design's highly-skilled employees who
will help Synopsys improve its existing products and facilitate the development
of new products. The foregoing discussion of the information and factors
considered by Synopsys' management is not intended to be exhaustive but includes
the material factors considered.
PURCHASE PRICE. Holders of Co-Design common stock received consideration
consisting of cash and notes totaling $32.7 million in exchange for all shares
of Co-Design common stock owned as of the merger date. The total purchase
consideration consists of the following:
(IN THOUSANDS)
Cash paid and notes issued of $2.9 million for Co-Design
common stock $ 32,651
Acquisition related costs 1,038
Fair value of options to purchase Synopsys common stock
issued, less $0.7 million representing the portion of
the intrinsic value of Co-Design's unvested options
applicable to the remaining vesting period 593
--------------
$ 34,282
==============
The acquisition-related costs of approximately $1.0 million consist
primarily of legal and accounting fees. As of October 31, 2002, substantially
all of these acquisition-related costs have been paid.
Total consideration for the acquisition and services provided has been
allocated to the total assets acquired of $8.8 million, total liabilities
assumed of $5.3 million and notes payable of $4.8 million, including
identifiable intangible assets, based on their respective fair values at the
acquisition date. The identifiable intangible assets consist of core/developed
technology totaling $6.2 million which is being amortized over an estimated
useful life of 10 years due to the fact that this technology is essentially a
programming language. The $4.8 million of notes are payable to former Co-Design
shareholders in 2007 of which $1.9 million has been included in integration
expense for services performed in the statement of operations. If certain
milestones are met, the notes may be prepaid in fiscal 2004 and upon prepayment,
an additional interest component totaling approximately $1.0 million is also
payable. The total purchase consideration has been allocated to the assets and
liabilities acquired, including identifiable intangible assets, based on their
respective fair values at the acquisition date and resulted in excess purchase
consideration over the net tangible and identifiable intangible assets acquired
of $27.7 million.
ACQUISITION OF INSILICON CORPORATION (INSILICON).
On September 20, 2002, the Company completed the acquisition of inSilicon.
REASONS FOR THE ACQUISITION. In approving the merger agreement, management
considered a number of factors, including the complementary nature of
inSilicon's portfolio of intellectual property blocks and Synopsys' own
portfolio; the fact that inSilicon had established a per-use license model for
its IP products, which would accelerate Synopsys' adoption of a per-use model
for its new and development-stage IP, inSilicon's relationships with chip design
teams, inSilicon's positive reputation as a vendor of high-quality IP and
inSilicon's highly-skilled employee base. The foregoing discussion of the
information and factors considered by Synopsys' management is not intended to be
exhaustive but includes the material factors considered.
62
PURCHASE PRICE. Holders of inSilicon common stock received $4.05 in
exchange for each share of inSilicon common stock owned as of the merger date,
or approximately $65.4 million. The total purchase consideration consists of the
following:
(IN THOUSANDS)
Cash paid for inSilicon common stock $ 65,386
Acquisition related costs 6,221
Fair value of options to purchase Synopsys common stock
issued, less $1.7 million representing the portion of
the intrinsic value of inSilicon's unvested options
applicable to the remaining vesting period 2,975
------------
$ 74,582
============
The acquisition-related costs of $6.2 million consist primarily of legal and
accounting fees of $1.8 million, and other directly related charges including
contract termination costs of $3.3 million, and restructuring costs of
approximately $0.8 million. As of October 31, 2002, $3.4 million of
acquisition-related costs have been paid. Of the balance remaining at October
31, 2002, $2.2 million represents outstanding contract termination costs.
The total purchase consideration has been allocated to the assets and
liabilities acquired, including identifiable intangible assets, based on their
respective fair values at the acquisition date, resulting in goodwill of $22.2
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 $ 24,908
Accounts receivable 2,428
Prepaid expenses and other current assets 7,463
Core/developed technology 15,100
Customer backlog 1,200
Goodwill 22,160
Other assets 1,290
------------
Total assets acquired $ 74,549
============
Liabilities acquired
Accounts payable and accrued liabilities $ 8,242
Deferred revenue 1,137
Income taxes payable 463
Other liabilities 1,736
-------------
Total liabilities acquired $ 11,578
=============
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, consistent with
the guidance in SFAS 142 as discussed under Note 11 below. The goodwill
associated with the inSilicon acquisition is not deductible for tax purposes.
inSilicon had executed signed contracts with five of its major customers to
provide IP licenses, including significant modifications to the IP license in
order to meet unique customer requirements. The value associated with these
contracts was determined by quantifying the projected cash flow related to these
contracts, discounted to present value, and is recorded as customer backlog in
intangible assets in the consolidated balance sheets.
Intangible assets are being amortized over their estimated useful life of
three years. The amortization of intangible assets is included in cost of
revenue in the statement of operations for the fiscal year ended October 31,
2002.
63
UNAUDITED PRO FORMA RESULTS OF OPERATIONS. The following table presents pro
forma results of operations and gives effect to the Avant! and inSilicon mergers
as if the mergers were consummated on November 1, 2000. The unaudited pro forma
results of operations are not necessarily indicative of the results of
operations had the Avant! and inSilicon mergers actually occurred at the
beginning of fiscal 2001, nor is it necessarily indicative of future operating
results:
YEAR ENDED
----------------------------------------
OCTOBER 31, OCTOBER 31,
2002 2001
----------------- -------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues $ 1,186,916 $ 1,100,249
Net income $ 117,494 $ 78,909
Basic earnings per share $ 1.56 $ 1.05
Weighted average common shares
outstanding 75,311 75,131
Diluted earnings per share $ 1.49 $ 0.98
Weighted average common shares
and dilutive stock options
outstanding 78,656 80,180
The unaudited pro forma results of operations for each of the periods
presented exclude non-recurring merger costs of $335.8 million for the Avant!
insurance policy premium, $82.5 million for IPRD resulting from the Avant!
merger, $5.2 million for IPRD resulting from the inSilicon merger and $21.0
million and $268.1 million for Avant!'s pre-merger litigation settlement and
other related costs incurred in fiscal 2002 and 2001, respectively. These
expenses are included in the historical consolidated statement of operations.
INTEGRATION COSTS. Non-recurring integration costs incurred relate to merger
activities which are not included in the purchase consideration under Emerging
Issues Task Force Number 95-3 (EITF 95-3), RECOGNITION OF LIABILITIES IN
CONNECTION WITH A PURCHASE BUSINESS COMBINATION. These costs are expensed as
incurred. During fiscal 2002, integration costs totaled $128.5 million. These
costs consisted primarily of (i) $95.0 million related to the premium for the
insurance policy acquired in conjunction with the Avant! merger, (ii) $14.7
million related to write-downs of Synopsys facilities and property under the
approved facility exit plan for the Avant! merger, (iii) $10.0 million and $0.7
million related to severance costs for Synopsys employees who were terminated
and costs associated with transition employees as a result of the Avant! and
inSilicon mergers, respectively, (iv) $1.3 million related to the write-off of
software licenses owned by Synopsys which were originally purchased from Avant!,
(v) $3.7 million goodwill impairment charge related to a prior Synopsys
acquisition as a result of the acquisition of Avant! and (vi) $1.2 million and
$1.9 million of other expenses including travel and certain professional fees
for the Avant! and Co-Design mergers, respectively.
PRIOR YEAR BUSINESS COMBINATIONS AND DIVESTITURES. On January 4, 2001, the
Company sold the assets of its silicon libraries business to Artisan Components,
Inc. for a total sales price of $15.5 million, including common stock with a
fair value on the date of sale of $11.4 million, and cash of $4.1 million. The
net book value of the assets sold was $1.4 million. Expenses incurred in
connection with the sale were $3.5 million. The Company recorded a gain on the
sale of the business of $10.6 million, which is included in other income, net in
2001. Direct revenue for the silicon libraries business was $0.2 million and
$4.3 million for the fiscal years 2001 and 2000, respectively.
There were no business combinations completed in fiscal 2001.
In fiscal 2000, the Company acquired (i) VirSim, a software product, from
Innoveda, Inc., for a purchase price of approximately $7.0 million in cash, (ii)
The Silicon Group, Inc., a privately held provider of integrated circuit design
and intellectual property integration services, for a purchase price of $3.0
million, including cash payments of $1.8 million and a reserve of approximately
34,000 shares of common stock for issuance under The Silicon Group's stock
option plan which was assumed in the transaction, and (iii) Leda, S.A. (Leda), a
privately held provider of RTL coding-style-checkers, for a purchase price of
$7.7 million, including cash payments of $7.5 million. Approximately $1.7
million of the Leda purchase price was allocated to in-process research and
development and charged to operations because the acquired technology had not
reached technological feasibility and had no alternative uses. The purchase
price of each of these transactions was allocated to the acquired assets and
liabilities based on their estimated fair values as of the date of the
respective acquisition. Amounts allocated to developed technology and goodwill
are being amortized on a straight-line basis over periods ranging from three to
five years. Beginning November 1, 2002, amounts allocated to goodwill will no
longer be amortized in accordance with FAS 142 as discussed below under Note 11.
64
NOTE 4. FINANCIAL INSTRUMENTS
CASH, CASH EQUIVALENTS AND INVESTMENTS. All cash equivalents, short-term
investments, and non-current investments have been classified as
available-for-sale securities and are detailed as follows:
NET NET
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------- ---------- ---------- -------------
OCTOBER 31, 2002 (IN THOUSANDS) Classified as current assets:
Cash................................. $ 129,044 $ -- $ -- $ 129,044
Money market funds................... 183,536 -- -- 183,536
Tax-exempt municipal obligations..... 101,904 249 -- 102,153
Municipal auction rate preferred stock -- -- -- --
------------ --------- --------- -------------
414,484 249 -- 414,733
Classified as non-current assets:
Equity securities.................... 25,113 14,273 -- 39,386
----------- --------- --------- -------------
Total.............................. $ 439,597 $ 14,522 $ -- $ 454,119
============= ========= ========= =============
OCTOBER 31, 2001 Classified as current assets:
Cash................................. $ 47,383 $ -- $ -- $ 47,383
Money market funds................... 224,313 -- -- 224,313
Tax-exempt municipal obligations..... 188,714 1,751 -- 190,465
Municipal auction rate preferred stock 14,275 -- -- 14,275
------------- ----------- --------- -------------
474,685 1,751 -- 476,436
Classified as non-current assets:
Equity securities.................... 38,577 23,122 -- 61,699
------------- ---------- --------- -------------
Total.............................. $ 513,262 $ 24,873 $ -- $ 538,135
============= ========== ========= =============
Short-term investments include tax-exempt municipal obligations, which may
have underlying maturities of more than one year. However, such investments may
have put options or reset dates within three years that meet high credit quality
standards as specified in the Company's investment policy. At October 31, 2002,
the underlying maturities of the Company's investments are $8.0 million within
one year, $39.9 million within one to five years, $15.1 million within five to
ten years and $39.1 million after ten years. These investments are generally
classified as available for sale, and are recorded on the balance sheet at fair
market value with unrealized gains or losses reported as a separate component of
accumulated other comprehensive income, net of tax. Realized gains and losses on
sales of short-term investments have not been material.
STRATEGIC INVESTMENTS. The Company's strategic investment portfolio consists
of minority equity investments in publicly traded companies and investments in
privately held companies, many of which can still be considered in the start-up
or development stages. The securities of publicly traded companies are generally
classified as available-for-sale securities accounted for under Statement of
Financial Accounting Standards No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES (SFAS 115), and are reported at fair value, with
unrealized gains or losses, net of tax, recorded as a component of other
comprehensive income in stockholders' equity. The cost of securities sold is
based on the specific identification method. The securities of privately held
companies are reported at the lower of cost or fair value.
During the years ended October 31, 2002 and 2001 the Company determined that
certain strategic investments, with an aggregate value of $16.3 million and $9.4
million, respectively, were impaired, and that the impairment was other than
temporary. Accordingly, the Company recorded a charge of approximately $11.3
million and $5.8 million during fiscal 2002 and 2001, respectively, to write
down the carrying value of the investments. The impairment charge is included in
other income, net. The Company reviews its investments in non-public companies
on a quarterly basis and estimates the amount of any impairment incurred during
the current period based on specific analysis of each investment, considering
the activities of and events occurring at each of the underlying portfolio
companies during the quarter. The Company's portfolio companies operate in
industries that are rapidly evolving and extremely competitive. For equity
investments in non-public companies for which there is not a market in which
their value is readily determinable, the Company assesses 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. The
primary business plan objectives the Company considers include achievement of
planned financial results, completion of capital raising activities, the
launching of technology, the hiring of key employees and overall progress on the
portfolio company's business plan. If it is determined that an impairment has
occurred with respect to an investment in a portfolio company, in the absence of
quantitative valuation metrics, management estimates the impairment and/or the
net realizable value of the portfolio investment based on public- and
private-company market comparable information and valuations completed for
companies similar to Synopsys' portfolio companies. There were no impairment
charges recorded during fiscal 2000.
65
DERIVATIVE FINANCIAL INSTRUMENTS. Available-for-sale equity investments
accounted for under SFAS 115 are subject to market price risk. From time to
time, the Company enters into and designates forward contracts to hedge variable
cash flows from anticipated sales of these investments. In accounting for a
derivative designated as a cash flow hedge, the effective portion of the change
in fair value of the derivative is initially recorded in other comprehensive
income and reclassified into earnings when the hedged anticipated transaction
affects earnings. The ineffective portion of the change in the fair value of the
derivative is recognized in earnings immediately.
The Company's objective for entering into derivative contracts is to lock in
the price of selected equity holdings while maintaining the rights and benefits
of ownership until the anticipated sale occurs. The forecasted sale selected for
hedging is determined by market conditions, up-front costs, and other relevant
factors. The Company has generally selected forward sale contracts to hedge its
market price risk.
Changes in the spot rate of the forward sale contracts designated and
qualifying as cash flow hedges of the forecasted sale of available-for-sale
investments accounted for under SFAS 115 are reported in other comprehensive
income. The notional amount of the forward designated as the hedging instrument
is equal to the available-for-sale securities being hedged. In addition, hedge
effectiveness is assessed based on the changes in spot prices. As such, the
hedging relationship is perfectly effective, both at inception of t he hedge and
on an on-going basis. The difference between the contract price and the forward
price, which is generally not material, is reflected in other income.
The Company has entered into forward sale contracts in fiscal 2001 and 2000
with a major financial institution for the sale through April 10, 2003 of
certain of the Company's strategic investments. During fiscal 2001, the Company
physically settled certain forward contracts. The net gain on the forward
contracts was offset by the net loss on the related available-for-sale
investment since inception of the hedge, with any gain or loss reclassified from
other comprehensive income to other income. As of October 31, 2002, the Company
has forward sale contracts outstanding for 46,790 shares of Broadcom Corporation
stock at a forward price of $222.72. As of October 31, 2002, the excess of the
fair market value of the forward sale price over cost has been recorded in
stockholders' equity as a component of accumulated other comprehensive income.
In fiscal 2002, the Company recorded a net realized gain on the sale of the
available-for-sale investments of $22.7 million (net of premium amortization).
As of October 31, 2002, the Company has recorded $7.6 million in long-term
investments due to locked-in unrealized gains on the available-for-sale
investments. As of October 31, 2002, the maximum length of time over which the
Company is hedging its exposure to the variability in future cash flows
associated with the forward sale contracts is 6 months.
FOREIGN CURRENCY HEDGING. The Company conducts business on a global basis.
Consequently, the Company enters into foreign currency forward contracts to
reduce the impact of certain currency exposures. As of October 31, 2002, 2001,
and 2000, the Company had $305.1 million, $72.2 million and $47.5 million,
respectively of short-term foreign currency forward contracts outstanding. These
contracts are denominated primarily in the Euro and Japanese yen. The
outstanding forward contracts have maturities that expire in approximately one
month from the balance sheet date. For fair value hedges, foreign currency gains
and losses on forward contracts and their underlying balance sheet exposures
resulting from market adjustments are included in earnings. Gains and losses
related to these instruments for the fiscal years ended October 31, 2002, 2001
and 2000 were not material. The Company also uses forward foreign currency
contracts to hedge cash flow exposures resulting from the impact of currency
exchange rate fluctuations on forecasted receivables. As of October 31, 2002,
the unrealized gain of approximately $10.0 million on these forward contracts is
recorded in stockholders' equity, net of tax, as a component of accumulated
other comprehensive income.
OTHER COMPREHENSIVE INCOME. Other comprehensive income includes a
reclassification adjustment related to unrealized gains on investments,
accumulated net translation adjustments and unrealized gains on certain foreign
currency forward contracts that qualify as cash flow hedges. In fiscal 2002,
2001 and 2000, the reclassification adjustment is $5.8 million, $33.7 million
and $8.9 million, respectively. The reclassification amount adjusts other
comprehensive income for gains on the sale of available-for-sale securities
realized during the current year and included in other comprehensive income as
unrealized holding gains in the period in which such unrealized gains arose. The
reclassification adjustment is net of income tax expense of $3.8 million, $21.6
million and $6.0 million, respectively, in fiscal 2002, 2001 and 2000.
DEBT. As of October 31, 2002, the Company's debt consisted of $0.1 million
for equipment leases and $5.1 million for notes payable related to acquisitions
payable through 2007. In fiscal 2002, the Company was also assessed
approximately $1.4 million to secure bonds related to certain property taxes. As
of October 31, 2001, the Company's debt consisted of $0.1 million for equipment
leases and $0.3 million of notes payable from acquisitions. The fair value of
the Company's long-term debt approximates the carrying amount.
66
NOTE 5. COMMITMENTS AND CONTINGENCIES
The Company leases its domestic and foreign facilities and certain office
equipment under operating leases. Rent expense was $33.7 million, $30.0 million
and $29.1 million in fiscal 2002, 2001 and 2000, respectively. During December
2000, the Company entered into a sublease agreement for a portion of its office
space through May 2003. Monthly lease payments of $912,000 began on December 1,
2000. In November 2002, the sub-lessee repaid monthly lease payments totaling
$8.1 million.
Future minimum lease payments on all facility operating leases (net of
sublease income) as of October 31, 2002 are as follows:
MINIMUM
LEASE
PAYMENTS (1) LEASE INCOME NET
------------- ---------------- -----------
FISCAL YEAR (IN THOUSANDS)
2003........................... $ 31,222 $ (7,768) $ 23,454
2004........................... 30,163 - 30,163
2005........................... 24,673 - 24,673
2006........................... 24,286 - 24,286
2007........................... 20,147 - 20,147
Thereafter..................... 103,221 - 103,221
----------- ------------- -----------
Total minimum payments required. $ 233,712 $ (7,768) $ 225,944
========== ============= ===========
(1) Minimum lease payments exclude leases related to Avant! facilities which the
Company intends to terminate under its approved facilities exit plan as these
payments are included in the Facilities Closure Costs portion of the Avant!
merger accrual, described in Note 3.
NOTE 6. STOCKHOLDERS' EQUITY
STOCK REPURCHASE PROGRAMS. In July 2001, the Company's Board of Directors
authorized stock repurchase programs under which Synopsys common stock with a
market value up to $500 million may be acquired in the open market. This stock
repurchase program replaced all prior repurchase programs authorized by the
Board. Common shares repurchased are intended to be used for ongoing stock
issuances under the Company's employee stock plans and for other corporate
purposes. The July 2001 stock repurchase program expired on October 31, 2002.
During fiscal 2002, 2001 and 2000, the Company purchased 3.9 million shares at
an average price of $44.20 per share, 6.6 million shares at an average price of
$50.00 per share, and 9.9 million shares at an average price of $40.02,
respectively.
PREFERRED SHARES RIGHTS PLAN. The Company has adopted a number of
provisions that could have anti-takeover effects, including a Preferred Shares
Rights Plan. In addition, the Board of Directors has the authority, without
further action by its shareholders, to fix the rights and preferences and issue
shares of authorized but undesignated shares of Preferred Stock. This provision
and other provisions of the Company's Restated Certificate of Incorporation and
Bylaws and the Delaware General Corporation Law may have the effect of deterring
hostile takeovers or delaying or preventing changes in control or management of
the Company, including transactions in which the stockholders of the Company
might otherwise receive a premium for their shares over then current market
prices. The preferred share rights expire on October 24, 2007.
EMPLOYEE STOCK PURCHASE PLAN. Under the Company's 1992 Employee Stock
Purchase Plan 7,050,000 shares have been authorized for issuance as of October
31, 2002. Under the ESPP, employees are granted the right to purchase shares of
common stock at a price per share that is 85% of the lesser of the fair market
value of the shares at (i) the beginning of a rolling two-year offering period,
or (ii) the end of each semi-annual purchase period. During fiscal 2002, 2001,
and 2000 shares totaling 627,941, 567,254, and 512,988, respectively, were
issued under the plan at average per share prices of $33.85, $33.20, and $32.63,
respectively. As of October 31, 2002, 2,885,283 shares of common stock were
reserved for future issuance under the plan.
STOCK OPTION PLANS. Under the Company's 1992 Stock Option Plan (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 the Company's 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. As of October 31, 2002,
3,523,486 shares of common stock are reserved for future grants under the 1992
Plan.
67
Under the Company's Non-Statutory Stock Option Plan (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 the stock at the grant date. Stock options
generally vest over a period of four years and expire ten years from the date of
grant. At October 31, 2002, 4,817,722 shares of common stock were reserved for
future grants.
Under the Company's 1994 Non-Employee Directors Stock Option Plan (Directors
Plan), a total of 750,000 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. Stock options are granted at not
less than 100% of the fair market value of those shares on the grant date. Stock
options granted upon appointment or election to the Board vest 25% annually but
may be exercised immediately. Stock options granted upon reelection to the Board
and for committee service vest 100% after the first year of continuous service.
As of October 31, 2002, 71,839 shares of common stock were reserved for future
grants.
The Company has assumed certain option plans in connection with business
combinations. Generally, these options were granted under terms similar to the
terms of the Company's stock option plans at prices adjusted to reflect the
relative exchange ratios. All assumed plans were terminated as to future grants
upon completion of each of the business combinations.
Additional information concerning stock option activity under all plans is as
follows:
WEIGHTED-
OPTIONS AVERAGE
OUTSTANDING EXERCISE PRICE
------------ ------------------
(IN THOUSANDS)
---------------------------------
Outstanding at October 31, 1999..... 13,031 $38.75
Granted and assumed.............. 16,220 $36.05
Exercised........................ (1,554) $27.37
Canceled......................... (2,952) $41.35
----------
Outstanding at October 31, 2000..... 24,745 $37.39
Granted.......................... 5,967 $48.23
Exercised........................ (2,605) $33.14
Canceled......................... (2,187) $39.80
-----------
Outstanding at October 31, 2001..... 25,920 $40.10
Granted.......................... 4,081 $47.88
Options assumed in acquisitions.. 2,511 $37.16
Exercised........................ (2,851) $34.43
Canceled......................... (1,681) $42.93
-----------
Outstanding at October 31, 2002..... 27,980 $41.40
===========
Options exercisable at:
October 31, 2000................. 6,619 $36.15
October 31, 2001................. 10,405 $38.23
October 31, 2002................. 15,230 $40.49
68
The following table summarizes information about stock options outstanding at
October 31, 2002:
OPTIONS OUTSTANDING
----------------------------------------
WEIGHTED- EXERCISABLE OPTIONS
AVERAGE -------------------------
REMAINING WEIGHTED- WEIGHTED-
CONTRACTUAL AVERAGE AVERAGE
RANGE OF NUMBER LIFE (IN EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING YEARS) PRICE EXERCISABLE PRICE
---------------- -------------- ------------- ---------- ------------- ----------
(IN THOUSANDS) (IN THOUSANDS)
$0.003-- $32.25 7,317 7.12 $29.45 4,197 $28.96
$32.38 -- $39.50 7,569 7.05 $37.31 4,863 $37.18
$39.81 -- $49.60 6,512 8.08 $45.17 2,998 $45.07
$49.83 -- $60.00 5,695 8.25 $54.68 2,591 $55.23
$60.06 --$111.86 887 7.35 $61.79 581 $62.13
------------ -------
$0.003--$111.86 27,980 7.56 $41.40 15,230 $40.49
============ =======
STOCK-BASED COMPENSATION. In accordance with APB 25, 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 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
SFAS No. 123. The Company has revised its SFAS No. 123 pro forma stock option
disclosure presented below to incorporate the tax benefits associated with
equity instruments. The fair value of these stock-based awards to employees was
estimated using the Black-Scholes option pricing model, assuming no expected
dividends and using the following weighted-average assumptions:
YEAR ENDED OCTOBER 31,
----------------------------------------
2002 2001 2000
------------- -------------- -----------
STOCK OPTION PLANS
Expected life (in years).... 4.9 4.4 3.9
Risk-free interest rate..... 4.0% 4.8% 6.3%
Volatility.................. 59.0% 62.0% 58.3%
ESPP
Expected life (in years).... 1.25 1.25 1.25
Risk-free interest rate..... 2.1% 4.1% 6.1%
Volatility.................. 59.0% 62.0% 58.3%
For pro forma purposes, the estimated fair value of the Company's
stock-based awards to employees is amortized over the options' vesting period of
four years and the ESPP's six-month to two year purchase period. The
weighted-average estimated fair value of stock options issued during fiscal
2002, 2001 and 2000 was $25.74, $25.62 and $15.96 per share, respectively. The
weighted-average estimated fair value of share purchase rights under the ESPP
during fiscal 2002, 2001 and 2000 was $14.97, $12.32 and $15.33 per share,
respectively.
The Company's pro forma net income and earnings per share data under SFAS No.
123 is as follows:
YEAR ENDED OCTOBER 31,
2002 2001 2000
------------ ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income (loss)
As reported under APB 25............$ (199,993) $ 56,802 $ 97,778
Pro forma under SFAS No. 123........$ (284,445) $ (32,110) $ 20,420
Earnings (loss) per share-- basic
As reported under APB 25............$ (2.99) $ 0.94 $ 1.43
Pro forma under SFAS No. 123........$ (4.26) $ (0.53) $ 0.30
Earnings (loss) per share-- diluted
As reported under APB 25............$ (2.99) $ 0.88 $ 1.38
Pro forma under SFAS No. 123........$ (4.26) $ (0.53) $ 0.29
69
NOTE 7. INCOME TAXES
The Company is entitled to a deduction for federal and state tax purposes
with respect to employees' stock option activity. The net reduction in taxes
otherwise payable arising from that deduction has been credited to additional
paid-in capital.
The components of the Company's total income before provision for income
taxes are as follows:
YEAR ENDED OCTOBER 31,
------------------------------------
2002 2001 2000
------------- ------------- ---------
(IN THOUSANDS)
United States................$ (309,072) $ 93,187 $ 150,641
Foreign...................... 20,132 (9,654) (4,703)
------------- ----------- -----------
$ (288,940) $ 83,533 $ 145,938
============= =========== ===========
The components of the provision (benefit) for income taxes are as follows:
YEAR ENDED OCTOBER 31,
----------------------------------------
2002 2001 2000
-------------- ------------ ------------
(IN THOUSANDS)
Current:
Federal....................... $ 9,605 $ 80,783 $ 62,644
State......................... (1,319) 7,758 8,949
Foreign....................... 11,474 6,782 3,388
-------------- ------------ -----------
19,760 95,323 74,981
Deferred:
Federal....................... (104,041) (66,049) (30,025)
State......................... (21,728) (13,076) (4,266)
Foreign....................... (2,398) (5,460) (3,394)
-------------- ------------ ----------
(128,167) (84,585) (37,685)
Charge equivalent to the federal
and state tax benefit related
to employee stock options..... 19,460 15,993 10,864
-------------- ------------ ----------
Provision (benefit) for income
taxes $(88,947) $ 26,731 $ 48,160
============= ============ ==========
The provision (benefit) for income taxes differs from the amount obtained by
applying the statutory federal income tax rate to income (loss) before income
taxes as follows:
YEAR ENDED OCTOBER 31,
-----------------------------------
2002 2001 2000
------------ ----------- ---------
(IN THOUSANDS)
Statutory federal tax................ $(101,129) $ 29,236 $ 51,078
State tax, net of federal effect..... (8,105) 2,611 5,555
Tax credits.......................... (10,745) (9,041) (7,248)
Tax benefit from foreign sales
corporation/extraterritorial
income exclusion.................. (2,827) (2,780) (3,146)
Tax exempt income.................... (1,865) (3,289) (5,508)
Foreign tax in excess of (less than)
U.S. statutory tax................ 1,553 2,679 (1,194)
Non-deductible merger and acquisition
expenses.......................... 4,367 5,601 5,454
In-process research and development
expenses.......................... 30,695 -- 829
Other................................ (891) 1,714 2,340
------------ ------------ ---------
$ (88,947) $ 26,731 $ 48,160
============ ============ =========
70
Net deferred tax assets of $276.3 million and $170.4 million were recorded
at October 31, 2002 and October 31, 2001, respectively. The net deferred tax
asset of $276.3 million for the year ended October 31, 2002 includes the tax
effects of the parent corporation, Synopsys, and the newly acquired
corporations, Avant!, inSilicon, and Co-Design. The tax effects of temporary
differences and carryforwards which give rise to significant portions of the
deferred tax assets and liabilities are as follows:
OCTOBER 31,
---------------------
2002 2001
----------- ---------
(IN THOUSANDS)
Net deferred tax assets:
Deferred tax assets:
Current:
Net operating loss and tax credit carryovers $ 7,370 $ 5,157
Deferred revenue........................... 111,463 122,857
Reserves and other expenses not currently
deductible............................... 62,414 17,831
Unrealized foreign exchange losses......... -- 1,839
Insurance premiums......................... 94,213 --
Other...................................... 10,491 1,555
------------ ---------
285,951 149,239
Non-current:
Net operating loss and tax credit carryovers 52,529 6,496
Deferred compensation...................... 9,247 5,907
Deferred revenue........................... -- 11,883
Depreciation and amortization.............. 32,335 6,698
Other...................................... 2,148 1,258
------------- ---------
96,259 32,242
------------- ---------
Total deferred tax assets....................... 382,210 181,481
Deferred tax liabilities:
Current:
Unrealized foreign exchange losses......... (3,084) --
------------- ---------
(3,084) --
Non-current:
Unrealized gain on securities investments.. (5,256) (9,196)
Net capitalized software development costs. (1,185) (397)
Intangible assets.......................... (96,358) --
Other...................................... -- (1,482)
------------- ----------
(102,799) (11,075)
------------- ----------
Total deferred tax liabilities.................... (105,883) (11,075)
------------- ----------
Net deferred tax assets........................... $ 276,327 $ 170,406
============= ==========
At October 31, 2002, the Company believes that it is more likely than not
that the results of future operations will generate sufficient taxable income to
realize the deferred tax assets.
The Company's United States income tax returns for fiscal years ended
September 30, 1996 and September 30, 1995 are under examination and the Internal
Revenue Service has proposed certain adjustments. Management believes that
adequate amounts have been provided for any adjustments that may ultimately
result from these examinations.
The Company has federal tax loss carryforwards of approximately $117.5
million at October 31, 2002. The loss carryforwards will expire in 2010 through
2020. Because of the change in ownership provisions of the Internal Revenue
Code, a portion of the Company's loss carryforwards may be subject to annual
limitations. The annual limitation may result in the expiration of the net
operating loss before utilization. The Company also has net operating loss
carryforwards from Ireland operations of approximately $25.2 million. These loss
carryforwards will expire in 2005 through 2006. Management believes that all net
operating losses will be utilized and a valuation allowance is not necessary.
71
NOTE 8. SEGMENT DISCLOSURE
Statement of Financial Accounting Standards No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION (SFAS 131), requires
disclosures of certain information regarding operating segments, products and
services, geographic areas of operation and major customers. The method for
determining what information to report under SFAS 131 is based upon the
"management approach," or the way that management organizes the operating
segments within a company, for which separate financial information is available
that is evaluated regularly by the Chief Operating Decision Maker (CODM) in
deciding how to allocate resources and in assessing performance. Synopsys' CODM
is the Chief Executive Officer and Chief Operating Officer.
The Company provides comprehensive design technology products and consulting
services in the electronic design automation software industry. The CODM
evaluates the performance of the Company based on profit or loss from operations
before income taxes not including merger-related costs, in-process research and
development and amortization of intangible assets. For the purpose of making
operating decisions, the CODM primarily considers financial information
presented on a consolidated basis accompanied by disaggregated information about
revenues by geographic region. There are no differences between the accounting
policies used to measure profit and loss for the Company segment and those used
on a consolidated basis. Revenue is defined as revenues from external customers.
The disaggregated financial information reviewed by the CODM is as follows:
YEAR ENDED OCTOBER 31,
-----------------------------------
2002 2001 2000
----------- ---------- ------------
(IN THOUSANDS)
Revenue:
Product............................... 245,193 163,924 434,077
Service............................... 287,747 341,833 340,796
Ratable license....................... 373,594 174,593 8,905
------------ --------- -----------
Total revenue.................... $ 906,534 $680,350 $ 783,778
============ ========= ===========
Gross margin before amortization of
intangible assets and deferred stock
compensation.......................... $ 767,311 $ 550,228 $ 659,304
Operating income before integration costs,
in-process research and development,
amortization of intangible assets and
deferred stock compensation, and $95
million of the insurance premium related
to the Cadence litigation (1)......... $ 198,496 $ 16,761 $ 122,014
(1) The total premium paid to the insurer was $335.8 million of which
$95.0 million is included in operating income but is excluded from this
table and $240.8 million is included in other income and
expense in the Company's consolidated statement of operations.
There were no integration, amortization of deferred stock compensation or
insurance settlement costs during fiscal 2001 and 2000. There were no in-process
research and development costs during fiscal 2001.
A reconciliation of the Company's segment gross margin to the Company's
gross margin is as follows:
YEAR ENDED OCTOBER 31,
---------------------------------
2002 2001 2000
---------- ---------- ----------
(IN THOUSANDS)
Gross margin before amortization of
intangible assets and deferred stock
compensation $ 767,311 $ 550,228 $ 659,304
Amortization of intangible assets and
deferred stock compensation (33,936) -- --
---------- ----------- ----------
Gross margin $ 733,375 $ 550,228 $ 659,304
========== =========== ==========
72
Reconciliation of the Company's segment profit and loss to the Company's
operating income (loss) is as follows:
YEAR ENDED OCTOBER 31,
-------------------------------------------
2002 2001 2000
-------------- ------------ --------------
(IN THOUSANDS)
Operating income before integration costs,
in-process research and development, amortization
of intangible assets and deferred stock
compensation, and $95 million of the insurance
premium related to the Cadence litigation (1)... $ 198,496 $ 16,761 $ 122,014
Integration costs........................ (128,528) -- --
In-process research and development...... (87,700) -- (1,750)
Amortization of intangible assets and
deferred stock compensation............ (62,585) (17,012) (15,129)
-------------- -------------- -------------
Operating (loss) income.................. $ (80,317) $ (251) $ 105,135
============== ============== =============
(1) The total premium paid to the insurer was $335.8 million of which
$95.0 million is included in operating income but is excluded from this
table and $240.8 million is included in other income and
expense in the Company's consolidated statement of operations.
Revenue and long-lived assets related to operations in the United States and
other geographic areas are as follows:
YEAR ENDED OCTOBER 31,
-------------------------------------------
2002 2001 2000
-------------- -------------- -------------
(IN THOUSANDS)
Revenue:
United States......... $ 591,526 $ 426,527 $ 456,759
Europe................ 145,758 125,380 141,306
Japan................. 95,413 69,850 130,698
Other................. 73,837 58,593 55,015
------------- ----------- -------------
Consolidated........ $ 906,534 $ 680,350 $ 783,778
============= =========== =============
OCTOBER 31, OCTOBER 31,
2002 2001
----------------- --------------
Long-lived assets:
United States......... $ 162,360 $ 176,330
Other................. 22,680 15,974
------------------ --------------
Consolidated........ $ 185,040 $ 192,304
================== ==============
Geographic revenue data for multi-region, multi-product transactions
reflects internal allocations and is therefore subject to certain assumptions
and the Company's methodology. Revenue is not reallocated among geographic
regions to reflect any re-mixing of licenses between different regions following
the initial product shipment. No one customer accounted for more than ten
percent of the Company's consolidated revenue in the periods presented.
The Company segregates revenue into five categories for purposes of internal
management reporting: Design Implementation, Verification and Test, Design
Analysis, Intellectual Property (IP) and Professional Services. The following
table summarizes the revenue attributable to each of the various categories.
Revenue attributable to products acquired from Avant!, inSilicon and Co-Design
that was recognized by the acquired companies prior to the respective
acquisition date is not reflected in the following tables. Revenue attributable
to such acquired products after the acquisition date of the respective company
is included in fiscal 2002. As a result of the Avant! merger, the Company has
redefined its product groups. Prior period amounts have been reclassified to
conform to the new presentation.
YEAR ENDED OCTOBER 31,
-----------------------------------
2002 2001 2000
----------- --------- -------------
(IN THOUSANDS)
Revenue:
Design Implementation.............$ 397,109 $ 270,357 $ 305,192
Verification and Test............. 269,098 222,776 266,489
Design Analysis................... 119,469 40,658 44,220
IP................................ 62,177 64,859 86,393
Professional Services............. 58,681 81,700 81,484
----------- ---------- ------------
Consolidated....................$ 906,534 $ 680,350 $ 783,778
=========== ========== ============
73
NOTE 9. TERMINATION OF AGREEMENT TO ACQUIRE IKOS SYSTEMS, INC.
On July 2, 2001, the Company entered into an Agreement and Plan of Merger
and Reorganization (the IKOS Merger Agreement) with IKOS Systems, Inc. (IKOS).
The IKOS Merger Agreement provided for the acquisition of all outstanding shares
of IKOS common stock by Synopsys.
On December 7, 2001, Mentor Graphics Corporation (Mentor) commenced a cash
tender offer to acquire all of the outstanding shares of IKOS common stock at
$11.00 per share, subject to certain conditions. On March 12, 2002, Synopsys and
IKOS executed a termination agreement by which the parties terminated the IKOS
Merger Agreement and pursuant to which IKOS paid Synopsys the $5.5 million
termination fee required by the IKOS Merger Agreement. This termination fee and
$2.4 million of expenses incurred in conjunction with the acquisition are
included in other income, net on the consolidated statement of operations for
the year ended October 31, 2002. Synopsys subsequently executed a revised
termination agreement with Mentor and IKOS in order to add Mentor as a party
thereto.
NOTE 10. DEFERRED STOCK COMPENSATION
In connection with the current year mergers, the Company also assumed
unvested stock options held by Avant!, inSilicon and Co-Design employees. The
Company has recorded deferred stock compensation totaling $8.1 million, $1.7
million and $0.7 million based on the intrinsic value of these assumed unvested
stock options for Avant!, inSilicon and Co-Design, respectively. The deferred
stock compensation is amortized over the options' remaining vesting period of
one to three years. During fiscal 2002, the Company recorded amortization of
deferred stock compensation in each of the following expense classifications in
the statement of operations:
(IN THOUSANDS)
Cost of revenues $ 207
Research and development 499
Sales and marketing 234
General and administrative 582
----------
Total $ 1,522
==========
NOTE 11. EFFECT OF NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards No. 141, BUSINESS COMBINATIONS
(SFAS 141), and GOODWILL AND OTHER INTANGIBLE ASSETS (SFAS 142). SFAS 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 and specifies criteria intangible
assets acquired in a purchase method business combination must meet to be
recognized apart from goodwill. SFAS 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually in accordance with the provisions of
SFAS 142.
The Company adopted SFAS 142 on November 1, 2002. As of October 31, 2002,
unamortized goodwill is $434.6 million, which will no longer be amortized
subsequent to the adoption of SFAS 142. Related goodwill amortization expense
for fiscal 2002, 2001 and 2000 is $16.2 million, $17.0 million and $15.1
million, respectively.
The Company adopted the provisions of SFAS 141 on July 1, 2001. Under SFAS
141, goodwill and intangible assets with indefinite useful lives acquired in a
purchase business combination completed after June 30, 2001, but before SFAS 142
is adopted, will not be amortized but will continue to be evaluated for
impairment in accordance with SFAS 121. Goodwill and intangible assets acquired
in business combinations completed before July 1, 2001 will continue to be
amortized and tested for impairment in accordance with current accounting
guidance until the date of adoption of SFAS 142.
Upon adoption of SFAS 142, the Company must evaluate its existing intangible
assets and goodwill acquired in purchase business combinations prior to July 1,
2001, and make any necessary reclassifications in order to conform with the new
criteria in SFAS 141 for recognition apart from goodwill. Upon adoption of SFAS
142, the Company has assessed useful lives and residual values of all intangible
assets acquired. The Company has also tested goodwill for impairment in
accordance with the provisions of SFAS 142. In completing its impairment
analysis, the Company has determined that it has one reporting unit as the
company operates in one reportable segment. In conjunction with the
implementation of SFAS No. 142, the Company has completed a goodwill impairment
review as of the beginning of fiscal 2003 and found no impairment. This
impairment review was based on the fair value of the Company as determined by
its market capitalization.
74
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS (SFAS 143). SFAS 143
requires that asset retirement obligations that are identifiable upon
acquisition, construction or development and during the operating life of a
long-lived asset be recorded as a liability using the present value of the
estimated cash flows. A corresponding amount would be capitalized as part of the
asset's carrying amount and amortized to expense over the asset's useful life.
The Company is required to adopt the provisions of SFAS 143 effective November
1, 2002. The adoption of SFAS 143 will not have a significant impact on its
financial position and results of operations.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS (SFAS
144), which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supersedes SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, and
the accounting and reporting provisions of APB Opinion No. 30, REPORTING THE
RESULTS OF OPERATIONS FOR A DISPOSAL OF A SEGMENT OF A BUSINESS. The Company is
required to adopt the provisions of SFAS 144 no later than November 1, 2002. The
adoption of SFAS 144 will not have a significant impact on the Company's
financial position and results of operations.
In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 (SFAS 146), ACCOUNTING FOR EXIT OR DISPOSAL ACTIVITIES. SFAS 146
addresses the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including costs related to
terminating a contract that is not a capital lease and termination benefits that
employees who are involuntarily terminated receive under the terms of a one-time
benefit arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS 146 supersedes Emerging Issues Task Force
Issue No. 94-3, LIABILITY RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS
AND OTHER COSTS TO EXIT AN ACTIVITY (INCLUDING CERTAIN COSTS INCURRED IN A
RESTRUCTURING) and requires liabilities associated with exit and disposal
activities to be expensed as incurred. SFAS 146 will be effective for exit or
disposal activities of the Company that are initiated after December 31, 2002.
The Company believes that the adoption of SFAS 146 will not have a significant
impact on the Company's financial position and results of operations.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 (SFAS 148), ACCOUNTING FOR STOCK-BASED COMPENSATION -
TRANSITION AND DISCLOSURE. SFAS 148 amends FASB Statement No. 123 (SFAS 123),
ACCOUNTING FOR STOCK-BASED Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The transition guidance and annual disclosure provisions of SFAS 148
are effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. The Company is
currently evaluating the impact of adoption of SFAS 148 on its financial
position and results of operations.
In November 2002, the EITF reached a consensus on Issue No. 00-21 (EITF
00-21), REVENUE ARRANGEMENTS WITH MULTIPLE DELIVERABLES. EITF 00-21 addresses
certain aspects of the accounting by a vendor for arrangements under which the
vendor will perform multiple revenue generating activities. EITF 00-21 will be
effective for fiscal years beginning after June 15, 2003. The Company does not
expect the adoption of EITF 00-21 to have a material impact on its financial
position and results of operations.
In November 2002, the FASB Interpretation No. 45 (Interpretation 45),
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS, which clarifies disclosure and
recognition/measurement requirements related to certain guarantees. The
disclosure requirements are effective for financial statements issued after
December 15, 2002 and the recognition/measurement requirements are effective on
a prospective basis for guarantees issued or modified after December 31, 2002.
The Company is currently evaluating the impact of adoption of Interpretation 45
on its financial position and results of operations.
NOTE 12. RELATED PARTY TRANSACTIONS
Approximately 8% of fiscal 2002 revenues were derived from a company whose
Chief Financial and Enterprise Officer serves on the Synopsys Board of
Directors. Management believes the transactions between the two parties were
carried out under the Company's normal terms and conditions.
The Company has a joint venture with Davan Tech Co., Ltd, of Korea (Davan
Tech) whereby Davan Tech acts as a non-exclusive distributor for the Company
subject to certain conditions as defined in the distribution agreement. As of
October 31, 2002, the Company owned approximately 10% of Davan Tech and the
investment is accounted for under the cost basis. During the period from June 6,
2002 through October 31, 2002, the Company recognized revenues totaling $1.3
million from Davan Tech.
75
The Chairman of the Company's Audit Committee is also the Chairman of the
Board of Directors for a company in which Synopsys has invested $500,000. During
the first quarter of fiscal 2003, Synopsys invested an additional $300,000 in
this company.
NOTE 13. SUBSEQUENT EVENTS
RENEWAL OF 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 repurchase Synopsys common
stock with a market value up to $500 million (not including amounts purchased to
date under the July 2001 program on the open market). Common shares repurchased
are intended to be used for ongoing stock issuances, such as for existing
employee stock option and stock purchase plans and acquisitions.
PROPOSED ACQUISITION OF NUMERICAL TECHNOLOGIES, INC. On January 13, 2003,
the Company entered into an Agreement and Plan of Merger with Numerical
Technologies, Inc. (Numerical) under which the Company commenced a cash tender
offer to acquire all of the outstanding shares of Numerical common stock at
$7.00 per share, followed by a second-step merger in which the Company would
acquire any untendered Numerical shares at the same price per share. The total
transaction value is expected to be approximately $250 million. Following the
consummation of the cash tender offer, Numerical will merge with and into a
wholly owned subsidiary of the Company. The acquisition is subject to certain
conditions, including the tender of a majority of the fully diluted shares of
Numerical, compliance with regulatory requirements and customary closing
conditions.
WORKFORCE REDUCTION. During the first quarter of fiscal 2003, the Company
implemented a workforce reduction. The purpose was to reduce expenses by
decreasing the number of employees in all departments in domestic and foreign
locations. As a result, the Company expects to record a charge of between $4.8
million and $5.3 million during the first quarter of fiscal 2003. The charge
consists of severance and other special termination benefits.
NOTE 14. SELECTED QUARTERLY DATA (UNAUDITED)
QUARTER ENDED
-----------------------------------------------------
JANUARY 31, APRIL 30, JULY 31, OCTOBER 31,
------------- ------------ ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2002:
Revenue $ 175,545 $ 185,638 $ 236,095 $ 309,256
Gross margin 140,355 151,246 188,409 253,365
Income (loss) before income taxes 20,179 30,716 (161,380) (178,455)
Net income (loss) 14,052 21,380 (137,589) (97,836)
Earnings (loss) per share
Basic $ 0.23 $ 0.35 $ (1.93) $ (1.31)
Diluted $ 0.22 $ 0.33 $ (1.93) $ (1.31)
Market stock price range (1):
High $ 59.70 $ 55.21 $ 55.30 $ 47.25
Low $ 49.46 $ 41.71 $ 40.24 $ 32.63
2001:
Revenue $ 157,154 $ 163,524 $ 176,110 $ 183,562
Gross margin 125,099 132,568 143,390 149,171
Income before income taxes 13,919 18,368 21,250 29,996
Net income 9,465 12,490 14,450 20,397
Earnings per share
Basic $ 0.15 $ 0.21 $ 0.24 $ 0.34
Diluted $ 0.15 $ 0.19 $ 0.22 $ 0.33
Market stock price range (1):
High $ 55.37 $ 61.87 $ 62.75 $ 54.35
Low $ 34.12 $ 43.12 $ 44.05 $ 37.04
(1) Company's common stock is traded on The Nasdaq Stock Market under
the symbol "SNPS." The stock prices shown represent quotations among
dealers without adjustments for retail markups, markdowns or
commissions and may not represent actual transactions. As of October
31, 2002, there were approximately 568 shareholders of record. To date,
the Company has paid no cash dividends on its capital stock, and has no
current intention to do so.
ITEM 9. CHANGES IN AND DISAGREETMENTS WITH ACCOUNTANTS ON ACCOUNTING & FINANCIAL
DISCLOSURE.
Not Applicable
76
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information regarding the directors, including
information furnished by them as to principal occupations, certain other
directorships held by them, any arrangements pursuant to which they were
selected as directors and their ages as of January 31, 2003.
NAME AGE YEAR FIRST
ELECTED
DIRECTOR
Aart J. de Geus.............................. 48 1986
Andy D. Bryant............................... 52 1999
Chi-Foon Chan................................ 53 1998
Bruce R. Chizen.............................. 47 2001
Deborah A. Coleman........................... 50 1995
A. Richard Newton............................ 51 1987; 1995
Sasson Somekh................................ 56 1999
Roy Vallee................................... 50 2003
Steven C. Walske............................. 50 1991
-------------------------------------------------------------------------------
BACKGROUND OF DIRECTORS
Dr. Aart J. de Geus co-founded Synopsys and currently serves as Chief
Executive Officer and Chairman of the Board of Directors. Since the inception of
Synopsys in December 1986, he has held a variety of positions, including Senior
Vice President of Engineering and Senior Vice President of Marketing. From 1986
to 1992, Dr. de Geus served as Chairman of the Board. He served as President
from 1992 to 1998. Dr. de Geus has served as Chief Executive Officer since
January 1994 and has held the additional title of Chairman of the Board since
February 1998. He has served as a Director since 1986. From 1982 to 1986 Dr. de
Geus was employed by General Electric Corporation, where he was the Manager of
the Advanced Computer-Aided Engineering Group. Dr. de Geus holds an M.S.E.E.
from the Swiss Federal Institute of Technology in Lausanne, Switzerland and a
Ph.D. in electrical engineering from Southern Methodist University.
Andy D. Bryant has been a Director of Synopsys since January 1999 and
currently serves as Executive Vice President and Chief Financial and Enterprise
Services Officer of Intel Corporation, with responsibility for financial
operations, human resources, information technology and e-business functions and
activities worldwide. Mr. Bryant joined Intel in 1981 as Controller for the
Commercial Memory Systems Operation and in 1983 became Systems Group Controller.
In 1987 he was promoted to Director of Finance for the corporation and was
appointed Vice President and Director of Finance of the Intel Products Group in
1990. Mr. Bryant became CFO in February of 1994 and was promoted to Senior Vice
President in January 1999. Mr. Bryant expanded his role to Chief Financial and
Enterprise Services Officer in December 1999. He was promoted to Executive Vice
President in January 2001. Prior to joining Intel, he held positions in finance
at Ford Motor Company and Chrysler Corporation. Mr. Bryant holds a B.A. in
economics from the University of Missouri and an M.B.A. in finance from the
University of Kansas.
Dr. Chi-Foon Chan joined Synopsys as Vice President of Application
Engineering & Services in May 1990. Since April 1997 he has served as Chief
Operating Officer and since February 1998 he has held the additional title of
President. Dr. Chan also became a Director of Synopsys in February 1998. From
September 1996 to February 1998 he served as Executive Vice President, Office of
the President. From February 1994 until April 1997 he served as Senior Vice
President, Design Tools Group and from October 1996 until April 1997 as Acting
Senior Vice President, Design Re-Use Group. Additionally, he has held the titles
of Vice President, Engineering and General Manager, DesignWare Operations and
Senior Vice President, Worldwide Field Organization. From March 1987 to May
1990, Dr. Chan was employed by NEC Electronics, where his last position was
General Manager, Microprocessor Division. From 1977 to 1987, Dr. Chan held a
number of senior engineering positions at Intel Corporation. Dr. Chan holds an
M.S. and Ph.D. in computer engineering from Case Western Reserve University.
Bruce R. Chizen has been a Director of Synopsys since April 2001. Mr.
Chizen has served as President of Adobe Systems Incorporated, a provider of
graphic design, publishing, and imaging software for Web and print production,
since April 2000 and as Chief Executive Officer since December 2000. He joined
Adobe Systems in August 1994 as Vice President and General Manager, Consumer
Products Division and in December 1997 became Senior Vice President and General
Manager, Graphics Products Division. In August 1998 Mr. Chizen was promoted to
Executive Vice President, Products and Marketing. From November 1992 to February
1994 he was Vice President and General Manager, Claris Clear Choice for Claris
Corp., a wholly-owned subsidiary of Apple Computer. He is a Director of Adobe
Systems Incorporated.
Deborah A. Coleman has been a Director of Synopsys since November 1995. Ms.
Coleman is co-founder and currently General Partner of SmartForest Ventures in
Portland, Oregon. Ms. Coleman was Chairman of the Board of Merix Corporation, a
manufacturer of printed circuit boards, from May 1994, when it was spun off from
Tektronix, Inc., until September 2001. She also served as Chief Executive
Officer of Merix from May 1994 to September 1999 and as President from March
1997 to September 1999. Ms. Coleman joined Merix from Tektronix, a diversified
electronics corporation, where she served as Vice President of Materials
Operations, responsible for worldwide procurement, distribution, component
engineering and component manufacturing operations. Prior to joining Tektronix
77
in November 1992, Ms. Coleman was with Apple Computer, Inc. for eleven years,
where she held several executive positions, including Chief Financial Officer,
Chief Information Officer and Vice President of Operations. She is a Director of
Applied Materials, Inc., a manufacturer of semiconductor fabrication equipment,
Chairman of the Board of Teseda Corporation, a semiconductor test equipment
company, and a director of Finatus, Inc., a web-based compliance service
provider.
Dr. A. Richard Newton has been a Director of Synopsys since January 1995.
Previously, Dr. Newton was a Director of Synopsys from January 1987 to June
1991. Dr. Newton has been a Professor of Electrical Engineering and Computer
Sciences at the University of California at Berkeley since 1979 and is currently
Dean of the College of Engineering. From July 1999 to June 2000, Dr. Newton was
Chair of the Electrical Engineering and Computer Sciences Department. Since 1988
Dr. Newton has acted as a Venture Partner with Mayfield Fund, a venture capital
partnership, and has contributed to the evaluation and development of over two
dozen new companies. From November 1994 to July 1995 he was acting President and
Chief Executive Officer of Silicon Light Machines, a private company which has
developed display systems based on the application of micromachined silicon
light-valves.
Dr. Sasson Somekh has been a Director of Synopsys since January 1999. He is
Executive Vice President of Applied Materials, Inc., a manufacturer of
semiconductor fabrication equipment. From December 1993 to November 2000, Dr.
Somekh served as Senior Vice President. Dr. Somekh served as Group Vice
President from 1990 to 1993. Prior to that, he was a divisional Vice President.
Dr. Somekh joined Applied Materials in 1980 as a Project Manager.
Roy Vallee has been a Director of Synopsys since February 2003. Mr. Vallee
is Chief Executive Officer and Chairman of the Board of Avnet, Inc., a global
semiconductor products and electronics distributor, positions he has held since
June 1998. Previously, he was Vice Chairman of the Board since November 1992,
and also President and Chief Operating Officer since March 1992. Mr. Vallee
currently serves on the board of directors of Teradyne, Inc., an automated
testing company for the electronics, communications and software industries. He
is also a member of the executive committee of the Global Technology
Distribution Council.
Steven C. Walske has been a Director of Synopsys since December 1991. Mr.
Walske has been Chief Business Strategist of Parametric Technology Corporation,
a supplier of software products for mechanical computer aided engineering since
June 2000. Previously, Mr. Walske served as Chairman, Chief Executive Officer
and a Director from August 1994 until June 2000 and as President and Chief
Executive Officer of that company from December 1986 to August 1994.
There are no family relationships among any executive officers, directors
or persons chosen or nominated to become executive officers or directors of
Synopsys.
DIRECTORS' COMPENSATION
Each member of the Board receives a retainer of $25,000 per year for
attendance at Board meetings. In addition, each member of the Audit Committee
receives $2,000 per Audit Committee meeting attended, other than the
Chairperson, who receives $4,000 per Audit Committee meeting attended.
In addition, non-employee members of the board of directors receive
automatic option grants under the 1994 Non-Employee Directors Stock Option Plan,
which in this document we refer to as the "Directors Plan." As of the date of
this Annual Report, all seven non-employee members of the Synopsys board of
directors were eligible to participate in the Directors Plan. 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. The annual 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.
During fiscal 2002, directors Andy D. Bryant, Bruce R. Chizen, Deborah A.
Coleman, A. Richard Newton, Sasson Somekh and Steven C. Walske each received
automatic grants of options to purchase 10,000 Synopsys common shares at an
exercise price of $49.83 per share for Synopsys board of directors service
during the year. In addition, during fiscal 2002, each of such directors
received options to purchase 10,000 Synopsys common shares for service on
Synopsys board of directors committees at an exercise price of $49.83. Mr.
Vallee, who was added to the Board in February 2003, received an option for
20,000 shares at an exercise price of $40.92 for his initial service, a pro
rated annual grant of 3,333 shares at an exercise price of $40.92 per share and
a pro rated committee grant of 3,333 shares at an exercise price of $40.46 per
share.
During fiscal 2002, Dr. Newton provided consulting services to Synopsys,
for which he was paid $180,000. Under Synopsys' agreement with Dr. Newton, at
Synopsys' request, Dr. Newton provides advice concerning long-term technology
strategy and industry development issues, as well as assistance in identifying
opportunities for partnerships with academia.
78
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires Synopsys' directors,
officers and greater than ten percent beneficial owners of its shares to file
reports of ownership and changes in ownership with the SEC. Directors, officers
and greater than ten percent stockholders are required by SEC regulations to
furnish Synopsys with copies of all Section 16(a) forms they file.
Based solely upon its review of the copies of the Forms 3, 4 and 5
received by Synopsys and/or written representations from certain reporting
persons, Synopsys believes that each of its directors, officers, and greater
than ten percent beneficial owners of its shares during the fiscal year ended
October 31, 2002 has complied with all filing requirements applicable to such
persons during such fiscal year.
79
EXECUTIVE OFFICERS
Information regarding executive officers who are not directors is
included in Part I of the Annual Report.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION AND OTHER MATTERS
The following table sets forth the compensation earned by (1) Synopsys'
Chief Executive Officer and (2) each of the other four most highly compensated
executive officers whose compensation for fiscal 2002 exceeded $100,000, which
in this document we collectively refer to as the "named executive officers," for
services rendered in all capacities to Synopsys during the last three fiscal
years.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION:
SECURITIES
AWARDS ALL OTHER
ANNUAL COMPENSATION ($) UNDERLYING COMPENSATION
NAME AND POSITION YEAR SALARY BONUS OPTIONS (#) ($) (1)
Aart J. de Geus........................... 2002 400,000 575,000 106,500 1,500
Chief Executive Officer and 2001 400,000 575,000 85,500 1,830
Chairman of the Board 2000 430,769 600,000 731,000 1,855
Chi-Foon Chan............................. 2002 400,000 575,000 91,700 5,138
President and Chief Operating 2001 400,000 575,000 71,000 2,588
Officer 2000 430,769 600,000 623,000 2,493
Vicki L. Andrews.......................... 2002 300,000 448,385(2) 72,900 13,884
Senior Vice President 2001 289,423 611,396(3) 60,500 9,544
World Wide Sales 2000 287,500 568,256(4) 179,000 9,826
Robert B. Henske.......................... 2002(5) 375,000 350,000 73,300 1,500
Senior Vice President and 2001 364,423 350,000 60,500 1,825
Chief Financial Officer 2000(6) 175,000 232,000 340,000 160
Steven K. Shevick(7)...................... 2002 250,000 220,000 25,300 1,500
Senior Vice President and Chief 2001 241,538 175,000 17,500 1,871
Financial Officer 2000 236,154 160,984 100,000 1,833
-------------------------------------------------------------------------------
(1) Amounts in this column reflect premiums paid for group term life insurance,
Synopsys 401(k) contributions and, in the case of Ms.Andrews only, car
allowances. Dr. Chan's 2002 amounts include special travel allowance.
(2) Ms. Andrews' 2002 bonus consists of commissions of $102,125 and variable
bonus of $346,260.
(3) Ms. Andrews' 2001 bonus consists of commissions of $150,000, a variable
bonus of $296,260, a relocation bonus of $160,000 and a special bonus of
$5,136.
(4) Ms. Andrews' 2000 bonus consists of commissions of $318,096 and a variable
bonus of $250,160.
(5) Mr. Henske resigned from his position effective January 3, 2003.
(6) Mr. Henske commenced employment with Synopsys on May 10, 2000.
(7) Mr. Shevick was appointed Chief Financial Officer of Synopsys on
January 2, 2003. Prior to that, he served as Vice President,
Investor Relations and Legal and General Counsel.
STOCK OPTION GRANTS, OPTION EXERCISES AND YEAR-END VALUES
Information regarding stock option grants, option exercises and year-end
values for the named executive officers during fiscal 2002 is included in Item 7
of this Annual Report.
80
Employment Contracts, Termination of Employment Arrangements and Change of
Control Agreements
Under Synopsys' 1992 Stock Option Plan ("1992 Plan"), in the event of
certain changes in the ownership or control of Synopsys involving a "Corporate
Transaction," which includes an acquisition of Synopsys by merger or asset
sales, all outstanding options under the 1992 Plan will automatically become
exercisable, unless the option is assumed by the successor corporation, or
parent thereof, or replaced by a comparable option to purchase shares of the
capital stock of the successor corporation, or parent thereof.
In addition, in the event of a successful hostile tender offer for more
than 50% of the outstanding Synopsys common shares or a change in the majority
of the Synopsys board of directors as a result of one or more contested
elections for membership on the Synopsys board of directors, the administrator
of the 1992 Plan has the authority to accelerate vesting of outstanding options
or shares purchased under the 1992 Plan.
The Directors Plan provides that in the event of a change of control or
corporate transaction, as such terms are defined in the Directors Plan, all
Directors Plan options held by such director shall become fully vested and
exercisable as of the date of such change of control or corporate transaction.
Synopsys has entered into Employment Agreements, effective October 1, 1997,
with its Chief Executive Officer and its President. Each Employment Agreement
provides that if the executive is terminated involuntarily other than for cause
within 24 months of a change of control, (a) the executive will be paid an
amount equal to two times the sum of the executive's annual base pay plus target
cash incentive, plus the cash value of the executive's health benefits for the
next 18 months, and (b) all stock options held by the executive will immediately
vest in full. If the executive is terminated involuntarily other than for cause
in any other situation, the executive will receive a cash payment equal to the
sum of the executive's annual base pay for one year plus the target cash
incentive for such year, plus the cash value of the executive's health benefits
for 12 months. The terms "involuntary termination," "cause" and "change of
control" are defined in the Employment Agreements, each of which is filed with
the SEC.
81
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of Synopsys common shares by (1) each person known by
Synopsys to own beneficially more than five percent of the outstanding Synopsys
common shares on that date, and, (2) as of February 6, 2003 (A) each Synopsys
director, (B) each of the named executive officers and (C) all Synopsys
directors and current executive officers as a group.
PERCENTAGE
NAME OF BENEFICIAL OWNER(1) NUMBER OWNERSHIP
J. & W. Seligman & Co. Incorporated....................................... 7,776,496 (2) 10.28%
100 Park Avenue, 8th Floor
New York, NY 10017
Franklin Resources, Inc. 5,291,927 (3) 7.0%
One Frankling Parkway
San Mateo, CA 94403-1906
Blum Capital Partners, L.P......................................... 4,906,200 (4) 6.61%
909 Montgomery Street, Suite 400
-----------------------------------------------------------------------------
San Francisco, CA 94133-4625
FMR Corp 4,785,520 (5) 6.33%
82 Devonshire Street, Boston,
Massachusetts 02109
Harris Associates L.P. 3,805,900 (6) 5.03%
Two North LaSalle Street,
Suite 500
Chicago, IL 60602-3790
Vicki L. Andrews.......................................................... 128,653 (7) *
Andy D. Bryant............................................................ 93,749 (8) *
Chi-Foon Chan............................................................. 939,867 (9) 1.25%
Bruce R. Chizen........................................................... 59,166(10) *
Deborah A. Coleman........................................................ 60,000(11) *
Aart J. de Geus........................................................... 1,708,165(12) 2.26%
Robert B. Henske.......................................................... 0 *
A. Richard Newton......................................................... 95,916(13) *
Steven K. Shevick......................................................... 128,663(14) *
Sasson Somekh............................................................. 113,333(15) *
Roy Vallee 0
*
Steven C. Walske.......................................................... 116,016(16) *
All directors and current executive officers as a group (11 persons)...... 3,443,528(17) 4.45%
* Less than 1%
(1) The persons named in the table above have sole voting and investment power
with respect to all Synopsys common shares shown as beneficially owned by
them, subject to community property laws where applicable and the
information contained in the footnotes of this table.
(2) Share ownership for J. & W. Seligman & Co. Incorporated was obtained from
Amendment No. 11 to the Schedule 13G filed with the Securities and Exchange
Commission on February 11, 2003.
(3) Share ownership for Franklin Resources was obtained from Amendment No. 2 to
the Schedule 13D filed with the Securities and Exchange Commission on
February 12, 2003. Includes 2,127,450 shares as to which Franklin Advisers,
Inc. has sole voting power, 1,921,522 shares as to which Templeton Global
Advisers Limited has sole voting power, 448,785 shares as to which
Fiduciary Trust Company International has sole voting power, 411,068 shares
as to which Franklin Templeton Investment Management Limited has sole
voting power, 232,110 shares as to which Templeton Investment Counsel, LLC
has sole voting power, 147,817 shares as to which Franklin Templeton
Investments Corp. has sole voting power and 3,175 shares as to which
Templeton/Franklin Investment Services, Inc. has sole voting power.
(4) Share ownership for Blum Capital Partners, L.P. was obtained from Schedule
13F-R filed with the Securities and Exchange Commission on
February 14, 2003.
(5) Share ownership for FMR Corp. was obtained from Amendment No. 2 to the
Schedule 13D filed with the Securities and Exchange Commission on
February 14, 2003.
(6) Share ownership for Harris Associates L.P. was obtained from Schedule 13G
filed with the Securities and Exchange Commission on February 14, 2003.
Includes 1,620,900 shares over which Harris Associates L.P. has sole voting
power and 2,185,000 shares over which Harris Associates L.P. has shared
voting power.
82
(7) Includes options to purchase 127,975 Synopsys common shares exercisable by
Ms. Andrews within 60 days of February 6, 2003.
(8) Consists of options to purchase 93,749 Synopssys common shares exercisable
by Mr. Bryant within 60 days of February 6, 2003.
(9) Includes options to purchase 907,633 Synopsys common shares exercisable by
Dr. Chan within 60 days of February 6, 2003.
(10) Consists of options to purchase 59,166 Synopsys common shares exercisable
by Mr. Chizen within 60 days February 6, 2003.
(11) Consists of options to purchase 60,000 Synopsys common shares exercisable
by Ms. Coleman within 60 days of February 6, 2003.
(12) Includes options to purchase 1,396,131 Synopsys common shares exercisable
by Dr. de Geus within 60 days of February 6, 2003.
(13) Consists of options to purchase 95,916 Synopsys common shares exercisable
by Dr. Newton within 60 days of February 6, 2003.
(14) Includes options to purchase 126,352 Synopsys common shares exercisable by
Mr. Shevick within 60 days of February 6, 2003.
(15) Includes options to purchase 100,833 Synopsys common shares exercisable by
Dr. Somekh within 60 days of February 6, 2003.
(16) Includes options to purchase 115,916 Synopsys common shares exercisable by
Mr. Walske within 60 days of February 6, 2003.
(17) Includes options to purchase 3,083,671 Synopsys common shares exercisable
by directors and current executive officers within 60 days of February 6,
2003.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 10, "Directors and Executive Officers of the Registrant-Directors'
Compensation."
ITEM 14. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company's Chief
Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the Company's disclosure controls and procedures (as such
term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within
90 days prior to the filing date of this annual report (the "Evaluation
Date"). Based on such evaluation, such officers have concluded that, as of
the Evaluation Date, the Company's disclosure controls and procedures are
effective for gathering, analyzing and disclosing the information that the
Company (including its consolidated subsidiaries) is required to include in
the Company's reports filed or submitted under the Exchange Act.
(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.
83
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on Form
10-K:
(1) Financial Statements
The following documents are included as Part II, Item 8, of this Annual
Report on Form 10-K:
PAGE
Report of Independent Auditors................................... 2
Consolidated Balance Sheets...................................... 3
Consolidated Statements of Operations............................ 4
Consolidated Statements of Stockholders' Equity and
Comprehensive Income........................................... 5
Consolidated Statements of Cash Flows............................ 9
Notes to Consolidated Financial Statements....................... 10
(2) Financial Statement Schedule
The information required by this item is incorporated by reference
herein from Amendment No. 1 to this Annual Report on Form 10-K.
(3) Exhibits
See Item 15(c) below.
(b) Reports on Form 8-K
None.
(c) Exhibits
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
2.1 Agreement and Plan of Merger, dated as of December 3, 2001, among
Synopsys, Inc., Maple Forest Acquisition L.L.C., and Avant!
Corporation. (1)
3.1 Fourth Amended and Restated Certificate of Incorporation (2)
3.2 Certificate of Designation of Series A Participating Preferred Stock(3)
3.3 Certificate of Amendment of Fourth Amended and Restated Certificate of
Incorporation (10)
3.4 Restated Bylaws of Synopsys, Inc. (2)
4.1 Amended and Restated Preferred Shares Rights Agreement dated
November 24, 1999 (3)
4.3 Specimen Common Stock Certificate (4)
10.1 Form of Indemnification Agreement (4)
10.2 Director's and Officer's Insurance and Company Reimbursement Policy (4)
10.3 Lease Agreement, dated August 17, 1990, between the Company and John
Arrillaga, Trustee, or his successor trustee, UTA dated July 20, 1977
(John Arrillaga Separate Property Trust), as amended, and Richard T.
Peery, Trustee, or his successor trustee, UTA dated July 20, 1977
(Richard T. Peery Separate Property Trust), as amended (4)
10.7 Lease Agreement, dated June 16, 1992, between the Company and John
Arrillaga, Trustee, or his successor trustee, UTA dated July 20, 1977
(John Arrillaga Separate Property Trust), as amended, and Richard T.
Peery, Trustee, or his successor trustee, UTA dated July 20, 1977
(Richard T. Peery Separate Property Trust), as amended (5)
10.8 Lease Agreement, dated June 23, 1993, between the Company and John
Arrillaga, Trustee, or his successor trustee, UTA dated July 20, 1977
(John Arrillaga Separate Property Trust), as amended, and Richard T.
Peery, Trustee, or his successor trustee, UTA dated July 20, 1977
(Richard T. Peery Separate Property Trust), as amended (6)
10.9 Lease Agreement, August 24, 1995, between the Company and John
Arrillaga, Trustee, or his successor trustee, UTA dated July 20, 1977
(John Arrillaga Separate Property Trust), as amended, and Richard T.
Peery, Trustee, or his successor trustee, UTA dated July 20, 1977
(Richard T. Peery Separate Property Trust), as amended(7)
10.10 Amendment No. 6 to Lease, dated July 18, 2001, to Lease Agreement dated
August 17, 1990, between the Company and John Arrillaga, Trustee, or
his successor trustee, UTA dated July 20, 1997 (John Arrillaga
Survivor's Trust), and Richard T. Peery, Trustee, or his successor
trustee, UTA dated July 20, 1997 (Richard T. Peery Separate Property
Trust), as amended (8)(9)
10.11 Amendment No. 4 to Lease, dated July 18, 2001, to Lease Agreement dated
June 16, 1992, between the Company and John Arrillaga, Trustee, or his
successor trustee, UTA dated July 20, 1997 (John Arrillaga Survivor's
Trust), and Richard T. Peery, Trustee, or his successor trustee, UTA
dated July 20, 1997 (Richard T. Peery Separate Property Trust),
as amended (8)(9)
10.12 Amendment No. 3 to Lease, dated July 18, 2001, to Lease Agreement dated
June 23, 1993, between the Company and John Arrillaga, Trustee, or his
successor trustee, UTA dated July 20, 1997 (John Arrillaga Survivor's
Trust), and Richard T. Peery, Trustee, or his successor trustee, UTA
dated July 20, 1997 (Richard T. Peery Separate Property Trust),
as amended (8)(9)
84
10.13 Amendment No. 1 to Lease, dated July 18, 2001, to Lease Agreement dated
August 24, 1995, between the Company and John Arrillaga, Trustee, or
his successor trustee, UTA dated July 20, 1997 (John Arrillaga
Survivor's Trust), and Richard T. Peery, Trustee, or his successor
trustee, UTA dated July 20, 1997 (Richard T. Peery Separate Property
Trust), as amended. (8) (9)
10.14 Lease dated January 2, 1996 between the Company and Tarigo-Paul, a
California Limited Partnership (10)
10.15 1992 Stock Option Plan, as amended and restated (11)(12)10.16 Employee
Stock Purchase Program, as amended and restated (11)(13)10.17
International Employee Stock Purchase Plan, as amended and
restated (11)(13)
10.18 Synopsys deferred compensation plan dated September 30, 1996 (11)(14)
10.19 1994 Non-Employee Directors Stock Option Plan, as amended
and restated(11)(15)
10.20 Form of Executive Employment Agreement dated October 1, 1997 (11)(16)
10.21 Schedule of Executive Employment Agreements (9)(11)
10.22 1998 Nonstatutory Stock Option Plan (11)(17)
10.23 Settlement Agreement and General Release by and among Cadence Design
Systems, Inc., Joseph Costello, Avant! Corporation LLC, Gerald Hsu,
Eric Cheng, Mitsuru Igusa and Synopsys, Inc. effective as of
November 13, 2002 (18)
10.24 Consulting Services Agreement between Synopsys, Inc. and
A. Richard Newton Dated November 1, 2001 (11)(19)
21.1 Subsidiaries of the Company (9)
23.1 Report on Financial Statement Schedule (9)
23.2 Consent of KPMG LLP, Independent Auditors
24.1 Power of Attorney (9)
99.1 Certification of Chief Exectuive Officer and Chief Financial 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 Current Report on Form 8-K filed
with the Securities and Exchange Commission on December 5, 2001.
(2) Incorporated by reference from exhibit to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended April 3, 1999.
(3) Incorporated by reference from exhibit to Amendment No. 1 to the Company's
Registration Statement on Form 8-A filed with the Securities and Exchange
Commission on December 13, 1999.
(4) Incorporated by reference from exhibit to the Company's Registration
Statement on Form S-1 (File No. 33-45138) which became effective February
24, 1992.
(5) Incorporated by reference from exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1992.
(6) Incorporated by reference from exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1993.
(7) Incorporated by reference from exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1995.
(8) Confidential Treatment requested for certain portions of this document.
(9) Filed as exhibit to Annual Report on Form 10-K for the fiscal year ended
October 31, 2002.
(10) Incorporated by reference from exhibit to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1996.
(11) Compensatory plan or agreement in which an executive officer or director
participates
(12) Incorporated by reference from exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended October 31, 2001.
(13) Incorporated by reference from exhibit to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended April 30, 2001.
(14) Incorporated by reference from exhibit to the Registration Statement on
Form S-4 (File No. 333-21129) of Synopsys, Inc. filed with the Securities
and Exchange Commission on February 5, 1997.
(15) Incorporated by reference from exhibit to the Company's Registration
Statement on Form S-8 (file No. 333-77597) filed with the Securities and
Exchange Commission on May 3, 1999.
(16) Incorporated by reference from exhibit to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended January 3, 1998.
(17) Incorporated by reference from exhibit to the Company's Registration
Statement on Form S-8 (File No. 333-90643) filed with the Securities and
Exchange Commission on November 9, 1999.
(18) Incorporated by reference exhibit to the Company's Current Report on Form
8-K filed with the Securities and Exchange Commission on November 19, 2002.
(19) Incorporated by reference from exhibit to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended April 30, 2002.
85
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) 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, in Mountain View,
State of California, on this 7th day of July, 2003.
SYNOPSYS, INC.
By: /S/ AART J. DE GEUS
-----------------------------------
Aart J. de Geus
Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
By: /S/ STEVEN K. SHEVICK
-----------------------------------
Steven K. Shevick
Senior Vice President, Finance
and Chief Financial Officer
(Principal Financial Officer)
By: /S/ RICHARD T. ROWLEY
-----------------------------------
Richard T. Rowley
Vice President, Corporate Controller
(Principal Accounting Officer)
86
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
/S/ AART J. DE GEUS* Chief Executive Officer July 7, 2003
-------------------------- (Principal Executive Officer)
Aart J. de Geus and Chairman of the Board of Directors
/S/ CHI-FOON CHAN* President, Chief Operating July 7, 2003
-------------------------- Officer and Director
Chi-Foon Chan
/S/ ANDY D. BRYANT* Director July 7, 2003
--------------------------
Andy D. Bryant
/S/ BRUCE R. CHIZEN* Director July 7, 2003
--------------------------
Bruce R. Chizen
/S/ DEBORAH A. COLEMAN* Director July 7, 2003
--------------------------
Deborah A. Coleman
/S/ A. RICHARD NEWTON* Director July 7, 2003
--------------------------
A. Richard Newton
/S/ SASSON SOMEKH* Director July 7, 2003
--------------------------
Sasson Somekh
Director
--------------------------
Roy Valee
/S/ STEVEN C. WALSKE* Director July 7, 2003
--------------------------
Steven C. Walske
/S/STEVEN K. SHEVICK
--------------------------
*By: Steven K. Shevick, Attorney-in-Fact
87
CERTIFICATIONS
I, Aart J. de Geus, certify that:
1. I have reviewed this annual report on Form 10-K of Synopsys, Inc.;
2. Based on my knowledge, this annual 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
annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 annual 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: July 7, 2003
/s/ AART J. DE GEUS
-----------------------
Aart J. de Geus
Chief Executive Officer
(Principal Executive Officer)
88
I, Steven K. Shevick, certify that:
1. I have reviewed this annual report on Form 10-K of Synopsys, Inc.;
2. Based on my knowledge, this annual 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
annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 annual 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: July 7, 2003
/S/ STEVEN K. SHEVICK
---------------------
Steven K. Shevick
Chief Financial Officer
(Principal Financial Officer)
89
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
2.1 Agreement and Plan of Merger, dated as of December 3, 2001, among
Synopsys, Inc., Maple Forest Acquisition L.L.C., and Avant!
Corporation. (1)
3.1 Fourth Amended and Restated Certificate of Incorporation (2)
3.2 Certificate of Designation of Series A Participating Preferred Stock(3)
3.3 Certificate of Amendment of Fourth Amended and Restated Certificate of
Incorporation (10)
3.4 Restated Bylaws of Synopsys, Inc. (2)
4.1 Amended and Restated Preferred Shares Rights Agreement dated
November 24, 1999 (3)
4.3 Specimen Common Stock Certificate (4)
10.1 Form of Indemnification Agreement (4)
10.2 Director's and Officer's Insurance and Company Reimbursement Policy (4)
10.3 Lease Agreement, dated August 17, 1990, between the Company and John
Arrillaga, Trustee, or his successor trustee, UTA dated July 20, 1977
(John Arrillaga Separate Property Trust), as amended, and Richard T.
Peery, Trustee, or his successor trustee, UTA dated July 20, 1977
(Richard T. Peery Separate Property Trust), as amended (4)
10.7 Lease Agreement, dated June 16, 1992, between the Company and John
Arrillaga, Trustee, or his successor trustee, UTA dated July 20, 1977
(John Arrillaga Separate Property Trust), as amended, and Richard T.
Peery, Trustee, or his successor trustee, UTA dated July 20, 1977
(Richard T. Peery Separate Property Trust), as amended (5)
10.8 Lease Agreement, dated June 23, 1993, between the Company and John
Arrillaga, Trustee, or his successor trustee, UTA dated July 20, 1977
(John Arrillaga Separate Property Trust), as amended, and Richard T.
Peery, Trustee, or his successor trustee, UTA dated July 20, 1977
(Richard T. Peery Separate Property Trust), as amended (6)
10.9 Lease Agreement, August 24, 1995, between the Company and John
Arrillaga, Trustee, or his successor trustee, UTA dated July 20, 1977
(John Arrillaga Separate Property Trust), as amended, and Richard T.
Peery, Trustee, or his successor trustee, UTA dated July 20,
1977(Richard T. Peery Separate Property Trust), as amended (7)
10.10 Amendment No. 6 to Lease, dated July 18, 2001, to Lease Agreement dated
August 17, 1990, between the Company and John Arrillaga, Trustee, or
his successor trustee, UTA dated July 20, 1997 (John Arrillaga
Survivor's Trust), and Richard T. Peery, Trustee, or his successor
trustee, UTA dated July 20, 1997 (Richard T. Peery Separate Property
Trust), as amended (8)(9)
10.11 Amendment No. 4 to Lease, dated July 18, 2001, to Lease Agreement dated
June 16, 1992, between the Company and John Arrillaga, Trustee, or his
successor trustee, UTA dated July 20, 1997 (John Arrillaga Survivor's
Trust), and Richard T. Peery, Trustee, or his successor trustee, UTA
dated July 20, 1997 (Richard T. Peery Separate Property Trust),
as amended (8)(9)
10.12 Amendment No. 3 to Lease, dated July 18, 2001, to Lease Agreement dated
June 23, 1993, between the Company and John Arrillaga, Trustee, or his
successor trustee, UTA dated July 20, 1997 (John Arrillaga Survivor's
Trust), and Richard T. Peery, Trustee, or his successor trustee, UTA
dated July 20, 1997 (Richard T. Peery Separate Property Trust),
as amended (8)(9)
10.13 Amendment No. 1 to Lease, dated July 18, 2001, to Lease Agreement dated
August 24, 1995, between the Company and John Arrillaga, Trustee, or
his successor trustee, UTA dated July 20, 1997 (John Arrillaga
Survivor's Trust), and Richard T. Peery, Trustee, or his successor
trustee, UTA dated July 20, 1997 (Richard T. Peery Separate Property
Trust), as amended. (8) (9)
10.14 Lease dated January 2, 1996 between the Company and Tarigo-Paul, a
California Limited Partnership (10)
10.15 1992 Stock Option Plan, as amended and restated (11)(12)10.16 Employee
Stock Purchase Program, as amended and restated (11)(13)10.17
International Employee Stock Purchase Plan, as amended and
restated (11)(13)
10.18 Synopsys deferred compensation plan dated September 30, 1996 (11)(14)
10.19 1994 Non-Employee Directors Stock Option Plan, as amended
and restated(11)(15)
90
10.20 Form of Executive Employment Agreement dated October 1, 1997 (11)(16)
10.21 Schedule of Executive Employment Agreements (9)(11)
10.22 1998 Nonstatutory Stock Option Plan (11)(17)
10.23 Settlement Agreement and General Release by and among Cadence Design
Systems, Inc., Joseph Costello, Avant! Corporation LLC, Gerald Hsu,
Eric Cheng, Mitsuru Igusa and Synopsys, Inc. effective as of
November 13, 2002 (18)
10.24 Consulting Services Agreement between Synopsys, Inc. and
A. Richard Newton Dated November 1, 2001 (11)(19)
Section 906 of the Sarbanes-Oxley Act of 2002.
21.1 Subsidiaries of the Company (9)
23.1 Report on Financial Statement Schedule (9)
23.2 Consent of KPMG LLP, Independent Auditors
24.1 Power of Attorney (9)
99.1 Certification of Chief Exectuive Officer and Chief Financial Officer
furnished pursuant to 18 U.S.C Section 1350 as adopted pursuant to
----------
(1) Incorporated by reference from exhibit to Current Report on Form 8-K filed
with the Securities and Exchange Commission on December 5, 2001.
(2) Incorporated by reference from exhibit to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended April 3, 1999.
(3) Incorporated by reference from exhibit to Amendment No. 1 to the Company's
Registration Statement on Form 8-A filed with the Securities and Exchange
Commission on December 13, 1999.
(4) Incorporated by reference from exhibit to the Company's Registration
Statement on Form S-1 (File No. 33-45138) which became effective February
24, 1992.
(5) Incorporated by reference from exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1992.
(6) Incorporated by reference from exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1993.
(7) Incorporated by reference from exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1995.
(8) Confidential Treatment requested for certain portions of this document.
(9) Filed as exhibit to Annual Report on Form 10-K for the fiscal year ended
October 31, 2002.
(10) Incorporated by reference from exhibit to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1996.
(11) Compensatory plan or agreement in which an executive officer or director
participates
(12) Incorporated by reference from exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended October 31, 2001.
(13) Incorporated by reference from exhibit to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended April 30, 2001.
(14) Incorporated by reference from exhibit to the Registration Statement on
Form S-4 (File No. 333-21129) of Synopsys, Inc. filed with the Securities
and Exchange Commission on February 5, 1997.
(15) Incorporated by reference from exhibit to the Company's Registration
Statement on Form S-8 (file No. 333-77597) filed with the Securities and
Exchange Commission on May 3, 1999.
(16) Incorporated by reference from exhibit to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended January 3, 1998.
(17) Incorporated by reference from exhibit to the Company's Registration
Statement on Form S-8 (File No. 333-90643) filed with the Securities and
Exchange Commission on November 9, 1999.
(18) Incorporated by reference exhibit to the Company's Current Report on Form
8-K filed with the Securities and Exchange Commission on November 19, 2002.
(19) Incorporated by reference from exhibit to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended April 30, 2002.
91
EXHIBIT 23.2
Consent of Independent Auditors
The Board of Directors
Synopsys, Inc.:
We consent to the incorporation by reference in registration statements (Nos.
333-75638 and 333-67184) on Form S-4 and (Nos. 333-45056, 333-38810, 333-32130,
333-90643, 333-84279, 333-77597, 333-56170, 333-63216, 333-71056, 333-50947,
333-77000, 333-97317, 333-97319, 333-99651, 333-100155, 333-103418, 333-103635,
333-103636, and 333-106149) on Form S-8 of Synopsys, Inc. of our reports dated
November 20, 2002, except as to Note 13, which is as of January 13, 2003,
relating to the consolidated balance sheets of Synopsys, Inc. and subsidiaries
as of October 31, 2002 and 2001 and the related consolidated statements of
operations, stockholders' equity and comprehensive income, and cash flows for
each of the years in the three-year period ended October 31, 2002, and the
related consolidated financial statement schedule, which reports appear in this
annual report on Form 10-K/A of Synopsys, Inc.
/s/ KPMG LLP
Mountain View, California
July 7, 2003
92
EXHIBIT 99.1
Certification
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of
Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a)
and (b) of section 1350, chapter 63 of title 18, United States Code), each of
the undersigned officers of Synopsys, Inc., a Delaware corporation (the
"Company"), does hereby certify, to such officer's knowledge, that:
The Annual Report on Form 10-K for the fiscal year ended October 31, 2002
(the "Form 10-K") of the Company to which this Certificiation is attached as
Exhibit 99.1 fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and information contained in the Form 10-K
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Dated: July 7, 2003
/s/ AART J. DE GEUS
-------------------------
Aart J. de Geus
Chief Executive Officer
Dated: July 7, 2003
/s/ STEVEN K. SHEVICK
-------------------------
Steven K. Shevick
Chief Financial Officer
The foregoing certification is being furnished solely pursuant to section 906 of
the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter
63 of title 18, United States Code) and is not deemed filed with the Securities
and Exchange Commission as part of the Form 10-K or as a separate discloure
document and is not to be incorporated by reference into any filing of Synopsys,
Inc. under the Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended (whether made before or after the date of the Form
10-K), irrespective of any general incorporation language contained in such
filing.
A signed original of this written statement required by Section 906 has been
provided to Synopsys, Inc. and will be retained by Synopsys, Inc. and furnished
to the Securities and Exchange Commission or its staff upon request.
93