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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 28, 1996
/ / 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 ____________
COMMISSION FILE NUMBER 1-10606
CADENCE DESIGN SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0148231
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(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or No.)
organization)
555 RIVER OAKS PARKWAY, SAN JOSE, CALIFORNIA 95134
(Address of principal executive offices, including Zip Code)
(408) 943-1234
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK $.01 PAR VALUE
PER SHARE NEW YORK STOCK EXCHANGE
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Name of each exchange on which
Title of each class registered
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
/X/ Yes / / No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
Aggregate market value of the voting stock held on March 3, 1997 by
non-affiliates
of the registrant: $2,837,562,594
Number of shares of common stock outstanding at March 3, 1997: 88,596,639
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the Annual Meeting to be held on May 1, 1997
are incorporated by reference into Part III hereof.
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CADENCE DESIGN SYSTEMS, INC.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
---------
PART I.
Item 1. Business..................................................................................... 3
Item 2. Properties................................................................................... 10
Item 3. Legal Proceedings............................................................................ 10
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 11
PART II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.................... 12
Item 6. Selected Financial Data...................................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................................ 12
Item 8. Financial Statements and Supplementary Data.................................................. 21
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................................................... 21
PART III.
Item 10. Directors and Executive Officers of the Registrant........................................... 22
Item 11. Executive Compensation....................................................................... 23
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 23
Item 13. Certain Relationships and Related Transactions............................................... 23
PART IV.
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K............................ 24
Signatures ............................................................................................. 55
2
PART I
ITEM 1. BUSINESS
Cadence Design Systems, Inc. (Cadence or the Company) develops, markets and
supports electronic design automation (EDA) 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. The Company's
products and services are used by companies throughout the world to design and
develop electronic circuits and systems, including semiconductors, computer
systems and peripherals, telecommunications and networking equipment, mobile and
wireless devices, automotive electronics, 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.
In February 1997, Cadence and IMS sold 1.65 million shares of common stock to
the public, of which .95 million were owned by the Company. As a result, the
Company received approximately $18.6 million of proceeds and reduced its
ownership in IMS to approximately 37%. As Cadence was the majority stockholder
with an ownership percentage of approximately 55% as of December 28, 1996, the
consolidated financial statements of the Company for all periods presented
include the accounts of IMS after elimination of inter-company accounts and
transactions and minority interest adjustments. In October 1996, the Company
entered into a merger agreement with Cooper and Chyan Technology, Inc. (CCT), a
company that develops, markets and supports software tools that help designers
route the wires that interconnect the electronic devices on high performance
PCBs and ICs. The acquisition is expected to be accounted for as a
pooling-of-interests. The merger has been approved by CCT's shareholders and is
currently awaiting regulatory approval. On January 3, 1997, each of Cadence and
CCT received a request for additional information from the United States Federal
Trade Commission with respect to their proposed transaction. There can be no
assurance that regulatory approval will be obtained and that the merger will be
consummated. In November 1996, the Company consummated a secondary public
offering whereby 5.75 million shares of common stock were sold, generating
$202.1 million of net proceeds. In December 1996, the Company completed the
acquisition of High Level Design Systems, Inc., (HLDS), a company which
developed, marketed and supported EDA software for the design of high-density,
high performance ICs. 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 million will be completed over the next
two to three years.
THE INTEGRATED CIRCUIT AND ELECTRONIC SYSTEM DESIGN PROCESS
The electrical design process involves describing the architectural,
behavioral, functional and structural attributes of an IC or electronic system.
This process involves describing the product overall system architecture and
then implementing it by creating a design description, simulating the design to
identify electrical defects and refining the description to meet predetermined
design specifications.
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ARCHITECTURAL DEFINITION
Cadence's Alta Business Unit offers a class of software for top-down design
known as electronic systems design automation (ESDA). The Company's ESDA
products are designed to allow customers to include product concepts in the EDA
environment, accelerating and enhancing the early phases of system development.
The Signal Processing Workbench (SPW-Registered Trademark-) tool set provides
customers with a higher level of design automation for a number of application
areas including wireless communications, networking and multi-media. The Signal
Processing Workbench includes a large applications library of design blocks, a
complete technology base and a visualization and analysis environment. Once the
design is conceptualized, the Signal Processing Workbench provides links to
implementation which include multiple capabilities that allow the design to be
passed downstream to ASIC and IC engineers.
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, which 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.
IMPLEMENTATION -- THE DESIGN DESCRIPTION
The first step in the implementation process is creation of the design
description. To handle the complexity of large designs, engineers use a variety
of techniques, including block diagrams, equations or special design description
languages referred to as hardware description languages (HDLs).
For digital designs, the most common HDLs are Verilog-Registered Trademark-
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 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 called Verilog-A-TM-
in 1994, and in June of 1996 it became an official Open Verilog International
(OVI) standard.
STRUCTURAL DESIGN & SIMULATION
Before an IC or PCB can be manufactured, high level design descriptions must
be detailed into a structural design, in which the engineer specifically defines
components, their interconnections and associated physical properties.
Structural designs may be created manually or generated using an automated
process called logic synthesis. In structural design, critical design time can
be saved by selecting components from an electronic library and including them
in the design, rather than recreating symbols and data for each design. A
database containing the design electrical characteristics, interconnections and
specific design rules is automatically created and used as the foundation for
subsequent design steps.
Electronics designers use simulation throughout the electrical design
process to identify design errors before the design is manufactured. In
addition, simulation enables electronics designers to quickly explore design
alternatives, and 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.
PHYSICAL DESIGN AND VERIFICATION
When the design is determined to be functionally correct, the designer
generates a non-graphical description called a netlist that details the design
components and interconnections. This netlist becomes the blueprint for physical
design. Next, the physical design team determines the layout and associated
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interconnection of the components on the target substrate that will yield the
optimum combination of performance, area and cost. Once this process is
completed, physical verification tools are used to provide a final check of the
design implementation before products are released to manufacturing. Accuracy in
this process is essential to avoiding costly production runs of faulty parts.
EDA TOOLS
The Company's EDA tools are used by customers to analyze, simulate,
implement and verify electronic designs. In addition, the Company's tools let
design architects and engineers build abstract models of chips, simulate their
behavior, and analyze their physical attributes for acceptable performance. The
resulting productivity and accuracy improvements over earlier generation
approaches to IC design enable customers to develop increasingly complex,
high-quality electronic products with accelerated time to market schedules.
CAE PRODUCTS
Cadence is a leader in the computer aided engineering (CAE) market primarily
based on its strong market presence in logic simulation. Cadence's Verilog HDL
logic simulator, VerilogXL-TM-, is used by numerous ASIC vendors and supports
over 185 ASIC libraries.
Cadence also offers a broad 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 enables designers to make
critical tradeoffs between area, power and performance to optimize their design
based on specific design requirements. With the advent of deep submicron
technology, successful completion of complex designs will require companies to
adopt new methodologies and utilize innovative design automation tools. Success
will be predicated on introducing physical design knowledge into the logic
design process to ensure that the resulting silicon will meet specifications.
The adoption of design planning tools will become increasingly important for
electronics designers because such tools provide the necessary bridge between
the logic and physical domains. An advanced high level design planning
environment allows engineers to accurately predict physical effects that are
used to provide guidelines for logic optimization and final implementation.
IC DESIGN PRODUCTS
The Company's custom layout portfolio is anchored by the
Virtuoso-Registered Trademark- 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 FastChip-TM-, which provides
the ability to rapidly create cells and blocks for applications including random
logic, standard cell blocks and library elements, reducing overall design time.
In addition, FastChip allows chip designers to perform extensive "what-if"
analysis with design variables like placement and aspect ratios that have
significant bearing on performance.
The Ensemble-TM- product family provides advanced place and route (P&R)
solutions for gate, cell, block and mixed designs including: Gate Ensemble-TM-
for gate array design, Cell Ensemble-Registered Trademark- , which is finely
tuned for two layer metal designs and Cell3 Ensemble-Registered Trademark-,
which is based on advanced routing algorithms for three layer metal and above
designs. Silicon Ensemble-TM-, which is based on Cadence's proprietary area-
based architecture and was introduced in early 1996, provides a broad solution
for routing designs that consist of a mix of cell and gate-based approaches. In
addition, Silicon Ensemble includes several specialized routing engines to deal
with specific design challenges like datapath, complex clock trees, crosstalk
and power.
Cadence's product lines for automated and interactive physical verification
are anchored by the Dracula-Registered Trademark- and Diva-TM- products,
respectively. Physical verification provides the final check before products are
released to manufacturing. In 1995, Cadence introduced Vampire-TM-, which
provides advanced hierarchical design capability necessary to successfully
verify large scale chips.
5
The Analog Artist-TM- series provides a broad 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
SpectreHDL-TM-, 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 SpectreRF-TM-, simulation technology
utilized specifically for the design of radio frequency applications.
Additionally, Cadence now offers IC design products previously marketed by
HLDS. These design planning products include Top-Down DP-TM-, which has been
released for limited customer use, for hardware description language designers
in the functional design phase; Logic DP-TM-, for application by gate level
designers in the logic implementation phase; and Physical DP-TM-, for
application by layout engineers in the physical implementation and verification
phase.
HLDS also offered an EDA infrastructure product now offered by Cadence on
which newly defined deep submicron (ICs with feature size below 0.35 micron)
design methodologies can be implemented. HLDS' infrastructure product, called
Pillar-TM-, provides computer aided design (CAD) developers who are responsible
for implementing deep submicron methodologies with a database, graphical user
interface, applications programming interfaces and a software development
environment.
HLDS also offered two other standalone EDA tools now offered by Cadence to
solve specific deep submicron design problems: HyperExtract-TM- and Fasnet-TM-
Delay Calculator. These tools complement the design planning products and may be
integrated with the Pillar infrastructure product.
SYSTEM DESIGN PRODUCTS
The Allegro-TM- product line offers broad solutions for layout of standard
PCB, hybrid (MCM) Allegro-TM- and advanced component packaging. In addition, the
Company offers thermal, signal integrity,
reliability and electromagnetic analysis tools for detecting potential
manufacturing problems. In 1995, the Company introduced BoardQuest-TM-, which is
specifically tailored for the needs of high-speed designers, offering advanced
system planning to accurately predict thermal, interconnect and electromagnetic
effects early in the design process. For analog system and board level design,
Cadence's Analog Workbench-TM- offers tools from top-down design through board
design.
SERVICES
Cadence offers services ranging from advanced tools training and methodology
assessment to joint design work with customers or even complete outsourcing of
its customer's design work where Cadence is responsible for the entire product
design from start to finish. In addition, the Company believes that customer
support is a key factor in successfully marketing EDA products and generating
repeat orders. The Company's product maintenance contracts entitle the customers
to product updates, documentation and ongoing support.
The Company is pursuing a strategy of combining a broad suite of design
tools with world-class support, design and process services to enable its
customers to accelerate their product development efforts, improve their design
productivity and successfully cope with the increasing complexity of IC and
electronic system design. The design process is becoming more complicated as
customers are seeking to create higher performance products, lower development
costs, improve time to market and migrate their design and manufacturing efforts
to utilize deep submicron technologies. As a consequence, the Company believes
that its solutions-oriented approach to providing both EDA tools and services
will enable customers to more effectively respond to demanding market
requirements.
Cadence offers a range of design development and support to its customers,
from remodeling the customer's design factory (i.e. re-engineering the product
design process) to leasing out Cadence's Design Factory(SM), which includes
everything from assistance with specific designs to a complete outsourcing of a
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particular design operation. The Company 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 services offerings include 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 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 February 28, 1997, Cadence had 1,784 employees engaged in field sales
and sales support, representing approximately 56% 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 or longer being typical. Activities during this
sales cycle typically consist of technical presentations, product
demonstrations, 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 1996, 1995 and 1994, Innotech
accounted for 14%, 15% and 10% of total revenue, respectively. Cadence's systems
products and services are marketed in Japan through a majority-owned subsidiary.
Revenue from international sources was $350.2 million, $271.8 million and
$221.5 million, or approximately 47%, 50% and 52% of total revenue for 1996,
1995 and 1994, respectively. (See Notes to Consolidated Financial Statements for
a summary of operations by geographic area.) Prices for international customers
are quoted from a local currency international price list. The list is prepared
based on the U.S. dollar price list but reflects the higher cost of doing
business outside the United States. International customers are invoiced in the
local currency or U.S. dollars using current exchange rates.
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 1996, 1995 and 1994, respectively, Cadence's investment in
research and development was $128.9 million, $100.4 million and $88.2 million
prior to capitalizing $13.6 million, $11.8 million and
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$10.8 million of software development costs. 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 1997 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, high-performance logic verification
technology and hardware/software co-design.
CUSTOMER ALLIANCES
Cadence has established close working relationships with a number of
semiconductor manufacturers and electronic system companies based on a business
alliances model. 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 alliances 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 Laboratories, is
committed to new technological development. This group, located in Berkeley,
California and in Rome, Italy, is chartered with identifying and developing
prototype technologies in emerging design areas which will offer substantially
improved alternatives to current EDA solutions.
COMPETITION
The Company operates in the highly competitive EDA industry, which continues
to be characterized by falling prices, 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 competes with other companies,
including Avant! Corporation, Mentor Graphics Corp., Synopsys, Inc., Viewlogic
Systems, Inc. and Zuken-Redac, that sell one or more competing products and with
actual and potential customers' internal EDA software development and design
services groups as well. 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 the Company's actual and potential competitors is significant. A
potential competitor who possesses the necessary knowledge of electronic circuit
and systems design, production and operation could develop competitive EDA tools
using a moderately priced computer workstation and bring such tools to market
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quickly. There can be no assurance that development of competitive products will
not result in a shift of customer preferences away from the Company's products,
resulting in a significant decrease in the sales of the Company's comparable
products.
Intense competition in the EDA industry has lowered product prices. In the
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. In 1996 Cadence introduced platinum status
relationships with its Connections Program to jointly deliver, with its platinum
partners, integrated design flows. In addition, Cadence is a founding member of
the Virtual Socket Interface Alliance, an open membership organization that is
developing open specifications to facilitate the development of next generation
"system-on-a-chip" solutions.
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 usually can be expanded to include additional Cadence tools
or third-party tools.
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.
Cadence relies principally 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. In appropriate circumstances,
Cadence 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 trade secret
laws and other traditional intellectual property protection mechanisms. In 1996,
Cadence was granted 9 new patents for a total of 25 issuances and was allowed 8
additional patents. In 1996, Cadence filed in excess of 15 new trademark
applications. In addition, Cadence has also sought federal copyright protection
for certain of its products. Cadence does not believe that any of its technology
infringes that of others nor does Cadence believe that any of its trademarks
infringe the marks of others.
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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 licensed 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 February 28, 1997, Cadence employed 3,190 persons, including 1,942 in
sales, marketing, support and manufacturing activities, 1,000 in product
development and 248 in management, administration and finance. None of Cadence's
employees is 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 510,000.
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 $5.6 million. The leases related to
approximately 129,000 square feet expire in March 1998, and the remaining lease
expires in June 1997. Approximately 198,000 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
$8.7 million. Cadence also leases approximately 100,000 square feet of
facilities in Chelmsford, Massachusetts for its east coast operations and
approximately 85,000 square feet in Sunnyvale, California for its Alta
operations at a combined annual rate of approximately $ 1.6 million.
Cadence also leases approximately 70,000 square feet in a building in
Beaverton, Oregon, at a current annual rental of approximately $.8 million,
which houses manufacturing, engineering, marketing and administrative operations
for IMS 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.
ITEM 3. LEGAL PROCEEDINGS
From time to time 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, licensing, contract law,
distribution arrangements, 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
(a company formed by a merger of companies formerly known as ArcSys, Inc. and
ISS, Inc. (Avant!)) and certain of its employees for misappropriation of trade
secrets, copyright infringement, conspiracy and other illegalities.
10
On January 16, 1996, Avant! filed various counterclaims against the Company
and the Company's President and CEO, and on April 12, 1996, Avant! filed a First
Amended Counterclaim. The amended counterclaim alleges, 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 amended
counterclaim also alleges that certain Company insiders engaged in illegal
insider trading with respect to Avant!'s stock. The Company and its President
and CEO continue to believe that each has meritorious defenses to Avant!'s
amended counterclaims, and each intends to defend such action vigorously. By an
order dated July 13, 1996, the court bifurcated Avant!'s counterclaim from the
Company's complaint.
On April 19, 1996, the company filed a motion seeking a preliminary
injunction to prevent further use of Cadence copyrighted code and trade secrets
by Avant!. By order of March 18, 1997, the Court granted in part and denied in
part that motion. The Court has not yet set a trial date. The Company intends to
pursue its claims vigorously.
Management believes that the ultimate resolution of the disputes and
litigation matters discussed above will not have a material adverse effect on
the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
11
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 28, 1996, the Company had approximately 1,644 stockholders of record,
not including those held in street or nominee name.
The following table sets forth the high and low sales price for the Common
Stock for each calendar quarter in the two-year period ended December 28, 1996.
HIGH LOW
--------- ---------
1995: First Quarter......................................................................... $ 12.39 $ 8.55
Second Quarter........................................................................ 15.50 11.28
Third Quarter......................................................................... 18.55 13.78
Fourth Quarter........................................................................ 28.25 16.05
1996: First Quarter......................................................................... $ 30.33 $ 23.00
Second Quarter........................................................................ 43.75 29.67
Third Quarter......................................................................... 37.88 23.00
Fourth Quarter........................................................................ 41.38 32.63
ITEM 6. SELECTED FINANCIAL DATA
Five fiscal years ended December 28, 1996
(In thousands, except per share amounts)
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
Revenue.............................................. $ 741,459 $ 548,418 $ 429,072 $ 368,623 $ 418,724
Unusual items (1).................................... $ 100,543 $ -- $ 14,707 $ 19,650 $ (253)
Income (loss) from operations........................ $ 91,259 $ 117,860 $ 44,047 $ (8,415) $ 65,710
Net income (loss) (2)................................ $ 29,038 $ 97,270 $ 36,648 $ (12,779) $ 55,360
Net income (loss) per share.......................... $ .32 $ 1.05 $ .37 $ (.13) $ .53
Total assets......................................... $ 717,001 $ 374,035 $ 361,048 $ 339,301 $ 367,243
Long-term obligations................................ $ 20,292 $ 1,619 $ 2,098 $ 4,001 $ 5,722
(1) See Notes to Consolidated Financial Statements for further discussion.
(2) Net income (loss) 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.
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 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
12
help optimize its customers' product development processes. The Company's
products and services are used by companies throughout the world to design and
develop electronic circuits and systems, including semiconductors, computer
systems and peripherals, telecommunications and networking equipment, mobile and
wireless devices, automotive electronics, consumer products and other advanced
electronics.
In December 1996, the Company completed the acquisition of High Level Design
Systems, Inc. (HLDS), a company which developed, marketed and supported EDA
software for the design of high-density, high performance ICs. The acquisition
was accounted for as a purchase and, accordingly, the results of HLDS 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
charge to operations of $95.7 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.
In November 1996, the Company consummated a secondary public offering
whereby 5.75 million shares of common stock were sold generating $202.1 million
of net proceeds.
In October 1996, the Company entered into a merger agreement with Cooper and
Chyan Technology, Inc. (CCT). CCT develops, markets and supports software tools
that help designers route the wires that interconnect the electronic devices on
high performance printed circuit boards (PCBs) and ICs. The acquisition is
expected to be accounted for as a pooling of interests. The merger has been
approved by CCT's shareholders and is currently awaiting regulatory approval.
There can be no assurance that regulatory approval will be obtained and that the
merger will be consummated.
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 remained the majority stockholder as of December 28, 1996, 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 February 1997, the Company
and IMS sold 1.7 million shares of common stock to the public of which .95
million were owned by the Company. As a result, the Company received
approximately $18.6 million and reduced its ownership in IMS to approximately
37%.
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.
13
RESULTS OF OPERATIONS
REVENUE
% CHANGE
--------------------
1996 1995 1994 96/95 95/94
--------- --------- --------- --------- ---------
(In millions)
Product............................................................. $ 414.1 $ 292.2 $ 241.5 42% 21%
Services............................................................ 114.6 65.9 28.4 74% 132%
Maintenance......................................................... 212.8 190.3 159.2 12% 20%
--------- --------- ---------
Total revenue..................................................... $ 741.5 $ 548.4 $ 429.1 35% 28%
--------- --------- ---------
--------- --------- ---------
Sources of Revenue as a Percent of Total Revenue
Product............................................................. 56% 53% 56%
Services............................................................ 15% 12% 7%
Maintenance......................................................... 29% 35% 37%
In 1996, strong demand for the Company's products and services generated a
35% increase in revenues as compared to the prior year.
The increases in product revenue in 1996 when compared with 1995 and in 1995
when compared with 1994 were primarily the result of increased demand for the
Company's products which enable customers to meet complex design challenges,
including deep submicron IC design. The 1996 increase was attributed to
increased sales volume of its automatic place and route, physical layout and
verification, and timing-driven design process tools. Also, demand increased for
Electronic Systems Design Automation (ESDA) products, produced by the Company's
Alta Group, which are designed to allow customers to include product concepts in
the EDA environment by accelerating and enhancing the early phases of system
development. The increase in product revenue in 1995 was exemplified by
increased sales volume of its IC, automated test equipment (ATE) hardware
business, top-down design and Alta Group's systems design products.
The increases in services revenue in 1996 and 1995 were the result of
significant demand for the Company's Spectrum Services offerings, which provide
a range of solutions to address the product development needs of its customers.
The 1995 increase in services 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 March
1995 for a total contract value of at least $75 million. The decreased services
revenue growth rate in 1996, as compared to 1995, was due to a small services
revenue base in 1994.
The increase in maintenance revenue was attributable to an increase in the
Company's installed base of products. The decreased maintenance revenue growth
rate in 1996, as compared to 1995, was due to customers renewing maintenance
contracts at a slower rate in 1996 as compared with 1995.
Revenue from international sources was approximately $350.2 million, $271.8
million and $221.5 million, or 47%, 50% and 52% of total revenue for 1996, 1995
and 1994, respectively. In 1996, domestic and international revenue increased
41% and 29%, respectively, following increases of 33% and 23% in 1995. The
increase in total revenue from international sources in 1996, as compared to
1995, was primarily attributable to product revenue growth and new Spectrum
Services contracts in all regions. The higher percentage increase in domestic
revenue in 1996, as compared to international revenue, was primarily
attributable to an increase in domestic services revenue in 1996 as compared to
1995. The increase in international revenue in 1996, as compared to 1995, more
than offset the negative impact of $31.4 million on revenue as the result of the
weakening of certain foreign currencies, primarily the Japanese yen, in relation
to the U.S. dollar.
14
COST OF REVENUE
% CHANGE
--------------------
1996 1995 1994 96/95 95/94
--------- --------- --------- --------- ---------
(In millions)
Product................................................................ $ 48.4 $ 44.8 $ 52.9 8% (15)%
Services............................................................... $ 81.0 $ 55.0 $ 22.6 47% 143%
Maintenance............................................................ $ 24.1 $ 16.7 $ 14.3 44% 17%
Cost of Revenue as a Percent of Related Revenue
Product................................................................ 12% 15% 22%
Services............................................................... 71% 83% 80%
Maintenance............................................................ 11% 9% 9%
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 increase in cost of product in
absolute dollars in 1996, as compared to 1995, was primarily due to the
increased cost of revenue associated with its ATE products resulting from higher
product demand, as well as increased purchased software amortization and the
write-off of $1.6 million of capitalized software development costs related to
products at the end of their life cycle. The decrease in cost of product as a
percentage of product revenue in 1996, as compared to 1995, was primarily due to
revenues growing at a faster rate than costs. 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 a reduction in printing and manufacturing costs 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 services 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 services
professionals. Cost of services increased in total dollars in both 1996 and 1995
due to increased services revenue and the continued development of this line of
business. The increase in cost of services from 1994 to 1995 was primarily due
to additional costs associated with the transfer to the Company of former
employees of Unisys pursuant to the outsourcing agreement signed in March 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 focused on serving the needs of Unisys, the
design and services resources acquired by the Company are also being used to
support other customers' design needs. The improvement in services gross margins
to 29% in 1996, as compared to 17% in 1995, was due to increased operating
efficiencies attained within existing services offerings. Continued investment
in developing new services offerings and the cost of integrating new services
professionals performing a growing number of services offerings will continue to
put pressure on services 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 total dollars and as a
percentage of maintenance revenue from 1995 to 1996 was principally due to
additional on-site support costs necessary to support a larger installed base.
15
OPERATING EXPENSES
% CHANGE
--------------------
1996 1995 1994 96/95 95/94
--------- --------- --------- --------- ---------
(In millions)
Marketing and sales.................................................. $ 226.5 $ 185.0 $ 163.4 22% 13%
Research and development............................................. $ 115.3 $ 88.6 $ 77.4 30% 14%
General and administrative........................................... $ 54.4 $ 40.4 $ 39.7 34% 2%
Expenses as a Percent of Total Revenue
Marketing and sales.................................................. 31% 34% 38%
Research and development............................................. 16% 16% 18%
General and administrative........................................... 7% 7% 9%
MARKETING AND SALES
The increase in marketing and sales for 1996, as compared to 1995, was
primarily the result of an increase of $26.6 million in employee related
expenses attributable to increased headcount including commissions, recruiting
and relocations, as well as increases in pre-sales activities and advertising.
This increase was partially offset by the weakening of certain foreign
currencies, primarily the Japanese yen, in relation to the U.S. dollar which
favorably impacted marketing and sales expenses by approximately $5.6 million in
1996, as compared to the prior year. 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.
RESEARCH AND DEVELOPMENT
The Company's investment in research and development, prior to the reduction
for capitalization of software development costs, was $128.9 million, $100.4
million and $88.2 million for 1996, 1995 and 1994, respectively, representing
17%, 18% and 21% of total revenue. The expense increases for 1996, as compared
to 1995, were primarily attributable to higher salary-related costs due to
increased headcount of $15.6 million, higher consulting and other outside
service costs of $6.0 million, and higher recruiting, computer maintenance and
facilities costs. 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 Company capitalized
approximately $13.6 million, $11.8 million and $10.8 million of software
development costs in the years 1996, 1995 and 1994, respectively, which
represented approximately 11%, 12% and 12% of total research and development
expenditures made in those years. The amount of capitalized software development
costs in any given period may vary depending on the exact nature of the
development performed.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased in 1996, as compared to 1995,
primarily as a result of higher legal costs of $5.9 million, higher management
information and telecommunication costs of $2.2 million and higher outside
service costs of $1.0 million. The decrease in general and administrative costs
as a percentage of revenue from 1994 to 1995 was primarily attributable to
revenue growing at a faster rate than costs. The increase in absolute costs of
$.7 million in 1995, as compared to 1994, 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.
16
OTHER ITEMS
1996 1995 1994
--------- --------- ---------
(In millions)
Unusual items.......................................................................... $ 100.5 $ -- $ 14.7
Other income (expense)................................................................. $ (.8) $ 17.2 $ 4.8
UNUSUAL ITEMS
The unusual items in 1996 and in 1994 included costs of $95.7 million and
$4.7 million related to the 1996 fourth quarter write-off and the 1994 third
quarter write-off of in-process research and development costs associated with
the HLDS acquisition and the Redwood acquisition, respectively, as the acquired
in-process research and development had not reached technological feasibility
and, in management's opinion, had no probable alternative future use. Included
in 1996 unusual items was $2.7 million of capitalized software development costs
for products developed by the Company which were replaced by HLDS products, as
well as $2.1 million of restructuring charges consisting of employee termination
costs associated with the outsourcing of the Company's management information
technology services and costs associated with excess facilities. Included in the
1994 unusual items was a $10 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 $9.0 million plus
$1.0 million for related legal costs.
OTHER INCOME AND EXPENSE
Interest income was $4.4 million, $4.9 million and $3.3 million for 1996,
1995 and 1994, respectively. The decrease in 1996, as compared to 1995, was
primarily attributable to prevailing interest rates being lower in 1996 as
compared to 1995. This decrease was partially offset by the increased interest
earned in the fourth quarter of 1996 as a result of the net proceeds received in
a secondary offering of the Company's common stock in the latter part of the
quarter. The increase in 1995 was primarily due to increased earnings on cash
investments resulting from higher interest rates during 1995 than during 1994.
Interest expense was $1.9 million, $2.2 million and $1.0 million for 1996, 1995
and 1994, respectively. The decrease in interest expense in 1996, as compared to
1995, was attributable to a larger notes payable balance being maintained during
a majority of 1995 as compared to 1996. The increase in interest expense in
1995, as compared to 1994, 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.
INCOME TAXES
1996 1995 1994
--------- --------- ---------
(In millions)
Provision for income taxes............................................................... $ 61.4 $ 37.8 $ 12.2
Effective tax rate....................................................................... 68% 28% 25%
As of December 28, 1996, the Company had gross deferred tax assets of
approximately $48.0 million against which the Company had recorded a valuation
allowance of $10.8 million, resulting in net deferred tax assets of $37.2
million. A significant portion of the net operating loss and credit
carryforwards which
17
created the deferred tax assets was generated by acquired companies prior to
their mergers with the Company and by restructuring charges recorded as a result
of these mergers. Approximately $9.0 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 $37.2
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 $37.2 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 1996 tax rate without the fourth quarter write-off of $95.7 million of
in-process research and development costs associated with the HLDS acquisition
(which is not deductible for tax purposes) was 33%. The increase in the 1996 tax
rate, as compared to the 1995 tax rate, excluding this fourth quarter write-off,
was primarily due to an increase in state income taxes and a smaller reduction
in the valuation allowance. The increase in the 1995 tax rate, as compared to
the 1994 tax rate, was attributable to an increase in foreign earnings which
were 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 Company
anticipates that its effective tax rate will remain at 33% in 1997.
LIQUIDITY AND CAPITAL RESOURCES
At December 28, 1996, the Company's principal sources of liquidity consisted
of $285.5 million of cash and short-term investments as compared with $96.6
million and $96.9 million at December 30, 1995 and December 31, 1994,
respectively, and a three-year, $120 million secured revolving line of credit
agreement. As of December 28, 1996, the Company had no borrowings under the
revolving line of credit.
Cash generated from operating activities decreased $21.8 million to $175.3
million for the year ended December 28, 1996, as compared to the year ended
December 30, 1995. The decrease was primarily due to increases in accounts
receivable, prepaid expenses and other, and lower deferred income taxes,
partially offset by an increase in net income prior to the write-off of
in-process research and development, an increase in accrued liabilities and
payables, and higher deferred revenue. Cash generated from operating activities
increased $42.7 million in the year ended December 30, 1995, as compared to the
year ended December 31, 1994, primarily due to higher net income and increases
in accrued liabilities and payables, and deferred revenue, partially offset by
increases in accounts receivable and prepaid expenses.
At December 28, 1996, the Company had net working capital of $259.6 million
compared with $6.5 million at December 30, 1995. The primary reasons for the
increase were net proceeds from the Company's secondary public offering of
$202.1 million, increases in accounts receivable of $59.9 million and in prepaid
expenses and other current assets of $35.5 million, partly offset by an increase
in deferred revenue of $14.7 million and an increase in accounts payable and
accrued liabilities of $24.2 million. The increase in accounts receivable was
attributable to increased billing activity late in the year. The increase in
deferred revenue was attributable to increased maintenance renewals and an
increase in deferred product revenue. The increase in accounts payable and
accrued liabilities was primarily attributable to payments expected to be made
in early 1997, including bonus and commissions payments, sales taxes and
issuances of stock under the Company's Employee Stock Purchase Plan (ESPP).
In addition to its short-term investments, the Company's primary investing
activities were purchases of property and equipment, purchases of software and
intangibles and the capitalization of software development costs, which combined
represented $96.4 million and $45.6 million of cash used for investing
activities in the years ended December 28, 1996 and December 30, 1995,
respectively.
Since 1994, as part of its authorized stock repurchase program, the Company
has sold put warrants and purchased call options through private placements. The
Company had a maximum potential obligation related to the put warrants at
December 28, 1996 to buy back 1.9 million shares of its common stock at an
18
aggregate price of approximately $66.6 million. The put warrants will expire in
March 1997 through September 1997. The Company has 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.
In connection with and prior to the consummation of the CCT merger, the
Company will rescind its stock repurchase program, with the exception of
continued systematic stock repurchases under its seasoned stock repurchase
program for the Company's ESPP. Such repurchases are intended to cover the
Company's expected re-issuances under the ESPP for the next 12 months.
Anticipated cash requirements for 1997 include the purchase of treasury
stock through the exercise of call options for the Company's seasoned systematic
stock repurchase program and the contemplated additions of property, plant and
equipment of approximately $60 million.
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 $25.0 million will be made over
the next two to three years. As of December 28, 1996, the Company had
contributed approximately $6.5 million, which is reflected in other assets in
the accompanying balance sheet.
The Company anticipates that current cash and short-term investment
balances, cash flows from operations, and the $120 million revolving line of
credit should be sufficient to meet its working capital and capital expenditure
requirements on a short and long-term basis.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Because of rapid technological changes in the EDA industry, the Company's
future revenues will depend on its ability to develop or acquire new products
and enhance its existing products on a timely basis to keep pace with
innovations in technology and to support a range of changing computer software
and hardware platforms and customer preferences. Changes in manufacturing
technology may render the Company's software tools obsolete. Lack of market
acceptance or significant delays in product development could result in a loss
of competitiveness of the Company's products, with a resulting loss of revenues.
The Company has been involved in a number of significant merger and
acquisition transactions. These transactions have been motivated by many
factors, including the desire to obtain new technologies, the desire to expand
and enhance the Company's product lines and the desire to attract key personnel.
Growth through acquisition has several identifiable risks, including risks
related to integration of the previously distinct businesses into a single unit,
the substantial management time devoted to such activities, undisclosed
liabilities, the failure to realize anticipated benefits (such as cost savings
and synergies) and issues related to product transition (such as distribution,
engineering, and customer support).
During the fourth quarter of 1996, the Company acquired HLDS and entered
into a merger agreement with CCT (Mergers). Both Mergers have several
identifiable risks, including those described above. To maintain and increase
profitability, the Company, HLDS, and CCT will need to successfully integrate
and streamline overlapping functions. Costs generally associated with this type
of integration that may be incurred by the Company include the write-off of
capitalized software, severance payments, closing of excess facilities, and
disposition of excess equipment. While some of these costs have not been
currently identified, any such costs will have an adverse effect on the
Company's operating results in the periods in which they are incurred. The
Company, HLDS, and CCT each have different systems and procedures in many
operational areas that must be rationalized and integrated. There can be no
assurance that such integration will be accomplished smoothly, expeditiously or
successfully. Failure to effectively accomplish the integration of the
operations of the Company, HLDS and CCT could have a material adverse effect on
Cadence's results of operations and financial condition. Moreover, uncertainty
in the marketplace or customer hesitation relating to the Mergers could
negatively affect the Company's results of operations.
19
Among the conditions that must be fulfilled in order to consummate the CCT
Merger is the expiration or termination of the waiting period applicable to the
CCT Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the HSR Act). The review of the Merger pursuant to the HSR Act may
substantially delay the Company's ability to consummate the Merger. There can be
no assurance that a challenge to the CCT Merger on antitrust grounds will not be
made, or if such a challenge is made, the Company will prevail or would not be
required to terminate the merger agreement, divest certain assets, license
certain proprietary technology or accept certain conditions in order to
consummate the CCT Merger. In addition, the Company has the right to waive the
condition that the CCT Merger be qualified for pooling of interests accounting
treatment. If the CCT Merger is consummated but fails to qualify for pooling of
interests accounting treatment, then the transaction would be accounted for as a
purchase. Accounting for the CCT Merger as a purchase could result in a
significant intangible asset or a significant charge against results of
operations or both, which could materially and adversely affect future results
of operations. There can be no assurance that all of the aforementioned
conditions will be satisfied or waived, and therefore, there can be no assurance
that the CCT Merger will be consummated.
During the first quarter of 1997, the Company completed the reorganization
of its sales force and other operating groups into business units. These
business units (Alta, Deep Submicron, Logic Verification, Full Custom and
Performance Engineering) are focused on delivering solutions to customers for
specific areas of the design process. Short-term customer uncertainty relating
to this reorganization could negatively affect the Company's results of
operations.
The Company's operating expenses are partially based on its expectations
regarding future revenue. The Company's results of operations may be adversely
affected if revenue does not materialize in a quarter as anticipated. Since
expenses 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 which would be attributable to various
factors and could affect quarter to quarter comparisons. The Company's focus on
providing services is relatively recent. The percentage revenue growth from this
source from 1995 to 1996 may not be indicative of future growth.
In addition, a substantial portion of the Company's revenues from services
are earned pursuant to fixed price contracts. Variances in costs associated with
those contracts could have a material adverse effect on the Company's business,
financial condition and results of operations. Although the Company's revenues
are not generally seasonal in nature, the Company has experienced, and may
continue to experience, decreases in first quarter revenue compared with the
preceding fourth quarter, which is believed to result primarily from the capital
purchase cycle of the Company's customers.
The Company is dependent upon the efforts and abilities of its senior
management, its research and development staff and a number of other key
management, sales, support, technical and services personnel. As noted above,
the Company has recently increased its focus on offering professional services
to its customers. To the extent that the Company is not able to attract, retain,
train, and motivate highly skilled employees who are able to provide services
that satisfy customers' expectations, the Company's business and operating
results would be adversely affected.
The Company expects that international revenues will continue to account for
a significant portion of its total revenues. The Company's international
operations involve a number of risks normally associated with such operations,
including, among others, adoption and expansion of government trade
restrictions, volatile foreign exchange rates, currency conversion risks,
limitations on repatriation of earnings, reduced protection of intellectual
property rights, the impact of possible recessionary environments in economies
outside the U.S., longer receivables collection periods and greater difficulty
in accounts receivable collection, difficulties in managing foreign operations,
political and economic instability, unexpected changes in regulatory
requirements and tariffs and other trade barriers. Currency exchange
fluctuations in countries in which the Company conducts business could also
materially adversely affect Cadence's business, financial condition and results
of operations. The Company enters into foreign currency forward
20
contracts to hedge the impact of foreign currency fluctuations. Although 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.
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)
1996 1995
------------------------------------------ ------------------------------------------
4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST
--------- --------- --------- --------- --------- --------- --------- ---------
Revenue....................... $ 212,262 $ 188,741 $ 177,026 $ 163,430 $ 163,756 $ 140,090 $ 128,539 $ 116,033
Cost of revenue............... $ 42,807 $ 39,262 $ 37,765 $ 33,639 $ 31,767 $ 30,349 $ 29,451 $ 24,963
Income (loss) from operations
(1)......................... $ (40,729) $ 49,982 $ 43,433 $ 38,573 $ 42,588 $ 32,666 $ 24,117 $ 18,489
Net income (loss) (2)......... $ (57,816) $ 32,687 $ 28,588 $ 25,579 $ 30,840 $ 35,909 $ 16,971 $ 13,550
Net income (loss) per share... $ (.72) $ .36 $ .31 $ .28 $ .33 $ .39 $ .18 $ .14
(1) Income (loss) from operations for the fourth quarter ended December 28, 1996
included unusual items totaling $100.5 million, of which $95.7 million was
for the write-off of in-process research and development.
(2) Net income (loss) included a $13.6 million after tax gain on the sale of
stock of a subsidiary in third quarter ended September 30, 1995.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 401(a) 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 1, 1997. 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 28, 1996, all
section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were complied with.
The executive officers of Cadence are as follows:
NAME AGE POSITIONS AND OFFICES
- ----------------------------------- --------- ----------------------------------------------------------------------
Joseph B. Costello................. 43 President, Chief Executive Officer and Director
H. Raymond Bingham................. 51 Executive Vice President and Chief Financial Officer
M. Robert Leach.................... 49 Senior Vice President, Services
Darrel A. Mank..................... 49 Senior Vice President, Design Services
K.C. Murphy........................ 42 Senior Vice President, Corporate Strategy
John F. Olsen...................... 45 Senior Vice President, Worldwide Sales
Shane Robison...................... 42 Senior Vice President, Engineering
Timothy Q. Unger................... 42 Senior Vice President, Human Resources
Anthony Zingale.................... 41 Senior Vice President, Worldwide Marketing
R.L. Smith McKeithen............... 52 Vice President, General Counsel and Secretary
Stephen Y. Fong.................... 39 Vice President of Finance and Corporate Treasurer
William Porter..................... 42 Vice President, Corporate Controller and Assistant Secretary
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 Cadence since
May 1988. In addition, Mr. Costello has served as Chief Executive Officer of the
Company since June 1988. Mr. Costello is also a director of Racotek, Inc.
H. RAYMOND BINGHAM joined Cadence in June 1993 as Executive Vice President
and Chief Financial Officer. Prior to joining the Company, he was Executive Vice
President and Chief Financial Officer 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
Services. Prior to joining the Company, Mr. Leach was partner-in-charge of the
worldwide electronics industry consulting practice for Andersen Consulting for
more than 10 years.
DARREL A. MANK joined Cadence in June 1996 as Senior Vice President, Design
Services. From 1991 through 1996, Mr. Mank served as Vice President and General
Manager of the portable products division of Cirrus Logic, Inc.
22
K.C. MURPHY joined Cadence in April 1996 as Senior Vice President, Corporate
Strategy. Prior to joining the Company, Mr. Murphy worked for 17 years at
Advanced Micro Devices where he held various positions, most recently Vice
President of Strategic Marketing.
JOHN F. OLSEN joined Cadence in May 1994 as Senior Vice President, Field
Operations, and became Senior Vice President, Worldwide Sales, in April 1996.
Prior to joining the Company, Mr. Olsen served as a partner for KPMG Peat
Marwick for five years.
SHANE V. ROBISON joined Cadence in July 1995 as Senior Vice President,
Engineering. Prior to joining the Company, Mr. Robison served as Vice President
and General Manager of Apple Computer's Personal Interactive Electronics
Division for more than seven years.
TIMOTHY Q. UNGER joined Cadence in September 1994 as Vice President, Human
Resources, and became Senior Vice President, Human Resources in January 1996.
From 1988 through 1994, Mr. Unger was Group Director of Human Resources for
Unisys Corporation.
ANTHONY ZINGALE joined Cadence in April 1989 and currently holds the
position of Senior Vice President, Worldwide Marketing. He previously served the
Company as Vice President and General Manager of the HDL Design Group, Vice
President of Corporate Marketing and Vice President of Marketing for the Systems
Division. Prior to joining the Company, Mr. Zingale was Vice President of
Marketing at EDA Systems, Inc., which was acquired by Digital Equipment
Corporation.
R.L. SMITH MCKEITHEN joined Cadence in June 1996 as Vice President, General
Counsel and Secretary. From 1994 to 1996, he served as Vice President, General
Counsel and Secretary of Strategic Mapping, Inc. From 1988 to 1994, he served as
Vice President, General Counsel and Secretary of Silicon Graphics, 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.
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.
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 1, 1997.
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 1, 1997.
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 1, 1997.
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........................................................ 30
- Consolidated Balance Sheets as of December 28, 1996 and December 30, 1995....................... 31
- Consolidated Statements of Income for the three fiscal years ended December 28,
1996......................................................................................... 32
- Consolidated Statements of Stockholders Equity for the three fiscal years ended
December 28, 1996............................................................................ 33
- Consolidated Statements of Cash Flows for the three fiscal years ended December 28,
1996......................................................................................... 34
- Notes to Consolidated Financial Statements...................................................... 35
(a)2. Financial Statement Schedules
II. Valuation and Qualifying Accounts and Reserves................................................ 54
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
24
The following exhibits are filed herewith:
EXHIBIT
NUMBER EXHIBIT TITLE
- --------- --------------------------------------------------------------------------------------------------------
2.03 Agreement and Plan of Merger and Reorganization dated as of October 28, 1996, among the Registrant,
Cooper & Chyan Technology, Inc. (CCT) and Wyoming Acquisition Sub, Inc. (incorporated by reference to
Registrant's Current Report on Form 8-K filed on November 7, 1996 (the November 7, 1996 8-K)).
2.04 Form of Certificate of Merger to be entered into by Registrant and CCT (incorporated by reference to
Exhibit 2.2 to the Registrant's Form S-4 Registration Statement No. 333-16779 filed on November 26, 1996
(the November 26, 1996 Form S-4))
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 (the 1989 Form 8-K)).
(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).
(g) The Registrant's Amendment of Certificate of Incorporation to increase the number of authorized
shares of common stock dated February 1997.
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 the 1989 Form 8-K).
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 Registrant 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.)
25
EXHIBIT
NUMBER EXHIBIT TITLE
- --------- --------------------------------------------------------------------------------------------------------
9.05 Form of Voting Agreement, dated as of October 28, 1996, between the Registrant and each of John F.
Cooper, David Chyan, William J. Portelli, Robert D. Selvi and John R. Harding (incorporated by reference
to Exhibit 99.3 to the November 7, 1996 Form 8-K).
10.01 Employment Agreement, dated as of October 28, 1996, between the Registrant and David Chyan (incorporated
by reference to Exhibit 99.5 to the November 7, 1996 Form 8-K).
10.02 The Registrant's 1987 Stock Option Plan, as amended on February 5, 1997.
10.03 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).*
10.04 The Registrant's 1988 Directors Stock Option Plan, as amended to date, including the Stock Option Grant
and Form of 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).*
10.05 The Registrant's 1993 Directors Stock Option Plan including the Form of Stock Option Grant (incorporated
by reference to Exhibit 10.04 of the 1994 Form S-8).*
10.06 The Registrant's 1995 Directors Stock Option Plan including the Form of Stock Option Grant.
(incorporated by reference to Exhibit 10.05 to the 1995 Form 10-K).
10.07 The Registrant's 1990 Employee Stock Purchase Plan as amended on March 4, 1997.
10.08 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)).*
10.09 The Registrant's Senior Executive Bonus Plan for 1996 (incorporated by reference to Exhibit 10.08 to the
1995 Form 10-K).
10.10 The Registrant's Chief Executive Officer Bonus Plan for 1996 (incorporated by reference to Exhibit 10.09
to the 1995 Form 10-K).
10.11 The Registrant's Deferred Compensation Plan for 1994 (incorporated by reference to Exhibit 10.09 to the
1994 Form 10-K).*
10.12 The Registrant's 1996 Deferred Compensation Venture Investment Plan (incorporated by reference to
Exhibit 10.11 to the 1995 Form 10-K).
10.13 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)).
10.14 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).
10.15 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).
26
EXHIBIT
NUMBER EXHIBIT TITLE
- --------- --------------------------------------------------------------------------------------------------------
10.16 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)).
10.17 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).
10.18 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).
10.19 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).
10.20 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).
10.21 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).*
10.22 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)).*
10.23 Offer letter to M. Robert Leach dated May 17, 1993 (incorporated by reference to Exhibit 10.25 to the
1993 Form 10-K).*
10.24 1993 Non-Statutory Stock Option Plan (incorporated by reference to Exhibit 4.05 to the 1994 Form S-8).*
10.25 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)).*
10.26 Consulting agreement dated October 26, 1993 with Alberto Sangiovanni-Vincentelli (incorporated by
reference to the 1994 Second Quarter Form 10-Q).*
10.27 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).
10.28 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)).
10.29 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).
27
EXHIBIT
NUMBER EXHIBIT TITLE
- --------- --------------------------------------------------------------------------------------------------------
10.30 The Registrant's amended and restated 401 (k) Plan (incorporated by reference to the Registrant's Form
10-Q for the first quarter ended March 30, 1996 (the March 30, 1996 10-Q)).
10.31 Amendment dated May 3, 1996 (incorporated by reference to the Registrant's Form 10-Q for the first
quarter ended March 30, 1996) to 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).
10.32 Revolving line of credit dated April 1996, by and between Credit Lyonnais and the Registrant
(incorporated by reference to the March 30, 1996 10-Q).
10.33 Term loan dated May 31, 1996, by and between Credit Lyonnais and River Oaks Place Associates L.P.
(ROPA), a California limited partnership (the Term Loan) (incorporated by reference to the Registrant's
Form 10-Q for the second quarter ended June 29, 1996 (the June 29, 1996 10-Q)).
10.34 Deed of Trust, Security Agreement, Assignment of Leases and Rents, Fixture Filing and Financing
Statement dated May 31, 1996, Schedule to Term Loan (incorporated by reference to the June 29, 1996
10-Q)
10.35 Assignment of Leases and Rents dated May 31, 1996, Schedule to Term Loan (incorporated by reference to
the June 29, 1996 10-Q).
10.36 Assignment of Partnership Interests by Seeley Properties, Inc. dated May 31, 1996, Schedule to Term Loan
(incorporated by reference to the June 29, 1996 10-Q).
10.37 Assignment of Partnership Interests by the Registrant dated May 31, 1996, Schedule to Term Loan
(incorporated by reference to the June 29, 1996 10-Q).
10.38 Environmental Indemnity dated May 31, 1996, Schedule to Term Loan (incorporated by reference to the June
29, 1996 10-Q).
10.39 Amendment dated August 2, 1996 (incorporated by reference to the June 29, 1996 10-Q), to Registrant's
1987 Stock Option Plan filed on May 31, 1994 (incorporated by reference to Exhibit 4.01 to the
Registrant's Form S-8 Registration Statement (No. 33-53913) filed on May 31, 1994).
10.40 Amendment dated August 2, 1996 (incorporated by reference to the June 29, 1996 10-Q), to Registrant's
1993 Non Statutory Stock Option Plan (incorporated by reference to the 1994 Third Quarter 10-Q).
10.41 Amendment Number 1, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form 10-Q), to
Lease Agreement for the Registrant's executive offices at 555 River Oaks Parkway, San Jose, California,
by and between ROPA and the Registrant (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)).
10.42 Amendment Number 2, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form 10-Q), to
Lease Agreement for the Registrant's executive offices at 555 River Oaks Parkway, San Jose, California,
by and between ROPA and the Registrant (incorporated by reference to Exhibit 10.14 to the 1990 Form
10-K).
10.43 Amendment Number 1, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form 10-Q), to
Lease Agreement for the Registrant's offices at 575 River Oaks Parkway, San Jose, California, by and
between ROPA and the Registrant (incorporated by reference to Exhibit 10.16 to the 1990 Form 10-K).
28
EXHIBIT
NUMBER EXHIBIT TITLE
- --------- --------------------------------------------------------------------------------------------------------
10.44 Amendment Number 2, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form 10-Q), to
Lease Agreement for the Registrant's offices at 575 River Oaks Parkway, San Jose, California, by and
between ROPA and the Registrant (incorporated by reference to Exhibit 10.16 to the 1990 Form 10-K).
10.45 Amendment Number 1, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form 10-Q), to
Lease Agreement for the Registrant's offices at 535 and 545 River Oaks Parkway, San Jose, California, by
and between ROPA and the Registrant (incorporated by reference to Exhibit 10.17 to the 1990 Form 10-K).
10.46 Amendment Number 2, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form 10-Q), to
Lease Agreement for the Registrant's offices at 535 and 545 River Oaks Parkway, San Jose, California, by
and between ROPA and the Registrant (incorporated by reference to Exhibit 10.17 to the 1990 Form 10-K).
10.47 Agreement and Plan of Merger and Reorganization dated as of October 3, 1996, among the Registrant, High
Level Design Systems, Inc. (HLDS) and Harbor Acquisition Sub, Inc. (incorporated by reference to the
November 7, 1996 8-K).
21.01 Subsidiaries of the Registrant.
23.01 Consent of Arthur Andersen LLP
27.1 Financial data schedule for the period ended December 28, 1996.
- ------------------------
* A management contract or compensatory plan required to be filed as an
exhibit to Form 10-K.
(b) Reports on Form 8-K
On November 7, 1996, the Registrant filed a current report on Form 8-K,
announcing the execution of an Agreement and Plan of Merger and
Reorganization with High Level Design Systems, Inc. on October 3, 1996, and
the execution of an Agreement and Plan of Merger and Reorganization with
Cooper & Chyan Technology, Inc. on October 28, 1996.
On December 31, 1996, Registrant filed a current Report on Form 8-K,
reporting that the Company had completed its acquisition of High Level
Design Systems, Inc.
On January 13, 1997, Registrant filed a Current Report on Form 8-K,
reporting that it has received requests for additional information from the
United States Federal Trade Commission with respect to its proposed merger
with Cooper & Chyan Technology, Inc.
(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.
29
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 28, 1996
and December 30, 1995, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 28, 1996. 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 28, 1996 and December 30, 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 28, 1996, 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 17, 1997
30
CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 28, 1996 AND DECEMBER 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1995
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash investments............................................................. $ 284,512 $ 84,867
Short-term investments................................................................ 1,015 11,774
Accounts receivable, less allowances of $8,772 in 1996 and $7,420 in 1995............. 148,449 88,503
Inventories........................................................................... 8,133 8,203
Prepaid expenses and other............................................................ 49,026 13,576
----------- -----------
Total current assets................................................................ 491,135 206,923
Property, Plant and Equipment, net...................................................... 160,927 124,103
Software Development Costs, net......................................................... 21,295 25,793
Purchased Software and Intangibles, net................................................. 10,267 8,268
Other Assets............................................................................ 33,377 8,948
----------- -----------
Total assets........................................................................ $ 717,001 $ 374,035
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable and current portion of long-term debt................................... $ 3,349 $ 1,497
Accounts payable and accrued liabilities.............................................. 116,174 91,999
Income taxes payable.................................................................. 4,901 14,524
Deferred revenue...................................................................... 107,154 92,407
----------- -----------
Total current liabilities........................................................... 231,578 200,427
----------- -----------
LONG-TERM LIABILITIES
Long-term debt........................................................................ 20,292 1,619
Deferred income taxes................................................................. -- 7,307
Minority interest liability........................................................... 15,205 12,167
Other long-term liabilities........................................................... 22,378 18,434
----------- -----------
Total long-term liabilities......................................................... 57,875 39,527
----------- -----------
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: 118,084 shares in 1996 and 113,794 shares in 1995
Outstanding: 86,611 shares in 1996 and 78,564 shares in 1995........................ 603,430 299,544
Treasury stock at cost (31,473 shares in 1996 and 35,230 shares in 1995).............. (325,637) (290,884)
Retained earnings..................................................................... 151,596 124,471
Accumulated translation adjustment.................................................... (1,841) 950
----------- -----------
Total stockholders' equity.......................................................... 427,548 134,081
----------- -----------
Total liabilities and stockholders' equity.......................................... $ 717,001 $ 374,035
----------- -----------
----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
31
CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE FISCAL YEARS ENDED DECEMBER 28, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1995 1994
---------- ---------- ----------
REVENUE
Product.................................................................... $ 414,029 $ 292,198 $ 241,545
Services................................................................... 114,620 65,860 28,365
Maintenance................................................................ 212,810 190,360 159,162
---------- ---------- ----------
Total revenue............................................................ 741,459 548,418 429,072
---------- ---------- ----------
COSTS AND EXPENSES
Cost of product............................................................ 48,383 44,793 52,897
Cost of services........................................................... 80,963 54,988 22,590
Cost of maintenance........................................................ 24,127 16,749 14,313
Marketing and sales........................................................ 226,496 185,025 163,408
Research and development................................................... 115,301 88,566 77,381
General and administrative................................................. 54,387 40,437 39,729
Unusual items.............................................................. 100,543 -- 14,707
---------- ---------- ----------
Total costs and expenses................................................. 650,200 430,558 385,025
---------- ---------- ----------
Income from operations....................................................... 91,259 117,860 44,047
Other income (expense), net.................................................. (782) 17,237 4,816
---------- ---------- ----------
Income before provision for income taxes..................................... 90,477 135,097 48,863
Provision for income taxes................................................... 61,439 37,827 12,215
---------- ---------- ----------
Net income................................................................... $ 29,038 $ 97,270 $ 36,648
---------- ---------- ----------
---------- ---------- ----------
Net income per share......................................................... $ .32 $ 1.05 $ .37
---------- ---------- ----------
---------- ---------- ----------
Weighted average common and common equivalent shares outstanding............. 91,590 92,948 98,805
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
32
CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE FISCAL YEARS ENDED DECEMBER 28, 1996
(IN THOUSANDS)
COMMON STOCK
------------------------
PAR VALUE AND TREASURY STOCK ACCUMULATED
CAPITAL IN ---------------------- RETAINED TRANSLATION
SHARES EXCESS OF PAR SHARES AMOUNT EARNINGS ADJUSTMENT
--------- ------------- --------- ----------- ---------- ------------
BALANCE, DECEMBER 31, 1993........... 103,588 $ 250,961 (10,929) $ (52,178) $ 8,527 $ (1,188)
Purchase of treasury stock........... -- -- (13,441) (95,119) -- --
Issuance of common stock............. 3,498 13,516 1,444 7,231 (1,165) --
Tax benefits from employee stock
transactions....................... -- 626 -- -- -- --
Treasury stock issued in connection
with acquisitions.................. -- 70 1,131 6,338 (633) --
Translation adjustment............... -- -- -- -- -- 2,429
Net income........................... -- -- -- -- 36,648 --
--------- ------------- --------- ----------- ---------- ------------
BALANCE, DECEMBER 31, 1994........... 107,086 265,173 (21,795) (133,728) 43,377 1,241
Purchase of treasury stock........... -- -- (14,430) (163,928) -- --
Issuance of common stock............. 6,708 26,984 995 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........... 113,794 299,544 (35,230) (290,884) 124,471 950
Purchase of treasury stock........... -- -- (5,157) (124,204) -- --
Issuance of common stock............. 4,290 30,498 602 5,401 (3) --
Tax benefits from employee stock
transactions....................... -- 58,418 -- -- -- --
Purchase of warrant.................. -- (2,437) -- -- (1,910) --
Treasury stock issued in connection
with an acquisition................ -- 73,492 2,562 25,906 -- --
Shares issued in secondary offering,
net of expenses.................... -- 143,915 5,750 58,144 -- --
Translation adjustment............... -- -- -- -- -- (2,791)
Net income........................... -- -- -- -- 29,038 --
--------- ------------- --------- ----------- ---------- ------------
BALANCE, DECEMBER 28, 1996........... 118,084 $ 603,430 (31,473) $ (325,637) $ 151,596 $ (1,841)
--------- ------------- --------- ----------- ---------- ------------
--------- ------------- --------- ----------- ---------- ------------
The accompanying notes are an integral part of these consolidated financial
statements.
33
CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE FISCAL YEARS ENDED DECEMBER 28, 1996
(IN THOUSANDS)
1996 1995 1994
---------- ---------- ----------
CASH AND CASH INVESTMENTS AT BEGINNING OF YEAR................................ $ 84,867 $ 75,011 $ 61,382
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................................. 29,038 97,270 36,648
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................. 51,742 46,019 44,257
Gain on sale of stock of subsidiary....................................... -- (18,873) --
Deferred income taxes..................................................... (15,943) 5,693 (2,105)
Write-off of in-process research and development.......................... 95,700 -- 4,653
Write-off of software development costs and costs related to
restructure............................................................. 4,843 -- --
Increase in other long-term liabilities and minority interest expense..... 5,992 3,135 3,985
Write-offs of equipment and other long-term assets........................ 1,719 2,281 1,229
Provisions for doubtful accounts and inventory write-offs................. 2,672 5,821 3,334
Changes in current assets and liabilities, net of effect of acquired
businesses:
Accounts receivable..................................................... (59,736) (13,760) 22,413
Inventories............................................................. (981) (4,059) (592)
Prepaid expenses and other.............................................. (33,091) (2,132) 7,871
Accrued liabilities and payables........................................ 78,836 44,439 10,612
Deferred revenue........................................................ 14,521 31,262 22,133
---------- ---------- ----------
Net cash provided by operating activities............................. 175,312 197,096 154,438
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities of short-term investments...................................... 18,618 43,296 69,796
Purchases of short-term investments....................................... (7,859) (33,205) (60,238)
Purchases of property, plant and equipment................................ (62,089) (28,338) (15,196)
Capitalization of software development costs.............................. (13,560) (11,845) (10,790)
Change in purchased software and intangibles and other assets............. (20,797) (5,454) 1,129
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...................................................... 13,870 1,304 10,321
Purchase of call options.................................................. (13,870) (1,304) (10,321)
---------- ---------- ----------
Net cash used for investing activities................................ (85,687) (5,626) (31,778)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes payable and long-term debt.................... (2,676) (26,542) (29,209)
Net proceeds from issuance of long-term debt.............................. 19,763 -- --
Sale of common stock...................................................... 226,749 26,500 13,516
Purchases of treasury stock............................................... (124,204) (163,928) (95,119)
Purchase of warrant....................................................... (4,347) (17,188) --
---------- ---------- ----------
Net cash provided by (used for) financing activities.................. 115,285 (181,158) (110,812)
---------- ---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH....................................... (5,265) (456) 1,781
---------- ---------- ----------
INCREASE IN CASH AND CASH INVESTMENTS......................................... 199,645 9,856 13,629
---------- ---------- ----------
CASH AND CASH INVESTMENTS AT END OF YEAR...................................... $ 284,512 $ 84,867 $ 75,011
---------- ---------- ----------
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................................................ $ 2,185 $ 2,423 $ 915
---------- ---------- ----------
---------- ---------- ----------
Income taxes (including foreign withholding tax)........................ $ 24,349 $ 12,968 $ 6,885
---------- ---------- ----------
---------- ---------- ----------
Non-cash investing and financing activities:
Capital lease obligations incurred for equipment........................ $ 3,070 $ 1,149 $ 1,466
---------- ---------- ----------
---------- ---------- ----------
Common and treasury stock issued under the Employee
Stock Purchase Plan and for an acquisition.............................. $ 110,607 $ 6,522 $ 6,066
---------- ---------- ----------
---------- ---------- ----------
Tax benefits from employee stock transactions............................. $ 58,418 $ 8,463 $ 626
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
34
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 1996
THE COMPANY
Cadence Design Systems, Inc. (the Company) develops, markets and supports
electronic design automation software tools 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 products and services
are used by companies throughout the world to design and develop electronic
circuits and systems, including semiconductors, computer systems and
peripherals, telecommunications and networking equipment, mobile and wireless
devices, automotive electronics, consumer products and other advanced
electronics.
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.
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.
The Company's fiscal year end is the Saturday closest to December 31.
Certain prior year financial statement balances have been reclassified to
conform to the 1996 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.
Services 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. Services 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.
35
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 28, 1996
In 1996, 1995 and 1994, one customer (a distributor), which also holds a
minority interest in a subsidiary of the Company, accounted for 14%, 15% and 10%
of total revenue, respectively. Outstanding trade accounts receivable from this
related party were approximately $3.4 million and $5.4 million at December 28,
1996 and December 30, 1995, respectively.
SOFTWARE DEVELOPMENT COSTS, 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 including, 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 services 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 $22.5 million,
$19.7 million and $20.2 million for 1996, 1995 and 1994, respectively. The
Company wrote off approximately $4.3 million of capitalized software development
costs related to products at the end of their life cycle in 1996, of which $2.7
million related to products that were replaced (or discontinued) as a result of
the High Level Design Systems, Inc. (HLDS) acquisition, and wrote off $.8
million of purchased software in 1995 for projects discontinued during that
year.
NET INCOME 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. Fully diluted net
income per share is substantially the same as primary net income per share.
CASH, CASH INVESTMENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid debt instruments, including
commercial paper, Euro time deposits, repurchase agreements, and certificates of
deposit with an original maturity of ninety days or less to be cash investments.
36
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 28, 1996
Debt instruments included in cash investments consisted of the following:
1996 1995
---------- ---------
(IN THOUSANDS)
Commercial paper............................................. $ 112,965 $ --
Certificates of deposit...................................... 4,221 --
Corporate debt securities.................................... -- 2,063
Euro time deposits........................................... 20,000 --
Repurchase agreements........................................ 19,803 6,034
U.S. Government notes........................................ -- 4,450
---------- ---------
$ 156,989 $ 12,547
---------- ---------
---------- ---------
The Company classifies its short-term investments in debt securities as
"held-to-maturity". Accordingly, these investments, which mature through June
1997, 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 28, 1996 and December 30, 1995 are not
material. Short-term investments consisted of $1.0 million of corporate debt
securities at December 28, 1996, and $8.8 million of corporate debt securities
and $3.0 million of U.S. Government notes at December 30, 1995.
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.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation and
amortization are provided over the estimated useful lives, by the straight-line
method, as follows: buildings -- 31 years; leasehold and building
improvements -- shorter of the lease term or the estimated useful life;
equipment -- 2-7 years; and furniture and fixtures -- 3-5 years.
FINANCIAL INSTRUMENTS
The Company has a seasoned authorized stock repurchase program under which
it repurchases common stock to satisfy estimated requirements for shares to be
issued under its Employee Stock Purchase Plan (ESPP). Such repurchases are
intended to cover the Company's expected reissuances under the ESPP for the next
12 months. The Company also has an unseasoned systematic repurchase program for
anticipated re-issuances of stock under the Company's stock option plans. In
connection with and prior to the consummation of the merger with Cooper & Chyan
Technology, Inc. (CCT) described below, the Company will rescind its stock
repurchase program, with the exception of continued systematic stock repurchases
under its seasoned stock repurchase program for the Company's ESPP.
Since 1994, as part of its authorized repurchase program, the Company has
sold put warrants through private placements. As of December 28, 1996, there
were outstanding 1.9 million put warrants which entitle the holder to sell one
share of common stock to the Company on a specified date and at a specified
price ranging from $34.92 to $36.11 per share. Additionally, during this same
period, the Company purchased call options that entitle the Company to buy on a
specified date one share of common stock at a specified price. As of December
28, 1996, the Company had 1.4 million outstanding call options at prices
37
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 28, 1996
ranging from $35.17 to $36.36 per share to satisfy anticipated stock repurchase
requirements under the Company's systematic repurchase programs. The put
warrants and call options outstanding at December 28, 1996 are exercisable on
various dates through September 1997. At December 28, 1996, the fair value of
the call options was approximately $9.7 million and the fair value of the put
warrants was approximately $6.3 million. The fair value of put warrants and call
options was estimated by the Company's investment bankers.
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 exercise price of the put warrants 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 28, 1996, 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 28, 1996 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 28, 1996 and December
30, 1995 was negligible. The notional amount of the forward contracts was
approximately $30.1 million at December 28, 1996. These contracts expired on
January 29, 1997.
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.
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.
38
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 28, 1996
OTHER INCOME (EXPENSE)
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
Interest income................................................................. $ 4,362 $ 4,854 $ 3,262
Interest expense................................................................ (1,913) (2,222) (1,045)
Gain on sale of IMS stock....................................................... -- 18,873 --
Gain on sale of investment...................................................... -- -- 4,196
Minority interest............................................................... (3,016) (1,341) (485)
Gain (loss) on foreign exchange................................................. 164 (117) (204)
Other expense, net.............................................................. (379) (2,810) (908)
--------- --------- ---------
Total other income (expense)................................................ $ (782) $ 17,237 $ 4,816
--------- --------- ---------
--------- --------- ---------
39
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 28, 1996
BALANCE SHEET COMPONENTS
1996 1995
---------- ----------
(IN THOUSANDS)
Inventories
Raw materials and supplies.............................................................. $ 3,981 $ 2,335
Work-in-process......................................................................... 3,031 3,825
Finished goods.......................................................................... 1,121 2,043
---------- ----------
Total inventories..................................................................... $ 8,133 $ 8,203
---------- ----------
---------- ----------
Property, Plant and Equipment
Land.................................................................................... $ 38,848 $ 38,848
Buildings............................................................................... 38,613 38,612
Leasehold and building improvements..................................................... 26,091 23,349
Equipment............................................................................... 161,155 108,911
Furniture and fixtures.................................................................. 23,524 19,834
---------- ----------
Total cost............................................................................ 288,231 229,554
Less: Accumulated depreciation and amortization......................................... 127,304 105,451
---------- ----------
Property, plant and equipment, net.................................................... $ 160,927 $ 124,103
---------- ----------
---------- ----------
Software Development Costs
Cost.................................................................................... $ 58,781 $ 47,944
Less: Accumulated amortization.......................................................... 37,486 22,151
---------- ----------
Software development costs, net....................................................... $ 21,295 $ 25,793
---------- ----------
---------- ----------
Purchased Software and Intangibles
Cost.................................................................................... $ 32,226 $ 23,086
Less: Accumulated amortization.......................................................... 21,959 14,818
---------- ----------
Purchased software and intangibles, net............................................... $ 10,267 $ 8,268
---------- ----------
---------- ----------
Accounts Payable and Accrued Liabilities
Payroll and payroll related accruals.................................................... $ 65,424 $ 48,668
Other accrued liabilities............................................................... 34,990 25,739
Accounts payable........................................................................ 15,760 17,592
---------- ----------
Total accounts payable and accrued liabilities........................................ $ 116,174 $ 91,999
---------- ----------
---------- ----------
INTEGRATED MEASUREMENT SYSTEMS, INC.
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
40
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 28, 1996
$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 $13.5 million and $10.6 million related to IMS is recorded
in minority interest liability in the accompanying December 28, 1996 and
December 30, 1995 balance sheets, respectively.
In January 1997, IMS filed a registration statement with the Securities and
Exchange Commission with the intent to sell 1.7 million shares to the public of
which .9 million are owned by the Company. The sale will result in the Company
reducing its ownership in IMS to approximately 37%.
ACQUISITIONS
HIGH LEVEL DESIGN SYSTEMS, INC.
In December 1996, the Company acquired all of the outstanding stock of High
Level Design Systems, Inc. (HLDS) for approximately 2.6 million shares of the
Company's common stock. The total purchase price was approximately $101.4
million. HLDS developed, marketed and supported electronic design automation
software for the design of high-density, high-performance integrated circuits.
The acquisition was accounted for as a purchase and, accordingly, the results of
HLDS from the date of acquisition forward have been recorded in the Company's
consolidated financial statements. In connection with the acquisition, net
intangibles of $99.6 million were acquired, of which $95.7 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 1996 statement of income as an unusual item within
operating expenses. The remaining intangible of $3.9 million, consisting of
goodwill, is included in purchased software and intangibles in the accompanying
balance sheets and is being amortized over its estimated useful life of five
years.
In connection with the acquisition, net assets acquired were as follows (in
thousands):
Trade accounts receivable and other current assets........ $ 1,840
Intangibles, including in-process research and
development............................................. 99,594
Property, equipment and other long-term assets............ 5,945
Current liabilities assumed............................... (5,680)
Long-term liabilities assumed............................. (300)
---------
Net assets acquired................................... $ 101,399
---------
---------
The following unaudited pro forma information shows the results of
operations for the two fiscal years ended December 28, 1996 as if the HLDS
acquisition had occurred at the beginning of each period presented and at the
purchase price established in December 1996. 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 1996 combine the
Company's results for the year ended December 28, 1996 with the results of HLDS
for the period from January 1, 1996 through the date of acquisition and includes
the $95.7 million write-off
41
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 28, 1996
discussed above. The following unaudited pro forma results include the
straight-line amortization of intangibles over a period of five years.
1996 1995
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Revenue..................................................... $ 751,453 $ 558,545
Net income.................................................. $ 24,924 $ 94,819
Net income per share........................................ $ .26 $ .99
Weighted average common and common equivalent shares
outstanding............................................... 94,309 95,667
REDWOOD DESIGN AUTOMATION, INC.
In August 1994, the Company acquired the business and certain assets of
Redwood Design Automation, Inc. (Redwood) for approximately .9 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 were included in purchased software and intangibles.
These amounts were fully amortized as of December 28, 1996 after 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 year ended December 31, 1994 as if the Redwood acquisition
had occurred at the beginning of the 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
the period or of future operations of the combined companies. The pro forma
results combine the Company's results for the year ended December 31, 1994 with
the results of Redwood for the period from January 1, 1994 through the
42
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 28, 1996
date of acquisition. The following unaudited pro forma results include the
straight-line amortization of intangibles over a period of two years (in
thousands, except per share amount).
Revenue................................................... $ 429,658
Net income................................................ $ 33,531
Net income per share...................................... $ .34
Weighted average common and common equivalent shares
outstanding............................................. 99,471
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 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
----------
----------
UNUSUAL ITEMS
Unusual items included within operating expenses are described below. No
unusual items were recorded during 1995.
1996 1994 1993 1992
---------- --------- --------- ---------
(IN THOUSANDS)
Write-off of in-process research and development....................... $ 95,700 $ 4,653 $ -- $ --
Write-off of capitalized software development costs for
products replaced by HLDS products................................... 2,724 -- -- --
Restructuring costs.................................................... 2,119 -- 13,450 --
Provision for settlement of litigation................................. -- 10,054 -- --
(Income) loss from operations of disposed division..................... -- -- 6,200 (253)
---------- --------- --------- ---------
Total unusual items.................................................. $ 100,543 $ 14,707 $ 19,650 $ (253)
---------- --------- --------- ---------
---------- --------- --------- ---------
The unusual items in 1996 and in 1994 included costs of $95.7 million and
$4.7 million related to the 1996 fourth quarter write-off and the 1994 third
quarter write-off of in-process research and development
43
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 28, 1996
associated with the HLDS acquisition and the Redwood acquisition, respectively.
The acquired in-process research and development had not reached technological
feasibility and, in management's opinion, had no probable alternative future
use. Also included in 1996 unusual items were $2.7 million of capitalized
software development costs for products developed by the Company which were
replaced by HLDS products in connection with the acquisition of HLDS. The 1996
restructuring costs of $2.1 million include employee termination costs
associated with the outsourcing of the Company's management information
technology services, as well as costs associated with excess facilities.
Included in the 1994 unusual items was an approximately $10 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.
In December 1993, the Company sold its Automated Systems (ASI) division for
a nominal amount of cash and future royalties. During 1996, ASI filed for
bankruptcy and 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. Loss on operations of ASI totalled $6.2 million in 1993.
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.
LINE OF CREDIT AND NOTE PAYABLE
In April 1996, the Company entered into a senior secured revolving credit
facility (the Facility) which allows the Company to borrow up to $120 million
through April 1999. The Facility is secured by the majority of the Company's
property, plant and equipment, cash, investments, intangibles, and certain other
assets. The Company has the option to pay interest based upon the London
Interbank Offered Rate (LIBOR) plus 1.5%, or the higher of the federal funds
effective rate plus .5% or prime. The Company must comply with certain financial
covenants and conditions as defined in the Facility which the Company was in
compliance with at December 28, 1996. As of December 28, 1996, the Company had
no outstanding borrowings under the Facility. The Facility has scheduled
mandatory reductions.
In May 1996, the Company's wholly owned real estate partnership, River Oaks
Place Associates L.P. (the Partnership), entered into a $20 million long-term
financing arrangement (the ROPA Loan) with a bank. The financing agreement
expires on December 31, 2005, and requires quarterly principal payments, which
began on September 30, 1996, in amounts ranging from $.4 million to $.7 million.
The Partnership has the option to pay interest at the LIBOR plus 1.5% or the
higher of the bank's prime rate plus .5% or
44
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 28, 1996
the Federal Funds rate plus 1.5%. The ROPA Loan is secured by the real and
personal properties of the Partnership. In connection with the ROPA Loan
agreement, the Company extended its lease agreements with the Partnership until
December 31, 2005 and minimum lease payments under the agreements have been
assigned as security under the ROPA Loan agreement.
NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consisted of the following:
1996 1995
--------- ---------
(IN THOUSANDS)
Capital lease obligations...................................... $ 4,016 $ 3,116
Note payable (ROPA Loan)....................................... 19,625 --
--------- ---------
Total........................................................ 23,641 3,116
Less: Current portion.......................................... 3,349 1,497
--------- ---------
Long-term debt............................................... $ 20,292 $ 1,619
--------- ---------
--------- ---------
The note payable will be repaid as follows (in millions): $1.6 in 1997 and
1998, $1.4 in 1999, $1.7 in 2000, $1.9 in 2001, and $11.4 thereafter.
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 $12.3 million,
$10.7 million and $19.0 million for 1996, 1995 and 1994, 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
28, 1996 were $5.7 million of which $2.3 million was included in accrued
liabilities and $3.4 million was included in other long-term liabilities in the
accompanying balance sheet.
45
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 28, 1996
At December 28, 1996, 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
--------- -----------
(IN THOUSANDS)
For the years:
1997......................................................... $ 2,038 $ 11,043
1998......................................................... 1,394 8,814
1999......................................................... 782 6,238
2000......................................................... 302 4,570
2001......................................................... 53 3,165
Thereafter..................................................... -- 1,641
--------- -----------
Total lease payments........................................... $ 4,569 $ 35,471
-----------
-----------
Less: Amount representing interest (Average rate of 7.5%)...... 553
---------
Present value of lease payments................................ 4,016
Less: Current portion.......................................... 1,800
---------
Long-term portion.............................................. $ 2,216
---------
---------
The cost of equipment under capital leases included in the balance sheets as
property, plant and equipment at December 28, 1996 and December 30, 1995 was
approximately $11.0 million and $12.6 million, respectively. Accumulated
amortization of the leased equipment at December 28, 1996 and December 30, 1995
was approximately $8.4 million and $10.1 million, respectively.
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 two to three years. As of December 28, 1996, the Company had
contributed approximately $6.5 million, which is reflected in other assets in
the accompanying balance sheet.
During the fourth quarter of 1996, the Company entered into a merger
agreement with Cooper & Chyan Technology, Inc. (CCT). The transaction will
entail a tax-free, stock-for-stock exchange at a fixed ratio of .85 shares of
the Company's common stock for each share of CCT stock. Based on CCT's 13.1
million shares outstanding on December 31, 1996, the Company expects to issue
approximately 11.1 million shares. In addition, the Company will assume
outstanding stock options of CCT based upon the exchange ratio of .85. The
merger, which is currently awaiting regulatory approval, is expected to be
accounted for as a pooling of interests.
From time to time 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
(a company formed by a merger of companies
46
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 28, 1996
formerly known as ArcSys, Inc. and ISS, 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, and on April 12, 1996, Avant! filed a First
Amended Counterclaim. The amended counterclaim alleges, 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 amended
counterclaim also alleges that certain 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. By an order dated July 13, 1996, the
court bifurcated Avant!'s counter-claim from the Company's complaint.
On April 19, 1996, the Company filed a motion seeking a preliminary
injunction to prevent Avant! from continuing to market ArcCell and ArcCell xo,
two software lines which the Company alleges were misappropriated. A hearing on
the motion was held on September 10, 1996. The Court has not yet issued a
ruling.
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 May 1996 and October 1995, the Company's Board of Directors effected
three-for-two stock splits 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 $.01 per share. The stock split resulted in the issuance
of approximately 25.8 million and 37.8 million additional shares of common stock
from authorized but unissued shares in 1996 and 1995, respectively. Accordingly,
all share and per share data have been adjusted to retroactively reflect the
stock splits.
STOCK COMPENSATION PLANS
FIXED STOCK OPTION PLANS
The Company's Employee Stock Option Plan (the Plan) provides for the
issuance of either incentive or non-qualified options to its employees to
purchase up to 30,685,050 shares of common stock 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.
The Company's Non-Statutory Stock Option Plan (the Non-Statutory Plan)
provides for the issuance of non-qualified options to its employees to purchase
up to 12,375,000 shares of common stock at an exercise price not less than the
fair market value of the stock on the date of grant. 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. Options under the
Non-Statutory Plan generally expire ten years from the date of grant.
47
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 28, 1996
Under the Directors Stock Option Plans (the Directors Plans), the Company
may grant non-qualified options to its non-employee directors for up to
1,676,248 shares of common stock at an exercise price not less than the fair
market value of the 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.
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.
A summary of the status of all of the Company's fixed stock option plans as
of and during the year ended December 28, 1996 is as follows:
1996
-------------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------------ -----------------
Outstanding at beginning of year.................... 20,574,794 $ 8.46
Assumption of HLDS options.......................... 506,110 14.89
Granted............................................. 3,539,798 31.99
Exercised........................................... (4,290,058) 5.53
Forfeited........................................... (841,633) 13.04
Expired............................................. (1,794) 4.27
------------
Outstanding at end of year........................ 19,487,217 $ 6.81
------------
------------
Options exercisable at year end..................... 10,149,039
Options available for future grant.................. 4,977,784
Weighted average fair value of options
granted during the year........................... $11.80
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ---------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
RANGE OF NUMBER AVERAGE AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/28/96 CONTRACTUAL LIFE PRICE AT 12/28/96 PRICE
- ----------------- ------------ ------------------- ------------- ------------ -------------
$.28 - $10.00 10,444,315 8.7 $ 5.11 8,419,146 $ 4.83
$10.01 - $20.00 4,864,326 9.0 15.28 1,520,376 15.14
$20.01 - $30.00 2,261,921 9.1 27.03 168,028 23.87
$30.01 - $40.00 1,895,605 8.9 35.68 41,489 33.41
$40.01 - $46.00 21,050 9.7 40.25 -- --
------------ ------------
19,487,217 10,149,039
------------ ------------
------------ ------------
48
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 28, 1996
Combined activity for the years ended December 30, 1995 and December 31,
1994 was as follows:
1995 1994
-------------- --------------
SHARES SHARES
-------------- --------------
Outstanding at beginning of year.................................................. 22,793,616 25,094,804
Granted........................................................................... 6,483,705 4,604,715
Exercised ($.19 per share to $11.69 per share).................................... (6,708,491) (3,498,376)
Cancelled......................................................................... (1,994,036) (3,407,527)
-------------- --------------
Outstanding at end of year...................................................... 20,574,794 22,793,616
-------------- --------------
-------------- --------------
Range of exercise prices of outstanding options at end of year.................... $ 0.19-$25.96 $ 0.19-$13.28
Options exercisable at year end................................................... 9,120,039 10,293,154
Options available for future grant................................................ 7,566,197 4,648,079
OPTION AGREEMENTS
Prior to 1996, the Company occasionally has issued options outside of the
Plan. As of December 28, 1996, options to purchase 55,705 shares were
outstanding and exercisable at prices ranging from $4.14 to $5.22 per share.
EMPLOYEE STOCK PURCHASE PLAN
Under the 1990 ESPP, the Company is authorized to issue up to 6,750,000
shares of common stock to its employees. Under the terms of the ESPP, employees
can choose each year to have up to 12% of their annual base earnings plus
bonuses withheld to purchase the Company's common stock. The purchase price of
the stock is 85% of the lesser of the fair market value as of the beginning or
the end of the semiannual option periods. Under the ESPP, the Company issued
605,537, 994,728 and 1,444,473 shares to employees in 1996, 1995 and 1994,
respectively. The weighted average fair value of shares issued in 1996 was
$7.33.
PRO FORMA INFORMATION
The Company applies APB Opinion No. 25 "Accounting for Stock Issued to
Employees" and related interpretations in accounting for the stock compensation
plans (the Plans) described above. Accordingly, no compensation cost has been
recognized for the Plans. If compensation cost for the Plans had been determined
consistent with SFAS No. 123 "Accounting for Stock-Based Compensation", the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
1996 1995
--------- ---------
IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS
Net Income As Reported $ 29,038 $ 97,270
Pro Forma $ 6,445 $ 87,300
Earnings per share -- primary As Reported $ .32 $ 1.05
Pro Forma $ .07 $ .94
Earnings per share -- fully diluted Pro Forma $ .04 $ .91
Because the method of accounting prescribed by SFAS 123 has not been applied
to options granted prior to January 1, 1995, and because the Black-Scholes
option valuation model was developed for traded
49
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 28, 1996
options and requires the input of subjective assumptions, the resulting pro
forma compensation cost may not be representative of that to be expected in
future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used for
1996 and 1995: risk-free interest rate of 6.16% for 1996 and 6.41% for 1995,
dividend yields of 0%, volatility factors of the expected market price of the
Company's common stock of 35%, and a weighted average expected life of an option
of four years.
WARRANT
In connection with the purchase of the business and certain assets of
Comdisco Systems, Inc. (Comdisco), a subsidiary of Comdisco, Inc., in June 1993,
the Company issued a warrant (Comdisco Warrant) to purchase 2,925,000 shares of
the Company's common stock at $6.45 per share. Pursuant to the original terms of
the warrant agreement, during 1996 and 1995, the Company repurchased portions of
the warrant applicable to 150,000 and 2,655,000 shares, respectively, for
approximately $4.3 million and $17.2 million, respectively. The warrant for the
remaining 120,000 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.
RESERVED FOR FUTURE ISSUANCE
As of December 28, 1996, the Company has reserved the following shares of
authorized but unissued common stock for future issuance:
Employee stock option plans................................. 23,430,961
Other option agreements..................................... 55,705
Directors stock option plans................................ 978,335
Employee stock purchase plan................................ 1,347,149
Put warrants................................................ 1,883,143
Comdisco Warrant............................................ 120,000
----------
Total................................................... 27,815,293
----------
----------
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.
50
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 28, 1996
INCOME TAXES
The provision for income taxes consisted of the following components:
1996 1995 1994
--------- --------- ---------
(IN THOUSANDS)
Current
Federal.......................................... $ 59,412 $ 11,954 $ 4,624
State............................................ 9,712 4,095 881
Foreign.......................................... 8,258 16,085 8,815
--------- --------- ---------
Total current...................................... 77,382 32,134 14,320
--------- --------- ---------
Deferred (prepaid)
Federal.......................................... (15,309) 4,989 (1,103)
State............................................ (750) 201 (384)
Foreign.......................................... 116 503 (618)
--------- --------- ---------
Total deferred (prepaid)........................... (15,943) 5,693 (2,105)
--------- --------- ---------
Total provision for income taxes............... $ 61,439 $ 37,827 $ 12,215
--------- --------- ---------
--------- --------- ---------
Income before income taxes for 1996, 1995 and 1994 included income of
approximately $25.3 million, $34.2 million and $19.2 million, respectively, from
the Company's foreign subsidiaries.
The provision for income taxes is net of the benefit of operating loss
carryforwards totaling $2.6 million, $9.7 million and $20.8 million, for 1996,
1995 and 1994, respectively.
The provision for income taxes differs from the amount estimated by applying
the statutory federal income tax rate to income before income taxes as follows:
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
Provision computed at federal statutory rate.................................. $ 31,667 $ 47,284 $ 17,074
State income tax, net of federal tax effect................................... 5,964 2,662 572
Change in valuation allowance................................................. (11,835) (19,999) (10,457)
Research and development tax credit........................................... (207) (494) (379)
Foreign income tax at a higher rate........................................... -- 2,129 --
Foreign tax credit............................................................ -- (769) (446)
Foreign withholding taxes..................................................... 2,823 3,414 3,446
Amortization of goodwill...................................................... 897 390 2,398
Write-off of in-process research and development.............................. 33,495 -- --
Other......................................................................... (1,365) 3,210 7
---------- ---------- ----------
Provision for income taxes.................................................... $ 61,439 $ 37,827 $ 12,215
---------- ---------- ----------
---------- ---------- ----------
Effective tax rate............................................................ 68% 28% 25%
---------- ---------- ----------
---------- ---------- ----------
51
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 28, 1996
The components of deferred tax assets and liabilities consisted of the
following:
1996 1995
---------- ----------
(IN THOUSANDS)
Deferred tax assets
Merger reserves......................................................................... $ 2,228 $ 3,394
Deferred revenue........................................................................ 5,367 5,075
Vacation accrual........................................................................ 3,517 2,902
Net operating losses.................................................................... 7,789 6,202
Tax credits............................................................................. 12,029 32,845
Other................................................................................... 17,063 12,148
---------- ----------
Total deferred tax assets................................................................. 47,993 62,566
Valuation allowance-provision for income taxes.......................................... (1,714) (13,549)
Valuation allowance-equity and intangibles.............................................. (9,041) (34,223)
---------- ----------
Net assets................................................................................ 37,238 14,794
---------- ----------
Deferred tax liabilities
Capitalized software.................................................................... (8,132) (10,091)
Other................................................................................... (9,202) (7,273)
---------- ----------
Total deferred tax liabilities............................................................ (17,334) (17,364)
---------- ----------
Total net deferred tax assets (liabilities)............................................... $ 19,904 $ (2,570)
---------- ----------
---------- ----------
The Company has recorded deferred tax assets of approximately $48.0 million
offset by a valuation allowance of $10.8 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 $37.2 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 $37.2 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 $37.0 million in 1996. The decrease
in valuation allowance-equity and intangibles of $25.2 million is due to the
realization of the tax benefits of stock option deductions generated in prior
years. The valuation allowance-provision for income taxes decreased by $11.8
million due to the realization of net operating losses and tax credits generated
in prior years. The remaining valuation allowance-provision for income taxes of
$1.7 million is due to net operating losses and tax credits of foreign
subsidiaries, the use of which is dependent upon generating sufficient taxable
income prior to their expiration.
The remaining net operating loss carryforwards will expire at various dates
from 1997 through 2010 and federal tax credit carryforwards will expire at
various dates from 1997 through 2011.
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
52
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 28, 1996
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.
1996 1995 1994
----------- ----------- -----------
(In thousands)
Revenue
Domestic operations(1)................................................... $ 633,997 $ 440,618 $ 344,696
European operations...................................................... 119,455 97,596 79,404
Asia/Pacific operations.................................................. 129,157 107,556 86,022
Eliminations............................................................. (141,150) (97,352) (81,050)
----------- ----------- -----------
Consolidated............................................................... $ 741,459 $ 548,418 $ 429,072
----------- ----------- -----------
----------- ----------- -----------
Intercompany revenue (eliminated in consolidation)
Domestic operations...................................................... $ 94,156 $ 58,719 $ 58,837
European operations...................................................... 16,984 15,893 9,495
Asia/Pacific operations.................................................. 30,010 22,740 12,718
----------- ----------- -----------
Consolidated............................................................... $ 141,150 $ 97,352 $ 81,050
----------- ----------- -----------
----------- ----------- -----------
Income from operations
Domestic operations...................................................... $ 67,222 $ 85,308 $ 25,763
European operations...................................................... 13,257 9,705 7,412
Asia/Pacific operations.................................................. 10,780 22,847 10,872
----------- ----------- -----------
Consolidated............................................................... $ 91,259 $ 117,860 $ 44,047
----------- ----------- -----------
----------- ----------- -----------
Identifiable assets
Domestic operations...................................................... $ 750,040 $ 396,676 $ 368,226
European operations...................................................... 53,716 50,303 56,343
Asia/Pacific operations.................................................. 59,008 63,680 42,095
Eliminations............................................................. (145,763) (136,624) (105,616)
----------- ----------- -----------
Consolidated............................................................... $ 717,001 $ 374,035 $ 361,048
----------- ----------- -----------
----------- ----------- -----------
(1) Domestic operations revenue includes export revenue of approximately $25.0
million, $14.7 million and $12.9 million to Europe for 1996, 1995 and 1994,
respectively, and approximately $125.9 million, $90.6 million and $65.4
million to Asia/Pacific for 1996, 1995 and 1994, respectively.
53
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 28, 1996
Allowance for doubtful accounts................................ $7,420 $1,621 $ (269)(1) $8,772
Accrued costs for disposed division............................ 865 -- (219) 646
Accrued restructuring costs.................................... -- 2,119 -- 2,119
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) 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) --
Accrued costs for disposed division............................ 1,373 -- (499) 874
(1) Uncollectible accounts written-off
54
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
21, 1997.
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
- -------------------------------------------
Joseph B. Costello March 21, 1997
CHIEF FINANCIAL OFFICER
/s/ H. RAYMOND BINGHAM
- -------------------------------------------
H. Raymond Bingham March 21, 1997
CONTROLLER (Principal Accounting Officer)
/s/ WILLIAM PORTER
- -------------------------------------------
William Porter March 21, 1997
ADDITIONAL DIRECTORS
/s/ CAROL BARTZ
- -------------------------------------------
Carol Bartz March 21, 1997
/s/ HENRY E. JOHNSTON
- -------------------------------------------
Henry E. Johnston March 21, 1997
/s/ DONALD L. LUCAS
- -------------------------------------------
Donald L. Lucas March 21, 1997
55
NAME/TITLE DATE
- ------------------------------------------------------ -----------------
/s/ DR. LEONARD Y. W. LIU
- -------------------------------------------
Dr. Leonard Y. W. Liu March 21, 1997
/s/ DR. ALBERTO SANGIOVANNI-VINCENTELLI
- -------------------------------------------
Dr. Alberto Sangiovanni-Vincentelli March 21, 1997
/s/ GEORGE M. SCALISE
- -------------------------------------------
George M. Scalise March 21, 1997
/s/ DR. JOHN B. SHOVEN
- -------------------------------------------
Dr. John B. Shoven March 21, 1997
/s/ JAMES E. SOLOMON
- -------------------------------------------
James E. Solomon March 21, 1997
56
EXHIBIT
NUMBER EXHIBIT TITLE LOCATION
- ----------- ---------------------------------------------------------------------------------------------- -------------
2.03 Agreement and Plan of Merger and Reorganization dated as of October 28, 1996, among the
Registrant, Cooper & Chyan Technology, Inc. (CCT) and Wyoming Acquisition Sub, Inc.
(incorporated by reference to Registrant's Current Report on Form 8-K filed on November 7,
1996 (the November 7, 1996 8-K)).
2.04 Form of Certificate of Merger to be entered into by Registrant and CCT (incorporated by
reference to Exhibit 2.2 to the Registrant's Form S-4 Registration Statement No. 333-16779
filed on November 26, 1996 (the November 26, 1996 Form S-4))
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 (the 1989 Form 8-K)).
(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).
(g) The Registrant's Form of Amendment of Certificate of Incorporation to increase the number 62
of authorized shares of common stock dated February 1997.
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 the 1989 Form 8-K).
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 Registrant 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.)
57
EXHIBIT
NUMBER EXHIBIT TITLE LOCATION
- ----------- ---------------------------------------------------------------------------------------------- -------------
9.05 Form of Voting Agreement, dated as of October 28, 1996, between the Registrant and each of
John F. Cooper, David Chyan, William J. Portelli, Robert D. Selvi and John R. Harding
(incorporated by reference to Exhibit 99.3 to the November 7, 1996 Form58-K).
10.01 Employment Agreement, dated as of October 28, 1996, between the Registrant and David Chyan
(incorporated by reference to Exhibit 99.5 to the November 7, 1996 Form 8-K).
10.02 The Registrant's 1987 Stock Option Plan, as amended on February 5, 1997. 63
10.03 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).*
10.04 The Registrant's 1988 Directors Stock Option Plan, as amended to date, including the Stock
Option Grant and Form of 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).*
10.05 The Registrant's 1993 Directors Stock Option Plan including the Form of Stock Option Grant
(incorporated by reference to Exhibit 10.04 of the 1994 Form S-8).*
10.06 The Registrant's 1995 Directors Stock Option Plan including the Form of Stock Option Grant.
(incorporated by reference to Exhibit 10.05 to the 1995 Form 10-K).
10.07 The Registrant's 1990 Employee Stock Purchase Plan as amended on March 4, 1997. 70
10.08 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)).*
10.09 The Registrant's Senior Executive Bonus Plan for 1996 (incorporated by reference to Exhibit
10.08 to the 1995 Form 10-K).
10.10 The Registrant's Chief Executive Officer Bonus Plan for 1996 (incorporated by reference to
Exhibit 10.09 to the 1995 Form 10-K).
10.11 The Registrant's Deferred Compensation Plan for 1994 (incorporated by reference to Exhibit
10.09 to the 1994 Form 10-K).*
10.12 The Registrant's 1996 Deferred Compensation Venture Investment Plan (incorporated by reference
to Exhibit 10.11 to the 1995 Form 10-K).
10.13 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)).
10.14 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).
58
EXHIBIT
NUMBER EXHIBIT TITLE LOCATION
- ----------- ---------------------------------------------------------------------------------------------- -------------
10.15 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).
10.16 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)).
10.17 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).
10.18 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).
10.19 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).
10.20 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).
10.21 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).*
10.22 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)).*
10.23 Offer letter to M. Robert Leach dated May 17, 1993 (incorporated by reference to Exhibit 10.25
to the 1993 Form 10-K).*
10.24 1993 Non-Statutory Stock Option Plan (incorporated by reference to Exhibit 4.05 to the 1994
Form S-8).*
10.25 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)).*
10.26 Consulting agreement dated October 26, 1993 with Alberto Sangiovanni-Vincentelli (incorporated
by reference to the 1994 Second Quarter Form 10-Q).*
10.27 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).
59
EXHIBIT
NUMBER EXHIBIT TITLE LOCATION
- ----------- ---------------------------------------------------------------------------------------------- -------------
10.28 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)).
10.29 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).
10.30 The Registrant's amended and restated 401 (k) Plan (incorporated by reference to the
Registrant's Form 10-Q for the first quarter ended March 30, 1996 (the March 30, 1996 10-Q)).
10.31 Amendment dated May 3, 1996 (incorporated by reference to the Registrant's Form 10-Q for the
first quarter ended March 30, 1996) to 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).
10.32 Revolving line of credit dated April 1996, by and between Credit Lyonnais and the Registrant
(incorporated by reference to the March 30, 1996 10-Q).
10.33 Term loan dated May 31, 1996, by and between Credit Lyonnais and River Oaks Place Associates
L.P. (ROPA), a California limited partnership (the Term Loan) (incorporated by reference to
the Registrant's Form 10-Q for the second quarter ended June 29, 1996 (the June 29, 1996
10-Q)).
10.34 Deed of Trust, Security Agreement, Assignment of Leases and Rents, Fixture Filing and
Financing Statement dated May 31, 1996, Schedule to Term Loan (incorporated by reference to
the June 29, 1996 10-Q)
10.35 Assignment of Leases and Rents dated May 31, 1996, Schedule to Term Loan (incorporated by
reference to the June 29, 1996 10-Q).
10.36 Assignment of Partnership Interests by Seeley Properties, Inc. dated May 31, 1996, Schedule to
Term Loan (incorporated by reference to the June 29, 1996 10-Q).
10.37 Assignment of Partnership Interests by the Registrant dated May 31, 1996, Schedule to Term
Loan (incorporated by reference to the June 29, 1996 10-Q).
10.38 Environmental Indemnity dated May 31, 1996, Schedule to Term Loan (incorporated by reference
to the June 29, 1996 10-Q).
10.39 Amendment dated August 2, 1996 (incorporated by reference to the June 29, 1996 10-Q), to
Registrant's 1987 Stock Option Plan filed on May 31, 1994 (incorporated by reference to
Exhibit 4.01 to the Registrant's Form S-8 Registration Statement (No. 33-53913) filed on May
31, 1994).
10.40 Amendment dated August 2, 1996 (incorporated by reference to the June 29, 1996 10-Q), to
Registrant's 1993 Non Statutory Stock Option Plan (incorporated by reference to the 1994 Third
Quarter 10-Q).
60
EXHIBIT
NUMBER EXHIBIT TITLE LOCATION
- ----------- ---------------------------------------------------------------------------------------------- -------------
10.41 Amendment Number 1, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form
10-Q), to Lease Agreement for the Registrant's executive offices at 555 River Oaks Parkway,
San Jose, California, by and between ROPA and the Registrant (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)).
10.42 Amendment Number 2, dated May 31,1996, (incorporated by reference to the June 29, 1996 Form
10-Q), to Lease Agreement for the Registrant's executive offices at 555 River Oaks Parkway,
San Jose, California, by and between ROPA and the Registrant (incorporated by reference to
Exhibit 10.14 to the 1990 Form 10-K).
10.43 Amendment Number 1, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form
10-Q), to Lease Agreement for the Registrant's offices at 575 River Oaks Parkway, San Jose,
California, by and between ROPA and the Registrant (incorporated by reference to Exhibit 10.16
to the 1990 Form 10-K).
10.44 Amendment Number 2, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form
10-Q), to Lease Agreement for the Registrant's offices at 575 River Oaks Parkway, San Jose,
California, by and between ROPA and the Registrant (incorporated by reference to Exhibit 10.16
to the 1990 Form 10-K).
10.45 Amendment Number 1, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form
10-Q), to Lease Agreement for the Registrant's offices at 535 and 545 River Oaks Parkway, San
Jose, California, by and between ROPA and the Registrant (incorporated by reference to Exhibit
10.17 to the 1990 Form 10-K).
10.46 Amendment Number 2, dated May 31, 1996, (incorporated by reference to the June 29, 1996 Form
10-Q), to Lease Agreement for the Registrant's offices at 535 and 545 River Oaks Parkway, San
Jose, California, by and between ROPA and the Registrant (incorporated by reference to Exhibit
10.17 to the 1990 Form 10-K).
10.47 Agreement and Plan of Merger and Reorganization dated as of October 3, 1996, among the
Registrant, High Level Design Systems, Inc. (HLDS) and Harbor Acquisition Sub, Inc.
(incorporated by reference to the November 7, 1996 8-K).
21.01 Subsidiaries of the Registrant. 77
23.01 Consent of Arthur Andersen LLP 78
27.1 Financial data schedule for the period ended December 28, 1996. 79
- ------------------------
*A management contract or compensatory plan required to be filed as an exhibit
to Form 10-K.
61