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THIS DOCUMENT IS AN ELECTRONIC CONFIRMING COPY OF THE FORM 10-K OF CADENCE
DESIGN SYSTEMS, INC. FOR THE YEAR ENDED DECEMBER 31, 1993 FILED ON MARCH
30, 1994.
SECURITIES AND EXCHANGE COMMISSION
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 fiscal year ended December 31, 1993
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________________to ____________________________
Commission file number 0-10606
CADENCE DESIGN SYSTEMS, INC.
__________________________________
(Exact name of registrant as specified in its charter)
Delaware 77-0148231
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
555 River Oaks Parkway, San Jose, California 95134
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 943-1234
---------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- ------------------------------------------------------------
Common Stock, $.01 par value per share New York Stock Exchange
- -------------------------------------- ------------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act: None
________________________________________________________________________________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ X ]
Aggregate market value of the voting stock held on March 25, 1994 by
non-affiliates of the registrant: $433,260,556
Number of shares of common stock outstanding: 41,265,044
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting to be held on May 17,
1994 are incorporated by reference
into Part III hereof.
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CADENCE DESIGN SYSTEMS, INC.
1993 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
----
PART 1
Item 1. Business 1
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Executive Officers of the Registrant 12
PART II
Item 5. Market for the Registrant's Common Equity and Related 14
Stockholder Matters
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial 15
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants on 23
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 23
Item 11. Executive Compensation 23
Item 12. Security Ownership of Certain Beneficial Owners and 23
Management
Item 13. Certain Relationships and Related Transactions 24
PART IV
Item 14. Exhibits, Financial Statements, Schedules, and Reports 24
on Form 8-K
Signatures 53
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PART I
ITEM 1. BUSINESS
Cadence Design Systems, Inc. ("Cadence" or the "Company") develops,
markets, and supports electronic design automation ("EDA") software products
that automate, enhance and accelerate the design and verification of integrated
circuits ("ICs") and electronic systems. Cadence's product lines are composed
of suites of software packages or tools, integrated through Cadence's
proprietary software architecture.
Cadence was formed as a result of the merger of SDA Systems, Inc.
("SDA") into ECAD, Inc. ("ECAD") in May 1988. ECAD commenced operations in
1982. SDA commenced operations in 1983. The Company's name was changed to
Cadence Design Systems, Inc. in June 1988. In March 1989, Cadence acquired
Tangent Systems Corporation ("Tangent"). In December 1989, Cadence merged with
Gateway Design Automation Corporation ("Gateway"), a leading EDA supplier of
digital logic simulation software. In July 1990 Cadence merged with Automated
Systems, Inc. ("ASI"), a company that marketed products and services related to
the design and manufacture of electronic printed circuit boards ("PCBs") to the
aerospace, defense, computer and telecommunications industries. In December
1991 Cadence merged with Valid Logic Systems Incorporated ("Valid"), a company
that developed and supported EDA software used to design electronic systems,
PCBs and applications for electronic product designs involving advanced
packaging technology such as hybrids and multi-chip modules ("MCMs"). In June
1993 Cadence acquired the business and certain assets of Comdisco Systems, Inc.
("Comdisco") a subsidiary of Comdisco, Inc. Comdisco develops, markets and
supports digital signal processing software products in the electronic systems
applications area. In December 1993 the Company sold its ASI division and
reported the operating results of ASI as discontinued operations for all prior
years.
Valid had acquired two companies by merger in February 1989:
Integrated Measurements Systems, Inc. ("IMS"), a company that manufactured and
marketed verification systems used in testing prototype application specific
integrated circuits ("ASICs"), and Analog Design Tools, Inc. ("ADT"), a
supplier of computer-aided engineering ("CAE") software for the design of
analog electronic circuits.
THE ELECTRONIC PRODUCT DEVELOPMENT CYCLE
ELECTRONIC DESIGN AUTOMATION EDA refers to the use of engineering
software to design electronic circuits and systems. A critical and enabling
technology for the global electronics industry, EDA allows engineers to
develop complex and high quality electronic products within accelerated
time-to-market schedules. EDA software is one of the key forces driving
electronics innovation and production.
Virtually all complex computer, telecommunication, aerospace and
semiconductor projects depend on advanced EDA solutions to handle the large
amounts of data associated with these designs. In addition, the short product
life cycles of consumer electronics products depend on the accelerated design
schedules that EDA software allows. EDA software can literally cut months from
a production schedule, allowing design teams to complete projects in a
timeframe that would be impossible if done manually.
Electronics manufacturing has a synergistic relationship with EDA.
Without EDA simulation software to verify design performance, the design
quality required for profitable high volume production of ICs and PCBs would be
compromised. EDA technology has also enabled the quick production time and
enormous market growth of semi-custom circuits and subsystems such as ASICs,
Programmable Logic Devices ("PLDs"), Field Programmable Gate Arrays ("FPGAs")
and MCMs.
EDA systems address two major functions in the electronic product
development cycle: electrical design, often referred to as CAE, and physical
design, often referred to as computer-aided design ("CAD"). Together, CAE and
CAD address the major phases in the design of electronic systems, PCBs, MCMs,
ASICs, PLDs, FPGAs and full-custom ICs.
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CAE DESIGN PROCESSES The electrical design process involves design
description, model development and simulation of the design's behavior and
timing performance. Additional design automation technologies, such as
architectural design and logic and test synthesis, can simplify the design
entry process; IC floorplanning can provide greater accuracy in simulation.
Design description (called design entry, design capture or schematic
capture) is the first step in the electronic design process. To handle the
complexity of large designs, design entry often consists of several levels of
design description. At the highest level of abstraction, a design can be
expressed in a behavioral description, a convention that allows engineers to
describe large and complex designs quickly. Behavioral design description
typically involves the use of equations, or a special design description
language called a Hardware Description Language ("HDL").
For digital designs, the most common HDLs are Verilog(R) HDL, a
language developed by Cadence that is now in the public domain, and VHDL, a
language standardized and backed by the U.S. Department of Defense and
supported by Cadence as well as many other EDA vendors. A similar standard is
emerging for analog design. Cadence is developing an analog hardware
description language ("AHDL") which it will seek to make an industry-standard.
Much as a sketch is detailed into a blueprint before building a house,
behavioral descriptions must be detailed into lower-level descriptions (also
called structural designs) before the IC or PCB can be manufactured. This
process can be done manually, or in an automated fashion using a process called
logic synthesis and a software tool such as the Cadence Synergy(TM)
synthesizer. In structural design, the engineer specifically defines
components, their interconnections, and associated physical properties. This
description can be the text file produced by logic synthesis, or a graphical
drawing called a schematic. In structural design, critical design time is
saved by pulling components from an electronic library and including them in
the design, rather than recreating symbols and data for each design. A
database, containing the design's electrical characteristics, interconnections
and specific design rules, is automatically created and used as the foundation
for subsequent design steps.
Simulation is used to verify the design electronically before it is
manufactured, enabling engineers to explore design alternatives quickly and to
catch costly design errors before the design is manufactured. Simulation can
be performed with different levels of design description: behavioral,
structural and mixed-level. These levels allow designers to test their design
concept, actual structure and performance, and a combination of concept and
structure. A key element in the simulation process is the use of component
libraries containing software models of commonly used parts. These are either
developed and supplied by Cadence, or are provided by third-parties such as
ASIC vendors or independent modeling companies that have certified their
libraries for use with Cadence's simulation products.
When the functionality and timing are determined to be correct, the
engineer generates a netlist. A netlist is a non-graphic description, in list
form, of all design components and interconnects. The netlist is the link
between the CAE design environment and the CAD process.
CAD DESIGN PROCESSES An electronic product's physical design process
varies depending on whether the final product is a full-custom IC, an ASIC or a
PCB. However, the physical design process typically includes the placement of
devices or components, electrical routing or wiring between those devices and
components, analysis of the layout to check for compliance with design rules
and performance specifications and the generation of data for use in
manufacturing and test activities.
If the design is a full custom IC, the process includes chip-level
architectural design, creation of cells and blocks, floorplanning, placement,
routing and compaction of the cells/blocks, analysis of conformance to
electrical and physical design rules, analysis of wire lengths, load factors
and timing performance, and generation of mask data for chip fabrication. If
the design is produced as a PCB or MCM incorporating off-the-shelf components,
full custom ICs and/or ASICs, physical design typically includes floorplanning
and pre-placement of critical components, automatic or interactive component
placement, analysis of thermal conditions and high-frequency transmission line
characteristics, analysis of testability and generation of test documentation,
pre-manufacturing clean-up or "glossing" of the board design, and generation of
a wide range of manufacturing data and artwork.
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CADENCE'S EDA PRODUCT FAMILY
Cadence's full line of integrated EDA software solutions has been
developed to support engineers at two levels. At one level, individual
engineers need solutions to solve their specific design needs. A second level
is to support teams of engineers working on larger projects. These engineers
need to share information across the entire company and can do so effectively
with a variety of solutions from Cadence.
Cadence offers a full line of integrated EDA solutions for three basic
design areas: IC design for digital, analog and mixed-signal devices; system
design for both digital and analog systems; and ASIC design, particularly for
high-performance sub-micron ASICs.
These three areas include solutions for the electrical and physical
design of all types of systems, subsystems, and ICs, including PCBs, MCMs,
hybrids, ASICs, PLDs, FPGAs, and full custom and semi-custom ICs.
The major advantages of Cadence products are in the areas of design
methodologies and integration of electrical and physical design tools.
Cadence's commitment to industry standard hardware platforms, operating systems
and networking protocols allows users to configure an open design environment
tailored to their specific needs. As design needs grow, the Cadence design
environment can be expanded to include additional Cadence tools or third-party
tools. Customizing environments can be handled through Cadence's Spectrum
Services Group, responsible for working with customers to define and implement
design environments optimized for customer project or product needs.
PRODUCT STRATEGY AND PRODUCTS
Cadence's goal is to provide technology that accelerates the creation of
innovative electronic products, enabling designers to bring complex products to
market quickly and reliably. To meet this goal consistently, Cadence has
adopted the following core product strategies:
o Focus development efforts on collapsing the most complex and
time-consuming aspects of the design process
o Provide full integration of leading-edge tools into a unified
environment
o Deliver solutions that combine software tools and advanced design
methodologies to streamline the overall design process
CORE PRODUCT TECHNOLOGY Cadence believes that within its integrated
solutions approach, customers still demand high performance point tools for
certain functions. By focusing technology development efforts to address the
most complex and time-consuming aspects of the design process, Cadence has
delivered a suite of individual design tools that has become well known in the
industry. These tools, which address all major areas of the design process,
include:
o Allegro(TM) and Prance-XL(TM) for board and MCM layout, along with
integrated layout analysis tools, DF/SigNoise(TM), DF/Thermax(TM),
and DF/Viable(TM)
o Analog Artist(TM) and Analog Workbench(TM) for analog IC and
system design, respectively
o Composer(TM) and Concept(TM) design entry environments
o Design Framework II(TM) framework technology
o Dracula(R) and Diva(TM) for verification
o Gate Ensemble(TM), Cell Ensemble(TM) and Block Ensemble(TM) for
place and route
o Preview(TM) for ASIC and IC floorplanning
o Profile(TM) analog behavioral language
o Spectre(TM), Cadence Spice(TM) and SpicePlus(TM) for analog simulation
o Synergy(TM) family for circuit synthesis and optimization
o Verilog-XL(TM) and Leapfrog(TM) VHDL for top-down digital simulation
o Virtuoso(TM) products for custom IC layout and library development
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OPEN ENVIRONMENT Cadence pioneered the ability to link and manage a
variety of design tools under a consistent graphical user interface with the
introduction of its Design Framework(TM) in 1985. In 1990 Cadence delivered
Design Framework II, so that designers can work with multiple tools more
efficiently. Through its communication and design management features, Design
Framework II also improves project and data management, critical for today's
large designs and design teams.
Design Framework II gives users an easy-to-use EDA software system,
which can easily be customized, combined with third party tools, and ported to
new computer platforms as they become available.
Cadence's software operates on industry standard workstations from
Digital Equipment Corporation, Hewlett-Packard/Apollo, International Business
Machines Corporation and Sun Microsystems, Inc. Cadence believes that it is
well positioned to port its systems quickly to other UNIX-based workstations
that may gain broad customer acceptance in the future.
The CAD Framework Initiative (CFI), a standards committee comprised of
EDA vendors and customers, has developed a reference architecture as an initial
step towards a universal framework definition. As a founding member, Cadence
works closely with CFI to develop this standard, and is advancing Design
Framework II to adhere to CFI's evolving guidelines.
INTEGRATED DESIGN SOLUTIONS
Cadence offers a full line of EDA software combined with framework
technology and advanced design methodologies to provide complete EDA solutions
that enhance productivity.
IC DESIGN Cadence's products have been used in every major electronic
product design ranging from microprocessors that are at the heart of personal
computers and workstations, to mixed signal chips that are driving the
telecommunications and networking industries. Cadence's IC solutions feature
proven tools for custom library development and editing, automated custom
design, advanced digital and analog simulation, and IC physical verification.
Building on this full-line of IC tools, Cadence offers complete, front-to-back
solutions for designing digital, analog, mixed-signal and microwave ICs. These
solutions streamline the design of complex chips and help design teams get to
market with innovative, high quality products.
For each step in the IC design process Cadence provides a complete
design environment to meet individual design tasks. Cadence's solution includes
the Virtuoso(TM) product family of custom layout tools supporting polygon
layout, symbolic layout and layout synthesis; the Ensemble(TM) product family
providing automatic place and route for both ASIC and custom cell-based design
styles; Chip Assembly Solution for multi-layered block placement and routing;
the Diva(TM) product family of interactive verification tools; and the DRACULA
product family of physical verification tools.
For analog designers, Cadence offers complete front-to-back solutions
for analog, mixed-signal and microwave circuits. The Analog Artist for IC
design provides advanced simulation, layout and verification, featuring
products like the Profile(TM) behavioral modeling and simulation software and
the Spectre(TM) high-speed circuit simulator. This solution supports design
teams with productive tools for fast, early evaluation of design alternatives
on complex analog designs, allowing teams to manage the critical
interdependencies between electrical design and physical layout.
Cadence's front-to-back IC solution includes a unique timing-driven
design methodology to minimize costly downstream iterations. All tools, from
synthesis and simulation to floorplanning and place and route, share critical
timing information to maintain consistency and ensure that key performance
requirements are met.
SYSTEM DESIGN Cadence provides complete front-to-back digital and
analog system design solutions built around the Concept design entry system;
the Verilog-XL and Leapfrog VHDL simulators; and the Allegro PCB/MCM physical
design system.
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Allegro, one of the industry's most comprehensive and
production-proven systems design environments includes: the DF/Viable(TM)
reliability analyzer, the DF/SigNoise(TM) and signal integrity analysis
modules, the DF/Thermax(R) thermal analysis software, and the Prance- XL(TM)
routers.
For analog board and system design, Cadence provides the Analog
Workbench, for top-down, front-to-back analog design. The Analog Workbench
provides simulation tools, integrated physical layout, extensive analog model
libraries and advanced analysis tools for tasks such as thermal analysis and
post-layout simulation with extracted temperatures.
Cadence's system design tools, combined with design methodologies such
as rules-driven design and correct-by-design, allow engineers to shorten design
cycles and improve the product quality of high-speed PCBs, MCMs, hybrids and
multiwire boards.
With Cadence's solutions, important design or technology
considerations are defined in advance and are automatically checked and
enforced throughout the design process to shorten design cycles and optimize
designs for performance, quality and cost. For additional accuracy, flexibility
and overall process control, Cadence's unique "synchronized" library approach
and in-process analysis tools cover electrical, thermal, reliability,
testability, manufacturing and design management constraints.
ASIC DESIGN Cadence helped pioneer the use of top-down design by ASIC
designers with its Verilog-XL simulator and Verilog(R) HDL design language.
Building on what is now the most broadly used top-down method in the industry,
Cadence offers a complete and production- proven top-down design system.
Included is a flexible environment with Composer(TM) mixed-level
design entry using either Verilog HDL or VHDL; large-capacity, high-
performance logic synthesis and optimization with the Synergy and
Optimizer(TM) synthesis software; fully integrated mixed-level logic simulation
with Verilog-XL(TM) and Leapfrog(TM) VHDL verification tools; and the
Preview(TM) floorplanner that enable the sharing of consistent timing data from
design entry through place and route. Completing the ASIC design process is
Cadence's Gate Ensemble place and route system. A new series of
design-for-test tools, offering advanced test synthesis and test pattern
generation capabilities, helps to shorten ASIC design cycles and improve
yields.
In addition, Cadence's extensive list of over 185 ASIC libraries and
endorsements from major ASIC vendors help ensure a production path for the most
complex, leading-edge ASIC designs.
MARKETING AND CUSTOMERS
CUSTOMERS AND MARKETING STRATEGY Cadence's customers and target
markets include computer manufacturers, consumer electronics companies, defense
electronics companies, merchant semiconductor manufacturers, ASIC foundries and
telecommunications companies. In addition, Cadence licenses its products to
international distributors in certain countries (see "International Sales"
below in this "Business" section). In 1993, 1992 and 1991 one customer,
Cadence's distributor in Japan, Innotech Corporation ("Innotech"), accounted
for 13%, 14% and 13% of total revenue, respectively.
Cadence's principal marketing objectives are:
o Offer high quality, complete and integrated design solutions
o Provide best-in-class technologies in critical design areas
o Deliver a standards-driven, open design environment
o Utilize Cadence's worldwide resources to solve customers' complex
design challenges and serve global customers
CUSTOMER SUPPORT Cadence's support group helps tailor new tools to a
customer's existing design environment, train designers on how to best utilize
their EDA software and provide ongoing software updates to enhance product
capabilities. The backbone of the global customer support process is the
customer response center program. These centers give Cadence customers
worldwide access to solution and product experts. A dedicated team of
application engineers is
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available to address customer applications issues as well as provide links
between customers and Cadence's product developers.
CADENCE SPECTRUM SERVICES Customizing design automation systems can
require a major time and resource investment from the customer. Spectrum
Services provides a structured consultative approach to analyzing the design
process. After an extensive review of a customer's business and technical
objectives and design processes, a comprehensive plan is developed for an
advanced custom design environment. By integrating Cadence's solutions with the
customer's software tools and third-party and custom-designed tools and
augmenting the software with expert advice on streamlining the design process,
customers benefit from a custom optimized design environment.
CUSTOMER PARTNERSHIPS Cadence has established close working
relationships with a number of semiconductor manufacturers and electronic
systems companies based on a business partnership model that has become a
central business model for the Company. To ensure that research and
development activities are properly prioritized, and also that finished
products meet customers' needs, major new product developments begin after
collaboration with a Cadence customer/partner.
There are presently several variations of Cadence partnerships: four
groups of technology partnerships (involving Cadence's IC, HDL, Systems Design
and Systems Physical Design Groups, respectively) and a fifth group that
focuses on development of specific products ("Product Development
Partnerships").
These technology partnerships allow Cadence to work with customers'
designers in defining and developing state-of-the-art solutions for current
and emerging design approaches. Through an engineer exchange program,
customers will often work on-site at Cadence facilities, giving Cadence
valuable insight into customer product planning. Product Development
Partnerships are generally directed at the development and refinement of
specific tools.
INDUSTRY ALLIANCES Cadence cooperates with other design automation
vendors to deliver full-scope technology to its customers. Through Cadence's
Connections(TM) Program, participating companies can integrate their products
and technologies more easily into Cadence's design framework. This provides
customers with the flexibility to mix and match third-party and proprietary
tools to specifically meet their design automation needs. Today over 70
companies have integrated their tools into Cadence's design framework.
UNIVERSITY SOFTWARE PROGRAM Cadence supports EDA research by sharing its
design automation technology and expertise with universities. More than 500
universities worldwide participate, including the University of California at
Berkeley, Duke University, the Massachusetts Institute of Technology and
Stanford University.
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SALES
As of December 31, 1993, Cadence had 796 employees engaged in field
sales and sales support, representing approximately 32% of its total employees.
Cadence's sales people present Cadence and its products for licensing to
prospective customers, while applications engineers provide technical pre-sales
as well as post-sales support. Due to the complexity of EDA products, the
selling cycle is generally long, with three to six months being typical.
Activities during this sales cycle typically consist of a technical
presentation, a product demonstration, a design benchmark and often, an on-site
customer evaluation of Cadence software.
NORTH AMERICAN SALES In the domestic market Cadence uses a direct
sales force, utilizing both sales people and applications engineers in each
territory to license its products. As of December 31, 1993, Cadence had 419
regional sales people and applications engineers licensing and supporting
Cadence's products in the United States and Canada. Cadence maintains domestic
sales and support offices at various locations across the United States.
INTERNATIONAL SALES In Europe and Asia Cadence markets and
supports its products primarily through 12 majority owned subsidiaries, which,
as of December 31, 1993, employed 86 salespeople and 291 other sales and
support personnel.
Cadence licenses its products in Japan through three distributors:
Innotech, Kanematsu Electronics and Sony Tektronics. Cadence's systems
products are marketed in Japan through a wholly-owned subsidiary and, until
1992, through a distributor, CIC, Inc. In March 1992 Cadence reached an
agreement to acquire CIC, Inc. and consolidated its systems product marketing
in Japan utilizing its subsidiary in Japan, Cadence Design Systems K.K.
("Cadence K.K.").
Cadence also serves its international customers through a
manufacturer's representative in Europe, European Silicon Structures B.V.
("ES2"). The Company also uses distributors in various countries. In
Singapore, Hong Kong, Brazil, Australia, India and The People's Republic of
China, Cadence uses CAD/CAM Systems, Modern Devices Ltd., Quick Chip Eng. E.
Projectos Ltd., Cadence Design Systems Pty Ltd., Wipro Information Technology
and IMAG Industries, Inc. and ReMA Ltd., respectively, as its distributors.
Revenue from international sources was $183.6 million, $215.4
million and $197.6 million or approximately 50%, 51% and 52% of total revenue
for the years ended December 31, 1993, 1992 and 1991, respectively.
Prices for international customers are quoted from an international
price list. The list is maintained in U.S. dollars but reflects the higher
cost of doing business outside the United States. International customers are
invoiced in U.S. dollars using current exchange rates or the local currency.
In light of the large portion of Cadence's revenue derived from international
sales, if the dollar strengthens in relation to the Japanese yen or certain
European currencies, Cadence's revenue from international sales may be
adversely affected. Cadence enters into forward exchange contracts to reduce
the impact of foreign currency fluctuations resulting from transaction gains
and losses. Cadence is required to have United States Department of Commerce
export licenses for shipment of its products outside the United States.
Although to date Cadence has not encountered any material difficulty in
obtaining these licenses, any difficulty in obtaining necessary export licenses
in the future could have an adverse effect on revenue.
Foreign subsidiaries' marketing and support expenses are incurred
in local currency and license fees paid by the subsidiaries to Cadence are paid
in local currency or U.S. dollars. Cadence is subject to the currency
conversion risks inherent in international transactions. It is Cadence's
policy to manage and minimize its foreign exchange risks.
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SERVICE AND SUPPORT
STANDARD SERVICE AND SUPPORT Cadence believes that customer
support is a key factor in successfully marketing EDA products and generating
repeat orders. A majority of Cadence's customers have purchased one-year
renewable maintenance contracts.
Product maintenance contracts entitle the customers to product
updates, documentation and ongoing support. Cadence tracks all service reports
using an on-line database that provides a mechanism for tracking progress in
solving any reported problem from first report to final software solution.
ENHANCED SERVICE AND SUPPORT Installing a new design automation
system, tailoring it to a customer's design environment and training designers
in the efficient use of this new system requires a major time and resource
investment from the customer. In response to customer requests, Cadence has
developed an enhanced consulting service capability. The Cadence consulting
services team is a group of Cadence employees whose services can be retained by
customers to provide a wide range of engineering activities from specialized
training to custom programming projects or contract design. These services
are intended to assist customers in becoming productive quickly through use of
Cadence's products, thereby improving customer satisfaction and increasing the
likelihood of follow-on sales.
PRODUCT DEVELOPMENT AND ENGINEERING
As of December 31, 1993, Cadence's product development was
performed by 750 employees, 476 employees located at its research and
development facilities in San Jose, Foster City, Santa Cruz and San Diego,
California, 106 employees in Chelmsford, Massachusetts, 59 employees in India,
13 employees in Taiwan, 15 employees in Lawrence, Kansas, 2 employees in Ohio
and 5 employees in Albany, New York. The development group includes experts in
database structures and industry specific algorithm technology. In June 1990,
the Company entered into a joint venture ("EuCAD") as majority owner with ES2.
During 1992, the Company acquired the minority interest in the joint venture.
EuCAD has 26 employees in the U.K. and 3 employees in France and specializes
in research and development activities in the EDA and ASIC design markets. The
Company also has 45 employees in Beaverton, Oregon at its IMS subsidiary.
For the years ended December 31, 1993, 1992 and 1991 Cadence's
research and development expenses were approximately $84.3 million, $81.2
million and $84.3 million (before capitalizing approximately $15.2 million,
$14.7 million and $16.2 million of software development costs in 1993, 1992 and
1991), respectively. Cadence began capitalizing certain of its software
development costs in 1986 in accordance with Statement of Financial Accounting
Standards No. 86. See Note 3 of Notes to Consolidated Financial Statements at
December 31, 1993 for a more complete description of Cadence's capitalization
of certain software development costs.
Certain faculty members from the University of California at
Berkeley, considered to be a leading university for IC design software
research, have served as consultants to Cadence since its inception. These
consultants have helped Cadence to stay abreast of the latest developments and
directions in the rapidly changing IC design software industry.
COMPETITION
Cadence competes with a number of companies in each of Cadence's
tool categories, as well as with internal CAD development groups of potential
customers. The EDA software industry is characterized by rapid technological
change and is intensely competitive. In Cadence's opinion, the principal
competitive factors in its markets include performance, ease of use, breadth of
tool offering, open system architecture, software portability, pre-sales and
post-sales support and price.
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PROPRIETARY RIGHTS
Cadence relies principally upon a combination of copyright and
trade secret laws and license agreements to protect Cadence's proprietary
interest in its products. Cadence's products are generally licensed to end
users pursuant to a license agreement that restricts the use of the products to
the customer's internal purposes. Cadence protects the source code version of
its products as a trade secret and as an unpublished copyrighted work. Cadence
has made portions of its source code available to certain customers under very
limited circumstances, subject to confidentiality, use and other restrictions.
Despite these precautions, it may be possible for third parties to copy aspects
of Cadence's products or to obtain and use information that Cadence regards as
proprietary without authorization. In addition, effective copyright and trade
secret protection for software products may be unavailable in certain foreign
countries.
Cadence believes that patent, trade secret and copyright protection
are less significant to Cadence's success than factors such as the knowledge,
ability and experience of Cadence's personnel, new product development,
frequent product enhancements, name recognition and ongoing reliable product
maintenance. Cadence does not believe that its products or processes infringe
on existing proprietary rights of others.
DRACULA(R), Verilog(R), Prance(R), Verifault-XL(R) and Thermax(R)
are registered trademarks of Cadence and substantially all of the other Cadence
product and product family names used herein are trademarks of Cadence.
MANUFACTURING AND BACKLOG
Cadence's software production operations consist of configuring the
proper version of a product, recording it on magnetic tape or other recording
media and producing user manuals and other documentation. Shipments are
generally made within two weeks of receiving an order. In light of the short
time between order and shipment of Cadence's products, Cadence generally has
relatively little backlog at any given date.
Cadence's product line includes a series of design verification
systems offered by IMS. Logic Master is a family of design verification
systems designed to work with most computer systems, workstations, or terminals
to receive and execute test commands and report the results of test procedures.
These systems are designed to match varying customer requirements. Generally,
they differ from one another as to speed, size of the device to be verified,
flexibility in the number and variety of applications in which a system can be
used and price.
EMPLOYEES
As of December 31, 1993, Cadence employed 2,476 persons, including
1,449 in sales, marketing, support and manufacturing activities, 750 in product
development and 277 in management, administration and finance. Of these
employees, 1,949 were located in the United States and 527 were located in 15
other countries. None of Cadence's employees are represented by a labor union
and Cadence has experienced no work stoppages. Cadence believes that its
employee relations are good.
Competition in recruiting of personnel in the software industry is
intense. Cadence believes that its future success will depend in part on its
continued ability to recruit and retain highly skilled management, marketing
and technical personnel.
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ITEM 2. PROPERTIES
Cadence leases approximately 692,000 square feet of facilities
comprised of four buildings located at 535-575 River Oaks Parkway (the "555
Facility"), three buildings at Seely Road and three buildings at Plumeria Drive
in San Jose, California for an annual rental of approximately $10,600,000.
Cadence also leases approximately 100,000 square feet of facilities in
Chelmsford, Massachusetts at an annual rate of approximately $450,000. Cadence
leases additional facilities for its sales offices in the United States and
various foreign countries, and research and development facilities in San
Diego, Foster City and Santa Cruz, California, Lawrence, Kansas, Albany, New
York, United Kingdom, France, Taiwan and India at an aggregate annual rental of
approximately $7,000,000.
Cadence leases design center facilities in Blue Bell, Pennsylvania
and Torrance, California, of approximately 11,700 and 13,700 square feet,
respectively, at a combined annual rate of approximately $500,000. Cadence has
contracted for the early termination of the Torrance facility lease and expects
this transaction will close by April 1994 for approximately $600,000. In
connection with its sales of ASI, Cadence has entered into a sublease agreement
with ASI for the rental of the Blue Bell facility.
Cadence also leases approximately 75,000 square feet in a building
in Beaverton, Oregon, at a current annual rental of approximately $540,000,
which houses manufacturing, engineering, marketing and administrative
operations for its IMS subsidiary.
During June 1989 Cadence acquired a 49% interest as a limited
partner in a real estate partnership. Also in 1989, the Company signed
agreements to lease the four buildings of the 555 Facility from the limited
partnership that is the owner of the 555 Facility for a period of ten years.
During June 1991 the Company acquired a 46.5% interest as a limited partner in
an additional real estate partnership, and signed agreements to lease upon
completion of construction three buildings proximate to the 555 Facility in San
Jose, California from the limited partnership for a period of fifteen years,
which commenced during the second quarter of 1992. During June 1991 the
Company acquired an 80% interest in a third real estate partnership which has
purchased land for future expansion. This third partnership is consolidated in
the accompanying financial statements. In March 1994 the Company acquired all
third-party interests in two real estate partnerships in which it is a 46.5%
and 80% limited partner, respectively, for approximately $9 million in cash and
the assumption of a secured construction loan of approximately $23.5 million.
The Company expects it will refinance the construction loan with permanent
financing when it comes due in June 1994, although it may elect to pay off the
construction loan with its cash reserves.
Cadence believes that these facilities are adequate for its current
needs and that suitable additional or substitute space will be available as
needed to accommodate expansion of Cadence's operations.
10
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ITEM 3. LEGAL PROCEEDINGS
Stockholder class action lawsuits were filed against the Company
and certain of its officers and directors in the United States District Court
for the Northern District of California, San Jose Division, on April 8 and 9,
1991. The suits were subsequently consolidated into a single lawsuit and the
class period changed to include purchasers of the Company's common stock during
the period from October 18, 1990 through April 3, 1991. The lawsuit alleges
violation of certain federal securities laws by maintaining artificially high
market prices for the Company's common stock through alleged misrepresentations
and nondisclosures regarding the Company's financial condition. The plaintiff
in the suit seeks compensatory damages unspecified in amount. On June 2, 1993
the District Court granted in part and denied in part the Company's motion to
dismiss the complaint in the class action originally filed in April 1991. The
effect of the ruling was to limit the class period to include purchasers of the
Company's common stock between January 29, 1991 and April 3, 1991. Trial of
this matter is scheduled to commence on August 8, 1994. The Company is
vigorously defending against the litigation.
On March 23, 1993 a separate class action lawsuit was filed
against the Company and certain of its directors and officers in the United
States District Court, Northern District of California, San Jose Division. Two
additional complaints, identical to the complaint filed on March 23, 1993
except for the identities of the plaintiffs, were filed later in March and in
April 1993. All three complaints were consolidated into a single lawsuit which
seeks unspecified damages on behalf of all purchasers of the Company's common
stock between October 12, 1992 and March 19, 1993. The lawsuit alleges
violation of certain federal securities laws by maintaining artificially high
market prices for the Company's common stock through alleged misrepresentations
and nondisclosures regarding the Company's financial condition. On November
18, 1993, the District Court granted the Company's motion to dismiss the 1993
complaint. The effect of the ruling was to dismiss the complaint except as to
a statement allegedly made on January 28, 1993, but plaintiffs were granted
leave to further amend their complaint. The Company is vigorously defending
against the litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive corporate officers of Cadence are as follows:
NAME AGE POSITIONS AND OFFICES
- ---- --- ---------------------
Joseph B. Costello 40 President, Chief Executive Officer and Director
Dr. Leonard Y. W. Liu 52 Chief Operating Officer and Director
W. Douglas Hajjar 46 Vice Chairman and Director
H. Raymond Bingham 48 Executive Vice President, Finance and Administration,
Chief Financial Officer and Secretary
M. Robert Leach 46 Senior Vice President, Consulting
Scott W. Sherwood 42 Senior Vice President, Human Resources
James E. Solomon 57 Vice President and Principal Technologist
Douglas J. McCutcheon 45 Vice President, Corporate Finance
William Porter 39 Vice President, Corporate Controller Assistant Secretary
Executive corporate officers are appointed by the Board of
Directors and serve at the discretion of the Board.
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JOSEPH B. COSTELLO was appointed as President and a director of
Cadence in May 1988 and as Chief Executive Officer in June 1988 . He is also a
director of Oracle Corporation, Microelectronics and Computer Technology
Corporation and Pano Corporation Display Systems.
DR. LEONARD Y.W. LIU was appointed to serve on the Board in June
1989. Dr. Liu was appointed as Chief Operating Officer of the Company in
February 1993. From April 1989 until March 1992, Dr. Liu was Chairman and
Chief Executive Officer of Acer America Corporation and President of Acer,
Inc., two personal computer suppliers. From 1969 until 1989, Dr. Liu held
various technical and general management positions at IBM Corporation, most
recently Manager of its Santa Teresa Laboratory. Dr. Liu is a director of Pano
Corporation Display Systems, Network Application Technology, Omni Science
Corporation and CIMIC Corporation.
W. DOUGLAS HAJJAR was Chief Executive Officer and a director of
Valid from May 1987 and Chairman of the Board of Valid from February 1988 until
Valid's merger with and into Cadence in December 1991, at which time he was
appointed as Vice Chairman and a director of Cadence. He also served as
President of Valid from February 1987 to September 1989 and as Chief Financial
Officer from May 1987 until August 1989. Mr. Hajjar was Chairman of the
Board, President and Chief Executive Officer of Telesis, a manufacturer of EDA
workstations and related software, from 1985 until the acquisition of Telesis
by Valid in 1987. Mr. Hajjar is a director of Control Data Corporation, Frame
Technology and Lasersight, Inc.
H. RAYMOND BINGHAM joined Cadence in June 1993 as Executive Vice
President and Chief Financial Officer. From June 1985 to May 1993 he served as
Executive Vice President and Chief Financial Officer of Red Lion Hotels and
Inns, which owns and operates a chain of 54 hotels. From 1981 to 1985 Mr.
Bingham was the Managing Director of Agrico Overseas Investment Company, a
subsidiary of the Williams Companies and was responsibile for developing and
managing international manufacturing joint ventures.
M. ROBERT LEACH joined Cadence in June 1993 as Senior Vice
President of Consulting. From September 1981 to June 1993 Mr. Leach served as
a partner in the worldwide electronics industry consulting practice for
Andersen Consulting.
SCOTT W. SHERWOOD joined Cadence in July 1990 as Vice President
Human Resources and was appointed Senior Vice President, Human Resources in
February 1992. From 1983 to 1990, he was Vice President Human Resources of
Mead Data Central, a division of Mead Corporation and provider of information
services to the legal community.
JAMES E. SOLOMON, a founder of SDA, served as its Chief Executive
Officer from its inception in July 1983 to May 1988 and as its President from
July 1983 to March 1987, at which time he was appointed Chairman of the Board.
He became a director of Cadence in 1988 and was Co-Chairman of Cadence's Board
of Directors from May 1988 until May 1989. He was appointed President of the
Company's Analog Division in December 1988, Senior Vice President of the IC
Design Group of Cadence in February 1993 and Vice President and Principal
Technologist in February 1994.
DOUGLAS J. MCCUTCHEON joined Cadence in January 1991 as its
Director, Financial Planning and Analysis, and in July 1991 became its Vice
President, Corporate Finance. From November 1989 to November 1990, Mr.
McCutcheon was President of Toshiba America Medical Credit, Inc., the
wholly-owned captive financing subsidiary of Toshiba America Medical Systems,
Inc., which sells and provides maintenance services for diagnostic and
therapeutic medical systems. From November 1980 to November 1989, Mr.
McCutcheon held various positions with Diasonics, Inc., a medical equipment
company, most recently as Vice President and Treasurer.
WILLIAM PORTER joined Cadence in February 1994 as Vice President,
Corporate Controller and Assistant Secretary. From September 1988 to February
1994 Mr. Porter served as Technical Accounting and Reporting Manager and most
recently as Controller of Cupertino Operations with Apple Computer Corporation,
a worldwide manufacturer of computer equipment. From 1976 until 1988 Mr.
Porter held various positions with Arthur Andersen & Co., most recently as a
Senior Audit Manager.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock was traded on the NASDAQ National Market
System under the NASDAQ symbol ECAD from the Company's initial public offering
at $7.83 per share on June 10, 1987 until June 1, 1988 when it began trading
under the NASDAQ symbol CDNC. Since September 17, 1990 the Company's Common
Stock has traded on the New York Stock Exchange under the symbol CDN. The
Company has not paid cash dividends in the past and none are planned to be paid
in the future. As of December 31, 1993, the Company had approximately 2,400
stockholders of record.
The following table sets forth the high and low bid prices for the
Common Stock for each calendar quarter in the two year period ended December
31, 1993.
High Low
---- ---
1992:
First Quarter $29.88 $19.75
Second Quarter 26.38 19.00
Third Quarter 22.13 16.00
Fourth Quarter 23.50 13.13
1993:
First Quarter $24.38 $ 9.25
Second Quarter 14.13 8.25
Third Quarter 14.38 9.75
Fourth Quarter 13.13 10.38
ITEM 6. SELECTED FINANCIAL DATA
For the years ended December 31,
(In thousands, except per share amounts)
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
Revenue $368,623 $418,724 $379,476 $374,357 $316,692
Restructuring costs 13,450 - - - 49,901 37,978 - - -
Net income (loss) from continuing
operations (607) 55,107 (17,068) (6,339) 37,778
Income (loss) from discontinued
operations (12,172) 253 (5,335) (3,009) (1,567)
Net income (loss) (12,779) 55,360 (22,403) (9,348) 36,211
Net income (loss) per share from
continuing operations (.02) 1.19 (.44) (.18) .91
Total assets 339,301 367,243 347,074 340,945 306,613
Long-term obligations and redeemable
convertible preferred stock 4,001 5,722 14,811 21,059 27,210
14
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cadence (the "Company") designs, develops, markets and supports
electronic design automation ("EDA") software products primarily used to
automate, enhance and accelerate the design, verification and testing of
integrated circuits, electronic systems and printed circuit boards ("PCBs").
In December 1991 the Company merged with Valid Logic Systems Incorporated
("Valid"). Valid commenced operations in 1981 and was involved in the
development, marketing and support of EDA products primarily used to design
electronic systems and PCBs. The merger was accounted for by the pooling of
interests method and all financial information prior to the merger has been
restated to combine the results of the Company and Valid. In connection with
the merger, the Company recorded $49.9 million of restructuring costs and $1.7
million of merger costs in the fourth quarter of 1991.
In June 1993 the Company acquired the business and certain assets of
Comdisco Systems, Inc. ("Comdisco"), a subsidiary of Comdisco, Inc. Comdisco
develops, markets and supports digital signal processing software products in
the electronic systems applications area. The acquisition was accounted for as
a purchase. Accordingly, the results of Comdisco from the date of the
acquisition forward have been recorded in the Company's consolidated financial
statements.
In December 1993 the Company sold its Automated Systems ("ASI") division.
ASI manufactures and provides design services for complex printed circuit
boards. The operating results of ASI have been reported as discontinued
operations in the consolidated statements of income for all years presented.
15
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Results of Operations
The following table sets forth for the years indicated (a) the percentage of
total revenue represented by each item reflected in the Company's consolidated
statements of income and (b) the percentage increase (decrease) in each such
item from the prior year.
(b) Period to Period
Percentage
Increase (Decrease)
-------------------
(a) Percentage of Total Revenue 1993 1992
Year Ended December 31, Compared with
--------------------------------
1993 1992 1991 1992 1991
---- ---- ---- ---- ----
Revenue:
Product 65% 75% 77% (23)% 8%
Maintenance 35 25 23 23 19
---- ---- ----
Total revenue 100 100 100 (12) 10
--- --- ---
Cost of revenue:
Product 20 18 17 (3) 18
Maintenance 4 4 6 (12) (23)
--- --- ---
Total cost of revenue 24 22 23 (5) 7
-- -- --
Gross margin 76 78 77 (14) 11
-- -- --
Operating expenses:
Marketing and sales 43 38 39 1 8
Research and development (1) 19 16 18 4 (3)
General and administrative 10 8 9 14 (6)
Restructuring costs 4 - - 13 * *
--- --- --
Total operating expenses 76 62 79 9 (14)
-- -- --
Income (loss) from continuing
operations - - 16 (2) * *
--- -- ----
Total other income - - - - - - (39) 4
--- --- ---
Income (loss) from continuing
operations before income taxes - - 16 (2) * *
Provision for income taxes - - 3 3 * 27
--- -- -
Net income (loss) from continuing
operations - - 13 (5) * *
--- -- ---
Discontinued operations:
Income (loss) from operations (2) - - (1) * *
Loss on disposal (1) - - - - * *
--- ---- ---
Income (loss) from discontinued
operations (3) - - (1) * *
--- --- ---
Net income (loss) (3) 13 (6) * *
Series A-1 preferred stock dividend - - - - - - - -% (58)%
--- --- ---
Net income (loss) attributable to
common stockholders (3)% 13% (6)% * *
==== == ===
* Not meaningful
(1) The Company capitalizes software development costs in accordance with
SFAS No. 86. Total research and development expenses incurred prior to
capitalization represented 23%, 19% and 22% of total revenue for 1993,
1992 and 1991, respectively. The percentage change from 1992 to 1993 and
from 1991 to 1992 was an increase of 4% and a decrease of 4%,
respectively, on a pre-capitalization basis.
16
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Revenue
Total revenue was approximately $368.6 million, $418.7 million and
$379.5 million for the years ended December 31, 1993, 1992 and 1991,
respectively. Total revenue decreased approximately $50.1 million for the year
ended December 31, 1993 as compared to the prior year and increased
approximately $39.2 million in 1992 as compared to 1991. The decrease in total
revenue in 1993 was primarily due to a $74.0 million decrease in product
revenue due to weak economic conditions in certain areas and lower sales volume
for the Company's products, as well as a shift in the Company's systems product
strategy. This decrease in product revenue was offset somewhat by the
acquisition of Comdisco. While product revenue decreased in 1993, maintenance
revenue increased by $23.9 million due to increased focus on customer
renewals, combined with a larger customer base. The growth in total revenue
in 1992 compared to 1991 was comprised of $22.9 million in product revenue due
to increased demand for the Company's products, including the new Valid
products as a result of the merger, and improved economic conditions in 1992 as
compared to 1991, and a $16.3 million increase in maintenance revenue.
Maintenance revenue continued to increase each year as the
Company's installed base of products has increased, growing by approximately
$23.9 million in 1993 compared to 1992 and by approximately $16.3 million in
1992 compared to 1991. As a percentage of total revenue, maintenance revenue
has grown over the last three years from approximately 23% to approximately 35%
of total revenue. The increase in maintenance revenue as a percentage of total
revenue is due in part to the Company's continued effort toward obtaining
customer renewals of maintenance coverage as well as the decrease in total
product revenue in 1993.
Revenue from international sources was approximately $183.6
million, $215.4 million and $197.6 million or 50%, 51% and 52% of total revenue
for each of the three years ended December 31, 1993, 1992 and 1991,
respectively. The decrease in 1993 was principally related to decreased sales
volume in Japan. It is anticipated that international revenue will continue to
constitute a significant portion of total revenue. International revenues are
subject to certain additional risks normally associated with international
operations, including, among others, adoption and expansion of government trade
restrictions, currency conversion risks, limitations on repatriation of
earnings and reduced protection of intellectual property rights. Due to the
continuing adverse business conditions in Japan, the Company has experienced
and can expect to experience a reduced level of activity from this important
market. A continued low level or further reduction of orders from Japan could
have a material adverse impact on the Company's results of operations.
Cost of Revenue
Total cost of revenue was approximately $89.4 million, $94.0
million and $87.6 million for the years ended December 31, 1993, 1992 and 1991,
respectively. Total cost of revenue decreased $4.6 million in 1993 compared to
1992 and increased $6.4 million in 1992 compared to 1991. The decrease in 1993
consisted of a $2.5 million decrease in product cost of revenue due to the
decrease in product revenue and related costs, reduced costs due to restructure
actions including related headcount reductions as well as the discontinuance in
1992 of sales of third- party hardware. This decrease was slightly offset by
an increase in cost of product associated with the newly acquired Comdisco
operations and a $4.0 million increase in amortization of software development
costs, purchased software and other intangibles. Cost of maintenance also
decreased $2.1 million in 1993 as compared to 1992 even though revenue
increased due to the streamlining of the maintenance renewal process which
includes a more cost-effective update program and lower cost media. The
increase in total cost of revenue in 1992 as compared to 1991 consisted of an
$11.7 million increase in cost of product, which was offset by a $5.4 million
decrease in cost of maintenance. The increase in cost of product was primarily
due to an increase in royalties of approximately $2.4 million and other related
software product costs. The increase in software costs in 1992 was primarily a
result of the expansion-related increase in personnel and capital expenditures
in the Company's operations departments, which include software tape
duplication, technical documentation and support, training and consulting
services. The decrease in cost of maintenance in 1992 was primarily due to
post-merger restructure and efficiencies, including the reduction of personnel
and other duplicate costs in 1992 due to the merger of the Company with Valid,
streamlining of the maintenance renewal process and a decrease in hardware
maintenance contracts and costs related to Valid. As a percentage of total
17
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revenue, cost of maintenance revenue has remained in the range of approximately
4% to 6% and cost of product revenue has been at approximately 17% to 20%.
Gross Margin
Gross margin was 76%, 78% and 77% for the years ended December 31,
1993, 1992 and 1991, respectively.
Marketing and Sales
Marketing and sales expenses increased $1.2 million in 1993
compared to 1992 and $11.8 million in 1992 compared to 1991. The increase in
1993 is primarily due to increased costs associated with the acquired Comdisco
operations. This increase was partially offset by reduced costs related to
restructure actions, including headcount reduction. The increase in 1992 was
due to the establishment and continued growth of foreign subsidiaries and
domestic field offices, and increased personnel and related expenses. As a
result of the merger with Valid, there were a number of duplicate sales
locations which were consolidated during 1992. Notwithstanding this, during
1992 the Company continued to focus on expanding its selling efforts. The
costs associated with the consolidation of sales offices were included in the
restructuring costs recorded in 1991. Marketing and sales expenses have
increased as a percentage of revenue from 39% in 1991 to 43% in 1993. The
higher percentage in 1993 is due primarily to the decrease in total revenue in
1993.
Research and Development
Total research and development expenditures incurred prior to
capitalization of software development costs increased 4% in 1993 as compared
to 1992 and decreased 4% in 1992 as compared to 1991, an increase of
approximately $3.1 million and a decrease of approximately $3.2 million,
respectively. The increase in 1993 is primarily due to increased expenses due
to the addition of Comdisco's operations. The decrease in total research and
development expenditures in 1992 compared to 1991 is due primarily to
post-merger restructure and efficiencies, including the reduction of personnel
and other duplicate costs in 1992 related to the merger with Valid. Prior to
the deduction for capitalization of software development costs, research and
development expenses comprised approximately 23%, 19% and 22% of total revenue
or approximately $84.3 million, $81.2 million and $84.3 million for the years
1993, 1992 and 1991, respectively. The increase as a percentage of revenue in
1993 is primarily due to the decrease in total revenue in 1993 as compared to
1992. The decrease as a percentage of revenue in 1992 as compared to 1991 is
due primarily to the elimination of duplicate costs in 1992 as a result of the
merger with Valid. The Company capitalized approximately $15.2 million, $14.7
million and $16.2 million of software development costs in the years 1993, 1992
and 1991, respectively, which represented approximately 18%, 18% and 19% of
total research and development expenditures made in those years. The amount of
capitalized software development costs in any given period may vary depending
on the exact nature of the development performed.
General and Administrative
General and administrative expenses increased approximately $4.9
million in 1993 compared to 1992 and decreased approximately $2.2 million in
1992 compared to 1991. The increase in 1993 is due to the addition of
Comdisco's operations, increased bad debt expense due to the write-off of
uncollectible accounts, increased professional services and employee-related
expenses. The decrease in 1992 was due primarily to the result of post-merger
efficiencies, including the reduction of personnel and related expenses and
duplicate facilities in 1992 as a result of the merger with Valid. As a
percentage of total revenue, general and administrative expenses have been in
the range of approximately 8% to 10%. The higher percentage in 1993 is
partially due to the decrease in total revenue in 1993.
18
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Restructuring Costs
In March 1993 the Company recorded restructuring costs of $13.5
million associated with a planned restructure of certain areas of sales,
operations and administration due to business conditions. The restructuring
charge primarily reflects costs associated with excess facilities, the
write-off of software development costs and purchased software and intangibles
and employee terminations resulting from lower revenue levels.
In the fourth quarter of 1991 the Company recorded restructuring
costs of approximately $49.9 million associated with the merger of Valid with
the Company. This amount included accruals for severance and payroll-related
payments, costs of closing excess or duplicate facilities and write-offs of
equipment, other assets and capitalized software development costs due to the
overlap of products.
Other Income and Expense
Interest income was $3.2 million, $3.6 million and $6.2 million
for the years ended December 31, 1993, 1992 and 1991, respectively. The
decrease in interest income in 1993 and 1992 was primarily due to a decrease in
interest rates which in 1992 was combined with a $20.7 million decrease in cash
and cash investments and short-term investments. Interest expense was $.7
million, $.9 million and $2.6 million for the years ended December 31, 1993,
1992 and 1991, respectively. The decrease in 1993 as compared to 1992 is due
to a decrease in capital lease borrowings and other debt obligations. The
decrease of $1.8 million in 1992 as compared to 1991 was due to the repayment
of $18.5 million in notes payable to banks in 1991. In addition, the Company
incurred approximately $1.7 million of merger costs in the fourth quarter of
1991 related to the merger of the Company and Valid.
Provision for Income Taxes
Through December 31, 1992, the Company accounted for income taxes
pursuant to Statement of Financial Accounting Standards ("SFAS") No. 96.
Effective January 1, 1993, the Company retroactively adopted SFAS No. 109,
"Accounting for Income Taxes." This pronouncement requires, among other
things, recognition of future tax benefits, measured by enacted tax rates,
attributable to (a) deductible temporary differences between the financial
statement and income tax basis of assets and (b) liabilities and tax net
operating loss carryforwards, to the extent that realization of such benefits
is more likely than not. The adoption of this accounting pronouncement did not
have a material impact on amounts reported in prior years' financial
statements.
As of December 31, 1993 the Company had gross deferred tax assets of
approximately $67.0 million against which the Company has recorded a valuation
allowance of $54.6 million, resulting in a net deferred tax asset of $12.4
million. A significant portion of the net operating loss and credit
carryforwards which created the deferred tax asset were generated by Valid
prior to its merger with the Company and by restructure charges recorded as a
result of the merger. Management has determined, based on the Company's
history of prior operating earnings and its expectations for future years, that
the recorded net deferred tax asset is realizable. However, no assurances can
be given that sufficient taxable income will be generated in future years for
the utilization of the net deferred tax asset.
The Company's tax provision for 1993 was zero as a result of the
operating loss in 1993 and the recording of the benefit of certain foreign
withholding and income taxes.
In 1992 the Company's effective tax rate was 19%. This rate
reflects the utilization of foreign tax credits, Valid's net operating losses
and temporary items generated in prior years but benefited currently.
19
22
The Company provided for income taxes in 1991 even though the
Company reflected a pretax loss. This provision was primarily attributable to
restructuring costs and foreign tax credits that the Company was not fully able
to benefit for financial statement purposes.
Net Income (Loss) From Continuing Operations
The net loss from continuing operations for 1993 was $.6 million
as compared with net income of $55.1 million in 1992 and net loss of $17.1
million in 1991. The net loss from continuing operations in 1993 was due to a
decrease in product revenue and $13.5 million recorded for restructuring
costs. The net income in 1992 compared to the net loss in 1991 was partially
due to increased revenue in 1992. Net income from continuing operations was
also favorably impacted by the post-merger restructure and efficiencies,
including the reduction of personnel and other duplicate costs in 1992 related
to the merger with Valid. The fourth quarter of 1991 also included $49.9
million of restructuring costs and $1.7 million of merger costs associated with
the merger of the Company and Valid.
Discontinued Operations
As previously discussed, the Company sold its ASI division in
December 1993 and restated the financial information of prior periods to report
discontinued operations of ASI as a separate line item in the consolidated
statements of income. The discontinued operations resulted in a loss of $12.2
million, income of $.3 million and a loss of $5.3 million for the years ended
December 31, 1993, 1992 and 1991, respectively. The loss for 1993 includes
$6.0 million recorded as a loss on disposal, which represents the loss on the
sale of the net assets as well as amounts accrued for estimated costs to be
incurred in connection with the disposal. In addition, the 1993 loss includes
$6.2 million for ASI's operating loss.
Quarterly Results of Operations
The following table sets forth selected unaudited quarterly
financial information for the Company's last eight quarters. This unaudited
information has been prepared on the same basis as the audited information and
in management's opinion reflects all adjustments (which include only normal
recurring adjustments) necessary for the fair presentation of the information
for the periods presented. Based on the Company's operating history and
factors that may cause fluctuations in the quarterly results,
quarter-to-quarter comparisons should not be relied upon as indicators of
future performance. Although the Company's revenues are not generally seasonal
in nature, the Company from time to time has experienced decreases in first
quarter revenue versus the preceding fourth quarter which is believed to result
primarily from the capital purchase cycle of the Company's customers.
The Company's operating expenses are partially based on its
expectations of future revenue. The Company's results of operations may be
adversely affected if revenue does not materialize in a period as expected.
Since expense levels are usually committed in advance of revenues and because
only a small portion of expenses vary with revenue, the Company's net income
may be impacted significantly by lower revenue. In addition, the Company's
results of operations for a particular quarter or quarters could be materially
adversely affected by the ultimate resolution of the disputes and litigation
matters discussed in Note 9 of Notes to Consolidated Financial Statements.
The Company's revenue decreased in each quarter in 1993 as
compared to the same quarter in the prior year. This decrease was due to weak
economic conditions and reduced demand for the Company's products as well as a
shift in the Company's system product strategy. In addition, the first quarter
of 1993 included approximately $13.5 million of restructuring costs related to
the Company's planned restructure.
20
23
(In thousands, except
per share data)
1993 1992
---------------------------------------- ----------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
--------- -------- -------- -------- ---------- ---------- ------- -------
Total revenue $106,076 $97,616 $88,814 $76,117 $116,918 $102,436 $101,416 $97,954
Costs and expenses 93,838 91,598 87,211 98,191 93,953 88,032 86,275 85,007
Net income (loss) from
continuing operations 8,249 5,073 1,909 (15,838) 20,089 12,307 12,384 10,327
Income (loss) from
discontinued operations (9,286) (1,331) (1,077) (478) (101) 408 564 (618)
Net income (loss) $ (1,037) $ 3,742 $ 832 $ (16,316) $ 19,988 $ 12,715 $ 12,948 $ 9,709
======== ======= ===== ========= ====== ======= ======= =======
Net income (loss)
per share from
continuing operations $.18 $.11 $.04 $(.36) $.44 $.27 $.27 $.22
==== ==== ==== ====== ==== ==== ==== ====
Weighted average
common and common
equivalent shares
outstanding 46,565 45,016 43,011 44,136 45,798 45,629 45,785 45,574
====== ====== ====== ====== ====== ====== ====== ======
The amounts in the table above reflect the results of the Company restated to
reflect the sale of ASI in the fourth quarter of 1993 and reclassification of
its operations to discontinued operations.
The following table represents quarterly information as previously reported for
the Company.
(In thousands, except
per share data)
1993 1992
------------------------------- --------------------------------------
3rd 2nd 1st 4th 3rd 2nd 1st
-------- ------- -------- -------- ------- -------- -------
Total revenue $100,464 $91,697 $79,339 $120,817 $106,468 $105,854 $101,361
Costs and expenses 95,758 91,150 101,886 97,920 91,665 90,153 89,027
Net income (loss) $ 3,742 $ 832 $(16,316) $19,988 $ 12,715 $ 12,948 $9,709
======= ====== ========= ====== ======== ======= ======
Net income (loss)
per share $.08 $.02 $(.37) $.44 $.28 $.28 $.21
==== ==== ====== ==== ==== ==== ====
Weighted average
common and common
equivalent shares
outstanding 45,016 43,011 44,136 45,798 45,629 45,785 45,574
====== ====== ====== ====== ====== ====== ======
Inflation
To date, the Company's operations have not been impacted
significantly by inflation.
21
24
Liquidity and Capital Resources
The Company raised approximately $10.8 million, $13.8 million and
$14.9 million through the sale of common stock pursuant to employee benefit
plans in 1993, 1992 and 1991, respectively. The Company purchased $52.2
million of treasury stock and repurchased $10.8 million and $1.8 million of
common stock for the years ended December 31, 1993, 1992 and 1991,
respectively. In addition, the Company realized approximately $90.7 million,
$40.4 million and $74.7 million in cash provided by operations in 1993, 1992
and 1991, respectively. The Company's principal investing activities consist of
the purchase of property, plant and equipment and the capitalization of
software development costs, which in total were $34.5 million, $45.7 million
and $44.6 million for the years ended December 31, 1993, 1992 and 1991,
respectively. In addition, the other major component of investing activities
is the change in short-term investments.
Working capital at December 31, 1993 was $105.0 million compared
with $153.3 million at December 31, 1992 and $119.0 million at December 31,
1991. The decrease in 1993 as compared to 1992 was primarily due to a decrease
of $30.9 million in accounts receivable primarily due to lower revenue, a $12.8
million increase in deferred revenue and a $7.3 million increase in accrued
liabilities related to restructuring accruals recorded in 1993. The increase
in 1992 as compared with 1991 was primarily due to a $17.0 million increase in
accounts receivable due to higher revenue, a $21.4 million decrease in accrued
liabilities related to restructuring accruals recorded in 1991 associated with
the Company's merger with Valid and an $11.9 million decrease in deferred
revenue. These increases were offset by a decrease of $20.7 million in cash
and cash investments and short-term investments.
Long-term obligations decreased $1.7 million in 1993 as compared
to 1992 due to a decrease in capital lease borrowings and increased $1.9
million in 1992 as compared to 1991 due to an increase in capital lease
borrowings and other debt obligations. At December 31, 1993 the Company had
available $15.0 million under equipment lease lines for future capital
expenditures and $17.5 million under two bank lines, which had not been drawn
upon at December 31, 1993 (see Notes 7 and 8 of Notes to Consolidated
Financial Statements for further discussion).
Anticipated cash requirements in 1994 are payments related to the
purchase of treasury stock, contemplated additions of capital equipment and
restructure costs accrued at December 31, 1993. Prior to 1993, the Company
authorized the repurchase of up to 2.8 million shares of common stock in the
open market over the next several years to satisfy its estimated requirements
for shares to be issued under its employee stock option and stock purchase
plans. In April 1993 the Company authorized the repurchase of an additional
4.0 million shares of common stock from time to time in the open market. In
total, as of December 31, 1993, approximately 5.5 million shares had been
repurchased. In addition, in February 1994 the Company authorized the
repurchase of an additional 2.9 million shares. In March 1994 the Company
acquired all third-party interests in two real estate partnerships in which it
is a 46.5% and 80% limited partner for approximately $9 million in cash and the
assumption of a secured construction loan of approximately $23.5 million. The
Company leases buildings from one of the limited partnerships and the second
limited partnership owns unencumbered land adjacent to the leased property (see
Note 3 of Notes to Consolidated Financial Statements). The Company expects it
will refinance the construction loan with permanent financing when it comes due
in June 1994, although it may elect to pay off the construction loan with its
cash reserves. The Company anticipates that current cash balances, cash flow
from operations and unused balances on capital lease lines and lines of credit
will be sufficient to meet its working capital and capital expenditure
requirements for at least the next year.
22
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The quarterly supplementary data is included as part of Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The financial statements required by this item are submitted as a
separate section of this Form 10-K. See Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not required pursuant to Instruction 1 to Item 304 of Regulation
S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 as to directors is incorporated
by reference from the section entitled "Election of Directors" in the Company's
Proxy Statement for its annual stockholders' meeting to be held May 17, 1994.
The information required by this Item as to executive officers is included in
Part I under "Executive Officers of the Registrant."
Pursuant to Item 405 of Regulation S-K, the Company has reviewed
all Forms 3, 4 and 5 required to be filed with respect to 1993 and has
determined that there are no delinquencies in filing reports required by
Section 16(a) of the Exchange Act for 1993 or prior years at the time of the
filing of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference
from the Company's Proxy Statement for its annual stockholders' meeting to be
held May 17, 1994.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference
from the Company's Proxy Statement for its annual stockholders' meeting to be
held May 17, 1994.
23
26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference
from the Company's Proxy Statement for its annual stockholders' meeting to be
held May 17, 1994.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
_
PAGE
(a)1. Financial Statements
o Report of Independent Public Accountants..................... 29
o Independent Auditor's Report.................................... 30
o Consolidated Financial Statements:
o Balance Sheets as of December 31, 1993 and 1992........... 31
o Statements of Income for the years ended
December 31, 1993, 1992 and 1991.................... 32
o Statements of Stockholders' Equity for the
years ended December 31, 1993, 1992 and 1991.... 33
o Statements of Cash Flows for the years ended
December 31, 1993, 1992 and 1991.................... 34
o Notes to Consolidated Financial Statements............. 35
(a)2. Financial Statement Schedules
VIII Valuation and Qualifying Accounts and Reserves.............. 50
IX Short-Term Borrowings . . . . . . . . . . . . . . . . . . . 51
X Supplementary Income Statement Information................. 52
All other schedules are omitted because they are not required or the
required information is shown in the financial statements or notes thereto.
(a)3. Exhibits
The following exhibits are filed herewith:
24
27
EXHIBIT
NUMBER EXHIBIT TITLE
3.01 (a) The Registrant's Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on
April 8, 1987 (incorporated by reference to Exhibit 3.01 to Registrant's Form S-1 Registration Statement (No. 33-
13845) originally filed on April 29, 1987 (the "1987 Form S-1")).
(b) The Registrant's Certificate of Retirement of Stock as filed with the Secretary of State of the State of
Delaware on September 28, 1987 (incorporated by reference to Exhibit 3.01(b) to Registrant's Form S-4 Registration
Statement (No. 33-20724) originally filed on February 25, 1988).
(c) The Registrant's Certificate of Ownership and Merger as filed with the Secretary of State of the State of
Delaware on June 1, 1988 (incorporated by reference to Exhibit 3.02(c) to the Registrant's Form S-1 Registration
Statement (No. 33-23107) originally filed on July 18, 1988 (the "1988 Form S-1")).
(d) The Registrant's Certificate of Designations of Series A Junior Participating Preferred Stock as filed with the
Secretary of State of the State of Delaware on June 8, 1989 (incorporated by reference to Exhibit 3A to the
Registrant's Form 8-K originally filed on June 12, 1989).
(e) The Registrant's Certificate of Amendment of Certificate of Incorporation as filed with the Secretary of State
of the State of Delaware on July 26, 1991 (incorporated by reference to Exhibit 3.01(e) to the Registrant's Form S-4
Registration Statement (No. 33-43400) originally filed on October 7, 1991 (the "1991 Form S-4")).
(f) The Registrant's Certificate of Designation of Series A Convertible Preferred Stock as filed with the Secretary
of State of the State of Delaware on December 30, 1991 (incorporated by reference to Exhibit 3.01(f) from the
Registrant's Form 10-K for the fiscal year ended December 31, 1991).
3.02 The Registrant's Bylaws, as currently in effect (incorporated by reference to Exhibit 3.02 to the 1987 Form S-1).
4.01 Specimen Certificate of the Registrant's Common Stock (incorporated by reference to Exhibit 4.01 to the 1991 Form S-
4).
4.02 Amended and Restated Rights Agreement, dated as of June 19, 1988, between the Registrant and Bank of America N.T. &
S.A., as Rights Agent, which includes as exhibits thereto the form of Right Certificate and the Summary of Rights to
Purchase Common Shares (incorporated by reference to Exhibit 4a to the Registrant's Form 8 filed on June 20, 1989).
25
28
EXHIBIT
NUMBER EXHIBIT TITLE
4.03 Assumption of Obligations under Amended and Restated Rights Agreement between the registrant and Harris Trust
Company of California (incorporated by reference to Exhibit 10.34 to the Registrant's 1991 Form S-4).
10.01 The Registrant's 1987 Stock Option Plan, as amended to date, (incorporated by reference to Exhibit 4.01 to the
Registrant's Form S-8 Registration Statement (No. 33-48371) filed on June 4, 1992 (the "1992 Form S-8")).*
10.02 Form of Stock Option Agreement and Form of Stock Option Exercise Request, as currently in effect under the
Registrant's 1987 Stock Option Plan (incorporated by reference to Exhibit 4.01 to the Registrant's Form S-8
Registration Statement (No. 33-22652) filed on June 20, 1988).*
10.03 The Registrant's 1988 Directors Stock Option Plan, as amended to date, including the Stock Option Grant and Stock
Option Exercise Notice and Agreement (the first document is incorporated by reference to Exhibit 4.02 of the
Registrant's 1992 Form S-8 and the latter two documents are incorporated by reference to Exhibit 10.08 - 10.10 of
the 1988 Form S-1).*
10.04 The Registrant's 1993 Directors Stock Option Plan including the Stock Option Grant. *
10.05 The Registrant's 1990 Stock Purchase Plan (incorporated by reference to Exhibit 4.03 of the 1992 Form S-8).*
10.06 The Registrant's Senior Executive Bonus Plan for 1993 (incorporated by reference to Exhibit 10.07 of the
Registrant's Form 10-K for the fiscal year ended December 31, 1992 (the "1992 Form 10-K")).*
10.07 The Registrant's Key Contributor Bonus Plan for 1993 (incorporated by reference to Exhibit 10.08 of the 1992 Form
10-K).*
10.08 The Registrant's Senior Executive Bonus Plan for 1994.*
10.09 The Registrant's Key Contributor Bonus Plan for 1994.*
10.10 The Registrant's Cash or Deferred Profit Sharing Plan, as currently in effect (certain amendments are attached; the
Plan itself is incorporated by reference to Exhibit 10.12 Registrant's Form S-4 Registration Statement (No. 33-
31673), originally filed on October 18, 1989 (the "1989 Form S-4")).*
10.11 Amended and Restated Lease, dated June 29, 1989, by and between River Oaks Place Associates, a California limited
partnership, ("ROPA") and the Registrant, for the Registrant's executive offices at 555 River Oaks Parkway, San
Jose, California (incorporated by reference to Exhibit 10.14 Registrant's Form 10-K for the fiscal year ended
December 31, 1990) (the "1990 Form 10-K")).
26
29
EXHIBIT
NUMBER EXHIBIT TITLE
10.12 Lease dated June 29, 1989 by and between ROPA and the Registrant for the Registrant's offices at 575 River Oaks
Parkway, San Jose, California (incorporated by reference to Exhibit 10.16 to the 1990 Form 10-K).
10.13 Lease dated June 29, 1989 by and between ROPA and the Registrant for the Registrant's offices at 535 and 545 River
Oaks Parkway, San Jose, California (incorporated by reference to Exhibit 10.17 to the 1990 Form 10-K).
10.14 Lease dated September 3, 1985 by and among the Richard T. Peery and John Arrillaga Seperate Property Trusts ("P/A
Trusts") and Valid Logic Systems Incorporated ("Valid") (which merged into the Registrant) for the Registrant's
offices at 75 West Plumeria Avenue, San Jose, California (incorporated by reference to Exhibit 10.16 to the Form 10-
K for Valid for the fiscal year ended December 30, 1990 (the "1990 Valid Form 10-K")).
10.15 Amendment Number 1, dated March 2, 1988, to Lease Agreement for 75 West Plumeria Avenue, San Jose, California, by
and among Valid and the P/A Trusts (incorporated by reference to Exhibit 10.17 to the 1990 Valid Form 10-K).
10.16 Lease dated December 19, 1988 by and among the P/A Trusts and Valid for the Registrant's offices at 2835 North First
Street, San Jose, California (incorporated by reference to Exhibit 10.18 to the 1990 Valid Form 10-K).
10.17 Lease dated September 3, 1985 by and among the P/A Trusts and Valid for the Registrant's offices at 2820 Orchard
Parkway, San Jose, California (incorporated by reference to Exhibit 10.14 to the 1990 Valid Form 10-K).
10.18 Amendment Number 1, dated March 2, 1988, to Lease Agreement for 2820 Orchard Parkway, San Jose, California, by and
among Valid and the P/A Trusts (incorporated by reference to Exhibit 10.15 to the 1990 Valid Form 10-K).
10.19 Form of Executive Compensation Agreement dated May 1989 between Registrant and Mr. Costello (incorporated by
reference to Exhibit 10.20 to the 1989 Form S-4).*
10.20 Leased dated as of June 18, 1991 by and between C.T. Montague I, L.P., a California limited partnership, and the
Registrant for improved real property including office buildings located at Seely Road and Montague Avenue, San
Jose, California (incorporated by reference to Exhibit 10.24 to the 1991 Form S-4).
10.21 Employment Agreement dated as of December 1, 1989 between the Registrant and Mr. Doug Hajjar (incorporated by
reference to Exhibit 10.36 to Form 10-K for Valid for the fiscal year ended December 31, 1989). *
10.22 Modification to Employment Agreement with Mr. Hajjar (incorporated by reference to Exhibit 10.03 to the 1991 Form S-
4). *
27
30
10.23 Amendment to Employment Agreement with Mr. Hajjar dated December 16, 1992 (incorporated by reference to Exhibit
10.18 to the Registrant's Form 10-K for the fiscal year ended December 31, 1992). *
10.24 Offer letter to H. Raymond Bingham dated May 12, 1993. *
10.25 Offer letter to M. Robert Leach dated May 17, 1993. *
10.26 Letter agreement dated March 9, 1994 by and among C.T. Properties, Inc.("General Partner"), Registrant, Montague
Investors, L.P. ("Montague") and David M. Thede ("Thede") whereby Registrant acquired all of Thede's ownership
interests in the C.T. Montague I, L.P. and C.T. Montague II, L.P. limited partnerships and the General Partner and
all of Montague's interests in C.T. Montague I, L.P..
21.01 Subsidiaries of the Registrant
23.01 Consent of Arthur Andersen & Co.
23.02 Consent of Deloitte & Touche
* A Management contract or compensatory plan required to be filed as an exhibit to Form 10-K.
(b) Reports on Form 8-K
None
(c) Exhibits
The Company hereby files as part of this Form 10-K the Exhibits listed in Item 14.(a)3. above.
(d) Financial Statement Schedules
See Item 14.(a)2. of this Form 10-K.
28
31
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cadence Design Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Cadence Design
Systems, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1993
and 1992, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1993. These financial statements and the schedules referred to below are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedules based on our
audits. We did not audit the financial statements of Valid Logic Systems
Incorporated, a company acquired during 1991 in a transaction accounted for as
a pooling of interests, as discussed in Note 1. Such statements are included
in the consolidated financial statements of Cadence Design Systems, Inc. and
reflect total revenues of 40 percent of the consolidated total for the year
ended December 31, 1991. These statements were audited by other auditors whose
report has been furnished to us and our opinion, insofar as it relates to
amounts included for Valid Logic Systems Incorporated, is based solely upon the
report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. 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 and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of Cadence Design Systems, Inc. and
subsidiaries as of December 31, 1993 and 1992, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedules listed in Item 14. (a) 2. are
presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. These
schedules have been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen & Co.
San Jose, California Arthur Andersen & Co.
January 26, 1994
29
32
INDEPENDENT AUDITORS' REPORT
Cadence Design Systems, Inc.
San Jose, California
We have audited the consolidated statements of operations, stockholders'
equity, and cash flows of Valid Logic Systems Incorporated (a wholly- owned
subsidiary of Cadence Design Systems, Inc.) and subsidiaries for the year ended
December 31, 1991. These financial statements (which are not presented
separately herein) are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of Valid Logic
Systems Incorporated and subsidiaries for the year ended December 31, 1991 in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche
DELOITTE & TOUCHE
San Jose, California
January 27, 1992
30
33
CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1993 AND 1992
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
1993 1992
---- ----
CURRENT ASSETS:
Cash and cash investments . . . . . . . . . . . . . . . . . . . . $ 61,382 $78,976
Short-term investments . . . . . . . . . . . . . . . . . . . . . . 31,423 10,943
Accounts receivable, less allowance of $3,471 in
1993 and $3,154 in 1992 for doubtful accounts . . . . . . . . . 101,890 132,832
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,744 6,062
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . 18,036 18,638
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . . 218,475 247,451
-------- --------
PROPERTY, PLANT AND EQUIPMENT, net . . . . . . . . . . . . . . . . . . . 61,477 63,460
SOFTWARE DEVELOPMENT COSTS, net . . . . . . . . . . . . . . . . . . . . . 31,265 30,618
PURCHASED SOFTWARE AND INTANGIBLES, net . . . . . . . . . . . . . . . . . 12,787 7,343
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,297 18,371
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . $339,301 $367,243
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations . . . . . . . . . . . . . $ 3,962 $ 5,355
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . 13,513 17,998
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . 51,352 44,080
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . 6,541 1,377
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . - - - - - 20
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . 38,111 25,355
-------- -------
Total current liabilities . . . . . . . . . . . . . . . . 113,479 94,185
--------- -------
LONG-TERM LIABILITIES:
Long-term obligations . . . . . . . . . . . . . . . . . . . . . . 4,001 5,722
Lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . 10,722 10,119
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . 2,243 7,123
Other noncurrent liabilities. . . . . . . . . . . . . . . . . . . 2,734 946
------- -------
Total long-term liabilities . . . . . . . . . . . . . . . 19,700 23,910
------ ------
COMMITMENTS AND CONTINGENCIES (NOTE 9) . . . . . . . . . . . . . . . . .
STOCKHOLDERS' EQUITY:
Common stock - - $.01 par value; authorized 150,000,000 shares
Issued: 46,038,646 shares for 1993 and 43,910,394 shares for 1992
Outstanding: 41,181,446 shares for 1993 and 43,910,394 shares
for 1992 . . . . . . . . . . . . . . . . . . . . . . . . . 460 439
Additional paid-in capital . . . . . . . . . . . . . . . . . . . 250,501 227,972
Treasury stock, at cost (4,857,200 shares for 1993) . . . . . . . (52,178) - - - - -
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 8,527 21,306
Accumulated translation adjustment . . . . . . . . . . . . . . . . (1,188) (569)
------------ ----------
Total stockholders' equity . . . . . . . . . . . . . . . . 206,122 249,148
--------- ---------
Total liabilities and stockholders' equity . . . . . . . $339,301 $367,243
======== ========
The accompanying notes are an integral part of these balance sheets.
31
34
CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1993 1992 1991
---- ---- ----
REVENUE:
Product . . . . . . . . . . . . . . . . . . . . . . $241,011 $315,024 $292,126
Maintenance . . . . . . . . . . . . . . . . . . . . 127,612 103,700 87,350
-------- -------- ---------
Total revenue . . . . . . . . . . . . . . . 368,623 418,724 379,476
-------- -------- --------
COST OF REVENUE:
Product . . . . . . . . . . . . . . . . . . . . . . 73,594 76,104 64,374
Maintenance . . . . . . . . . . . . . . . . . . . . 15,757 17,850 23,208
------- -------- --------
Total cost of revenue . . . . . . . . . . . 89,351 93,954 87,582
------- -------- ------
GROSS MARGIN . . . . . . . . . . . . . . . . . . . . . . 279,272 324,770 291,894
-------- -------- -------
OPERATING EXPENSES:
Marketing and sales . . . . . . . . . . . . . . . . 160,212 159,009 147,180
Research and development . . . . . . . . . . . . . . 69,088 66,432 68,157
General and administrative . . . . . . . . . . . . . 38,737 33,872 36,065
Restructuring costs . . . . . . . . . . . . . . . . 13,450 ------ 49,901
--------- -------- -------
Total operating expenses . . . . . . . . . . 281,487 259,313 301,303
--------- -------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS . . . . . . . . . (2,215) 65,457 (9,409)
----------- -------- --------
OTHER INCOME (EXPENSE):
Interest income . . . . . . . . . . . . . . . . . . 3,159 3,586 6,151
Interest expense . . . . . . . . . . . . . . . . . . (723) (853) (2,641)
Merger costs . . . . . . . . . . . . . . . . . . . . ------- -------- (1,660)
Other, net . . . . . . . . . . . . . . . . . . . . . (828) (97) 691
--------- -------- ---------
Total other income . . . . . . . . . . . . 1,608 2,636 2,541
--------- -------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . (607) 68,093 (6,868)
PROVISION FOR INCOME TAXES . . . . . . . . . . . . . . . . -------- 12,986 10,200
--------- -------- ---------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS . . . . . . . (607) 55,107 (17,068)
--------- -------- ---------
DISCONTINUED OPERATIONS (NOTE 2):
INCOME (LOSS) FROM OPERATIONS . . . . . . . . . . . . . (6,200) 253 (5,335)
LOSS ON DISPOSAL . . . . . . . . . . . . . . . . . . . (5,972) -------- --------
-------- -------- ----------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS . . . . . . . . (12,172) 253 (5,335)
--------- -------- ----------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . (12,779) 55,360 (22,403)
SERIES A-1 PREFERRED STOCK DIVIDEND . . . . . . . . . . . . -------- 559 1,344
---------- -------- ---------
NET INCOME (LOSS) ATTRIBUTABLE TO
COMMON STOCKHOLDERS . . . . . . . . . . . . . . . . . $ (12,779) $ 54,801 $ (23,747)
========= ======== ==========
NET INCOME (LOSS) PER SHARE:
From continuing operations . . . . . . . . . . . . . . $ (.02) $ 1.19 $ (.44)
From discontinued operations . . . . . . . . . . . . . (.28) .01 (.13)
--------- -------- ----------
Net income (loss) per share . . . . . . . . $ (.30) $ 1.20 $ (.57)
========= ======== ==========
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING . . . . . . . . . . . . . . . . . . . . . 43,060 45,689 41,355
======== ======== =========
The accompanying notes are an integral part of these financial statements
32
35
CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(IN THOUSANDS)
Retaomed
Additional Earnings Accumulated
Common Stock Paid-In Treasury Stock (Accumulated Translation
Shares Amount Capital Shares Amount Deficit) Adjustment Total
------ ------ ------- ------ ------ ---------- ---------- -----
BALANCE, DECEMBER 31, 1990 40,271 $403 $199,614 - - - - - $ - - - - - $(9,748) $5,368 $195,637
Repurchase of common stock (80) (1) (1,824) - - - - - - - - - - - - - - - - - - (1,825)
Issuance of common stock to employees 1,806 18 14,839 - - - - - - - - - - - - - - - - - - 14,857
Payment of stock notes receivable - - - - - - - 130 - - - - - - - - - - - - - - - - - - 130
Exchange of warrant for common stock 199 2 (2) - - - - - - - - - - - - - - - - - - - - - - -
Tax benefits from employee
stock transactions - - - - - - - 477 - - - - - - - - - - - - - - - - - - 477
Series A-1 preferred stock dividends - - - - - - - - - - - - - - - - - - - - - (1,344) - - - - (1,344)
Translation adjustment - - - - - - - - - - - - - - - - - - - - - - - - - (356) (356)
Net loss - - - - - - - - - - - - - - - - - - - - - (22,403) - - - - (22,403)
------- ----- -------- --------- --------- --------- ------- ---------
BALANCE, DECEMBER 31, 1991 42,196 422 213,234 - - - - - - - - - - (33,495) 5,012 185,173
Repurchase of common stock (557) (6) (10,792) - - - - - - - - - - - - - - - - - - (10,798)
Issuance of common stock to employees 1,410 15 13,801 - - - - - - - - - - - - - - - - - - 13,816
Conversion of preferred stock 861 8 10,989 - - - - - - - - - - - - - - - - - - 10,997
Payment of stock notes receivable - - - - - - - 1 - - - - - - - - - - - - - - - - - - 1
Tax benefits from employee
stock transactions - - - - - - - 739 - - - - - - - - - - - - - - - - - - 739
Series A-1 preferred stock dividends - - - - - - - - - - - - - - - - - - - - - (559) - - - - (559)
Translation adjustment - - - - - - - - - - - - - - - - - - - - - - - - - (5,581) (5,581)
Net income - - - - - - - - - - - - - - - - - - - - - 55,360 - - - - 55,360
------- ----- -------- --------- --------- --------- ------- ---------
BALANCE, DECEMBER 31, 1992 43,910 439 227,972 - - - - - - - - - - 21,306 (569) 249,148
Purchase of treasury stock - - - - - - - - - - - (4,857) (52,178) - - - - - - - - (52,178)
Issuance of common stock to employees 1,079 11 10,794 - - - - - - - - - - - - - - - - - - 10,805
Tax benefits from employee stock
transactions - - - - - - - 842 - - - - - - - - - - - - - - - - - - 842
Common stock issued in connection
with Comdisco acquisition 1,050 10 9,046 - - - - - - - - - - - - - - - - - - 9,056
Issuance of warrant in connection with
Comdisco acquisition - - - - - - - 1,847 - - - - - - - - - - - - - - - - - - 1,847
Translation adjustment - - - - - - - - - - - - - - - - - - - - - - - - - (619) (619)
Net loss - - - - - - - - - - - - - - - - - - - - - (12,779) - - - - (12,779)
------- ----- -------- --------- --------- --------- ------- ---------
BALANCE, DECEMBER 31, 1993 46,039 $460 $250,501 (4,857) $(52,178) $8,527 $(1,188) $206,122
======= ===== ========= ========= ========= ========== ======== =========
The accompanying notes are an integral part of these financial statements.
33
36
CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(IN THOUSANDS)
1993 1992 1991
---- ---- ----
CASH AND CASH INVESTMENTS AT
BEGINNING OF YEAR...................................................... $ 78,976 $ 87,681 $ 71,058
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................................... (12,779) 55,360 (22,403)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization..................................... 43,966 36,424 38,884
Lease liabilities................................................. (2,970) (3,245) 35
Deferred income taxes, noncurrent................................. (4,834) (352) (913)
Write down and reserve of assets related to restructure........... 3,500 - - - - - - - - - -
Other noncurrent liabilities...................................... 4,826 396 (628)
Accruals for severance and facilities restructure costs........... 7,210 - - - - - 30,566
Write-offs of equipment and other assets.......................... 400 1,516 2,334
Write-offs of capitalized software development costs and
purchased software and intangibles.............................. 2,740 2,794 10,896
Provisions for doubtful accounts.................................. 2,648 1,087 936
Provisions for inventory write-offs............................... 381 1,006 363
Changes in current assets and liabilities, net of acquisition
of Comdisco and Japan distributorship---
(Increase) decrease in accounts receivable........................ 28,724 (14,342) (2,766)
(Increase) decrease in inventories................................ (32) (579) 892
(Increase) decrease in prepaid expenses and other................. (3,668) (6,516) 4,067
Increase (decrease) in accrued liabilities and payables........... 9,238 (20,581) 918
Increase (decrease) in deferred revenue........................... 11,134 (12,637) 11,812
Increase (decrease) in deferred income taxes...................... 253 20 (252)
-------- -------- --------
Net cash provided by operating activities............................ 90,737 40,351 74,741
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in short-term investments.......................... (20,480) 11,973 6,890
Purchase of property, plant and equipment ............................. (19,274) (30,958) (28,388)
Capitalization of software development costs........................... (15,207) (14,741) (16,188)
Increase in purchased software and intangibles
and other assets..................................................... (4,228) (2,409) (2,994)
Proceeds from sale of equipment........................................ 774 - - - - - 1,704
Cash acquired from purchase of distributorship, net of cash paid....... - - - - - 1,523 - - - - -
-------- -------- --------
Net cash used for investing activities............................... (58,415) (34,612) (38,976)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term obligations............................ (8,117) (13,512) (52,142)
Proceeds from borrowings............................................... - - - - - - - - - - 24,099
Sales of common stock, net of notes receivable from stockholders....... 10,805 13,816 14,857
Payment of stock notes receivable...................................... - - - - - 1 130
Repurchase of common stock............................................. (52,178) (10,798) (1,825)
Payment of dividend on preferred stock................................. - - - - - (559) (2,300)
-------- -------- --------
Net cash used for financing activities............................... (49,490) (11,052) (17,181)
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.................................... (426) (3,392) (1,961)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH INVESTMENTS........................... (17,594) (8,705) 16,623
-------- -------- --------
CASH AND CASH INVESTMENTS AT END OF YEAR................................... $ 61,382 $ 78,976 $ 87,681
======== ======== ========
The accompanying notes are an integral part of these financial statements.
34
37
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993
1. ORGANIZATION OF THE COMPANY
Cadence Design Systems, Inc. (the "Company") develops, markets and
supports computer-aided design software products that automate, enhance and
accelerate the design, verification and testing of integrated circuits and
complex electronic circuits and systems.
In December 1991 the Company acquired all of the outstanding
common and preferred stock of Valid Logic Systems Incorporated ("Valid") in
exchange for approximately 10,816,000 shares of the Company's common stock and
86,133 shares of the Company's preferred stock. Valid was involved in the
design, development, marketing and support of electronic design automation
software products primarily used to design electronic systems and printed
circuit boards ("PCBs"). In connection with the merger, each share of Valid
common and preferred stock was converted into .323 shares of the Company's
common and preferred stock, respectively. The Company also issued
approximately 199,000 shares of common stock in exchange for an outstanding
warrant to purchase common stock of Valid. The Company also assumed Valid's
outstanding stock options and all other outstanding warrants. Each such option
and warrant to purchase one share of Valid common stock was converted into an
option and warrant, respectively, to purchase .323 shares of the Company's
common stock. The merger was accounted for as a pooling of interests and,
accordingly, the financial statements for periods prior to the merger have been
restated to include the results of Valid.
In June 1993 the Company acquired the business and certain assets
of Comdisco Systems, Inc. ("Comdisco"), a subsidiary of Comdisco, Inc. in
exchange for 1,050,000 shares of the Company's common stock and a warrant to
purchase 1,300,000 shares of the Company's common stock. The acquisition was
accounted for as a purchase. Accordingly, the results of Comdisco from the
date of acquisition forward have been recorded in the Company's consolidated
financial statements. Comparative pro forma financial information has not been
presented as the results of operations for Comdisco are not material to the
Company's consolidated financial statements for 1993, 1992 and 1991. The
acquisition costs of $10,903,000 include amounts paid for the net tangible
assets of Comdisco and purchased software and other intangibles.
2. DISCONTINUED OPERATIONS
In December 1993 the Company sold its Automated Systems ("ASI")
division. ASI was sold for a nominal amount of cash and future royalties
amounting to 5% of gross revenues of ASI for the period from January 1, 1994
through December 31, 2003, up to maximum royalties of $12,000,000. The
royalties will be recorded in future periods as earned. The sale of ASI
resulted in a loss on disposal of $6.0 million (the income tax effect of which
was not material). This loss includes the loss on the sale of the net assets,
as well as amounts accrued for estimated costs to be incurred in connection
with the disposal. As of December 31, 1993, the Company has recorded $1.4
million in accrued liabilities and $2.0 million in other noncurrent liabilities
for liabilities associated with the discontinued division. The operating
results of the discontinued division have been reported as discontinued
operations in the consolidated statements of income for all years presented.
The prior year balance sheet has also been adjusted to reflect the net current
assets of ASI as of December 31, 1992 of $4.8 million as a single line item in
other current assets and to reflect the net noncurrent assets of $3.0 million
as a single line item in other assets. There were no remaining assets related
to ASI on the Company's balance sheet as of December 31, 1993. Revenue of the
discontinued division was $11,165,000, $15,776,000 and $12,079,000 for the
years ending December 31, 1993, 1992 and 1991, respectively.
35
38
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries after elimination of intercompany
accounts and transactions. The ownership interest of minority participants in
subsidiaries that are not wholly owned was approximately $725,000 and $946,000
at December 31, 1993 and 1992, respectively, and is included in other
noncurrent liabilities in the accompanying balance sheets. Minority interest
income was approximately $134,000 and $196,000 and minority interest expense
was $268,000 for the years ended December 31, 1993, 1992 and 1991,
respectively, and is included in other income and expense in the accompanying
statements of income.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation and
amortization are provided over the following estimated useful lives, by the
straight-line method.
Equipment 2-7 years
Furniture and fixtures 5 years
Leasehold improvements Shorter of the lease term or the estimated useful life
CASH AND CASH INVESTMENTS
For purposes of the statements of cash flows, the Company
considers all commercial paper, medium-term notes, bankers' acceptances,
certificates of deposit, municipal bonds, Euro certificates of deposit and
money market accounts with an original maturity of ninety days or less to be
cash and cash investments.
SHORT-TERM INVESTMENTS
Short-term investments are stated at cost, which approximates
market value, and consist principally of Euro certificates of deposit,
medium-term notes, money market accounts, commercial paper, bankers'
acceptances and certificates of deposit with an original maturity of greater
than ninety days that the Company intends to sell within one year.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out
method) or market. Cost includes labor, material and manufacturing overhead.
Inventories include testing equipment and accelerators.
Inventories consisted of the following (in thousands):
December 31,
-----------------------------
1993 1992
---- ----
Raw materials and supplies $2,240 $1,642
Work-in-progress 2,214 2,527
Finished goods 1,290 1,893
------ ------
Total inventories $5,744 $6,062
====== ======
36
39
REAL ESTATE PARTNERSHIPS
During 1989 and 1991 the Company acquired a 49% and 46.5% interest
as a limited partner in two real estate partnerships and signed agreements to
lease buildings from the limited partnerships. Both of the above commitments
are included in future operating lease commitments in Note 7. The investment
in these partnerships of approximately $5.2 million at December 31, 1993 and
1992 is included in other assets in the accompanying balance sheets. The
Company accounts for these investments under the equity method of accounting.
During June 1991 the Company acquired an 80% interest in a third real estate
partnership which has purchased land for future expansion. This partnership is
consolidated in the accompanying financial statements.
REVENUE RECOGNITION
Product revenue consists principally of revenue earned under
software license agreements. Revenue earned under license agreements to end
users is generally recognized when a customer purchase order has been received,
the software has been shipped, the Company has a right to invoice the customer
and there are no significant obligations remaining. Design services revenue
and test equipment revenue are recognized upon delivery of the final design or
shipment of the test equipment. Nonrefundable revenue earned under guaranteed
revenue commitments from products relicensed through OEMs, system integrators
and software value-added relicensors is recognized at the latter of the
beginning of the commitment period or shipment of the initial product master.
Additional revenue under these agreements is recognized at the time such
amounts are reported to the Company.
Maintenance revenue consists of fees for providing system updates,
user documentation and technical support for software products. Maintenance
revenue is recognized ratably over the term of the agreement.
In 1993, 1992 and 1991 one customer (a distributor) accounted for
13%, 14% and 13% of total revenue, respectively.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes internally generated software development
costs in compliance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed." Capitalization of software development costs begins upon the
establishment of technological feasibility for the product. The establishment
of technological feasibility and the ongoing assessment of the recoverability
of these costs requires considerable judgment by management with respect to
certain external factors, including, but not limited to, anticipated future
gross product revenue, estimated economic life and changes in software and
hardware technology. Software development costs capitalized were $15,207,000,
$14,741,000 and $16,188,000 for the years ended December 31, 1993, 1992 and
1991, respectively.
Amortization of capitalized software development costs begins when
the products are available for general release to customers and is generally
computed on a straight-line basis over the remaining estimated economic life
of the product (three to five years). Amortization, which is included in cost
of revenue in the accompanying statements of income, amounted to $13,065,000,
$11,043,000 and $11,904,000 for the years ended December 31, 1993, 1992 and
1991, respectively. The Company wrote off $1,495,000 of capitalized software in
1993 for projects discontinued during the year. In connection with the merger
with Valid, the Company also wrote off $2,794,000 and $10,896,000 of
capitalized software in 1992 and 1991, respectively, due to an overlap of
products.
37
40
PURCHASED SOFTWARE AND INTANGIBLES
Purchased software and intangibles are stated at cost less
accumulated amortization. Amortization is generally computed on a
straight-line basis over the remaining estimated economic life of the
underlying product (two to seven years). The cost and related accumulated
amortization of purchased software and intangibles were as follows (in
thousands):
December 31,
------------------------------
1993 1992
---- ----
Cost $24,587 $16,557
Less: Accumulated amortization 11,800 9,214
-------- ----------
Net purchased software and intangibles $ 12,787 $ 7,343
======== ========
INCOME TAXES
Through December 31, 1992 the Company accounted for income taxes
pursuant to Statement of Financial Accounting Standards ("SFAS") No. 96,
"Accounting for Income Taxes." Effective January 1, 1993 the Company
retroactively adopted the provisions of SFAS No.109, "Accounting for Income
Taxes." This statement provides for a liability approach under which deferred
income taxes are provided based upon enacted tax laws and rates applicable to
the periods in which the taxes become payable. The adoption of this accounting
pronouncement did not have a material impact on the prior years' financial
statements (see Note 11).
FOREIGN CURRENCY TRANSLATION
As of December 31, 1991 the functional currency of certain of the
Company's foreign subsidiaries was the U.S. dollar, whereas the functional
currency of the former Valid subsidiaries was the local currency. During 1992,
the Company made certain changes in the manner in which the subsidiaries'
operations were conducted to conform more closely to the Valid business model.
Accordingly, the functional currency of the U.S. dollar foreign subsidiaries
was changed to the respective local currency effective for the first quarter of
1992. Gains and losses resulting from the translation of the financial
statements for the subsidiaries are reported as a separate component of
stockholders' equity.
MERGER COSTS
Total costs incurred by the Company and Valid in 1991 in
connection with the merger of the two companies were $1,660,000. These costs,
consisting primarily of legal, accounting and other related expenses, were
charged to operations in the fourth quarter of 1991.
NET INCOME (LOSS) PER SHARE
Net income per share for each period is calculated by dividing net
income attributable to common stockholders by the weighted average number of
common stock and common stock equivalents outstanding during the period.
Common stock equivalents consist of dilutive shares issuable upon the exercise
of outstanding common stock options and warrants and the conversion of Series
A-1 preferred stock. Net loss per share is calculated by dividing net loss
attributable to common stockholders by the weighted average number of common
shares. Fully diluted net income (loss) per share is substantially the same as
primary net income (loss) per share.
38
41
SUPPLEMENTAL STATEMENTS OF CASH FLOWS DISCLOSURES
Cash paid for interest and income taxes, including foreign
withholding taxes, was as follows (in thousands):
Income
Interest Taxes
-------- -----
Year Ended December 31,
1993 $ 541 $ 3,884
1992 $ 803 $ 9,151
1991 $ 2,837 $ 10,921
DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES
Notes payable and capital lease obligations incurred for property, plant and
equipment placed into service in 1993, 1992 and 1991 were $4,441,000,
$5,498,000 and $2,195,000, respectively.
As discussed in Note 1, in June 1993 the Company acquired the
business and certain assets of Comdisco in exchange for 1,050,000 shares of the
Company's common stock and a warrant to purchase 1,300,000 shares of the
Company's common stock. The cost in excess of net assets acquired was
$6,500,000 which is being amortized over seven years and is included in
purchased software and intangibles in the accompanying balance sheet. The
accumulated amortization as of December 31, 1993 was approximately $436,000.
In connection with the acquisition, net assets acquired were as follows (in
thousands):
Trade accounts receivables and other current assets $ 4,381
Purchased software and other intangibles 6,500
Property, equipment and other long-term assets 1,909
Liabilities assumed (1,887)
-----------
Net assets acquired $10,903
==========
In March 1992 the Company acquired a distributorship in Japan,
which, as its sole operation, had distributed the Company's system products.
As part of this transaction, the Company paid approximately $400,000 in cash
and issued a note for $3,100,000 in exchange for stock and a consulting
agreement. This acquisition was accounted for as a purchase. The cost in
excess of the net assets acquired was approximately $5.2 million which is being
amortized over five years and is included in other assets in the accompanying
balance sheets. The accumulated amortization as of December 31, 1993 and 1992
was approximately $2,079,000 and $854,000, respectively.
During 1992 all of the Company's outstanding Series A-1 preferred
stock was converted to approximately 861,000 shares of the Company's common
stock.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is practicable
to estimate that value.
The carrying amount of cash and cash investments and short-term
investments is a reasonable estimate of fair value because of the short
maturity of those instruments.
The fair value of the Company's long-term obligations, excluding
capital leases, is estimated based on the quoted market prices for the same or
similar issues or on the current rates offered to the Company for debt of the
same remaining maturities. The carrying amount of the Company's long-term debt
at December 31, 1993 approximates its fair value.
39
42
The Company enters into forward exchange contracts to reduce the
impact of foreign currency fluctuations on those accounts that give rise to
transaction gains or losses. As of December 31, 1993 the Company had entered
into forward exchange contracts in the amount of $33,058,000, maturing January
31, 1994. The fair value of foreign currency contracts is estimated by
obtaining quotes from banks. The market value was approximately the same as
the carrying value as of December 31, 1993.
CONCENTRATION OF CREDIT RISK
Financial instruments which may potentially subject the Company to
concentrations of credit risk consist principally of cash and cash investments,
short-term investments and accounts receivable. The Company's investment
policy limits investments to short-term, low-risk instruments. Concentration
of credit risk related to accounts receivable is limited due to the varied
customers comprising the Company's customer base and their dispersion across
geographies.
RESTRUCTURING COSTS
In March 1993 the Company recorded restructuring costs of
$13,450,000 associated with a planned restructure of certain areas of sales,
operations and administration due to business conditions. The restructuring
charge primarily reflects costs associated with excess facilities, the
write-off of software development costs and purchased software and intangibles
and employee terminations resulting from the change in product strategy and
lower revenue levels.
In December 1991 the Company recorded restructuring costs of
$49,901,000 associated with the merger of Valid with the Company. This amount
included approximately $5,530,000 for excess fixed assets and other assets,
$13,385,000 for severance and payroll-related payments, $16,475,000 for closing
of excess and duplicate facilities, $10,896,000 for write-offs of capitalized
software due to overlap of products and $3,615,000 for other items.
POST RETIREMENT BENEFITS
Statement of Financial Accounting Standards No. 106, "Accounting
for Post Retirement Benefits other than Pensions," which was effective for the
Company in fiscal 1993, has no effect on the Company as the Company has not
offered such post retirement benefits.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," which will be effective
for the Company in fiscal 1994, is not expected to have a material impact on
the Company.
40
43
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of (in thousands):
December 31,
-------------------------------
1993 1992
---- ----
Equipment $ 98,675 $109,001
Furniture and fixtures 20,474 18,471
Land and improvements 8,378 8,324
Leasehold improvements 17,334 18,697
-------- --------
Total cost 144,861 154,493
Less: Accumulated depreciation and amortization 83,384 91,033
-------- -------
Property, plant and equipment, net $ 61,477 $ 63,460
======== ========
The cost of equipment, furniture and fixtures under capital leases
included in property, plant and equipment at December 31, 1993 and 1992 was
$22,178,000 and $25,622,000, respectively. Accumulated amortization of the
leased equipment, furniture and fixtures at such dates was $16,199,000 and
$19,568,000, respectively.
5. ACCRUED LIABILITIES
Accrued liabilities consisted of (in thousands):
December 31,
-------------------------------
1993 1992
---- ----
Payroll and payroll-related accruals $27,837 $26,076
Accrued merger and restructuring costs 3,669 4,658
Other accrued liabilities 19,846 13,346
-------- --------
Total accrued liabilities $51,352 $44,080
======= =======
Accrued merger and restructuring costs consist principally of
severance obligations and the current portion of lease obligations for closing
of excess facilities.
6. LONG-TERM OBLIGATIONS
Long-term obligations consisted of (in thousands):
December 31,
-------------------------------
1993 1992
---- ----
Capital lease obligations (Note 7) $6,103 $6,615
Note payable related to the acquisition of
Japan distributorship, due in annual
installments 1,860 2,480
Other notes payable ----- 1,982
------ ------
Total 7,963 11,077
Less: Current portion 3,962 5,355
------ ------
Long-term obligations $4,001 $5,722
====== ======
At December 31, 1993 future principal payments on long-term
obligations, excluding capital lease obligations, were $620,000 for each of the
years ending December 31, 1994, 1995 and 1996, respectively.
41
44
7. LEASES
Facilities and equipment are leased under various capital and
operating leases expiring on different dates through the year 2008. Certain of
these leases contain renewal options. The terms of several of the facilities
agreements, accounted for as operating leases, provide for the deferral of
several months' rental payments or scheduled rent increases. Rental expense
under these agreements is recognized on a straight-line basis. Rental expense
was approximately $19,983,000, $21,287,000 and $16,798,000 for the years ended
December 31, 1993, 1992 and 1991, respectively.
In connection with the merger with Valid and planned restructure,
the Company has closed certain excess and duplicate facilities. Accordingly,
the Company has accrued for estimated future minimum rent and maintenance costs
related to these facilities. Total costs accrued at December 31, 1993 were
$8,557,000, of which $1,193,000 is included in accrued liabilities and
$7,364,000 is included in lease liabilities in the accompanying balance sheet.
In connection with the disposition of ASI, the Company has accrued
for estimated future rent on facilities not assumed by the purchaser. Total
costs accrued at December 31, 1993 were $1,911,000, of which $102,000 is
included in accrued liabilities and $1,809,000 is included in other noncurrent
liabilities in the accompanying balance sheet.
At December 31, 1993 future minimum lease payments under capital
and operating leases and the present value of the capital lease payments were
as follows (in thousands):
Capital Operating
Leases Leases
------ -----------
Years ending December 31,
1994 $3,661 $ 19,451
1995 1,984 18,421
1996 564 17,278
1997 287 16,516
1998 147 14,212
Thereafter - - - 59,736
------- ------
Total lease payments 6,643 $ 145,614
==========
Less: Amount representing interest
(average rate of 7.5%) 540
--------
Present value of lease payments 6,103
Less: Current portion 3,342
--------
Long-term portion $2,761
========
As of December 31, 1993 the Company had $15.0 million available
for future borrowings under capital lease agreements which expire in September
1994.
8. LINES OF CREDIT
The Company has unsecured lines of credit with two banks allowing
for combined maximum borrowings of $17,500,000 in the form of (a) domestic rate
revolving loans with interest at the banks' prime lending rate, (b) Eurodollar
rate loans with interest that exceeds three- quarters of one percent of the
banks' current Eurodollar rate quoted for the same amount and maturity, or (c)
issuances of letters of credit. There were no outstanding borrowings at
December 31, 1993 or 1992 under these agreements. Certain financial covenants
and restrictions are included in these agreements. As a result of its treasury
stock purchase activity during 1993, the Company was not in compliance with
certain covenants related to one of its lines of credit, with a borrowing
amount of $10,000,000, as of December 31, 1993. The Company subsequently
obtained a waiver of the noncompliance from the bank. These lines of credit
will expire in May 1994 and June 1994.
42
45
9. COMMITMENTS AND CONTINGENCIES
The Company has entered into an executive compensation agreement
with one of its executive officers. This agreement provides severance benefits
to the executive in the event that within 120 days before or two years after
any change in control, or sale of all or substantially all assets of the
Company, the executive's employment is terminated by the Company or the
executive, in circumstances described in the agreement. The severance benefits
are a cash payment of two times the executive's base salary, plus accelerated
vesting of all outstanding stock options.
The Company assumed as part of the ASI acquisition an agreement
dated April 22, 1985 under which the Company is obligated to pay to a former
ASI officer a monthly annuity for a fifteen-year period after his retirement
date or a lump sum payment subject to the terms of the agreement. The Company
has accrued an amount equal to the present value of the estimated future
payments at the eligible retirement date. Such accrual amount is included in
accrued liabilities in the accompanying balance sheet.
The Company is involved in various disputes and litigation matters
which have arisen in the ordinary course of business. These include disputes
and lawsuits related to intellectual property, contract law and employee
relations matters and the stockholder class action lawsuits described below,
which allege violation of certain federal securities laws by maintaining
artificially high market prices for the Company's common stock through alleged
misrepresentations and nondisclosures regarding the Company's financial
condition.
Stockholder class action lawsuits were filed against the Company
and certain of its officers and directors in the United States District Court
for the Northern District of California, San Jose Division, on April 8 and 9,
1991. The suits were subsequently consolidated into a single lawsuit and the
class period changed to include purchasers of the Company's common stock during
the period from October 18, 1990 through April 3, 1991. The plaintiff in the
suit seeks compensatory damages unspecified in amount. On June 2, 1993 the
District Court granted in part and denied in part the Company's motion to
dismiss the Complaint in the class action originally filed in April 1991. The
effect of the ruling was to limit the class period to include purchasers of the
Company's common stock between January 29, 1991 and April 3, 1991. Trial of
this matter is scheduled to commence on August 8, 1994. The Company is
vigorously defending against the litigation.
On March 23, 1993 a separate class action lawsuit was filed
against the Company and certain of its directors and officers in the United
States District Court, Northern District of California, San Jose Division. Two
additional complaints, identical to the complaint filed on March 23, 1993
except for the identities of the plaintiffs, were filed later in March and in
April 1993. All three complaints were consolidated into a single lawsuit which
seeks unspecified damages on behalf of all purchasers of the Company's common
stock between October 12, 1992 and March 19, 1993. On November 18, 1993, the
District Court granted the Company's motion to dismiss the 1993 complaint. The
effect of the ruling was to dismiss the complaint except as to a statement
allegedly made on January 28, 1993, but plaintiffs were granted leave to
further amend their complaint. The Company is vigorously defending against the
litigation.
Management believes that the ultimate resolution of the disputes
and litigation matters discussed above will not have a material adverse impact
on the Company's financial position or results of operations.
43
46
10. STOCKHOLDERS' EQUITY
REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company has 2,000,000 shares of authorized and unissued
preferred stock at $.01 par value per share. At December 31, 1993 and 1992
there were no shares of preferred stock outstanding.
In 1990 a corporation acquired a minority interest in Valid
through an initial investment of $10,998,000, in exchange for 86,133 shares of
newly issued Series A-1 voting, convertible preferred stock, convertible into
861,330 common shares, at a purchase price equivalent to $13.00 per common
share. All of the preferred stock was converted to common stock during 1992.
In 1990 the corporation also purchased, for $1,187,500, a warrant to acquire up
to 4,750,000 shares of Valid's common stock. This warrant was exchanged for
approximately 199,000 shares of common stock upon the merger of Valid with the
Company.
Each share of Series A-1 preferred stock was entitled to receive
cumulative annual dividends. The dividends were payable in cash. In 1992 and
1991 the Company recorded $559,000 and $1,344,000, respectively, for dividends
paid to the corporation.
EMPLOYEE STOCK OPTION PLANS
The Company's Employee Stock Option Plan (the "Plan") provides for
employees to be granted options to purchase up to 13,637,800 shares of common
stock. The Plan provides for the issuance of either incentive or nonqualified
options at an exercise price not less than fair market value of the stock on
the date of grant. Options granted under the Plan become exercisable over
periods of one to four years and expire five to ten years from the date of
grant. At December 31, 1993 options to purchase 8,320,101 shares were
outstanding under the Plan, of which options for 1,317,646 shares were
exercisable at prices ranging from $2.00 to $28.75. Options to purchase
1,284,864 shares were available for future grant under the Plan. During 1993
holders of the Company's options were given the opportunity to exchange
previously granted stock options for new common stock options exercisable at
$8.81 per share, the fair market value of the common stock on the date of
exchange. Under the terms of the new options, one-third of the shares vest one
year from the date of grant and the remaining shares vest in 24 equal monthly
installments. Options to purchase 4,856,026 shares were exchanged. Options to
purchase 4,032,835 shares of common stock have been exercised as of December
31, 1993.
During 1993 the Company adopted a Non-Statutory Stock Option Plan
(the "Non-Statutory Plan"). The Company has reserved 2,500,000 shares of
common stock for issuance under the Non-Statutory Plan. Since directors and
officers of the Company are not eligible to receive options under the
Non-Statutory Plan, stockholder approval is not required nor will it be sought.
Options granted under the Non-Statutory Plan become exercisable over a
four-year period, with one-fourth of the shares vesting one year from the
vesting commencement date and the remaining shares vesting in 36 equal monthly
installments. The Non-Statutory options generally expire ten years from the
date of grant. At December 31, 1993 options to purchase 1,230,225 shares were
outstanding, none of which were exercisable. Options to purchase 1,269,775
shares were available for future grant under the Non-Statutory Plan.
44
47
STOCK OPTION PLANS - COMPANIES ACQUIRED
The Company has reserved a total of 1,313,996 shares of its
authorized common stock for issuance upon the exercise of options granted to
former employees of companies acquired (the "Acquired Options"). The Acquired
Options were assumed by the Company outside the Plan, but all are administered
as if assumed under the Plan. All of the Acquired Options have been adjusted
to effectuate the conversion under the terms of the Agreements and Plans of
Reorganization between the Company and the companies acquired. The Acquired
Options generally become exercisable over a four-year period and generally
expire either five or ten years from the date of grant. At December 31, 1993
Acquired Options to purchase a total of 1,313,996 shares were outstanding, of
which 1,128,756 were exercisable at prices ranging from $.41 to $21.52. No
additional options will be granted under any of the acquired companies' plans.
Combined activity with respect to the Employee Stock Option Plans and Stock
Option Plans - Companies Acquired was as follows:
Number Option
of Shares Price
--------- -----
Outstanding, December 31, 1990 7,880,956 $ .41 - $27.69
Granted 1,754,754 3.68 - 34.13
Exercised (1,479,274) .41 - 25.25
Canceled (474,612) .72 - 28.75
----------- --------------
Outstanding, December 31, 1991 7,681,824 .41 - 34.13
Granted 4,877,991 15.69 - 28.50
Exercised (1,086,173) .41 - 26.31
Canceled (3,638,691) .96 - 34.13
----------- -----------------
Outstanding, December 31, 1992 7,834,951 .41 - 28.75
Granted 9,456,161 8.63 - 23.13
Exercised ( 550,051) .41 - 21.52
Cancelled (5,876,739) 1.22 - 27.44
----------- ----------------
Outstanding, December 31, 1993 10,864,322 $ .41 - $28.75
=========== ================
OPTION AGREEMENTS
The Company occasionally has issued options outside of the Plan.
As of December 31, 1993 options to purchase 70,313 shares were outstanding
under these agreements, of which 21,250 were exercisable at prices ranging from
$18.25 to $20.94 per share.
DIRECTORS STOCK OPTION PLANS
The Company's Board of Directors has adopted the 1988 and 1993
Directors Stock Option Plans (the "Directors Plans") in the indicated years.
The Company has reserved 445,000 shares of common stock for issuance under the
Directors Plans. The Directors Plans provide for the issuance of nonqualified
stock options to nonemployee directors of the Company with an exercise price
equal to the fair market value of the common stock on date of grant. Options
granted under the Directors Plans have a term of up to ten years and vest
one-third one year from the date of grant and two-thirds ratably over the
subsequent two years. As of December 31, 1993 options to purchase 265,000
shares of common stock at $9.31 to $29.88 per share were outstanding under the
Directors Plans, of which options for 99,717 shares were exercisable at prices
ranging from $16.25 to $29.88 per share. Options to purchase 87,223 shares
are available for future grant under the Directors Plans. Options to purchase
92,777 shares of common stock have been exercised as of December 31, 1993 under
the Directors Plans. No additional options will be granted under the 1988
Directors Plan.
45
48
EMPLOYEE STOCK PURCHASE PLANS
The Company has reserved 1,500,000 shares of common stock for
issuance under the 1990 Employee Stock Purchase Plan (the "ESPP"). Under the
ESPP the Company's employees may purchase shares of common stock at a price per
share that is 85% of the lesser of the fair market value as of the beginning or
the end of the semiannual option periods. In addition, Valid had a similar
plan for which shares were approved for issuance in 1983. For the years ended
December 31, 1993, 1992 and 1991 shares issued under the combined plans were
487,941, 324,183 and 286,586, respectively. As of December 31, 1993, 449,668
shares were available for future purchase under the ESPP. No additional shares
will be issued under the Valid stock purchase plan.
WARRANT
In connection with the purchase of Comdisco, the Company issued a
warrant to purchase 1,300,000 shares of the Company's common stock at $14.50
per share. The warrant expires in June 2003 and can be exercised at any time
in increments of not less than 50,000 shares. The warrant was valued at
approximately $1,847,000 which was included as part of the total purchase price
of Comdisco.
RESERVED FOR FUTURE ISSUANCE
As of December 31, 1993 the Company has reserved the following
shares of authorized but unissued common stock for future issuance:
Employee Stock Option Plans 12,104,965
Stock Option Plans - Companies Acquired 1,313,996
Other Option Agreements 70,313
Directors Stock Option Plans 352,223
Employee Stock Purchase Plan 449,668
Warrant 1,300,000
----------
Total 15,591,165
==========
STOCKHOLDER RIGHTS PLAN
During 1989 the Company adopted a Stockholder Rights Plan. As
part of this plan the Company's Board of Directors declared a dividend of one
Common Share Purchase Right (the "Right") for each share of the Company's
common stock outstanding on July 20, 1989. The Board also authorized the
issuance of one such Right for each share of the Company's common stock issued
after July 20, 1989 until the occurrence of certain events.
Each Right entitles the holder thereof to purchase one share of
the Company's common stock for $100, subject to adjustment in certain events.
The Rights are not exercisable until the occurrence of certain events related
to a person acquiring, or announcing the intention to acquire, 20% or more of
the Company's common stock. Upon such acquisition, each Right (other than
those held by the acquiring person) will be exercisable for that number of
shares of the Company's common stock having a market value of two times the
exercise price of the Right. If the Company subsequently enters into certain
business combinations, each Right (other than those held by the acquiring
person) will be exercisable for that number of shares of common stock of the
other party to the business combination having a market value of two times the
exercise price of the Right. The Rights currently trade with the Company's
common stock. The Rights are subject to redemption at the option of the Board
of Directors at a price of $.01 per Right until the occurrence of certain
events, and are exchangeable for the Company's common stock, at the discretion
of the Board of Directors, under certain circumstances. The Rights expire on
May 30, 1999.
46
49
11. INCOME TAXES
Through December 31, 1992 the Company accounted for income taxes pursuant to
Statement of Financial Accounting Standards ("SFAS") No. 96, "Accounting for
Income Taxes." Effective January 1, 1993 the Company retroactively adopted the
provisions of SFAS No. 109, "Accounting for Income Taxes." The adoption of this
accounting pronouncement did not have a material impact on amounts reported in
prior years' financial statements.
The provision for income taxes for the year ended December 31,
consisted of the following components (in thousands):
1993 1992 1991
---- ---- ----
Current:
Federal $ 730 $1,227 $ 1,688
State 180 2,104 516
Foreign 8,939 10,447 10,168
------- ------ --------
Total current 9,849 13,778 12,372
------- ------ --------
Deferred (prepaid):
Federal (1,749) (987) (692)
State (1,220) (225) (510)
Foreign (6,880) 420 (970)
---------- --------- --------
Total prepaid (9,849) (792) (2,172)
---------- ---------- --------
Total provision for income taxes $ ------- $12,986 $10,200
============ ======= =======
Income (loss) from continuing operations before income taxes for
the years ended December 31, 1993, 1992 and 1991 included income (loss) of
$9,166,000, $5,478,000 and $(4,493,000), respectively, from the Company's
foreign subsidiaries.
The provision for income taxes at December 31, differs from the
amount estimated by applying the statutory federal income tax rate to income
(loss) from continuing operations before taxes as follows (in thousands):
1993 1992 1991
---- ---- ----
Provision (benefit) computed at federal $ (212) $ 23,237 $ (3,911)
statutory rate
State income tax (benefit), net of federal tax
effect 117 993 (147)
Change in valuation allowance 2,014 (11,619) 8,848
Research and development tax credits (1,020) - - - - - -
Foreign income taxed at higher tax rate 372 123 1,040
Merger costs not deductible - - - - - 680
Foreign tax credits utilized (6,958) (8,675) (3,215)
Foreign taxes incurred 6,958 9,627 5,021
Other (1,271) (700) 1,884
------- --------- ---------
Provision for income taxes $ - - - - $12,986 $10,200
========= ======= =======
47
50
The components of deferred tax assets and liabilities consisted of
the following (in thousands):
Year Ended December 31,
----------------------------
1993 1992
---- ----
Deferred tax assets:
Restructure reserves $ 7,938 $ 9,092
Net operating losses 20,792 24,264
Tax credits 30,163 21,956
Other 8,097 - - -
-------- ----------
Total assets 66,990 55,312
Valuation allowance-provision for
income taxes (38,847) (36,833)
Valuation allowance-equity/
intangibles (15,751) (11,882)
-------- --------
Net assets 12,392 6,597
------ -----
Deferred tax liabilities:
Capitalized software (11,467) (11,261)
Other - - - (2,479)
-------- ---------
Total liabilities (11,467) (13,740)
-------- --------
Total net deferred tax assets (liabilities) $ 925 $(7,143)
======== ========
The deferred assets which will affect equity or intangibles and
which will not be available to offset future provisions for income taxes are
stated in the above table as "Valuation allowance-equity/intangibles." The net
operating losses will expire at various dates from 1998 through the year 2006
and tax credit carry forwards will expire at various dates from 1997 through
the year 2008.
12. RELATED PARTY TRANSACTIONS
During 1993 a customer of the Company entered into a consulting
joint venture with the Company. Revenue related to this customer was
approximately $5,928,000 for the year ended December 31, 1993. Outstanding
trade accounts receivable from this related party were $2,268,000 at December
31, 1993.
A minority interest participant in a subsidiary of the Company is
also a major customer of the Company. Revenue related to this customer (a
distributor) was approximately $48,655,000, $57,133,000 and $49,672,000 for the
years ended December 31, 1993, 1992 and 1991, respectively. Outstanding trade
accounts receivable from this related party were approximately $10,304,000 and
$17,021,000 as of December 31, 1993 and 1992, respectively.
During 1990 a customer of the Company entered into a research and
development joint venture with the Company. During 1992 the Company acquired
the minority interest in the joint venture. Revenue related to this customer
was approximately $777,000 and $1,276,000 for the years ended December 31, 1992
and 1991, respectively. There were no accounts receivable outstanding for this
customer at December 31, 1992.
48
51
13. OPERATIONS BY GEOGRAPHIC AREA
The Company operates primarily in one industry segment -- the
development and marketing of computer-aided design software. The Company's
products have been marketed internationally through distributors and through
the Company's subsidiaries in Europe, Japan and the Far East. Intercompany
revenue results from licenses that are based on a percentage of the
subsidiaries' revenue from unaffiliated customers. The following table
presents a summary of operations by geographic area (in thousands):
Year Ended December 31,
-------------------------------------------
1993 1992 1991
---- ---- ----
Revenue:
Domestic operations (1) $298,366 $344,370 $350,547
European operations 73,181 76,196 75,018
Asia/Pacific operations 69,320 71,113 61,540
Eliminations (72,244) (72,955) (107,629)
--------- ----------- ----------
Consolidated $368,623 $418,724 $379,476
======== ========== ==========
Intercompany revenue
(eliminated in consolidation):
Domestic operations $ 54,224 $ 54,084 $ 92,062
European operations 9,494 8,824 6,204
Asia/Pacific operations 8,526 10,047 9,363
------- ---------- ----------
Consolidated $ 72,244 $ 72,955 $107,629
========= ========== =========
Income (loss) from continuing operations:
Domestic operations $ (8,924) $ 61,023 $ (4,832)
European operations 4,107 3,919 (9,319)
Asia/Pacific operations 2,602 515 4,742
---------- ---------- ----------
Consolidated $ (2,215) $ 65,457 $ (9,409)
========== ========== =========
Identifiable assets:
Domestic operations $339,897 $370,289 $ 355,561
European operations 50,186 52,536 36,221
Asia/Pacific operations 52,401 40,108 26,245
Eliminations (103,183) (95,690) (70,953)
--------- ----------- -----------
Consolidated $339,301 $367,243 $ 347,074
======== ======== =========
(1) Domestic operations revenue includes export revenue of approximately
$10,137,000, $11,500,000 and $4,900,000 to Europe for the years ended
December 31, 1993, 1992 and 1991, respectively, and approximately
$48,971,000, $75,400,000 and $71,700,000 to Asia/Pacific for the years
ended December 31, 1993, 1992 and 1991, respectively.
49
52
SCHEDULE VIII
CADENCE DESIGN SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
Additions
Balance at Charged to Deductions Balance at
Beginning of Costs and From End of
Description Period Expenses Reserves Period
- ------------------------------------- -------------- --------- -------- ---------
Year Ended December 31, 1993
Allowance for doubtful accounts $3,154 $5,648 $(5,331)(1) $3,471
Inventory reserve 538 381 (331)(2) 588
Accrued restructuring costs 4,658 7,210 (8,199)(3) 3,669
Accrued discontinued operations costs - 3,382 (2,009)(4) 1,373
Year Ended December 31, 1992
Allowance for doubtful accounts 3,068 1,087 (1,001)(1) 3,154
Inventory reserve 1,271 1,006 (1,739)(2) 538
Accrued restructuring costs 22,015 - (17,357)(3) 4,658
Year Ended December 31, 1991
Allowance for doubtful accounts 3,754 936 (1,622)(1) 3,068
Inventory reserve 4,254 363 (3,346)(2) 1,271
Accrued restructuring costs 6,487 34,616 (19,088)(3) 22,015
(1) Uncollectible accounts written-off
(2) Inventory costs written-off
(3) Incurred severance and facilities costs relating to the Company's
restructuring and a reclassification of $3,500 and $13,135 in 1993 and
1991, respectively, from accrued operating lease obligations to lease
liabilities.
(4) Reflects a reclassification of $2,009 from accrued liabilities to other
noncurrent liabilities.
50
53
SCHEDULE IX
CADENCE DESIGN SYSTEMS, INC.
SHORT-TERM BORROWINGS
(DOLLARS IN THOUSANDS)
Maximum Average Weighted
Weighted Amount Amount Average
Average Outstanding Outstanding Interest Rate
Category of Aggregate Balance at Interest During the During the During the
Short-term Borrowings End of Year Rate Year Year (1) Year (2)
- --------------------- ----------- --------- --------------- --------- ---------
Year ended December 31, 1991 $ - - - - - - -% $17,370 $11,274 9.8%
Bank line of credit
borrowings
(1) Computed by dividing the average month-end balance
(2) Computed by averaging month-end balance interest rates
51
54
SCHEDULE X
CADENCE DESIGN SYSTEMS, INC.
SUPPLEMENTARY INCOME STATEMENT INFORMATION
(IN THOUSANDS)
Amounts Charged to Costs
and Expenses
------------------------------
Year Ended December 31,
------------------------------
Item 1993 1992 1991
- --------------------------------------------------- ---- ---- ----
Repairs and maintenance $5,538 $6,007 $6,732
Amortization of software development
costs and purchased software and intangibles 18,293 14,136 14,422
Royalties 5,403 6,577 4,213
52
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Cadence Design Systems, Inc. has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized, March
30, 1994.
CADENCE DESIGN SYSTEMS, INC.
/s/ Joseph B. Costello
---------------------------------
Joseph B. Costello
President & Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in the capabilities and on the date indicated.
NAME/TITLE DATE
- ---------- ----
PRESIDENT, CHIEF EXECUTIVE OFFICER
/s/ Joseph B. Costello March 30, 1994
- -------------------------------
Joseph B. Costello
CHIEF FINANCIAL OFFICER
/s/ H. Raymond Bingham March 30, 1994
- -----------------------
H. Raymond Bingham
CONTROLLER (Chief Accounting Officer)
/s/ William Porter March 30, 1994
- --------------------------------
William Porter
DIRECTORS
/s/ Donald L. Lucas March 30, 1994
- --------------------
Donald L. Lucas
_________________________________ March 30, 1994
W. Douglas Hajjar
53
56
NAME/TITLE DATE
- ---------- ----
/s/ Carol Bartz March 30, 1994
- ----------------
Carol Bartz
_________________________________ March 30, 1994
Raymond J. Lane
/s/ Dr. Leonard Y.W. Liu March 30, 1994
- -------------------------
Dr. Leonard Y.W. Liu
_________________________________ March 30, 1994
Dr. Alberto Sangiovanni-Vincentelli
/s/ George M. Scalise March 30, 1994
- ---------------------
George M. Scalise
/s/ James E. Solomon March 30, 1994
- --------------------
James E. Solomon
/s/ Dr. John B. Shoven March 30, 1994
- ------------------------
Dr. John B. Shoven
54
57
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT TITLE LOCATION
- ------ ------------- --------
3.01 (a) The Registrant's Certificate of Incorporation, as filed with the Secretary of State of the State of
Delaware on April 8, 1987 (incorporated by reference to Exhibit 3.01 to Registrant's Form S-1
Registration Statement (No. 33-13845) originally filed on April 29, 1987 (the "1987 Form S-1")).
(b) The Registrant's Certificate of Retirement of Stock as filed with the Secretary of State of the
State of Delaware on September 28, 1987 (incorporated by reference to Exhibit 3.01(b) to Registrant's
Form S-4 Registration Statement (No. 33-20724) originally filed on February 25, 1988).
(c) The Registrant's Certificate of Ownership and Merger as filed with the Secretary of State of the
State of Delaware on June 1, 1988 (incorporated by reference to Exhibit 3.02(c) to the Registrant's
Form S-1 Registration Statement (No. 33-23107) originally filed on July 18, 1988 (the "1988 Form S-1")).
(d) The Registrant's Certificate of Designations of Series A Junior Participating Preferred Stock as filed
with the Secretary of State of the State of Delaware on June 8, 1989 (incorporated by reference to
Exhibit 3A to the Registrant's Form 8-K originally filed on June 12, 1989).
(e) The Registrant's Certificate of Amendment of Certificate of Incorporation as filed with the Secretary
of State of the State of Delaware on July 26, 1991 (incorporated by reference to Exhibit 3.01(e) to the
Registrant's Form S-4 Registration Statement (No. 33-43400) originally filed on October 7, 1991
(the "1991 Form S-4")).
(f) The Registrant's Certificate of Designation of Series A Convertible Preferred Stock as filed with the
Secretary of State of the State of Delaware on December 30, 1991 (incorporated by reference to Exhibit 3.01(f)
from the Registrant's Form 10-K for the fiscal year ended December 31, 1991).
3.02 The Registrant's Bylaws, as currently in effect (incorporated by reference to Exhibit 3.02 to the
1987 Form S-1).
4.01 Specimen Certificate of the Registrant's Common Stock (incorporated by reference to Exhibit 4.01 to the
1991 Form S-4).
4.02 Amended and Restated Rights Agreement, dated as of June 19, 1988, between the Registrant and Bank of
America N.T. & S.A., as Rights Agent, which includes as exhibits thereto the form of Right Certificate
and the Summary of Rights to Purchase Common Shares (incorporated by reference to Exhibit 4a to the
Registrant's Form 8 filed on June 20, 1989).
55
58
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT TITLE LOCATION
- ------ ------------- --------
4.03 Assumption of Obligations under Amended and Restated Rights Agreement between the registrant and Harris
Trust Company of California (incorporated by reference to Exhibit 10.34 to the Registrant's 1991
Form S-4).
10.01 The Registrant's 1987 Stock Option Plan, as amended to date, (incorporated by reference to Exhibit 4.01
to the Registrant's Form S-8 Registration Statement (No. 33-48371) filed on June 4, 1992 (the
"1992 Form S-8")).*
10.02 Form of Stock Option Agreement and Form of Stock Option Exercise Request, as currently in effect
under the Registrant's 1987 Stock Option Plan (incorporated by reference to Exhibit 4.01 to the
Registrant's Form S-8 Registration Statement (No. 33-22652) filed on June 20, 1988).*
10.03 The Registrant's 1988 Directors Stock Option Plan, as amended to date, including the Stock Option
Grant and Stock Option Exercise Notice and Agreement (the first document is incorporated by reference
to Exhibit 4.02 of the Registrant's 1992 Form S-8 and the latter two documents are incorporated by
reference to Exhibit 10.08 - 10.10 of the 1988 Form S-1).*
10.04 The Registrant's 1993 Directors Stock Option Plan including the Stock Option Grant. * 59
10.05 The Registrant's 1990 Stock Purchase Plan (incorporated by reference to Exhibit 4.03 of the 1992
Form S-8).*
10.06 The Registrant's Senior Executive Bonus Plan for 1993 (incorporated by reference to Exhibit 10.07 of the
Registrant's Form 10-K for the fiscal year ended December 31, 1992 (the "1992 Form 10-K")).*
10.07 The Registrant's Key Contributor Bonus Plan for 1993 (incorporated by reference to Exhibit 10.08
of the 1992 Form 10-K).*
10.08 The Registrant's Senior Executive Bonus Plan for 1994.* 66
10.09 The Registrant's Key Contributor Bonus Plan for 1994.* 67
10.10 The Registrant's Cash or Deferred Profit Sharing Plan, as currently in effect (certain amendments 68
are attached; the Plan itself is incorporated by reference to Exhibit 10.12 Registrant's Form S-4
Registration Statement (No. 33-31673), originally filed on October 18, 1989 (the "1989 Form S-4")).*
10.11 Amended and Restated Lease, dated June 29, 1989, by and between River Oaks Place Associates, a
California limited partnership, ("ROPA") and the Registrant, for the Registrant's executive offices
at 555 River Oaks Parkway, San Jose, California (incorporated by reference to Exhibit 10.14
Registrant's Form 10-K for the fiscal year ended December 31, 1990) (the "1990 Form 10-K")).
56
59
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT TITLE LOCATION
- ------ ------------- --------
10.12 Lease dated June 29, 1989 by and between ROPA and the Registrant for the Registrant's offices at 575 River
Oaks Parkway, San Jose, California (incorporated by reference to Exhibit 10.16 to the 1990 Form 10-K).
10.13 Lease dated June 29, 1989 by and between ROPA and the Registrant for the Registrant's offices at 535 and
545 River Oaks Parkway, San Jose, California (incorporated by reference to Exhibit 10.17 to the 1990
Form 10-K).
10.14 Lease dated September 3, 1985 by and among the Richard T. Peery and John Arrillaga Seperate Property
Trusts ("P/A Trusts") and Valid Logic Systems Incorporated ("Valid") (which merged into the Registrant)
for the Registrant's offices at 75 West Plumeria Avenue, San Jose, California (incorporated by reference
to Exhibit 10.16 to the Form 10-K for Valid for the fiscal year ended December 30, 1990 (the "1990
Valid Form 10-K")).
10.15 Amendment Number 1, dated March 2, 1988, to Lease Agreement for 75 West Plumeria Avenue, San Jose,
California, by and among Valid and the P/A Trusts (incorporated by reference to Exhibit 10.17 to the
1990 Valid Form 10-K).
10.16 Lease dated December 19, 1988 by and among the P/A Trusts and Valid for the Registrant's offices at
2835 North First Street, San Jose, California (incorporated by reference to Exhibit 10.18 to the 1990
Valid Form 10-K).
10.17 Lease dated September 3, 1985 by and among the P/A Trusts and Valid for the Registrant's offices at
2820 Orchard Parkway, San Jose, California (incorporated by reference to Exhibit 10.14 to the 1990
Valid Form 10-K).
10.18 Amendment Number 1, dated March 2, 1988, to Lease Agreement for 2820 Orchard Parkway, San Jose, California,
by and among Valid and the P/A Trusts (incorporated by reference to Exhibit 10.15 to the 1990 Valid
Form 10-K).
10.19 Form of Executive Compensation Agreement dated May 1989 between Registrant and Mr. Costello (incorporated
by reference to Exhibit 10.20 to the 1989 Form S-4).*
10.20 Leased dated as of June 18, 1991 by and between C.T. Montague I, L.P., a California limited partnership,
and the Registrant for improved real property including office buildings located at Seely Road and Montague
Avenue, San Jose, California (incorporated by reference to Exhibit 10.24 to the 1991 Form S-4).
10.21 Employment Agreement dated as of December 1, 1989 between the Registrant and Mr. Doug Hajjar (incorporated
by reference to Exhibit 10.36 to Form 10-K for Valid for the fiscal year ended December 31, 1989). *
57
60
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT TITLE LOCATION
- ------ ------------- --------
10.22 Modification to Employment Agreement with Mr. Hajjar (incorporated by reference to
Exhibit 10.03 to the 1991 Form S-4). *
10.23 Amendment to Employment Agreement with Mr. Hajjar dated December 16, 1992
(incorporated by reference to Exhibit 10.18 to the Registrant's Form 10-K for
the fiscal year ended December 31, 1992). *
10.24 Offer letter to H. Raymond Bingham dated May 12, 1993. * 89
10.25 Offer letter to M. Robert Leach dated May 17, 1993. * 91
10.26 Letter agreement dated March 9, 1994 by and among C.T. Properties, Inc. ("General 93
Partner"), Registrant, Montague Investors, L.P. ("Montague") and David M. Thede
("Thede") whereby Registrant acquired all of Thede's ownership interests in the
C.T. Montague I, L.P. and C.T. Montague II, L.P. limited partnerships and the
General Partner and all of Montague's interests in C.T. Montague I, L.P.
21.01 Subsidiaries of the Registrant 112
23.01 Consent of Arthur Andersen & Co. 113
23.02 Consent of Deloitte & Touche 114
* A Management contract or compensatory plan required to be filed as an exhibit to Form 10-K.
(b) Reports on Form 8-K
None
(c) Exhibits
The Company hereby files as part of this Form 10-K the Exhibits listed in Item 14.(a)3. above.
(d) Financial Statement Schedules
See Item 14.(a)2. of this Form 10-K.
58