===============================================================================UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
----------------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
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the year ended October 31, 2002
2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-45138
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 0-19807
SYNOPSYS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 56-1546236
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
(Exact name of registrant as specified in its charter)
| Delaware | 56-1546236 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
700 EAST MIDDLEFIELD ROAD, MOUNTAIN VIEW, CALIFORNIAEast Middlefield Road, Mountain View, California 94043
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(Address of principal executive offices, including zip code)
(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,
(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
par value
(Title of Class)
Preferred Share Purchase Rights
(Title of Class)
Indicate by check mark whether the registrantRegistrant (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 registrantRegistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X]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'sRegistrant’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 registrantRegistrant is an accelerated filer (as defined in Rule 12b-2 of the Act). [ ]x Yes [X]¨ No
State the
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'sRegistrant’s most recently completed second fiscal quarter: $1,699,717,300.
quarter was $2,286,755,272. Excludes an aggregate of 94,085,796 shares of common stock held by officers and directors and by each person known by the Registrant to own 5% or more of the outstanding common stock on such date, giving effect to the two-for-one stock split completed on September 23, 2003. Exclusion of shares held by any of these persons should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant, or that such person is controlled by or under common control with the Registrant.
On January 4, 20032, 2004, approximately 74,187,775156,562,816 shares of the registrant'sRegistrant’s Common stock, $0.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating to its 2003 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
===============================================================================
None.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED OCTOBER
Year ended October 31, 2002
2003
TABLE OF CONTENTS
PAGE NO.
| Page No. | ||||
Item 1. | 3 | |||
Item 2. | 14 | |||
Item 3. | 15 | |||
Item 4. | 15 | |||
Item 5. | Market for Registrant’s Common Equity and Related Stockholder Matters | 18 | ||
Item 6. | 18 | |||
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 19 | ||
Item 7A. | 46 | |||
Item 8. | 48 | |||
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 83 | ||
Item 9A. | 83 | |||
Item 10. | 84 | |||
Item 11. | 87 | |||
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 89 | ||
Item 13. | 90 | |||
Item 14. | 91 | |||
Item 15. | Exhibits, Financial Statements, Schedules and Reports on Form 8-K | 92 | ||
| 95 | ||||
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 14
Item 3. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 17
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters...................................... 18
Item 6. Selected Financial Data..................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 19
Item 7a. Quantitative and Qualitative Disclosure About Market Risk... 49
Item 8. Financial Statements and Supplementary Data................. 50
Item 9. Changes in and Disagreements with Accountants
This Annual Report on Accounting
and Financial Disclosure................................. 87
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 87
Item 11. Executive Compensation...................................... 87
Item 12. Security Ownership of Certain Beneficial Owners and Management 87
Item 13. Certain Relationships and Related Transactions............. 87
Item 14. Controls and Procedures.................................... 87
PART IV
Item 15. Exhibits, Financial Statements, Schedules and Reports
on Form 8-K............................................ 88
SIGNATURES.......................................................... 92
CERTIFICATIONS...................................................... 123
PART I
This Form 10-K, including "Item 1. Business,"Item 1, “Business,” includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934.1934 that involve risks, uncertainties and assumptions. If these risks or uncertainties materialize, or if our assumptions are incorrect, our actual results could differ materially from those expressed or implied by these forward-looking statements. These statements include, but are not limited to statements concerning: the Company'sour business, strategy; the Company's expansion into the market for
physical design tools; the Company's intentions regarding its system level
designproduct and verification tools; the Company's intentions regardingplatform strategies; benefits we expect from previous and future acquisitions; completion of development of our unfinished products that address signal integrity problems; the Company's intentions
regarding design reuse tools and techniques, including the Company's
expectations regarding expanding its inventoryor further development or integration of IP cores; the Company's
intentions regarding its physical synthesis line ofour existing products; the Company's
expectations regardingshift of semiconductor manufacturing to 130 nanometer and below silicon processes; the expected customer benefits of the Milkyway™ design database; our future research and development salesspending; continuation of current industry trends towards vendor consolidation; customer interest in more highly integrated tools and marketing,design flows; our expectations of the continuing success of our intellectual property and generalnew ventures initiatives; and administrative expenses; the Company's efforts to enhance its
existing products and developour expectations of our future liquidity requirements. For a discussion of certain risks or acquire new products; the Company's
expectations regarding license mix; and the Company's requirements for working
capital. The Company'suncertainties which could cause our actual results couldto differ materially from those projectedwe project in thethese forward-looking statements, as a result of risks and
uncertainties that include, but are not limited to, those discussed under the
caption "Factorsplease see Part II, Item 7, “Factors That May Affect Future Results"Results” under Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations included in Part
II, Item 7 hereto, as well as factors discussed elsewherebelow. The information we include in this Form 10-K.
ITEM10-K is as of its filing date with the Securities and Exchange Commission and future events or circumstances could differ significantly from the forward-looking statements included in this report. We assume no obligation, and do not intend, to update these forward-looking statements.
Item 1. BUSINESS
INTRODUCTION
Business
Introduction
Synopsys, Inc. (Synopsys or(Synopsys) is the Company) is a leading supplier ofworld leader in electronic design automation (EDA) software used to the global electronics industry. The
Company's products are used by designers ofdesign complex integrated circuits (ICs), including
system-on-a-chip ICs, and systems-on-chips (SoCs) in the electronicglobal semiconductor and electronics industries. Our software and intellectual property products (such as computers, cell
phones, and internet routers) that use such ICsdesign services provide a complete IC design and verification solution from original concept to automate significant portions
of theirthe actual chip, design process. ICs are distinguished by the speed at which they
run, their area, the amount of power they consumeenabling our customers to bring advanced products to market quickly.
We incorporated in 1986 in North Carolina 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 incorporatedreincorporated in Delaware in 1987. THE ROLE OFOur headquarters are located at 700 East Middlefield Road, Mountain View, California 94043, telephone number (650) 584-5000. We have more than 60 offices throughout North America, Europe, Japan and Asia.
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Proxy Statements relating to our annual meetings of stockholders, Current Reports on Form 8-K and amendments to these reports are available, free of charge, on our Internet website (www.synopsys.com). We post these reports as soon as practicable after we file them with the Securities and Exchange Commission.
The Role of EDA IN THE ELECTRONICS INDUSTRY
Overin the past three decades,Electronics Industry
Continuing technology advances in the semiconductor industry have dramatically increased the size,feature density, speed, power efficiency and functional capacity of ICs:
o Thesemiconductors (also referred to as integrated circuits, ICs or chips).
Combined, these changesadvances in semiconductor technology have fostered thedriven development of lower cost, higher performance computers, wireless communications networks, cell phones, hand-held personal digital assistants,devices, Internet routers and manya wealth of other goodselectronic devices. Each advance, however, has introduced new challenges for all participants in semiconductor production, including designers, manufacturers, equipment manufacturers 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 providingsuppliers.
The IC designers with tools and techniquesDesign Process
EDA software is central 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
manufacturabilityprocess, as it enables designers to:
In simplified form, theIC design of an integrated circuit consists of five
basic steps:
SYSTEM DESIGN. First, asystem design, logic design, functional verification, physical design and physical verification.
System Design. In system design, the designer describes the chip’s desired functions that the chip is to
perform in very basic terms using a specialized high-level computer language. During thislanguage, typically Verilog or VHDL. 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 producesyields a "registerrelatively high-level, “register transfer level" or "RTL"level” (RTL) description of the chip. Most of this processSystem design is completed manually, although
there is a small but growingan early stage market segment for EDA companies, as most EDA products that help automatehave focused to date on logic design, functional verification and physical design and verification at the system level.
LOGIC SYNTHESIS. After the designer is satisfied with the RTL code, a logic
synthesis program convertsverification.
Logic Design. Logic design, or “synthesis,” programs convert the RTL code into a logical diagram of the chip, and produce a data file known as a “net list” describing the various groups of transistors, or “gates,” to be built on the chip. Related programs insert into the design the additional circuitry that will be requiredneeded 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",“physical synthesis,” produces a data file containing
"placed gates", which describesdescribing the logic blocks and includes information about
where they will be physically located, or "placed", onchip plus a chip. See discussion
below under "Current Issues Facing IC Designers". Inportion of the chip’s physical layout. Also, 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,SoCs, designers are increasingly performing "design planning", either before or“design planning” in conjunction with logic
synthesis. In design planning,which the designer determines the location of the major functional "blocks" that will be captured“blocks” on the system-on-a-chipSoC prior to logic synthesis.
Functional Verification. Before 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 stageafter logic design, the designer uses simulationtestbench automation and related programsother verification tools to simulate large sets of inputs that a given IC design might confront in real-life operation. By running these extensive tests, the designer can verify that the design successfully performedwill function as intended.
Physical Design. In the functions
thatphysical design stage, the designer intended, by feeding an exhaustive arrayplans the physical location of potential inputs
into a specialized program, "simulating" the functioningall 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 alleach of the wires connecting each one of them are mapped out inwith a series of transformations that gradually gets more“place and more
detailed. First,route” tool. The designer first determines the location on the chip die offor each block of the chip, is
finalized, andas well as the location offor each transistor within each block, is determined
- -- a process known as "placement" -- then all of“placement.” Then the designer adds the connections between the transistors, are determined -- a process known as "routing".“routing.” The resultoutput of place and route programs is one or more data files that can be read by physical verification programs (see(as described below) or by the equipment used to manufacture the chip.
PHYSICAL VERIFICATION.
Physical Verification. Before sending the chip design data filefiles to a chip
manufacturer for fabrication, the designer must perform a series of further verification steps, are
undertaken. The designer must confirmconfirming again that the chip as placed and routed will 2
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 verifyand checking to make sure that the final design complies with allthe specific requirements of the design rules
set forth by the partyfabrication facility that will manufacture the chip. Finally, theThe 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. completion of this final phase is called “tapeout.”
In the actual chip design,
of a chip each of these steps has a number of different elements. Theadditional elements, and designers often undertake the various design and verification steps or
the different elements within the steps, may be undertaken in a different order than described above, and repeat one or repeatedmore steps multiple times. And, as described below,Further, several of the steps, especially logic design and physical design, are becoming more integrated with each other. In any event, ifIf at any stage of the process the designer determines the chip doesdesign will not perform as intended, then the designer must go back one or more steps to either
redesignand correct the RTL, redesign theproblem, then continue through subsequent steps. Recreating a chip’s logic re-run the verification or redo the
physical design, of the chip.devising and performing simulation over again, and other iterations all take time. Each such iteration takes time,adds significant costs, and the more time the
process takes, the more expensive the process becomes, and themakes it more difficult it
will be for the designer to meet his or her time-to-market goals.
CURRENT ISSUES FACING
Current Issues Facing IC DESIGNERS
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
3
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 numberface three principal types 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
interrelated challenges:
| • | Product Challenges. Chips are differentiated on a number of dimensions, including size, speed, functionality, power consumption and performance. The designer must balance each dimension against the others, making key tradeoff decisions—often through multiple iterations—to reach a final design. As chips become more complex, this balancing of factors becomes disproportionately more difficult. In the meantime, designers of advanced chips must also successfully address technical issues, including: |
| • | Timing closure: achieving consistency between the speed of the chip after logic design and the speed of the chip after physical design; |
| • | Signal integrity: a general term describing the many electrical effects, like cross-talk and other forms of interference, that occur as the wires on a chip get more narrow and closer together; |
| • | Power management: reducing power consumption is an important objective for chips to be used in battery-operated devices, such as laptop computers and cell phones; |
| • | Verification: the number of tests required to verify a chip increases geometrically as the number of transistors increases, to the point that verification is the single most time-consuming and resource intensive aspect of overall design; |
| • | Manufacturability: due in substantial part to steadily decreasing feature widths and thus increasing feature density, faithfully translating the design produced by EDA tools into the intricate pattern of wires and transistors on the chip has become significantly more difficult; |
| • | Design for test: ensuring that the chip can be tested rapidly and at a reasonable cost once manufactured, despite substantial increases in the number of circuits on the chip that need testing;and |
| • | Yield: ensuring that the chip can be manufactured successfully and at an acceptable number of good chips per wafer. |
| • | Cost. In planning a chip project, our customers must consider design costs, manufacturing costs and support costs, all of which are steadily increasing. The higher the cost, the higher the expected volume of chips the customer must sell to make a given chip project profitable. Faced with increasing costs, our customers continue to focus intensely on controlling their research and development and manufacturing costs, including their costs in EDA. As a result, many of our customers have begun consolidating suppliers to improve their purchasing terms and, more importantly, to gain the benefits of better integrated products. |
| • | Schedule. Economic pressures, competition and continuing innovation continue to shorten the life cycle of electronic products. Accordingly, time-to-market is critical to a product’s commercial success. The design time for a product’s IC components is a major determining factor of that product’s time-to-market. Accordingly, our customers require EDA products that can address greater complexity, while increasing design speed and maintaining design reliability. |
Synopsys providesOverview
We provide products and services that help our 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.leading-edge ICs. As a result of our merger withmid-2002 acquisition of Avant! Corporation (Avant!), which was completed in June 2002, Synopsys substantially filled out its
portfoliowe now offer a comprehensive suite of system design, logic design, functional verification, physical design and physical verification products. Through ourOur March 2003 acquisition of inSilicon, completed in September 2002, we significantly
augmentedNumerical Technologies, Inc. (Numerical) expanded our portfolioofferings of IP components. As of the end of fiscal 2002, we
offered customers all of the principalmanufacturing technologies and products required to design a chip from
concept to the point at which it is handed to the manufacturer for fabrication,
andgeared towards small geometry designs. We also sell the broadest array of design building blockspre-verified intellectual property (IP) components of any company in the EDA or
intellectual property (IP) industry. Synopsys also offersFinally, we offer a full range of professional services, including turnkey design services, design assistance and methodology consulting.
Synopsys markets its
We market our products on a worldwide basis and offersoffer comprehensive customer service, education, consulting and support as integral components of itsour product offerings. Products are marketedWe market our products primarily through itsour direct sales force. Synopsys hasWe have licensed itsour products to most of the world'sworld’s leading semiconductor, computer, communications, electronics and electronicsdevice companies.
STRATEGY
Synopsys'
Strategy
Our strategy ishas three principal components. First, we have historically focused, and will continue to develop and offerfocus, on providing our customers the most technologically advanced products to its customers aaddress each step in the IC design process. Second, building on the strength of our individual products, we will continue to focus on developing broad, andincreasingly integrated array“platforms,” or collections of tools and services required to enable design of complex ICs,
especially system-on-a-chip ICs. The Company is seeking to build and enhancekey individual 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 togetherintegrated through the use of common technologies, to deliver enhanced value. In fiscal 2003, we created two distinct platforms: our Galaxy Design Platform and our Discovery Verification Platform. Third, we will expand our product offerings in areas offering the potential for rapid growth. For example, we have undertaken initiatives in both the intellectual property and design for manufacturing segments as described below underProducts and Services.
Organization
We operate in a common databasesingle segment 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.
4
ORGANIZATION
Synopsys is currently organized into four product developmentprimary groups: Implementation, Verification, Solutions and New Ventures.
| • | Implementation Group: develops and markets the products included in the Galaxy Design Platform and related products. |
| • | Verification Group: develops and markets the products included in the Discovery Verification Platform and related products. |
| • | Solutions Group: develops and markets our DesignWare® library of pre-designed IP blocks for chip designers and provides turnkey IC design and verification services. |
| • | New Ventures Group: focuses on our Design for Manufacturing initiatives and analog/mixed-signal design and verification products. |
Our other 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 Wideinclude Worldwide Sales, group, a World WideWorldwide Application Services, group, a Finance, group, a Human Resources and Facilities, group and aChief Technology Office.
Products and Information Systems group.
PRODUCTS
SynopsysServices
Our products and services are focusedfocus on the principal needs of semiconductor designers and, at a business level, are divided into the four categoriesgroups specified above -- IC Implementation, Verification, Nanometer,
Analysis and Test and Intellectual Property and Professional Services. Theabove. We provide financial information regarding our products and services included in these categories are discussed below.
Financial information regarding Synopsys' products and services is included
under Part II, Item 7 -- Management's, Management’s Discussion and Analysis of Financial Condition and Results of Operations -- "Results—Results of Operations -- —Revenue -- —Product Groups."Groups.
Implementation Group
Galaxy Design Platform. In February 2003, we announced the combination of many of our leading IC IMPLEMENTATION PRODUCTS
Synopsys'design products into a single, unified platform called the Galaxy™ Design Platform. Galaxy includes the following products:
| • | Design Compiler® is our market-leading logic synthesis tool used by a broad range of companies engaged in the design of ICs to optimize their designs for performance and area. |
| • | Physical Compiler® is our physical synthesis product which unites logic synthesis and placement functionality and addresses critical timing problems encountered in designing advanced ICs and SoCs. |
| • | Module Compiler™ allows designers to reuse their datapath structures to obtain the best implementation for their designs. |
| • | Power Compiler™ helps designers manage and verify power consumption at different levels of the design process. |
| • | DFT Compiler™ inserts functional and test logic required to enable efficient, high-coverage testing of the chip after manufacturing. |
| • | Jupiter XT™is our hierarchical design planning tool that allows designers to quickly partition their chip design into the best physical hierarchy to optimize logic synthesis and physical implementation. |
| • | Apollo™is our basic physical design tool used for the placement and routing of a chip. |
| • | Astro™is our advanced physical design system for optimization, placement and routing while concurrently accounting for physical effects. |
| • | PrimeTime®/PrimeTime SI are timing analysis products that measure and analyze the speed at which a design will operate when it is fabricated. PrimeTime SI analyzes the effect of cross-talk on timing, an increasingly important issue at chip geometries below 180 nanometers. |
| • | Star-RCXT™ is our industry-leading extraction solution for analyzing IC layout data and determining key electrical characteristics of a chip, such as capacitance and resistance. |
| • | Hercules™is our physical verification product family that performs design-rule checking, electrical rule checking, and layout versus schematic verification. |
| • | Milkyway™ Database is a common design data repository which enables better interoperability among implementation and analysis tools. Storing design data in this single database with rapid read/write access can reduce data translation times between tools and inconsistent interpretations of diverse data. We opened this database to our customers and other EDA vendors in February 2003 to reduce integration costs for our customers and advance tool interoperability in the industry. |
With the Galaxy Design Platform, our goal is to provide our customers a single, integrated IC Implementationdesign platform based on leading individual products include mostwhich incorporates common libraries and consistent timing, delay calculation and constraints throughout the design process using our open Milkyway database, and yet allows designers the flexibility to integrate internally developed and third-party tools. With this advanced functionality,
common foundation and flexibility, our Galaxy Design Platform should help reduce design times, decrease integration costs and minimize the risks inherent in advanced, complex IC designs.
Verification Group
Discovery Verification Platform. Also during fiscal 2003, we introduced our Discovery™ Verification Platform. The Discovery Platform combines many of our verification and nanometer level analysis tools in a unified environment to provide high performance and efficient interaction among these technologies. The Discovery Verification Platform includes the following products:
| • | VCS® is our high performance software simulator that serves as the basic engine of the Discovery Verification Platform and is often used in simulation “farms” consisting of hundreds or thousands of computers. VCS includes technologies that support model development, testbench creation, coverage feedback and debugging techniques. |
| • | System Studio is a verification environment which focuses on the interaction between software and hardware and permits designers to model various alternatives for their chips at a system level. |
| • | LEDA is our programmable coding and design guideline checker that enhance a designer’s ability to check a design for synthesizability, simulatability, testability and reusability. |
| • | Vera® automates the creation of “testbenches,” or custom models that provide simulation inputs and respond to simulated outputs from the design during verification. Automating this process significantly reduces overall design and verification time. Vera is integrated with our other simulation products to provide increased productivity benefits. |
| • | Formality® is our formal verification solution that compares two versions of a design to determine if they are equivalent. The use of formal verification reduces the need to perform simulation, which is substantially more time-consuming, thus potentially saving a significant amount of time in the overall design process. |
| • | Magellan™ combines functional and formal verification technologies to allow engineers to find deep, corner-case software defects, or “bugs,” quickly during verification. |
| • | NanoSim® is our advanced, transistor level circuit simulation and analysis product for digital, analog and mixed signal verification that offers circuit simulation, timing and power analysis in a single tool. NanoSim is a key component of Discovery AMS. |
| • | HSPICE® offers high-accuracy, transistor-level circuit simulation enabling designers to better predict the timing, power consumption and functionality of their designs. |
The Discovery Verification Platform also includes our Discovery AMS platform, a subset of the products used inabove technologies tuned to perform verification on analog and mixed analog-and-digital designs, and supports the logic synthesislatest Accellera SystemVerilog language standard, Verilog, VHDL, mixed-HDL, SystemC, and physical design phasesfor analog mixed-signal based methodologies, Verilog-AMS and SPICE.
The increasing size and complexity of IC design, includingtoday’s ICs and SoCs have vastly increased the Company's logic synthesis, physical synthesis, design planning, placetime and route,
extractioneffort required to verify chip designs, with test creation and reliability analysis products. The Company's IC Implementation
products include the largest proportionverification now consuming up to 70% of the products acquired from Avant!.
Historically, the key technologiestotal design time 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.
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
5
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).given IC. 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 ofDiscovery Platform combines 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 designdesign-for-verification methodologies, and provides a consistent control environment to significantly improve the speed, breadth and accuracy of our customers’ verification tools. These products enable IC designers to quicklyefforts on complex chip designs, increasing their productivity 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 byhelping them deliver 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
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and next generation coverage. These capabilities are integrated into a single
open platform that is also highly automated, which improves designer
productivity.
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' acquisitionmarket faster.
Solutions
Synopsys’ Solutions Group includes our portfolio 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
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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.
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.
8
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 includeand components and 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.
INTELLECTUAL PROPERTY PRODUCTS.Consulting Services Group.
Intellectual Property Products. As IC designs continue to grow in size, reusing proven design blocks is becoming a morean increasingly important method for reducingway to reduce overall design cost and 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)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) libraryMore recently, IC companies have been able to increasingly reuse pre-designed and verified IP components, particularly those that implement basic or standardized functions. The ability to reuse such IP allows IC companies to focus their design teams on designing the chip features that will give its products providea competitive advantage. Using pre-designed IP can also reduce a chip designer’s verification risk by ensuring that the “designed in” portions of the chip are “pre-verified” and thus high quality. Because of the increasing importance of pre-designed IP, and in order to minimize the risk and effort in acquiring IP from a myriad of smaller suppliers, IC designers are beginning to consolidate their IP purchases from fewer vendors who can provide a reliable, comprehensive portfolio of proven IP.
Our IP products include:
| • | DesignWare Foundation Library is an extensive library of basic chip elements (for example, adders and multipliers) which Design Compiler uses in logic synthesis. |
| • | DesignWare Verification Library is our library of popular chip function models used during the verification process of chip design. |
| • | DesignWare Cores are pre-designed and pre-verified design blocks that implement many of the most important industry standards, including USB (1.1, 2.0 and On-The-Go), PCI (PCI, PCI-X and PCI Express), Ethernet and JPEG. |
Finally, Synopsys’ Star IP program permits DesignWare library users to gain access to popular microprocessor cores from leading semiconductor and IP companies. We have worked with a single
librarythese companies to improve the reusability of pre-designed and pre-verified synthesizable IPthese microprocessor 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 assistintegrate them with verification of their designs. During 2002, Synopsys
introduced a complete AMBA On-Chip-Bus toother DesignWare providing designers with
access to the most popular bus architecture for designers using microprocessor subsystems. The program includes 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 fromcompanies like MIPS, Technologies, Infineon
Technologies, NEC and other providers.
PROFESSIONAL SERVICES
Synopsys Infineon, and in 2003 we added a PowerPC microprocessor from IBM.
Professional Services provides. We provide a comprehensive portfolio of consulting services covering all critical phases of the system-on-a-chipSoC development process, as well as systems development in wireless and broadband applications. Customers are offeredWe offer customers a variety of engagement models ranging from project assistance, -- which helps a customerour customers design, verify and/or test itstheir chips and improve itstheir design process --processes, to full turn-keyturnkey development. Fiscal
2002 was
New Ventures
Our New Ventures Group includes a challenging yearnumber of products and initiatives relating to analog/mixed signal IC design and verification and design for manufacturing.
Analog Mixed-Signal Tools. Our Cosmos™ tool is used to create analog designs. Cosmos uses schematic-driven layout to place and route full-custom ICs. The New Ventures Group also manages development and marketing of our NanoSim and HSPICE tools described above underDiscovery Verification Platform.
Design for Manufacturing. With the professional services business, as customers
continuedacquisitions of Avant! and Numerical, we offer a variety of products and technologies used at the intersection of IC design and manufacturing which address a variety of issues, principally those encountered using photolithography techniques to reduce their usemanufacture ICs when advanced ICs have feature dimensions smaller than the wavelength of outside consultants as part of their own
cost-cutting efforts.
CUSTOMER SERVICE AND SUPPORT
Synopsys devotes substantial resourceslight used to providing customers with technical
support, customer education,expose those dimensions during production. We address these markets through our Design for Manufacturing initiatives, which include:
| • | CATS® is our mask data preparation product that takes a final IC design and “fractures” or “breaks” it into the physical features that will be included in the photomasks to be used in manufacturing. |
| • | Proteus OPC™/InPhase are optical proximity correction (OPC) products which embed and verify corrective features in an IC design and masks to improve manufacturing results for subwavelength |
feature width design. OPC applies systematic changes to mask geometries to compensate for nonlinear distortions caused by optical diffraction and resist process effects. |
| • | Phase Shift Masking Technologies consist of mask design techniques that use optical interference to improve depth-of-field and resolution in subwavelength photolithography. |
| • | SiVL®(Silicon versus Layout) verifies the layout of a subwavelength IC against the silicon it is intended to produce by reading in the layout and simulating lithographic process effects, including optical, resist and etch effects. |
| • | Virtual Stepper is our mask qualification product that checks mask quality and analyzes printability of mask defects, helping to separate true defects from nuisance defects. |
Customer Service and consulting services. The Company believes that
9
We believe a high level of customer service and support is critical to the adoption and successful utilizationuse of itsour 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
TechnicalWe provide technical support for the Company'sour products is provided through both field- and corporate-based technical application engineering groups. Technical support
isCustomers who purchase Technology Subscription Licenses (TSLs) receive software maintenance services, also known as “post contract support” (PCS), bundled with thetheir license fee when a customer purchases a TSLfee. Customers who purchase term licenses and perpetual licenses may be
purchased separately when the customer purchases a perpetual license. Technical
support includespurchase these services separately. SeeProduct Sales and Licensing Agreementsbelow.
Software maintenance services include minor product enhancements to the products developed during the year,we develop, bug fixes and access to Synopsys application consultants, our worldwide network
of product experts,technical support center for problem resolution. Customersprimary support. Software maintenance also haveincludes access via electronic mail and the World Wide Web to SolvNet(R)SolvNet®, a direct-access service
available worldwide, 24 hours per day,our web-based support solution that lets customers quickly seek answers to design questions or more insight into design problems. SolvNet combines
Synopsys'gives customers access to Synopsys’ complete design knowledge database withusing 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 technicalCustomers can also engage our application consultants, our worldwide network of product experts, for additional 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.
CUSTOMER EDUCATION SERVICES
Synopsys offersneeds.
Customer Education Services
We offer training workshops designed to increase customer design productivity with the Company'swhile using our products. An extensive curriculum covers theWorkshops cover Synopsys tools and methodology required to successfully complete the fullused in our design
implementation and verification process. Areas covered includetool flows, as well as specialized modules addressing system design, logic design, synthesis, physical design, simulation and test. RegularlyWe offer regularly scheduled workshops are offered in Mountain View, California; Austin, Texas; Burlington,Marlboro, Massachusetts; Reading, England; Rungis, France; Munich, Germany; Tokyo and Osaka, Japan; Seoul, Korea and other locations. On-siteWe also schedule on-site workshops are available worldwide at customers'our customers’ facilities or other locations. Over 6,800 designApproximately 8,500 engineers attended Synopsys workshops during fiscal 2002.
PRODUCT WARRANTIES
Synopsys2003.
Product Warranties
We generally warrants itswarrant our products to be free from defects in media and to substantially conform to material specifications for a period of 90 days. Synopsys hasWe also typically provide our customers limited indemnities with respect to claims that their use of our design and verification software products infringe on United States patents, copyrights, trademarks or trade secrets. We have not experienced significant returnsmaterial warranty or indemnity claims to date.
SUPPORT FOR INDUSTRY STANDARDS
Synopsys
Support for Industry Standards
We actively createscreate and supportssupport standards it believeswe believe will help itsour customers increase productivity, and solve design problems, including key
interfaces and modeling languages that promote system-on-a-chip design and
facilitateimprove interoperability of tools from different vendors.vendors, and solve design problems. Standards in the EDA industry can be established by formal accredited committees, by licensing made available to all, or through open source licensing.
Synopsys'
Synopsys’ products support many formal standards, including the two most commonly used hardware description languages, VHDL, and Verilog HDL, SystemVerilog and SystemC, as well as numerous industry standard data formats for the exchange of data between Synopsys'our tools,
and other EDA products.
10
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 toolstool companies; the interoperability committee of the EDA Consortium, which helps promote quality and interoperability among EDA products from different vendors; the Institute of Electrical and Electronics Engineers (IEEE), a non-profit, technical professional association and a leading developer of global industry standards; 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'property; and the Open SystemC Initiative (OSCI), a non-profit organization that manages SystemC, a language developed by Synopsys and donated to OSCI, with representation from the systems, semiconductor, IP, embedded software and EDA industries.
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 use these standards to interface tools with each other to produce flexible design flows.facilitate interoperability of their tools. The standards provided by Synopsys as open sourcesoffered through TAP-in include Liberty for library modeling, SDC for design constraints, SAIF for switching activity and OpenVera for hardware verification. SynopsysSynopsys’ common database, Milkyway, is a member of the Board of Directors of the Open SystemC
Initiative (OSCI), a not-for-profit organization that manages SystemC, a
language developedavailable for tool integration 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'vendors through our MAP-in program.
Synopsys’ products are written mainly in the C and C++ languages and utilize industry standards for graphical user interfaces. Synopsys'Our software runs under UNIX operating systems, such as Solaris and HP-UX, and most products also run onunder the open sourceRedHat Linux operating system. Synopsys'Synopsys’ products are offered on the most widely used hardware platforms, including those from Sun Microsystems, Hewlett-Packard, IBM and PCs that are based upon Intel microprocessor-based PCs.
SALES, DISTRIBUTION AND BACKLOG
Synopsys markets itsand AMD microprocessors.
Sales, Distribution and Backlog
We market our products and services primarily through its direct sales and application service forcesengineers or support personnel in the United States and principal foreign markets. Synopsys employsWe employ highly skilled engineers and technically proficient sales persons in order to understand our customer'scustomers’ needs and to explain and demonstrate the value of Synopsys'our products.
For
In fiscal 2003, 2002 and 2001, foreign revenues represented 43%, 35% and 2000, foreign sales represented 35%, 37% and 42%, respectively, of Synopsys'Synopsys’ total revenue. Additional information relating to domestic and foreign operations is contained in Note 89 of ourNotes to Synopsys'
Consolidated Financial Statements.
The Company hasStatements in Part II, Item 8.Financial Statements and Supplementary Data. Information relating to risks associated with foreign operations are described in Part II, Item 7,Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Future Results—Stagnation of foreign economies, foreign exchange rate fluctuations or other international issues could adversely affect our performance.
We have sales/support centers throughout the United States, in addition to itsour Mountain View, California headquarters. Outside the United States, the Company haswe have sales/support offices in Canada, Denmark, Finland, France, Germany, Hong Kong, India, Israel, Italy, Japan, Korea, the People'sNetherlands, the People’s Republic of China, Singapore, South Korea, Sweden, Switzerland, Taiwan and the United Kingdom, includingKingdom. Our foreign headquarters officesis in Dublin, Ireland. The Company'sOur offices are further described under "ItemPart I, Item 2 - Properties."
The Company utilizes a distributor for sales, Properties.
In limited circumstances, we use distributors to assist us in the sale of certain products in Korea.specified markets. See Note 11 of ourNotes to Consolidated Financial Statements in Part III, "Item 13 Certain RelationshipsII, Item 8.Financial Statements and Related Transactions" below.
Synopsys'Supplementary Datafor additional information about one of our distributors.
Historically, orders and revenue have been 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. We expect the first fiscal quarter will remain our lowest orders and revenue quarter; orders and revenue in other quarters will vary based on the particular timing and type of individual contracts entered into with large customers.
Synopsys’ aggregate non-cancelable backlog on December 1, 2002 was approximately $1.3$1.6 billion comparedon November 1, 2003, representing a 17% increase from the end of the prior fiscal year. Aggregate non-cancelable backlog includes deferred revenue, operational backlog and financial backlog and excludes all items relating to approximately $802.7 million on December 1, 2001.
11
Thisconsulting services. Deferred revenue represents orders for software products, license maintenance and other services which have been delivered and billed to the customer but the revenue has not yet been earned. Operational backlog consists of orders for system and software products sold under perpetual or term 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 expectedshipped. Financial backlog consists of future installments to be completed within one year,billed and subscription
services, maintenancereceived from the customer not yet currently due and support with contract periods extending up to fifteen
months.payable. In the case of a TSL, financial 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
We have 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'sorder cancellations.
Research and Development
Our future performance depends in large part on itsour ability to further integrate our design and verification platforms, maintain and enhance itsour current product lines,products, develop new products, maintain
technological competitiveness and meet an expanding range of customer requirements. In addition to researchResearch and development on existing and new products is primarily conducted within each business unit, the Companyunit. Synopsys also maintains an advanced research group thatAdvanced Technology Group, which 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 CompanySynopsys within both industry and academia.
During fiscal 2003, 2002 2001 and 2000,2001, research and development expenses, net of capitalized software development costs, were $285.9 million, $225.5 million $189.8 million and $189.3$189.8 million, respectively. Synopsys capitalized software development costs ofwere approximately $1.6$2.6 million, $1.0$1.6 million and $1.0 million in fiscal 2003, 2002 and 2001, and 2000, respectively. The Company anticipatesWe anticipate that itwe will continue to commit substantial resources to research and development in the future.
MANUFACTURING
Synopsys'
Manufacturing
Synopsys’ manufacturing operations consist of assembling, testing, packaging and shipping its system andCD-ROMs containing software products and documentation needed to
fulfill each order. Manufacturing isthe related documentation. We currently coordinatedconduct these activities through contract vendors, located near Synopsys' Mountain View, California and Dublin, Ireland
facilities. The contract vendorswho provide the majority of CD-ROM replication and on-demand printing and distribution of product media and documentation. Synopsys
deliversWe deliver an increasing proportion of itsour 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'scustomer’s site. SynopsysWe typically delivers
itsdeliver our software products within 10 days of acceptance of customer purchase orders and execution of software license agreements unless the customer has requestedrequests otherwise.
COMPETITION
Competition
The EDA industry is highly competitive. We compete against other EDA vendors and with customers' internally developedagainst our customers’ own design tools and internal design capabilities for a share of the overall EDA budgets of our potential
customers.capabilities. In general, competition is basedwe compete on product quality and features, post-sale support, interoperability with other vendors'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. (Cadence) and Mentor Graphics Corporation, as well asand companies that offer products focused on
a discrete phase or phases of the integrated circuit design process. InDuring the current economic environment, price andrecent semiconductor downturn, we have increasingly competed on the basis of payment terms have increased in importance as a basis for competition.and price. During fiscal 2002,2003, we have increasingly agreed to extended payment terms on our TSLs, which
has had a negative effect onnegatively affecting our deferred revenue and cash flow from operations. In addition, in certain situations our competitors are offeringoffer aggressive discounts on their products. As a result, average prices may fall.
12
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!,While we offer allhave introduced design and verification platforms that integrate many of the point toolsproducts required to design an IC some of which integrate logic and physicalinto a unified flow, we face significant competition from companies that also offer their own integrated design capabilities. Our products compete principally with design flow products
fromflows, such as Cadence and Magma Design Automation, whichInc. To be successful in some respects may be more
integrated thanthe future, we believe we must further integrate our products. Our future success depends on our ability to
integrate Synopsys' logic design and physical synthesisverification products, with the
physical design products acquired from Avant!, which will continue to 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 integratedcustomers fail to adopt our design flow products on a timely basisand verification platforms or if we are unsuccessful in developingunable to develop new discrete design tools or convincing customersenhance existing ones to adopt such products,add increased functionality or performance, 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
Synopsysoperations will be materially and adversely affected.
Product Sales and Licensing Agreements
We typically licenses itslicense our 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 aour licenses are network licenselicenses that allowsallow a number of individual users to access the software on a defined network. License fees are dependentdepend 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 forIn certain cases, customers have the right to use our products over a wide-area network or to exchange a portion of the software. The vast majoritysoftware under license for different software products of customers buying
perpetualequal value.
We currently offer our software products under three license types: renewable TSLs, renewable term 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'sFor a full discussion of these licenses, see Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations --
ResultsOperations—Critical Accounting Policies—Revenue Recognition below.
With respect to our DesignWare Core intellectual property products, we typically license those products to our customers under nonexclusive license agreements which provide usage rights for specific applications. Fees under these licenses are typically charged on a per design basis plus, in some cases, royalties.
Finally, our professional services teams typically operate under consulting agreements with our customers with statements 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, comparedwork specific to 80% in fiscal 2001.
During fiscal 2003, each project.
Proprietary Rights
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.
13
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 its proprietary rights in its products. Therights. Our 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 tomay develop similar technology independently. In addition, effective copyright and trade secret protection may be unavailable or limited in certain foreign countries. The CompanyWe currently holds U.S.hold United States and foreign patents on some of the technologies included in itsour products and will continue to pursue additional patents in the future.
Although the Company believes that its products, trademarks
Under our customer agreements and other proprietary rights do notlicense agreements, in many cases we offer to indemnify our customer if the licensed products infringe on the proprietary rightsa third party’s intellectual property rights. As a result, we are from time to time subject to claims that our products infringe on these third party rights. For example, we are currently
defending some of third parties,
thereour customers against claims that their use of one of our products infringes a patent held by a Japanese electronics company. We believe this claim is without merit and will continue to vigorously pursue this defense.
These types of claims can be no assurance that infringement claims will not be asserted against
the Companyresult in the future or that any such claims will notcostly and time-consuming litigation, require the Companyus to enter into royalty arrangements, subject us to damages or result in costlyinjunctions restricting our sale of products, require us to refund license fees to our customers or to forgo future payments or require us to redesign certain of our products, any one of which could materially and time-consuming
litigation.
EMPLOYEES
adversely affect our business.
Employees
As of November 2, 2002,1, 2003, Synopsys had a total of 4,2544,362 employees, of whom 2,8492,885 were based in North America and 1,4051,477 were based outside of North America. Synopsys'Our future financial results depend in part upon the continued service of itsour key technical and senior management personnel and itsour 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 competition for the most highly 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, weWe have periodically experienced and may continue
to experience, significant employee turnover. ThereWe can beprovide no assuranceassurances that Synopsyswe can retain itsour key managerial and technical employees or that it cancontinue to attract assimilate or retain otheradditional highly qualified technical and managerial personnel in the future. None of Synopsys'our employees is represented by a labor union. Synopsys has notWe have experienced anyno work stoppages, and considers itswe believe our employee relations with its employees to beare good.
ITEM
Item 2. PROPERTIES
Synopsys'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 April 2007, and approximately 85,00072,000 square feet of space in a third building, which is under lease untilthrough April 2007. We use these buildings for administrative, marketing, research and development and support activities. In addition, Synopsys leases 16,000 square feet of space in Pleasanton and Fremont, California as telecommute centers. The CompanyAs a result of fiscal 2002 and 2003 acquisitions, we assumed leases of approximately 55,000 square feet of space in San Jose, California, 7,500 square feet of space in Pleasanton and 5,000 square feet of space in Austin, Texas, none of which we currently occupy.
Synopsys owns two buildings withtotaling approximately 236,000230,000 square feet on approximately 43 acres of land in Hillsborough,Hillsboro, Oregon, which are usedwe use for administrative, marketing, research and development and support activities. In addition, the Company leaseswe lease approximately 82,00080,000 square feet of space in Marlboro, Massachusetts for sales and support, research and development and customer education activities. This facility is leased through MarchJanuary 2009.
Synopsys owns a fourth building in Sunnyvale, California with approximately 120,000 square feet, which is leased to a third party through June 2003.February 2009. Synopsys also owns thirty-four34 acres of undeveloped land held for sale in San Jose, California and 13 acres of undeveloped land in Marlboro, Massachusetts
The CompanyMassachusetts.
Synopsys currently leases 2732 other offices throughout the United States primarily for sales and support.
The Company
Synopsys 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 2025.2026. In addition, Synopsys leases 3234 foreign sales and service offices in Canada, Denmark, Finland, France, Germany, Hong Kong, India, Israel, Italy, Japan, Korea, the People'sNetherlands, the People’s Republic of China, Singapore, South Korea, Sweden, Switzerland, Taiwan
and the United Kingdom. The CompanyWe also leaseslease research and development facilities in Canada, France, Germany, India, Ireland, Japan, Korea, the Netherlands, the People’s Republic of China, South Korea, Sweden, Taiwan and the People's Republic of
China.
14
ITEMUnited Kingdom.
We believe our properties are adequately maintained and suitable for their intended use and that our facilities have adequate capacity for our current needs.
Item 3. LEGAL PROCEEDINGS
AVANT! LITIGATION
Avant!, which upon completion of the Synopsys-Avant! merger became a
wholly-owned subsidiary of Legal Proceedings
Synopsys is or wascurrently a party to a number of material
civil litigation matters.
On November 13, 2002, Synopsys entered into a settlement agreement byvarious claims and among Synopsys, Cadence Design Systems, Inc., Avant! Corporation LLC and the
individuals namedlegal proceedings which arise in the litigation entitled Cadence Design Systems, Inc. et al.
v. Avant! Corporation et al. pursuantordinary course of business. If management believes a loss arising from these actions is probable and can reasonably be estimated, we record the amount of the loss or the minimum estimated liability when the loss is estimated using a range and no point within the range is more probable than another. As additional information becomes available, we assess any potential liability related to which Cadence, Avant!these actions and such
individuals agreed to dismiss all pending claimsrevise our estimates, if necessary. Based on currently available information, management believes the ultimate outcome of these actions, individually 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!,aggregate, will not 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 assetmaterial adverse effect 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.
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.
15
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,our financial position andor overall trends in results of operations. Between JulyHowever, litigation is inherently uncertain, and October 2001, three derivative actions were filed against
Avant! and certainwe could therefore receive unfavorable rulings. An unfavorable ruling could include monetary damages or an injunction prohibiting Synopsys from selling one or more products. An unexpected unfavorable ruling could have a material adverse impact on our results 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,operations for the period 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 andwhich 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 agreedruling occurs or future periods.
Item 4.Submission of Matters to a settlement
involving paymentVote 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!.
16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Security Holders
No matters were submitted for a vote of security holders during the fourth quarter of fiscal 2003.
Executive Officers of the fiscal year covered by this Report.
EXECUTIVE OFFICERS OF THE COMPANY
Registrant
The executive officers of the CompanySynopsys and their ages as of January 1,December 31, 2003, are as follows:
NAME AGE POSITION
---- --- --------are:
Name | Age | Position | ||
Aart J. de Geus | 49 | Chief Executive Officer and Chairman of the Board of Directors | ||
Chi-Foon Chan | 54 | President and Chief Operating Officer | ||
Steven K. Shevick | 47 | Senior Vice President, Finance and Chief Financial Officer | ||
Vicki L. Andrews | 48 | Senior Vice President, Worldwide Sales | ||
Raul Camposano | 48 | Senior Vice President and Chief Technology Officer | ||
John Chilton | 46 | Senior Vice President and General Manager, Solutions Group | ||
Janet S. Collinson | 43 | Senior Vice President, Human Resources and Facilities | ||
Antun Domic | 52 | Senior Vice President and General Manager, Implementation Group | ||
Manoj Gandhi | 43 | Senior Vice President and General Manager, Verification Group | ||
Deirdre Hanford | 41 | Senior Vice President, Worldwide Application Services | ||
Sanjiv Kaul | 45 | Senior Vice President, New Ventures Group | ||
Rex S. Jackson | 43 | Vice President, General Counsel and Corporate Secretary | ||
Dr. Aart J. de Geus......48...ChiefGeus co-founded Synopsys and currently serves as Chief Executive Officer and Chairman of the Board of DirectorsDirectors. 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........52...President,Chan joined Synopsys as Vice President of Application Engineering & Services in May 1990. Since April 1997 he has served as Chief Operating Officer Vicki L. Andrews.....47...Seniorand 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 Sales
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 a Ph.D. in computer engineering from Case Western Reserve University.
Steven K. Shevick....46...SeniorShevick joined Synopsys in July 1995 and currently serves as Senior Vice President, Finance and Chief Financial Officer. Mr. Shevick was appointed Senior Vice President and Chief Financial Officer DR. AARTin January 2003. From October 1999 to January 2003, he was Vice President, Investor Relations and Legal and Corporate 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.
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.
Dr. Raul Camposano has served as Senior Vice President and Chief Technology Officer since September 2000. Prior to that time, he was our Senior Vice President, General Manager of the Design Tools Group from 1997 through September 2000. Prior to joining Synopsys in 1994, he directed the Design Technology Institute at the German National Research Center for Computer Science (GMD) and was a professor in the Department of Computer Science at the University of Paderborn, Germany. Between 1986 and 1991, Dr. Camposano worked at the IBM T.J. Watson Research Center. He was also a member of the research staff at the Computer Science Research Laboratory at the University of Karlsruhe. Dr. Camposano received a B.S.E.E. degree in 1977 and a diploma in electrical engineering in 1978 from the University of Chile and a Ph.D. in computer science from the University of Karlsruhe in 1981.
John Chiltonhas served as Senior Vice President and General Manager of the Solutions Group of Synopsys since August 2003. Prior to that time, he was our Senior Vice President and General Manager of the IP and Design Services Business Unit from 2001 to August 2003. From 1997 to 2001, Mr. Chilton served as Vice President and General Manager of the Design Reuse Business Unit. Mr. Chilton received an M.S.E.E. from the University of Southern California and a B.S.E.E. from University of California at Los Angeles.
Janet S. Collinson has served as Senior Vice President, Human Resources and Facilities since August 2003. From September 1999 to August 2003 she was our Vice President, Real Estate and Facilities. Prior to that time she served as Director of Facilities from January 1997 to September 1999. Ms. Collinson received a B.S. in Human Resources from California State University, Fresno.
Dr. Antun Domic has served as Senior Vice President and General Manager of the Implementation Group since August 2003. Prior to that, Dr. Domic was Vice President and General Manager of the Nanometer Analysis and Test Group from 1999 to August 2003. Dr. Domic joined Synopsys in April 1997, having previously worked at Cadence Design Systems and Digital Equipment Corporation. Dr. Domic has a B.S. in Mathematics and Electrical Engineering from the University of Chile in Santiago, Chile, and a Ph.D. in Mathematics from the Massachusetts Institute of Technology.
Manoj Gandhi has served as Senior Vice President and General Manager, Verification Group since August 2000. Prior to that he was Vice President and General Manager of the Verification Tools Group from July 1999 to August 2000. Prior to that time, he was Vice President of Engineering from December 1997 until July 1999. He holds a B.S. in Computer Science and Engineering from the Indian Institute of Technology, Kharagpur and an M.S. in Computer Science from the University of Massachusetts, Amherst.
Deirdre Hanford has served as Senior Vice President of Worldwide Applications Services since December 2002. Prior to that time, she was Senior Vice President, Business and Market Development of Synopsys from September 1999 to December 2002. From October 1998 until September 1999, she served as Vice President Sales for Professional Services and prior to that as Vice President, Corporate Applications Engineering from April 1996 to September 1999. Ms. Hanford received a B.S.E.E. from Brown University and an M.S.E.E. from University of California at Berkeley. Ms. Hanford sits on the board of directors of Joint Venture Silicon Valley, an industry advocacy group, and the American Electronics Association’s national board of directors.
Sanjiv Kaulhas served as the Senior Vice President of the New Ventures Group since July 2003. Prior to that he was Senior Vice President of Corporate Applications and Marketing from October 2002 to July 2003. From 1998 until July 2003, Mr. Kaul headed our IC Implementation business unit. He joined Synopsys in April 1995. Mr. Kaul holds a B.S. degree from the University of Delhi, India and a B.S.E.E. from the University of Maryland. He has also done graduate work at Santa Clara University.
Rex S. Jackson joined Synopsys in February 2003 as Vice President, General Counsel and Corporate Secretary. Prior to joining Synopsys, Mr. Jackson was an investment director with Redleaf Group, Inc., an early stage venture capital firm, from April 2000 through December 2001, and President and CEO of Atlantes Services, Inc., a Redleaf portfolio company, from December 2001 through February 2003. Prior to joining Redleaf, from August 1998 to April 2000, Mr. Jackson was Vice President and General Counsel of AdForce, Inc., a provider of ad management and delivery services on the Internet. Prior to joining AdForce, Mr. Jackson served as Vice President, Business Development and General Counsel of Read-Rite Corporation, a manufacturer of thin film recording heads for the disk and tape drive industries from 1996 to 1998 and as Vice President and General Counsel from 1992 to 1996. Mr. Jackson holds an A.B. degree from Duke University and a J.D. degree from Stanford University.
There are no family relationships among any Synopsys executive officers or directors.
Item 5.Market for Registrant’s Common Equity and Related Stockholder Matters
The table below sets forth information regarding repurchases of Synopsys common stock by Synopsys during the fiscal quarter ended October 31, 2003.
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Programs | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Programs | ||||||
Month #1 August 3, 2003 through September 6, 2003 | 1,088,610 | $ | 31.3214 | 1,088,610 | $ | 239,254,000 | ||||
Month #2 September 7, 2003 through October 4, 2003 | — | $ | — | — | — | |||||
Month #3 October 5, 2003 through November 1, 2003 | — | $ | — | — | — | |||||
Total | 1,088,610 | $ | 31.3214 | 1,088,610 | $ | 239,254,000 | ||||
All shares were purchased pursuant to a $500 million stock repurchase program approved by Synopsys’ Board of Directors on December 9, 2002. Effective December 3, 2003, the Board of Directors renewed the program and increased the authorized funds to $500 million, not including amounts expended prior to such date. Funds are available until expended or until the program is suspended by the Chief Financial Officer or the Board of Directors.
The remaining information required by Item 5 is set forth in Note 13 of ourNotes to Consolidated Financial Statements in Part II, Item 8,Financial Statements and Supplementary Data.
Item 6.Selected Financial Data
Financial Summary
| Fiscal Year Ended(1) | ||||||||||||||||
| October 31, | September 30, | |||||||||||||||
| 2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||
| (in thousands, except per share data) | ||||||||||||||||
Revenue | $ | 1,176,983 | $ | 906,534 | $ | 680,350 | $ | 783,778 | $ | 806,098 | ||||||
Income (loss) before income taxes and extraordinary items(2) | 218,989 | (288,940 | ) | 83,533 | 145,938 | 251,411 | ||||||||||
Provision (benefit) for income taxes | 69,265 | (88,947 | ) | 26,731 | 48,160 | 90,049 | ||||||||||
Net income (loss) | 149,724 | (199,993 | ) | 56,802 | 97,778 | 161,362 | ||||||||||
Earnings (loss) per share(3): | ||||||||||||||||
Basic | 0.99 | (1.50 | ) | 0.47 | 0.71 | 1.15 | ||||||||||
Diluted | 0.95 | (1.50 | ) | 0.44 | 0.69 | 1.10 | ||||||||||
Working capital | 434,247 | 151,946 | 254,962 | 331,857 | 627,207 | |||||||||||
Total assets | 2,307,353 | 1,978,714 | 1,128,907 | 1,050,993 | 1,173,918 | |||||||||||
Long-term debt | 7,219 | 6,547 | 73 | 564 | 11,642 | |||||||||||
Stockholders’ equity | 1,433,410 | 1,113,481 | 485,656 | 682,829 | 865,596 | |||||||||||
| (1) | Synopsys has a fiscal year that ends on the Saturday nearest October 31. Fiscal 2003, 2002, 2000 and 1999 were 52-week years while fiscal 2001 was a 53-week year. For presentation purposes, the consolidated financial statements refer to the calendar month end. Prior to fiscal 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 $0.11. The net loss during the transition period is due to the fact that sales in the first month following a quarter end are historically lower than in the second and third months. 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. |
| (2) | Includes charges of $19.9 million, $87.7 million, $1.7 million and $21.2 million for fiscal 2003, 2002, 2000, and 1999, respectively, for in-process research and development. Fiscal 2002 includes merger-related and other costs of $128.5 million and insurance premium costs of $335.8 million related to the Avant! merger. |
| (3) | Per share data for all periods presented have been adjusted to reflect Synopsys’ two-for-one stock split completed on September 23, 2003. |
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the related “Notes to Consolidated Financial Statements” in Item 8, and “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. This discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Our actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, risks and uncertainties, including the risk factors set forth in this discussion, especially under the caption “Factors That May Affect Future Results,” and elsewhere in this Form 10-K. Generally, the words “may,” “will,” “could,” “would,” “anticipate,” “expect,” “intend,” “believe,” “continue,” or the negatives of such terms, or other comparable terminology and similar expressions identify forward-looking statements. The information included in this Form 10-K is as of the filing date with the Securities and Exchange Commission and future events or circumstances could differ significantly from the forward-looking statements included herein. Accordingly, we caution readers not to place undue reliance on such statements.
Overview
The following is a summary of the discussion of our financial condition and results of operations and is qualified in its entirety by the fuller discussion contained in this Item 7. This summary should be read in conjunction with Part I, Item 1, “Business” and is qualified in its entirety by the risk factors set forth in Item 7 as described below under “Factors That May Affect Future Results.”
Synopsys is the world leader in electronic design automation (EDA) software used to design complex integrated circuits (ICs) and systems-on-chips (SoCs) in the global semiconductor and electronics industries. Our software and intellectual property products and design services provide a complete IC design and verification solution from original concept to the actual chip, enabling our customers to bring advanced products to market quickly. See “Item 1, Business” for a more complete description of our business.
Business Environment
As an EDA software provider, we generate substantially all of our revenues from the semiconductor and electronics industries. Our customers typically fund purchases of our software and services out of their research and development budgets. As a result, our revenues are heavily influenced by our customers’ long-term business outlook, and willingness to invest in new chip designs.
Beginning in late calendar 2000, the semiconductor industry entered its steepest and longest downturn of the past 20 years, with industry sales dropping by approximately 46% from late 2000 to early 2002. As a result, over the past three years our customers have focused on controlling costs and reducing risk, including constraining R&D expenditures, cutting back on their design starts, purchasing from fewer suppliers, requiring more favorable pricing and payment terms from those suppliers and pursuing consolidation within their own industry. Further, during this downturn, many start-up semiconductor design companies failed or were acquired, and the pace of investment in new companies declined.
In response to these conditions, we have focused on providing the most technologically advanced products to address each step in the IC design process, on integrating these products into broad platforms, and on expanding our product offerings. Our goal is to be the EDA technology supplier of choice for our customers as they pursue longer-term, broader, more flexible relationships with fewer suppliers. Reflecting this trend, in fiscal 2003 we signed 11 new contracts over $25 million, up from only three in fiscal 2001.
While the semiconductor industry experienced a moderate recovery in 2003, our customers have remained cautious. It is therefore not yet clear when improved demand in our own customers’ electronics end markets will cause them to significantly increase their R&D spending or their design starts, and hence their spending on EDA.
Product Developments
As the result of a multi-year strategy based upon focused internal development efforts and selective acquisitions, we offer our customers a comprehensive, end-to-end design flow. Our suite of system design, logic design, functional verification, physical design and physical verification products enables our customers to take an IC from concept all the way to manufacturing.
Following the completion of the Avant! merger in mid-2002, we moved quickly to integrate our operations and research and development teams. We have also pursued integration of the products themselves. In February 2003, we announced the combination of many of our leading IC design products into a single, unified platform called the Galaxy Design Platform, which now includes seven of our twelve highest revenue products: Design Compiler, Apollo/Astro, Physical Compiler, PrimeTime, Hercules, STAR-RCXT and DFT Compiler. Concurrently with this announcement, we also opened access to our Milkyway design database, which provides a common data repository and improves interoperability among multiple products. Enabling customers and other EDA tool vendors to link their tools directly into the Milkyway environment will benefit customers and other EDA companies by reducing integration costs and advancing tool interoperability for the electronics industry.
We also announced our Discovery Verification Platform in fiscal 2003, which combines many of our verification and nanometer level analysis tools in a unified environment to provide high performance and efficient interaction among these technologies, and includes three of our twelve highest revenue products: VCS, HSPICE and NanoSim.
Finally, in March 2003 we completed our acquisition of Numerical Technologies, Inc., which specializes in sub-wavelength photolithography-enabling solutions, expanding our offerings of manufacturing technologies and products geared towards small geometry designs.
Financial Performance
Acquisitions
In fiscal 2003, we completed (i) our acquisition of Numerical Technologies, Inc. (Numerical) to expand our offerings of design for manufacturing products and (ii) two other acquisitions we do not consider material for financial statement purposes.
In fiscal 2002, we acquired: (i) Avant! Corporation (Avant!), a leading developer of software used in the physical design and physical verification phases of IC design; (ii) Co-Design Automation, Inc. (Co-Design), a developer of simulation software used in the high-level verification stage of the chip design process; and (iii) inSilicon Corporation (inSilicon), which developed, marketed and licensed an extensive portfolio of silicon intellectual property.
Our results of operations include the revenues attributable to products acquired in these mergers that are recognized after the respective merger dates but not any revenues recognized by these acquired companies prior to their respective merger dates. In addition, these acquisitions caused us to incur charges related to these acquisitions, such as amortization of goodwill, intangible assets and deferred stock compensation, and integration, as more fully discussed below.
Critical Accounting Policies
We base the discussion and analysis of our financial condition and results of operations upon our audited consolidated financial statements, which we prepare in accordance with accounting principles generally accepted in the United States of America. In preparing these financial statements, we must make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and various other assumptions we believe are reasonable under the circumstances. Our actual results may differ from these estimates.
The accounting policies that most frequently require us to make estimates and judgments, and therefore are critical to understanding our results of operations, are:
Revenue Recognition. Our revenue recognition policy is detailed in Note 2 of ourNotes to Consolidated Financial Statements in Part II, Item 8.Financial Statements and Supplementary Data. We have designed and implemented revenue recognition policies in accordance with Statement of Position (SOP) 97-2,Software Revenue Recognition, as amended by SOP 98-9,Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions, and SOP 98-4,Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition.
With respect to software sales, Synopsys utilizes three license types:
| • | Technology Subscription Licenses (TSLs), which are for a finite term, on average approximately three years, and generally provide the customer limited rights to receive, or to exchange certain quantities of licensed software for, unspecified future technology. Post-contract customer support (maintenance or PCS) is bundled for the term of the license and not charged for separately. |
| • | Term licenses, which are also for a finite term, usually two to three years, but do not provide the customer any rights to receive, or to exchange licensed software for, unspecified future technology. Customers purchase maintenance separately for the first year and may renew annually for the balance of the term. The annual maintenance fee is typically calculated as a percentage of the net license fee. |
| • | Perpetual licenses, which continue as long as the customer renews maintenance, plus an additional 20 years. Perpetual licenses do not provide the customer any rights to receive, or to exchange licensed software for, unspecified future technology. Customers purchase maintenance separately for the first year and may renew annually. The annual maintenance fee for purchases under $2 million is typically calculated as a percentage of the list price of the licensed software; for purchases over $2 million, the annual maintenance fee is typically calculated as a percentage of the net license fee. |
We report revenue in three categories: upfront license revenue, time-based license revenue and services.
Upfront license revenue includes:
| • | Perpetual licenses. We recognize the perpetual license fee in full if, upon shipment of the software, payment terms require the customer to pay at least 75% of the perpetual license fee within one year from shipment. |
| • | Upfront term licenses. We recognize the term license fee in full if, upon shipment of the software, payment terms require the customer to pay at least 75% of the term license fee within one year from shipment. |
Time-based license revenue includes:
| • | Technology Subscription Licenses. We typically recognize revenue from TSL license fees (which include bundled maintenance) ratably over the term of the license period. However, where extended payment terms (as discussed below) are offered under the license arrangement, we recognize revenue from TSL license fees in an amount that is the lesser of the ratable portion of the entire fee or customer installments as they become due and payable. |
| • | Term Licenses with Extended Payment Terms. For term licenses where less than 75% of the term license fee is due within one year from shipment, we recognize revenue as customer installments become due and payable. |
Services revenue includes:
| • | Maintenance Fees Associated with Perpetual and Term Licenses. We generally recognize revenue from maintenance associated with perpetual and term licenses ratably over the maintenance term. |
| • | Consulting and Training Fees. We generally recognize revenue from consulting and training services as services are performed. |
We allocate revenue on software transactions (referred to as an “arrangement” in the accounting literature) involving multiple elements to each element based on the relative fair values of the elements. Our determination of fair value of each element in multiple element arrangements is based on vendor-specific objective evidence (VSOE). We limit our assessment of VSOE for each element to the price charged when the same element is sold separately.
We have analyzed all of the elements included in our multiple-element arrangements and determined that we have sufficient VSOE to allocate revenue to the maintenance components of our perpetual and term license products and to consulting. Accordingly, assuming all other revenue recognition criteria are met, we recognize revenue from perpetual and term licenses upon delivery using the residual method in accordance with SOP 98-9 and recognize revenue from maintenance ratably over the maintenance term.
Customers occasionally request the right to convert their existing TSLs to perpetual licenses. Customers pay an incremental fee to convert the TSL to a perpetual license, which we recognize upon contract signing, in accordance with AICPA Technical Practice Aid (TPA) 5100.74, assuming all other revenue recognition criteria have been met. In some situations, the contract converting the TSL to a perpetual license is modified to such an extent that a new arrangement exists. The changes to the contract may include increases or decreases in the total technology under license, changes in payment terms, changes in license terms and other pertinent factors. In these situations, we account for all of the arrangement fees as a new sale and recognize revenue when all other revenue recognition criteria have been met. We have a policy that defines the specific circumstances under which such transactions are accounted for as a new perpetual license sale.
We make significant judgments related to revenue recognition. Specifically, in connection with each transaction involving our products, we must evaluate whether: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) our fee is fixed or determinable, and (iv) collectibility is probable. We apply these criteria as discussed below.
| • | Persuasive Evidence of an Arrangement Exists. We require a written contract, signed by both the customer and us, or a purchase order from those customers that have previously negotiated a standard end-user license arrangement or volume purchase agreement with us prior to recognizing revenue on an arrangement. |
| • | Delivery Has Occurred. We deliver software to our customers physically or electronically. For physical deliveries, our standard transfer terms are typically FOB shipping point. For electronic deliveries, delivery occurs when we provide the customer access codes or “keys” that allow the customer to take immediate possession of the software on its hardware. |
| • | The Fee is Fixed or Determinable. Our determination that an arrangement fee is fixed or determinable depends principally on the arrangement’s payment terms. Our standard payment terms require 75% or more of the arrangement fee to be paid within one year. Where these terms apply, we regard the fee as fixed or determinable, and we recognize revenue upon delivery (assuming other revenue recognition criteria are met). If the payment terms do not meet this standard, which we refer to as “extended payment terms,” we do not consider the fee to be fixed or determinable and generally recognize revenue when customer installments are due and payable. In the case of a TSL, we recognize revenue ratably even if the fee is fixed or determinable, due to application of other revenue accounting guidelines. |
| • | Collectibility is Probable. To recognize revenue, we must judge collectibility of the arrangement fees, which we do on a customer-by-customer basis pursuant to our credit review policy. We typically sell to customers with whom we have a history of successful collection. For a new |
customer, we evaluate the customer’s financial position and ability to pay and typically assign a credit limit based on that review. We increase the credit limit only after we have established a successful collection history with the customer. If we determine at any time that collectibility is not probable based upon our credit review process or the customer’s payment history, we recognize revenue on a cash-collected basis. |
Valuation of Intangible Assets. We evaluate our intangible assets for indications of impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Intangible assets consist of purchased technology, contract rights intangibles, customer-installed base/relationships, trademarks and tradenames, covenants not to compete, customer backlog and capitalized software. Factors that could trigger an impairment review include significant under-performance relative to expected historical or projected future operating results, significant changes in the manner of our use of the acquired assets or the strategy for our overall business or significant negative industry or economic trends. If this evaluation indicates that the value of the intangible asset may be impaired, we make an assessment of the recoverability of the net carrying value of the asset over its remaining useful life. If this assessment indicates that the intangible asset is not recoverable, based on the estimated undiscounted future cash flows of the acquired entity or technology over the remaining amortization period, we will reduce the net carrying value of the related intangible asset to fair value and may adjust the remaining amortization period. Any such impairment charge could be significant and could have a material adverse effect on our reported financial statements. We did not record any impairment charges on our intangible assets during fiscal 2003. As of October 31, 2003, the carrying amount of our intangible assets, net was $285.6 million.
We evaluate goodwill on a quarterly basis for indications of impairment based on our fair value as determined by our market capitalization in accordance with Statement of Financial Standards No. 142 (SFAS 142),Goodwill and Other Intangible Assets. If this evaluation indicates that the value of the goodwill may be impaired, we make an assessment of the impairment of the goodwill using the two-step method prescribed by SFAS 142. Any such impairment charge could be significant and could have a material adverse effect on our reported financial statements. We did not record any impairment charges on our goodwill during fiscal 2003. As of October 31, 2003, the carrying amount of our goodwill, net was $550.7 million.
Income Taxes. The relative proportions of our domestic and foreign revenue and income directly affect our effective tax rate. We are also subject to changing tax laws in the multiple jurisdictions in which we operate. As of October 31, 2003, current net deferred tax assets and long-term liabilities totaled $248.4 million and $7.4 million, respectively. We believe it is more likely than not that our results of future operations will generate sufficient taxable income to utilize our net deferred tax assets. We consider future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for any valuation allowance, and if we determine we would not be able to realize all or part of our net deferred tax assets in the future, we would charge to income an adjustment to the deferred tax assets in the period we make that determination.
We provide for United States (U.S.) income taxes on the earnings of our foreign subsidiaries unless they are considered permanently invested outside of the United States. As of October 31, 2003, the cumulative amount of earnings upon which United States income taxes have not been provided is approximately $176.7 million. As of October 31, 2003, the unrecognized deferred tax liability for these earnings was approximately $49.1 million.
Allowance for Doubtful Accounts. We estimate the collectibility of accounts receivable on an account-by-account basis and establish a specific reserve for any particular receivable when we determine collectibility is not probable. In addition, we provide a general reserve on all accounts receivable, which we calculate as a percentage, determined within a specified range of percentages of the outstanding balance in each aged group. In determining this percentage, we specifically analyze accounts receivable and historical bad debt expense, customer creditworthiness, current economic trends, international exposures (such as currency devaluation), and changes in our customer payment terms to evaluate the adequacy of the allowance for doubtful
accounts. If the financial condition of our customers deteriorates, impairing their ability to make payments, we may need to establish additional allowances. As of October 31, 2003, our allowance for doubtful accounts was $8.3 million.
Strategic Investments. We review our investments in non-public companies on a quarterly basis and estimate the amount of any impairment incurred during the current period based on a specific analysis of each investment, considering the activities of and events occurring at each of the underlying portfolio companies during the quarter. Our portfolio companies operate in industries that are rapidly evolving and extremely competitive. For equity investments in non-public companies where we cannot readily determine market value, we assess each investment for indicators of impairment at each quarter end based primarily on achievement of business plan objectives and current market conditions, among other factors, and information available to us at the time of assessment. The primary business plan objectives we consider include achievement of planned financial results, completion of capital raising activities, the launching of technology, the hiring of key employees and the portfolio company’s overall progress on its business plan. If we determine an investment in a portfolio company is impaired, absent quantitative valuation metrics, management estimates the impairment and/or the net realizable value of the portfolio investment based on public- and private-company market comparable information and valuations completed for companies similar to our portfolio companies. Future adverse changes in market conditions, poor operating results of underlying investments and other information obtained after our quarterly assessment could result in additional losses or an inability to recover the current carrying value of the investments thereby requiring a further impairment charge in the future. As of October 31, 2003, we valued our strategic investments at $8.6 million.
Results of Operations
Synopsys generates revenue primarily from licensing its software and intellectual property, from sales of maintenance, and from providing consulting services. In our licensing activities, to respond to our customers’ respective technology, flexibility and budget requirements, we have offered a variety of license types. We generally classify those license types as TBLs on which revenue is recognized over time, and upfront licenses on which revenue is recognized at the time of product shipment. These license types vary significantly in terms of access to technology, duration, flexibility and payment terms. SeeCritical Accounting Policies—Revenue Recognition above for a full discussion of our types of licenses and services and the revenue recognition associated with each.
Prior to the fourth quarter of fiscal 2000, we principally licensed our software via perpetual licenses and upfront term licenses, with the license revenue typically recognized upfront at the time the order was received and maintenance recognized ratably over the maintenance term. In the fourth quarter of fiscal 2000, we introduced Time Subscription Licenses. Since we bundle products and maintenance in TSLs, we generally recognize both product and service TSL revenue ratably over the term of the license, or, if later, as payments become due. As a result, a TSL order results in significantly lower current-period revenue than an equal-sized order for a perpetual or upfront term license. Conversely, a TSL order will result in higher revenues recognized in future periods than an equal-sized order for a perpetual or upfront term license. For example, for a $120,000 order for a perpetual or upfront term license, we recognize $120,000 of revenue in the quarter the product is shipped and no revenue in future quarters. For a $120,000 order for a 3-year TSL shipped on the first day of the quarter, we recognize $10,000 of revenue in the quarter the product is shipped and in each of the 11 succeeding quarters.
Because we generally recognize revenue on TSLs ratably over the TSL term, our reported revenue dropped significantly following our adoption of TSLs in the fourth quarter of fiscal 2000. In each quarter since adoption, however, our ratable revenue has grown as TSL orders we receive each quarter contribute revenue that is “layered” over the revenue ratably recognizable from TSL orders we received in prior quarters. As the TSL model matures, growth in ratable revenue in any quarter will depend on revenue derived from new TSL orders
received in the quarter, offset by the loss of revenue from TSLs that expire in such quarter or the prior quarter, which cease to contribute to revenue. Due to the “layering” effect, revenue may grow from quarter to quarter for some time even if orders do not grow. The complete phase-in period of the TSL model is difficult to predict, as it is affected by mergers and acquisitions and by the precise mix of TSL orders received. We expect, however, that when the TSL model is fully phased in over the long term, revenue growth should track orders growth on a percentage basis.
Our license revenue in any given quarter depends upon the volume of upfront licenses shipped during the quarter, the amount of TBL revenue recognized from TBLs booked in prior periods, and to a much smaller degree, the amount of revenue recognized on TBL orders booked during the quarter. We set our revenue targets based in large part on orders targets and our expected mix of perpetual licenses, term licenses and TSLs for a given period. If we achieve the total order target but not our target license mix, we may not reach our revenue targets (if upfront license orders are lower than we expect), or may exceed them (if upfront license orders are higher than we expect). If we achieve the target license mix but orders are below target, then we will not meet our revenue targets.
The precise mix of orders can fluctuate substantially from quarter to quarter. Our historical license order mix since adopting TSLs in August 2000 has been 24% upfront licenses and 76% time-based licenses, although the percentage of upfront license orders in any given quarter has been as high as 33% and as low as 14%. The license mix for the fourth quarter of fiscal 2003 was 33% upfront and 67% time-based as compared to 27% upfront and 73% time-based for the same period in fiscal 2002.
Revenue. Revenue consists of fees for upfront and time-based licenses of our software and intellectual property products, maintenance, customer training and consulting. We classify revenue as upfront license, time-based license or services. Upfront license revenue consists primarily of perpetual and upfront term software licenses. Time-based license revenue consists of revenue from our TSLs and from term licenses which have extended payment terms as discussed above. Service revenue consists of maintenance under perpetual and term licenses and fees for consulting services and training.
Total revenue for fiscal 2003 increased 30% to $1,177.0 million as compared to $906.5 million in fiscal 2002. The increase in total revenue for fiscal 2003 is primarily due to (i) contribution of Avant! products for a full fiscal year, (ii) continued phase-in of the TSL model and (iii) license renewals with many of our largest Japanese customers in the second quarter of fiscal 2003, a relatively high proportion of which were perpetual licenses. In the fourth quarter of fiscal 2003, we reintroduced term licenses. Total revenue from term licenses in fiscal 2003 was $3.6 million.
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 contribution of Avant! products from June 2002 through the end of fiscal 2002 and to the ongoing phase in of the TSL license model.
Upfront license revenue for fiscal 2003 increased 22% to $298.3 million as compared to $245.2 million in fiscal 2002. The increase in upfront license revenue is primarily due to the contribution of Avant! products for a full fiscal year and license renewals with many of our largest Japanese customers in the second quarter of fiscal 2003, a relatively high proportion of which were perpetual licenses. During the second quarter of fiscal 2002, we began offering to some of our customers that entered into perpetual licenses in excess of $2 million variable maintenance arrangements under which the annual maintenance fee is calculated as a percentage of the net license fee rather than as a fixed percentage of the list price. These arrangements accounted for $220.0 million of our product sales in fiscal 2003 as compared to $131.6 million in fiscal 2002.
Upfront license revenue for fiscal 2002 increased 50% to $245.2 million as compared to $163.9 million for fiscal 2001. The increase in upfront license revenue for fiscal 2002 as compared to fiscal 2001 was 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.
Time-based license revenue for fiscal 2003 increased 65% to $618.0 million as compared to $373.6 million in fiscal 2002. The increase in time-based license revenue is due to the additional quarters that the TSL license model has been used and to the increased volume of time-based license sales contributed by Avant! products for a full fiscal year.
Time-based 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 was due to the additional quarters that the TSL license model has been used and to the increased volume of ratable license sales resulting from the Avant! merger.
Service revenue for fiscal 2003 decreased 9% to $260.7 million as compared to $287.7 million in fiscal 2002. Service revenue for fiscal 2002 decreased 16% to $287.7 million as compared to $341.8 million for fiscal 2001. These decreases in service revenue were primarily due to the impact of our adoption of TSLs, which bundle maintenance with the software and do not contribute any separately recognized service revenue. Further, economic conditions led our customers to reduce their costs by curtailing their use of outside consultants such as our professional services personnel, and, in some cases, discontinuing maintenance on their perpetual licenses. In addition, customers deferred or cancelled a number of projects in our consulting backlog and reduced certain expenditures on training. And finally, our adoption of variable maintenance perpetual arrangements in fiscal 2002 has substantially lowered our maintenance fees from perpetual licenses.
Related Party Transactions. Revenues derived from Intel Corporation and its subsidiaries in the aggregate accounted for approximately 9.5% and 7.9% of fiscal 2003 and 2002 revenues, respectively. Andy D. Bryant, Intel Corporation’s Executive Vice President and Chief Financial and Enterprise Services Officer, also serves on our Board of Directors. Management believes the transactions between the two parties were carried out on an arm’s length basis.
Revenue Seasonality. Historically, orders and revenue have been 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. We expect the first fiscal quarter will remain our lowest orders and revenues quarter; orders and revenues in other quarters will vary based on the particular timing and type of individual contracts entered into with large customers.
Revenue—Product Groups. For management reporting purposes, we organize our products and services into five distinct groups: Galaxy Design Platform, Discovery Verification Platform, Intellectual Property (IP), New Ventures and Professional Services & Other. The following table summarizes the revenue attributable to these groups as a percentage of total revenue for the last twelve quarters. We include revenue from companies or products we have acquired during the periods covered from the acquisition date through the end of the relevant periods. For presentation purposes, we allocate maintenance, which represented approximately 18% of our total revenue and approximately 84% of our total services revenue for fiscal 2003, to the products to which those support services relate. Further, with the adoption of our platform strategy in fiscal 2003, we redefined our product groups and have reclassified prior period revenues in accordance with this new grouping to provide a consistent presentation.
Between any two quarters, the percentage of our total revenue from each group fluctuates based on the mix of upfront versus time-based orders received for these products during the quarter. Further, since our adoption of TSLs in the fourth quarter of fiscal 2000, an increasing percentage of the revenue in a given quarter in the Galaxy Design Platform, Discovery Verification Platform and New Ventures groups is from customer orders placed in preceding quarters. Accordingly, for the Galaxy Design Platform, Discovery Verification Platform and New Ventures groups, quarter-to-quarter changes are not necessarily indicative of fundamental strength or weakness in those groups.
Revenue Galaxy Design Platform Discovery Verification Platform IP New Ventures Professional Services & Other Total Fiscal 2003 Fiscal 2002 Fiscal 2001 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 62 % 64 % 70 % 65 % 68 % 65 % 61 % 60 % 59 % 56 % 54 % 55 % 22 20 19 22 20 20 21 24 23 23 22 21 7 8 5 6 5 5 9 8 9 10 9 10 5 5 4 3 3 4 — — — — — — 4 3 2 4 4 6 9 8 9 11 15 14 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 %
Galaxy Design Platform. Our Galaxy Design Platform includes our logic synthesis, physical synthesis, physical design, timing analysis, signal integrity analysis and physical verification products. Our principal products in this category at October 31, 2003 were Design Compiler, Apollo, Astro, Physical Compiler, Prime Time, Hercules, Star RXCT and DFT Compiler.
Revenue for this platform increased significantly in percentage and absolute dollar terms following the Avant! merger in the third quarter of fiscal 2002, primarily because this product group represented the largest portion of Avant!’s revenue before the acquisition. The percentage increase in the second quarter of fiscal 2003 was due to a number of large orders, many of which were perpetual licenses, by Japanese customers in that quarter. Going forward, we believe physical implementation, physical synthesis and design analysis products will account for an increasing share of Galaxy Design Platform revenues relative to our logic synthesis products as customers recognize the importance of using physical level and design analysis tools to address design challenges particular to small geometry designs.
Discovery Verification Platform. Our Discovery Verification Platform includes our verification and simulation products. Our principal products in this category are VCS, HSPICE, NanoSim, Formality, Vera and System Studio. Though the Avant! merger added few verification products, revenue for this platform as a percentage of total revenue has remained fairly consistent, reflecting continued adoption of these tools by our customers. In absolute dollar terms, revenue from this platform has generally increased consistently with our overall averages.
Intellectual Property. Our IP products include the DesignWare library of IC design components and verification models and inSilicon products we acquired in September 2002. IP revenue as a percentage of total revenue decreased beginning in the third quarter of fiscal 2002 principally because we acquired few IP products in the Avant! merger, but increased beginning in the third quarter of fiscal 2003 due to increased sales of our DesignWare cores and products acquired in the inSilicon merger, particularly in the communications and connectivity areas.
New Ventures. Our New Ventures products include our analog and mixed signal and design for manufacturing tools. We had no revenue from these tools prior to the third quarter of fiscal 2002, when we acquired Avant!. New Ventures revenue as a percentage of total revenue has since increased moderately primarily as a result of the growing need for tools and methodologies required for smaller geometry designs, and has increased in absolute dollar terms consistently with our overall averages.
Professional Services & Other. The Professional Services Group provides consulting services, including design methodology assistance, specialized systems design services, turnkey design and training. As a percentage of total revenue, revenue from this product group declined significantly through the second quarter of fiscal 2003, reflecting a decrease in consulting orders from our customers due to difficult economic conditions as discussed above underRevenue, and the fact that Avant! did not have a significant professional services business.
Workforce Realignment. During the fourth quarter of fiscal 2003, we decided to realign our operations, effective in the first quarter of fiscal 2004, in order to focus resources on more strategic areas of investment and to become more operationally efficient. This realignment affected a total of approximately 240 employees (140 in the U.S. and 100 outside the U.S.) in all departments in domestic and foreign locations. The associated charge for fiscal 2003 was $14.9 million consisting of severance and other termination benefits, which are generally much higher in locations outside the U.S., and is reflected in the consolidated statement of income as follows:
Year Ended October 31, | ||||||
| 2003 | 2002 | |||||
| (in thousands) | ||||||
Cost of revenue | $ | 2,569 | $ | — | ||
Research and development | 6,270 | — | ||||
Sales and marketing | 4,847 | — | ||||
General and administrative | 1,170 | — | ||||
Total | $ | 14,856 | $ | — | ||
We expect to incur additional costs between $3 million and $4 million during the first and second quarters of fiscal 2004 related to the consolidation of excess facilities and to the termination of certain lease obligations.
Temporary Shutdown of Operations. During the third quarter of fiscal 2003, we had a four-day shutdown of operations in North America as a cost-saving measure. The savings relates primarily to salaries and benefits as follows:
Year Ended October 31, | ||||||
| 2003 | 2002 | |||||
| (in thousands) | ||||||
Cost of revenue | $ | 874 | $ | — | ||
Research and development | 617 | — | ||||
Sales and marketing | 1,925 | — | ||||
General and administrative | 1,379 | — | ||||
Total | $ | 4,795 | $ | — | ||
Work Force Reduction. We reduced our workforce during the first quarter of fiscal 2003 and the second quarter of fiscal 2002. The purpose was to reduce expenses by decreasing the number of employees in all departments in domestic and foreign locations. As a result, we decreased our workforce by approximately 200 and 175 employees during the first quarter of fiscal 2003 and the second quarter of fiscal 2002, respectively. The associated charge for fiscal 2003 was $4.4 million as compared to $3.9 million for fiscal 2002. The charge consists of severance and other termination benefits and is reflected in the consolidated statements of income as follows:
Year Ended October 31, | ||||||
| 2003 | 2002 | |||||
| (in thousands) | ||||||
Cost of revenue | $ | 1,167 | $ | 678 | ||
Research and development | 1,388 | 1,081 | ||||
Sales and marketing | 1,239 | 1,078 | ||||
General and administrative | 630 | 1,033 | ||||
Total | $ | 4,424 | $ | 3,870 | ||
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. Cost of service revenue includes consulting services, personnel and related costs associated with providing training and maintenance on perpetual and term licenses. Cost of ratable license revenue includes the costs of product and services related to our TSLs. 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 associated with certain executory contracts and the amortization of core/ developed technology related to acquisitions which occurred in fiscal 2003 and 2002. There was no cost of revenue amortization of intangible assets and deferred stock compensation in fiscal 2001. Total amortization of intangible assets and deferred stock compensation included in cost of revenues is as follows:
Year Ended October 31, | ||||||
| 2003 | 2002 | |||||
| (in thousands) | ||||||
Core/developed technology | $ | 72,866 | $ | 26,192 | ||
Contract rights intangible | 17,233 | 7,181 | ||||
Other intangible assets | 2,215 | 356 | ||||
Deferred stock compensation | 542 | 207 | ||||
Total | $ | 92,856 | $ | 33,936 | ||
Total cost of revenue as a percentage of total revenue for fiscal 2003 increased to 20% as compared to 19% in fiscal 2002. This increase is primarily due to an increase in amortization of contract rights intangible and core/developed technology recorded as a result of our acquisitions in fiscal 2003 and 2002, the cost of our realignment of operations totaling $2.6 million as discussed above underWorkforce Realignment, additional royalties of $1.5 million and other termination benefits of $1.2 million as discussed above underWork Force Reduction. Our total product costs are relatively fixed and do not fluctuate significantly with changes in revenue or changes in revenue recognition methods.
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 revenue, excluding 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 until fully phased in and due to the fact that other cost of revenue components remained relatively flat. However, this decrease 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 acquisitions in fiscal 2002.
Research and Development. Research and development expenses for fiscal 2003 increased 27% to $285.9 million as compared to $225.5 million in fiscal 2002. The increase consists primarily of (i) $30.7 million in research and development personnel and related costs as a result of acquisitions in fiscal 2002 and 2003 and including additional employer payroll taxes incurred as a result of an increase in the number of stock option exercises during the fiscal year; (ii) $22.2 million in increased human resources, information technology and facilities costs to research and development as a result of the increase in research and development headcount as a percentage of total headcount; (iii) $6.3 million as a result of our realignment of operations as discussed above underWorkforce Realignment; and (iv) $2.3 million in consulting services. These increases are partially offset by a decrease in depreciation expense of $2.8 million.
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 (i) $28.7 million in compensation and compensation-related costs as a result of an increase in research and development headcount due to the Avant! merger; (ii) $11.3 million in human resources, technology and facilities costs as a result of increased research and
development staffing; and (iii) $4.2 million in depreciation expense. These increases were partially offset by decreases of (i) $5.4 million in consulting expenses and (ii) $4.3 million of other expenses including facilities, travel, communications, supplies and recruiting as a result of our cost reduction programs.
Sales and Marketing. Sales and marketing expenses for fiscal 2003 increased 17% to $310.7 million as compared to $264.8 million in fiscal 2002. The increase consists primarily of (i) $42.4 million in additional sales and marketing personnel and related costs as a result of acquisitions in fiscal 2002 and 2003 and including additional employer payroll taxes incurred as a result of an increase in the number of stock option exercises during the fiscal year offset by savings from a four-day shutdown of operations in North America; (ii) $4.8 million as a result of our realignment of operations as discussed above underWorkforce Realignment; and (iii) $2.7 million in additional travel expenses. These increases were partially offset by a decrease of $3.8 million in human resources, technology and facilities costs to sales and marketing expenses as a result of a decrease in sales and marketing headcount as a percentage of total headcount.
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 (i) $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; (ii) $1.3 million in employee functions; (iii) $1.4 million in consulting expenses; and (iv) $2.8 million in other expenses including communications and supplies, foundation contributions, professional services, subscriptions and memberships as a result of our cost reduction efforts. These decreases were partially offset by increases of (i) $4.8 million in compensation and related costs attributable to an increase in sales and marketing headcount resulting from the Avant! merger and (ii) $1.9 million in travel relating to customer visits to discuss the integration of Synopsys and Avant! products.
General and Administrative. General and administrative expenses for fiscal 2003 increased 15% to $90.0 million as compared to $78.5 million in fiscal 2002. The increase consists primarily of (i) $12.8 million in additional general and administrative personnel and related costs as a result of acquisitions in fiscal 2002 and 2003 and including additional employer taxes incurred as a result of an increase in the number of stock option exercises during the current year; (ii) $7.0 million in depreciation on upgrades to our information technology infrastructure; (iii) $5.7 million in facilities costs due to new leases during the current year and the expiration of a sublease on one of Synopsys’ buildings in June 2003; (iv) $3.7 million in professional services costs, patent prosecution expenditures, Sarbanes-Oxley Act compliance and litigation; (v) $2.8 million in maintenance agreements covering more software and computing equipment due to acquisitions in fiscal 2002 and 2003; and (vi) $1.2 million related to the realignment of operations as discussed above underWorkforce Realignment. These increases were offset by a decrease of (i) $14.2 million in human resources, technology and facilities costs to general and administrative expenses as a result of a decrease in general and administrative headcount as a percentage of total headcount; and (ii) a decrease of $6.6 million in bad debt expense as accounts receivable aging improved year over year.
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 (i) $11.1 million in facilities costs as a result of an increased number of sites due to the Avant! merger; (ii) $7.0 million in compensation and compensation-related costs as a result of increased headcount due to the Avant! merger; (iii) $5.6 million in professional service fees; (iv) $2.2 million in communications costs; (v) $1.6 million in equipment to update licenses for our internal enterprise application systems; (vi) $1.4 million in depreciation; and (vii) $2.9 million in other expenses including travel and property tax assessments. These increases were offset by decreases of (i) $20.0 million as a result of decreased general and administrative headcount as a percentage of total headcount and (ii) $3.9 million in consulting costs as a result of our cost reduction efforts.
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 were $128.5 million and 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. Purchased in-process research and development (IPRD) of $19.9 million and $87.7 million in fiscal 2003 and 2002, respectively, represents the write-off of in-process technologies associated with our acquisitions of Numerical in fiscal 2003 and Avant! and inSilicon in fiscal 2002. 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.
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 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.
Numerical. On March 1, 2003, we acquired Numerical, which specialized in subwavelength lithography-enabling solutions. The IPRD expense related to the Numerical acquisition was $18.3 million. Numerical had five IPRD projects—Phase Shift Masking (PSM), Subwavelength Software, Equipment Software, Cadabra and Computer Aided Transcription System (CATS)—representing 25%, 7%, 6%, 5% and 57%, respectively, of the total
IPRD value. These projects were expected to be completed shortly following the completion of the merger. PSM, Subwavelength Software and CATS were completed in fiscal 2003. Cadabra was released in the first quarter of fiscal 2004. The Equipment Software project consists of in-process technology for multiple products. These products were either completed in fiscal 2003, discontinued or are expected to be integrated with other Synopsys products during fiscal 2004. Expenditures to complete Numerical’s IPRD approximate the original estimates.
inSilicon. On September 20, 2002, we acquired inSilicon, a leading provider of connectivity semiconductor intellectual property used by semiconductor and systems companies to design systems-on-chip that are critical components of innovative wired and wireless products. The IPRD expense related to the inSilicon acquisition was $5.2 million. inSilicon had three IPRD projects—DELA, Peripheral Component Interconnect (PCI) Express and Universal Serial Business Physical (USB PHY)—accounting for 54%, 23% and 23% of the total IPRD value, respectively. These projects were 25%, 67% and 20% complete at the time of acquisition, respectively. During fiscal 2003, Synopsys decided to no longer pursue the DELA project. PCI Express is approximately 80% complete and USB PHY has been completed. Expenditures to complete USB PHY and expected expenditures to complete PCI Express approximate the original estimates.
Avant!. On June 6, 2002, we acquired Avant!, a leading developer of software used in the physical design and physical verification stages of IC design. The IPRD expense related to the Avant! merger was $82.5 million. The principal in-process technologies were identified based on the following product families:
| Value | Percent Complete as of Date of Acquisition | ||||||
Product Family | Short-Term | Long-Term | |||||
| (in thousands) | |||||||
Physical Products Division (PPD) | $ | 48,000 | 90% | 60% | |||
Verification Products Division (VPD) | $ | 7,900 | 90% | 50% | |||
Analysis Products Division (APD) | $ | 18,700 | 90% | 76% | |||
Logical Products Division (LPD) | $ | 1,400 | 90% | not applicable | |||
Technology Computer Aided Design (TCAD) | $ | 2,200 | 90% | 80% | |||
Analogy | $ | 4,300 | 90% | 75% | |||
These projects were completed during fiscal 2002 and 2003. Expenditures to complete the acquired in-process technologies approximated the original estimates.
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 Goodwill, Intangible Assets and Deferred Stock Compensation. Amortization of intangible assets and deferred stock compensation includes the amortization of trademarks, tradenames, customer relationships and covenants not to compete and is included in operating expenses as follows:
| Year Ended October 31, | |||||||||
| 2003 | 2002 | 2001 | |||||||
| (in thousands) | |||||||||
Intangible assets | $ | 30,864 | $ | 11,133 | $ | — | |||
Deferred stock compensation | 4,454 | 1,315 | — | ||||||
Goodwill | — | 16,201 | 17,012 | ||||||
Total | $ | 35,318 | $ | 28,649 | $ | 17,012 | |||
The increase in amortization of intangible assets is due primarily to fiscal 2003 and 2002 acquisitions partially offset by a decrease in goodwill amortization as a result of the adoption of SFAS 142 on November 1, 2002.
The following table presents the estimated future amortization of deferred stock compensation reported in both cost of revenue and operating expenses:
| Fiscal Year | (in thousands) | ||
2004 | $ | 3,677 | |
2005 | 2,403 | ||
2006 | 840 | ||
2007 | 250 | ||
Total estimated future amortization of deferred stock compensation | $ | 7,170 | |
Impairment of Intangible Assets. 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 consolidated statement of operations. The impairment charge is primarily attributable to certain technology acquired from and goodwill related to the acquisition of Stanza, Inc. (Stanza) in 1999. During 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! provided customers with superior capabilities. As a result, we do not anticipate any future sales of the Stanza product.
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 consolidated statement of operations. The impairment charge is attributable to certain technology acquired from and goodwill related to the acquisition of Eagle Design Automation, Inc. (Eagle) in 1997. During fiscal 2001, we determined that we would not allocate future resources to assist in the market growth of this technology. As a result, we do not anticipate any future sales of the Eagle product.
There were no impairment charges during fiscal 2003.
Other (Expense) Income, Net. Other income, net was $24.1 million in fiscal 2003 and consisted primarily of (i) realized gain on investments of $20.7 million; (ii) rental income of $6.3 million; (iii) interest income of $5.2 million; (iv) impairment charges related to certain assets in our venture portfolio of ($4.5) million; (vii) foundation contributions of ($2.1) million; and (viii) interest expense of ($1.6) million.
Other (expense), net of other income was ($208.6) million in fiscal 2002 and consisted primarily of (i) ($240.8) million expense due to the settlement of the Cadence Design Systems, Inc. (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 Systems, Inc. (IKOS) merger 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.
Other income, net was $83.8 million in fiscal 2001 and consisted primarily of (i) a gain of $10.6 million on the sale of our silicon libraries business to Artisan Components, Inc.; (ii) ($5.8) million in impairment charges related to certain assets in our venture portfolio; (iii) realized gains on investments of $55.3 million; (iv) rental income of $8.6 million; (v) interest income of $12.8 million; and (vi) other miscellaneous income including amortization of premium forwards and foreign exchange gains and losses recognized during the fiscal year of $2.3 million.
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. 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 a number of 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.
Effect of New Accounting Standards
In July 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets. We adopted SFAS 142 on November 1, 2002 and ceased amortizing goodwill recorded for business combinations consummated prior to July 1, 2001. In addition, as of November 1, 2002, we assessed the useful lives and residual values of all acquired intangible assets recorded on the balance sheet and also tested goodwill for impairment per SFAS 142. In our impairment analysis, we determined we have one reporting unit. We completed the goodwill impairment review as of the beginning of fiscal 2003 and found no indicators of impairment. This impairment review was based on our fair value as determined by our market capitalization. As of October 31, 2003, unamortized goodwill was $550.7 million, which, in accordance with SFAS 142, we will not amortize.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments increased $283.6 million, or 68%, to $698.4 million as of October 31, 2003 from $414.7 million as of October 31, 2002. Our source of cash, cash equivalents and short-term investments over the last three years has been from funds generated from our business, including cash on hand from companies we have acquired.
Cash provided by operations was $391.5 million in fiscal 2003 as compared to cash used by operations of $181.0 million in fiscal 2002. Cash flow in fiscal 2002 reflected the payment of $335.8 million in insurance premiums related to settlement of litigation between Avant!, which we acquired in June 2002, and Cadence, resulting in a net loss for the year. Cash provided by operations is directly related to the payment terms we grant on sales of our software and services. During fiscal 2003, we have increasingly granted extended payment terms to our customers, negatively affecting cash flow from operations. Cash flow from operations in 2003 reflected a significant cash tax benefit resulting form the net loss in fiscal 2002. During fiscal 2003 cash was provided by net income adjusted for non-cash related items, for cash flows related to hedging activities and by an increase in deferred revenue due to continued sales of TSLs. Cash used for changes in working capital balances included decreases in accounts payable, accrued liabilities and accounts receivable. Accounts payable and accrued liabilities decreased as a result of payments of merger-related accruals, commissions and year-end bonuses, partially offset by current year accruals. Accounts receivable decreased due to the timing of installment billings to customers on long-term arrangements.
Cash used in investing activities was $258.3 million in fiscal 2003 as compared to cash provided by investing activities of $275.7 million in fiscal 2002. During fiscal 2003, the following occurred: (i) cash paid for acquisitions totaled $167.7 million; (ii) net purchases of short- and long-term investments totaled $37.8 million; and (iii) capital expenditures totaled $50.1 million. In fiscal 2002, the following occurred: (i) cash received from acquisitions totaled $168.3 million; (ii) proceeds from net sales of investments totaled $157.8 million; and (iii) capital expenditures totaled $48.8 million.
Cash provided by financing activities was $74.2 million in fiscal 2003 as compared to cash used in financing activities of $51.8 million in fiscal 2002. The increase of $126.0 million in cash provided by financing activities is primarily due to an increase in proceeds of $215.1 million from the sale of shares pursuant to our
employee stock option plans during fiscal 2003 offset by an increase in the purchase of treasury stock. During fiscal 2003, Synopsys repurchased treasury stock of $260.7 million as compared to $171.7 million in fiscal 2002.
Accounts receivable, net of allowances, decreased $6.2 million, or 3%, to $201.0 million as of October 31, 2003 from $207.2 million as of October 31, 2002. Days sales outstanding, calculated based on revenues for the most recent quarter and accounts receivable at the balance sheet date, decreased to 58 days as of October 31, 2003 from 61 days as of October 31, 2002. The decrease in days sales outstanding is due in part to the timing of large cash collections realized during the fourth quarter of fiscal 2003.
On November 22, 2002 and December 16, 2002, we made payments to Cadence totaling $20.0 million and $245.0 million, respectively, under the terms of the settlement agreement relating to litigation between Cadence and Avant!. See Note 3 of ourNotes to Consolidated Financial Statements in Part II, Item 8.Financial Statements and Supplementary Data.
On March 1, 2003, we completed our acquisition of Numerical Technologies, Inc. We paid Numerical common stock holders $7.00 in cash in exchange for each share of Numerical common stock owned as of the merger date, or approximately $240.2 million in total and $161.3 million net of cash held by Numerical at the merger date. We paid for Numerical common stock out of our cash, cash equivalents and short-term investments.
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.
Stock Option Plans
Under our 1992 Stock Option Plan (the 1992 Plan), 38,951,016 shares of common stock have been authorized for issuance. Pursuant to the 1992 Plan, the Board of Directors (the Board) 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 granted under the 1992 Plan generally vest over a period of four years and expire ten years from the date of grant. As of October 31, 2003, 9,003,784 stock options remain outstanding and 7,479,776 shares of common stock are reserved for future grants under this plan.
Under our 1998 Non-Statutory Stock Option Plan (the 1998 Plan), 53,247,068 shares of common stock have been authorized for issuance. Pursuant to the 1998 Plan, the Board may grant non-qualified stock options to employees, excluding executive officers. Exercisability, option price and other terms are determined by the Board but the option price shall not be less than 100% of the fair market value of those shares on the grant date. Stock options granted under the 1998 Plan generally vest over a period of four years and expire ten years from the date of grant. As of October 31, 2003, 28,161,720 stock options remain outstanding and 8,179,958 shares of common stock were reserved for future grants under this plan.
Under our 1994 Non-Employee Directors Stock Option Plan (the Directors Plan), 1,800,000 shares have been authorized for issuance. The Directors Plan provides for automatic grants to each non-employee member of the Board upon initial appointment or election to the Board, upon reelection and for annual service on Board committees. The option price shall not be less than 100% of the fair market value of those shares on the grant date. Under the Directors Plan, as originally adopted, new directors receive an option for 40,000 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 20,000 shares and an additional option for 10,000 shares for each Board committee membership, up to a maximum of two committee service grants per year. In August 2003, the Board amended the Directors Plan in order to reduce the size of the initial and committee grants to 30,000 and 5,000 shares, respectively. The annual and committee service option grants vest in full on the date immediately prior to the date of the annual meeting following their grant. In the case of directors appointed to the Board between annual meetings, the annual and any committee grants are prorated based upon the amount of time since the last annual meeting. As of October 31, 2003, 1,168,492 stock options remain outstanding and 110,346 shares of common stock were reserved for future grants under this plan.
We have assumed certain option plans in connection with business combinations. Generally, the options granted under these plans have terms similar to our own options. The exercise prices of such options have been adjusted to reflect the relative exchange ratios. We do not intend to make future grants out of these option plans.
We monitor dilution related to our option program by comparing net option grants in a given fiscal period to the number of shares outstanding. The dilution percentage is calculated as the new option grants for the fiscal period, net of options forfeited by employees leaving Synopsys, divided by the total outstanding shares at the end of such fiscal period. The option dilution percentages were 0.9% and 3.4% for fiscal 2003 and 2002, respectively.
A summary of the distribution and dilutive effect of options granted is as follows:
Year Ended October 31, | ||||||
| 2003 | 2002 | |||||
Total grants, net of returns and cancellations, during the period as percentage of outstanding shares exclusive of options assumed in acquisitions | 0.9 | %(1) | 3.4 | % | ||
Grants to named executive officers, as defined below, during the period as a percentage of total options granted | 8.4 | % | 9.3 | % | ||
Grants to named executive officers during the period as a percentage of outstanding shares | 0.2 | % | 0.5 | % | ||
Total outstanding options held by named executive officers as a percentage of total options outstanding | 16.7 | % | 13.7 | % | ||
| (1) | Total grants, net of returns and cancellations, include the cancellation of approximately 812,000 options from a former named executive officer. If these options had been excluded from the calculation, the net grants for fiscal 2003 as a percentage of outstanding shares would have been 1.4%. |
A summary of our option activity and related weighted-average exercise prices for fiscal 2003 is as follows:
Shares Available for Options | Options Outstanding | ||||||||
Number of Shares | Weighted- Average Exercise Price | ||||||||
| (in thousands, except per share amounts) | |||||||||
Balance at October 31, 2002 | 16,826 | 55,960 | $ | 20.70 | |||||
Grants | (4,518 | ) | 4,518 | $ | 25.06 | ||||
Options assumed in acquisitions | — | 2,115 | $ | 24.74 | |||||
Exercises | — | (16,573 | ) | $ | 18.60 | ||||
Cancellations | 3,162 | (3,901 | ) | $ | 24.02 | ||||
Additional shares reserved | 300 | — | — | ||||||
Balance at October 31, 2003 | 15,770 | 42,119 | $ | 21.89 | |||||
As of October 31, 2003, a total of approximately 39.0 million, 53.2 million and 1.8 million shares were reserved for issuance under our 1992, 1998 and Directors Plans, respectively, of which 15.8 million shares were available for future grants. For additional information regarding our stock option activity during fiscal 2002, please see Note 7 of ourNotes to Consolidated Financial Statements in Part II, Item 8.Financial Statements and Supplementary Data.
A summary of outstanding in-the-money and out-of-the-money options and related weighted-average exercise prices as of October 31, 2003 is as follows:
| Exercisable | Unexercisable | Total | |||||||||||||
| Shares | Weighted- Average Exercise Price | Shares | Weighted- Average Exercise Price | Shares | Weighted- Average Exercise Price | ||||||||||
| (in thousands, except per share amounts) | |||||||||||||||
In-the-Money | 25,467 | $ | 21.31 | 15,714 | $ | 21.84 | 41,181 | $ | 21.51 | ||||||
Out-of-the-Money(1) | 457 | $ | 40.72 | 481 | $ | 36.05 | 938 | $ | 38.33 | ||||||
Total Options Outstanding | 25,924 | $ | 21.65 | 16,195 | $ | 22.27 | 42,119 | $ | 21.89 | ||||||
| (1) | Out-of-the-money options are those options with an exercise price equal to or above the closing price of $31.72 on October 31, 2003, the last trading day of fiscal 2003. |
The following table sets forth further information regarding individual grants of options during fiscal 2003 for the Chief Executive Officer and each of the other four most highly compensated executive officers (named executive officers) serving as such on October 31, 2003 whose compensation for fiscal 2003 exceeded $100,000.
| Individual Grants | Exercise Price ($/Share) | Expiration Date | Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term ($) | |||||||||||||
Number of Granted(1) | Percent of Total Options Granted to Employees(2) | |||||||||||||||
Name | 5% | 10% | ||||||||||||||
Aart J. de Geus | 60,000 16,500 16,600 11,500 | 1.43 0.39 0.39 0.27 | % % % % | $ $ $ $ | 21.73 20.46 29.28 33.30 | 12/9/12 2/25/13 5/27/13 8/26/13 | $ $ $ $ | 819,764 212,309 305,673 240,799 | $ $ $ $ | 2,077,443 538,032 774,635 610,232 | ||||||
Chi-Foon Chan | 60,000 15,150 15,200 10,500 | 1.43 0.36 0.36 0.25 | % % % % | $ $ $ $ | 21.73 20.46 29.28 33.30 | 12/9/12 2/25/13 5/27/13 8/26/13 | $ $ $ $ | 819,764 194,938 279,893 219,860 | $ $ $ $ | 2,077,443 494,011 709,305 557,168 | ||||||
Vicki L. Andrews | 27,200 10,950 13,000 10,000 | 0.65 0.26 0.31 0.24 | % % % % | $ $ $ $ | 21.73 20.46 29.28 33.30 | 12/9/12 2/25/13 5/27/13 8/26/13 | $ $ $ $ | 371,626 140,896 239,382 209,390 | $ $ $ $ | 941,774 357,057 606,642 530,637 | ||||||
John Chilton | 13,800 7,200 5,800 8,000 | 0.33 0.17 0.14 0.19 | % % % % | $ $ $ $ | 21.73 20.46 29.28 33.30 | 12/9/12 2/25/13 5/27/13 8/26/13 | $ $ $ $ | 188,546 92,644 106,801 167,512 | $ $ $ $ | 477,812 234,777 270,656 424,509 | ||||||
Antun Domic | 22,700 8,850 7,800 9,000 | 0.54 0.21 0.19 0.22 | % % % % | $ $ $ $ | 21.73 20.46 29.28 33.30 | 12/9/12 2/25/13 5/27/13 8/26/13 | $ $ $ $ | 310,144 113,875 143,630 188,451 | $ $ $ $ | 785,966 288,581 363,985 477,573 | ||||||
| (1) | Sum of all option grants made during fiscal 2003 to such person. Options become exercisable ratably in a series of monthly installments over a four-year period from the grant date, assuming continued service to Synopsys, subject to acceleration under certain circumstances involving a change in control of Synopsys. Each option has a maximum term of ten years, subject to earlier termination upon the optionee’s cessation of service. |
| (2) | Based on a total of 4.2 million shares subject to options granted to employees under Synopsys’ option plans during fiscal 2003. |
The following table provides the specified information concerning exercises of options to purchase our common stock and the value of unexercised options held by our named executive officers as of October 31, 2003:
Name | Shares Acquired On Exercise | Value Realized(1) | Number of Securities Underlying Unexercised Options at October 31, 2003 Exercisable/Unexercisable | Value of In-the-Money Options at October 31, 2003(2) Exercisable/Unexercisable | ||||||||||
Aart J. de Geus | — | — | 3,071,648 | 490,352 | $ | 34,652,561 | $ | 4,728,735 | ||||||
Chi-Foon Chan | 200,000 | 2,734,000 | 1,855,278 | 421,372 | $ | 17,989,193 | $ | 3,998,101 | ||||||
Vicki L. Andrews | 114,332 | 1,417,088 | 235,097 | 244,853 | $ | 1,521,659 | $ | 1,920,072 | ||||||
John Chilton | 198,226 | 2,695,140 | 177,828 | 146,232 | $ | 1,084,343 | $ | 1,062,785 | ||||||
Antun Domic | 167,000 | 1,939,111 | 197,235 | 173,815 | $ | 1,187,687 | $ | 1,350,641 | ||||||
| (1) | Market value at exercise less exercise price. |
| (2) | Market value of underlying securities as of October 31, 2003 ($31.72) minus the exercise price. |
The following table provides information regarding equity compensation plans approved and not approved by security holders as of October 31, 2003:
Plan Category | Number of Securities (a) | Weighted-Average (b) | Number of Securities (c) | ||||||
| (in thousands, except price per share amounts) | |||||||||
Employee Equity Compensation Plans Approved by Stockholders(1) | 10,172 | $ | 21.43 | 15,424 | (4) | ||||
Employee Equity Compensation Plans Not Approved by Stockholders(2) | 28,162 | $ | 22.27 | 8,180 | |||||
Total | 38,334 | (3) | $ | 22.04 | 23,604 | (5) | |||
| (1) | Synopsys’ stockholder approved equity compensation plans include the 1992 Plan, the Directors Plan and the Employee Stock Purchase Plans. |
| (2) | Synopsys’ only non-stockholder approved equity compensation plan is the 1998 Plan. |
| (3) | Does not include information for options assumed in connection with acquisitions. As of October 31, 2003, a total of 3.8 million shares of our common stock were issuable upon exercise of such outstanding options. |
| (4) | Includes 3.6 million shares approved by stockholders on June 20, 2003, for addition to the Employee Stock Purchase Plans. |
| (5) | Comprised of (i) 7.5 million shares remaining available for issuance under the 1992 Plan, (ii) 8.2 million shares remaining available for issuance under the 1998 Plan, (iii) 0.1 million shares remaining available for issuance under the Directors Plan, and (iv) 7.8 million shares remaining available for issuance under the Employee Stock Purchase Plans as of October 31, 2003. |
Pre-approvals of Non-Audit Services by Audit Committee
Pursuant to Section 10A(i)(3) of the Exchange Act, during the fourth quarter of fiscal 2003, the Audit Committee pre-approved the following non-audit services to be performed by KPMG LLP, our independent auditors:
| 1. | Consultation relating to merger or liquidation of certain Synopsys foreign subsidiaries; and |
| 2. | International tax planning and tax compliance services relating to certain foreign subsidiaries. |
Factors That May Affect Future Results
Weakness or budgetary caution in the semiconductor and electronics industries would negatively impact our business.
The semiconductor and electronics industries experienced steep declines in orders and revenue in 2001 and 2002, before recovering moderately in 2003. Further recovery is subject to significant risks, and these manufacturers have been cautious to adopt an improved outlook on demand for their products. Accordingly, they may continue to constrain their EDA investments, and we cannot predict whether, or when, further recovery will translate into increased EDA investments. Should our customers and prospective customers remain cautious in their EDA purchases due to market conditions or other factors, our business, operating results and financial condition would be materially and adversely affected.
The EDA industry is highly competitive, and competition may have a material adverse affect on our business and operating results.
We compete with other EDA vendors that offer a broad range of products and services, such as Cadence Design Systems and Mentor Graphics Corporation, and with EDA vendors that offer products focused on one or more discrete phases of the IC design process. We also compete with customers’ internally developed design tools and capabilities. If we fail to compete effectively our business will be materially and adversely affected.
We compete principally on technology leadership, product quality and features, post-sale support, interoperability with our own and other vendors’ products, price and payment terms. Additional competitive challenges include:
Our revenue and earnings fluctuate, which could cause our financial results to not meet expectations and our stock price to decline.
Many factors affect our revenue and earnings, making it difficult to predict revenue and earnings for any given fiscal period, including customer demand, license terms, and the timing of revenue recognition on products and services sold. Accordingly, stockholders should not view our historical results as necessarily indicative of our future performance. If our financial results or targets do not meet investor and analyst expectations, our stock price could decline.
The following are some of the specific factors that could affect our revenue and earnings in a particular quarter or over several fiscal periods:
The decline in starts of new IC designs, industry consolidation and other potentially long-term trends may have an adverse affect on the EDA industry, including demand for our products and services.
Technology innovations, such as system-on-a-chip designs and IC designs with features of 130 nanometers and below, have substantially increased the complexity, cost and risk of designing and manufacturing ICs. These trends require semiconductor manufactures to purchase increasingly sophisticated EDA software and pre-designed and pre-verified IP components, creating market opportunity for us. At the same time, they contribute, along with the downturn in the semiconductor industry in 2001 and 2002, to the following potentially long-term trends:
These trends, if sustained, could have an adverse effect on the EDA industry, including the demand for our products and services.
Businesses we have acquired or that we may acquire in the future may not perform as we project.
We have acquired a number of companies in recent years, and as part of our efforts to expand our product and services offerings, we may acquire additional companies. During fiscal 2002, we acquired Avant!, inSilicon and Co-Design. During fiscal 2003, we acquired Numerical, InnoLogic Systems, Inc., and the verification IP assets of Qualis, Inc. Bidding for future acquisitions may be intense, which may make it difficult for us to acquire additional companies at acceptable prices, if at all.
In addition to direct costs, acquisitions pose a number of risks, including:
While we review proposed acquisitions carefully and strive to negotiate terms that are favorable to us, we can provide no assurances that any acquisition will have a positive effect on our performance. Furthermore, if we later determine we cannot use or sell an acquired product or technology, we could be required to write down the goodwill associated with such product or technology; these writedowns, if significant, could have a material adverse effect on our results of operations.
Stagnation of foreign economies, foreign exchange rate fluctuations or other international issues could adversely affect our performance.
During fiscal 2003, we derived 43% of our revenue from outside North America, as compared to 35% during fiscal 2002. Foreign sales are vulnerable to regional or worldwide economic, political and health conditions, including the effects of international political conflict and hostilities and the outbreak of diseases such as SARS. In particular, continued weakness in the telecommunications equipment business would adversely impact many of our largest European-based customers and which would cause them to curtail their EDA investments. While our sales in Japan were relatively strong during fiscal 2003, the Japanese economy remains generally weak and future growth is thus difficult to predict. Furthermore, achievement of our overall orders and revenue plans assume sales growth in the Asia Pacific region, which may not occur if growth in the rest of the world’s economies does not accelerate.
Our operating results are subject to fluctuations in foreign currency exchange rates. Our revenues and operating results are adversely affected when the U.S. dollar weakens relative to other currencies, particularly the
Euro, and to a lesser extent, the Japanese yen. If the U.S. dollar should continue to weaken in fiscal 2004 relative to other currencies, particularly the Euro, our revenues and operating results will be adversely affected. Exchange rates are subject to significant and rapid fluctuations, and therefore we cannot predict the prospective impact of exchange rate fluctuations on our business, operating results and financial condition.
A failure to recruit and retain key employees would have a material adverse effect on our ability to compete.
To be successful, we must attract and retain key technical, sales and managerial employees, including those who join Synopsys in connection with acquisitions. There are a limited number of qualified EDA and IC design engineers, and competition for these individuals is intense. Companies in the EDA industry and in the general electronics industry value experience at Synopsys. Accordingly, our employees, including employees who have joined Synopsys in connection with acquisitions, are often recruited aggressively by our competitors, and to a lesser extent, our customers. In the past, we have had high employee turnover, which may recur in the future. Our failure to recruit and retain key technical, sales and managerial personnel could have a material adverse effect on our business, financial condition and results of operations.
We issue stock options as a key component of our overall compensation. Recently enacted regulations of the Nasdaq National Market regarding stockholder approval of equity compensation plans could make it more difficult for us to grant stock options to employees in the future. In addition, the FASB and other regulatory bodies have proposed changes to generally accepted accounting principles (GAAP) that may require us to adopt a different method of determining the compensation expense for our employee stock options. Because of these enacted and proposed changes, it is possible that we may in the future incur increased cash compensation costs as a substitute for reduced stock option grants, may lose top employees to non-public, start-up companies or may generally find it more difficult to attract, retain and motivate employees, any one of which could materially and adversely affect our business.
Product errors or defects could expose us to liability and harm our reputation.
Despite extensive testing prior to releasing our products, software products frequently contain errors or defects, especially when first introduced, when new versions are released or when integrated with technologies developed by acquired companies. Product errors could affect the performance or interoperability of our products, could delay the development or release of new products or new versions of products, and could adversely affect market acceptance or perception of our products. Errors or delays in releasing new products or new versions of products could cause us to lose revenues or market share, increase our service costs, subject us to liability for damages and divert our resources from other tasks, any one of which could adversely affect our business and operating results.
Failing to protect our proprietary technology would have a material adverse effect on our financial condition and results of operations.
Our success depends in part upon protecting our proprietary technology. To protect this technology we rely on agreements with customers, employees and others and on intellectual property laws worldwide. We can provide no assurances that these agreements will not be breached, that we would have adequate remedies for any breach or that our trade secrets will not otherwise become known or be independently developed by competitors. Moreover, certain foreign countries do not currently provide effective legal protection for intellectual property; our ability to prevent the unauthorized use of our products in those countries is therefore limited. If we do not obtain or maintain appropriate patent, copyright or trade secret protection, for any reason, or cannot fully defend our intellectual property rights in certain jurisdictions, our business, financial condition and results of operations could be materially and adversely affected.
We have a policy of aggressively pursuing action against companies or individuals that wrongfully appropriate or use our products and technologies. However, there can be no assurance that these actions will be successful.
From time to time we are subject to claims that our products infringe on third party intellectual property rights.
Under our customer agreements and other license agreements, in many cases we offer to indemnify our customer if the licensed products infringe on a third party’s intellectual property rights. As a result, we are from time to time subject to claims that our products infringe on these third party rights. For example, we are currently defending some of our customers against claims that their use of one of our products infringes a patent held by a Japanese electronics company. We believe this claim is without merit and will continue to vigorously pursue this defense.
These types of claims can result in costly and time-consuming litigation, require us to enter into royalty arrangements, subject us to damages or injunctions restricting our sale of products, require us to refund license fees to our customers or to forgo future payments or require us to redesign certain of our products, any one of which could materially and adversely affect our business.
We are subject to changes in financial accounting standards, which may affect our reported financial results or the way we conduct business.
Accounting policies affecting software revenue recognition have been the subject of frequent interpretations, significantly effecting the way we license our products. As a result of the enactment of the Sarbanes-Oxley Act and the review of accounting policies by the SEC and national and international accounting standards bodies, the frequency of accounting policy changes may accelerate. Future changes in financial accounting standards, including pronouncements relating to revenue recognition, may have a significant effect on our reported results, including reporting of transactions completed before the effective date of the changes.
The FASB and various federal legislative proposals have proposed changes to GAAP that may require us to adopt a different method of determining the compensation expense for our employee stock options. Synopsys currently uses the intrinsic value method to measure compensation expense for stock-based awards to our employees. Under this standard, we generally do not consider stock option grants issued under our employee stock option plans to be compensation when the exercise price of the stock option is equal to the fair market value on the date of grant. If any change to GAAP is adopted that requires us to adopt a different method of determining the compensation expense for our employee stock options, our reported results of operations may be adversely affected.
An unfavorable government review of our tax returns or changes in our effective tax rates could adversely affect our operating results.
Our operations are subject to income and transaction taxes in the United States and in multiple foreign jurisdictions. We exercise judgment in determining our worldwide provision for income taxes, and in the ordinary course of our business, there may be transactions and calculations where the ultimate tax determination is uncertain. In addition, we are undergoing an audit of our federal income taxes for fiscal 2001. Although we believe our tax estimates are reasonable, we can provide no assurance that any final determination in the audit will not be materially different than the treatment reflected in our historical income tax provisions and accruals. If additional taxes are assessed as a result of an audit or litigation, there could be a material effect on our income tax provision and net income in the period or periods for which that determination is made.
Computer viruses, intrusion attempts on our information technology infrastructure and denial of service attacks could seriously disrupt our business operations.
Recently, “hackers” and others have created a number of computer viruses or otherwise initiated “denial of service” attacks on computer networks and systems. Our information technology infrastructure is regularly subject to various attacks and intrusion efforts of differing seriousness and sophistication. While we diligently maintain our information technology infrastructure and continuously implement protections against such viruses
or intrusions, if our defensive measures fail or should similar defensive measures by our customers fail, our business could be materially and adversely affected.
We have adopted anti-takeover provisions, which may delay or prevent changes in control of management.
We have a number of provisions that could have anti-takeover effects. In 1997, our Board of Directors 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 our stockholders, to issue additional shares of common stock, to fix the rights and preferences of authorized but undesignated shares of preferred stock, and to issue shares of such preferred stock. These and other provisions of Synopsys’ Restated Certificate of Incorporation and Bylaws and the Delaware General Corporation Law may deter hostile takeovers or delay or prevent changes in control of Synopsys management, including transactions in which Synopsys’ stockholders might otherwise receive a premium for their shares over then current market prices.
If export controls affecting our products are expanded, our business will be adversely affected.
The U.S. Department of Commerce regulates the sale and shipment of certain technologies by U.S. companies to foreign countries. To date, we believe we have successfully complied with applicable export regulations. However, if the U.S. Department of Commerce places significant export controls on our existing, future or acquired products, our business would be materially and adversely affected.
Terrorist acts and acts of war may seriously harm our financial condition and results of operations.
Terrorist acts or acts of war (wherever located around the world) may damage or disrupt Synopsys, our employees, facilities, partners, suppliers, or customers or cause unpredictable swings in foreign currency exchange rates, all of which could significantly impact our results of operations and expenses and financial condition. The potential for future terrorist attacks, the national and international responses to terrorist attacks or perceived threats to national security, and other acts of war or hostility have created many economic and political uncertainties that could adversely affect our business and results of operations in ways we cannot presently predict. We are predominantly uninsured for losses and interruptions caused by acts of war.
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. Our exposure to market risk for changes in interest rates relates primarily to our short-term investment portfolio. The primary objective of our investment activities is to preserve the principal while at the same time maximizing yields without significantly increasing the risk. To achieve this objective, we maintain our portfolio of cash equivalents and investments in a mix of tax-exempt and taxable instruments that meet high credit quality standards, as specified in our investment policy. None of our investments are held for trading purposes. Our policy also limits the amount of credit exposure to any one issue, issuer and type of instrument.
The following table presents the carrying value and related weighted-average total return for our investment portfolio. The carrying value approximates fair value as of October 31, 2003. In accordance with our investment policy, the weighted-average maturities of our total invested funds do not exceed one year.
Carrying Amount | Weighted- After Tax Return | |||||
| (in thousands) | ||||||
Short-term investments—fixed rate (U.S.) | $ | 174,049 | 1.69 | % | ||
Money market funds—variable rate (U.S.) | 305,926 | 0.79 | % | |||
Cash deposits and money market funds—variable rate (International) | 147,178 | 0.94 | % | |||
Total interest bearing instruments | $ | 627,153 | 1.08 | % | ||
As of October 31, 2003, the stated maturities of our current investments are $36.6 million within one year, $84.0 million within one to five years, $13.8 million within five to ten years and $39.6 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.
Our strategic investment portfolio consists of minority equity investments in publicly traded companies and investments in privately held companies. 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, 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 basis of securities sold is based on the specific identification method. These securities of privately held companies are reported at the lower of cost or fair value.
See Note 5 of ourNotes to Consolidated Financial Statements in Part II, Item 8.Financial Statements and Supplementary Datafor additional information on investment maturity dates, long-term debt and equity price risk related to our long-term investments and carrying value and write-downs of our strategic investments.
Foreign Currency Risk. The functional currency of each of Synopsys’ foreign subsidiaries is the foreign subsidiary’s local currency, except for our principal Irish subsidiary whose functional currency is the U.S. dollar. At the present time, we hedge only (i) those currency exposures associated with certain assets and liabilities denominated in non-functional currencies, and (ii) forecasted accounts receivable, backlog and accounts payable denominated in non-functional currencies. Our hedging activities are intended to offset the impact of currency fluctuations on the value of these balances. The success of these activities depends upon the accuracy of our estimates of balances denominated in various currencies. We do not attempt to hedge operating expenses denominated in any foreign currency. Looking forward, to the extent our estimates of various balances denominated in non-functional currencies prove inaccurate, then we will not be completely hedged, and we will record a gain or loss, depending upon the nature and extent of such inaccuracy. We can provide no assurances that our hedging transactions will be effective.
Foreign currency contracts entered into in connection with our hedging activities contain credit risk in that the counterparty may be unable to meet the terms of the agreements. We have limited these agreements to major financial institutions to reduce this credit risk. Furthermore, we monitor the potential risk of loss with any one financial institution. We do not enter into forward contracts for speculative purposes.
Effective May 4, 2003, we changed the functional reporting currency of our principal Irish subsidiary from the Euro to the U.S. dollar because an increasing percentage of that subsidiary’s sales in Europe and Asia, and the resulting accounts receivable, are denominated in U.S. dollars. The expenses of our Irish subsidiary, which manages all of our European offices, are predominantly in Euros. The accounts receivable and the expenses of our Japanese subsidiary are denominated in yen.
The following table provides information about our foreign currency contracts as of October 31, 2003. Due to the short-term nature of these contracts, the contract rates approximate the weighted-average currency exchange rates as of October 31, 2003. These forward contracts mature in approximately thirty days, and contracts are rolled forward on a monthly basis to match firmly committed transactions.
| USD Amount | Contract Rate | ||||
| (in thousands) | |||||
Forward Net Contract Values: | |||||
Japanese yen | $ | 102,678 | 109.2300 | ||
Euro | 9,062 | 0.8569 | |||
Canadian dollar | 7,084 | 1.3157 | |||
British pound sterling | 5,531 | 0.5916 | |||
Israeli shekel | 1,986 | 4.5011 | |||
Korean won | 2,419 | 1190.0000 | |||
Singapore dollar | 936 | 1.7458 | |||
Taiwan dollar | 3,784 | 33.9600 | |||
Hong Kong dollar | 5,281 | 7.7517 | |||
Chinese renminbi | 4,343 | 8.2729 | |||
| $ | 143,104 | ||||
Net unrealized gains of approximately $19.3 million and $10.0 million, net of tax on the outstanding forward contracts, as of October 31, 2003 and 2002, respectively, are included in accumulated other comprehensive income on the consolidated balance sheet. Net unrealized losses, net of tax on the outstanding forward contracts, as of October 31, 2001 were not material. Net cash inflows on maturing forward contracts during fiscal 2003 were $37.7 million.
Item 8.Financial Statements and Supplementary Data
REPORT OF KPMG LLP, INDEPENDENT AUDITORS
The Board of Directors and
Shareholders of Synopsys, Inc.:
We have audited the accompanying consolidated balance sheets of Synopsys, Inc. and subsidiaries (the Company) as of October 31, 2003 and 2002, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended October 31, 2003. 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, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended October 31, 2003, in conformity with accounting principles generally accepted in the United States of America.
As discussed in note 2 to the consolidated financial statements, effective November 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets.
/s/ KPMG LLP
Mountain View, California
November 24, 2003
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
| October 31, | ||||||||
| 2003 | 2002 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 524,308 | $ | 312,580 | ||||
Short-term investments | 174,049 | 102,153 | ||||||
Total cash, cash equivalents and short-term investments | 698,357 | 414,733 | ||||||
Accounts receivable, net of allowances of $8,295 and $11,565, respectively | 200,998 | 207,206 | ||||||
Deferred income taxes | 248,425 | 282,867 | ||||||
Income taxes receivable | 72,124 | 2,038 | ||||||
Prepaid expenses and other current assets | 19,302 | 22,471 | ||||||
Total current assets | 1,239,206 | 929,315 | ||||||
Property and equipment, net | 184,313 | 185,040 | ||||||
Long-term investments | 8,595 | 39,386 | ||||||
Goodwill, net | 550,732 | 434,554 | ||||||
Intangible assets, net | 285,583 | 355,334 | ||||||
Other assets | 38,924 | 35,085 | ||||||
Total assets | $ | 2,307,353 | $ | 1,978,714 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities | $ | 204,226 | $ | 248,212 | ||||
Accrued income taxes | 201,855 | 169,912 | ||||||
Deferred revenue | 398,878 | 359,245 | ||||||
Total current liabilities | 804,959 | 777,369 | ||||||
Deferred compensation and other liabilities | 47,390 | 36,387 | ||||||
Long-term deferred revenue | 21,594 | 51,477 | ||||||
Stockholders’ equity: | ||||||||
Common stock, $0.01 par value; 400,000 shares authorized; 155,837 and 147,124 shares outstanding, respectively | 1,560 | 1,470 | ||||||
Additional paid-in capital | 1,198,421 | 1,038,651 | ||||||
Retained earnings | 251,979 | 198,863 | ||||||
Treasury stock, at cost; 662 and 5,482 shares, respectively | (20,733 | ) | (116,499 | ) | ||||
Deferred stock compensation | (7,170 | ) | (8,858 | ) | ||||
Accumulated other comprehensive income (loss) | 9,353 | (146 | ) | |||||
Total stockholders’ equity | 1,433,410 | 1,113,481 | ||||||
Total liabilities and stockholders’ equity | $ | 2,307,353 | $ | 1,978,714 | ||||
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| Year Ended October 31, | |||||||||||
| 2003 | 2002 | 2001 | |||||||||
Revenue: | |||||||||||
Upfront license | $ | 298,280 | $ | 245,193 | $ | 163,924 | |||||
Service | 260,679 | 287,747 | 341,833 | ||||||||
Time-based license | 618,024 | 373,594 | 174,593 | ||||||||
Total revenue | 1,176,983 | 906,534 | 680,350 | ||||||||
Cost of revenue: | |||||||||||
Upfront license | 15,950 | 15,319 | 20,479 | ||||||||
Service | 77,996 | 78,167 | 79,747 | ||||||||
Time-based license | 53,515 | 45,737 | 29,896 | ||||||||
Amortization of intangible assets and deferred stock compensation | 92,856 | 33,936 | — | ||||||||
Total cost of revenue | 240,317 | 173,159 | 130,122 | ||||||||
Gross margin | 936,666 | 733,375 | 550,228 | ||||||||
Operating expenses: | |||||||||||
Research and development | 285,880 | 225,545 | 189,831 | ||||||||
Sales and marketing | 310,692 | 264,809 | 273,954 | ||||||||
General and administrative | 90,021 | 78,461 | 69,682 | ||||||||
Integration | — | 128,528 | — | ||||||||
In-process research and development | 19,850 | 87,700 | — | ||||||||
Amortization of goodwill, intangible assets and deferred stock compensation | 35,318 | 28,649 | 17,012 | ||||||||
Total operating expenses | 741,761 | 813,692 | 550,479 | ||||||||
Operating income (loss) | 194,905 | (80,317 | ) | (251 | ) | ||||||
Other income (expense), net | 24,084 | (208,623 | ) | 83,784 | |||||||
Income (loss) before provision (benefit) for income taxes | 218,989 | (288,940 | ) | 83,533 | |||||||
Provision (benefit) for income taxes | 69,265 | (88,947 | ) | 26,731 | |||||||
Net income (loss) | $ | 149,724 | $ | (199,993 | ) | $ | 56,802 | ||||
Basic earnings (loss) per share: | |||||||||||
Net income (loss) per share | $ | 0.99 | $ | (1.50 | ) | $ | 0.47 | ||||
Weighted-average common shares | 151,251 | 133,616 | 121,202 | ||||||||
Diluted earnings (loss) per share: | |||||||||||
Net income (loss) per share | $ | 0.95 | $ | (1.50 | ) | $ | 0.44 | ||||
Weighted-average common shares and dilutive stock options outstanding | 158,326 | 133,616 | 129,318 | ||||||||
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
| Common Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Deferred Compensation | Comprehensive Income (Loss) | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
Balance at October 31, 2000 | 125,754 | $ | 1,258 | $ | 558,087 | $ | 405,419 | $ | (329,493 | ) | — | $ | 47,558 | $ | 682,829 | ||||||||||||||||||||
Components of comprehensive income: | |||||||||||||||||||||||||||||||||||
Net income | — | — | — | 56,802 | — | — | $ | 56,802 | — | 56,802 | |||||||||||||||||||||||||
Unrealized loss on investments, net of tax of $2,644 | — | — | — | — | — | — | (4,063 | ) | |||||||||||||||||||||||||||
Reclassification adjustment on unrealized gains on investments, net of tax of $21,647 | — | — | — | — | — | — | (33,713 | ) | |||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | — | (5,669 | ) | |||||||||||||||||||||||||||
Accumulated other comprehensive loss | (43,445 | ) | (43,445 | ) | (43,445 | ) | |||||||||||||||||||||||||||||
Total comprehensive income | $ | 13,357 | |||||||||||||||||||||||||||||||||
Acquisition of treasury stock | (13,234 | ) | (132 | ) | 132 | — | (331,882 | ) | — | — | (331,882 | ) | |||||||||||||||||||||||
Stock issued under stock option and stock purchase plans | 6,336 | 64 | 596 | (25,559 | ) | 130,258 | — | — | 105,359 | ||||||||||||||||||||||||||
Tax benefits associated with exercise of stock options | — | — | 15,993 | — | — | — | — | 15,993 | |||||||||||||||||||||||||||
Balance at October 31, 2001 | 118,856 | $ | 1,190 | $ | 574,808 | $ | 436,662 | $ | (531,117 | ) | $ | — | $ | 4,113 | $ | 485,656 | |||||||||||||||||||
Components of comprehensive income: | |||||||||||||||||||||||||||||||||||
Net loss | — | — | — | (199,993 | ) | — | — | $ | (199,993 | ) | — | (199,993 | ) | ||||||||||||||||||||||
Unrealized gain on investments, net of tax of $5,045 | — | — | — | — | — | — | 7,753 | ||||||||||||||||||||||||||||
Unrealized gain on currency contracts, net of tax of $4,218 | — | — | — | — | — | — | 6,482 | ||||||||||||||||||||||||||||
Reclassification adjustment on unrealized gains on investments, net of tax of $3,095 | — | — | — | — | — | — | (13,738 | ) | |||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | — | (4,756 | ) | |||||||||||||||||||||||||||
Accumulated other comprehensive loss | (4,259 | ) | (4,259 | ) | (4,259 | ) | |||||||||||||||||||||||||||||
Total comprehensive loss | $ | (204,252 | ) | ||||||||||||||||||||||||||||||||
Acquisition of Avant! Corporation | 29,060 | 290 | 434,921 | — | 431,312 | (8,102 | ) | — | 858,421 | ||||||||||||||||||||||||||
Amortization of deferred stock compensation related to acquisitions | — | — | (83 | ) | — | — | 1,605 | — | 1,522 | ||||||||||||||||||||||||||
Acquisition of treasury stock | (7,768 | ) | (78 | ) | 78 | — | (171,678 | ) | — | — | (171,678 | ) | |||||||||||||||||||||||
Stock options assumed in connection with acquisition of inSilicon and Co-Design | — | — | 5,929 | — | — | (2,361 | ) | — | 3,568 | ||||||||||||||||||||||||||
Stock issued under stock option and stock purchase plans | 6,976 | 68 | 3,538 | (37,806 | ) | 154,984 | — | — | 120,784 | ||||||||||||||||||||||||||
Tax benefits associated with exercise of stock options | — | — | 19,460 | — | — | — | — | 19,460 | |||||||||||||||||||||||||||
Balance at October 31, 2002 | 147,124 | $ | 1,470 | $ | 1,038,651 | $ | 198,863 | $ | (116,499 | ) | $ | (8,858 | ) | $ | (146 | ) | $ | 1,113,481 | |||||||||||||||||
SYNOPSYS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS) - continued
(in thousands)
| Common Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Deferred Compensation | Comprehensive Income (Loss) | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
Balance Forward: | |||||||||||||||||||||||||||||||||||
Balance at October 31, 2002 | 147,124 | $ | 1,470 | $ | 1,038,651 | $ | 198,863 | $ | (116,499 | ) | $ | (8,858 | ) | $ | (146 | ) | $ | 1,113,481 | |||||||||||||||||
Components of comprehensive income: | |||||||||||||||||||||||||||||||||||
Net income | — | — | — | 149,724 | — | — | $ | 149,724 | — | 149,724 | |||||||||||||||||||||||||
Unrealized gain on investments, net of tax of $2,370 | — | — | — | — | — | — | 3,663 | ||||||||||||||||||||||||||||
Unrealized gain on currency contracts, net of tax of $12,426 | — | — | — | — | — | — | 19,204 | ||||||||||||||||||||||||||||
Reclassification adjustment on unrealized gains on investments, net of tax of $7,546 | — | — | — | — | — | — | (11,644 | ) | |||||||||||||||||||||||||||
Reclassification on unrealized gains on currency contracts, net of tax of $4,115 | — | — | — | — | — | — | (6,359 | ) | |||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | — | 4,635 | ||||||||||||||||||||||||||||
Accumulated other comprehensive income | 9,499 | 9,499 | 9,499 | ||||||||||||||||||||||||||||||||
Total comprehensive income | $ | 159,223 | |||||||||||||||||||||||||||||||||
Amortization of deferred stock compensation related to acquisitions, net of forfeitures | — | — | (1,888 | ) | — | — | 6,884 | — | 4,996 | ||||||||||||||||||||||||||
Acquisition of treasury stock | (9,407 | ) | (94 | ) | 94 | — | (260,746 | ) | — | — | (260,746 | ) | |||||||||||||||||||||||
Stock options assumed in connection with acquisition of Numerical | — | — | 21,696 | — | — | (5,196 | ) | — | 16,500 | ||||||||||||||||||||||||||
Stock issued under stock option and stock purchase plans | 18,120 | 184 | 74,840 | (96,608 | ) | 356,512 | — | — | 334,928 | ||||||||||||||||||||||||||
Tax benefits associated with exercise of stock options | — | — | 65,028 | — | — | — | — | 65,028 | |||||||||||||||||||||||||||
Balance at October 31, 2003 | 155,837 | $ | 1,560 | $ | 1,198,421 | $ | 251,979 | $ | (20,733 | ) | $ | (7,170 | ) | $ | 9,353 | $ | 1,433,410 | ||||||||||||||||||
See accompanying notes to the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Year Ended October 31, | ||||||||||||
| 2003 | 2002 | 2001 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
Net income (loss) | $ | 149,724 | $ | (199,993 | ) | $ | 56,802 | |||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||
Amortization and depreciation | 184,110 | 116,100 | 65,162 | |||||||||
Provision for doubtful accounts | (1,577 | ) | 7,042 | 5,759 | ||||||||
Write-down of long term investments | 4,525 | 11,326 | 5,848 | |||||||||
Write-down of land and property | — | 14,712 | — | |||||||||
Gain on sale of long-term investments | (22,366 | ) | (21,299 | ) | (57,080 | ) | ||||||
Write-down of goodwill and intangible assets | — | 3,785 | 2,200 | |||||||||
Deferred income taxes | (30,503 | ) | (128,167 | ) | (58,831 | ) | ||||||
Net change in unrealized gains and losses on foreign exchange contracts | 18,107 | — | — | |||||||||
Deferred rent | 1,725 | 2,804 | — | |||||||||
In-process research and development | 19,850 | 87,700 | — | |||||||||
Non-cash gain on sale of Silicon Libraries | — | — | (10,580 | ) | ||||||||
Non-cash compensation expense | — | 1,761 | — | |||||||||
Tax benefit associated with stock options | 65,028 | 19,460 | 15,993 | |||||||||
Net changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | 7,183 | 5,275 | (5,190 | ) | ||||||||
Prepaid expenses and other current assets | 66,289 | 2,930 | (231 | ) | ||||||||
Other assets | (9,055 | ) | (14,814 | ) | (1,754 | ) | ||||||
Accounts payable and accrued liabilities | (31,840 | ) | (77,546 | ) | (8,072 | ) | ||||||
Accrued income taxes | (44,510 | ) | (20,974 | ) | 54,563 | |||||||
Deferred revenue | 5,226 | 5,993 | 229,160 | |||||||||
Deferred compensation | 9,618 | 2,856 | 1,771 | |||||||||
Net cash provided by (used in) operating activities | 391,534 | (181,049 | ) | 295,520 | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
Proceeds from sales and maturities of short-term investments | 253,828 | 876,298 | 2,003,589 | |||||||||
Purchases of short-term investments | (325,386 | ) | (769,102 | ) | (1,927,784 | ) | ||||||
Proceeds from sales of long-term investments | 34,951 | 56,033 | 77,777 | |||||||||
Purchases of long-term investments | (1,213 | ) | (5,472 | ) | (12,076 | ) | ||||||
Proceeds from sale of Silicon Libraries | — | — | 4,122 | |||||||||
Purchases of property and equipment | (50,148 | ) | (48,755 | ) | (82,490 | ) | ||||||
Cash paid for acquisitions, net of cash received | (167,744 | ) | 168,311 | — | ||||||||
Intangible assets, net | — | — | (313 | ) | ||||||||
Capitalization of software development costs | (2,616 | ) | (1,592 | ) | (1,000 | ) | ||||||
Net cash (used in) provided by investing activities | (258,328 | ) | 275,721 | 61,825 | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
Principal payments on debt obligations | — | — | (6,162 | ) | ||||||||
Issuances of common stock | 334,928 | 119,868 | 105,359 | |||||||||
Purchases of treasury stock | (260,746 | ) | (171,677 | ) | (331,882 | ) | ||||||
Net cash provided by (used in) financing activities | 74,182 | (51,809 | ) | (232,685 | ) | |||||||
Effect of exchange rate changes on cash | 4,340 | (1,979 | ) | (5,669 | ) | |||||||
Net increase in cash and cash equivalents | 211,728 | 40,884 | 118,991 | |||||||||
Cash and cash equivalents, beginning of year | 312,580 | 271,696 | 152,705 | |||||||||
Cash and cash equivalents, end of year | $ | 524,308 | $ | 312,580 | $ | 271,696 | ||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||||||
Cash paid during the year for: | ||||||||||||
Income taxes | $ | 36,055 | $ | 70,750 | $ | 25,262 | ||||||
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of Business
Synopsys, Inc. (Synopsys or the Company) is the world market leader in electronic design automation (EDA) software for semiconductor design. The Company delivers technology-leading semiconductor design and verification platforms to global electronics companies enabling development of complex systems-on-a-chip (SoCs). Synopsys also provides intellectual property and design services to simplify the design process and to accelerate time to market for its customers.
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 2003 and 2002 were 52-week years and fiscal 2001 was a 53-week year. Fiscal 2004 will be a 52-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.
Foreign Currency Translation. The functional currency of each of the Company’s foreign subsidiaries is the foreign subsidiary’s local currency except for the Company’s principal Irish subsidiary, whose functional currency is the United States (U.S.) dollar. Non-functional currency monetary balances are remeasured into the functional currency of the subsidiary with any related gain or loss recorded in earnings. The Company translates assets and liabilities of its foreign operations into U.S. dollars at exchange rates in effect at the balance sheet date. The Company translates income and expense items 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.
Use of Estimates. To prepare financial statements in conformity with generally accepted accounting principles, management must make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Fair Values of Financial Instruments. The fair value of the Company’s cash, short-term investments, 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.
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 cost of securities sold is based on the specific identification method and realized gains and losses are included in other income (expense), 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 global electronics market. The Company performs on-going credit evaluations of its customers’ financial condition and generally does not require collateral. The Company establishes reserves for potential credit losses and such losses have been within management’s expectations and have not been material in any year.
Allowance for Doubtful Accounts and Sales Returns. The Company establishes reserves for potential credit losses including a specific reserve for any particular receivable when collectibility is not probable. In addition, the Company provides a general reserve on all accounts receivable based on a specified range of percentages of the outstanding balance in each aged group. Such losses have been within management’s expectations and have not been material in any year. The following table provides a rollforward of the changes in the allowance for doubtful accounts and sales returns.
Fiscal Year | Balance at Beginning of Period | Additions Charged to Expense | Deductions(1) | Balance at End of Period | |||||||||
| (in thousands) | |||||||||||||
2003 | $ | 11,565 | $ | (1,577 | ) | $ | 1,693 | $ | 8,295 | ||||
2002 | $ | 11,027 | $ | 7,042 | $ | 6,504 | $ | 11,565 | |||||
2001 | $ | 9,539 | $ | 5,759 | $ | 4,271 | $ | 11,027 | |||||
| (1) | Accounts written off, net of recoveries. |
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.
Property and Equipment. Property and equipment is recorded at cost. Assets are depreciated using the straight-line method over their estimated useful lives ranging from three to five years. Leasehold improvements are depreciated 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 and was $15.1 million, $11.9 million and $10.5 million in fiscal 2003, 2002 and 2001, respectively. A detail of property and equipment is as follows:
| October 31, | ||||||||
| 2003 | 2002 | |||||||
| (in thousands) | ||||||||
Computer and other equipment | $ | 316,985 | $ | 279,239 | ||||
Buildings | 21,821 | 21,821 | ||||||
Furniture and fixtures | 27,629 | 26,446 | ||||||
Land | 42,754 | 42,754 | ||||||
Leasehold improvements | 66,566 | 61,796 | ||||||
| 475,755 | 432,056 | |||||||
Less accumulated depreciation and amortization | (291,442 | ) | (247,016 | ) | ||||
Total property and equipment, net | $ | 184,313 | $ | 185,040 | ||||
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 $2.6 million, $1.6 million and $1.0 million in fiscal 2003, 2002 and 2001, respectively. 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 $1.6 million, $1.1 million and $1.0 million in fiscal 2003, 2002 and 2001, 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 $123.2 million, $61.1 million and $17.0 million in fiscal 2003, 2002 and 2001, respectively.
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. (Stanza) in 1999. The Company determined that it would not allocate future resources to assist in the market growth of this technology as products offered by Avant! Corporation (Avant!) provide customers with similar capabilities as well as additional functionality. As a result, the Company does not anticipate any future sales of the Stanza product.
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. (Eagle) in 1997. The Company determined that it would not allocate future resources to assist in the market growth of this technology. As a result, the Company does not anticipate any future sales of the Eagle product.
Accounts Payable and Accrued Liabilities. Accounts payable and accrued liabilities consist of:
| October 31, | ||||||
| 2003 | 2002 | |||||
| (in thousands) | ||||||
Payroll and related benefits | $ | 122,137 | $ | 106,155 | ||
Acquisition related costs | 4,627 | 66,874 | ||||
Other accrued liabilities | 65,687 | 56,544 | ||||
Accounts payable | 11,775 | 18,639 | ||||
Total accounts payable and accrued liabilities | $ | 204,226 | $ | 248,212 | ||
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, 2003 and 2002, the invested amounts under the Plan total $31.3 million and $22.8 million, respectively, and are recorded as a long-term asset on the Company’s balance sheet. As of October 31, 2003 and 2002, the Company has recorded $32.5 million and $22.9 million, respectively, as a long-term liability to recognize undistributed amounts due to employees.
Stock Split. On September 23, 2003, the Company completed a two-for-one stock split in the form of a stock dividend. All common share and per share data for all periods presented have been adjusted to reflect the stock split.
Other Comprehensive Income. The Company records comprehensive income in accordance with Statement of Financial Accounting Standards No. 130,Reporting Comprehensive Income, which establishes standards for reporting and displaying comprehensive net income and its components in the financial statements. Comprehensive income, as defined, includes all changes in equity during a period from non-owner sources, such as accumulated net translation adjustments, unrealized gains on certain foreign currency forward contracts that qualify as cash flow hedges and reclassification adjustments related to unrealized gains on investments. Reclassification adjustments decrease other comprehensive income for gains on the sale of available-for-sale securities realized during the current year and are included in other comprehensive income as unrealized holding gains in the period in which such unrealized gains arose.
Revenue Recognition. Synopsys has designed and implemented revenue recognition policies in accordance with Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions, and SOP 98-4, Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue Recognition.
With respect to software sales, Synopsys utilizes three license types:
| • | Technology Subscription Licenses (TSLs), which are for a finite term, on average approximately three years, and generally provide the customer limited rights to receive, or to exchange certain quantities of licensed software for, unspecified future technology. Post-contract customer support (maintenance or PCS) is bundled for the term of the license and not charged for separately. |
| • | Term licenses, which are also for a finite term, usually two to three years, but do not provide the customer any rights to receive, or to exchange licensed software for, unspecified future technology. Customers purchase maintenance separately for the first year and may renew annually for the balance of the term. The annual maintenance fee is typically calculated as a percentage of the net license fee. |
| • | Perpetual licenses, which continue as long as the customer renews maintenance, plus an additional 20 years. Perpetual licenses do not provide the customer any rights to receive, or to exchange licensed software for, unspecified future technology. Customers purchase maintenance separately for the first year and may renew annually. The annual maintenance fee for purchases under $2 million is typically calculated as a percentage of the list price of the licensed software; for purchases over $2 million, the annual maintenance fee is typically calculated as a percentage of the net license fee. |
The Company reports revenue in three categories: upfront license revenue, time-based license revenue and services.
Upfront license revenue includes:
| • | Perpetual licenses. The Company recognizes the perpetual license fee in full if, upon shipment of the software, payment terms require the customer to pay at least 75% of the perpetual license fee within one year from shipment. |
| • | Upfront term licenses. The Company recognizes the term license fee in full if, upon shipment of the software, payment terms require the customer to pay at least 75% of the term license fee within one year from shipment. |
Time-based license revenue includes:
| • | Technology Subscription Licenses. The Company typically recognizes revenue from TSL license fees (which include bundled maintenance) ratably over the term of the license period. However, where extended payment terms (as discussed below) are offered under the license arrangement, the |
Company recognizes revenue from TSL license fees in an amount that is the lesser of the ratable portion of the entire fee or customer installments as they become due and payable. |
| • | Term Licenses with Extended Payment Terms. For term licenses where less than 75% of the term license fee is due within one year from shipment, the Company recognizes revenue as customer installments become due and payable. |
Services revenue includes:
| • | Maintenance Fees Associated with Perpetual and Term Licenses. The Company generally recognizes revenue from maintenance associated with perpetual and term licenses ratably over the maintenance term. |
| • | Consulting and Training Fees. The Company generally recognizes revenue from consulting and training services as services are performed. |
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 maintenance components of its perpetual and term license products and to consulting. Accordingly, assuming all other revenue recognition criteria are met, revenue from perpetual and term licenses is recognized upon delivery using the residual method in accordance with SOP 98-9 and revenue from maintenance is recognized ratably over the maintenance term.
Customers occasionally request the right to convert their existing TSLs to perpetual licenses. Customers pay an incremental fee to convert the TSL to a perpetual license, which the Company recognizes upon contract signing, in accordance with AICPA Technical Practice Aid (TPA) 5100.74, assuming all other revenue recognition criteria have been met. In some situations, the contract converting the TSL to a perpetual term license is modified to such an extent that a new arrangement exists. The changes to the contract may include increases or decreases in the total technology under license, changes in payment terms, changes in license terms and other pertinent factors. In these situations, the Company accounts for all of the arrangement fees as a new sale and recognizes revenue when all other revenue recognition criteria have been met. The Company has a policy that defines the specific circumstances under which such transactions are accounted for as a new perpetual license sale.
The Company makes significant judgments related to revenue recognition. Specifically, in connection with each transaction involving its products (referred to as an “arrangement” in the accounting literature), the Company must evaluate whether: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) its fee is fixed or determinable, and (iv) collectibility is probable. The Company applies these criteria as discussed below.
| • | Persuasive Evidence of an Arrangement Exists. The Company’s customary practice is to have a written contract, signed by both the customer and the Company, 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 delivers software to its customers physically or electronically. For physical deliveries, the standard transfer terms are typically FOB shipping point. For electronic deliveries, delivery occurs when the Company provides the customer access codes, or “keys,” that allow the customer to take immediate possession of the software on its hardware. |
| • | The Fee is Fixed or Determinable. The Company’s standard payment terms require 75% or more of the arrangement fee to be paid within one year. Where these terms apply, the Company regards the fee as fixed or determinable, and the Company recognizes revenue upon delivery (assuming other revenue recognition criteria are met). If the payment terms do not meet this standard, which we refer to as “extended payment terms,” we do not consider the fee to be fixed or determinable and generally recognize revenue when customer installments are due and payable. In the case of a TSL, we recognize revenue ratably even if the fee is fixed or determinable, due to application of other revenue accounting guidelines. |
| • | Collectibility is Probable. To recognize revenue, the Company must judge collectibility of the arrangement fees, which it does on a customer-by-customer basis pursuant to its credit review policy. The Company typically sells to customers with whom it has a history of successful collection. For a new customer, the Company evaluates the customer’s financial position and ability to pay and typically assigns a credit limit based on that review. The Company increases the credit limit only after it has established a successful collection history with the customer. If the Company determines at any time that collectibility is not probable based upon its credit review process or the customer’s payment history, the Company recognizes revenue on a cash-collected basis. |
Earnings Per Share. The Company computes basic earnings per share using the weighted-average number of common shares outstanding during the period. The Company computes diluted earnings per share using the weighted-average number of common shares and dilutive stock options outstanding during the period; the number of weighted-average dilutive stock options outstanding is computed using the treasury stock method. Due to the net loss incurred for fiscal 2002, the effect of employee stock options is anti-dilutive in that period.
The table below reconciles the weighted-average common shares used to calculate basic net income per share with the weighted-average common shares used to calculate diluted net income per share.
| Year Ended October 31, | ||||||
| 2003 | 2002 | 2001 | ||||
| (in thousands) | ||||||
Weighted-average common shares for basic net income (loss) per share | 151,251 | 133,616 | 121,202 | |||
Weighted-average dilutive stock options outstanding under the treasury stock method | 7,075 | — | 8,116 | |||
Weighted-average common shares for diluted net income (loss) per share | 158,326 | 133,616 | 129,318 | |||
The effect of dilutive employee stock options excludes approximately 12.0 million, 56.0 million and 7.6 million stock options for fiscal 2003, 2002 and 2001, respectively, which were anti-dilutive for net income per share calculations.
Stock-Based Compensation. As permitted by Statement of Financial Accounting Standards No. 123 (SFAS 123),Accounting for Stock-Based Compensation, the Company has elected to use the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 (APB 25),Accounting for Stock Issued to Employees, to measure compensation expense for stock-based awards to employees. Accordingly, the Company generally recognizes no compensation expense with respect to stock-based awards to employees as awards are issued with exercise prices equal to the fair value of the common stock on the grant date. 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 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, | |||||||||
| 2003 | 2002 | 2001 | |||||||
| Stock Option Plans | |||||||||
Expected life (in years) | 5.1 | 4.9 | 4.4 | ||||||
Risk-free interest rate | 2.9 | % | 4.0 | % | 4.8 | % | |||
Volatility | 57.8 | % | 59.0 | % | 62.0 | % | |||
| ESPP | |||||||||
Expected life (in years) | 1.25 | 1.25 | 1.25 | ||||||
Risk-free interest rate | 1.3 | % | 2.1 | % | 4.1 | % | |||
Volatility | 58.6 | % | 59.0 | % | 62.0 | % | |||
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 purchase period. The weighted-average estimated fair value of stock options issued during fiscal 2003, 2002 and 2001 was $13.06, $12.87 and $12.81 per share, respectively. The weighted-average estimated fair value of share purchase rights under the ESPP during fiscal 2003, 2002 and 2001 was $6.16, $7.49 and $6.16 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, | ||||||||||||
| 2003 | 2002 | 2001 | ||||||||||
| (in thousands, except per share amounts) | ||||||||||||
Net income (loss), as reported under APB 25 | $ | 149,724 | $ | (199,993 | ) | $ | 56,802 | |||||
Stock-based employee compensation included in net income (loss) | 4,996 | 1,522 | — | |||||||||
Stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects | (99,522 | ) | (85,974 | ) | (88,912 | ) | ||||||
Pro forma net income (loss) under SFAS 123 | $ | 55,198 | $ | (284,445 | ) | $ | (32,110 | ) | ||||
Earnings (loss) per share—basic | ||||||||||||
As reported under APB 25 | $ | 0.99 | $ | (1.50 | ) | $ | 0.47 | |||||
Pro forma under SFAS 123 | $ | 0.36 | $ | (2.13 | ) | $ | (0.26 | ) | ||||
Earnings (loss) per share—diluted | ||||||||||||
As reported under APB 25 | $ | 0.95 | $ | (1.50 | ) | $ | 0.44 | |||||
Pro forma under SFAS 123 | $ | 0.36 | $ | (2.13 | ) | $ | (0.26 | ) | ||||
Foreign Currency Contracts. The Company operates internationally and is exposed to potentially adverse movements in currency exchange rates. The Company enters into foreign currency forward contracts to reduce its exposure to foreign currency rate changes on non-functional currency denominated forecasted transactions and balance sheet positions. These foreign currency contracts are carried at fair value, have a duration of approximately 30 days and are denominated primarily in the Euro and the Japanese yen. As of October 31, 2003, 2002, and 2001, the Company had $143.1 million, $305.1 million and $72.2 million, respectively, of short-term foreign currency forward contracts outstanding. The contract value approximates fair value.
The components of the Company’s foreign currency forward contracts related to forecasted transactions are designated as cash flow hedges, with gains and losses recorded in stockholders’ equity and reclassified into earnings at the time the forecasted transactions occur. As of October 31, 2003, an unrealized gain of approximately $19.3 million is recorded in stockholders’ equity, net of tax, as a component of accumulated other comprehensive income. The maximum length of time over which the Company is hedging its exposure to the variability in future cash flows for forecasted transactions is approximately three years.
Hedging effectiveness is evaluated monthly using spot rates, with any gain or loss caused by hedging ineffectiveness reclassified to earnings as other income (expense). The premium/discount component of the forward contracts is amortized to other income (expense) and is not included in evaluating hedging effectiveness.
The earnings impact of gains and losses on foreign currency forward contracts, net of foreign currency remeasurement gains and losses, was immaterial for the fiscal years ended October 31, 2003, 2002, and 2001.
Effective May 4, 2003, the Company changed the functional reporting currency of its principal Irish subsidiary to the U.S. dollar from the Euro because an increasing percentage of its sales in Europe and Asia, and the resulting accounts receivable are denominated in U.S. dollars.
Reclassifications. Certain prior year amounts have been reclassified to conform to current year presentation.
Effect of New Accounting Standards. In May 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 150 (SFAS 150),Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS 150 establishes standards to classify and measure certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS 150 is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. The Company adopted SFAS 150 as of the beginning of its fourth quarter. The adoption of SFAS 150 did not have a significant impact on the Company’s financial position or results of operations.
In April 2003, the FASB issued Statements of Financial Accounting Standards No. 149 (SFAS 149),Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under FASB Statement of Financial Accounting Standards No. 133,Accounting for Derivative Instruments and Hedging Activities. SFAS 149 is generally effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of SFAS 149 did not have a significant impact on the Company’s financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),Consolidation of Variable Interest Entities. Variable interest entities are created for a single specified purpose, for example, to facilitate securitization, leasing, hedging, research and development, or other transactions or arrangements. This interpretation of Accounting Research Bulletin No. 51,Consolidated Financial Statements, defines a variable interest entity and provides guidelines on identifying and assessing an enterprise’s interests in a variable interest entity in order to determine whether to consolidate that entity. Generally, FIN 46 applies to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. For existing variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003, the provision of this interpretation will apply no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. The adoption of FIN 46 did not have a significant impact on the Company’s financial position or 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,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 adopted the disclosure provisions of SFAS 148 beginning in the first quarter of fiscal 2003.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 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 typically warrant our products to be free from defects in media and to substantially conform to material specifications for a period of 90 days. We also indemnify our customers from third party claims of intellectual property infringement relating to the use of our products. Historically, costs related to these guarantees have not been significant, and we are unable estimate the potential impact of these guarantees on our future results of operations.
In July 2001, the FASB issued Statements of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets. The Company adopted SFAS 142 on November 1, 2002 and ceased amortizing goodwill recorded for business combinations consummated prior to July 1, 2001. In addition, as of November 1, 2002, the Company assessed the useful lives and residual values of all acquired intangible assets recorded on the balance sheet and also tested goodwill for impairment per SFAS 142. In the Company’s impairment analysis, Synopsys determined it has one reporting unit. The Company completed the goodwill impairment review as of the beginning of fiscal 2003 and found no indicators of impairment. This impairment review was based on the fair value of the Company as determined by its market capitalization. All remaining and future acquired goodwill will be subject to an impairment test in the fourth quarter of each fiscal year. As of October 31, 2003, unamortized goodwill was $550.7 million, which, in accordance with SFAS 142, the Company will not amortize.
Note 3. Business Combinations and Divestitures
Purchase Combinations. During fiscal 2003 and 2002, the Company made a number of purchase acquisitions. 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.
Pro forma results of operations are presented only for certain material acquisitions since the effects of the remaining fiscal 2003 and 2002 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.
Fiscal 2003 Acquisitions
Numerical Technologies, Inc. (Numerical). On March 1, 2003, the Company completed its acquisition of Numerical.
Reasons for the Acquisition. In approving the merger, management considered a number of factors, including its opinion that combining Numerical’s subwavelength, lithography-enabling solutions with Synopsys’ leading integrated circuit (IC) design solutions would enable Synopsys to further reduce costs and manufacturing risk for its customers as they create smaller, faster and more power-efficient ICs. The foregoing discussion of the
information and factors considered by the Board of Directors (the Board) is not intended to be exhaustive but includes the material factors considered by the Board.
Purchase Price. The Company paid Numerical common stock holders $7.00 in cash in exchange for each share of Numerical common stock owned as of the merger date, or approximately $240.2 million. The total purchase consideration consisted of:
| (in thousands) | |||
Cash paid for Numerical common stock | $ | 240,214 | |
Acquisition-related costs | 10,044 | ||
Fair value of options to purchase Synopsys common stock issued, less $5.2 million representing the portion of the intrinsic value of Numerical’s unvested options applicable to the remaining vesting period | 16,500 | ||
| $ | 266,758 | ||
Acquisition-related costs of $10.0 million consisted primarily of legal and accounting fees of $2.7 million and other directly related charges including $5.2 million in restructuring costs and $1.6 million in directors and officers liability insurance costs incurred to cover Numerical’s former officers and Board of Directors as required by the merger agreement. As of October 31, 2003, the Company had paid $8.3 million of the acquisition-related costs and $0.4 million of the original accrual was reversed. Of the balance remaining of $1.3 million as of October 31, 2003, $0.9 million represents facilities closure costs.
The following table summarizes the allocation of the purchase price for Numerical and the estimated amortization period for the acquired intangibles:
| (in thousands) | |||
Cash, cash equivalents and short-term investments | $ | 79,461 | |
Accounts receivable | 4,904 | ||
Prepaid expenses and other current assets | 3,368 | ||
Identifiable intangible assets: | |||
Core/developed technology(1) | 22,580 | ||
Customer relationships(2) | 20,120 | ||
Customer backlog(1) | 4,870 | ||
Goodwill | 140,102 | ||
Other assets | 5,584 | ||
Total assets acquired | 280,989 | ||
Accounts payable and accrued liabilities | 8,163 | ||
Deferred revenue | 3,627 | ||
Deferred tax liabilities | 20,691 | ||
Total liabilities assumed | 32,481 | ||
Net assets acquired | 248,508 | ||
In-process research and development | 18,250 | ||
Purchase price | $ | 266,758 | |
| (1) | Estimated useful life is 3 years. |
| (2) | Estimated useful life is 6 years. |
Goodwill and Intangible Assets. Goodwill, representing the excess of the purchase consideration over the fair value of net tangible and identifiable intangible assets acquired in the Numerical merger, will not be amortized and is not deductible for tax purposes. Except for amortization of the core/developed technology and backlog (which are included in cost of revenue in the statement of operations for fiscal 2003), the Company includes amortization of the intangible assets in operating expenses in its statement of operations.
Unaudited Pro Forma Results of Operations. The following table presents pro forma results of operations and gives effect to the Numerical acquisition as if the acquisition was consummated at the beginning of fiscal 2002. The Company has not included the effect of its other fiscal 2003 acquisitions as if the acquisitions were consummated at the beginning of fiscal 2002 because the effects of these acquisitions were not material. The Company’s results of operations may have been different than those shown below if the Company had actually acquired Numerical at the beginning of fiscal 2002. Pro forma results below do not necessarily indicate future operating results.
| Year Ended October 31, | |||||||
| 2003 | 2002 | ||||||
(in thousands, except per share amounts) | |||||||
Revenue(1) | $ | 1,193,544 | $ | 956,280 | |||
Net income(2) | $ | 138,862 | $ | (266,132 | ) | ||
Basic earnings per share | $ | 0.92 | $ | (1.99 | ) | ||
Weighted-average common shares outstanding(3) | 151,251 | 133,616 | |||||
Diluted earnings per share | $ | 0.88 | $ | (1.99 | ) | ||
Weighted-average common shares and dilutive stock options outstanding(3) | 158,326 | 133,616 | |||||
| (1) | Fiscal 2002 pro forma results of operations and fiscal 2003 pro forma results of operations for the period from November 1, 2002 through February 28, 2003 include Numerical’s reported revenue in the periods Numerical recognized such revenues. However, the purchase method of accounting requires Synopsys to reduce Numerical’s reported deferred revenue to an amount equal to the fair value of the legal liability, resulting in lower revenue in periods following the merger than Numerical would have achieved as a separate company. Therefore, revenues from Numerical products for the period from March 1, 2003 to October 31, 2003 included in the pro forma results of operations reflect the lower amortization of deferred revenue stemming from this purchase accounting adjustment. |
| (2) | Pro forma net income for fiscal 2003 includes in-process research and development costs of $19.9 million from fiscal 2003 acquisitions. |
| (3) | The calculations of the weighted-average common shares outstanding and weighted-average common shares and dilutive stock options outstanding for fiscal 2002 includes the impact of the shares issued in the acquisition of Avant! as of the acquisition date as discussed below. |
Other Fiscal 2003 Acquisitions. During fiscal 2003, the Company completed two additional acquisitions for aggregate consideration consisting of $8.8 million in upfront payments and acquisition expenses and contingent consideration totaling $3.5 million based on the achievement of certain milestones as outlined in the merger agreements. In-process research and development expenses associated with these acquisitions totaled $1.6 million for fiscal 2003. These acquisitions are not considered material to the Company’s balance sheet and results of operations.
Fiscal 2002 Acquisitions
Avant! Corporation. On June 6, 2002, the Company completed its acquisition of Avant!.
Reasons For the Acquisition. The Board unanimously approved the merger with Avant! at its December 1, 2001 meeting. In approving the merger agreement, the Board consulted with legal and financial advisors as well as with management and considered a number of factors. These factors included the fact that the merger was expected to enable Synopsys to offer its customers a complete end-to-end solution for system-on-chip design that combines 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 expected 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 would gain new opportunities to market its existing products. The foregoing discussion of the information and factors considered by the Board is not intended to be exhaustive but includes the material factors the Board considered.
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 was 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 | 119,471 | ||
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 | ||
| $ | 977,892 | ||
Acquisition-related costs consist of the following:
| (in thousands) | Balance June 6, 2002 | Additions | Payments | Balance October 31, 2002 | Payments | Reversals | Balance October 31, 2003 | ||||||||||||||||||
Facilities closure costs | $ | 62,638 | $ | — | $ | (5,377 | ) | $ | 57,261 | $ | (25,119 | ) | $ | (31,578 | )(2) | $ | 564 | ||||||||
Employee severance costs | 50,367 | 647 | (1) | (50,724 | ) | 290 | (290 | ) | — | — | |||||||||||||||
Other acquisition-related costs | 37,342 | 55 | (33,557 | ) | 3,840 | (1,580 | ) | — | 2,260 | ||||||||||||||||
Total | $ | 150,347 | $ | 702 | $ | (89,658 | ) | $ | 61,391 | $ | (26,989 | ) | $ | (31,578 | ) | $ | 2,824 | ||||||||
| (1) | During fiscal 2002, additions were made to increase the total acquisition related costs including an increase to employee severance costs of $0.6 million for actual amounts paid to such employees. |
| (2) | Synopsys settled claims of one of the two landlords of these buildings during the first quarter of fiscal 2003 for $7.4 million, and settled the claims of the other landlord during the second quarter of fiscal 2003 for $15.0 million. Resolving these contingencies reduced the amount allocated to liabilities and goodwill by $31.6 million. |
As of October 31, 2003, $116.6 million of costs have been paid. The remaining acquisition-related costs of $2.3 million consist primarily of liquidation fees.
Facilities closure costs at the closing date include $54.2 million related to Avant!’s corporate headquarters. After the merger, Synopsys consolidated the functions performed in the buildings into its corporate facilities. The lessors brought a claim against Avant! for the future amounts payable under the lease agreements. The amount accrued at the closing date was equal to the future amounts payable under the related lease agreements, without taking into consideration in the accrual any defenses the Company may have had to the claim. Synopsys settled the claims of one of the two landlords of these buildings during the first quarter of fiscal 2003 for $7.4 million, and settled the claims of the other landlord during the second quarter of fiscal 2003 for $15.0 million. Resolving these contingencies reduced the amount allocated to liabilities and goodwill by $31.6 million. The $0.6 million remaining facilities closure cost is the present value of the future obligations under certain of Avant!’s other lease agreements which the Company has or intends to terminate under an approved facilities exit plan, plus additional costs the Company expects to incur directly related to vacating such facilities.
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.
Other 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.
The following table summarizes the allocation of the purchase price for Avant! and the estimated amortization period for the acquired intangibles:
| (in thousands) | |||
Cash, cash equivalents and short-term investments | $ | 241,313 | |
Accounts receivable | 61,635 | ||
Prepaid expenses and other current assets | 17,067 | ||
Identifiable intangible assets: | |||
Core/developed technology(1) | 189,800 | ||
Contract rights intangible(1) | 51,700 | ||
Customer installed base/relationship(2) | 102,900 | ||
Trademarks and tradenames(1) | 17,700 | ||
Covenants not to compete(3) | 9,100 | ||
Customer backlog(1) | 2,100 | ||
Goodwill | 342,810 | ||
Other assets | 5,788 | ||
Total assets acquired | 1,041,913 | ||
Accounts payable and accrued liabilities | 22,516 | ||
Deferred revenue | 30,080 | ||
Income taxes payable | 89,274 | ||
Other liabilities | 4,651 | ||
Total liabilities assumed | 146,521 | ||
Net assets acquired | 895,392 | ||
In-process research and development | 82,500 | ||
Purchase price | $ | 977,892 | |
| (1) | Estimated useful life is 3 years. |
| (2) | Estimated useful life is 6 years. |
| (3) | Estimated useful life ranges from 2 to 4 years depending on life of the related agreement. |
The initial allocation of the purchase price included certain assets and liabilities recorded using preliminary estimates of fair value. During fiscal 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 fiscal 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. (Artisan) 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 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 net tangible and identifiable intangible assets acquired in the merger, will not be amortized, consistent with the guidance in SFAS 142 (see Note 2). The goodwill associated with the Avant! merger is not deductible for tax purposes.
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 maintenance 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 maintenance 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 fiscal 2003 and 2002. Amortization of core/developed technology and contract rights intangible is included in cost of revenue.
Cadence Design Systems, Inc. (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.
The Company paid a total premium of $335.8 million for the policy, of which $240.8 million was contingently refundable. The balance of the premium paid to the insurer of $95.0 million was included in integration expense for fiscal 2002. Under the policy, the insurer was obligated to pay covered loss up to a limit of liability equaling (i) $500.0 million plus (ii) interest accruing at the fixed rate of 2%, compounded semi-annually, on $250.0 million (the interest component), as reduced by previous covered losses. Interest earned on $250.0 million was included in other income, net in the post-merger consolidated statement of operations for fiscal 2002.
On November 13, 2002, Cadence and Synopsys reached a settlement of the litigation. Under the terms of the agreement, Synopsys paid Cadence $265.0 million in two installments—$20.0 million on November 22, 2002 and $245.0 million on December 16, 2002. In addition, Cadence and Synopsys have entered into reciprocal license 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 equals the contingently refundable portion of the insurance premium plus interest accrued on the refundable portion. This expense is included in other income (expense), net on the consolidated statement of operations in fiscal 2002.
Co-Design Automation, Inc. (Co-Design). On September 6, 2002, the Company completed its acquisition of Co-Design.
Reasons for the Acquisition. In approving the merger agreement, management considered a number of factors, including its belief that (i) the acquisition would 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 was expected to improve the performance of Synopsys’ products; and (iii) the acquisition would give Synopsys access to Co-Design’s highly-skilled employees who would 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 consisted of the following:
| (in thousands) | |||
Cash paid for Co-Design common stock | $ | 29,783 | |
Notes payable | 2,897 | ||
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 | ||
| $ | 34,311 | ||
The acquisition-related costs of approximately $1.0 million consisted primarily of legal and accounting fees. As of October 31, 2003, substantially all of these acquisition-related costs have been paid.
The following table summarizes the allocation of the purchase price for Co-Design and the estimated amortization period for the acquired intangibles:
| (in thousands) | |||
Current assets | $ | 3,532 | |
Identifiable intangible assets: | |||
Core/developed technology(1) | 6,200 | ||
Goodwill | 27,659 | ||
Other assets | 1,220 | ||
Total assets acquired | 38,611 | ||
Escrow payable | 3,443 | ||
Other current liabilities | 857 | ||
Total liabilities assumed | 4,300 | ||
Net assets acquired | $ | 34,311 | |
| (1) | Estimated useful life is 10 years. |
Notes of $4.8 million are payable to former Co-Design shareholders, of which $1.9 million was included in integration expense in the statement of operations for services performed in fiscal 2002 and the remainder was an element of the purchase price. An aggregate of $4.1 million of these notes will be paid in September 2007. The remaining notes are subject to prepayment in September 2004 if certain milestones are met.
inSilicon Corporation (inSilicon). On September 20, 2002, the Company completed its acquisition of inSilicon.
Reasons for the Acquisition. In approving the merger agreement, management considered a number of factors, including (i) the complementary nature of inSilicon’s portfolio of intellectual property blocks and Synopsys’ own portfolio; (ii) the fact that inSilicon had established a per-use license model for its IP products, which was expected to accelerate Synopsys’ adoption of a per-use model for its new and development-stage IP; (iii) inSilicon’s relationships with chip design teams; (iv) inSilicon’s positive reputation as a vendor of high-quality IP; and (v) 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.
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 consisted 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 consisted primarily of legal and accounting fees of $1.8 million, other directly related charges including contract termination costs of $3.3 million and restructuring costs of approximately $0.8 million. As of October 31, 2003, substantially all of the acquisition related costs have been paid.
The following table summarizes the allocation of the purchase price for inSilicon and the estimated amortization period for the acquired intangibles:
| (in thousands) | |||
Cash, cash equivalents and short-term investments | $ | 24,908 | |
Accounts receivable | 2,428 | ||
Prepaid expenses and other current assets | 7,463 | ||
Identifiable intangible assets: | |||
Core/developed technology(1) | 15,100 | ||
Customer backlog(1) | 1,200 | ||
Goodwill | 22,160 | ||
Other assets | 1,480 | ||
Total assets acquired | 74,739 | ||
Accounts payable and accrued liabilities | 2,021 | ||
Deferred revenue | 1,137 | ||
Income taxes payable | 463 | ||
Other liabilities | 1,736 | ||
Total liabilities assumed | 5,357 | ||
Net assets acquired | 69,382 | ||
In-process research and development | 5,200 | ||
Purchase price | $ | 74,582 | |
| (1) | Estimated useful life is 3 years. |
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 (see Note 2). The goodwill associated with the inSilicon acquisition is not deductible for tax purposes.
The amortization of intangible assets is included in cost of revenue in the statement of operations for fiscal 2003 and 2002. 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.
Unaudited Pro Forma Results of Operations. The following table presents pro forma results of operations and gives effect to the Avant! and inSilicon acquisitions as if the acquisitions were consummated at the beginning of fiscal 2002. The Company has not included the effect of its other fiscal 2002 acquisitions because the effects of these acquisitions were not material. The Company’s results of operations may have been different than those shown below if the Company had actually acquired Avant! and inSilicon at the beginning of fiscal 2002. Pro forma results below do not necessarily indicate future operating results.
| Year Ended October 31, | ||||||||
| 2002 | 2001 | |||||||
(in thousands, except per share amounts) | ||||||||
Revenue(1) | $ | 1,186,916 | $ | 1,100,249 | ||||
Net income(2) | $ | (186,415 | ) | $ | (82,487 | ) | ||
Basic earnings per share | $ | (1.24 | ) | $ | (0.55 | ) | ||
Weighted-average common shares outstanding | 150,622 | 150,262 | ||||||
Diluted earnings per share | $ | (1.24 | ) | $ | (0.55 | ) | ||
Weighted-average common shares and dilutive stock options outstanding | 150,622 | 150,262 | ||||||
| (1) | Fiscal 2002 pro forma results of operations for the period from November 1, 2002 to the date of acquisition include Avant! and inSilicon’s reported revenue in the periods Avant! and inSilicon recognized such revenues. However, the purchase method of accounting requires Synopsys to reduce Avant! and inSilicon’s reported deferred revenue to an amount equal to the fair value of the legal liability, resulting in lower revenue in periods following the merger than Avant! and inSilicon would have achieved as separate companies. Therefore, revenues from Avant! and inSilicon products for the period from the date of acquisition to October 31, 2002 included in the pro forma results of operations reflect the lower amortization of deferred revenue stemming from this purchase accounting adjustment. |
| (2) | Net income for fiscal 2002 includes non-recurring acquisition costs incurred by Synopsys 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. Net income for fiscal 2002 and 2001 also includes non-recurring costs incurred by Avant! of $21.0 and $268.1 million, respectively, for certain litigation settlement costs paid by Avant! prior to the merger. |
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,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.
Fiscal 2001 Divestitures
Artisan Components, Inc. On January 4, 2001, the Company sold the assets of its silicon libraries business to Artisan for a total sales price of $15.5 million, including common stock with a fair value on the date of sale of $11.4 million and cash of $4.1 million. The net book value of the assets sold was $1.4 million. 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 fiscal 2001. Direct revenue for the silicon libraries business was $0.2 million in fiscal 2001.
Note 4. Goodwill and Other Intangible Assets, Net
Goodwill for the years ended October 31, 2002 and 2003 consisted of the following:
| (in thousands) | ||||
Balance at October 31, 2001 | $ | 35,077 | ||
Additions | 419,463 | |||
Amortization | (16,201 | ) | ||
Impairments | (3,693 | ) | ||
Other adjustments | (92 | ) | ||
Balance at October 31, 2002 | 434,554 | |||
Additions(1) | 143,361 | |||
Amortization | — | |||
Impairments | — | |||
Other adjustments(2) | (27,183 | ) | ||
Balance at October 31, 2003 | $ | 550,732 | ||
| (1) | Additions include goodwill and intangible assets acquired as part of the Numerical acquisition, assets acquired as part of other acquisitions made during the fiscal year, contract termination costs and amounts related to foreign currency fluctuations for goodwill which is not denominated in U.S. dollars. |
| (2) | Reversals primarily include $31.6 million related to Avant! facilities discussed above underFiscal 2002 Acquisitions above, offset by the reduction of $4.3 million in Avant! unbilled receivables. These receivables relate to long-term library business service contracts under which Avant! had not yet performed services and, as such, represent executory contracts rather than unbilled receivables. The amount assigned to the associated intangible asset was not material. |
Intangible assets as of October 31, 2002 consisted of the following:
| Gross Assets | Accumulated Amortization | Net Assets | |||||||
| (in thousands) | |||||||||
Contract rights intangible | $ | 51,700 | $ | 7,181 | $ | 44,519 | |||
Core/developed technology | 215,462 | 28,696 | 186,766 | ||||||
Covenant not to compete | 9,100 | 948 | 8,152 | ||||||
Customer backlog | 3,300 | 33 | 3,267 | ||||||
Customer relationship | 102,890 | 7,108 | 95,782 | ||||||
Trademark and tradename | 17,700 | 2,458 | 15,242 | ||||||
Total intangible assets(1) | $ | 400,152 | $ | 46,424 | $ | 353,728 | |||
| (1) | Total intangible assets do not include capitalized research and development, net of $1.6 million as of October 31, 2002. |
Intangible assets as of October 31, 2003 consisted of the following:
| Gross Assets | Accumulated Amortization | Net Assets | |||||||
| (in thousands) | |||||||||
Contract rights intangible | $ | 51,700 | $ | 24,414 | $ | 27,286 | |||
Core/developed technology | 241,457 | 104,335 | 137,122 | ||||||
Covenant not to compete | 9,554 | 3,330 | 6,224 | ||||||
Customer backlog | 8,270 | 2,248 | 6,022 | ||||||
Customer relationship | 123,570 | 26,857 | 96,713 | ||||||
Trademark and tradename | 18,007 | 8,418 | 9,589 | ||||||
Total intangible assets(1) | $ | 452,558 | $ | 169,602 | $ | 282,956 | |||
| (1) | Total intangible assets do not include capitalized research and development, net of $2.6 million as of October 31, 2003. |
Total amortization expense related to other intangible assets is set forth in the table below:
| Year Ended October 31, | |||||||||
| 2003 | 2002 | 2001 | |||||||
| (in thousands) | |||||||||
Contract rights intangible | $ | 17,233 | $ | 7,181 | $ | — | |||
Core/developed technology | 75,639 | 27,124 | — | ||||||
Covenant not to compete | 2,382 | 948 | — | ||||||
Customer backlog | 2,215 | 33 | — | ||||||
Customer relationship | 19,749 | 7,118 | — | ||||||
Trademark and tradename | 5,960 | 2,458 | — | ||||||
Total intangible assets(1) | $ | 123,178 | $ | 44,862 | $ | — | |||
| (1) | Total amortization of intangible assets does not include amortization of capitalized research and development of $1.6 million, $1.1 million and $1.0 million in fiscal 2003, 2002 and 2001, respectively. |
The following table presents the estimated future amortization of other intangible assets:
| Fiscal Year | (in thousands) | ||
2004 | $ | 126,674 | |
2005 | 90,814 | ||
2006 | 26,154 | ||
2007 | 21,698 | ||
2008 | 14,347 | ||
Thereafter | 3,269 | ||
Total estimated future amortization of other intangible assets | $ | 282,956 | |
The following table reflects adjusted net income (loss) per share, excluding amortization of goodwill, for fiscal 2002 and 2001 as if the Company had adopted SFAS 142 as of July 1, 2001. The Company’s actual results of operations are shown for fiscal 2003.
| Year Ended October 31, | ||||||||||
| 2003 | 2002 | 2001 | ||||||||
(in thousands, except per share amounts) | ||||||||||
Net income (loss) | $ | 149,724 | $ | (199,993 | ) | $ | 56,802 | |||
Add: Amortization of goodwill | — | 16,201 | 17,012 | |||||||
Adjusted net income (loss) | $ | 149,724 | $ | (183,792 | ) | $ | 73,814 | |||
Basic earnings (loss) per share | $ | 0.99 | $ | (1.38 | ) | $ | 0.61 | |||
Weighted-average common shares outstanding | 151,251 | 133,616 | 121,202 | |||||||
Diluted earnings (loss) per share | $ | 0.95 | $ | (1.38 | ) | $ | 0.57 | |||
Weighted-average common shares and dilutive stock options outstanding | 158,326 | 133,616 | 129,318 | |||||||
Note 5. 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:
| Cost | Net Unrealized Gains | Net Unrealized Losses | Estimated Fair Value | |||||||||||
Balance at October 31, 2003 | (in thousands) | |||||||||||||
Classified as current assets: | ||||||||||||||
Cash | $ | 218,382 | $ | — | $ | — | $ | 218,382 | ||||||
Money market funds | 305,926 | — | — | 305,926 | ||||||||||
Tax-exempt municipal obligations | 166,362 | 587 | — | 166,949 | ||||||||||
Municipal auction rate preferred stock | 7,100 | — | — | 7,100 | ||||||||||
| 697,770 | 587 | — | 698,357 | |||||||||||
Classified as non-current assets: | ||||||||||||||
Equity securities | 8,938 | — | (343 | ) | 8,595 | |||||||||
Total | $ | 706,708 | $ | 587 | $ | (343 | ) | $ | 706,952 | |||||
Balance at October 31, 2002 | ||||||||||||||
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 | ||||||
As of October 31, 2003, the stated maturities of the Company’s current investments are $36.6 million within one year, $84.0 million within one to five years, $13.8 million within five to ten years and $39.6 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. The securities of publicly traded companies are generally classified as available-for-sale securities accounted for under Statement of Financial Accounting Standards No. 115 (SFAS 115),Accounting for Certain Investments in Debt and Equity Securities, 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 basis of securities sold is based on the specific identification method. These securities of privately held companies are reported at the lower of cost or fair value.
During the years ended October 31, 2003, 2002 and 2001 the Company determined that certain strategic investments, with an aggregate value of $7.1 million, $16.3 million and $9.4 million, respectively, were impaired and that the impairment was permanent. Accordingly, the Company recorded a charge of approximately $4.5 million, $11.3 million and $5.8 million during fiscal 2003, 2002 and 2001, respectively, to write down the carrying value of the investments.
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 the hedge and on an on-going basis. The difference between the contract price and the forward price, which is generally not material, is reflected in other income.
The Company entered into forward sale contracts in fiscal 2001 and 2000 with a major financial institution for the sale of certain of the Company’s strategic investments. During fiscal 2001, 2002 and 2003, 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, 2003, there are no forward contracts outstanding.
Debt. As of October 31, 2003, the Company’s debt totaled $7.2 million consisting primarily of $5.1 million for notes payable related to acquisitions payable through 2007 and $1.5 million to secure bonds related to certain property taxes. As of October 31, 2002, the Company’s debt consisted of $0.1 million for equipment leases, $5.1 million for notes payable related to acquisitions and $1.4 million to secure bonds related to certain property taxes.
Note 6. Commitments and Contingencies
The Company leases its domestic and foreign facilities and certain office equipment under operating leases. Rent expense was $35.1 million, $33.7 million and $30.0 million in fiscal 2003, 2002 and 2001, respectively. In October 2003, the Company entered into a lease agreement for a portion of its office space by which it leases a building owned by it in Sunnyvale, California to a third party through February 2009. The Company will receive monthly sublease payments of $150,000 beginning March 2004.
Future minimum lease payments on all facility operating leases, net of sublease income, as of October 31, 2003 are as follows:
| Minimum Lease Payments (1) | Lease Income | Net | |||||||
| Fiscal Year | (in thousands) | ||||||||
2004 | $ | 38,470 | $ | 1,200 | $ | 37,270 | |||
2005 | 33,226 | 1,838 | 31,388 | ||||||
2006 | 31,662 | 1,896 | 29,766 | ||||||
2007 | 26,706 | 1,954 | 24,752 | ||||||
2008 | 21,732 | 2,011 | 19,721 | ||||||
Thereafter | 115,031 | 677 | 114,354 | ||||||
Total minimum payments required | $ | 266,827 | $ | 9,576 | $ | 257,251 | |||
| (1) | Minimum lease payments exclude leases related to Avant! and Numerical facilities which the Company intends to terminate under its approved facilities exit plan as these payments are included in the acquisition-related costs for the Avant! and Numerical acquisitions (see Note 3). |
Note 7. Stockholders’ Equity
Stock Repurchase Programs. In July 2001, the Company’s Board of Directors authorized a stock repurchase program 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. The Company intends to use all common shares repurchased for ongoing stock issuances such as existing employee stock option plans, existing stock purchase plans and acquisitions. The July 2001 stock repurchase program expired on October 31, 2002. In December 2002, the Company’s Board of Directors renewed the stock repurchase program originally approved in July 2001 (see note 12). During fiscal 2003, 2002 and 2001, the Company purchased approximately 9.4 million shares at an average price of $27.72 per share, approximately 7.8 million shares at an average price of $22.10 per share, and approximately 13.2 million shares at an average price of $25.00 per share, 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 Employee Stock Purchase Plan and International Employee Stock Purchase Plan (collectively, the ESPP) an aggregate of 17,700,000 shares have been authorized for issuance as of October 31, 2003. 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 2003, 2002, and 2001 shares totaling 1,536,574, 1,255,882 and 1,134,508, respectively, were issued under the plan at average per share prices of $17.35, $16.93 and $16.60, respectively. As of October 31, 2003, 7,833,992 shares of common stock were reserved for future issuance under the plan.
Stock Option Plans. Under the Company’s 1992 Stock Option Plan (the 1992 Plan), 38,951,016 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 granted under the 1992 Plan generally vest over a period of four years and expire ten years from the date of grant. As of October 31, 2003, 9,003,784 stock options remain outstanding and 7,479,776 shares of common stock are reserved for future grants under this plan.
Under the Company’s 1998 Non-Statutory Stock Option Plan (the 1998 Plan), 53,247,068 shares of common stock have been authorized for issuance. Pursuant to the 1998 Plan, the Board of Directors may grant non-qualified stock options to employees, excluding executive officers. Exercisability, option price and other terms are determined by the Board of Directors, but the option price shall not be less than 100% of the fair market value of those shares on the grant date. Stock options granted under the 1998 Plan generally vest over a period of four years and expire ten years from the date of grant. As of October 31, 2003, 28,161,720 stock options remain outstanding and 8,179,958 shares of common stock were reserved for future grants under this plan.
Under the Company’s 1994 Non-Employee Directors Stock Option Plan (the Directors Plan), 1,800,000 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, upon reelection and for annual service on Board committees. The option price shall not be less than 100% of the fair market value of those shares on the grant date. Under the Directors Plan, as originally adopted, new directors receive an option for 40,000 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 20,000 shares and an additional option for 10,000 shares for each Board committee membership, up to a maximum of two committee service grants per year. In August 2003, the Board amended the Directors Plan to reduce the size of the initial and committee grants to 30,000 and 5,000 shares, respectively. The annual and committee service option grants vest in full on the date immediately prior to the date of the annual meeting following their grant. In the case of directors appointed to the Board between annual meetings, the annual and any committee grants are prorated based upon the amount of time since the last annual meeting. As of October 31, 2003, 1,168,492 stock options remain outstanding and 110,346 shares of common stock were reserved for future grants under this plan.
The Company has assumed certain option plans in connection with business combinations. Generally, the options granted under these plans have terms similar to the Company’s options. The exercise prices of such options have been adjusted to reflect the relative exchange ratios. The Company does not intend to make future grants out of these option plans.
Additional information concerning stock option activity under all plans is as follows:
| Options Outstanding | Weighted- Average Exercise Price | |||||
| (in thousands) | ||||||
Outstanding at October 31, 2000 | 49,490 | $ | 18.70 | |||
Granted | 11,934 | $ | 24.12 | |||
Exercised | (5,210 | ) | $ | 16.57 | ||
Canceled | (4,374 | ) | $ | 19.90 | ||
Outstanding at October 31, 2001 | 51,840 | $ | 20.05 | |||
Granted | 8,162 | $ | 23.94 | |||
Options assumed in acquisitions | 5,022 | $ | 18.58 | |||
Exercised | (5,702 | ) | $ | 17.22 | ||
Canceled | (3,362 | ) | $ | 21.47 | ||
Outstanding at October 31, 2002 | 55,960 | $ | 20.70 | |||
Granted | 4,518 | $ | 25.06 | |||
Options assumed in acquisitions | 2,115 | $ | 24.74 | |||
Exercised | (16,573 | ) | $ | 18.60 | ||
Canceled | (3,901 | ) | $ | 24.02 | ||
Outstanding at October 31, 2003 | 42,119 | $ | 21.89 | |||
Options exercisable at: | ||||||
October 31, 2001 | 20,810 | $ | 19.12 | |||
October 31, 2002 | 30,460 | $ | 20.25 | |||
October 31, 2003 | 25,924 | $ | 21.65 | |||
The following table summarizes information about stock options outstanding as of October 31, 2003:
| Options Outstanding | Exercisable Options | |||||||||||
Range of Exercise Prices | Number Outstanding | Weighted- Average Remaining Contractual Life (In Years) | Weighted- Average Exercise Price | Number Exercisable | Weighted- Average Exercise Price | |||||||
| (in thousands) | (in thousands) | |||||||||||
$0.001 — $14.09 | 2,104 | 5.40 | $ | 9.82 | 1,450 | $ | 10.25 | |||||
$14.24 — $16.13 | 6,468 | 6.67 | $ | 15.98 | 4,147 | $ | 15.98 | |||||
$16.19 — $18.72 | 5,401 | 6.34 | $ | 18.05 | 3,684 | $ | 18.00 | |||||
$18.78 — $20.00 | 4,797 | 6.48 | $ | 19.61 | 3,572 | $ | 19.55 | |||||
$20.01 — $22.03 | 4,819 | 7.59 | $ | 21.34 | 2,408 | $ | 21.30 | |||||
$22.06 — $24.80 | 5,506 | 7.32 | $ | 23.57 | 2,919 | $ | 23.57 | |||||
$24.92 — $27.20 | 5,110 | 7.94 | $ | 25.87 | 2,543 | $ | 25.96 | |||||
$27.40 — $30.00 | 4,634 | 6.87 | $ | 28.93 | 3,346 | $ | 28.89 | |||||
$30.03 — $97.92 | 3,277 | 7.98 | $ | 32.67 | 1,852 | $ | 32.87 | |||||
$130.44 — $130.44 | 3 | 6.61 | $ | 130.44 | 3 | $ | 130.44 | |||||
$0.001 — $130.44 | 42,119 | 7.01 | $ | 21.89 | 25,924 | $ | 21.65 | |||||
Note 8. 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 (loss) before provision for income taxes are as follows:
| Year Ended October 31, | |||||||||||
| 2003 | 2002 | 2001 | |||||||||
| (in thousands) | |||||||||||
United States | $ | 35,651 | $ | (309,072 | ) | $ | 93,187 | ||||
Foreign | 183,338 | 20,132 | (9,654 | ) | |||||||
| $ | 218,989 | $ | (288,940 | ) | $ | 83,533 | |||||
The components of the provision (benefit) for income taxes are as follows:
| Year Ended October 31, | ||||||||||||
| 2003 | 2002 | 2001 | ||||||||||
| (in thousands) | ||||||||||||
Current: | ||||||||||||
Federal | $ | (13,355 | ) | $ | 9,605 | $ | 80,783 | |||||
State | 117 | (1,319 | ) | 7,758 | ||||||||
Foreign | 47,978 | 11,474 | 6,782 | |||||||||
| 34,740 | 19,760 | 95,323 | ||||||||||
Deferred: | ||||||||||||
Federal | (9,228 | ) | (104,041 | ) | (66,049 | ) | ||||||
State | (1,312 | ) | (21,728 | ) | (13,076 | ) | ||||||
Foreign | (19,963 | ) | (2,398 | ) | (5,460 | ) | ||||||
| (30,503 | ) | (128,167 | ) | (84,585 | ) | |||||||
Charge equivalent to the federal and state tax benefit related to employee stock options | 65,028 | 19,460 | 15,993 | |||||||||
Provision (benefit) for income taxes | $ | 69,265 | $ | (88,947 | ) | $ | 26,731 | |||||
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, | ||||||||||||
| 2003 | 2002 | 2001 | ||||||||||
| (in thousands) | ||||||||||||
Statutory federal tax | $ | 76,646 | $ | (101,129 | ) | $ | 29,236 | |||||
State tax, net of federal effect | 6,909 | (8,105 | ) | 2,611 | ||||||||
Tax credits | (4,020 | ) | (10,745 | ) | (9,041 | ) | ||||||
Tax benefit from foreign sales corporation/extraterritorial income exclusion | — | (2,827 | ) | (2,780 | ) | |||||||
Tax exempt income | (1,265 | ) | (1,865 | ) | (3,289 | ) | ||||||
Foreign tax (less than) in excess of U.S. statutory tax | (16,479 | ) | 1,553 | 2,679 | ||||||||
Non-deductible merger and acquisition expenses | — | 4,367 | 5,601 | |||||||||
In-process research and development expenses | 6,948 | 30,695 | — | |||||||||
Other | 526 | (891 | ) | 1,714 | ||||||||
| $ | 69,265 | $ | (88,947 | ) | $ | 26,731 | ||||||
Net deferred tax assets of $241.0 million and $276.3 million were recorded as of October 31, 2003 and 2002, respectively. The net deferred tax asset of $241.0 million for fiscal 2003 includes the tax effects of the parent corporation, the Company, and newly acquired corporations, Numerical and InnoLogic Systems, Inc. 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, | ||||||
| 2003 | 2002 | |||||
| (in thousands) | ||||||
Net deferred tax assets: | ||||||
Deferred tax assets: | ||||||
Current: | ||||||
Net operating loss and tax credit carryovers | $ | 82,973 | $ | 7,370 | ||
Deferred revenue | 113,906 | 111,463 | ||||
Reserves and other expenses not currently deductible | 51,427 | 62,414 | ||||
Insurance premiums | — | 94,213 | ||||
Other | 267 | 10,491 | ||||
| 248,573 | 285,951 | |||||
Non-current: | ||||||
Net operating loss and tax credit carryovers | 63,940 | 52,529 | ||||
Deferred compensation | 8,853 | 9,247 | ||||
Depreciation and amortization | 9,193 | 32,335 | ||||
Other | — | 2,148 | ||||
| 81,986 | 96,259 | |||||
Total deferred tax assets | 330,559 | 382,210 | ||||
Deferred tax liabilities: | ||||||
Current: | ||||||
Unrealized foreign exchange losses | 148 | 3,084 | ||||
Non-current: | ||||||
Unrealized gain on securities investments | 96 | 5,256 | ||||
Net capitalized software development costs | 1,030 | 1,185 | ||||
Intangible assets | 86,114 | 96,358 | ||||
Other | 2,177 | — | ||||
| 89,417 | 102,799 | |||||
Total deferred tax liabilities | 89,565 | 105,883 | ||||
Net deferred tax assets | $ | 240,994 | $ | 276,327 | ||
As of October 31, 2003, 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 U.S. income tax return for fiscal 2001 is under examination. Management believes that adequate amounts have been provided for any adjustments that may ultimately result from this examination.
The Company has federal tax loss carryforwards of approximately $230.5 million as of October 31, 2003 which includes a federal loss carryforward of approximately $75.4 million resulting from tax deductions in 2003 related to employee stock options. The loss carryforwards will expire in 2010 through 2023. 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. Management believes that all net operating losses will be utilized, and a valuation allowance is not necessary. The tax benefit of federal net operating losses attributable to employee stock options is credited directly to stockholder’s equity.
The Company has federal foreign tax credits of $33.1 million. If not utilized, $28.2 million of the foreign tax credit carryforwards will expire in 2008, and $4.9 million of the foreign tax credit carryforwards will begin to
expire in 2005. The Company has federal and California research and development credits of $14.6 million and $17.5 million, respectively. If not utilized, the federal research and development credits will begin to expire in 2022. The Company has other state tax credits of $2.8 million that, if not utilized, will begin to expire in 2006.
The Company provides for U.S. income taxes on the earnings of its foreign subsidiaries unless they are considered permanently invested outside of the U.S. As of October 31, 2003, the cumulative amount of earnings upon which U.S. income taxes have not been provided is approximately $176.7 million. As of October 31, 2003, the unrecognized deferred tax liability for these earnings was approximately $49.1 million.
Note 9. Segment Disclosure
Statement of Financial Accounting Standards No. 131 (SFAS 131),Disclosures about Segments of an Enterprise and Related Information, requires disclosures of certain information regarding operating segments, products and services, geographic areas of operation and major customers. SFAS 131 reporting is based upon the “management approach”: how management organizes the Company’s operating segments for which separate financial information (i) is available and (ii) is evaluated regularly by the Chief Operating Decision Maker (CODM) in deciding how to allocate resources and in assessing performance. Synopsys’ CODMs are the Company’s Chief Executive Officer and Chief Operating Officer.
The Company provides software products and consulting services in the electronic design automation software industry. In making operating decisions, the CODMs primarily consider consolidated financial information, accompanied by disaggregated information about revenues by geographic region. The Company operates in a single segment. Revenue is defined as revenues from external customers.
Revenue and long-lived assets related to operations in the United States and other geographic areas were:
| Year Ended October 31, | |||||||||
| 2003 | 2002 | 2001 | |||||||
| (in thousands) | |||||||||
Revenue: | |||||||||
United States | $ | 668,771 | $ | 591,526 | $ | 426,527 | |||
Europe | 184,116 | 145,758 | 125,380 | ||||||
Japan | 217,111 | 95,413 | 69,850 | ||||||
Other | 106,985 | 73,837 | 58,593 | ||||||
Consolidated | $ | 1,176,983 | $ | 906,534 | $ | 680,350 | |||
| October 31, | ||||||
| 2003 | 2002 | |||||
| (in thousands) | ||||||
Long-lived assets: | ||||||
United States | $ | 160,588 | $ | 162,360 | ||
Other | 23,725 | 22,680 | ||||
Consolidated | $ | 184,313 | $ | 185,040 | ||
Geographic revenue data for multi-region, multi-product transactions reflect internal allocations and is therefore subject to certain assumptions and to the Company’s methodology. Beginning in fiscal 2003, geographic revenue reflects reconfiguration of licenses between different regions following the initial product shipment.
For management reporting purposes, we organize our products and services into five distinct groups: Galaxy Design Platform, Discovery Verification Platform, Intellectual Property (IP), New Ventures and Professional Services & Other. The following table summarizes the revenue attributable to these groups as a percentage of
total revenue for the last twelve quarters. We include revenue from companies or products we have acquired during the periods covered from the acquisition date through the end of the relevant periods. For presentation purposes, we allocate maintenance, which represented approximately 18% of our total revenue and approximately 84% of our total services revenue for fiscal 2003, to the products to which those support services relate. Further, with the adoption of our platform strategy in fiscal 2003, we redefined our product groups and have reclassified prior period revenues in accordance with this new grouping to provide a consistent presentation.
| Year Ended October 31, | |||||||||
| 2003 | 2002 | 2001 | |||||||
| (in thousands) | |||||||||
Revenue: | |||||||||
Galaxy Design Platform | $ | 765,688 | $ | 580,808 | $ | 381,250 | |||
Discovery Verification Platform | 245,914 | 189,317 | 151,321 | ||||||
IP | 74,096 | 59,976 | 64,163 | ||||||
New Ventures | 52,093 | 17,681 | — | ||||||
Professional Services & Other | 39,192 | 58,752 | 83,616 | ||||||
Consolidated | $ | 1,176,983 | $ | 906,534 | $ | 680,350 | |||
Beginning in fiscal 2003, product revenue reflects reconfiguration of licenses between different product categories following the initial product shipment.
No one customer accounted for more than ten percent of the Company’s consolidated revenue in the periods presented.
Note 10. 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 11. Related Party Transactions
Revenues derived from Intel Corporation and its subsidiaries in the aggregate accounted for approximately 9.5% and 7.9% of fiscal 2003 and 2002 revenues, respectively. Andy D. Bryant, Intel Corporation’s Executive Vice President and Chief Financial and Enterprise Services Officer, also serves on the Company’s Board of Directors. Management believes the transactions between the two parties were carried out on an arm’s length basis.
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, 2003, the Company owned approximately 10% of Davan Tech, and the investment is accounted for under the cost basis. During fiscal 2003 and the period from June 6, 2002 through October 31, 2002, the Company recognized revenues totaling $3.9 million and $1.3 million, respectively, from Davan Tech. Accounts receivable included $0.9 million and $3.7 million of receivable from Davan Tech as of October 31,
2003 and 2002, respectively. In December 2003, the Company terminated its distribution agreement with Davan Tech.
The Company maintains a System-on-a-Chip Venture Fund (the Fund) authorized by the Company’s Board which invests in companies that will facilitate building SoCs. The fund is administered by an investment advisory board consisting of senior Company officers, including the Company’s Chief Executive Officer and Chief Operating Officer, and Dr. A. Richard Newton, a member of the Board. The Fund has invested $800,000 in a private company that develops SoC test systems. The Chairman of the Company’s Audit Committee, Deborah A. Coleman, is also the Chairman of the Board for such company. Ms. Coleman did not participate in Fund’s investment decision.
During fiscal 2003 and 2002, Dr. A. Richard Newton, a member of Synopsys’ Board of Directors, provided consulting services to Synopsys and was paid $180,000. Under Synopsys’ agreement with Dr. Newton, Dr. Newton provides advice, at Synopsys’ request, concerning long-term technology strategy and industry development issues as well as assistance in identifying opportunities for partnerships with academia.
Note 12. Subsequent Event
In December 2003, the Board renewed the Company’s stock repurchase program and replenished the amount available for purchases up to $500 million, not including purchases made to date under the program.
Note 13. Selected Quarterly Data(Unaudited)
| Quarter Ended | ||||||||||||||
| January 31, | April 30, | July 31, | October 31, | |||||||||||
| (in thousands, except per share data) | ||||||||||||||
2003: | ||||||||||||||
Revenue | $ | 268,136 | $ | 292,028 | $ | 300,366 | $ | 316,453 | ||||||
Gross margin | 208,783 | 232,652 | 242,208 | 253,023 | ||||||||||
Income before income taxes | 48,946 | 38,926 | 68,026 | 63,091 | ||||||||||
Net income | 34,385 | 22,289 | 48,475 | 44,575 | ||||||||||
Earnings per share | ||||||||||||||
Basic | $ | 0.23 | $ | 0.15 | $ | 0.32 | $ | 0.29 | ||||||
Diluted | $ | 0.22 | $ | 0.15 | $ | 0.30 | $ | 0.27 | ||||||
Market stock price range(1): | ||||||||||||||
High | $ | 26.43 | $ | 25.00 | $ | 32.96 | $ | 34.47 | ||||||
Low | $ | 19.24 | $ | 18.25 | $ | 25.00 | $ | 27.07 | ||||||
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 | $ | 0.12 | $ | 0.17 | $ | (0.97 | ) | $ | (0.65 | ) | ||||
Diluted | $ | 0.11 | $ | 0.16 | $ | (0.97 | ) | $ | (0.65 | ) | ||||
Market stock price range(1): | ||||||||||||||
High | $ | 29.85 | $ | 27.61 | $ | 27.65 | $ | 23.63 | ||||||
Low | $ | 24.73 | $ | 20.86 | $ | 20.12 | $ | 16.32 | ||||||
| (1) | The Company’s common stock is traded on the Nasdaq National 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, 2003, there were approximately 588 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 Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A.Controls and Procedures
| (a) | Evaluation of Disclosure Controls and Procedures. As of October 31, 2003 (the Evaluation Date), Synopsys carried out an evaluation under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Synopsys’ disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable, not absolute, assurance of achieving their control objectives. Subject to these limitations, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required. |
| (b) | Changes in Internal Controls. There were no changes in Synopsys’ internal controls over financial reporting during the fiscal quarter ended October 31, 2003 that have materially affected, or are reasonably likely to materially affect, Synopsys’ internal control over financial reporting. |
Item 10.Directors and Executive Officers of the Registrant
Directors and Executive Officers
Set forth below are the persons who serve as members of the Board of Directors of Synopsys and 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 or nominees and their ages as of December 31, 2003.
Name | Age | Year First Elected Director | ||
Aart J. de Geus | 49 | 1986 | ||
Andy D. Bryant | 53 | 1999 | ||
Chi-Foon Chan | 54 | 1998 | ||
Bruce R. Chizen | 48 | 2001 | ||
Deborah A. Coleman | 50 | 1995 | ||
A. Richard Newton | 52 | 1987; 1995 | ||
Sasson Somekh | 57 | 1999 | ||
Roy Vallee | 51 | 2003 | ||
Steven C. Walske | 51 | 1991 |
Background of Directors
Dr. Aart J. DE GEUS de Geusco-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
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 Chief Financial Officer in February 1994 and was promoted to Senior Vice President in January 1999. Mr. Bryant was appointed Chief Financial and Enterprise Services Officer in December 1999 and 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. He is a director of Kryptig Corp, a secure-messaging provider of medical information flows.
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 CompanySynopsys 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 ReuseRe-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 a Ph.D. in computer engineering from Case Western Reserve University.
VICKI L. ANDREWS
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 SynopsysAdobe Systems in May 1993 and currently servesAugust 1994 as Senior Vice President Worldwide Sales. Before holding that position, she servedand General Manager, Consumer Products Division and 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 appointedDecember 1997 became Senior Vice President and Chief Financial
Officer in January 2003.General Manager, Graphics Products Division. In August 1998, Mr. Chizen was promoted to Executive Vice President, Products and Marketing. From October 1999November 1992 to January 2003,February 1994 he was Vice President Investor Relations and LegalGeneral Manager, Claris Clear Choice for Claris Corp., a wholly-owned subsidiary of Apple Computer. He is a director of Adobe Systems.
Deborah A. Coleman has been a Director of Synopsys since November 1995. Ms. Coleman is co-founder and Secretary.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 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 holds an M.B.A. from Stanford University. Ms. Coleman 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 Kryptig Corp., a secure-messaging provider of medical information flows.
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 March 1998July 1999 to October 1999,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 that 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. Dr. Somekh joined Novellus Systems, Inc., a manufacturer of semiconductor fabrication equipment, as President in January 2004. Previously, Dr. Somekh served as a member of the Board of Directors of Applied Materials, Inc., also a manufacturer of semiconductor fabrication equipment, from April 2003 until December 2003, and as an Executive Vice President of Applied from November 2000 until August 2003. Dr. Somekh served as a Senior Vice President of Applied from December 1993 to November 2000 and as a Group Vice President from 1990 to 1993. Dr. Somekh is a board member of Nanosys, Inc., a privately-held developer of nano-enabled systems for use in energy, defense, electronics, healthcare and information technology applications.
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 Legal, General Counsel and Assistant
Corporate Secretary. From July 1995 toChief Operating Officer since March 1998 he1992. 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 Chairman 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 Deputy General
Counsel and Assistant Corporate Secretary. Mr. Shevick holds an A.B. from
Harvard CollegeChairman, Chief Executive Officer and a J.D.Director from Georgetown University Law Center.
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.
Information with respect to executive officers of Registrant is included under Part I, Item 4.Submission of Matters to a Vote of Security Holders—Executive Officers of the Company.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this item is set forthRegistrant
Identification of Audit Committee and Financial Expert
Synopsys maintains an Audit Committee consisting of directors Ms. Coleman, Dr. Somekh and Mr. Vallee. All of such members satisfy the independence criteria of the National Association of Securities Dealers, Inc. for serving on page 86 of thisan audit committee. SEC regulations require Synopsys 2002 Annual Reportto disclose whether a director qualifying as a “financial expert” serves on Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL SUMMARY
Section 21E16(a) Beneficial Ownership Reporting Compliance
Section 16(a) 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 discussionrequires our directors, executive officers and analysisgreater than ten percent beneficial owners of our financial condition and resultsstock to file reports 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.
19
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.
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
20
(such as currency devaluation),ownership and changes in our customer payment terms when
evaluatingownership with the adequacySEC. Directors, executive officers and greater than ten percent stockholders are required by SEC regulations to furnish Synopsys with copies of all Section 16(a) reports they file.
Based solely on its review 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.
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 resultcopies of the merger, we are now able to offer a comprehensive array of products for the
designForms 3, 4 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 between5 filed by or received from its reporting persons (or written representations received from such persons), 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 believebelieves 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
expertiseeach of its employees,directors, executive officers and therefore the price is justified. The resultsgreater than ten percent beneficial owners 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.
21
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
recognizedits stock 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
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
22
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.
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 virtuallycomplied with 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 relatingfiling requirements applicable 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 PCSpersons except that otherwise would have been reflected in service revenue is now reflected in
ratable license revenue.
23
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 fromSanjiv Kaul, Senior Vice President, New Ventures Group, filed 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 managementForm 4 late 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
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
24
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 TSLsone transaction as a result of the mixtransition from paper to electronic filing requirements.
Adoption of perpetual versus time-based license orders received duringCode of Ethics
Synopsys has adopted a particular
quarter. DuringCode of Ethics and Business Conduct (the Code) applicable to all of its Board members, employees and executive officers, including its Chief Executive Officer (Principal Executive Officer), Chief Financial Officer (Principal Financial Officer) and Vice President, Controller and Treasurer (Principal Accounting Officer). Synopsys has made the third quarterCode available on its website at www.synopsys.com/corporate/governance.
Synopsys intends to satisfy the disclosure requirement under Item 10 of fiscal 2002, revenue from this product
group as a percentage of total revenues increased to 17%, due primarilyForm 8-K regarding (i) any amendments to the Avant! acquisition, asCode, or (ii) any waivers under the second largest portion of Avant!'s revenue was
derived from products that were added to the Design Analysis category.
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.
25
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 assetsCode 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
reducedSynopsys’ Chief Executive Officer, Chief Financial Officer, 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
===========
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 flatposting such information on its website 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.
26
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. www.synopsys.com/corporate/governance.
Item 11.Executive Compensation
Named Executive Officer Compensation
The following paragraphs contain
forward-looking statements withintable sets forth 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.
27
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 acquisitionscompensation earned during fiscal 2001. At the date of each acquisition, the projects associated with the IPRD
efforts had not yet reached technological feasibility2003 by (1) Synopsys’ Chief Executive Officer 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(2) each of the acquired companies. Also see Note 3, Business Combinations, of Notesother four most highly compensated executive officers whose compensation earned during fiscal 2003 exceeded $100,000 for services rendered in all capacities to Synopsys' Consolidated Financial Statements.
VALUATION OF IPRD.Synopsys during the last three fiscal years. We use an independent third party valuation firmcollectively refer to assist us valuingthese individuals as the tangiblenamed executive officers.
Summary Compensation Table
Name and Position | Year | Annual Compensation ($) | Long-Term Options (#) | All Other Compensation ($)(1) | |||||||
| Salary | Bonus | ||||||||||
Aart J. de Geus Chief Executive Officer and Chairman of the Board | 2003 2002 2001 | 400,000 400,000 400,000 | 605,000 535,000 575,000 | | 104,600 106,500 85,500 | 2,362 1,500 1,830 | |||||
Chi-Foon Chan President and Chief Operating Officer | 2003 2002 2001 | 400,000 400,000 400,000 | 605,000 535,000 575,000 | | 100,850 91,700 71,000 | 3,128 5,138 2,588 | |||||
Vicki L. Andrews Senior Vice President, Worldwide Sales | 2003 2002 2001 | 300,000 300,000 289,423 | 534,496 364,045 611,396 | (2) (3) | 61,150 72,900 60,500 | 9,579 13,884 9,544 | |||||
John Chilton(4) Senior Vice President and General Manager, Solutions Group | 2003 | 320,000 | 295,000 | 34,800 | 2,437 | ||||||
Antun Domic(4) Senior Vice President and General Manager, Implementation Group | 2003 | 330,000 | 320,000 | 48,350 | 2,981 | ||||||
| (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) | Represents bonus and commissions earned during fiscal year. |
| (3) | Amount comprised of bonus and commissions of $451,396 and a relocation bonus of $160,000. |
| (4) | Information for Mr. Chilton and Dr. Domic is presented only for fiscal 2003 as such persons were appointed executive officers during fiscal 2003. |
Information regarding stock option grants to and intangible assets and the in-process
technologies acquired in each of our business combinations. 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 createdexercises by the researchnamed executive officers is included under Part II, Item 7. Management’s Discussion and development effortsAnalysis of the acquired business prior to the dateFinancial Condition and Results 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!Operations—Stock Option Plans. 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,
28
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
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
========
29
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.
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 $55.3 million, (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.
30
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.
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
================
31
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.
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.
32
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
Director Compensation
Each member of the Board consistingreceives a retainer of severance plus a cash payment equal to the
intrinsic value of his in-the-money stock options$25,000 per year for attendance 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
consummationBoard meetings. Each member 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.
Under our 1994 Non-Employee Directors Stock Option Plan (the Directors Plan), a total of 750,0001,800,000 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, upon reelection and for annual service on Board committees. Stock options are granted at not
less thanThe option price is 100% of the fair market value of those shares on the grant date. Stock
options granted upon appointment or electionUnder the Directors Plan, as originally adopted, new directors received an option for 40,000 shares, vesting in equal installments over four years. In addition, each continuing director who was reelected at an annual meeting of stockholders received an option for 20,000 shares and an additional option for 10,000 shares for each Board committee membership, up to a maximum of two committee service grants per year. In August 2003, the Board amended the Directors Plan to reduce the size of the initial and committee grants to 30,000 and 5,000 shares, respectively. The annual and committee service option grants vest in full on the date immediately prior to the date of the annual meeting following their grant. In the case of directors appointed to the Board vest 25% annually but
may be exercised immediately. Stockbetween annual meetings, the annual and any committee grants are prorated based upon the amount of time since the last annual meeting.
During fiscal 2003, Ms. Coleman, Drs. Newton and Somekh and Messrs. Bryant, Chizen, Walske and Vallee each received automatic grants of options granted upon reelection to purchase 20,000 Synopsys common shares at an exercise price of $30.94 per share for Synopsys Board of Directors service during the year, and two grants of options to purchase 10,000 shares each at an exercise price of $30.94 per share for Synopsys Board of Directors Committee service during the year. Mr. Vallee, who joined the Board in February 2003, also received an option for 40,000 shares at an exercise price of $20.46 for his initial service, a pro-rated annual grant of 6,666 shares at an exercise price of $20.46 per share, and two pro-rated committee grants for committee service vest 100% afteran aggregate of 6,666 shares at an exercise price of $20.23 per share.
Change of Control Agreements and Named Executive Officer Employment Contracts
Under the first year1992 Stock Option Plan (1992 Plan), in the event of continuous service.
Ascertain changes in the ownership or control of October 31, 2002, 515,580 stock options remainSynopsys involving a “Corporate Transaction,” which includes an acquisition of Synopsys by merger or asset sale, each outstanding and 71,839option 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 commonthe capital 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 relatedsuccessor 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 Board of Directors as a result of one or more contested elections for membership on the Board of Directors, the administrator of the 1992 Plan has the authority to our option program by comparing net option
grantsaccelerate vesting of outstanding options or shares purchased under the 1992 Plan.
The Directors Plan provides that in the event of a given yearchange of control or corporate transaction, as such terms are defined in the Directors Plan, all outstanding Directors Plan options 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 Chairman and Chief Executive Officer and its President and Chief Operating Officer. 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 numbersum of shares outstanding. The dilution
percentage is calculated as the new option grantsexecutive’s annual base pay plus target cash incentive, plus the cash value of the executive’s health benefits 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%next 18 months, 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.
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(b) all stock options held by Named Executive
Officers as percentagethe 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 total options outstanding 13.7% 13.6%
42
A summarythe executive’s annual base pay for one year plus the target cash incentive for such year plus the cash value of our stock option activitythe executive’s health benefits for 12 months. The terms “involuntary termination,” “cause” 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“change 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,control” are defined in the Employment Agreements, each of which 8.4 million shares were available for future grants. For
additional information regarding our stock option activityis filed with the SEC.
Committee Interlocks and Insider Participation
The members of the Compensation Committee during fiscal 2001,
please see Note 62003 were, Ms. Coleman and Messrs. Bryant, Chizen and Walske. Effective December 2003, the Compensation Committee consists of Notes to Consolidated Financial Statements.
A summaryMs. Coleman and Messrs. Chizen and Walske, all 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:
No Compensation Committee member was at any time during fiscal year.
(2)Exercisable shares represent those options2003, or at any other time, an officer or employee of Synopsys or any of its subsidiaries.
No executive officer of Synopsys serves on the board of directors or compensation committee of any entity that have vestedhas one or more executive officers serving on Synopsys’ Board of Directors or Compensation Committee.
Item 12.Security Ownership of Certain Beneficial Owners and exclude 135,000 options granted to Directors that are exercisable
prior toManagement and Related Stockholder Matters
Ownership of the vesting date.
43
The following table sets forth furthercertain information regarding individual
grantswith respect to the beneficial ownership of options during fiscal 2002 forSynopsys’ common stock as of December 31, 2003 by (1) each person known by Synopsys to beneficially own more than five percent of Synopsys’ common stock outstanding on that date, (2) each Synopsys director, (3) each of the Named Executive Officers.
named executive officers and (4) all of Synopsys’ directors and executive officers as a group.
| Shares of Common Stock Beneficially Owned | ||||||
Name of Beneficial Owner(1) | Number | Percentage Ownership | ||||
J. & W. Seligman & Co. Incorporated 100 Park Avenue, 8th Floor New York, NY 10017 | 14,016,496 | (2) | 8.52 | % | ||
FMR Corp. 82 Devonshire Street Boston, MA 02109 | 9,571,040 | (3) | 5.82 | % | ||
Vicki L. Andrews | 200,986 | (4) | * | |||
Andy D. Bryant | 199,498 | (5) | * | |||
Chi-Foon Chan | 1,857,069 | (6) | 1.13 | % | ||
John Chilton | 183,305 | (7) | * | |||
Bruce R. Chizen | 158,332 | (8) | * | |||
Deborah A. Coleman | 121,400 | (9) | * | |||
Aart J. de Geus | 3,625,776 | (10) | 2.20 | % | ||
Antun Domic | 208,451 | (11) | * | |||
A. Richard Newton | 173,832 | (12) | * | |||
Sasson Somekh | 266,666 | (13) | * | |||
Roy Vallee | 93,332 | (14) | * | |||
Steven C. Walske | 206,032 | (15) | * | |||
All directors and executive officers as a group (19 persons) | 8,813,628 | (16) | 5.36 | % | ||
| * | Less than 1% |
| (1) | The persons named in the table above have sole voting and investment power with respect to all 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 (JWS) was obtained from Amendment No. 12 |
| (3) | Share ownership for FMR Corp. was obtained from Amendment No. 2 to the Schedule 13G filed with the Securities and Exchange Commission on February 14, 2003. Fidelity Management & Research Company (Fidelity), a wholly-owned subsidiary of FMR Corp. and a registered investment advisor, may be deemed to be the beneficial owner of such shares as a result of acting as an investment adviser to various investment companies registered under the Investment Company Act of 1940 (the Fidelity Funds). Edward C. Johnson III and Abigail P. Johnson, as substantial stockholders and directors of FMR Corp., and FMR Corp., through its control of Fidelity, and the Fidelity Funds each has beneficial ownership of the shares held by the Funds. Edward C. Johnson III, FMR Corp., through its control of Fidelity, and the Fidelity Funds each has sole power to dispose of the 9,216,138 shares held by the Fidelity Funds. The Fidelity Funds’ Board of Trustees has the sole power to vote or direct the voting of the shares held by the Fidelity funds. Fidelity Management Trust Company holds 344,144 shares, of which Edward C. Johnson III and FMR Corp., through its control of Fidelity Management Trust Company, hold sole power to dispose and, with respect to 255,460 of such shares, sole voting power. Geode Capital Management, LLC (Geode LLC) may also be deemed to be the beneficial owner of certain of such shares. Geode LLC is wholly-owned by Fidelity Investors III Limited Partnership (FILP III). Fidelity Investors Management, LLC (FIML) is the general partner and investment manager of FILP III, and is an investment manager registered under the Investment Advisors Act of 1940. The managers of Geode LLC, the members of FIML and the limited partners of FILP III are certain shareholders and employees of FMR Corp. |
| (4) | Includes options to purchase 194,541 shares exercisable by Ms. Andrews within 60 days of December 31, 2003. |
| (5) | Includes options to purchase 197,498 shares exercisable by Mr. Bryant within 60 days of December 31, 2003. |
| (6) | Includes options to purchase 1,762,933 shares exercisable by Dr. Chan |
| (7) | Includes options to purchase 166,803 shares exercisable by Mr. Chilton within 60 days December 31, |
| (8) | Includes options to purchase 158,332 shares exercisable by Mr. Chizen within 60 days December 31, 2003. |
| (9) | Includes options to purchase 120,000 shares exercisable by Ms. Coleman within 60 days of December 31, 2003. |
| (10) | Includes options to purchase 3,050,846 shares exercisable by Dr. de Geus |
| (11) | Includes options to purchase 205,451 shares exercisable by Dr. Domic within 60 days of December 31, 2003. |
| (12) | Includes options to purchase 171,832 shares exercisable by Dr. Newton within 60 days of December 31, 2003. |
| (13) | Includes options to purchase 241,666 shares exercisable by Dr. Somekh within 60 days of December 31, 2003. |
| (14) | Includes options to purchase 93,332 shares exercisable by Mr. Vallee within 60 days of December 31, 2003. |
| (15) | Includes options to purchase 185,832 shares exercisable by Mr. Walske within 60 days of December 31, 2003. |
| (16) | Includes options to purchase 8,011,447 shares exercisable by directors and executive officers within 60 days of December 31, 2003. |
Stockholder Approval of underlying securities on November 1, 2002 ($39.64)
minusStock Plans
Information regarding the exercise price.
44
The following table provides information regarding equity compensation plansCompany’s stockholder approved and notnon-stockholder 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 OF UNDER EQUITY
EXERCISE OF OUTSTANDING COMPENSATION PLANS
OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
OPTIONS, WARRANTS, WARRANTS, AND REFLECTED IN COLUMN
AND RIGHTS 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 optionsplans is included 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.
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.
45
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.
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.
46
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.
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.
47
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.
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.
48
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.
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'sPart II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Operations—Stock Option Plansand "Foreign Exchange Hedging" in Note 4 of Notes to Consolidated Financial
Statements.
49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF KPMG LLP, INDEPENDENT AUDITORS
To The Board of Directorsincorporated by reference here.
Item 13.Certain Relationships and Shareholders of Synopsys, Inc.:
We have audited the accompanying consolidated balance sheets of Synopsys,
Inc.Related Transactions
Revenues derived from Intel Corporation and its 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.
Mountain View, California
November 20, 2002, except as to Note 13,
which is as of January 13, 2003
50
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.
51
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.
52
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)
53
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
54
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.
55
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
=============== ============================
56
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.
57
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.
58
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.
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.
59
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.
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.
60
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.
61
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 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/or the remaining amortization period may
be adjusted. In fiscal 2002, the Company recognized an aggregate impairment
62
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.
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.
63
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
============== ============== ==============
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.
64
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
==============
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.
65
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 OCTOBER 31, OCTOBER 31,
TOTAL COST ADDITIONS 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
================
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.
66
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.
67
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.
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.
68
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.
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
================
69
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.
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 $ 994,099
Net income $ 117,494 $ 55,395
Basic earnings per share $ 1.56 $ 0.74
Weighted average common shares
outstanding 75,311 75,131
Diluted earnings per share $ 1.49 $ 0.69
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 $236.5 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.
70
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.
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
============= ============ ============ ============
71
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),approximately 9.5% 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.
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.
72
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 the hedge and
on an on-going basis. The difference between the contract price and the forward
price, which is generally not material, is reflected in other income.
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.
73
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 prepaid 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.
74
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.
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.
75
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
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 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%
76
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 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 $16.84, $16.57 and $14.32 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........ $ (333,708) $ (80,107) $ (757)
Earnings (loss) per share-- basic
As reported under APB 25............ $ (2.99) $ 0.94 $ 1.43
Pro forma under SFAS No. 123........ $ (5.00) $ (1.32) $ (0.01)
Earnings (loss) per share-- diluted
As reported under APB 25............ $ (2.99) $ 0.88 $ 1.38
Pro forma under SFAS No. 123........ $ (5.00) $ (1.32) $ (0.01)
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
============= ============= ============
77
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
============ ============ ===========
78
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.
79
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.
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.
80
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
============ ============ ============
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.
81
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
============== ============== ==============
82
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.
83
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 beginning7.9% 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.
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.
84
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 whoserespectively. Andy D. Bryant, Intel Corporation’s Executive Vice President and Chief Financial and Enterprise Services Officer, also serves on the SynopsysSynopsys’ Board of Directors. Management believes the transactions between the two parties were carried out under the Company's normal terms and conditions.
on an arm’s length basis.
The Company maintains a System-on-a-Chip Venture Fund (the Fund) authorized by the Company’s Board which invests in companies that will facilitate building SoCs. The fund is administered by an investment advisory board consisting of senior Company officers, including the Company’s Chief Executive Officer and Chief Operating Officer, and Dr. A. Richard Newton, a member of the Board. The Fund has invested $800,000 in 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.private company that develops SoC test systems. The Chairman of the Company'sCompany’s Audit Committee, Deborah A. Coleman, is also the Chairman of the Board of Directors for a companysuch company. Ms. Coleman did not participate in which Synopsys has invested $500,000. Fund’s investment decision.
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'sDr. A. Richard Newton, a member of Synopsys’ Board of Directors, renewed its stock repurchase program originallyprovided consulting services to Synopsys and was paid $180,000. Under Synopsys’ agreement with Dr. Newton, Dr. Newton provides advice, at Synopsys’ request, concerning long-term technology strategy and industry development issues as well as assistance in identifying opportunities for partnerships with academia.
Item 14.Principal Accounting Fees and Services
Fees of KPMG LLP
The following table presents fees for professional audit services rendered by KPMG LLP for the audit of Synopsys’ annual financial statements for fiscal 2003 and 2002, and fees billed for other services rendered by KPMG LLP.
Year Ended October 31, | ||||||
| 2003 | 2002 | |||||
| (in thousands) | ||||||
Audit fees | $ | 2,558 | $ | 3,235 | ||
Audit related fees(1) | 215 | 312 | ||||
Tax fees(2) | 537 | 484 | ||||
All other fees | — | — | ||||
Total fees | $ | 3,310 | $ | 4,031 | ||
| (1) | Audit related fees consisted of fees for due diligence services and consultation relating to acquisitions. |
| (2) | Tax fees consisted of fees for international tax planning services and advice as well as fees for international tax compliance, international executive services and tax-related due diligence services for acquisitions. |
Audit Committee Pre-Approval Policy
Section 10A(i)(1) of the Exchange Act requires that all non-audit services to be performed by Synopsys’ principal accountants be approved in July
2001. Underadvance by the renewed program,Audit Committee of the Company may repurchase Synopsys common
stock with a market value upBoard of Directors, subject to $500 million (not including amounts purchasedcertain exceptions relating to date undernon-audit services accounting for less than five percent of the July 2001 program ontotal fees paid to its principal accountants which are subsequently ratified by the open market)Audit Committee (the De Minimus Exception). Common shares repurchased
are intendedPursuant 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,Section 10A(i)(3) of the Company entered into an Agreement and Plan of Merger with Numerical
Technologies, Inc. (Numerical) underExchange Act, the Audit Committee has established procedures by which the Company commenced a cash tender
offer to acquire allChairperson of the outstanding sharesAudit Committee may pre-approve such services provided the Chairperson report the details of Numerical common stockthe services to the full Audit Committee at $7.00 per share, followed by a second-step mergerits next regularly scheduled meeting. None of the audit-related or non-audit services described above were performed pursuant to the De Minimus Exception during the periods 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 withpre-approval requirement has been in effect.
Item 15.Exhibits, Financial Statements, Schedules 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.
85
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 tradedReports 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.
86
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to directors of the Company will be included
under the caption "Proposal One -- Election of Directors" in Synopsys' Notice of
Annual Meeting and Proxy Statement for Synopsys' 2003 annual meeting of
stockholders, which Notice and Proxy Statement is expected to be mailed to
Synopsys stockholders within 120 days after the end of Synopsys' fiscal year
ended November 2, 2002 and which information shall be incorporated herein by
reference. Information with respect to Executive Officers is included under the
heading "Executive Officers of the Company" in Part I hereof after Item 4.
The information regarding delinquent filers pursuant to Item 405 of
Regulation S-K will be included under the heading "Section 16(a) Beneficial
Ownership Reporting Compliance" under the caption "Additional Information" in
the Proxy Statement, which information shall be incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be included under the heading
"Executive Compensation" under the caption "Proposal One -- Election of
Directors" in the Proxy Statement, which information shall be incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be included under the heading
"Security Ownership of Certain Beneficial Owners and Management" under the
caption "Proposal One -- Election of Directors" in the Proxy Statement, which
information shall be incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be included under the caption
"Proposal One -- Election of Directors" in the Proxy Statement, which
information shall be incorporated herein by reference.
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.
87
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORMForm 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....................................50
Consolidated Balance Sheets.......................................51
Consolidated Statements of Operations.............................52
Consolidated Statements of Stockholders' Equity and
Comprehensive Income............................................53
Consolidated Statements of Cash Flows.............................57
Notes to Consolidated Financial Statements........................58
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| 49 | ||
| 50 | ||
Consolidated Statements of Stockholders’ Equity and Comprehensive Income | 51 | |
| 53 | ||
| 54 |
(2) Financial Statement Schedule
The following schedule of the Company is included herein:
Valuation and Qualifying Accounts and Reserves (Schedule II)
All other schedules are omitted because they are not applicable or the
amounts are immaterial or the required information is presented in the
consolidated financial statements or notes thereto.
The following documents are included in Exhibit 23 hereto:
Exhibit 23.1 Report on Financial Statement Schedule
Exhibit 23.2 Consent of KPMG LLP, Independent Auditors
Schedules
None.
(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)
88
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
The 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)
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)
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)
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)
10.14 Lease dated January 2, 1996 between the Company and Tarigo-Paul,filed a
California Limited Partnership(9)
89
10.15 1992 Stock Option Plan, as amended and restated(10)(11)
10.16 Employee Stock Purchase Program, as amended and restated(10)(12)
10.17 International Employee Stock Purchase Plan, as amended and
restated(10)(12)
10.18 Synopsys deferred compensation plan dated September 30, 1996(10)(13)
10.19 1994 Non-Employee Directors Stock Option Plan, as amended
and restated(10)(14)
10.20 Form of Executive Employment Agreement dated October 1, 1997(10)(15)
10.21 Schedule of Executive Employment Agreements(10) 10.22 1998 Nonstatutory
Stock Option Plan(10)(16)
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 (17)
10.24 Consulting Services Agreement between Synopsys, Inc. and
A. Richard Newton Dated November 1, 2001(10)(18)
21.1 Subsidiaries of the Company
23.1 Report on Financial Statement Schedule
23.2 Consent of KPMG LLP, Independent Auditors
24.1 Power of Attorney (see page 93)
- ----------
(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-QAugust 20, 2003 reporting its results of operations for the quarterly periodquarter 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) Incorporated by reference from exhibit to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended MarchJuly 31, 1996.
(10) Compensatory plan or agreement in which an executive officer or director
participates
(11) Incorporated by reference from exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended October 31, 2001.
90
(12) Incorporated by reference from exhibit to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended April 30, 2001.
(13) 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.
(14) 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.
(15) Incorporated by reference from exhibit to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended January 3, 1998.
(16) 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.
(17) 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.
(18) Incorporated by reference from exhibit to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended April 30, 2002.
91
(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 | Amended and Restated Certificate of Incorporation(2) | |
| 3.2 | Restated Bylaws of Synopsys, Inc.(3) | |
| 4.1 | Amended and Restated Preferred Shares Rights Agreement dated April 7, 2000(4) | |
| 4.3 | Specimen Common Stock Certificate(5) | |
| 10.1 | Form of Indemnification Agreement(5) | |
| 10.2 | Director’s and Officer’s Insurance and Company Reimbursement Policy(5) | |
| 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(5) | |
| 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(6) | |
Exhibit Number | Exhibit Description | |
| 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(7) | |
| 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(8) | |
| 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(9)(10) | |
| 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(9)(10) | |
| 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(9)(10) | |
| 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.(9)(10) | |
| 10.14 | Lease dated January 2, 1996 between the Company and Tarigo-Paul, a California Limited Partnership(11) | |
| 10.15 | 1992 Stock Option Plan, as amended and restated(12)(13) | |
| 10.16 | Employee Stock Purchase Program, as amended and restated(12) | |
| 10.17 | International Employee Stock Purchase Plan, as amended and restated(12) | |
| 10.18 | Synopsys deferred compensation plan dated September 30, 1996(12)(15) | |
| 10.19 | 1994 Non-Employee Directors Stock Option Plan, as amended and restated(12)(16) | |
| 10.20 | Form of Executive Employment Agreement dated October 1, 1997(12)(17) | |
| 10.21 | Schedule of Executive Employment Agreements(9) | |
| 10.22 | 1998 Nonstatutory Stock Option Plan(12)(18) | |
| 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(19) | |
| 10.24 | Consulting Services Agreement between Synopsys, Inc. and A. Richard Newton Dated November 1, 2001(12)(20) | |
| 21.1 | Subsidiaries of the Company | |
| 23.1 | Consent of KPMG LLP, Independent Auditors | |
Exhibit Number | Exhibit Description | |
| 24.1 | Power of Attorney (see page 96) | |
| 31.1 | Certification of Chief Executive Officer furnished pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act | |
| 31.2 | Certification of Chief Financial Officer furnished pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act | |
| 32.1 | Certification of Chief Executive Officer and Chief Financial Officer furnished pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code | |
| (1) | Incorporated by reference from exhibit to Current Report on Form 8-K (Commission File No. 000-19807) 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 (Commission File No. 000-19807) for the quarterly period ended July 31, 2003. |
| (3) | Incorporated by reference from exhibit to the Company’s Quarterly Report on Form 10-Q (Commission File No. 000-19807) for the quarterly period ended April 3, 1999. |
| (4) | Incorporated by reference from exhibit to Amendment No. 2 to the Company’s Registration Statement on Form 8-A (Commission File No. 000-19807) filed with the Securities and Exchange Commission on April 10, 2000. |
| (5) | 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. |
| (6) | Incorporated by reference from exhibit to the Company’s Annual Report on Form 10-K (Commission File No. 000-19807) for the fiscal year ended September 30, 1992. |
| (7) | Incorporated by reference from exhibit to the Company’s Annual Report on Form 10-K (Commission File No. 000-19807) for the fiscal year ended September 30, 1993. |
| (8) | Incorporated by reference from exhibit to the Company’s Annual Report on Form 10-K (Commission File No. 000-19807) for the fiscal year ended September 30, 1995. |
| (9) | Incorporated by reference from exhibit to the Company’s Annual Report on Form 10-K (Commission File No. 000-19807) for the fiscal year ended October 31, 2002. |
| (10) | Confidential Treatment granted for certain portions of this document. |
| (11) | Incorporated by reference from exhibit to the Company’s Quarterly Report on Form 10-Q (Commission File No. 000-19807) for the quarterly period ended March 31, 1996. |
| (12) | Compensatory plan or agreement in which an executive officer or director participates. |
| (13) | Incorporated by reference from exhibit to the Company’s Annual Report on Form 10-K (Commission File No. 000-19807) for the fiscal year ended October 31, 2001. |
| (14) | Incorporated by reference from exhibit to the Company’s Quarterly Report on Form 10-Q (Commission File No. 000-19807) for the quarterly period ended April 30, 2001. |
| (15) | 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. |
| (16) | Incorporated by reference from exhibit to the Company’s Quarterly Report on Form 10-Q (Commission File No. 000-19807) for the quarterly period ended July 31, 2003. |
| (17) | Incorporated by reference from exhibit to the Company’s Quarterly Report on Form 10-Q (Commission File No. 000-19807) for the quarterly period ended January 3, 1998. |
| (18) | 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. |
| (19) | Incorporated by reference exhibit to the Company’s Current Report on Form 8-K (Commission File No. 000-19807) filed with the Securities and Exchange Commission on November 19, 2002. |
| (20) | Incorporated by reference from exhibit to the Company’s Quarterly Report on Form 10-Q (Commission File No. 000-19807) for the quarterly period ended April 30, 2002. |
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 27th29th day of January 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)
92
| 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 and Treasurer | ||
(Principal Accounting Officer) | ||
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Aart J. de Geus and Steven K. Shevick, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. 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 January 27, 2003
- -------------------------- (Principal Executive
Aart J. de Geus Officer) and Chairman of
the Board of Directors
/S/ CHI-FOON CHAN President, Chief Operating January 27, 2003
- --------------------------
Chi-Foon Chan Officer and Director
/S/ ANDY D. BRYANT Director January 27, 2003
- --------------------------
Andy D. Bryant
/S/ BRUCE R. CHIZEN Director January 27, 2003
- --------------------------
Bruce R. Chizen
/S/ DEBORAH A. COLEMAN Director January 27, 2003
- --------------------------
Deborah A. Coleman
/S/ A. RICHARD NEWTON Director January 27, 2003
- --------------------------
A. Richard Newton
/S/ SASSON SOMEKH Director January 27, 2003
- --------------------------
Sasson Somekh
/S/ STEVEN C. WALSKE Director January 27, 2003
- --------------------------
Steven C. Walske
93
SCHEDULE II
SYNOPSYS, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED TO END OF
OF PERIOD EXPENSE DEDUCTIONS(1) PERIOD
----------- ----------- ------------- ----------
Allowance for Doubtful Accounts
and Sales Returns
Fiscal 2002.................. $ 11,027 $ 7,042 $ 6,504 $ 11,565
Fiscal 2001.................. 9,539 5,759 4,271 11,027
Fiscal 2000.................. 10,563 3,528 4,552 9,539
- ----------
(1) Accounts written off, net of recoveries.
94
Signature | Title | Date | ||
/s/ AART J. DE GEUS Aart J. de Geus | Chief Executive Officer (Principal Executive Officer) and Chairman of the Board of Directors | January 29, 2004 | ||
/s/ CHI-FOON CHAN Chi-Foon Chan | President, Chief Operating Officer and Director | January 29, 2004 | ||
/s/ ANDY D. BRYANT Andy D. Bryant | Director | January 29, 2004 | ||
/s/ BRUCE R. CHIZEN Bruce R. Chizen | Director | January 29, 2004 | ||
/s/ DEBORAH A. COLEMAN Deborah A. Coleman | Director | January 29, 2004 | ||
/s/ A. RICHARD NEWTON A. Richard Newton | Director | January 29, 2004 | ||
/s/ SASSON SOMEKH Sasson Somekh | Director | January 29, 2004 | ||
/s/ STEVEN C. WALSKE Steven C. Walske | Director | January 29, 2004 | ||
/s/ ROY VALLEE Roy Vallee | Director | January 29, 2004 | ||
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
2.1
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 | Amended and Restated Certificate of Incorporation(2) | |
| 3.2 | Restated Bylaws of Synopsys, Inc.(3) | |
| 4.1 | Amended and Restated Preferred Shares Rights Agreement dated April 7, 2000(4) | |
| 4.3 | Specimen Common Stock Certificate(5) | |
| 10.1 | Form of Indemnification Agreement(5) | |
| 10.2 | Director’s and Officer’s Insurance and Company Reimbursement Policy(5) | |
| 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(5) | |
| 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(6) | |
| 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(7) | |
| 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(8) | |
| 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(9)(10) | |
| 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(9)(10) | |
| 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(9)(10) | |
| 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.(9)(10) | |
| 10.14 | Lease dated January 2, 1996 between the Company and Tarigo-Paul, a California Limited Partnership(11) | |
Exhibit Number | Exhibit Description | |
| 10.15 | 1992 Stock Option Plan, as amended and restated(12)(13) | |
| 10.16 | Employee Stock Purchase Program, as amended and restated(12) | |
| 10.17 | International Employee Stock Purchase Plan, as amended and restated(12) | |
| 10.18 | Synopsys deferred compensation plan dated September 30, 1996(12)(15) | |
| 10.19 | 1994 Non-Employee Directors Stock Option Plan, as amended and restated(12)(16) | |
| 10.20 | Form of Executive Employment Agreement dated October 1, 1997(12)(17) | |
| 10.21 | Schedule of Executive Employment Agreements(9) | |
| 10.22 | 1998 Nonstatutory Stock Option Plan(12)(18) | |
| 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(19) | |
| 10.24 | Consulting Services Agreement between Synopsys, Inc. and A. Richard Newton Dated November 1, 2001(12)(20) | |
| 21.1 | Subsidiaries of the Company | |
| 23.1 | Consent of KPMG LLP, Independent Auditors | |
| 24.1 | Power of Attorney (see page 96) | |
| 31.1 | Certification of Chief Executive Officer furnished pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act | |
| 31.2 | Certification of Chief Financial Officer furnished pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act | |
| 32.1 | Certification of Chief Executive Officer and Chief Financial Officer furnished pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter 63 of Title 18 of the United States Code | |
| (1) | Incorporated by reference from exhibit to Current Report on Form 8-K (Commission File No. 000-19807) 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 (Commission File No. 000-19807) for the quarterly period ended July 31, 2003. |
| (3) | Incorporated by reference from exhibit to the Company’s Quarterly Report on Form 10-Q (Commission File No. 000-19807) for the quarterly period ended April 3, 1999. |
| (4) | Incorporated by reference from exhibit to Amendment No. 2 to the Company’s Registration Statement on Form 8-A (Commission File No. 000-19807) filed with the Securities and Exchange Commission on April 10, 2000. |
| (5) | 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. |
| (6) | Incorporated by reference from exhibit to the Company’s Annual Report on Form 10-K (Commission File No. 000-19807) for the fiscal year ended September 30, 1992. |
| (7) | Incorporated by reference from exhibit to the Company’s Annual Report on Form 10-K (Commission File No. 000-19807) for the fiscal year ended September 30, 1993. |
| (8) | Incorporated by reference from exhibit to the Company’s Annual Report on Form 10-K (Commission File No. 000-19807) for the fiscal year ended September 30, 1995. |
| (9) | Incorporated by reference from exhibit to the Company’s Annual Report on Form 10-K (Commission File No. 000-19807) for the fiscal year ended October 31, 2002. |
| (10) | Confidential Treatment granted for certain portions of this document. |
| (11) | Incorporated by reference from exhibit to the Company’s Quarterly Report on Form 10-Q (Commission File No. 000-19807) for the quarterly period ended March 31, 1996. |
| (12) | Compensatory plan or agreement in which an executive officer or director participates. |
| (13) | Incorporated by reference from exhibit to the Company’s Annual Report on Form 10-K (Commission File No. 000-19807) for the fiscal year ended October 31, 2001. |
| (14) | Incorporated by reference from exhibit to the Company’s Quarterly Report on Form 10-Q (Commission File No. 000-19807) for the quarterly period ended April 30, 2001. |
| (15) | 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. |
| (16) | Incorporated by reference from exhibit to the Company’s Quarterly Report on Form 10-Q (Commission File No. 000-19807) for the quarterly period ended July 31, 2003. |
| (17) | Incorporated by reference from exhibit to the Company’s Quarterly Report on Form 10-Q (Commission File No. 000-19807) for the quarterly period ended January 3, 1998. |
| (18) | 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. |
| (19) | Incorporated by reference exhibit to the Company’s Current Report on Form 8-K (Commission File No. 000-19807) filed with the Securities and Exchange Commission on November 19, 2002. |
| (20) | Incorporated by reference from exhibit to the Company’s Quarterly Report on Form 10-Q (Commission File No. 000-19807) for the quarterly period ended April 30, 2002. |
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)
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)
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)
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)
10.14 Lease dated January 2, 1996 between the Company and Tarigo-Paul, a
California Limited Partnership(9)
10.15 1992 Stock Option Plan, as amended and restated(10)(11)
10.16 Employee Stock Purchase Program, as amended and restated(10)(12)
10.17 International Employee Stock Purchase Plan, as amended and
restated(10)(12)
10.18 Synopsys deferred compensation plan dated
September 30, 1996(10)(13)
10.19 1994 Non-Employee Directors Stock Option Plan, as amended and
restated(10)(14)
10.20 Form of Executive Employment Agreement dated October 1, 1997(10)(15)
10.21 Schedule of Executive Employment Agreements(10)
10.22 1998 Nonstatutory Stock Option Plan(10)(16)
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 (17)
10.24 Consulting Services Agreement between Synopsys, Inc. and
A. Richard Newton Dated November 1, 2001(10)(18)
21.1 Subsidiaries of the Company
23.1 Report on Financial Statement Schedule
23.2 Consent of KPMG LLP, Independent Auditors
24.1 Power of Attorney (see page 93)
- ----------
(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) Incorporated by reference from exhibit to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1996.
(10) Compensatory plan or agreement in which an executive officer or director
participates
(11) Incorporated by reference from exhibit to the Company's Annual Report on
Form 10-K for the fiscal year ended October 31, 2001.
(12) Incorporated by reference from exhibit to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended April 30, 2001.
(13) 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.
(14) 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.
(15) Incorporated by reference from exhibit to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended January 3, 1998.
(16) 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.
(17) 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.
(18) Incorporated by reference from exhibit to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended April 30, 2002.
EXHIBIT 10.10
AMENDMENT NO. 6
TO LEASE
THIS AMENDMENT NO. 6 is made and entered into this 18th day of July,
2001, by and between JOHN ARRILLAGA, Trustee, or his Successor Trustee UTA dated
7/20/77 (JOHN ARRILLAGA SURVIVOR'S TRUST) (previously known as the "Arrillaga
Family Trust and the John Arrillaga Separate Property Trust") as amended, and
RICHARD T. PEERY, Trustee, or his Successor Trustee UTA dated 7/20/77 (RICHARD
T. PEERY SEPARATE PROPERTY TRUST) as amended, collectively as LANDLORD, and
SYNOPSYS, INC., A DELAWARE CORPORATION, as TENANT.
RECITALS
A. WHEREAS, by Lease Agreement dated August 17, 1990 Landlord leased to
Tenant all of that certain 104,170+/- square foot building located at 7000 East
Middlefield Rd., Mountain View, California, the details of which are more
particularly set forth in said August 17, 1990 Lease Agreement (the "Lease"),
and
B. WHEREAS, said Lease was amended by the Commencement Letter dated April
1, 1991 which amended the Commencement Date of the Lease to commence March 15,
1991 and terminate March 14, 1999, and
C. WHEREAS, said Lease was amended by Amendment No. 1 dated June 16, 1992
which: (i) extended the Lease Term through October 31, 2000; (ii) added a
Paragraph addressing co-terminous lease terms; (iii) replaced Lease Paragraph 51
("Hazardous Materials") and Exhibit A to the Lease; and (iv) amended Lease
Paragraph 31 ("Notices") and the Basic Rent schedule, and
D. WHEREAS, said Lease was amended by Amendment No. 2 dated March 22, 1993
which extended the Lease Term through December 31, 2000 and amended the Basic
Rent Schedule, and
E. WHEREAS, said Lease was amended by Amendment No. 3 dated June 23, 1993,
which: (i) extended the Term of the Lease through December 31, 2002 to be
co-terminous with the projected term of the Lease Agreement dated June 23, 1993
for premises located at 700A East Middlefield Road, Mountain View, California;
(ii) amended the Basic Rent schedule; and (iii) replaced Paragraph 47
("Parking"), and
F. WHEREAS, said Lease was amended by Amendment No. 4 dated November 4,
1994 which: (i) extended the Term of the Lease through February 28, 2003 to be
co-terminous with the extended Termination Date of the Lease Agreement dated
June 23, 1993 for premises located at 700A East Middlefield Road, Mountain View,
California, and (ii) amended the Basic Rent schedule and the Aggregate Rent of
the Lease Agreement, and
G. WHEREAS, said Lease was amended by Amendment No. 5 dated October 4,
1995, which: (i) amended Amendment No. 3 Paragraph 2 ("Lease Terms
Co-Terminous") and Amendment No. 2 Paragraph 1 ("Term of Lease") to include
reference to Tenant's other lease agreements with Landlord dated June 16, 1992,
June 23, 1993, and August 24, 1994 for premises respectively located at 700B and
700A East Middlefield Road, Mountain View, California and 1101 West Maude
Avenue, Sunnyvale, California (the "Other Leases"); (ii) added a Cross Default
Paragraph in reference to the Other Leases; and (iii) established Tenant's
temporary driveway rights to adjacent property leased by Tenant at 1101 West
Maude Avenue, Mountain View, California; and (iv) replaced EXHIBIT A to said
Lease, and
H. WHEREAS, it is now the desire of the parties hereto to amend the Lease
by (i) extending the Term for twelve years, thereby changing the Termination
Date from February 28, 2003 to February 28, 2015, (ii) amending the Basic Rent
schedule and Aggregate Rent accordingly, (iii) increasing the Security Deposit
required under the Lease, (iv) amending the Management Fee charged to Tenant,
(vii) replacing Lease Paragraphs 12 ("Property Insurance") and 31 ("Notices"),
(viii) amending Lease Paragraphs 5 ("Acceptance and Surrender of Premises"), 6
("Alterations and Additions"), 11 ("Tenant's Personal Property Insurance and
Workman's Compensation Insurance") and 21 ("Destruction"), and (ix) adding a ,
paragraph ("Authority to Execute") to said Lease Agreement as hereinafter set
forth.
AGREEMENT
NOW THEREFORE, for valuable consideration, receipt of which is hereby
acknowledged, and in consideration of the hereinafter mutual promises, the
parties hereto do agree as follows:
1. TERM OF LEASE: It is agreed between the parties that the Term of said
Lease Agreement shall be extended for an additional twelve (12) year period, and
the Lease Termination Date shall be changed from February 28, 2003 to February
28, 2015.
2. BASIC RENT SCHEDULE: The monthly Basic Rent Schedule shall be adjusted
as follows:
On March 1, 2003, the sum of [***]* shall be due, and a like sum due on the
first day of each month thereafter, through and including February 1, 2004.
On March 1, 2004, the sum of [***]* shall be due, and a like sum due on the
first day of each month thereafter, through and including February 1, 2005.
On March 1, 2005, the sum of [***]* shall be due, and a like sum due on the
first day of each month thereafter, through and including February 1, 2006.
On March 1, 2006, the sum of [***]* shall be due, and like sum due on the
first day of each month thereafter, through and including February 1, 2007.
On March 1, 2007, the sum of [***]* shall be due, and a like sum due on the
first day of each month thereafter, through and including February 1, 2008.
On March 1, 2008, the sum of [***]* shall be due, and a like sum due on the
first day of each month thereafter, through and including February 1, 2009.
On March 1, 2009, the sum of [***]* shall be due, and a like sum due on the
first day of each month thereafter, through and including February 1, 2010.
On March 1, 2010 the sum of [***]* shall be due, and a like sum due on the
first day of each month thereafter, through and including February 1, 2011.
On March 1, 2011, the sum of [***]* shall be due, and a like sum due on the
first day of each month thereafter, through and including February 1, 2012.
On March 1, 2012, the sum of [***]* shall be due, and a like sum due on the
first day of each month thereafter, through and including February 1, 2013.
On March 1, 2013, the sum of [***]* shall be due, and a like sum' due on
the first day of each month thereafter, through and including February 1, 2014.
On March 1, 2014, the sum of [***]* shall be due, and alike sum due on the
first day of each month thereafter, through and including February 1, 2015.
The Aggregate Basic Rent for the Lease Term, as extended, shall be
increased by $[***]* or from $[***]* to $[***]*.
- --------
* Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
3. SECURITY DEPOSIT: Provided Tenant is not in default (pursuant to
Paragraph 19 of the Lease, i.e., Tenant has received notice and any applicable
cure period has expired without cure) of any of the terms, covenants, and
conditions of the Lease Agreement, the Security Deposit required under the Lease
shall remain $364,595.00. In the event of a Tenant default, Tenant's Security
Deposit shall be increased by $236,797.30, or from $364,595.00 to $601,392.30.
Within ten (10) days of notice from Landlord of an uncured default under the
Lease, Tenant shall (i) provide Landlord with an amended Standby Letter of
Credit, in compliance with the terms of Lease Paragraph 45 ("Security Deposit
Represented by Standby Letter of Credit") in the total amount of $601,392.30 or
(ii) deposit additional cash in the amount of $236,797.30. Within ten business
days of Tenant's execution of this Amendment No. 6, Tenant shall provide
Landlord with an amended Standby Letter of Credit reflecting an expiration date
on the Standby Letter of Credit of March 30, 2015.
4. MANAGEMENT FEE: Effective March 1, 2003, and on the first day of each
month thereafter during said Lease Term, Tenant shall pay to Landlord, in
addition to the Basic Rent and Additional Rent, a fixed monthly management fee
("Management Fee") equal to one and one-half percent (1.5%) of the Basic Rent
due for each month throughout the remaining Lease Term. Notwithstanding anything
to the contrary above or in Lease Paragraph 4.D ("Additional Rent"), no
additional real property management fee shall be charged to Tenant.
5. PROPERTY INSURANCE: Lease Paragraph 12 ("Property Insurance") is hereby
deleted in its entirety and shall be replaced with the following:
"12. PROPERTY INSURANCE. Landlord shall purchase and keep in force, and as
Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant shall
pay to Landlord (or Landlord's agent if so directed by Landlord) Tenant's
proportionate share (allocated to the Leased Premises by square footage or other
equitable basis as calculated and determined by Landlord) of the deductibles on
insurance claims and the cost of, policy or policies of insurance covering loss
or damage to the Premises (including all improvements within the Premises
constructed by either Landlord or Tenant (provided Tenant has obtained
Landlord's written approval for said improvements to the Premises) and Complex
(excluding routine maintenance and repairs and incidental damage or destruction
caused by accidents or vandalism for which Tenant is responsible under Paragraph
7) in the amount of the full replacement value thereof, providing protection
against those perils included within the classification of "all risks" insurance
and flood and/or earthquake insurance, if available, plus a policy of rental
income insurance in the amount of one hundred (100%) percent of twelve (12)
months Basic Rent, plus sums paid as Additional Rent and any deductibles related
thereto. If such insurance cost is increased due to Tenant's use of the Premises
or the Complex, Tenant agrees to pay to Landlord the full cost of such increase.
Tenant shall have no interest in nor any right to the proceeds of any insurance
procured by Landlord for the Complex.
In addition and notwithstanding anything to the contrary in this Paragraph
12, each party to this Lease hereby waives all rights of recovery against the
other party or its officer, employees, agents and representatives for loss or
damage to its property or the property of others under its control, arising from
any cause insured against under the fire and extended coverage (excluding,
however, any loss resulting from Hazardous Material contamination of the
Property) required to be maintained by the terms of this Lease Agreement to the
extent full reimbursement of the loss/claim is received by the insured party.
Each party required to carry property insurance hereunder shall cause the policy
evidencing such insurance to include a provision permitting such release of
liability ("waiver of subrogation endorsement") provided, however, that if the
insurance policy of either releasing party prohibits such waiver, then this
waiver shall not take effect until consent to such waiver is obtained; provided,
however, that if the insurance policy of either releasing party prohibits such
waiver, then this waiver shall not take effect until consent to such waiver is
obtained. If such waiver is so prohibited, the insured party affected shall
promptly notify the other party thereof. In the event the waivers are issued to
the parties and are not valid under current policies and/or subsequent insurance
policies, the non-complying party will provide, to the other party, 30 days
advance notification of the cancellation of the subrogation waiver, in which
case neither party will provide such subrogation waiver thereafter and this
Paragraph will be null and void. The foregoing waiver of subrogation shall not
include any loss resulting from Hazardous Material contamination of the Property
or any insurance coverage relating thereto."
6. NOTICES: Lease Paragraph 31 ("Notices") is hereby deleted in its
entirety and shall be replaced with the following:
"31. NOTICES. All notices, demands, requests, advices or designations which
may be or are required to be given by either party to the other hereunder shall
be in writing. All notices, demands, requests, advices or designations by
Landlord to Tenant shall be sufficiently given, made or delivered if personally
served on Tenant by leaving the same at the Premises (provided written receipt
is offered and is addressed to the attention of the Vice President of Real
Estate) or if sent by United States certified or registered mail, postage
prepaid or by a reputable same day or overnight courier service addressed to
Tenant at: SYNOPSYS, INC., 700 EAST MIDDLEFIELD ROAD, MOUNTAIN VIEW, CA 94043,
ATTN: VICE PRESIDENT OF REAL ESTATE. As an accommodation to Tenant, Landlord
shall also send a copy of all notices to: SHARTSIS, FRIESE & GINSBURG LLP, ONE
MARITIME PLAZA, 18TH FLOOR, SAN FRANCISCO, CA 94111, ATTN: JONATHON M. KENNEDY;
however, Tenant acknowledges and agrees that any notice delivered to Tenant's
main address listed above shall be considered to be delivered to Tenant,
regardless of whether or not said notice is submitted and/or received at the
secondary address., All notices, demands, requests, advices or designations by
Tenant to Landlord shall be sent by United States certified or registered mail,
postage prepaid, addressed to Landlord at its offices at: PEERY/ARRILLAGA, 2560
MISSION COLLEGE BLVD., SUITE 101, SANTA CLARA, CA 95054. Each notice, request,
demand, advice or designation referred to in this Paragraph shall be deemed
received on the date of the personal service or receipt or refusal to accept
receipt of the mailing thereof in the manner herein provided, as the case may
be. Either party shall have the right, upon ten (10) days written notice to the
other, to change the address as noted herein."
7. ALTERATIONS MADE BY TENANT: The provisions of this Paragraph 7 shall
modify Lease Paragraphs 5 ("Acceptance and Surrender of Premises") and 6
("Alterations and Additions"), as follows:
A. Landlord acknowledges that Tenant shall have the right, subject to
the terms of thin Paragraph 7.A, to make non-structural, interior
improvements ("Interior Improvements") to the Premises subject to the
following:
a) Tenant shall provide Landlord, for Landlord's approval, a set
of construction plans and a list reflecting the Interior Improvements
Tenant desires to make to the Increased Premises no later than
November 1, 2002. Upon Landlord's review and approval of said Interior
Improvements, said construction plans shall become EXHIBIT B-1 to this
Lease. Construction of said Interior Improvements shall not commence
until Landlord and Tenant execute Landlord's standard Consent to
Alterations agreement and Landlord has posted its Notice of
Non-Responsibility;
b) Landlord shall not be required, under any circumstance, to
contribute any concessions or monetary contribution to said Interior
Improvements;
c) Tenant shall not be required to remove the Landlord approved
Interior Improvements shown on EXHIBIT B-1 at the expiration or
earlier termination of the Lease Term. Notwithstanding anything to the
contrary herein, Landlord's approval of said Interior Improvements
referenced in Section 7.A(a) above may provide for specific Interior
Improvements to be restored at the expiration or earlier termination
of the Lease Term if said Interior Improvements are not consistent
with Landlord's standard interior improvements.
B. Notwithstanding anything to the contrary in Lease Paragraph 6
("Alterations and Additions"), Landlord's written consent to any future
alterations or additions to the Premises will specify whether Landlord
shall require removal of said alterations and/or additions, provided Tenant
requests such determination from Landlord.
8. TENANT'S PERSONAL PROPERTY INSURANCE AND WORKMAN'S COMPENSATION
INSURANCE. The provisions of this Paragraph 8 shall modify Lease Paragraph 11
("Tenant's Personal Property Insurance and Workman's Compensation Insurance"),
as follows: Tenant's obligation to insure the leasehold improvements owned by
Tenant within the Leased Premises shall be limited to those leasehold
improvements owned by Tenant that are not covered by real property insurance
Landlord obtains pursuant to Lease Paragraph 12 ("Property Insurance") as
amended in Paragraph 5 above.
9. DESTRUCTION. The provisions of this Paragraph 9 shall modify Lease
Paragraph 21 ("Destruction"), as follows: Landlord's obligation to rebuild or
restore the Premises shall be limited to the building and any interior
improvements covered by the real` property insurance Landlord obtains pursuant
to Lease Paragraph 12 ("Property Insurance") as amended in Paragraph 5 above:
10. AUTHORITY TO EXECUTE. The parties executing this Agreement hereby
warrant and represent that they are properly authorized to execute this
Agreement and bind the parties on behalf of whom they execute this Agreement and
to all of the terms, covenants and condition of this Agreement as they relate to
the respective parties hereto.
EXCEPT AS MODIFIED HEREIN, all other terms, covenants, and conditions of
said August 17, 1990 Lease Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment No. 6
to Lease as of the day and year last written below:
LANDLORD: TENANT:
JOHN ARRILLAGA SURVIVOR'S SYNOPSYS, INC.
TRUST a Delaware corporation
By /S/ JOHN ARRILLAGA By /S/ AART DE GEUS
------------------------------------- --------------------------------
John Arrillaga, Trustee
Date: 8/8/01 AART DE GEUS
--------------------------------- ----------------------------------
Print or Type Name
RICHARD T. PEERY SEPARATE Title: CHAIRMAN & CEO
---------------------------
PROPERTY TRUST
By /S/ JASON PEERY Date: 8/8/01
------------------------------------- ----------------------------
Jason Peery, Special Trustee
Date: 8/8/01
---------------------------------
EXHIBIT 10.11
AMENDMENT NO. 4
TO LEASE
THIS AMENDMENT NO. 4 is made and entered into this 18th day of July,
2001, by and between JOHN ARRILLAGA, Trustee, or his Successor Trustee UTA dated
7/20/77 (JOHN ARRILLAGA SURVIVOR'S TRUST) (previously known as the "Arrillaga
Family Trust" and the "John Arrillaga Separate Property Trust") as amended, and
RICHARD T. PEERY, Trustee, or his Successor Trustee UTA dated 7/20/77 (RICHARD
T. PEERY SEPARATE PROPERTY TRUST) as amended, collectively as LANDLORD, and
SYNOPSYS, INC., A DELAWARE CORPORATION, as TENANT.
RECITALS
A. WHEREAS, by Lease Agreement dated June 16, 1992 Landlord leased to
Tenant all of that certain 104,170+/- square foot building located at 700B E.
Middlefield Road, Mountain View, California, the details of which are more
particularly set forth in said June 16, 1992 Lease Agreement, and
B. WHEREAS, said Lease was amended by the Commencement Letter dated March
9, 1993 which changed the Commencement Date of the Lease from November 1, 1992
to December 21, 1992, and changed the Termination Date from October 31, 2000 to
December 31, 2000, and,
C. WHEREAS, said Lease was amended by Amendment No. 1 dated June 23, 1993,
which: (i) established December 21, 1993 as the Commencement Date for the second
floor of the Premises; (ii) extended the Term for two years, changing the
Termination Date from December 31, 2000 to December 31, 2002 to be co-terminous
with the projected term of the lease agreement dated June 23, 1993 for premises
located at 700A E. Middlefield Road, Mountain View, California, (iii) amended
the Basic Rent Schedule; (iv) replaced Lease Paragraph 46 ("Parking"); and (v)
established June 1, 1993 as the Commencement Date for the payment of Additional
Rent expenses for 100% o of the building, and
D. WHEREAS, said Lease was amended by Amendment No. 2 dated November 4,
1994 which: (i) extended the Term for two months, thereby changing the
Termination Date from December 31, 2002 to February 28, 2003 to be co-terminous
with the extended termination date of the lease agreement dated June 23, 1993
for premises located at 700A E. Middlefield Road, Mountain View, California, and
(ii) amended the Basic Rent Schedule and Aggregate Rent accordingly, and
E. WHEREAS, said Lease was amended by Amendment No. 3 dated October 4, 1995
which: (i) amended (a) Amendment No. 1 Paragraph 3 ("Lease Terms Co-Terminous")
and (b) Lease Paragraph 49 ("Cross Default") to include reference to Tenant's
other lease agreements with Landlord dated August 17, 1990, June 23, 1993 and
August 24, 1995 for premises respectively located at 7000 and 700A E.
Middlefield Road and 1101 W. Maude Avenue, Mountain View, California; (ii)
amended Lease Paragraph 52.B. ("Structural Capital Costs Regulated by
Governmental Agencies after the Commencement of this Lease Not Caused by Tenant
or Tenant's Uses or Remodeling of the Premises") to correct an error disclosed
by an audit of said Lease which required the deletion of the reference to the
last four years of the Lease Term as a factor in calculating Tenant's cash
contribution towards the cost of said capital improvements; (iii) established
Tenant's temporary driveway rights to adjacent property leased by Tenant at 1101
W. Maude Avenue, Mountain View, California; and (iv) replaced EXHIBIT A to said
Lease, and
F. WHEREAS, it is now the desire of the parties hereto to amend the Lease
by (i) extending the Term for twelve (12) years, thereby changing the
Termination Date from February 28, 2003 to February 28, 2015, (ii) amending the
Basic Rent schedule and Aggregate Rent accordingly, (iii) increasing the
Security Deposit required under the Lease, (iv) amending the Management Fee
charged to Tenant, (v) replacing Lease Paragraphs 12 ("Property Insurance") and
31 ("Notices"), (vi) amending Lease Paragraphs 5 ("Acceptance and Surrender of
Premises"), 6 ("Alterations and Additions"), 11 ("Tenant's Personal Property
Insurance and Workman's Compensation Insurance") and 21 ("Destruction"), (vii)
adding a paragraph ("Authority to Execute") and (viii) deleting Lease Paragraphs
54 ("Option to Lease Building A (700A Middlefield Rd., Mt. View, CA) Option
Space"), 55 ("First Right of Refusal") and 56 ("Rights Reserved for Tenant's
Personal Benefit") to the Lease Agreement as hereinafter set forth.
AGREEMENT
NOW THEREFORE, for valuable consideration, receipt of which is hereby
acknowledged, and in consideration of the hereinafter mutual promises, the
parties hereto do agree as follows:
1. TERM OF LEASE: It is agreed between the parties that the Term of said
Lease Agreement shall be extended for an additional twelve (12) year period, and
the Lease Termination Date shall be changed from February 28, 2003 to February
28, 2015.
2. BASIC RENT: The monthly Basic Rent shall be adjusted as follows:
On March 1, 2003, the sum of [***]* shall be due, and a like sum due on the
first day of each month thereafter, through and including February 1, 2004.
On March 1, 2004, the sum of [***]* shall be due, and alike sum due on the
first day of each month thereafter, through and including February 1, 2005.
On March 1, 2005, the sum of [***]* shall be due, and a like sum due on the
first day of each month thereafter, through and including February 1, 2006.
On March 1, 2006, the sum of [***]* shall be due, and like sum due on the
first day of each month thereafter, through and including February 1, 2007.
On March 1, 2007, the sum of [***]* shall be due, and alike sum due on the
first day of each month thereafter, through and including February 1, 2008.
On March l, 2008, the sum of [***]* shall be due, and a like sum due on the
first day of each month thereafter, through and including February 1, 2009.
On March 1, 2009, the sum of [***]* shall be due, and a like sum due on the
first day of each month thereafter, through and including February 1, 2010.
On March 1, 2010, the sum of [***]* shall be due, and a like sum due on the
first day of each month thereafter, through and including February 1, 2011.
On March 1, 2011, the sum of [***]* shall be due, and alike sum due on the
first day of each month thereafter, through and including February 1, 2012.
On March 1, 2012, the sum of [***]* shall be due, and a like sum due on the
first day of each month thereafter, through and including February 1, 2013.
On March 1, 2013, the sum of [***]* shall be due, and a like sum due on the
first day of each month thereafter, through and including February 1, 2014.
On March 1, 2014, the sum of [***]* shall be due, and a like sum due on the
first day of each month thereafter, through and including February l, 2015.
The Aggregate Basic Rent for the Lease Term, as extended, shall be
increased by $[***]* or from $[***]* to $[***]*.
3. SECURITY DEPOSIT: Provided Tenant is not in default (pursuant to
Paragraph 19 of the Lease, i.e., Tenant has received notice and any applicable
cure period has expired without cure) of any of the terms, covenants, and
conditions of the Lease Agreement, the Security Deposit required under the Lease
shall remain $333,344.00. In the event of a Tenant default, Tenant's Security
Deposit shall be increased by $268,048.30, or from $333,344.00 to $601,392.30.
Within ten (10) days of notice from Landlord of an uncured default under the
Lease, Tenant shall (i) provide Landlord with an amended Standby Letter of
Credit, in compliance with the terms of Lease Paragraph 45 ("Security Deposit
Represented by Standby Letter of Credit") in the total amount of $601,392.30 or
(ii) deposit additional cash in the amount of $268,048.30. Within ten (10)
business days of Tenant's execution of this Amendment No. 4, Tenant shall
provide Landlord with an amended Standby Letter of Credit reflecting an
expiration date on the Standby Letter of Credit of March 30, 2015.
4. MANAGEMENT FEE: Effective March 1, 2003, and on the first day of each
month thereafter during said Lease Term, Tenant shall pay to Landlord, in
addition to the Basic Rent and Additional Rent, a fixed monthly management fee
("Management Fee") equal to one and one-half percent (1.5%) of the Basic Rent
due for each month throughout the remaining Lease Term. Notwithstanding anything
to the contrary above or in Lease Paragraph 4.D ("Additional Rent"), no
additional real property management fee shall be charged to Tenant.
5. PROPERTY INSURANCE: Lease Paragraph 12 ("Property Insurance") is hereby
deleted in its entirety and shall be replaced with the following:
"12. PROPERTY INSURANCE. Landlord shall purchase and keep in force, and as
Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant shall
pay to Landlord (or Landlord's agent if so directed by Landlord) Tenant's
proportionate share (allocated to the Leased Premises by square footage or other
equitable basis as calculated and determined by Landlord) of the deductibles on
insurance claims and the cost of, policy or policies of insurance covering loss
or damage to the Premises (including all improvements within the Premises
constructed by either Landlord or Tenant (provided Tenant has obtained
Landlord's written approval for said improvements to the Premises) and Complex
(excluding routine maintenance and repairs and incidental damage or destruction
caused by accidents or vandalism for which Tenant is responsible under Paragraph
7) in the amount of the full replacement value thereof, providing protection
against those perils included within the classification of "all risks" insurance
and flood and/or earthquake insurance, if available, plus a policy of rental
income insurance in the amount of one hundred (100%) percent of twelve (12)
months Basic Rent, plus sums paid as Additional Rent and any deductibles related
thereto. If such insurance cost is increased due to Tenant's use of the Premises
or the Complex, Tenant agrees to pay to Landlord the full cost of such increase.
Tenant shall have no interest in nor any right to the proceeds of any insurance
procured by Landlord for the Complex:
- --------
* Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
In addition and notwithstanding anything to the contrary in this
Paragraph 12, each party to this Lease hereby waives all rights of recovery
against the other party or its officer, employees, gents and representatives for
loss or damage to its property or the property of others under its control,
arising from any cause insured against under the fire and extended coverage
(excluding, however, any loss resulting from Hazardous Material contamination of
the Property) required to be maintained by the terms of this Lease Agreement to
the extent full reimbursement of the loss/claim is received by the insured
party. Each party required to carry property insurance hereunder shall cause the
policy evidencing such insurance to include a provision permitting such release
of liability ("waiver of subrogation endorsement") provided, however, that if
the insurance policy of either releasing party prohibits such waiver, then this
waiver shall not take effect until consent to such waiver is obtained; provided,
however, that if the insurance policy of either releasing party prohibits such
waiver, then this waiver shall not take effect until consent to such waiver is
obtained. If such waiver is so prohibited, the insured party affected shall
promptly notify the other party thereof. In the event the waivers are issued to
the parties and are not valid under current policies and/or subsequent insurance
policies, the non-complying party will provide, to the other party, 30 days
advance notification of the cancellation of the subrogation waiver, in which
case neither party will provide such subrogation waiver thereafter and this
Paragraph will be null and void. The foregoing waiver of subrogation shall not
include any loss resulting from Hazardous Material contamination of the Property
or any insurance coverage relating thereto."
6. NOTICES: Lease Paragraph 31 ("Notices") is hereby deleted in its
entirety and shall be replaced with the following:
"31. NOTICES. All notices, demands, requests, advices or designations which
may be or are required to be given by either party to the other hereunder shall
be in writing. All notices, demands, requests, advices or designations by
Landlord to Tenant shall be sufficiently given, made or delivered if personally
served on Tenant by leaving the same at the Premises (provided written receipt
is offer d is addressed to the attention of the Vice President of Real Estate)
or if sent by United States certified or registered mail, postage prepaid or by
a reputable same day or overnight courier service addressed to Tenant at:
SYNOPSYS, INC., 700 EAST MIDDLEFIELD ROAD, MOUNTAIN VIEW, CA 94043, ATTN: VICE
PRESIDENT OF REAL ESTATE. As an accommodation to Tenant, Landlord shall also
send a copy of all notices to: SHARTSIS, FRIESE & GINSBURG LLP, ONE MARITIME
PLAZA, 18TH FLOOR, SAN FRANCISCO, CA 94111, ATTN: JONATHON M. KENNEDY; however,
Tenant acknowledges and agrees that any notice delivered to Tenant's main
address listed above shall be considered to be delivered to Tenant, regardless
of whether or not said notice is submitted and/or received at the secondary
address. All notices, demands, requests, advices or designations by Tenant to
Landlord shall be sent by United States certified or registered mail, postage
prepaid, addressed to Landlord at its offices at: PEERY/ARRILLAGA, 2560 MISSION
COLLEGE BLVD., SUITE 101, SANTA CLARA, CA 95054. Each notice, request, demand,
advice or designation referred to in this Paragraph shall be deemed received on
the date of the personal service or receipt or refusal to accept receipt of the
mailing thereof in the manner herein provided, as the case may be. Either party
shall have the right, upon ten (10) days written notice to the other, to change
the address as noted herein."
7. ALTERATIONS MADE BY TENANT: The provisions of this Paragraph 7 shall
modify Lease Paragraphs 5 ("Acceptance and Surrender of Premises") and 6
("Alterations and Additions"), as follows:
A. Landlord acknowledges that Tenant shall have the right, subject to
the terms of this Paragraph 7.A, to make non-structural, interior
improvements ("Interior Improvements") to the Premises subject to the
following:
a) Tenant shall provide Landlord, for Landlord's approval, a set
of construction plans and a list reflecting the Interior Improvements
Tenant desires to make to the Increased Premises no later than
November 1, 2002. Upon Landlord's review and approval of said Interior
Improvements, said construction plans shall become EXHIBIT B-1 to this
Lease. Construction of said Interior Improvements shall not commence
until Landlord and Tenant execute Landlord's standard Consent to
Alterations agreement and Landlord has posted its Notice of
Non-Responsibility;
b) Landlord shall not be required, under any circumstance, to
contribute any concessions or monetary contribution to said Interior
Improvements;
c) Tenant shall not be required to remove the Landlord approved
Interior Improvements shown on EXHIBIT B-1 at the expiration or
earlier termination of the Lease Term. Notwithstanding anything to the
contrary herein, Landlord's approval of said Interior Improvements
referenced in Section 7.A(a) above may provide for specific Interior
Improvements to be restored at the' expiration or earlier termination
of the Lease Term if said Interior Improvements are not consistent
with Landlord's standard interior improvements.
B. Notwithstanding anything to the contrary in Lease Paragraph 6
("Alterations and Additions"), Landlord's written consent to any future
alterations or additions to the Premises will specify whether Landlord
shall require removal of said alterations and/or additions, provided Tenant
requests such determination from Landlord.
8. TENANT'S PERSONAL PROPERTY INSURANCE AND WORKMAN'S COMPENSATION
INSURANCE. The provisions of this Paragraph 8 shall modify Lease Paragraph 11
"Tenant's Personal Property Insurance and Workman's Compensation Insurance"), as
follows: Tenant's obligation to insure the leasehold improvements owned by
Tenant within the Leased Premises shall be limited to those leasehold
improvements owned by Tenant that are not covered by real property insurance
Landlord obtains pursuant to Lease Paragraph 12 ("Property Insurance") as
amended in Paragraph 5 above.
9. DESTRUCTION. The provisions of this Paragraph 9 shall modify Lease
Paragraph 21 ("Destruction"), as follows: Landlord's obligation to rebuild or
restore the Premises shall be limited to the building and any interior
improvements covered by the real property insurance Landlord obtains pursuant to
Lease Paragraph 12 ("Property Insurance") as amended in Paragraph 5 above:
10. AUTHORITY TO EXECUTE. The parties executing this Agreement hereby
warrant and represent that they are properly authorized to execute this
Agreement and bind the parties on behalf of whom they execute this Agreement and
to all of the terms, covenants and conditions of this Agreement as they relate
to the respective parties hereto.
11. DELETION OF PARAGRAPHS: Insomuch as Tenant has entered into a lease
agreement with Landlord for premises located at 700A East Middlefield Road,
Mountain View, California (Building A), it is agreed between the parties that
Lease Paragraphs 54 ("Option to Lease Building A (700A Middlefield Rd., Mt.
View, CA) Option Space"), 55 ("First Right of Refusal") and 56 ("Rights Reserved
for Tenant's Personal Benefit"), all of which relate to said Building A, are
hereby deleted and shall be of no further force or effect.
EXCEPT AS MODIFIED HEREIN, all other terms, covenants, and conditions of
said June 16, 1992 Lease Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment No. 4
to Lease as of the day and year last written below.
LANDLORD: TENANT:
JOHN ARRILLAGA SURVIVOR'S SYNOPSYS, INC.
TRUST a Delaware corporation
By /S/ JOHN ARRILLAGA By /S/ AART DE GEUS
----------------------------------------- ---------------------------
John Arrillaga, Trustee
Date: 8/8/01 AART DE GEUS
------------------------------------- -----------------------------
Print or Type Name
RICHARD T. PEERY SEPARATE Title: CHAIRMAN & CEO
----------------------
PROPERTY TRUST
By /S/ JASON PEERY Date: 8/8/01
----------------------------------------- -----------------------
Jason Peery, Special Trustee
EXHIBIT 10.12
AMENDMENT NO. 3
TO LEASE
THIS AMENDMENT NO. 3 is made and entered into this l8th day of July,
2001, by and between JOHN ARRILLAGA, Trustee, or his Successor Trustee UTA dated
7/20/77 (JOHN ARRILLAGA SURVIVOR'S TRUST) (previously known as the "Arrillaga
Family Trust" and the "John Arrillaga Separate Property Trust") as amended, and
RICHARD T. PEERY, Trustee, or his Successor Trustee UTA dated 7/20/77 (RICHARD
T. PEERY SEPARATE PROPERTY TRUST) as amended, collectively as LANDLORD, and
SYNOPSYS, INC., A DELAWARE CORPORATION, as TENANT.
RECITALS
A. WHEREAS, by Lease Agreement dated June 23, 1993 Landlord leased to
Tenant all of that certain 104,170+/- square foot building located at 700A East
Middlefield Road, Mountain View, California, the details of which are more
particularly set forth in said June 23, 1993 Lease Agreement, and
B. WHEREAS, said Lease was amended by Amendment No. 1 dated November 4,
1994 which: (i) acknowledged Tenant's exercise of it option to delay occupancy
of the first floor of the Premises and established February 1, 1995 as the
Commencement Date for the second floor of the Premises; (ii) decreased the Term
of the Lease to eight years five months, or from October 1, 1994 through
February 28, 2003, pursuant to Lease Paragraph 51 ("Commencement Date, Lease
Term and Basic Rent Schedule Amended in the Event Tenant Delays Occupancy on the
First and/or Second Floor of the Leased Premises"); and (iii) amended the Basic
Rent Schedule and the Aggregate Rent accordingly, and,
C. WHEREAS, said Lease was amended by Amendment No. 2 dated October 4,
1995 which: (i) amended Lease Paragraphs 49 ("Cross Default") and 50 ("Lease
Terms Co-Terminous") to include reference to Tenant's other lease agreements
with Landlord dated August 17, 1990, June 16, 1992 and August 24, 1995 for
premises respectively located at 7000 and 700B East Middlefield Road, Mountain
View, California and 1101 West Maude Avenue, Mountain View, California; (ii)
amended Lease Paragraph 523 ("Structural Capital Costs Regulated by Governmental
Agencies after the Commencement of this Lease Not Caused by Tenant or Tenant's
Uses or Remodeling of the Premises") to correct an error disclosed by an audit
of the Lease which required the deletion of the reference to the last four years
of the Lease Term as a factor in calculating Tenant's cash contribution towards
the cost of said improvements; (iii) established Tenant's temporary driveway
rights to adjacent property leased by Tenant at 1101 West Maude Avenue, Mountain
View, California; and (iv) replaced Exhibit A to the Lease, and
D. WHEREAS, it is now the desire of the parties hereto to amend the
Lease by (i) extending the Term for twelve years, thereby changing the
Termination Date from February 28, 2003 to February 28, 2015, (ii) amending the
Basic Rent schedule and Aggregate Rent accordingly, (iii) increasing the
Security Deposit required under the Lease, (iv) amending the Management Fee
charged to Tenant, (vii) replacing Lease Paragraphs 12 ("Property Insurance")
and 31 ("Notices"), (viii) amending Lease Paragraphs 5 ("Acceptance and
Surrender of Premises"), 6 ("Alterations and Additions"), 11 ("Tenant's Personal
Property Insurance and Workman's Compensation Insurance") and 21 ("Destruction")
and (ix) adding a paragraph ("Authority to Execute") to the Lease Agreement as
hereinafter set forth.
AGREEMENT
NOW THEREFORE, for valuable consideration, receipt of which is hereby
acknowledged, and in consideration of the hereinafter mutual promises, the
parties hereto do agree as follows:
1. TERM OF LEASE: It is agreed between the parties that the Term of said
Lease Agreement shall be extended for an additional twelve (12) year period, and
the Lease Termination Date shall be changed from February 28, 2003 to February
28, 2015.
2. BASIC RENT SCHEDULE: The monthly Basic Rent Schedule shall be adjusted
as follows:
On March 1, 2003, the sum of [***]* shall be due, and a like sum due on
the first day of each month thereafter, through and including February 1, 2004.
On March 1, 2004, the sum of [***]* shall be due, and a like sum due on
the first day of each month thereafter, through and including February 1, 2005.
On March 1, 2005, the sum of [***]* shall be due, and a like sum due on
the first day of each month thereafter, through and including February 1, 2006.
On March 1, 2006, the sum of [***]* shall be due, and like sum due on
the first day of each month thereafter, through and including February 1, 2007.
On March 1, 2007, the sum of [***]* shall be due, and a like sum due on
the first day of each month thereafter, through and including February 1, 2008.
On March 1, 2008, the sum of [***]* shall be due, and a like sum due on
the first day of each month thereafter, through and including February 1, 2009.
On March 1, 2009, the sum of [***]* shall be due, and a like sum due on
the first day of each month thereafter, through and including February 1, 2010.
On March 1, 2010, the sum of [***]* shall be due, and a like sum due on
the first day of each month thereafter, through and including February 1, 2011.
On March 1, 2011, the sum of [***]* shall be due, and a like sum due on
the first day of each month thereafter, through and including February 1, 2012.
On March l, 2012, the sum of [***]* shall be due, and a like sum due on
the first day of each month thereafter, through and including February 1, 2013.
On March 1, 2013, the sum of [***]* shall be due, and a like sum due on
the first day of each month thereafter, through and including February 1, 2014.
On March 1, 2014, the sum of [***]* shall be due, and a like sum due on
the first day of each month - thereafter, through and including February 1,
2015.
The Aggregate Basic Rent for the Lease Term, as extended, shall be
increased by $[***]*, or from $[***]* to $[***]*.
3. SECURITY DEPOSIT: Provided Tenant is not in default (pursuant to
Paragraph 19 of the Lease, I.E., Tenant has received notice and any applicable
cure period has expired without cure) of any of the terms, covenants, and
conditions of the Lease Agreement, the Security Deposit required under the Lease
shall remain $343,761.00. In the event of a Tenant default, Tenant's Security
Deposit shall be increased by $257,631.30, or from $343,761.00 to $601,392.30.
Within ten days of notice from Landlord of an uncured default under the Lease,
Tenant shall provide Landlord with: (i) an amended Standby Letter of Credit, in
compliance with the terms of Lease Paragraph 46 ("Security Deposit Represented
by Standby Letter of Credit") in the total amount of $601,392.30; or (ii)
deposit additional cash in the amount of $257,631.30. Within ten business days
of Tenant's execution of this Amendment No. 3, Tenant shall provide Landlord
with an amended Standby Letter of Credit reflecting an expiration date on the
Standby Letter of Credit of March 30, 2015.
4. MANAGEMENT FEE: Effective March l, 2003, and on the first day of each
month thereafter during said Lease Term, Tenant shall pay to Landlord, in
addition to the Basic Rent and Additional Rent, a fixed monthly management fee
("Management Fee") equal to one and one-half percent (1.5%) of the Basic Rent
due for each month throughout the remaining Lease Term. Notwithstanding anything
to the contrary above or in Lease Paragraph 4.D ("Additional Rent"), no
additional real property management fee shall be charged to Tenant.
5. PROPERTY INSURANCE: Lease Paragraph 12 ("Property Insurance") is hereby
deleted in its entirety and shall be replaced with the following:
"12. PROPERTY INSURANCE. Landlord shall purchase and keep in force, and as
Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant shall
pay to Landlord (or Landlord's agent if so directed by Landlord) Tenant's
proportionate share (allocated to the Leased Premises by square footage or other
equitable basis as calculated and determined by Landlord) of the deductibles on
insurance claims and the cost of, policy or policies of insurance covering loss
or damage to the Premises (including all improvements within the Premises
constructed by either Landlord or Tenant (provided Tenant has obtained
Landlord's written approval for said improvements to the Premises) and Complex
(excluding routine maintenance and repairs and incidental damage or destruction
caused by accidents or vandalism for which Tenant is responsible under Paragraph
7) in the amount of the full replacement value thereof, providing protection
against those perils included within the classification of "all risks" insurance
and flood and/or earthquake insurance, if available, plus a policy of rental
income insurance in the amount of one hundred (100%) percent of twelve (12)
months Basic Rent, plus sums paid as Additional Rent and any deductibles related
thereto. If such insurance cost is increased due to Tenant's use of the Premises
or the Complex, Tenant agrees to pay to Landlord the full cost of such increase.
Tenant shall have no interest in nor any right to the proceeds of any insurance
procured by Landlord for the Complex.
In addition and notwithstanding anything to the contrary in this Paragraph
12, each party to this Lease hereby waives all rights of recovery against the
other party or its officer, employees, agents and representatives for loss or
damage to its property or the property of others under its control, arising from
any cause insured against under the fire and extended coverage (excluding,
however, any loss resulting from Hazardous Material contamination of the
Property) required to be maintained by the terms of this Lease Agreement to the
extent full reimbursement of the loss/claim is received by the insured party.
Each party required to carry property insurance hereunder shall cause the policy
evidencing such insurance to include a provision permitting such release of
liability ("waiver of subrogation endorsement") provided, however, that if the
- --------
* Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
insurance policy of either releasing party prohibits such waiver, then this
waiver shall not take effect until consent to such waiver is obtained; provided,
however, that if the insurance policy of either releasing party prohibits such
waiver, then this waiver shall not take effect until consent to such waiver is
obtained. If such waiver is so prohibited, the insured party affected shall
promptly notify the other party thereof. In the event the waivers are issued to
the parties and are not valid under current policies and/or subsequent insurance
policies, the non-complying party will provide, to the other party, 30 days
advance notification of the cancellation of the subrogation waiver, in which
case neither party will provide such subrogation waiver thereafter and this
Paragraph will be null and void. The foregoing waiver of subrogation shall not
include any loss resulting from Hazardous Material contamination of the Property
or any insurance coverage relating thereto."
6. NOTICES: Lease Paragraph 31 ("Notices") is hereby deleted in its
entirety and shall be replaced with the following:
"31. NOTICES. All notices, demands, requests, advices or designations which
may be or are required to be given by either party to the other hereunder shall
be in writing. All notices, demands, requests, advices or designations by
Landlord to Tenant shall be sufficiently given, made or delivered if personally
served on Tenant by leaving the same at the Premises (provided written receipt
is offered and is addressed to the attention of the Vice President of Real
Estate) or if sent by United States certified or registered mail, postage
prepaid or by a reputable same day or overnight courier service addressed to
Tenant at: SYNOPSYS, INC., 700 EAST MIDDLEFIELD ROAD, MOUNTAIN VIEW, CA 94043,
ATTN: VICE PRESIDENT OF REAL ESTATE. As an accommodation to Tenant, Landlord
shall also send a copy of all notices to: SHARTSIS, FRIESE & GINSBURG LLP, ONE
MARITIME PLAZA, 18TH FLOOR, SAN FRANCISCO, CA 94111, ATTN: JONATHON M. KENNEDY;
however, Tenant acknowledges and agrees that any notice delivered to Tenant's
main address listed above shall be considered to be delivered to Tenant,
regardless of whether or not said notice is submitted and/or received at the
secondary address. All notices, demands, requests, advices or designations by
Tenant to Landlord shall be sent by United States certified or registered mail,
postage prepaid, addressed to Landlord at its offices at: PEERY/ARRILLAGA, 2560
MISSION COLLEGE BLVD., SUITE 101, SANTA CLARA, CA 95054. Each notice, request,
demand, advice or designation referred to in this Paragraph shall be deemed
received on the date of the personal service or receipt or refusal to accept
receipt of the mailing thereof in the manner herein provided, as the case may
be. Either party shall have the right, upon ten (10) days written notice to the
other, to change the address as noted herein."
7. ALTERATIONS MADE BY TENANT: The provisions of this Paragraph 7 shall
modify Lease Paragraphs 5 ("Acceptance and Surrender of Premises") and 6
("Alterations and Additions"), as follows:
a) Landlord acknowledges that Tenant shall have the right, subject to
the terms of this Paragraph 7.A, to make non-structural, interior
improvements ("Interior Improvements") to the Premises subject to the
following:
b) Tenant shall provide Landlord, for Landlord's approval, a set of
construction plans and a list reflecting the Interior Improvements Tenant
desires to make to the Increased Premises no later than November 1, 2002
Upon Landlord's review and approval of said Interior Improvements, said
construction plans shall become Exhibit B-1 to this Lease. Construction of
said Interior Improvements shall not commence until Landlord and Tenant
execute Landlord's standard Consent to Alterations agreement and' Landlord
has posted its Notice of Non-Responsibility;
c) Landlord shall not be required, under any circumstance, to
contribute any concessions or monetary contribution to said Interior
Improvements;
d) Tenant shall not be required to remove the Landlord approved
Interior Improvements shown on Exhibit B-1 at the expiration or earlier
termination of the Lease Term. Notwithstanding anything to the contrary
herein, Landlord's approval of said Interior Improvements referenced in
Section 7.A(a) above may provide for specific Interior Improvements to be
restored at the expiration or earlier termination of the Lease Term if said
Interior Improvements are not consistent with Landlord's standard interior
improvements;
e) Notwithstanding anything to the contrary in Lease Paragraph 6
("Alterations and Additions"), Landlord's written consent to any future
alterations or additions to the Premises will specify whether Landlord
shall require removal of said alterations and/or additions, provided Tenant
requests such determination from Landlord.
8. TENANT'S PERSONAL PROPERTY INSURANCE AND WORKMAN'S COMPENSATION
INSURANCE. The provisions of this Paragraph 8 shall modify Lease Paragraph 11
("Tenant's Personal Property Insurance and Workman's Compensation Insurance"),
as follows: Tenant's obligation to insure the leasehold improvements owned by
Tenant within the Leased Premises shall be limited to those leasehold
improvements owned by Tenant that are not covered by real property insurance
Landlord obtains pursuant to Lease Paragraph 12 ("Property Insurance") as
amended in Paragraph 5 above.
9. DESTRUCTION. The provisions of this Paragraph 9 shall modify Lease
Paragraph 21 ("Destruction"), as follows: Landlord's obligation to rebuild or
restore the Premises shall be limited to the building and any interior
improvements covered by the real property insurance Landlord obtains pursuant to
Lease Paragraph 12 ("Property Insurance") as amended in Paragraph 5 above.
10. AUTHORITY TO EXECUTE. The parties executing this Agreement hereby
warrant and represent that they are properly authorized to execute this
Agreement and bind the parties on behalf of whom they execute this Agreement and
to all of the terms, covenants and conditions of this Agreement as they relate
to the respective parties hereto.
EXCEPT AS MODIFIED HEREIN, all other terms, covenants, and conditions
of said June 23, 1993 Lease Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment
No. 3 to Lease as of the day and year last written below.
LANDLORD: TENANT:
JOHN ARRILLAGA SURVIVOR'S SYNOPSYS, INC.
TRUST a Delaware corporation
By /S/ JOHN ARRILLAGA By /S/ AART DE GEUS
--------------------------------------- -----------------------------
John Arrillaga, Trustee
Date: 8/8/01 AART DE GEUS
----------------------------------- -------------------------------
Print or Type Name
RICHARD T. PEERY SEPARATE Title: CHAIRMAN & CEO
------------------------
PROPERTY TRUST
By /S/ JASON PEERY Date: 8/8/01
--------------------------------------- -------------------------
Jason Peery, Special Trustee
Date: 8/8/01
-----------------------------------
EXHIBIT 10.13
AMENDMENT NO. 1
TO LEASE
THIS AMENDMENT NO. 1 is made and entered into this 18th day of July,
2001, by and between JOHN ARRILLAGA, Trustee, or his Successor Trustee UTA dated
7/20/77 (JOHN ARRILLAGA SURVIVOR'S TRUST) (previously known as the "Arrillaga
Family Trust") as amended, and RICHARD T. PEERY, Trustee, or his Successor
Trustee UTA dated 7/20/77 (RICHARD T. PEERY SEPARATE PROPERTY TRUST) as amended,
collectively as LANDLORD, and SYNOPSYS, INC., A DELAWARE CORPORATION, as TENANT.
RECITALS
A. WHEREAS, by Lease Agreement dated August 24, 1995 Landlord leased to
Tenant all of that certain 85,000+/- square foot building located at 1101 West
Maude Avenue, Mountain View, California, the details of which are more
particularly set forth in said August 24, 1995 Lease Agreement, and
B. WHEREAS, it is now the desire of the parties hereto to amend the
Lease by: (i) extending the Term for twelve years, thereby changing the
Termination Date from February 28, 2003 to February 28, 2015, (ii) amending the
Basic Rent schedule and Aggregate Rent accordingly, (iii) increasing the
Security Deposit required under the Lease, (iv) amending the Management Fee
charged to Tenant, (vii) replacing Lease Paragraphs 12 ("Property Insurance")
and 31 ("Notices"), (viii) amending Lease Paragraphs 5 ("Acceptance and
Surrender of Premises"), 6 ("Alterations and Additions"), 11 ("Tenant's Personal
Property Insurance and Workman's Compensation Insurance") and 21
("Destruction"), (xi) adding a paragraph ("Authority to Execute"), and (x)
deleting Lease Paragraphs 53 ("Two (2) - Three (3) Year Options to Extend") and
54 ("Tenant's Option to Terminate Lease") to the Lease Agreement as hereinafter
set forth.
AGREEMENT
NOW THEREFORE, for valuable consideration, receipt of which is hereby
acknowledged, and in consideration of the hereinafter mutual promises, the
parties hereto do agree as follows:
1) TERM OF LEASE: It is agreed between the parties that the Term of said
Lease Agreement shall be extended for an additional twelve (12) year period (the
"Extended Term"), and the Lease Termination Date shall be changed from February
28, 2003 to February 28, 2015. The Extended Term of the Lease is comprised of
the two three year extensions (which extend the Term to February 28, 2009)
covered under Tenant's Option to Extend pursuant to Lease Paragraph 53 ("Two
Three Year Options to Extend") and an additional six year extension, which
extends the Term to February 28, 2015 to make the Termination Date of this Lease
co-terminous with the extended term of the Existing Leases as referenced in
Lease Paragraph 47 ("Lease Terms Co-Terminous"). Tenant and Landlord hereby
acknowledge Tenant's exercise of said Options to Extend the Terms of said Lease,
and Lease Paragraph 53 is hereby deleted in its entirety upon the execution of
this Amendment No. 1.
2) BASIC RENTAL FOR EXTENDED TERM OF LEASE: The monthly Basic Rental for
the Extended Term of Lease shall be as follows:
On March 1, 2003, the sum of [***]* shall be due, and a like sum due on
the first day of each month thereafter through and including February 1, 2004.
On March 1, 2004, the sum of [***]* shall be due, and a like sum due on
the first day of each month thereafter through and including February 1, 2005.
On March 1, 2005, the sum of [***]* shall be due, and a like sum due on
the first day of each month thereafter through and including February 1, 2006.
On March 1, 2006, the sum of [***]* shall be due, and a like sum due on
the first day of each month thereafter through and including February 1, 2007.
On March 1, 2007, the sum of [***]* shall be due, and a like sum due on
the first day of each month thereafter through and including February 1, 2008.
On March 1, 2008, the sum of [***]*shall be due, and a like sum due on
the first day of each month thereafter, through and including February 1, 2009.
On March 1, 2009, the sum of [***]* shall be due, and a like sum due on
the first day of each month thereafter, through and including February 1, 2010.
On March 1, 2010, the sum of [***]* shall be due, and a like sum due on
the first day of each month thereafter, through and including February l, 2011.
On March 1, 2011, the sum of [***]* shall be due, and a like sum due on
the first day of each month thereafter, through and including February 1, 2012.
On March 1, 2012, the sum of [***]* shall be due, and a like sum due on
the first day of each month thereafter, through and including February 1, 2013.
On March 1, 2013, the sum of [***]* shall be due, and a like sum due on
the first day of each month thereafter, through and including February 1, 2014.
On March 1, 2014, the sum of [***]* shall be due, and a like sum due on
the first day of each month thereafter, through and including February 1, 2015.
The Aggregate Basic Rent for the Lease Term, as extended, shall be
increased by $[***]* or from $[***]* to $[***]*.
3) SECURITY DEPOSIT: Provided Tenant is not in default (pursuant to
Paragraph 19 of the Lease, i.e.. Tenant has received notice and any applicable
cure period has expired without cure) of any of the terms, covenants, and
conditions of the Lease Agreement, the Security Deposit required under the Lease
shall remain $280,500.00. In the event of a Tenant default, Tenant's Security
Deposit shall be increased by $210,220.42, or from $280,500.00 to $490,720.42 as
follows:
A. By February 28, 2003 (or within ten (10) days of notice from
Landlord of an uncured default under the Lease if said default occurs after
February 28, 2003), Tenant shall: (i) provide Landlord with an amended
Standby Letter of Credit, in compliance with the terms of Lease Paragraph
44 ("Security Deposit Represented by Standby Letter of Credit") in the
total amount of $297,500.00, which amount is the Security Deposit required
under Tenant's First Three Year Option to Extend as stated in Lease
Paragraph 53.A; or (ii) deposit cash in the amount of $17,000.00.
- --------
* Confidential treatment has been requested for the bracketed portion. The
confidential redacted portion has been omitted and filed separately with the
Securities and Exchange Commission.
B. By February 28, 2006 (or within ten (10) days of notice from
Landlord of an uncured default under the Lease if said default occurs after
February 28, 2006), Tenant shall: (i) provide Landlord with an amended
Standby Letter of Credit, in compliance with the terms of Lease Paragraph
44 ("Security Deposit Represented by Standby Letter of Credit") in the
total amount of $323,000.00, which amount is the Security Deposit required
under Tenant's Second Three Year Option to Extend as stated in Lease
Paragraph 53.13; or (ii) deposit cash in the amount of $25,500.00.
C. By February 28, 2009 (or within ten (10) days of notice from
Landlord of an uncured default under the Lease if said default occurs after
February 28, 2006), Tenant shall: (i) provide Landlord with an amended
Standby Letter of Credit, in compliance with the terms of Lease Paragraph
44 ("Security Deposit Represented by Standby Letter of Credit") in the
total amount of $490,720.42, which amount is the total Security Deposit
required under the Lease; or (ii) deposit cash in the amount of
$167,720.42.
Within ten (10) business days of Tenant's execution of this Amendment No.
1, Tenant shall provide Landlord with an amended Standby Letter of Credit
reflecting an expiration date on the Standby Letter of Credit of March 30, 2015.
4) MANAGEMENT FEE: Effective March 1, 2009, and on the first day of each
month thereafter during said Lease Term, Tenant shall pay to Landlord, in
addition to the Basic Rent and Additional Rent, a fixed monthly management fee
("Management Fee") equal to one and one-half percent (1.5%) of the Basic Rent
due for each month throughout the remaining Lease Term. Notwithstanding anything
to the contrary above or in Lease Paragraph 4.D ("Additional Rent"), no
additional real property management fee shall be charged to Tenant.
5) PROPERTY INSURANCE: Lease Paragraph 12 ("Property Insurance") is hereby
deleted in its entirety and shall be replaced with the following:
"12: PROPERTY INSURANCE. Landlord shall purchase and keep in force, and as
Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant shall
pay to Landlord (or Landlord's agent if so directed by Landlord) Tenant's
proportionate share (allocated to the Leased Premises by square footage or other
equitable basis as calculated and determined by Landlord) of the deductibles on
insurance claims and the cost of, policy or policies of insurance covering loss
or damage to the Premises (including all improvements within the Premises
constructed by either Landlord or Tenant (provided Tenant has obtained
Landlord's written approval for said improvements to the Premises) and Complex
(excluding routine maintenance and repairs and incidental damage or destruction
caused by accidents or vandalism for which Tenant is responsible under Paragraph
7) in the amount of the full replacement value thereof, providing protection
against those perils included within the classification of "all risks" insurance
and flood and/or earthquake insurance, if available, plus a policy of rental
income insurance in the amount of one hundred (100%) percent of twelve (12)
months Basic Rent, plus sums paid as Additional Rent and any deductibles related
thereto. If such insurance cost is increased due to Tenant's use of the Premises
or the Complex, Tenant agrees to pay to Landlord the full cost of such increase.
Tenant shall have no interest in nor any right to the proceeds of any insurance
procured by Landlord for the Complex.
In addition and notwithstanding anything to the contrary in this
Paragraph 12, each party to this Lease hereby waives all rights of recovery
against the other party or its officer, employees, gents and representatives for
loss or damage to its property or the property of others under its control,
arising from any cause insured against under the fire and extended coverage
(excluding, however, any loss resulting from Hazardous Material contamination of
the Property) required to be maintained by the terms of this Lease Agreement to
the extent full reimbursement of the loss/claim is received by the insured
party. Each party required to carry property insurance hereunder shall cause the
policy evidencing such insurance to include a provision permitting such release
of liability ("waiver of subrogation endorsement") provided, however, that if
the insurance policy of either releasing party prohibits such waiver, then this
waiver shall not take effect until consent to such waiver is obtained; provided,
however, that if the insurance policy of either releasing party prohibits such
waiver, then this waiver shall not take effect until consent to such waiver is
obtained. If such waiver is so prohibited, the insured party affected shall
promptly notify the other party thereof. In the' event the waivers are issued to
the parties and are not valid under current policies and/or subsequent insurance
policies, the non-complying party will provide, to the other party, 30 days
advance notification of the cancellation of the subrogation waiver, in which
case neither party will provide such subrogation waiver thereafter and this
Paragraph will be null and void. The foregoing waiver of subrogation shall not
include any loss resulting from Hazardous Material contamination of the Property
or any insurance coverage relating thereto."
6) NOTICES: Lease Paragraph 31 ("Notices") is hereby deleted in its
entirety and shall be replaced with the following:
"31. NOTICES. All notices, demands, requests, advices or designations which
maybe or are required to be given by either party to the other hereunder shall
be in writing. All notices, demands, requests, advices or designations by
Landlord to Tenant shall be sufficiently given, made or delivered if personally
served on Tenant by leaving the same at the Premises (provided written receipt
is offered and is addressed to the attention of the Vice President of Real
Estate) or if sent by United States certified or registered mail, postage
prepaid or by a reputable same day or overnight courier service addressed to
Tenant at: SYNOPSYS, INC., 700 EAST MIDDLEFIELD ROAD, MOUNTAIN VIEW, CA 94043,
ATTN: VICE PRESIDENT OF REAL ESTATE. As an accommodation to Tenant, Landlord
shall also send a copy of all notices to: SHARTSIS, FRIESE & GINSBURG LLP, ONE
MARITIME PLAZA, 18TH FLOOR, SAN FRANCISCO, CA 94111, ATTN: JONATHON M. KENNEDY;
however, Tenant acknowledges and agrees that any notice delivered to Tenant's
main address listed above shall be considered to be delivered to Tenant,
regardless of whether or not said notice is submitted and/or received at the
secondary address. All notices, demands, requests, advices or designations by
Tenant to Landlord shall be sent by United States certified or registered mail,
postage prepaid, addressed to Landlord at its offices at: PEERY/ARRILLAGA, 2560
MISSION COLLEGE BLVD., SUITE 101, SANTA CLARA, CA 95054. Each notice, request,
demand, advice or designation referred to in this Paragraph shall be deemed
received on the date of the personal service or receipt or refusal to accept
receipt of the mailing thereof in the manner herein provided, as the case may
be. Either party shall have the right, upon ten (10) days written notice to the
other, to change the address as noted herein."
7) ALTERATIONS MADE BY TENANT: The provisions of this Paragraph 7 shall
modify Lease Paragraphs 5 ("Acceptance and Surrender of Premises") and 6
("Alterations and Additions"), as follows:
A. Landlord acknowledges that Tenant shall have the right, subject to
the terms of this Paragraph 7.A, to make non-structural, interior
improvements ("Interior Improvements") to the Premises subject to the
following:
a) Tenant shall provide Landlord, for Landlord's approval, a set
of construction plans and a list reflecting the Interior Improvements
Tenant desires to make to the Increased Premises no later than
November 1, 2002. Upon Landlord's review and approval of said Interior
Improvements, said construction plans shall become EXHIBIT B-1 to this
Lease. Construction of said Interior Improvements shall not commence
until Landlord and Tenant execute Landlord's standard Consent to
Alterations agreement and Landlord has posted its Notice of
Non-Responsibility;
b) Landlord shall not be required, under any circumstance, to
contribute any concessions or monetary contribution to said Interior
Improvements;
c) Tenant shall not be required to remove the Landlord approved
Interior Improvements shown on EXHIBIT B-1 at the expiration or
earlier termination of the Lease Term. Notwithstanding anything to the
contrary herein, Landlord's approval of said Interior Improvements
referenced in Section 7.A(a) above may provide for specific Interior
Improvements to be restored of the expiration or earlier termination
of the Lease Term if said Interior Improvements are not consistent
with Landlord's standard interior improvements.
B. Notwithstanding anything to the contrary in Lease Paragraph 6
("Alterations and Additions"), Landlord's written consent to any future
alterations or additions to the Premises will specify whether Landlord
shall require removal of said alterations and/or additions, provided Tenant
requests such determination from Landlord:
8) TENANT'S PERSONAL PROPERTY INSURANCE AND WORKMAN'S COMPENSATION
INSURANCE. The provisions of this Paragraph 8 shall modify Lease Paragraph 11
("Tenant's Personal Property Insurance and Workman's Compensation Insurance"),
as follows: Tenant's obligation to insure the leasehold improvements owned by
Tenant within the Leased Premises shall be limited to those leasehold
improvements owned by Tenant that are not covered by real property insurance
Landlord obtains pursuant to Lease Paragraph 12 ("Property Insurance") as
amended in Paragraph 5 above.
9) DESTRUCTION. The provisions of this Paragraph 9 shall modify Lease
Paragraph 21 ("Destruction"), as follows: Landlord's obligation to rebuild or
restore the Premises shall be limited to the building and any interior
improvements covered by the real property insurance Landlord obtains pursuant to
Lease Paragraph 12 ("Property Insurance") as amended in Paragraph 5 above.
10) AUTHORITY TO EXECUTE. The parties executing this Agreement hereby
warrant and represent that they are properly authorized to execute this
Agreement and bind the parties on behalf of whom they execute this Agreement and
to all of the terms, covenants and conditions of this Agreement as they relate
to the respective parties hereto.
11) TENANT'S OPTION TO TERMINATE LEASE: Lease Paragraph 54 ("Tenant's
Option to Terminate Lease") is hereby deleted in its entirety, and shall be of
no further force or effect.
EXCEPT AS MODIFIED HEREIN, all other terms, covenants, and conditions of
said August 24, 1995 Lease Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment No. 1
to Lease as, of the day and year last written below.
LANDLORD: TENANT:
JOHN ARRILLAGA SURVIVOR'S SYNOPSYS, INC.
TRUST a Delaware corporation
By /S/ JOHN ARRILLAGA By /S/ AART DE GEUS
----------------------------------------- -----------------------------
John Arrillaga, Trustee
Date: 8/8/01 AART DE GEUS
------------------------------------- -------------------------------
Print or Type Name
RICHARD T. PEERY SEPARATE Title: CHAIRMAN & CEO
------------------------
PROPERTY TRUST
By /S/ JASON PEERY Date: 8/8/01
----------------------------------------- -------------------------
Jason Peery, Special Trustee
Date: 8/8/01
------------
EXHIBIT 10.21
SCHEDULE OF EXECUTIVE EMPLOYMENT AGREEMENTS
The Company has entered into Employment Agreements in the form filed as
Exhibit 10.29(a) to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended January 3, 1998 with the individuals listed below. Both
agreements are identical except for the references to names, titles and
annualized base salaries (for fiscal 2002), which are shown in the schedule
below.
NAME TITLE ANNUALIZED BASE SALARY
---- ------ ----------------------
Aart de Geus Chief Executive Officer $400,000
Chi-Foon Chan Chief Operating Officer $400,000
EXHIBIT 21.1
SYNOPSYS, INC.
Subsidiaries
NAME JURISDICTION OF INCORPORATION
ACEO Technology, Inc. US
Advanced Test Technologies, Inc. US
Analogy France SARL France
Analogy GmbH Germany
Analogy UK Ltd. United Kingdom
Analogy AB Sweden Sweden
Angel Fund Limited Hong Kong
Angel Hi-Tech Limited Bermuda
Angel Technology Limited Not Available
Apteq Design Systems, Inc. US
Archer Systems, Inc. US
Avansmart, Inc. Delaware
Avant! Asia Investment Holdings, Inc. British Virgin Islands
Avant! China People's Republic of China
Avant! China Holdings, Ltd. Bermuda
Avant! Corp SRL (Italy) Italy
Avant! Corporation LLC Delaware
Avant! Corporation Limited United Kingdom
Avant! Europe Manufacturing Ltd. Ireland
Avant! Export FSC, Inc. Barbados
Gemstone LLC Not Available
Avant! Gmbh Germany
Avant! Global Investment Holdings, Ltd. Bermuda
Avant! Global Technologies Ltd. Bermuda
Avant! Hi-Tech Corporation Taiwan
Avant! International Distribution Ltd. Ireland
Avant! Japan Corporation Japan
Avant! Korea Co., Ltd. Korea
Avant! Micro-Electronic (Shanghai) Company Limited China
Avant! Software & Development Centre (India) Private
Limited India
Avant! Software (Israel) Ltd. Israel
Avant! Sweden SA Sweden
Avant! Taiwan Holdings, Ltd. Bermuda
Avant! UK UK
Avant! Worldwide Holdings, Ltd. Bermuda
Avanticorp. Hong Kong Limited Hong Kong
Avanwise, Inc. Delaware
Chronologic Simulation, Inc. US
Cida Technology, Inc. US
Co-Design Automation, Inc. US
Co-Design Automation Ltd. UK
Compass Design Automation International, B.V. Netherlands
Compass Design Automation, EURL France
Compass Design Automation, Inc. US
Compass Italy BV Netherlands
Compass Japan KK Japan
Compass Korea Korea
Crystal Investment (Taiwan) Corporation Taiwan
Crystal VC Cayman Island
Eagle Design Automation, Inc. US
Electronic Design Automation Services Europe Netherlands
Epic International, Inc. US
Everest Design Automation, Inc. US
Galax! Delaware
Gambit Automation Design, Inc. US
Gemstone LLC Delaware
inSilicon Canada Corporation Canada
inSilicon Canada Holding ULC Canada
inSilicon Canada Ltd. Canada
inSilicon Corporation Delaware
inSilicon GmbH Germany
inSilicon Holding Corp. US (DE)
inSilicon International, Inc. US (DE)
inSilicon K.K. Japan
inSilicon Limited UK
InterHDL, Inc. California
InterHDL Design Corp. U.S
Maingate Electronics, Inc. Japan
Maude Avenue Land Corporation US
Meta Software KK Japan
Meta Software SA Switzerland
Nexus IC Cayman Islands
Nexus IC Asia Cayman Islands
Oak Merger Corp Delaware
Quad Design Technology, Inc. US
Radiant Design Tools, Inc. US
Silerity, Inc. US
Stanza Systems, Inc. US
Sunrise Test Systems, Inc. US
Symmetry Design Systems, Inc. US
Synopsys Holding Company US
Synopsys Ireland Limited (GB01) Ireland
Synopsys International Limited Ireland
Synopsys Ireland Resources Ireland
Synopsys International Inc. (FSC) Barbados
Synopsys International Trading (Shanghai) Co., Ltd. People's Republic of China
Synopsys Denmark ApS (DK01) Denmark
Synopsys Finland OY (Smartech) (FI01) Finland
Synopsys SARL (FR01) France
Synopsys Consulting SARL France
Synopsys Services SARL France
Synopsys Leda SARL France
Synopsys Leasing Company US
Synopsys GmbH (DE01) Germany
Synopsys (India) Private Limited (IN01) India
Synopsys (India) EDA Software India
Private Limited (IN03)
Synopsys Israel Limited) (IL01) Israel
Synopsys Italia S.r.l. (IT01) Italy
Nihon Synopsys K.K. Japan
Synopsys Korea, Inc. (Yuhan Hoesa Synopsys Korea) Korea
Synopsys Scandinavia AB (SE01) Sweden
Synopsys (Singapore) Pte. Limited (SG01) Singapore
Synopsys (Northern Europe) Limited (GB01) UK
Synopsys Taiwan Limited (TW01) Taiwan
System Science, Inc. US
The CAE Company Netherlands
The Silicon Group, Inc. Texas
TMA Italy Italy
TMA UK United Kingdom
Viewlogic Asia Corporation US
Xianqu Science & Technology (Shenzhen) Co., Ltd. People's Republic of China
Xynetix Design Systems, U.K. United Kingdom
Xynetix GmbH Germany
EXHIBIT 23.1
REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors
Synopsys, Inc.:
Under the date of November 20, 2002, except as to Note 13, which is as of
January 13, 2003, we reported on 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. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedule as listed in the accompanying index. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
Mountain View, California
November 20, 2002, except as to Note 13,
which is as of January 13, 2003
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, and 333-100155) 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 of Synopsys, Inc.
KPMG LLP
Mountain View, California
January 29, 2003
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: January 27, 2003
/s/ AART J. DE GEUS
-----------------------
Aart J. de Geus
Chief Executive Officer
(Principal Executive Officer)
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: January 27, 2003
/S/ STEVEN K. SHEVICK
---------------------
Steven K. Shevick
Chief Financial Officer
(Principal Financial Officer)