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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 1-10606
CADENCE DESIGN SYSTEMS, INC.
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(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
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Names of each exchange on which registered
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Common Stock $.01 par value per share New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
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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
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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. [ ]
Aggregate market value of the voting stock held on March 8, 1996 by
non-affiliates of the registrant:
$1,824,348,281
Number of shares of common stock outstanding at March 8, 1996: 51,866,484
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the Annual Meeting to be held on May 3, 1996
are incorporated by reference into Part III hereof.
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CADENCE DESIGN SYSTEMS, INC.
1995 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I. PAGE
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Item 1. Business 1
Item 2. Properties 8
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 4 A. Executive Officers of the Registrant 9
PART II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters 11
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 12
Item 8. Financial Statements and Supplementary Data 19
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 20
PART III.
Item 10. Directors and Executive Officers of the Registrant 20
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners and Management 20
Item 13. Certain Relationships and Related Transactions 20
PART IV.
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K 21
Signatures 45
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PART I.
ITEM 1. BUSINESS
Cadence Design Systems, Inc. ("Cadence" or the "Company") develops,
markets and supports electronic design automation software tools that automate,
enhance and accelerate the design and verification of integrated circuits
("ICs") and electronic systems. The Company combines its technology with
services to help optimize its customers' product development processes. This
combination of products and services, generally referred to as EDA, is used by
companies throughout the world to design semiconductors, computer systems and
peripherals, telecommunications and networking equipment, mobile/wireless
devices, automotive components, consumer products and other advanced
electronics.
Cadence was formed as a result of the merger of SDA Systems, Inc.
("SDA") into ECAD, Inc. ("ECAD") in May 1988. In addition to certain smaller
acquisitions from 1989 through 1994, in December 1991, Cadence merged with Valid
Logic Systems Incorporated ("Valid"), a company that developed and supported EDA
software used to design electronic systems, printed circuit boards ("PCBs") and
applications for electronic product designs involving advanced packaging
technology such as hybrids and multi-chip modules ("MCMs"). In February 1989,
Valid had acquired Integrated Measurement Systems, Inc. ("IMS"), a company that
manufactures and markets verification systems used in testing prototype
application specific integrated circuits ("ASICs"). During 1995, Cadence and IMS
sold to the public approximately 3.0 million shares of common stock, of which
approximately 2.6 million shares were sold by the Company as the sole selling
stockholder of IMS. As Cadence remains the majority stockholder with an
ownership percentage of approximately 55%, the consolidated financial statements
of the Company for all periods presented include the accounts of IMS after
elimination of intercompany accounts and transactions and minority interest
adjustments. As part of its overall investment strategy, the Company has
committed to participate in a venture capital partnership, Telos Venture
Partners (the "Partnership"), as a limited partner. The Partnership's purpose is
to make venture capital investments in start-up and growth oriented businesses,
with some emphasis on businesses in the semiconductor and software industries.
The Company's total investment of $25.0 million will be made over the next three
to four years.
EDA tools are used primarily by electronic designers to develop
electronic circuits and systems. Cadence's sophisticated tools are used to
analyze, simulate, implement and verify electronic designs. By using these tools
to automate significant parts of the design process, electronic engineers can
focus their time on developing the intellectual content of the integrated
circuit or electronic system, which is at the heart of a company's
competitiveness. In addition, powerful design automation software tools let
design architects and engineers build abstract models of chips, simulate their
behavior, and analyze their physical attributes for acceptable performance. EDA
also ensures that the product design can be manufactured and can work as
intended. The result is significant productivity and accuracy improvements over
earlier generation approaches to design, enabling customers to develop
increasingly complex, high-quality electronic products with accelerated
time-to-market schedules.
As the process of designing advanced silicon and systems has grown
increasingly complicated, even with the most sophisticated EDA tools, product
developers' resources have become strained in their ability to meet demanding
market requirements. In response to this challenge, Cadence has developed a
unique approach which combines the industry's most comprehensive line of
software tools with an expert team of experienced support, design and process
service professionals. This approach not only gives customers access to
leading-edge design technology, but also improves the overall productivity of
their design process. The Company's services range from advanced tools training
to methodology assessment to joint design work with customers and to complete
outsourcing of its customers' design work. As an example, in March 1995, the
Company signed a $75 million agreement with Unisys Corporation to assume a
substantial portion of Unisys' internal silicon design operations. This
comprehensive approach to working with customers has been widely accepted in the
marketplace, as evidenced by a 132% increase in the Company's service revenue in
1995 as compared to 1994.
The third component of Cadence's business model is customer support,
which the Company believes is a key factor in successfully marketing EDA
products and generating repeat orders. A
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majority of Cadence's customers have purchased one-year renewable maintenance
contracts. These product maintenance contracts entitle the customers to product
updates, documentation and ongoing support. The backbone of global customer
support 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 available to address customer application issues as
well as to provide links between customers and Cadence's product developers.
THE ELECTRONIC PRODUCT DEVELOPMENT CYCLE
EDA tools assist with the two major functions of the electronic product
development cycle: electrical design, often referred to as CAE, and physical
design, often referred to as computer aided design ("CAD").
The electrical design process, or CAE, involves describing the
behavioral, functional and structural attributes of an IC or electronic system.
This process involves creating a design description, simulating the design to
assure it is void of electrical defects and refining the description to meet
predetermined design specifications. The first step in the CAE process is
creation of the design description (often called design entry, design capture or
schematic capture). To handle the complexity of large designs, design entry
often consists of several levels of design abstraction using a variety of design
capture techniques. The most common techniques are the use of block diagrams,
equations or special design description languages referred to as Hardware
Description Language ("HDL").
For digital designs, the most common HDLs are Verilog(R) HDL, a
language originally developed by Cadence that is now in the public domain and an
Institute of Electronic and Electrical Engineers ("IEEE") standard, and VHSIC
HDL(TM) ("VHDL"), a language that is also an IEEE standard and backed by the
U.S. Department of Defense. Verilog(R) and VHDL are both supported by Cadence as
well as many other EDA vendors. Similar standard HDLs are emerging for analog
design. Cadence introduced an analog extension to Verilog(R) called AHDL in 1994
and is seeking to make it an industry standard.
Before an IC or PCB can be manufactured, high level design descriptions
must be detailed into a lower level of abstraction referred to as structural
design. This process can be done manually or automated using a process called
logic synthesis. In structural design, the engineer specifically defines
components, their interconnections and associated physical properties. This
description can be in a form of a text file produced by logic synthesis or a
structural diagram 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 every symbol and all 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 throughout the CAE process to catch costly design
errors before the design is manufactured. In addition, simulation enables
engineers to quickly explore various design alternatives. It can be performed at
different levels of design abstraction and with mixed levels of abstraction.
This enables a designer to verify the conceptual, structural and performance
aspects of the design. 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, the designer, application specific
integrated circuit ("ASIC") vendors or independent modeling companies, that have
certified their libraries for use with Cadence's simulation products.
When the design is determined to be functionally correct, the designer
generates a netlist. A netlist is a non-graphical description, in list form, of
all design components and interconnections. The netlist is the link between the
CAE design environment and the CAD process.
CAE PRODUCTS
Cadence is a mainstay in the CAE market primarily based on its strong
market presence in logic simulation. Cadence's Verilog(R) HDL logic simulator,
Verilog XL(TM), is used by numerous ASIC vendors and supports over 185 ASIC
libraries. Cadence also has established a significant position in the VHDL
design market with its Leapfrog(TM) VHDL simulator due to its strong performance
and robust design environment.
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Cadence was the pioneer in offering a solution for companies that
choose to utilize a mixed language (both Verilog(R) HDL and VHDL(R)) design
approach with its 1994 introduction of Model Import. This product, sold as an
adjunct to either Verilog XL(TM) or Leapfrog(TM), enables designers to import a
textual description block of Verilog(R) or VHDL(R) into their native design
environment. In 1995, Cadence introduced a next generation mixed language
solution based on a unique simulation architecture called INCA(TM). The INCA(TM)
architecture utilizes a state of the art simulation technique called native
compiled code generation which delivers the fastest throughput of any
conventional software approach.
Cadence also offers a comprehensive suite of tools for logic synthesis.
The Synergy(TM) product line provides designers the ability to easily target
their design for implementation into an ASIC, Field Programmable Gate Array
("FPGA") or Programmable Logic Device ("PLD") design. Synergy(TM) enables
designers to make critical tradeoffs between area, power and performance to
optimize their design based on specific design requirements. In addition,
Synergy(TM) offers advanced design-for-test capability with built in test
synthesis support. The combination of Cadence's simulation and synthesis
capabilities provide designers with a core design environment that supports the
most broadly used top-down design methodology in the industry today.
With the advent of deep sub-micron technology, companies need to adopt
new methodologies and will require innovative design automation tools to enable
the successful completion of complex designs. The key to successfully designing
chips implemented in 0.5m technology and below is utilizing knowledge of the
physical design process in the logic design space. With its current industry
position in IC place and route, Cadence is strongly positioned to develop and
deliver next generation logic design tools that will provide designers with
these mandatory capabilities. During 1994, Cadence introduced Silicon
Synthesis(TM) which provides the ability to optimize logic based on actual
physical implementation. This approach enables designers to avoid costly design
iterations caused by lack of timing consistency between a logic description and
final implementation. In 1995, the Company introduced SiliconQuest(TM), an
advanced high level chip planning environment that allows engineers to
accurately predict physical effects that are used to provide guidelines for
logic optimization. In addition, SiliconQuest(TM) provides a foundation for the
methodology shift required to combat deep sub-micron design issues.
IC DESIGN PRODUCTS
Cadence has long been a leader in the IC CAD market with high
performance technology in the custom layout, automatic place and route and
verification areas. These technologies are tightly integrated with the Company's
suite of CAE tools to offer one of the industry's most comprehensive
front-to-back design solutions.
The Company's custom layout portfolio is anchored by the Virtuoso(TM)
product family. This suite consists of tools for basic layout editing, design
compaction, layout synthesis and device-level editing. In 1995, the Company
introduced Virtuoso(TM) FastChip, which provides the ability to rapidly create
cells and blocks for applications including random logic, standard cell blocks
and library elements. By automating a significant portion of the layout process,
FastChip enables designers to significantly reduce overall design time. In
addition, it allows them to perform extensive "what-if" analysis with design
variables like placement and aspect ratios that have significant bearing on
performance.
Cadence's Ensemble(TM) product family provides advanced place and route
("P&R") solutions for gate, cell, block and mixed designs. A significant number
of major ASIC vendors use Gate Ensemble(TM) as their internal P&R engine.
Cadence offers two products for cell based routing, Cell Ensemble(TM) and
Cell3(TM). Built on a channel-based routing architecture, Cell Ensemble(TM) is
finely tuned for two layer metal designs. For three layer metal and above,
Cell3(TM) is a widely-used solution. Cell3's(TM) innovative area-based
architecture is based on the industry's most advanced routing algorithms. For
block-based routing, the Company offers Block Ensemble(TM). Cadence's early-1996
introduction of Silicon Ensemble(TM) unveiled a fourth generation P&R system to
tackle today's increasingly challenging design problems. Based on Cadence
proprietary area-based architecture, Silicon Ensemble(TM) provides a
comprehensive solution for routing up designs that consist of a mix of cell and
gate-based approaches. In addition, Silicon Ensemble(TM) includes several
specialized routing engines to deal with specific design
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challenges like datapath, complex clock trees, crosstalk and low power. The
product family is rounded out with one of the industry's fastest placement
systems, QPlace(TM). Based on innovative quadratic algorithms, QPlace(TM) has
been rapidly accepted throughout the ASIC community.
Cadence has long been an industry leader in physical verification based
on the overwhelming market adoption of the Company's Dracula(R) product family.
Physical verification provides the final check before products are released to
manufacturing. Thus, accuracy in the verification process is essential to
avoiding costly production runs of faulty parts. Dracula(R) has been the
industry's benchmark for accuracy which has been the key to its success. For
interactive verification, the Company's Diva(R) product line has also enjoyed
significant market success. In 1995, Cadence introduced Vampire(TM) as a
solution to next-generation verification design requirements. Vampire(TM)
provides advanced hierarchical design capability necessary to successfully
verify today's largest chips.
SYSTEM DESIGN PRODUCTS
The Allegro(TM) product family is the foundation of Cadence's PCB
design. The Allegro(TM) line offers complete solutions for layout of standard
PCB, hybrid, MCM and advanced component packaging. Products which compliment the
Allegro(TM) line (DF/Signoise(TM) for signal integrity, DF/Thermax(TM) for
thermal, DF/Viable(TM) for reliability and DF/EMControl(TM) for electromagnetic
compliance) round out a suite of analysis tools for detecting potential
manufacturing problems. In 1995, the Company introduced BoardQuest(TM), a
breakthrough approach to system design planning. BoardQuest(TM) is specifically
tailored for the needs of high-speed designers, offering an advanced system to
accurately predict thermal, interconnect and electromagnetic effects early in
the design process.
For analog designers, Cadence offers integrated solutions for analog,
mixed signal and microwave IC and system design. The Analog Artist(TM) series
provides a comprehensive set of simulation, layout and verification tools for
chip design. This product family features the Spectre(TM) high-speed circuit
simulation family of products. In 1994, Cadence introduced Spectre(TM)HDL, the
industry's first analog behavioral simulation system for analog and mixed-signal
applications. In 1995, the Company further expanded the product offering with
the introduction of Spectre(TM)RF, simulation technology utilized specifically
for the design of radio frequency applications. For analog system and board
level design, Cadence's Analog Workbench(TM) offers tools from top-down design
through board design. A key to the success of Analog Workbench(TM) has been the
extensive analog model libraries and advanced statistical analysis tools
available with the design environment.
ELECTRONIC SYSTEMS DESIGN AUTOMATION ("ESDA") PRODUCTS
Cadence's Alta Group has developed an entirely new class of software
for top-down design known as Electronic Systems Design Automation ("ESDA"). ESDA
accelerates and enhances the early phases of system development. The Alta Group,
led by its Signal Processing Workbench ("SPW")(R) tool set is able to provide
customers with a higher level of design automation for a number of application
areas including wireless communications, networking and multi-media.
ESDA is seen as a natural evolution of EDA that enables customers to
include product concept in the design environment. Alta's focus is on Virtual
Product Design, a new approach that starts with the creation of a product
prototype in software, what is called virtual prototype. Virtual prototyping
allows the designer to focus on what is needed for the product to be successful
as opposed to how the design is implemented.
Alta's product offerings include a large applications library of design
blocks, a complete technology base and a visualization and analysis environment.
Once the design is conceptualized, Alta's products provide links to
implementation which include multiple capabilities that allow the design to be
passed downstream to ASIC and IC engineers.
CADENCE SPECTRUM SERVICES
Cadence offers many levels of design development and support to its
customers, ranging from assistance with specific designs to a complete
re-engineering of the product development process, and
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possibly a complete outsourcing of a particular design operation. Cadence works
with the customer's executive management and engineering team to assess a
customer's design goals and objectives and translate those goals into design
solutions. Cadence's technical and business service professionals, with
extensive design experience, have the flexibility and expertise to manage the
design process at any stage, and they work with customers to find the solution
that will help them achieve market success.
Cadence's services offerings include, in part, product design, library
design, design process and software services. Cadence offers product design
services to facilitate complex IC design targeted to on-time completion with
unsurpassed reliability. The Company offers on-site design assistance and full
service chip designs. Library design services assist in the optimization of
libraries for performance, density, quality, reliability and testability and the
targeting of existing libraries to multiple foundry sources and product
applications. Cadence also offers design process services to assist its
customers management and engineering teams to optimize their internal design
process by providing a product development environment blueprint and
implementation management.
In addition, Cadence offers application and education services that
facilitate the implementation and assimilation of Cadence tools and technology,
aimed at maximizing customers' productivity with Cadence's software
applications.
MARKETING AND SALES
As of March 1, 1996, Cadence had 869 employees engaged in field sales
and sales support, representing approximately 29% of its total work force. In
North America, Cadence uses a direct sales force consisting of sales people and
applications engineers to license its products. Cadence's sales force presents
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.
In Europe and Asia, Cadence markets and supports its products primarily
through 15 majority-owned subsidiaries. Cadence also serves its international
customers through distributors in various countries throughout Europe and
Asia/Pacific. Cadence licenses its IC products in Japan primarily though a
distributor, Innotech Corporation ("Innotech"). In 1995, 1994 and 1993, Innotech
accounted for 15%, 10% and 13% of total revenue, respectively. Cadence's systems
products are marketed in Japan through a majority-owned subsidiary.
Revenue from international sources was $271.8 million, $221.5 million
and $183.6 million, or approximately 50%, 52% and 50% of total revenue for 1995,
1994 and 1993, respectively. (See Notes to Consolidated Financial Statements for
a summary of operations by geographic area.) 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.
The Company enters into foreign currency forward contracts to hedge the
impact of foreign currency fluctuations. Though the Company attempts to reduce
the impact of foreign currency fluctuations, significant exchange rate movements
may have a material adverse impact on the Company's results of operations.
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.
PRODUCT DEVELOPMENT AND ENGINEERING
For the years 1995, 1994 and 1993, respectively, Cadence's investment
in research and development was $100.4 million, $88.2 million and $89.7 million
prior to capitalizing $11.8 million, $10.8 million and $15.2 million of software
development costs. Cadence began capitalizing certain of
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its software development costs in 1986 in accordance with Statement of Financial
Accounting Standards No. 86. See Notes to Consolidated Financial Statements for
a more complete description of Cadence's capitalization of certain software
development costs.
Cadence is currently developing technology that it will introduce to
the EDA market in 1996 and beyond. Among the primary areas that Cadence is
addressing are the design of silicon devices in the deep sub-micron range,
high-speed board design, architectural-level design and high-performance logic
verification technology.
Customer Partnerships
Cadence has established close working relationships with a number of
semiconductor manufacturers and electronic system 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 often times begin after collaboration with a Cadence
customer/partner.
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.
University Programs
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.
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.
Next-Generation Technological Development
Cadence's advanced research and development group, Cadence Berkeley
Laboratories, is committed to new technological development. This group is
chartered with identifying and developing prototype technologies in emerging
design areas which will offer substantially improved alternatives to current EDA
solutions. Cadence Berkeley Laboratories is Cadence's commitment that it is
continuing to develop leading-edge technology.
COMPETITION
The Company faces intense competition in the EDA product market, which
continues to be characterized by aggressive pricing practices and new market
entrants. The Company competes with other companies, including Mentor Graphics
Corp., Synopsys, Inc., Viewlogic Systems, Inc. and Zuken-Redac that sell one or
more competing products and with potential customers' internal EDA software
development groups. Some of the Company's competitors may have substantially
greater financial, marketing and technological resources than the Company. There
can be no assurance that the Company will be able to compete successfully.
Because the EDA industry is labor intensive rather than capital
intensive, the number of potential competitors to the Company is significant. A
potential competitor who possesses the necessary knowledge of electronic circuit
and systems design, production and operation could develop EDA tools using a
moderately priced computer workstation and bring such tools to market quickly.
If such an EDA software tool were to surpass the technology of a tool of the
Company, the attention of customers might rapidly shift to the new tool,
resulting in a precipitous decline in the sales of the Company's comparable
product.
The Company has in the past discounted EDA product prices where deemed
necessary for competitive reasons or in connection with volume purchase
agreements with major customers. In the
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past, discounts of up to 60% of the list prices of the EDA products have been
given. Although the Company is striving to reduce discounts, it recognizes that
it may be required to discount EDA product prices under similar circumstances in
the future.
Cadence cooperates with other design automation vendors to deliver
full-scope technology to its customers. Through Cadence's Connections Program,
customers can more easily integrate Cadence products and technologies with other
companies' products and technologies. This provides customers with the
flexibility to mix and match third-party and proprietary tools to specifically
meet their design automation needs. Today over 100 companies have integrated
their tools with Cadence's software.
The major advantages of Cadence products over its competitors products
include higher performance capabilities, enhanced features, and more efficient
design methodologies through 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, a Cadence
design environment can be expanded to include additional Cadence tools or
third-party tools.
Currently, no major EDA software supplier or consulting organization
has demonstrated offerings for the electronic engineering market in as
comprehensive of a fashion as Cadence. The Company believes that the
infrastructure it has put in place over the past three years has given it a
significant lead over other companies that might attempt to emulate its services
business model.
PROPRIETARY TECHNOLOGY
Cadence believes that its continued success lies, in part, in its
employees and the combined knowledge, ability and experience they collectively
bring and the abilities of its management team to focus that energy on achieving
the Company's goals and objectives.
To help focus its energies on the engineering side and to stress the
importance of new technology development to Cadence, the Company has an
aggressive invention program which is actively conveyed to the Company's many
designers, developers, and other engineering personnel throughout the world. The
Company has a very competitive employee invention compensation awards program to
promote the disclosure of inventive subject matter for patent protection. Given
that name recognition in the community is also very important to Cadence and its
engineers, the Company also has an aggressive author incentive awards program to
encourage the publication of some of its developments pioneered by the
engineering community.
Cadence primarily relies on licensing, non-disclosure, proprietary
rights, and other forms of agreements to secure its rights to its proprietary
technology. Cadence's products are generally licensed to end-users on a "right
to use" basis pursuant, typically, to a non-transferable license grant which
restricts the use of its products to designated seats at designated sites for
the customer's internal design purposes only. Cadence's various agreements
prohibit a customer from disclosing the proprietary information contained in the
Company's products to any other third person or entity. Although Cadence has
taken various technical measures in the form of keys, time-driven locks, and
other software and hardware mechanisms to protect its technology, Cadence
recognizes that it may very well be technologically feasible for competitors of
Cadence to copy aspects of the Company's licensed products in violation of
agreements and Cadence's proprietary rights. Cadence fully intends to remain
aggressive with respect to protecting its proprietary technology and will seek
civil and criminal penalties along with any available equitable relief against
those who would take or attempt to take or otherwise misappropriate its
proprietary technology and other confidential information.
Cadence also relies on a combination of patent, copyright, and
tradesecret laws and other traditional intellectual property protection
mechanisms. In 1995, Cadence was granted five new patents for a total of 16
issuances and was allowed four additional patents. Further, Cadence has in
excess of 25 patent applications pending with more in process. Cadence has an
aggressive trademark program extending world-wide and common law rights to
protect its good name associated with marks on its goods and services. In 1995,
Cadence filed in excess of 35 new trademark applications. In addition, Cadence
has also sought federal copyright protection for certain of its products.
Cadence does not
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believe that any of its technology infringes that of others nor does Cadence
believe that any of its trademarks infringe the marks of others.
Although Cadence recognizes that technology development and the
protection of such technology is vitally important to maintaining its place
within the EDA industry, because of the rapid pace of technological change in
the industry, it may very well be that inherent factors such as the knowledge,
ability, and experience of the Company's personnel, along with name recognition,
and various ongoing product support activities may prove to be more significant
in maintaining the Company's competitive edge.
MANUFACTURING
Cadence's software production operations consist of configuring the
proper version of a product, recording it on magnetic tape or CD-ROM, and
producing customer unique access keys which allow customers to use purchased
products. User manuals and other documentation are generally available on
CD-ROM, but are occasionally supplied in hard copy format. Shipments are
generally made within two weeks of receiving an order.
EMPLOYEES
As of March 1, 1996, Cadence employed 3,028 persons, including 1,778 in
sales, marketing, support and manufacturing activities, 997 in product
development and 253 in management, administration and finance. 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.
ITEM 2. PROPERTIES
The Company's headquarters are located in San Jose, California, and the
Company owns the related land and buildings. The total square footage of the
buildings comprising the Company's headquarters is approximately 515,000. In
addition, the Company also owns undeveloped land adjacent to the Company's
headquarters, available for future expansion.
In addition to the Company's headquarters, the Company continues to
lease three buildings with approximately 209,000 square feet in San Jose,
California at an annual rate of approximately $2.9 million. The leases related
to approximately 129,000 square feet expire in March 1998, and the remaining
lease expires in February 1999. Approximately 112,000 of the square footage of
these facilities has been sublet and the balance remains available for sublet.
Cadence leases additional facilities for its sales offices in the
United States and various foreign countries, and research and development
facilities in San Diego, Santa Cruz and Berkeley, California, Lawrence, Kansas,
United Kingdom, France, Taiwan and India at an aggregate annual rental of
approximately $8.1 million. Cadence also leases approximately 100,000 square
feet of facilities in Chelmsford, Massachusetts for its east coast operations
and approximately 70,000 square feet in Sunnyvale, California for its Alta Group
operations at a combined annual rate of approximately $1.0 million.
Cadence also leases approximately 83,000 square feet in a building in
Beaverton, Oregon, at a current annual rental of approximately $.7 million,
which houses manufacturing, engineering, marketing and administrative operations
for its IMS subsidiary and a regional software sales office.
Cadence believes that these facilities and the undeveloped land
adjacent to its current headquarters are adequate for its current needs and that
suitable additional or substitute space will be available as needed to
accommodate expansion of the Company's operations.
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ITEM 3. LEGAL PROCEEDINGS
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.
The Company filed a complaint in the United States District Court for
the Northern District of California on December 6, 1995 against Avant!
Corporation (formerly known as ArcSys, Inc., "Avant!") and certain of its
employees for misappropriation of trade secrets, copyright infringement,
conspiracy and other illegalities.
On January 16, 1996, Avant! filed various counterclaims against the
Company and the Company's President and CEO, alleging, inter alia, that the
Company and its President and CEO had cooperated with the Santa Clara County
District Attorney and initiated and pursued its complaint against Avant! for
anti competitive reasons, engaged in wrongful activity in an attempt to
manipulate Avant!'s stock price and utilized certain pricing policies and other
acts to unfairly compete against Avant! in the marketplace. The counterclaim
also alleges that certain unspecified Company insiders engaged in illegal
insider trading with respect to Avant!'s stock. The Company and its President
and CEO believe that each has meritorious defenses to Avant!'s claims, and each
intends to defend such action vigorously.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Cadence are as follows:
NAME AGE POSITIONS AND OFFICES
- ---- --- ---------------------
Joseph B. Costello 42 President, Chief Executive Officer and Director
H. Raymond Bingham 50 Executive Vice President, Chief Financial Officer and Secretary
M. Robert Leach 48 Senior Vice President, Spectrum Services
John F. Olsen 44 Senior Vice President, Worldwide Sales
James E. Solomon 59 Senior Vice President and Principal Technologist
Stephen Y. Fong 38 Vice President of Finance and Corporate Treasurer
Mark S. Garrett 38 Vice President, Corporate Financial Planning and Analysis
William Porter 41 Vice President, Corporate Controller and Assistant Secretary
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Executive corporate officers are appointed by the Board of Directors
and serve at the discretion of the Board.
JOSEPH B. COSTELLO has served as President and a director of the
Company since May 1988. In addition, Mr. Costello has served as Chief Executive
Officer of the Company since June 1988. Previously he served as a director of
SDA Systems, Inc. ("SDA"), from May 1987 to May 1988. From March 1986 to March
1987, he served as SDA's President and Chief Operating Officer.
H. RAYMOND BINGHAM joined Cadence in June 1993 as Executive Vice
President of Finance and Administration and Chief Financial Officer. In February
1994, Mr. Bingham was appointed Secretary. Prior to joining Cadence, he was
Executive Vice President and CFO of Red Lion Hotels and Inns for eight years.
Mr. Bingham is a director of Sunstone Hotel Investors, Inc. and Integrated
Measurement Systems, Inc.
M. ROBERT LEACH joined Cadence in June 1993 as Senior Vice President of
Spectrum Services. Prior to joining Cadence, Mr. Leach was partner-in-charge of
the worldwide electronics industry consulting practice for Andersen Consulting
for more than 10 years.
JOHN F. OLSEN joined Cadence in May 1994 as Senior Vice President,
Field Operations. Prior to joining Cadence, Mr. Olsen served as a partner for
KPMG Peat Marwick for 5 years.
JAMES E. SOLOMON has served as director of the Company since May 1988.
Mr. Solomon has also served as Senior Vice President and Principal Technologist
for the Company since February 1994. Prior to that, he served as Senior Vice
President of the Company's Analog Division from February 1993 to February 1994
and as President of the Company's Analog Division from December 1988 to February
1993. Mr. Solomon also served as Co-Chairman of the Board of Directors for the
Company from May 1988 until May 1989. As a founder of SDA, Mr. Solomon served as
its Chief Executive Officer from its inception in July 1983 to May 1988, as its
President from July 1983 to March 1987, and as its Chairman of the Board from
March 1987 until its merger with ECAD, Inc. in May 1988. Mr. Solomon is a
Director of Integrated Measurement Systems, Inc.
STEPHEN Y. FONG joined Cadence in November 1995 as Vice President of
Finance and Corporate Treasurer. From 1982 to 1995, he held various financial
management positions with Syntex Corporation, a multi-national pharmaceutical
company based in Palo Alto, California, most recently as Assistant Treasurer.
From 1979 to 1982, Mr. Fong was with Deloitte and Touche, most recently as
Senior Accountant.
MARK S. GARRETT joined Cadence in June 1991 as Division
Controller/Director of Finance for the Systems Division. Mr. Garrett served in
the same position for the CAE Division from January 1992 to December 1992, as
Group Director, Technology Development Finance from January 1993 to July 1994,
and Group Director, Spectrum Services Business Operations from August 1994 to
February 1995. Mr. Garrett was appointed Vice President Financial Planning and
Analysis for Cadence in February 1995. Prior to joining Cadence, he held various
financial positions at IBM Corporation since June 1979.
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, he held
various positions with Arthur Andersen LLP, most recently as 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 is traded on the New York Stock Exchange
under the symbol CDN. The Company has never declared or paid any cash dividends
on its common stock in the past and none are planned to be paid in the future.
As of December 30, 1995, the Company had approximately 1,556 stockholders of
record, not including those held in street or nominee name.
The following table sets forth the high and low sales for the Common
Stock for each calendar quarter in the two-year period ended December 30, 1995.
High Low
---- ---
1994:
First Quarter $10.42 $ 6.83
Second Quarter $11.25 $ 8.42
Third Quarter $12.17 $ 8.83
Fourth Quarter $14.50 $11.25
1995:
First Quarter $18.58 $12.83
Second Quarter $23.25 $16.92
Third Quarter $27.83 $20.67
Fourth Quarter $42.38 $24.08
ITEM 6. SELECTED FINANCIAL DATA
Five fiscal years ended December 30, 1995 (In thousands, except per share
amounts)
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Revenue $ 548,418 $ 429,072 $ 368,623 $ 418,724 $ 379,476
Unusual items (1) $ -- $ 14,707 $ 19,650 $ (253) $ 55,236
Income (loss) from operations $ 117,860 $ 44,047 $ (8,415) $ 65,710 $ (14,744)
Net income (loss) (2) $ 97,270 $ 36,648 $ (12,779) $ 55,360 $ (22,403)
Net income (loss) per share $ 1.57 $ .56 $ (.20) $ .80 $ (.38)
Total assets $ 374,035 $ 361,048 $ 339,301 $ 367,243 $ 347,074
Long-term obligations and redeemable $ 1,619 $ 2,098 $ 4,001 $ 5,722 $ 14,811
convertible preferred stock
(1) See Notes to Consolidated Financial Statements for further discussion.
(2) In addition to unusual items, net income (loss) also included a $13.6
million after tax gain on the sale of stock of a subsidiary and a $3.1
million after tax gain on the sale of an equity investment in the years
ended December 30, 1995 and December 31, 1994, respectively.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING
DISCUSSION CONTAINS FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW IN FACTORS THAT MAY
AFFECT FUTURE RESULTS.
OVERVIEW
Cadence Design Systems, Inc. (the "Company") develops, markets and
supports electronic design automation ("EDA") software products and services
that automate, enhance and accelerate the design and verification of integrated
circuits ("ICs") and electronic systems. The Company combines its technology
with services to help optimize its customers' product development processes. The
Company's customers and target markets include computer manufacturers, consumer
electronics companies, industrial electronics companies, semiconductor
manufacturers, ASIC foundries and telecommunications companies throughout the
world.
In July 1995, the Company and its wholly-owned subsidiary, Integrated
Measurement Systems, Inc. ("IMS") sold to the public approximately 3.0 million
shares of common stock, of which approximately 2.6 million shares were sold by
the Company as the sole selling stockholder of IMS and .4 million shares were
sold by IMS. As a result of the offering and sale of shares by the Company, the
Company's ownership interest in IMS decreased to approximately 55%. However, as
the Company remains the majority stockholder, the consolidated financial
statements of the Company for all periods presented include the accounts of IMS
after elimination of intercompany accounts and transactions and minority
interest adjustments.
In August 1994, the Company acquired the business and certain assets of
Redwood Design Automation, Inc. ("Redwood"). Redwood developed, marketed and
supported advanced software tools for electronic systems design. The acquisition
was accounted for as a purchase, and accordingly, the results of Redwood from
the date of the acquisition forward have been recorded in the Company's
consolidated financial statements. In connection with the acquisition, the
Company recorded a one-time charge to operations of $4.7 million for the
write-off of in-process research and development that had not reached
technological feasibility and, in management's opinion, had no probable
alternative future use. The Redwood business is now a part of the Company's Alta
Group.
In June 1993, the Company acquired the business and certain assets of
Comdisco Systems, Inc. ("Comdisco"), a subsidiary of Comdisco, Inc. The Comdisco
business involves the development, marketing and support of digital signal
processing software products in the electronic systems design area. The
acquisition was accounted for as a purchase and accordingly, the results of
Comdisco from the date of the acquisition forward have been recorded in the
Company's consolidated financial statements. The Comdisco business is now a part
of the Company's Alta Group.
In December 1993, the Company sold its Automated Systems ("ASI")
division. The operating results of ASI have been reported as a disposal of a
division and are included as an unusual item within operating expenses in the
consolidated statements of income for all years presented. The loss on disposal
of approximately $6.0 million is classified in other income (expense) in the
1993 statement of income.
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RESULTS OF OPERATIONS
REVENUE
% Change
------------
1995 1994 1993 95/94 94/93
---- ---- ---- ----- -----
(In millions)
Product $292.2 $241.5 $224.1 21% 8%
Service 65.9 28.4 16.9 132% 68%
Maintenance 190.3 159.2 127.6 20% 25%
------ ------ ------
Total revenue $548.4 $429.1 $368.6 28% 16%
====== ====== ======
Sources of Revenue as a Percent of Total Revenue
Product 53% 56% 61%
Service 12% 7% 4%
Maintenance 35% 37% 35%
In 1995, strong demand for the Company's products and services
generated a 28% increase in revenues as compared to the prior year. Revenue from
international sources was approximately $271.8 million, $221.5 million and
$183.6 million or, 50%, 52% and 50% of total revenue for 1995, 1994 and 1993,
respectively. In 1995, domestic and international revenue increased 33% and 23%,
respectively, following increases of 12% and 21% in 1994. The higher percentage
increase in domestic revenue in 1995 as compared to international revenue was
primarily attributable to an increase in domestic service revenue in 1995 as
compared to 1994. In addition, $11.7 million of the $50.3 million increase in
international revenue for the year ended December 30, 1995 was attributable to
the favorable impact on revenue of foreign exchange rates as the result of the
strengthening of certain foreign currencies in relation to the U.S. dollar as
compared to 1994.
The increase in product revenue in 1995 reflected increased market
acceptance of the Company's products which enable customers to meet complex
design challenges, such as deep submicron IC design and high-speed board design.
This was exemplified by increased sales volume of its IC, automated test
engineering ("ATE"), top-down design ("HDL") and Alta Group's systems design
products. The Company's ATE, HDL and Alta Group product offerings also led the
increase in 1994 product revenue as compared to 1993. The 1994 increase in Alta
Group product revenue was partly due to 1994 including a full year of revenue
related to the Comdisco business as compared to 1993 which included only revenue
from the date of acquisition forward.
The increase in service revenue was the result of significant demand
for the Company's service offerings which provide a complete range of solutions
to address the product development needs of its customers. The 1995 increase in
service revenue was driven by an outsourcing agreement with Unisys Corporation
("Unisys") to assume a substantial portion of Unisys' internal silicon design
operation. This five-year agreement was signed in the first quarter of 1995 for
a total contract value of at least $75 million.
The increases in maintenance revenue were attributable to an increase
in the Company's installed base of products as well as the Company's continuing
success at obtaining customer maintenance renewals.
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COST OF REVENUE
% Change
------------
1995 1994 1993 95/94 94/93
---- ---- ---- ----- -----
(In millions)
Product $44.8 $52.9 $53.7 (15)% (1)%
Service $55.0 $22.6 $15.4 143% 46%
Maintenance $16.7 $14.3 $14.9 17% (4)%
Cost of Revenue as a Percent of Related Revenue
Product 15% 22% 24%
Service 83% 80% 91%
Maintenance 9% 9% 12%
Cost of product revenue includes costs of production personnel,
packaging and documentation, amortization of capitalized software development
costs and costs of the Company's ATE hardware business. The decrease in cost of
product in absolute dollars and as a percentage of product revenue in 1995 as
compared to 1994 was primarily due to productivity improvements in the software
release and production process and reduction in printing and manufacturing
expenses due to decreased demand for manuals, partly offset by increased cost of
revenue associated with its ATE products resulting from higher product demand.
Cost of service revenue includes personnel and related costs associated
with providing services to customers and the infrastructure to manage a services
organization, as well as costs to recruit, develop and retain service
professionals. Cost of service in absolute dollars has increased each year since
1993 due to the development of this line of business. The increase in cost of
service from 1994 to 1995 was also due to additional costs associated with the
transfer to the Company of former employees of Unisys pursuant to the
outsourcing agreement signed in the first quarter of 1995. As part of the Unisys
outsourcing agreement, the Company retained approximately 180 hardware and
software designers and acquired fixed assets and certain intangibles. While
primarily focusing on serving the needs of Unisys, the design and service
resources acquired by the Company are also being used to support other
customers' design needs. Service gross margins could continue to be adversely
affected until the design and service resources acquired from Unisys are more
fully utilized through additional revenue contracts. Additionally, the cost of
integrating new service professionals performing a growing number of service
offerings will also put pressure on service gross margins until operating
efficiencies are obtained.
Cost of maintenance revenue includes the cost of customer services such
as hot-line and on-site support and the production cost of the maintenance
renewal process. The increase in cost of maintenance in absolute dollars from
1994 to 1995 was principally due to additional costs necessary to support a
larger installed base. The decrease in cost of maintenance revenue from 1993 to
1994 was primarily due to the continued streamlining of the maintenance renewal
process.
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OPERATING EXPENSES
% Change
------------
1995 1994 1993 95/94 94/93
---- ---- ---- ----- -----
(In millions)
Marketing and sales $185.0 $163.4 $160.2 13% 2%
Research and development $ 88.6 $ 77.4 $ 74.5 14% 4%
General and administrative $ 40.4 $ 39.7 $ 38.7 2% 3%
Expenses as a Percent of Total Revenue
Marketing and sales 34% 38% 43%
Research and development 16% 18% 20%
General and administrative 7% 9% 11%
MARKETING AND SALES
Marketing and sales expenses grew from 1994 to 1995 due to an
additional $28.2 million of employee related costs resulting from increased
headcount, a higher volume of pre-sales activities and increased commissions and
sales incentives. Of these increased expenses, $5.1 million was attributable to
the effect of the strengthening of certain foreign currencies in relation to the
U.S. dollar. These increases were offset by approximately $6.0 million of
decreased facilities costs. The increase in 1994 as compared to 1993 was the
result of increased costs of $4.7 million related to the Alta operations which
were offset by cost reductions in other areas. As a percentage of total revenue,
sales and marketing expenses were higher in 1993 due to lower revenue levels.
RESEARCH AND DEVELOPMENT
The Company's investment in research and development, prior to the
reduction for capitalization of software development costs, was $100.4 million,
$88.2 million and $89.7 million for 1995, 1994 and 1993, respectively,
representing 18%, 21% and 24% of total revenue. The increase of $12.2 million
from 1994 as compared to 1995 was primarily due to personnel costs of $11.0
million associated with increased headcount and incentive compensation and $1.6
million of higher consulting costs, offset by decreased facilities costs. The
decrease in 1994 as compared to 1993 was due to lower occupancy costs of $2.5
million and decreased capital equipment costs of $1.5 million offset by
increased costs of $2.4 million related to the Alta Group. The Company
capitalized approximately $11.8 million, $10.8 million and $15.2 million of
software development costs in the years 1995, 1994 and 1993, respectively, which
represented approximately 12%, 12% and 17% 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
The decrease in general and administrative costs as a percentage of
revenue from 1993 to 1995 was primarily attributable to revenue growing at a
faster rate than costs. The increase in absolute costs of $.7 million in 1995
was the result of $1.1 million of additional information system costs and $.7
million of additional legal expenses. These costs were offset by reductions in
employee-related costs, facilities costs and bad debt expense. The 1994 increase
in general and administrative costs was due to higher employee-related costs and
operations of the Alta Group totaling $2.5 million offset by cost savings of
$1.3 million resulting from lower facility costs.
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OTHER ITEMS
1995 1994 1993
---- ---- ----
(In millions)
Unusual items $ -- $14.7 $19.7
Other income (expense) $17.2 $ 4.8 $(4.4)
UNUSUAL ITEMS
The unusual items in 1994 included costs of $4.7 million related to the
1994 third quarter write-off of in-process research and development associated
with the Redwood acquisition as Redwood's development efforts had not reached
technological feasibility and, in management's opinion, had no probable
alternative future use. Also included in the 1994 unusual items was a $10.0
million provision for settlement of litigation. In April 1994, the Company
entered into agreements to settle two class action lawsuits for a combined
settlement of $16.5 million, of which approximately $7.5 million was covered by
the Company's insurance carriers. Reflected in the statement of income in 1994
was the net settlement cost of approximately $9.0 million plus approximately
$1.0 million for related legal costs.
Restructuring costs of $13.5 million associated with a planned
restructure of certain areas of sales, operations and administration due to
business conditions were recorded as an unusual item in March 1993. The
restructuring charge primarily reflected costs associated with employee
terminations, excess facilities and the write-off of purchased software and
intangibles arising from required adjustments to the Company's cost structure
necessitated by lower revenue levels. Also included in the restructuring charge
was an additional provision for doubtful accounts and the write-off of certain
software development costs resulting from changes in the Company's systems
product strategy. In December 1993, the Company sold its ASI division,
therefore, also included in unusual items for 1993 was the division's loss from
operations of $6.2 million.
OTHER INCOME AND EXPENSE
Interest income was $4.9 million, $3.3 million and $3.2 million for
1995, 1994 and 1993, respectively. The increase in 1995 is primarily due to
increased earnings on cash investments resulting from higher interest rates.
Interest expense was $2.2 million, $1.0 million and $.7 million for 1995, 1994
and 1993, respectively. The increase in interest expense in 1995 as compared to
1994 and in 1994 as compared to 1993 was due to an increase in notes payable
related to the purchase of corporate facilities in the first and fourth quarters
of 1994. The note payable related to the first facility purchase was paid in
full in May 1994, and the note payable related to the second facility purchase
was paid in full in October 1995. Included in 1995 other income was an $18.9
million gain on the sale of approximately 45% of the stock of IMS, a previously
wholly-owned subsidiary, in an initial public offering. In 1994, other income
included a $4.2 million gain related to the sale of an equity investment. A $6.0
million loss on the disposal of the Company's ASI division was included in 1993
other expense.
INCOME TAXES
(In millions) 1995 1994 1993
---- ---- ----
Provision for income taxes $37.8 $12.2 $ --
Effective tax rate 28% 25% --%
As of December 30, 1995, the Company had gross deferred tax assets of
approximately $62.6 million against which the Company had recorded a valuation
allowance of $47.8 million, resulting in net deferred tax assets of $14.8
million. A significant portion of the net operating loss and credit
carryforwards which created the deferred tax assets was generated by acquired
companies prior to their merger with the Company and by restructuring charges
recorded as a result of these mergers. Approximately $34.2 million of these
deferred tax assets will affect equity and intangibles and will not be available
to offset future provisions for income taxes. Realization of the net deferred
tax assets of $14.8 million is dependent on generating sufficient taxable income
prior to the expiration of the loss and tax credit carryforwards. Although
realization is not assured, management believes that it is more likely than not
that the net deferred tax assets of $14.8 million will be realized. The amount
of the net deferred
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tax assets considered realizable, however, could be reduced or increased in the
near term if actual facts, including the estimate of future taxable income,
differ from those estimated.
The increase in the 1995 tax rate as compared to 1994 was attributable
to an increase in foreign earnings which are subject to a higher tax rate than
the U.S. tax rate, the related cost of repatriating these earnings and an
increase in state income taxes. The 1994 effective tax rate reflected a
reduction in the valuation allowance primarily from the utilization of net
operating losses generated in prior years. In 1993, the Company's tax provision
was zero as a result of the operating loss in 1993 and the recording of the
benefit of certain foreign withholding and income taxes. The Company anticipates
that its effective tax rate will increase to approximately 33% in 1996.
LIQUIDITY AND CAPITAL RESOURCES
At December 30, 1995, the Company's principal sources of liquidity
consisted of $96.6 million of cash and cash investments and short-term
investments as compared to $96.9 million and $92.8 million at December 31, 1994
and 1993, respectively. The Company was able to maintain its cash position while
repurchasing $163.9 million and $95.1 million of treasury stock and repaying
notes payable and long-term debt totaling $26.5 million and $29.2 million in
1995 and 1994, respectively.
Cash generated from operating activities increased $42.7 million in
1995 and $57.2 million in 1994. The 1995 increase was driven primarily by higher
net income and increases in accrued liabilities and payables and deferred
revenue, offset by increases in accounts receivable and prepaid expenses. The
increase in 1994 as compared to 1993 was primarily the result of increases in
net income and deferred revenue.
Working capital at December 30, 1995 was $6.5 million compared with
$27.5 million at December 31, 1994. The primary reasons for the decrease in 1995
as compared to 1994 were increases in deferred revenue of $31.2 million and
current payables and accrued liabilities of $29.7 million, offset by a decrease
in notes payable of $24.9 million and an increase in accounts receivable of $9.9
million. The increase in deferred revenue was attributable to increased
maintenance renewals and an increase in deferred product revenue deferred in
accordance with the American Institute of Certified Public Accountants Statement
of Position 91-1 entitled "Software Revenue Recognition." The increase in
current payables and accrued liabilities was due to increased commissions,
incentive bonuses and income taxes in 1995. Notes payable decreased in 1995 as
the Company repaid a $23.7 million secured loan assumed as part of a 1994
purchase of corporate facilities. Although accounts receivable increased as a
result of increased revenue in 1995 as compared to 1994, days sales outstanding
decreased from 58 days at December 1994 to 49 days at December 1995 due to
improved collection efforts.
In addition to its short-term investments, the Company's primary
investing activities were the purchase of property, plant and equipment and the
capitalization of software development costs, which combined, represented $40.2
million, $26.0 million and $33.7 million of cash used for investing activities
in 1995, 1994 and 1993, respectively. In 1995, the Company also generated $29.9
million from the sale of 3.0 million shares of IMS stock in an initial public
offering.
The Company has an authorized stock repurchase program. In total, as of
December 30, 1995, the Company had authorized the repurchase of 34.1 million
shares, of which approximately 26.8 million shares had been repurchased. The
Company repurchases common stock in part to satisfy estimated requirements for
shares to be issued under the Company's employee stock option and stock purchase
plans as well as in connection with acquisitions. Past repurchase activity
should not be considered an indicator of future repurchases.
Since 1994, as part of its authorized repurchase program, the Company
has sold 10.1 million put warrants through private placements. As of December
30, 1995, 7.5 million of these warrants had expired out of the money. The
remaining outstanding 2.6 million warrants entitle the holder to sell one share
of common stock to the Company on a specified date and at a specified price
ranging from $24.09 to $33.03 per share. Additionally, during this same period,
the Company purchased approximately 7.6 million call options that entitle the
Company to buy on a specified date one share of common stock at a specified
price. As of December 30, 1995, the Company had repurchased 5.6 million common
shares
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20
pursuant to the exercise of call options for $72.8 million. The remaining 2.0
million outstanding call options range in price from $24.17 to $33.37 per share.
The Company has the right to settle the put warrants with stock, cash
or a combination of stock and cash equal to the difference between the exercise
price and the fair value at the date of exercise. Settlement of the put warrants
with stock could cause the Company to issue a substantial number of shares,
depending on the amounts of the repurchase obligations and the per share fair
value of the Company's common stock at the time of exercise. In addition,
settlement of put warrants in stock or cash could lead to the disposition by put
warrant holders of shares of the Company's common stock that such holders may
have accumulated in anticipation of the exercise of the put warrants or call
options, which may impact the price of the Company's common stock.
As discussed above, financing activities in 1995, 1994 and 1993 related
principally to the Company's stock repurchase program and payments of notes
payable. The Company's stock repurchases included open market and private
purchases, and as discussed above, exercise of call options. In 1995, the
Company repurchased a warrant previously issued in connection with an
acquisition, equivalent to approximately 1.8 million shares of the Company's
common stock for a total cost of $17.2 million. The sale of common stock
primarily to the Company's employees as part of its employee benefit plans
generated $26.5 million, $13.5 million and $4.3 million in cash during 1995,
1994 and 1993, respectively.
Anticipated cash requirements for fiscal 1996 include the purchase of
treasury stock through the exercise of the Company's call options and in the
open market. The Company has the right to purchase approximately 2.0 million
shares through the exercise of call options in 1996 at a cost of approximately
$52.3 million. As part of its overall investment strategy, the Company has
committed to participate in a venture capital partnership as a limited partner.
The Company's total investment of $25.0 million will be made over the next three
to four years. Other cash requirements include contemplated additions of capital
equipment of approximately $35.0 million.
The Company anticipates that current cash and short-term investment
balances, cash flows from operations and short and long-term borrowing
capabilities will be sufficient to meet its working capital and capital
expenditure requirements on a short and long-term basis. The Company's majority
owned subsidiary, IMS, has a $10.0 million bank line of credit. The Company is
currently in negotiations with various lenders regarding a line of credit, but
there can be no assurance that mutually acceptable terms can be reached and that
the Company will have a line of credit available in the short-term. To the
extent that the Company does not utilize bank lines of credit or borrowings to
fund its operations on a short-term basis, the Company may continue to reduce
its current cash and may experience future working capital deficits on a
short-term basis.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company competes in the highly competitive EDA market which
continues to be characterized by aggressive pricing practices, rapid
technological change and new market entrants. The Company's success is dependent
upon its ability to develop innovative, cost-competitive EDA software products
and services, and to bring them to market in a timely manner.
The Company's future operating results are dependent on the Company's
ability to successfully implement its strategy to help its customers meet their
business objectives by optimizing their product development processes. The
Company accomplishes this through a combination of technology and services.
Inherent in implementing this strategy are a number of risks that the Company
must manage and that could affect its future operating results. These risks
include the ability to successfully recruit, train and retain its skilled
service professionals and the ability to profitably deliver services that meet
customer expectations. Growth of the service business is constrained by the
Company's ability to hire and train service professionals to keep pace with
demand. The Company's profitability could be adversely affected if it is unable
to develop its services business as expected.
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
18
21
restrictions, volatile foreign exchange rates, currency conversion risks,
limitations on repatriation of earnings and reduced protection of intellectual
property rights.
The Company enters into foreign currency forward contracts to hedge the
impact of foreign currency fluctuations. Though the Company attempts to reduce
the impact of foreign currency fluctuations, significant exchange rate movements
may have a material adverse impact on the Company's results of operations.
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 quarter 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 operating
results may be impacted significantly by lower revenue. 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 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.
Due to the foregoing, as well as other factors, past financial
performance should not be considered an indicator of future performance. In
addition, the Company's participation in a highly dynamic industry often results
in significant volatility of the Company's common stock price. Any change in
revenues or operating results below levels expected by securities analysts for
the Company or its competitors, and the timing of the announcement of such
shortfalls, could have an immediate and significant adverse effect on the
trading price of the Company's common stock in any given period.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are submitted as a
separate section of this Form 10-K. See Item 14.
SUMMARY QUARTERLY DATA-UNAUDITED
(In thousands, except per share amounts)
1995 1994
----------------------------------------- ------------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
----------------------------------------- ------------------------------------------
Revenue $163,756 $140,090 $128,539 $116,033 $121,653 $109,598 $101,043 $ 96,778
Cost of revenue $ 31,767 $ 30,349 $ 29,451 $ 24,963 $ 23,889 $ 22,000 $ 21,595 $ 22,316
Income (loss) from
operations (1) $ 42,588 $ 32,666 $ 24,117 $ 18,489 $ 24,043 $ 12,483 $ 13,000 $ (5,479)
Net income (loss) (2) $ 30,840 $ 35,909 $ 16,971 $ 13,550 $ 20,932 $ 9,483 $ 10,082 $ (3,849)
Net income (loss)
per share $ .50 $ .59 $ .27 $ .21 $ .33 $ .15 $ .15 $ (.06)
(1) Income (loss) from operations included unusual items of $4.7 million for
the write-off of in-process research and development, a $2.1 million credit
to the provision for settlement of litigation established in the first
quarter of 1994 and a $12.1 million provision for settlement of litigation
in the quarters ended September 30, 1994, June 30, 1994 and March 31, 1994,
respectively.
(2) In addition to unusual items, net income (loss) also included a $13.6
million after tax gain on the sale of stock of a subsidiary and a $3.1
million after tax gain on the sale of an equity investment in the quarters
ended September 30, 1995 and December 31, 1994, respectively.
19
22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
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 3, 1996. The
information required by this Item as to executive officers is included in Part I
under " Executive Officers of the Registrant."
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 30, 1995, all
section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with; except that one
report, covering one transaction, was filed late by Mr. Mark Garrett.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from
the sections entitled "Compensation of Directors" and "Compensation of
Executive Officers" in the Company's Proxy Statement for its annual
stockholders' meeting to be held May 3, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from
the section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Company's Proxy Statement for its annual stockholders'
meeting to be held May 3, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from
the section entitled "Certain Transactions" in the Company's Proxy Statement for
its annual stockholders' meeting to be held May 3, 1996.
20
23
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
PAGE
----
(a)1. Financial Statements
- Report of Independent Public Accountants 25
- Consolidated Balance Sheets as of December 30, 1995 and December 31,1994 26
- Consolidated Statements of Income for the three fiscal years ended
December 30, 1995 27
- Consolidated Statements of Stockholders' Equity for the three fiscal years
ended December 30, 1995 28
- Consolidated Statements of Cash Flows for the three fiscal years ended
December 30, 1995 29
- Notes to Consolidated Financial Statements 30
(a)2. Financial Statement Schedules
II. Valuation and Qualifying Accounts and Reserves 44
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:
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 the 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 the 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")).
21
24
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
(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 (as incorporated
by reference to Exhibit 3.02 to the 1987 Form S-1 and as amended
by Exhibit 3-b to Form 8-K filed June 12, 1989).
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 Rights Agreement, dated as of February 9, 1996, between the
Company and Harris Trust and Savings Bank which includes as
exhibits thereto the Certificate of Designations for the
Series A Junior Participating Preferred Stock, the form of Right
Certificate and the Summary of Rights to Purchase Preferred
Shares (incorporated by reference to Exhibit 1A, 1B and 1C to
the Registrant's Form 8-K filed February 16, 1996.)
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. 33-53913) filed on May 31,
1994 (the "1994 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 to the Registrant's 1994 Form S-8 and
the latter two documents are incorporated by reference to
Exhibit 10.08 - 10.10 to the Registrant's 1988 Form S-1).*
10.04 The Registrant's 1993 Directors Stock Option Plan including the
Stock Option Grant (incorporated by reference to Exhibit 10.04
of the 1994 Form S-8).*
10.05 The Registrant's 1995 Directors Stock Option Plan including the
Stock Option Grant. *
10.06 The Registrant's 1990 Employee Stock Purchase Plan as amended to
date (incorporated by reference to Exhibit 4.03 of the 1994 Form
S-8).*
10.07 The Registrant's Senior Executive Bonus Plan for 1995
(incorporated by reference to Exhibit 10.08 of the Registrant's
Form 10-K for the fiscal year ended December 31, 1994 (the "1994
Form 10-K")).*
10.08 The Registrant's Senior Executive Bonus Plan for 1996.*
10.09 The Registrant's Chief Executive Officer Bonus Plan for 1996.*
10.10 The Registrant's Deferred Compensation Plan for 1994
(incorporated by reference to Exhibit 10.09 to the 1994 Form
10-K).*
10.11 The Registrant's 1996 Deferred Compensation Venture Investment
Plan.*
22
25
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
10.12 Amended and Restated Lease, dated June 29, 1989, by and between
River Oaks Place Associates ("ROPA"), a California limited
partnership, and the Registrant, for the Registrant's executive
offices at 555 River Oaks Parkway, San Jose, California
(incorporated by reference to Exhibit 10.14 to the Registrant's
Form 10-K for the fiscal year ended December 31, 1990 (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 575 River Oaks Parkway, San
Jose, California (incorporated by reference to Exhibit 10.16 to
the 1990 Form 10-K).
10.14 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).
10.15 Lease dated September 3, 1985 by and among the Richard T. Peery
and John Arrillaga Separate 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")).
10.16 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).
10.17 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).
10.18 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).
10.19 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).
10.20 Form of Executive Compensation Agreement dated May 1989 between
Registrant and Mr. Costello (incorporated by reference to
Exhibit 10.20 to the Registrant's Form S-4 registration
statement (No. 33-31673), originally filed on October 18,
1989).*
10.21 Offer letter to H. Raymond Bingham dated May 12, 1993
(incorporated by reference to Exhibit 10.24 to the Form 10-K for
the fiscal year ended December 31, 1993 (the "1993 Form
10-K")).*
10.22 Offer letter to M. Robert Leach dated May 17, 1993 (incorporated
by reference to Exhibit 10.25 to the 1993 Form 10-K).*
10.23 1993 Non-Statutory Stock Option Plan (incorporated by reference
to Exhibit 4.05 to the 1994 Form S-8).*
23
26
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
10.24 Consulting agreement dated May 1, 1994 with Henry E. Johnston,
who was made a director on July 5, 1994 by unanimous written
consent (incorporated by reference to the Registrant's Form 10-Q
for the quarterly period ended June 30, 1994 (the "1994 Second
Quarter Form 10-Q")).*
10.25 Consulting agreement dated October 26, 1993 with Alberto
Sangiovanni-Vincentelli (incorporated by reference to the 1994
Second Quarter Form 10-Q).*
10.26 Letter agreement dated August 17, 1994 by and among Registrant,
Morris Management Company (the "General Partner"), and Morris
Associates VI, L.P. ("Morris") whereby Registrant acquired all
of the interests in River Oaks Place Associates, L.P.
(incorporated by reference to the Registrant's Form 8-K filed
November 14, 1994).
10.27 Agreement of Merger and Plan of Reorganization by and among
Registrant, Simon Software, Inc. and Redwood Design Automation,
Inc. ("Redwood") dated as of July 8, 1994 (incorporated by
reference to the Registrant's Form 10-Q/A, Amendment Number 1 to
the 1994 Second Quarter Form 10-Q, filed November 14, 1994 (the
"1994 Second Quarter 10-Q/A")).
10.28 Agreement of Merger dated as of August 1, 1994 between Redwood
and CDS Corporation (incorporated by reference to the
Registrant's 1994 Second Quarter 10-Q/A).
10.29 Form of Stock Option Agreement for Registrant's 1993 Non
Statutory Stock Option Plan (incorporated by reference to the
Registrant's Form 10-Q for the third quarter ended September 30,
1994).*
10.30 Form of Underwriting Agreement in connection with Integrated
Measurement Systems, Inc. public offering (incorporated by
reference to the Registrant's Form 10-Q for the third quarter
ended September 30, 1995).
21.01 Subsidiaries of the Registrant
23.01 Consent of Arthur Andersen LLP
27.1 Financial data schedule for the period ended December 30, 1995.
_ _ _ _ _ _ _ _ _ _
* A management contract or compensatory plan required to be filed
as an exhibit to Form 10-K.
(b) Reports on Form 8-K
On February 16, 1996, Registrant filed a Current Report on Form
8-K, reporting that its Board of Directors had approved a
Stockholder Rights Plan and cancelled its previous Stockholder
Rights Plan established in 1989.
(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
24
27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF 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 30, 1995
and December 31, 1994, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 30, 1995. These financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule 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, 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 30, 1995 and December 31, 1994, and the results
of their operations and their cash flows for each of the three years in the
period ended December 30, 1995, 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 schedule listed in Item 14. (a) 2. is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states 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 LLP
---------------------------
ARTHUR ANDERSEN LLP
San Jose, California
January 19, 1996
25
28
CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 30, 1995 AND DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
1995 1994
---- ----
CURRENT ASSETS:
Cash and cash investments .................................................. $ 84,867 $ 75,011
Short-term investments ..................................................... 11,774 21,865
Accounts receivable, less allowances of $7,420 in 1995 and $4,905 in 1994 .. 88,503 78,629
Inventories ................................................................ 8,203 5,137
Prepaid expenses and other ................................................. 13,576 11,293
--------- ---------
Total current assets ................................................... 206,923 191,935
PROPERTY, PLANT AND EQUIPMENT, net ............................................. 124,103 122,064
SOFTWARE DEVELOPMENT COSTS, net ................................................ 25,793 27,832
PURCHASED SOFTWARE AND INTANGIBLES, net ........................................ 8,268 10,557
OTHER ASSETS ................................................................... 8,948 8,660
--------- ---------
Total assets ........................................................... $ 374,035 $ 361,048
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current portion of long-term debt ........................ $ 1,497 $ 26,412
Accounts payable ........................................................... 17,592 12,522
Accrued liabilities ........................................................ 74,407 56,359
Income taxes payable ....................................................... 14,524 7,944
Deferred revenue ........................................................... 92,407 61,205
--------- ---------
Total current liabilities .............................................. 200,427 164,442
--------- ---------
LONG-TERM LIABILITIES:
Long-term debt ............................................................. 1,619 2,098
Deferred income taxes ...................................................... 7,307 904
Minority interest liability ................................................ 12,167 883
Other long-term liabilities ................................................ 18,434 16,658
--------- ---------
Total long-term liabilities ............................................ 39,527 20,543
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value; authorized 2,000 shares, none issued
Common stock and capital in excess of $.01 par value
Authorized: 150,000 shares
Issued: 75,863 shares in 1995 and 71,391 shares in 1994
Outstanding: 52,376 shares in 1995 and 56,861 shares in 1994 .......... 299,544 265,173
Treasury stock at cost (23,487 shares in 1995 and 14,530 shares in 1994) ... (290,884) (133,728)
Retained earnings .......................................................... 124,471 43,377
Accumulated translation adjustment ......................................... 950 1,241
--------- ---------
Total stockholders' equity ............................................. 134,081 176,063
--------- ---------
Total liabilities and stockholders' equity ............................. $ 374,035 $ 361,048
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
26
29
CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE FISCAL YEARS ENDED DECEMBER 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995 1994 1993
---- ---- ----
REVENUE:
Product ...................................... $292,198 $241,545 $ 224,139
Service ...................................... 65,860 28,365 16,872
Maintenance .................................. 190,360 159,162 127,612
-------- -------- ---------
Total revenue ............................ 548,418 429,072 368,623
-------- -------- ---------
COSTS AND EXPENSES:
Cost of product .............................. 44,793 52,897 53,677
Cost of service .............................. 54,988 22,590 15,431
Cost of maintenance .......................... 16,749 14,313 14,864
Marketing and sales .......................... 185,025 163,408 160,212
Research and development ..................... 88,566 77,381 74,467
General and administrative ................... 40,437 39,729 38,737
Unusual items ................................ -- 14,707 19,650
-------- -------- ---------
Total costs and expenses ................. 430,558 385,025 377,038
-------- -------- ---------
Income (loss) from operations .................... 117,860 44,047 (8,415)
Other income (expense) ........................... 17,237 4,816 (4,364)
-------- -------- ---------
Income (loss) before provision for income taxes .. 135,097 48,863 (12,779)
Provision for income taxes ....................... 37,827 12,215 --
-------- -------- ---------
Net income (loss) ................................ $ 97,270 $ 36,648 $ (12,779)
======== ======== =========
Net income (loss) per share ...................... $ 1.57 $ 0.56 $ (.20)
======== ======== =========
Weighted average common and common equivalent
shares outstanding ........................... 61,965 65,870 64,590
======== ======== =========
The accompanying notes are an integral part of these
consolidated financial statements.
27
30
CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE FISCAL YEARS ENDED DECEMBER 30, 1995
(IN THOUSANDS)
Common Stock
------------
Par Value Accumulated
and Capital In Treasury Stock Retained Translation
Shares Excess of Par Shares Amount Earnings Adjustment
------ -------------- ------- --------- --------- -----------
BALANCE, DECEMBER 31, 1992 ........... 65,865 $ 228,411 -- $ -- $ 21,306 $ (569)
Purchase of treasury stock ........... -- -- (7,286) (52,178) -- --
Issuance of common stock ............. 1,619 10,805 -- -- -- --
Tax benefits from employee
stock transactions ............. -- 842 -- -- -- --
Common stock issued in connection
with acquisition ................ 1,575 9,056 -- -- -- --
Issuance of warrant in connection with
acquisition .................... -- 1,847 -- -- -- --
Translation adjustment ............... -- -- -- -- -- (619)
Net loss ............................. -- -- -- -- (12,779) --
------ --------- ------- --------- --------- -------
BALANCE, DECEMBER 31, 1993 ........... 69,059 250,961 (7,286) (52,178) 8,527 (1,188)
Purchase of treasury stock ........... -- -- (8,961) (95,119) -- --
Issuance of common stock ............. 2,332 13,516 963 7,231 (1,165) --
Tax benefits from employee
stock transactions .............. -- 626 -- -- -- --
Treasury stock issued in connection
with acquisitions .............. -- 70 754 6,338 (633) --
Translation adjustment ............... -- -- -- -- -- 2,429
Net income ........................... -- -- -- -- 36,648 --
------ --------- ------- --------- --------- -------
BALANCE, DECEMBER 31, 1994 ........... 71,391 265,173 (14,530) (133,728) 43,377 1,241
Purchase of treasury stock ........... -- -- (9,620) (163,928) -- --
Issuance of common stock ............. 4,472 26,984 663 6,772 (734) --
Tax benefits from employee
stock transactions ............. -- 8,463 -- -- -- --
Purchase of warrant .................. -- (1,746) -- -- (15,442) --
Unrealized gain on investment in
subsidiary ..................... -- 670 -- -- -- --
Translation adjustment ............... -- -- -- -- -- (291)
Net income ........................... -- -- -- -- 97,270 --
------ --------- ------- --------- --------- -------
BALANCE, DECEMBER 30, 1995 ........... 75,863 $ 299,544 (23,487) $(290,884) $ 124,471 $ 950
====== ========= ======= ========= ========= =======
The accompanying notes are an integral part of these
consolidated financial statements.
28
31
CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE FISCAL YEARS ENDED DECEMBER 30, 1995
(IN THOUSANDS)
1995 1994 1993
---- ---- ----
CASH AND CASH INVESTMENTS AT BEGINNING OF YEAR ................................... $ 75,011 $ 61,382 $ 78,976
--------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .......................................................... 97,270 36,648 (12,779)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ........................................... 46,019 44,257 43,966
Gain on sale of stock of subsidiary ..................................... (18,873) -- --
Deferred income taxes ................................................... 5,693 (2,105) (9,849)
Write-off of in-process research and development ........................ -- 4,653 --
Accruals and write-down and reserve of assets related to restructure .... -- -- 10,710
Increase in other long-term liabilities and minority interest expense ... 3,135 3,985 1,856
Write-offs of equipment and other long-term assets ...................... 2,281 1,229 3,140
Provisions for doubtful accounts and inventory write-offs ............... 5,821 3,334 3,029
Changes in current assets and liabilities, net of effect of acquired
businesses:
Accounts receivable ................................................. (13,760) 22,413 28,724
Inventories ......................................................... (4,059) (592) (32)
Prepaid expenses and other .......................................... (2,132) 7,871 1,347
Accrued liabilities and payables .................................... 44,439 10,612 16,013
Deferred revenue .................................................... 31,262 22,133 11,134
--------- --------- --------
Net cash provided by operating activities ........................ 197,096 154,438 97,259
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of short-term investments .................................... 43,296 69,796 63,273
Purchases of short-term investments ..................................... (33,205) (60,238) (83,753)
Purchases of property, plant and equipment .............................. (28,338) (15,196) (18,500)
Capitalization of software development costs ............................ (11,845) (10,790) (15,207)
Change in purchased software and intangibles and other assets ........... (5,454) 1,129 (4,228)
Net proceeds from sale of subsidiary stock .............................. 29,920 -- --
Payment for purchase of third-party interests in partnerships,
net of cash acquired ................................................ -- (14,624) --
Cash advanced to a company prior to acquisition ......................... -- (1,855) --
Sale of put warrants .................................................... 1,304 10,321 --
Purchase of call options ................................................ (1,304) (10,321) --
--------- --------- --------
Net cash used for investing activities ........................... (5,626) (31,778) (58,415)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable and long-term debt .................. (26,542) (29,209) (8,117)
Sale of common stock .................................................... 26,500 13,516 4,283
Purchases of treasury stock ............................................. (163,928) (95,119) (52,178)
Purchase of warrant ..................................................... (17,188) -- --
--------- --------- --------
Net cash used for financing activities ........................... (181,158) (110,812) (56,012)
--------- --------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH .......................................... (456) 1,781 (426)
--------- --------- --------
INCREASE (DECREASE) IN CASH AND CASH INVESTMENTS ................................. 9,856 13,629 (17,594)
--------- --------- --------
CASH AND CASH INVESTMENTS AT END OF YEAR ......................................... $ 84,867 $ 75,011 $ 61,382
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest ............................................................ $ 2,423 $ 915 $ 541
========= ========= ========
Income taxes (including foreign withholding tax) .................... $ 12,968 $ 6,885 $ 3,884
========= ========= ========
Non-cash investing and financing activities:
Capital lease obligations incurred for equipment .................... $ 1,149 $ 1,466 $ 4,441
========= ========= ========
Common and treasury stock issued under the Employee
Stock Purchase Plan .............................................. $ 6,522 $ 6,066 $ 6,522
========= ========= ========
Tax benefits from employee stock transactions ....................... $ 8,463 $ 626 $ 842
========= ========= ========
The accompanying notes are an integral part of these
consolidated financial statements.
29
32
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 1995
THE COMPANY
Cadence Design Systems, Inc. (the "Company") develops, markets and
supports electronic design automation software products and services that
automate, enhance and accelerate the design and verification of integrated
circuits and electronic systems. The Company combines its technology with
services to help optimize its customers' product development processes. The
Company's customers and target markets include computer manufacturers, consumer
electronics companies, industrial electronics companies, semiconductor
manufacturers, ASIC foundries and telecommunications companies throughout the
world.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries after elimination of intercompany
accounts and transactions. The functional currency of all of the Company's
foreign subsidiaries is the local currency. Gains and losses resulting from the
translation of the subsidiaries' financial statements are reported as a separate
component of stockholders' equity. Effective December 31, 1994, the Company's
fiscal year end is the Saturday closest to December 31.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain prior year financial statement balances have been reclassified
to conform to the 1995 presentation.
REVENUE RECOGNITION
Product revenue consists principally of revenue earned under software
license agreements and is generally recognized when the software has been
shipped and there are no significant obligations remaining. Revenue from
subscription license agreements which include software and maintenance is
deferred and recognized ratably over the term of the subscription period. Test
equipment revenue is recognized upon shipment of the test equipment.
Service revenue consists primarily of revenues received for performing
product design development and process improvement, and education and
assimilation of software products into the customers' product development
process. Service revenue is generally recognized as the services are performed
or on the percentage of completion method of accounting, depending upon the
nature of the project. Under the percentage of completion method, revenue
recognized is that portion of the total contract price that costs expended to
date bears to the anticipated final total costs based on current estimates of
the costs to complete the project. If the total estimated costs to complete a
project exceed the total contract amount, indicating a loss, the entire
anticipated loss would be recognized currently.
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 1995, 1994 and 1993, one customer (a distributor), which also holds
a minority interest in a subsidiary of the Company, accounted for 15%, 10% and
13% of total revenue, respectively.
Outstanding trade accounts receivable from this related party were
approximately $5.4 million and $3.7 million at December 30, 1995 and December
31, 1994, respectively.
30
33
SOFTWARE DEVELOPMENT COSTS AND PURCHASED SOFTWARE AND INTANGIBLES
The Company capitalizes software development costs in compliance with
Statement of Financial Accounting Standards ("SFAS") 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 of 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, but not limited to, anticipated future gross product revenue, estimated
economic life and changes in software and hardware technology. 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 three years or, if less, the remaining estimated economic life of the
product. Purchased software and intangibles are amortized on a straight-line
basis over the remaining estimated economic life of the underlying product (two
to seven years). It is reasonably possible that the estimates of anticipated
future gross revenues, the remaining estimated economic life of the products, or
both could differ from those used to assess the recoverability of these costs
and result in a write-down of the carrying amount or a shortened life of the
costs in the near term.
In the accompanying statements of income, amortization is included in
cost of product for capitalized software development costs and in either cost of
product or cost of service for purchased software costs, as determined by the
nature of the underlying transaction. In total, amortization of capitalized and
purchased software and intangibles amounted to approximately $19.7 million,
$20.2 million and $17.1 million for 1995, 1994 and 1993, respectively. The
Company wrote off $.8 million of purchased software in 1995 and $1.5 million of
capitalized software in 1993 for projects discontinued during the year.
NET INCOME (LOSS) PER SHARE
Net income per share for each period is calculated by dividing net
income by the weighted average shares of common stock and common stock
equivalents outstanding during the period (calculated using the modified
treasury stock method). Common stock equivalents consist of dilutive shares
issuable upon the exercise of outstanding common stock options and warrants. Net
loss per share is calculated by dividing net loss by the weighted average number
of common shares outstanding. Fully diluted net income (loss) per share is
substantially the same as primary net income (loss) per share.
CASH, CASH INVESTMENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid debt instruments and
certificates of deposit with an original maturity of ninety days or less to be
cash investments. The Company classifies its investments in debt securities as
"held-to-maturity". Accordingly, these investments, which mature at various
dates through August 1996, are valued using the amortized cost method. The fair
value of the investments approximates amortized cost, and as such, the gross
unrealized holding gains and losses at December 30, 1995 and December 31, 1994
are not material. Short-term investments consisted of the following:
1995 1994
---- ----
(In thousands)
Commercial paper $ -- $ 10,795
Certificates of deposit -- 6,031
Corporate debt securities 8,774 --
European certificates of deposit -- 4,004
U.S. Government notes 3,000 --
Other debt securities -- 1,035
--------- ---------
Total short-term investments $ 11,774 $ 21,865
========= =========
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out
method) or market. Cost includes labor, material and manufacturing overhead.
Inventories are composed of test equipment.
31
34
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.
Buildings 31 years
Leasehold and building improvements Shorter of the lease term or the
estimated useful life
Equipment 3 - 6 years
Furniture and fixtures 3 - 5 years
FINANCIAL INSTRUMENTS
The Company has an authorized stock repurchase program. In total, as of
December 30, 1995, the Company had authorized the repurchase of 34.1 million
shares of which approximately 26.8 million shares had been repurchased. The
Company repurchases common stock in part to satisfy estimated requirements for
shares to be issued under the Company's employee stock option and stock purchase
plans as well as in connection with acquisitions.
Since 1994, as part of its authorized repurchase program, the Company
sold 10.1 million put warrants through private placement. As of December 30,
1995, 7.5 million of these warrants had expired out of the money. The remaining
outstanding 2.6 million warrants entitle the holder to sell one share of common
stock to the Company on a specified date and at a specified price ranging from
$24.09 to $33.03 per share. Additionally, during this same period, the Company
purchased approximately 7.6 million call options that entitle the Company to buy
on a specified date one share of common stock at a specified price. As of
December 30, 1995, the Company had repurchased 5.6 million common shares
pursuant to the exercise of call options for $72.8 million. The remaining 2.0
million outstanding call options range in price from $24.17 to $33.37 per share.
The Company has the right to settle the put warrants with stock, cash
or a combination of stock and cash equal to the difference between the exercise
price and the fair value at the date of exercise. Settlement of the put warrants
with stock could cause the Company to issue a substantial number of shares,
depending on the amounts of the repurchase obligations and the per share fair
value of the Company's common stock at the time of exercise. In addition,
settlement of put warrants in stock or cash could lead to the disposition by put
warrant holders of shares of the Company's common stock that such holders may
have accumulated in anticipation of the exercise of the put warrants or call
options, which may impact the price of the Company's common stock.
At December 30, 1995, the fair value of these call options was
approximately $31.2 million and the fair value of the put warrants was
approximately $.9 million. The put warrants and call options outstanding at
December 30, 1995 are exercisable on various dates through April 1996. Fair
value of put warrants and call options was estimated by the Company's investment
bankers.
At December 30, 1995, the Company had both the unconditional right and
the intent to settle these put warrants with stock, and therefore, no amount was
classified out of stockholders' equity in the accompanying balance sheet. The
effect of the exercise of these put warrants and call options is reported in
stockholders' equity.
The Company enters into foreign currency forward exchange contracts
("forward contracts") to hedge the impact of foreign currency fluctuations. Due
to the short-term nature of these forward contracts, the unrealized gains and
losses were not material at December 30, 1995 and will be recorded when
realized. The estimated fair value for foreign exchange contracts is primarily
based on quoted market prices for the same or similar instruments, adjusted
where necessary for maturity differences. The estimated fair value at December
30, 1995 and December 31, 1994 was negligible. The notional amount of the
forward contracts was approximately $30.0 million at December 30, 1995. These
contracts expired on January 31, 1996.
For certain of the Company's financial instruments, including cash and
cash investments, short-term investments and debt, the carrying amounts
approximate fair value due to their short-term nature.
32
35
The estimated fair values discussed above may not be representative of
actual values that could have been realized as of year-end or that will be
realized in the future.
CONCENTRATION OF CREDIT RISK
Financial instruments which may potentially subject the Company to
concentrations of credit risk consist principally of cash investments,
short-term investments, accounts receivable, foreign exchange forward contracts,
and call options purchased in conjunction with its stock repurchase program. 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. Credit exposure related to the forward
contracts is limited to the unrealized gains on these contracts. Credit exposure
on call options is limited to the unrealized gains on the option contracts. All
financial instruments are executed with financial institutions with strong
credit ratings which minimizes risk of loss due to nonpayment. The Company has
not experienced any losses due to credit impairment related to its financial
instruments.
NEW ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock Based Compensation" which will be effective for
the Company's 1996 fiscal year. SFAS No. 123 allows companies which have
stock-based compensation arrangements with employees to adopt a new fair-value
basis of accounting for stock options and other equity instruments, or to
continue to apply the existing accounting rules under Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" but
with additional financial statement disclosure. The Company plans to continue to
account for stock-based compensation arrangements under APB Opinion No. 25, and
therefore does not anticipate SFAS No. 123 will have a material impact on its
financial position, results of operations or cash flows.
OTHER INCOME (EXPENSE)
1995 1994 1993
---- ---- ----
(In thousands)
Interest income $ 4,854 $ 3,262 $ 3,159
Interest expense (2,222) (1,045) (723)
Gain on sale of IMS stock 18,873 -- --
Gain on sale of investment -- 4,196 --
Loss on disposal of division (see Unusual Items) -- -- (5,972)
Minority interest income (expense) (1,341) (485)
134
Loss on foreign exchange (117) (204) (281)
Other expense, net (2,810) (908) (681)
--------- ---------- ----------
Total other income (expense) $ 17,237 $ 4,816 $ (4,364)
========= ========== ==========
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36
BALANCE SHEET COMPONENTS
1995 1994
---- ----
(In thousands)
Inventories
Raw materials and supplies $ 2,335 $ 1,268
Work-in-process 3,825 2,250
Finished goods 2,043 1,619
---------- ----------
Total inventories $ 8,203 $ 5,137
========== ==========
Property, Plant and Equipment
Land $ 38,848 $ 38,848
Buildings 38,612 38,612
Leasehold and building improvements 23,349 22,442
Equipment 108,911 101,087
Furniture and fixtures 19,834 19,762
---------- ----------
Total cost 229,554 220,751
Less: Accumulated depreciation and amortization 105,451 98,687
---------- ----------
Property, plant and equipment, net $ 124,103 $ 122,064
========== ==========
Software Development Costs
Cost $ 47,944 $ 57,921
Less: Accumulated amortization 22,151 30,089
---------- ----------
Software development costs, net $ 25,793 $ 27,832
========== ==========
Purchased Software and Intangibles
Cost $ 23,086 $ 28,242
Less: Accumulated amortization 14,818 17,685
---------- ----------
Purchased software and intangibles, net $ 8,268 $ 10,557
========== ==========
Accrued Liabilities
Payroll and payroll related accruals $ 48,668 $ 35,452
Other accrued liabilities 25,739 20,907
---------- ----------
Total accrued liabilities $ 74,407 $ 56,359
========== ==========
INTEGRATED MEASUREMENT SYSTEMS, INC. INITIAL PUBLIC OFFERING
In July 1995, the Company and its wholly owned subsidiary, Integrated
Measurement Systems, Inc. ("IMS") sold to the public approximately 3.0 million
shares of common stock at $11 per share in a registered initial public offering.
Of these shares, approximately .4 million were sold by IMS and approximately 2.6
million were sold by the Company as the sole selling stockholder of IMS. The
sale generated net proceeds to the Company, after underwriting expenses,
discounts, commissions and other expenses, of approximately $26.6 million and a
pre-tax gain of approximately $18.9 million, which is reflected as other income
in the accompanying statement of income. The Company also recognized a $.7
million unrealized gain, net of taxes, which was recorded in stockholders'
equity. IMS received net proceeds of approximately $3.3 million. As a result of
the offering and sale of shares by the Company, the Company's ownership interest
in IMS decreased to approximately 55%. The minority interest liability of $10.6
million related to IMS is recorded in minority interest liability in the
accompanying December 30, 1995 balance sheet.
34
37
ACQUISITIONS
REDWOOD DESIGN AUTOMATION
In August 1994, the Company acquired the business and certain assets of
Redwood Design Automation, Inc. ("Redwood") for approximately .6 million shares
of the Company's common stock valued at $4.6 million. Prior to the acquisition
of Redwood, the Company advanced $1.8 million to Redwood which was not repaid.
Redwood was a development stage company formed to design, develop and market
software for use in electronic systems design. The acquisition was accounted for
as a purchase and accordingly, the results of Redwood from the date of
acquisition forward have been recorded in the Company's consolidated financial
statements. In connection with the acquisition, net intangibles of $6.8 million
were acquired, of which $4.7 million was reflected as a one-time charge to
operations for the write-off of in-process research and development that had not
reached technological feasibility and, in management's opinion, had no probable
alternative future use. This one-time charge was reflected in the Company's 1994
statement of income as an unusual item within operating expenses. The remaining
intangibles of $2.1 million are included in purchased software and intangibles
in the accompanying balance sheets and are being amortized over their useful
life of two years.
In connection with the acquisition, net assets acquired were as follows
(in thousands):
Trade accounts receivable and other current assets $ 562
Intangibles, including in-process research and development 6,756
Property, equipment and other long-term assets 541
Current liabilities assumed (1,162)
Long-term liabilities assumed (292)
-------
Net assets acquired $ 6,405
=======
The following unaudited pro forma information shows the results of
operations for the twelve months ended December 31, 1994 and 1993 as if the
Redwood acquisition had occurred at the beginning of each period presented and
at the purchase price established in August 1994. The results are not
necessarily indicative of what would have occurred had the acquisition actually
been made at the beginning of each of the respective periods presented or of
future operations of the combined companies. The pro forma results for 1994
combine the Company's results for the twelve month period ended December 31,
1994 with the results of Redwood for the period from January 1, 1994 through the
date of acquisition. The pro forma results for 1993 combine the Company's
results for the twelve month period ended December 31, 1993 with Redwood's
twelve month fiscal period from February 1, 1993 through January 31, 1994. The
following unaudited pro forma results include the straight-line amortization of
intangibles over a period of two years.
1994 1993
---- ----
(In thousands)
Revenue $429,658 $368,935
Net income (loss) $ 33,531 $(19,051)
Net income (loss) per share $ .51 $ (.29)
Weighted average common and common equivalent shares
outstanding 66,314 65,219
REAL ESTATE PARTNERSHIPS
In March 1994, the Company acquired all third-party interests in two
real estate partnerships in which it was a 46.5% and 80% limited partner,
respectively, for approximately $8.7 million in cash and the assumption of a
secured construction loan of approximately $23.5 million. The Company leased
buildings from one of the limited partnerships, and the second limited
partnership owned unencumbered land adjacent to the leased property. The Company
repaid the secured construction loan in May 1994.
In October 1994, the Company acquired all third-party interests in a
third real estate partnership in which it was a 49% limited partner for
approximately $5.9 million in cash. The partnership owns
35
38
land and buildings which are leased to the Company and were subject to a secured
note in the amount of approximately $23.7 million which the Company repaid in
October 1995.
In connection with the acquisition of the partnerships, net assets
acquired were as follows (in thousands):
Property and other assets $ 66,030
Liabilities assumed (47,423)
Less: Cash acquired (3,983)
--------
Net cash paid $ 14,624
========
COMDISCO SYSTEMS, INC.
In June 1993, the Company acquired the business and certain assets of
Comdisco Systems, Inc. ("Comdisco"), a subsidiary of Comdisco, Inc., in exchange
for approximately 1.6 million shares of the Company's common stock and a warrant
to purchase approximately 1.9 million shares of the Company's common stock
valued in total at $10.9 million. 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 information has not been presented as the results of
operations of Comdisco are not material to the Company's consolidated financial
statements. The acquisition costs include amounts paid for the net tangible
assets of Comdisco and purchased software and other intangibles. The cost in
excess of net assets acquired was $6.5 million which is being amortized over
seven years and is included in purchased software and intangibles in the
accompanying balance sheets.
In connection with the acquisition, net assets acquired were as follows
(in thousands):
Trade accounts receivable 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 in exchange for capital stock $10,903
=======
UNUSUAL ITEMS
Unusual items included within operating expenses are described below.
No unusual items were recorded during 1995.
1994 1993 1992 1991
---- ---- ---- ----
(In thousands)
Write-off of in-process research and development $ 4,653 $ -- $ -- $ --
Provision for settlement of ligation 10,054 -- -- --
Loss (income) from operations of disposed division -- 6,200 (253) 5,335
Restructuring costs -- 13,450 -- 49,901
------- ------- ---- -------
Total unusual items $14,707 $19,650 $(253) $55,236
======= ======= ===== =======
PROVISION FOR SETTLEMENT OF LITIGATION
In April 1994, the Company entered into agreements to settle two class
action lawsuits for a combined settlement of $16.5 million, of which
approximately $7.5 million was covered by the Company's insurance carriers.
Reflected in the Company's operating expenses is the net settlement cost of
approximately $9.0 million plus approximately $1.0 million for related legal
costs.
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39
LOSS (INCOME) FROM OPERATIONS OF DISPOSED DIVISION
In December 1993, the Company sold its Automated Systems ("ASI")
division. ASI was sold for a nominal amount of cash and future royalties. During
1994, ASI filed for Chapter 11 bankruptcy and in 1995, the royalty terms were
renegotiated. However, it is unknown if the Company will ultimately receive any
such royalties.
In light of the nominal proceeds received, the sale of ASI resulted in
a loss on disposal of approximately $6.0 million. The loss was due principally
to the loss on the sale of the net operating assets, as well as amounts accrued
for estimated costs to be incurred in connection with the disposal. As of
December 30, 1995 and December 31, 1994, respectively, the Company had recorded
approximately $.9 million and $.9 million in accrued liabilities and
approximately $1.0 million and $1.1 million in other long-term liabilities for
liabilities associated with the disposed division.
The Company had previously reported the operating results of ASI as a
discontinued operation in the statement of income. In connection with the filing
of a registration statement on Form S-3 to register common stock issued to the
stockholders of Comdisco and Redwood, the Securities and Exchange Commission
reviewed the Company's 1993 financial statements and requested that the results
of operations and the loss on disposal of ASI be reclassified as components of
continuing operations since ASI was not deemed a major line of business. As a
result, the Company has classified the respective income and loss from
operations of the disposed division as unusual items within operations in the
accompanying statements of income. The loss of $6.0 million on disposal of the
division is classified in other income (expense) in the accompanying 1993
statement of income. Revenue from this division was approximately $11.2 million
for the year ending December 31, 1993.
RESTRUCTURING COSTS
In March 1993, the Company recorded restructuring costs of
approximately $13.5 million associated with a planned restructure of certain
areas of sales, operations and administration due to business conditions. The
restructuring charge included approximately $4.5 million for employee
terminations. The Company terminated approximately 270 employees at an actual
total cost of approximately $4.6 million. In addition, the restructuring charge
included approximately $3.5 million for excess facilities and approximately $2.1
million for the write-off of purchased software and intangibles arising from
required adjustments to the Company's cost structure necessitated by lower
revenue levels. Substantially all of the excess facilities accrual was utilized
by December 31, 1993. The restructuring charge also included an additional
provision for doubtful accounts of approximately $3.0 million, which was
utilized by December 31, 1993 and write-off of certain software development
costs of $.4 million resulting from changes in the systems product strategy.
NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consisted of the following:
1995 1994
---- ----
(In thousands)
Capital lease obligations $3,116 $ 4,840
Secured mortgage (Paid in full in October 1995) -- 23,670
------ -------
Total 3,116 28,510
Less: Current portion 1,497 26,412
------ -------
Long-term debt $1,619 $ 2,098
====== =======
37
40
LEASES
Equipment and facilities are leased under various capital and operating
leases expiring on different dates through the year 2008. Certain of these
leases contain renewal options. Rental expense was approximately $10.7 million,
$19.0 million and $20.0 million for 1995, 1994 and 1993, respectively.
In connection with a previous merger, the Company has closed certain
facilities and, accordingly, has accrued for estimated future minimum rent and
maintenance costs related to these facilities. Total costs accrued at December
30, 1995 were $7.9 million of which $2.4 million was included in accrued
liabilities and approximately $5.5 million was included in other long-term
liabilities in the accompanying balance sheet.
At December 30, 1995, future minimum lease payments under capital and
operating leases and the present value of the capital lease payments were as
follows:
Capital Operating
Leases Leases
------- ---------
For the years: (In thousands)
1996 $1,802 $13,235
1997 1,040 12,758
1998 476 7,634
1999 298 3,982
2000 192 2,980
Thereafter -- 4,026
------ -------
Total lease payments 3,808 $44,615
=======
Less: Amount representing interest (Average rate of 8.7%) 692
------
Present value of lease payments 3,116
Less: Current portion 1,497
------
Long-term portion $1,619
======
The cost of equipment under capital leases included in the balance
sheet as property, plant and equipment at December 30, 1995 and December 31,
1994 was approximately $12.6 million and $17.9 million, respectively.
Accumulated amortization of the leased equipment at December 30, 1995 and
December 31, 1994 was approximately $10.1 million and $13.9 million,
respectively.
LINE OF CREDIT
The Company's majority-owned subsidiary, IMS, has a revolving line of
credit with a bank allowing for maximum borrowings of $10.0 million with
interest at the bank's prime rate, interbank offering rates plus 1.25%, or
banker's acceptance plus 1.25%, at the borrower's option. There were no
outstanding borrowings at December 30, 1995 under this agreement. At December
30, 1995, IMS was in full compliance with all covenants and conditions in the
agreement. The line of credit expires April 30, 1997.
COMMITMENTS AND CONTINGENCIES
As part of its overall investment strategy, the Company has committed
to participating in a venture capital partnership as a limited partner. The
Company's total committed investment of at least $25 million will be made over
the next three to four years.
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.
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41
The Company filed a complaint in the United States District Court for
the Northern District of California on December 6, 1995 against Avant!
Corporation (formerly known as ArcSys, Inc., "Avant!") and certain of its
employees for misappropriation of trade secrets, copyright infringement,
conspiracy and other illegalities.
On January 16, 1996, Avant! filed various counterclaims against the
Company and the Company's President and CEO, alleging, inter alia, that the
Company and its President and CEO had cooperated with the Santa Clara County
District Attorney and initiated and pursued its complaint against Avant! for
anti competitive reasons, engaged in wrongful activity in an attempt to
manipulate Avant!'s stock price and utilized certain pricing policies and other
acts to unfairly compete against Avant! in the marketplace. The counterclaim
also alleges that certain unspecified Company insiders engaged in illegal
insider trading with respect to Avant!'s stock. The Company and its President
and CEO believe that each has meritorious defenses to Avant!'s claims, and each
intends to defend such action vigorously.
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.
STOCKHOLDERS' EQUITY
STOCK SPLIT
In October 1995, the Company's Board of Directors effected a
three-for-two stock split payable in the form of a dividend of one additional
share of the Company's common stock for every two shares owned by stockholders.
Par value remained at $0.01 per share. The stock split resulted in the issuance
of approximately 25.2 million additional shares of common stock from authorized
but unissued shares. Accordingly, all share and per share data have been
adjusted to retroactively reflect the stock split.
EMPLOYEE STOCK OPTION PLANS
The Company's Employee Stock Option Plan (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. 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 $5.87 per share, the fair market
value of the common stock on the date of exchange. Under the terms of the new
options, one-third of the shares vest one year from the date of grant and the
remaining shares vest in 24 equal monthly installments. Options to purchase
7,284,039 shares were exchanged.
During 1993, the Company adopted a Non-Statutory Stock Option Plan (the
"Non-Statutory Plan"). Options granted under the Non-Statutory Plan become
exercisable over a four year period, with one-fourth of the shares vesting one
year from the vesting commencement date and the remaining shares vesting in 36
equal monthly installments. The options granted under the Non-Statutory Plan
generally expire ten years from the date of grant.
In 1995, the Company's Board of Directors' authorized an additional 4.5
million shares to be issued under the 1993 Non-Statutory Plan. Since directors
and officers of the Company are not eligible to receive options under the
Non-Statutory Plan, stockholder approval is not required nor will it be sought.
The Company has assumed certain options granted to former employees of
acquired companies ("Acquired Options"). The Acquired Options were assumed by
the Company outside of the Plan, but all are administered as if assumed under
the Plan. All of the Acquired Options have been adjusted to effectuate the
conversion under the terms of the Agreements and Plans of Reorganization between
the Company and the companies acquired. The Acquired Options generally become
exercisable over a four year period and generally expire either five or ten
years from the date of grant. No additional options will be granted under any of
the acquired companies' plans.
39
42
Combined activity with respect to all employee stock option plans was
as follows:
1995 1994 1993
---- ---- ----
Options outstanding at beginning of the year 14,836,524 16,296,483 11,752,427
Granted 4,164,970 3,009,810 14,184,242
Exercised ($.28 per share to $17.54 per share) (4,383,800) (2,286,668) (825,077)
Canceled (1,324,134) (2,183,101) (8,815,109)
------------- ------------- -------------
Options outstanding at end of the year 13,293,560 14,836,524 16,296,483
============= ============= =============
Range of exercise price of outstanding options at end
of the year $.28 - $38.94 $.28 - $18.29 $.28 - $19.17
============= ============= =============
Options exercisable at end of the year 5,861,833 6,680,691 3,669,603
============= ============= =============
Options available for future grant 4,665,241 3,027,885 3,831,959
============= ============= =============
OPTION AGREEMENTS
The Company occasionally has issued options outside of the Plan. As of
December 30, 1995, options to purchase 60,470 shares were outstanding under
these agreements, of which 51,641 were exercisable at prices ranging from $6.21
to $7.83 per share.
DIRECTORS STOCK PLANS
The Company's Board of Directors has adopted the 1988, 1993 and 1995
Directors Stock Option Plans (the "Directors Plans") in the indicated years. The
1995 Directors Plan is subject to stockholder approval, which will be sought at
the 1996 stockholders' meeting. The Company has reserved 1,117,500 shares of
common stock for issuance under these 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 the
date of grant. Options granted under the Directors Plans have a term of up to
ten years. Certain of the option grants vest one year from the date of grant and
certain other option grants vest one-third one year from the date of grant and
two-thirds ratably over the subsequent two years. As of December 30, 1995,
options to purchase 362,500 shares of common stock at $6.21 to $36.44 per share
were outstanding under the Directors Plans, of which options for 166,552 shares
were exercisable at prices ranging from $6.21 to $14.42 per share. Options to
purchase 378,890 shares are available for future grant under the Directors
Plans. Options to purchase 233,610 shares of common stock have been exercised
and 142,500 have expired as of December 30, 1995 under the Directors Plans. No
additional options will be granted under the 1988 Directors Plan.
EMPLOYEE STOCK PURCHASE PLANS
The Company has reserved 4,500,000 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. For 1995, 1994 and 1993, shares issued
under the plan were 663,152, 962,982 and 731,912, respectively.
WARRANT
In connection with the purchase of the business and certain assets of
Comdisco, the Company issued a warrant to purchase 1,950,000 shares of the
Company's common stock at $9.67 per share. During 1995, the Company repurchased
portions of the warrant applicable to 1,770,000 shares for approximately $17.2
million. The warrant for the remaining 180,000 shares 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 the time of issuance at approximately $1.8 million and was
included as part of the total purchase price of Comdisco.
40
43
RESERVED FOR FUTURE ISSUANCE
As of December 30, 1995, the Company has reserved the following shares
of authorized but unissued common stock for future issuance:
Employee stock option plans 17,958,801
Other option agreements 60,470
Directors stock option plans 741,390
Employee stock purchase plan 1,300,229
Put warrants 2,608,126
Comdisco warrant 180,000
----------
Total 22,849,016
==========
STOCKHOLDER RIGHTS PLAN
On February 9, 1996, the Company adopted a new Stockholder Rights Plan
(the "Preferred Rights Plan") to protect stockholders' rights in the event of a
proposed or actual acquisition of 15% or more of the outstanding shares of the
Company's common stock. As part of this plan, each share of the Company's common
stock carries a right to purchase one one-thousandth (1/1000) of a share of
Series A Junior Participating Preferred Stock ("the Right"), par value $.01 per
share of the Company at a price of $240 per one one-thousandth of a share
subject to adjustment. 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. The Rights expire on February 20, 2006.
Concurrent with the adoption of the Preferred Rights Plan, the Board of
Directors amended the Company's 1989 Stockholder Rights Plan to provide for the
expiration of the rights thereunder effective February 9, 1996.
INCOME TAXES
The provision for income taxes consisted of the following components:
1995 1994 1993
---- ---- ----
(In thousands)
Current
Federal $11,954 $ 4,624 $ 730
State 4,095 881 180
Foreign 16,085 8,815 8,939
------- ------- -------
Total current 32,134 14,320 9,849
------- ------- -------
Deferred (prepaid)
Federal 4,989 (1,103) (1,749)
State 201 (384) (1,220)
Foreign 503 (618) (6,880)
------- ------- -------
Total deferred (prepaid) 5,693 (2,105) (9,849)
------- ------- -------
Total provision for income taxes $37,827 $12,215 $ --
======= ======= =======
Income (loss) before income taxes for 1995, 1994 and 1993 included
income of approximately $34.2 million, $19.2 million and $9.2 million,
respectively, from the Company's foreign subsidiaries.
The provision for income taxes is net of the benefit of operating loss
carryforwards totaling $9.7 million, $20.8 million and $2.8 million, for 1995,
1994 and 1993, respectively.
41
44
The provision for income taxes differs from the amount estimated by
applying the statutory federal income tax rate to income (loss) before income
taxes as follows:
1995 1994 1993
---- ---- ----
(In thousands)
Provision (benefit) computed at federal statutory rate $ 47,284 $ 17,074 $(4,473)
State income tax, net of federal tax effect 2,662 572 117
Change in valuation allowance (19,999) (10,457) 7,172
Research and development tax credit (494) (379) (1,270)
Foreign income tax at a higher rate 2,129 -- --
Foreign tax credit (769) (446) (6,958)
Foreign withholding taxes 3,414 3,446 6,958
Amortization of goodwill 390 2,398 372
Other 3,210 7 (1,918)
-------- -------- -------
Provision for income taxes $ 37,827 $ 12,215 $ --
======== ======== =======
Effective tax rate 28% 25% --%
======== ======== =======
The components of deferred tax assets and liabilities consisted of the
following:
1995 1994
---- ----
(In thousands)
Deferred tax assets:
Merger reserves $ 3,394 $ 3,829
Net operating losses 6,202 19,146
Tax credits 32,845 33,910
Other 20,125 14,650
-------- --------
Total deferred tax assets 62,566 71,535
Valuation allowance-provision for income taxes (13,549) (33,548)
Valuation allowance-equity and intangibles (34,223) (19,713)
-------- --------
Net assets 14,794 18,274
-------- --------
Deferred tax liabilities:
Capitalized software (10,091) (11,233)
Other (7,273) (3,970)
-------- --------
Total deferred tax liabilities (17,364) (15,203)
-------- --------
Total net deferred tax (liabilities) assets $ (2,570) $ 3,071
======== ========
The Company has recorded deferred tax assets of $62.6 million offset by
a valuation allowance of $47.8 million. Certain of these deferred tax assets
will affect equity and intangibles and will not be available to offset future
provisions for income taxes and are identified in the above table as "valuation
allowance-equity and intangibles". Realization of the net deferred tax assets of
$14.8 million is dependent on generating sufficient taxable income prior to the
expiration of the loss and tax credit carryforwards. Although realization is not
assured, management believes it is more likely than not that the net deferred
tax assets of $14.8 million will be realized. The amount of the net deferred tax
assets considered realizable, however, could be reduced or increased in the near
term if actual facts, including the estimate of future taxable income, differ
from those estimated.
The net valuation allowance decreased by $5.5 million in 1995. The
increase in valuation allowance-equity and intangibles of $14.5 million is due
to an increase in the tax benefits related to stock option exercises which are
required to be credited to equity in future periods. This increase in the
valuation allowance-equity and intangibles was offset by a decrease in the
valuation allowance-provision for income taxes of $20.0 million due to the
realization of net operating losses and tax credits generated in prior years.
42
45
The remaining net operating loss carryforwards will expire at various
dates from 1997 through 2008 and tax credit carryforwards will expire at various
dates from 1996 through 2010.
The Company's federal income tax returns for 1989 through 1991 have
been examined by the Internal Revenue Service ("IRS"). Tax credits of $15.6
million have been disallowed by the IRS. The Company is contesting these
adjustments and is pursuing administrative remedies. Management believes that
adequate provision has been made for any deficiency that may result from this
examination and that the resolution of this matter will not have a material
adverse impact on the Company's financial position or results of operations.
OPERATIONS BY GEOGRAPHIC AREA
The Company operates primarily in one industry segment; the development
and marketing of computer-aided design software and related services. The
Company's products have been marketed internationally through distributors and
through the Company's subsidiaries in Europe and Asia/Pacific. 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.
1995 1994 1993
---- ---- ----
(In thousands)
Revenue
Domestic operations(1) $ 440,618 $ 344,696 $ 298,366
European operations 97,596 79,404 73,181
Asia/Pacific operations 107,556 86,022 69,320
Eliminations (97,352) (81,050) (72,244)
--------- --------- ---------
Consolidated $ 548,418 $ 429,072 $ 368,623
========= ========= =========
Intercompany revenue (eliminated in consolidation)
Domestic operations $ 58,719 $ 58,837 $ 54,224
European operations 15,893 9,495 9,494
Asia/Pacific operations 22,740 12,718 8,526
--------- --------- ---------
Consolidated $ 97,352 $ 81,050 $ 72,244
========= ========= =========
Income (loss) from operations
Domestic operations $ 85,308 $ 25,763 $ (15,124)
European operations 9,705 7,412 4,107
Asia/Pacific operations 22,847 10,872 2,602
--------- --------- ---------
Consolidated $ 117,860 $ 44,047 $ (8,415)
========= ========= =========
Identifiable assets
Domestic operations $ 396,676 $ 368,226 $ 339,897
European operations 50,303 56,343 50,186
Asia/Pacific operations 63,680 42,095 52,401
Eliminations (136,624) (105,616) (103,183)
--------- --------- ---------
Consolidated $ 374,035 $ 361,048 $ 339,301
========= ========= =========
(1) Domestic operations revenue includes export revenue of approximately $14.7
million, $12.9 million and $10.1 million to Europe for 1995, 1994 and 1993,
respectively, and approximately $90.6 million, $65.4 million and $49.0 million
to Asia/Pacific for 1995, 1994 and 1993, respectively.
43
46
SCHEDULE II
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 30, 1995
Allowance for doubtful accounts $4,905 $4,827 $(2,312)(1) $7,420
Accrued costs for disposed division 874 -- (9)(4) 865
Year Ended December 31, 1994
Allowance for doubtful accounts $3,471 $2,178 $ (744)(1) $4,905
Accrued restructuring costs 3,669 -- (3,669)(2) --
Accrued costs for disposed division 1,373 -- (499)(4) 874
Year Ended December 31, 1993
Allowance for doubtful accounts $3,154 $5,648 $(5,331)(1) $3,471
Accrued restructuring costs 4,658 7,210 (8,199)(2) 3,669
Accrued costs for disposed division -- 3,382 (2,009)(3) 1,373
(1) Uncollectible accounts written-off
(2) Incurred severance and facilities costs relating to the Company's
restructuring and a reclassification of $3,500 in 1993 from accrued
operating lease obligations to lease liabilities.
(3) Reflects a reclassification of $2,009 from accrued liabilities to other
noncurrent liabilities.
(4) Incurred severance and facilities costs relating to the Company's disposal
of a division.
44
47
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
27, 1996.
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
AND DIRECTOR
/s/ Joseph B. Costello March 27, 1996
- -----------------------------------------------------
Joseph B. Costello
CHIEF FINANCIAL OFFICER
/s/ H. Raymond Bingham March 27, 1996
- -----------------------------------------------------
H. Raymond Bingham
CONTROLLER (Chief Accounting Officer)
/s/ William Porter March 27, 1996
- -----------------------------------------------------
William Porter
45
48
ADDITIONAL DIRECTORS
/s/ Carol Bartz March 27, 1996
- -----------------------------------------------------
Carol Bartz
/s/ Henry E. Johnston March 27, 1996
- -----------------------------------------------------
Henry E. Johnston
/s/ Donald L. Lucas March 27, 1996
- -----------------------------------------------------
Donald L. Lucas
/s/ Dr. Leonard Y. W. Liu March 27, 1996
- -----------------------------------------------------
Dr. Leonard Y. W. Liu
/s/ Dr. Alberto Sangiovanni-Vincentelli March 27, 1996
- -----------------------------------------------------
Dr. Alberto Sangiovanni-Vincentelli
/s/ George M. Scalise March 27, 1996
- -----------------------------------------------------
George M. Scalise
/s/ Dr. John B. Shoven March 27, 1996
- -----------------------------------------------------
Dr. John B. Shoven
/s/ James E. Solomon March 27, 1996
- -----------------------------------------------------
James E. Solomon
46
49
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 the 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 the 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 (as incorporated
by reference to Exhibit 3.02 to the 1987 Form S-1 and as amended
by Exhibit 3-b to Form 8-K filed June 12, 1989).
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 Rights Agreement, dated as of February 9, 1996, between the
Company and Harris Trust and Savings Bank which includes as
exhibits thereto the Certificate of Designations for the Series A
Junior Participating Preferred Stock, the form of Right
Certificate and the Summary of Rights to Purchase Preferred
Shares (incorporated by reference to Exhibit 1A, 1B and 1C to
the Registrant's Form 8-K filed February 9, 1996.)
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. 33-53913) filed on May 31,
1994 (the "1994 Form S-8")).*
47
50
EXHIBIT
NUMBER EXHIBIT TITLE LOCATION
------ ------------- --------
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 to the Registrant's 1994 Form S-8 and
the latter two documents are incorporated by reference to
Exhibit 10.08 - 10.10 to the Registrant's 1988 Form S-1).*
10.04 The Registrant's 1993 Directors Stock Option Plan including the
Stock Option Grant (incorporated by reference to Exhibit 10.04
of the 1994 Form S-8).*
10.05 The Registrant's 1995 Directors Stock Option Plan including the Stock Option
Grant. * 51
10.06 The Registrant's 1990 Employee Stock Purchase Plan as amended to
date (incorporated by reference to Exhibit 4.03 of the 1994 Form
S-8).*
10.07 The Registrant's Senior Executive Bonus Plan for 1995
(incorporated by reference to Exhibit 10.08 of the Registrant's
Form 10-K for the fiscal year ended December 31, 1994 (the "1994
Form 10-K")).*
10.08 The Registrant's Senior Executive Bonus Plan for 1996.* 58
10.09 The Registrant's Chief Executive Officer Bonus Plan for 1996.* 59
10.10 The Registrant's Deferred Compensation Plan for 1994 (incorporated by reference
to Exhibit 10.09 to the 1994 Form 10-K).*
10.11 The Registrant's 1996 Deferred Compensation Venture Investment Plan.* 61
10.12 Amended and Restated Lease, dated June 29, 1989, by and between
River Oaks Place Associates ("ROPA"), a California limited
partnership, and the Registrant, for the Registrant's executive
offices at 555 River Oaks Parkway, San Jose, California
(incorporated by reference to Exhibit 10.14 to the Registrant's
Form 10-K for the fiscal year ended December 31, 1990 (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 575 River Oaks Parkway, San
Jose, California (incorporated by reference to Exhibit 10.16 to
the 1990 Form 10-K).
48
51
EXHIBIT
NUMBER EXHIBIT TITLE LOCATION
------ ------------- --------
10.14 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).
10.15 Lease dated September 3, 1985 by and among the Richard T. Peery
and John Arrillaga Separate 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")).
10.16 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).
10.17 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).
10.18 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).
10.19 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).
10.20 Form of Executive Compensation Agreement dated May 1989 between Registrant and
Mr. Costello (incorporated by reference to Exhibit 10.20 to the Registrant's
Form S-4 registration statement (No. 33-31673), originally filed on October 18,
1989).*
10.21 Offer letter to H. Raymond Bingham dated May 12, 1993
(incorporated by reference to Exhibit 10.24 to the Form 10-K for
the fiscal year ended December 31, 1993 (the "1993 Form
10-K")).*
10.22 Offer letter to M. Robert Leach dated May 17, 1993 (incorporated by reference
to Exhibit 10.25 to the 1993 Form 10-K).*
10.23 1993 Non-Statutory Stock Option Plan (incorporated by reference to Exhibit 4.05
to the 1994 Form S-8).*
10.24 Consulting agreement dated May 1, 1994 with Henry E. Johnston,
who was made a director on July 5, 1994 by unanimous written
consent (incorporated by reference to the Registrant's Form 10-Q
for the quarterly period ended June 30, 1994 (the "1994 Second
Quarter Form 10-Q")).*
49
52
EXHIBIT
NUMBER EXHIBIT TITLE LOCATION
------ ------------- --------
10.25 Consulting agreement dated October 26, 1993 with Alberto
Sangiovanni-Vincentelli (incorporated by reference to the 1994 Second Quarter
Form 10-Q).*
10.26 Letter agreement dated August 17, 1994 by and among Registrant,
Morris Management Company (the "General Partner"), and Morris
Associates VI, L.P. ("Morris") whereby Registrant acquired all
of the interests in River Oaks Place Associates, L.P.
(incorporated by reference to the Registrant's Form 8-K filed
November 14, 1994).
10.27 Agreement of Merger and Plan of Reorganization by and among Registrant, Simon
Software, Inc. and Redwood Design Automation, Inc. ("Redwood") dated as of July
8, 1994 (incorporated by reference to the Registrant's Form 10-Q/A, Amendment
Number 1 to the 1994 Second Quarter Form 10-Q, filed November 14, 1994 (the
"1994 Second Quarter 10-Q/A")).
10.28 Agreement of Merger dated as of August 1, 1994 between Redwood
and CDS Corporation (incorporated by reference to the
Registrant's 1994 Second Quarter 10-Q/A).
10.29 Form of Stock Option Agreement for Registrant's 1993 Non
Statutory Stock Option Plan (incorporated by reference to the
Registrant's Form 10-Q for the third quarter ended September 30,
1994).*
10.30 Form of Underwriting Agreement in connection with Integrated Measurement
Systems, Inc. public offering (incorporated by reference to the Registrant's
Form 10-Q for the third quarter ended September 30, 1995).
21.01 Subsidiaries of the Registrant 71
23.01 Consent of Arthur Andersen LLP 72
27.1 Financial data schedule for the period ended December 30, 1995.
- ---------
* A management contract or compensatory plan required to be filed as an
exhibit to Form 10-K.
50