Back to GetFilings.com
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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
For the fiscal year ended January 2, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------ -------------
Commission file number 1-10606
----------------
CADENCE DESIGN SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0148231
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2655 Seely Avenue, Building 5, 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 New York Stock Exchange
share (Names 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. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the 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 5, 1999
by non-affiliates of the registrant: $5,056,651,451
Number of shares of common stock outstanding at March 5, 1999: 217,490,385
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 1999 Annual Meeting are
incorporated by reference into Part III hereof.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CADENCE DESIGN SYSTEMS, INC.
1998 FORM 10-K ANNUAL REPORT
Table of Contents
Page
PART I ----
Item 1. Business................................................................. 3
Item 2. Properties............................................................... 10
Item 3. Legal Proceedings........................................................ 11
Item 4. Submission of Matters to a Vote of Security Holders...................... 12
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters................................................................. 13
Item 6 Selected Financial Data.................................................. 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............... 35
Item 8. Financial Statements and Supplementary Data.............................. 36
Item 9. Changes and Disagreements with Accountants on Accounting and Financial
Disclosure.............................................................. 37
PART III
Item 10. Directors and Executive Officers of the Registrant....................... 38
Item 11. Executive Compensation................................................... 39
Item 12 Security Ownership of Certain Beneficial Owners and Management........... 39
Item 13. Certain Relationships and Related Transactions........................... 39
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K........ 40
Signatures............................................................... 78
2
PART I.
ITEM 1. BUSINESS
Certain statements contained in this Annual Report on Form 10-K, including,
without limitation, statements containing the words "believes," "anticipates,"
"estimates," "intends," "expects," and words of similar import, constitute
forward-looking statements within the meaning of the Private Securities Reform
Act of 1995. Actual results could vary materially from those expressed in
those statements. Readers are referred to the "Marketing and Sales," "Research
and Development," "Competition," "Proprietary Technology," "Manufacturing,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and "Factors That May Affect Future Results" sections contained
herein, which identify some of the important factors or events that could
cause actual results or performances to differ materially from those contained
in the forward-looking statements.
Overview
Cadence Design Systems, Inc. (Cadence(R)) provides software technology and
comprehensive design and consulting services and technology for the product
development requirements of the world's leading electronics companies. Cadence
licenses its leading-edge electronic design automation (EDA) software
technology and provides a range of professional services to companies
throughout the world ranging from consulting services to help optimize
performance of the customers' product to design services to create the actual
design of the electronic system for the customer's product. Cadence is a
supplier of "design realization" solutions, which are used by companies to
design and develop complex chips and electronic 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 Delaware corporation as a result of the merger of
SDA Systems, Inc. into ECAD, Inc. in May 1988. Cadence's executive offices are
located at 2655 Seely Avenue, Building 5, San Jose, California 95134, and its
telephone number at that location is (408) 943-1234.
Electronic Design Automation
The worldwide electronics industry is quickly evolving from a business-to-
business mode to more of a consumer electronics industry. The shift of the
electronics industry to the consumer electronics industry is evidenced by the
incorporation of electronic content in consumer items such as home appliances,
automotive products, entertainment products and games, and personal
communication and organization devices. The electronics industry presents
challenges for developers of electronic products, where time-to-market, cost,
performance, quality, reliability, size and the need for product diversity
become the focus in a fast-paced and volatile industry.
Within the context of this evolution, a significant challenge faced by the
electronics industry is the continuing escalation in complexity of electronic
devices. The major trends escalating the complexity of designing and
manufacturing electronic devices are as follows:
. Space between transistors is shrinking from 0.35 microns to 0.25 microns
or less due to advances in manufacturing processes. This is commonly
referred to in the semiconductor industry as the migration to deep
submicron (DSM) and represents a major challenge for the entire
electronics industry. Shrinkage of transistor spacing to such
infinitesimal proportions (for reference, the diameter of the period at
the end of this sentence is approximately 400 microns) is challenging the
fundamental laws of physics and chemistry.
. The capability to manufacture chips from a 12 inch wafer as opposed to an
8 inch wafer is leading to millions more transistors residing on a single
chip.
3
. The ability to design entire systems on a single chip, referred to in the
industry as SOC. Placing the entire system on a single chip instead of a
board increases the design complexity of the chip by an order of
magnitude. In addition, it gives rise to a new requirement of co-
designing hardware and software on a single chip.
The above trends are posing fundamentally new challenges for electronics
designers. These challenges are being addressed in a number of ways, including
revamping old design methodologies, introducing new EDA tools and technologies
to design environments and adopting a "system-on-a-chip" (SOC) style of design
to take advantage of silicon manufacturing capabilities.
The Complex Chips and Electronics System Design and Development Process
The electronic design process involves describing the architectural,
behavioral, functional and structural attributes of an integrated circuit or
electronic system. This process involves describing the product's overall
system architecture and then implementing it by creating a design description,
simulating the design to identify electrical defects and refining the design
description to meet predetermined design specifications.
Architectural Definition
A natural evolution of EDA is a top-down design approach known as
electronic systems design automation. Electronic systems design automation
allows customers to include product concepts in the EDA environment thereby
accelerating and enhancing the early phases of system development.
A new electronic systems design automation approach called virtual
prototyping creates a product prototype in software, allowing the designer to
focus on what is needed for the product to be successful as opposed to how the
electronic system design is to be implemented.
The Design Description
Based on the overall system architecture, a design description is created
using a variety of techniques, including block diagrams, equations or special
design description languages referred to as hardware description languages.
Structural Design and Simulation
Before an integrated circuit or printed circuit board 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. A database
containing the design's electrical characteristics, interconnections and
specific design rules is automatically created and used as the foundation for
subsequent design steps.
Electronic product designers use simulation throughout the electrical
design process to identify design errors before the design is manufactured. In
addition, simulation enables electronic product designers to quickly explore
design alternatives, which can be performed at different levels of design
abstraction. A designer is then able to verify the conceptual, structural and
performance aspects of the design.
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 the
physical design of the electronic system. Next, the physical design team
determines the layout and associated interconnection of the components on the
target substrate that will yield the optimum combination of
4
performance, size 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.
Electronic Design Automation Tools
Cadence's product offerings include a variety of EDA tools. These EDA tools
include system level design, custom integrated circuit design, deep submicron
design, logic design and verification, printed circuit board design, all of
which enable electronic product designers to improve the productivity and
quality of their electronic design process. Cadence's products include
software tools that enable engineers to design, optimize and verify electronic
systems and complex chips from architectural to physical design, and to design
and optimize printed circuit boards used in electronic systems.
System-Level Design
Cadence's Cierto(TM) product line allows customers to test their concepts
early in the design process, giving them an opportunity to ensure that their
product design meets required specifications. The Cierto signal processing
worksystem toolset provides electronics companies with a high level of design
automation for a number of application areas, including wireless
communications, networking and multimedia.
Deep Submicron Implementation
Cadence's custom layout portfolio for deep submicron design is anchored by
the Virtuoso(R) product line, which provides tools for basic layout editing,
design compaction, layout synthesis and device-level editing.
The Assura(TM) product line provides integral solutions for automated and
interactive physical verification, which enables electronic product designers
to perform a final check of their design before products utilizing such design
are released to manufacturing.
The Envisia(TM) product line provides a broad solution for design planning,
synthesis and placement and routing of deep submicron design. The Envisia(TM)
product line includes specialized technology to deal with complex challenges
such as timing convergence, crosstalk and signal integrity.
Design and Verification
Cadence's Affirma(R) design and verification product line include logic,
analog and mixed-signal design analysis and verification. Affirma(R) products
can predict the behavior of designs in a short cycle time. Affirma(R) products
are used by numerous application-specific integrated circuit (ASIC) vendors
and support over 185 ASIC libraries.
Printed Circuit Board Design Products
The Intrica(TM) product line offers broad solutions for the layout of
standard printed circuit board and advanced component packaging.
Connections Program
Cadence cooperates with other design automation vendors to deliver
technology to its customers. Through the Cadence Connections(R) Program,
customers can more easily integrate products and technologies with other EDA
vendors' products and technologies. This enables the flexibility to mix-and-
match third-party and proprietary tools to specifically meet a customer's
design automation needs. Today, more than 100 companies have integrated their
tools with Cadence software.
5
Services
Cadence offers developers of electronic products a portfolio of services
within the broad categories of consulting services (also known as methodology
services) and design services.
Consulting Services
Cadence provides a variety of services that help improve design
environments, from training classes and custom software coding to flow and
methodology deployment, to complete design process re-engineering. Cadence's
Educational Services offer more than 50 training courses within many areas of
Cadence technology. Cadence Applications Services help developers of
electronic products to maximize their productivity with Cadence software
applications by transferring knowledge from Cadence applications engineers to
customer design teams in new methodologies and technologies. In addition,
Cadence offers design process solutions, including optimizing existing product
development processes, creating new design methodologies, migrating to new
methodologies based on significant upgrades of integrated circuit technology,
constructing high re-use product development systems and transferring
technological competency.
Design Services
Cadence offers services to perform design projects for electronic system
components such as integrated circuits or software. When developers of
electronic content lack the experience or resources to do their own design
work, or when they need to keep their internal engineers on other design
activities, Cadence's design services help these developers by doing design
work for them. Cadence offers design services in areas such as integrated
circuit design, analog/mixed-signal, wireless communications, intellectual
property reuse and silicon foundry services. Cadence's design services provide
a wide range of skills in all phases of design, from the creation of high-
level specifications, through implementation, to factory hand-off and the
development of test procedures. Cadence has available resources to execute
projects of various sizes and scope and has expertise in embedded systems
design, digital and analog/mixed-signal integrated circuit design, wireless,
multimedia, datacommunications and telecommunications product design.
Maintenance
Cadence offers standard support services, which include product updates,
telephone and internet support and metrics reporting. Custom support services
are also available, including standard support services plus account technical
management, application and educational services.
Marketing and Sales
In North America, Cadence uses a direct sales force consisting of sales
people and applications engineers to license and optimize its products and
market its consulting and design services. 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. During the sales
cycle, Cadence's direct sales force generally provides technical
presentations, product demonstrations and often, an on-site customer
evaluation of Cadence software.
Internationally (excluding Japan), Cadence markets and supports its
products and services primarily through its subsidiaries and various
distributors. Following a reorganization of Cadence's distribution channel in
Japan in 1997, Cadence now licenses its products through Innotech Corporation
(Innotech), in which Cadence is an approximately 18% stockholder. Cadence
markets its consulting and design services in Japan through a wholly-owned
subsidiary. Revenue from Innotech, which consists of licensing royalties, did
not exceed 10% of Cadence's revenue in 1998 and 1997. In 1996, licensing
royalties from Innotech accounted for 13% of Cadence's revenue.
6
Revenue from international sources including Japan was $603.1 million,
$487.3 million and $373.2 million, or approximately 50%, 53% and 48% of total
revenue for 1998, 1997 and 1996, respectively. See "Notes to Consolidated
Financial Statements" for a summary of revenue 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.
Recent economic uncertainty and the weakening of foreign currencies in the
Asia-Pacific region has had, and may continue to have, a seriously harmful
effect on Cadence's revenue and operating results.
Fluctuations in the rate of exchange between U.S. Dollars and the
currencies of countries other than the U.S. in which Cadence conducts business
could seriously harm its business, operating results and financial condition.
For example, if there is an increase in the rate at which a foreign currency
exchanges into U.S. Dollars, it will take more of the foreign currency to
equal a specified amount of U.S. Dollars than before the rate increase. If
Cadence prices its products and services in the foreign currency, it will
receive less in U.S. Dollars than it did before the rate increase went into
effect. If Cadence prices its products and services in U.S. Dollars, an
increase in the exchange rate will result in an increase in the price for
Cadence's products and services compared to those products of its competitors
that are priced in local currency. This could result in Cadence's prices being
uncompetitive in markets where business is transacted in the local currency.
Cadence's international operations may also be subject to other risks,
including:
. The adoption and expansion of government trade restrictions;
. Volatile foreign exchange rates and currency conversion risks;
. Limitations on repatriation of earnings;
. Reduced protection of intellectual property rights in some countries;
. Recessions in foreign economies;
. Longer receivables collection periods and greater difficulty in
collecting accounts receivable;
. Difficulties in managing foreign operations;
. Political and economic instability;
. Unexpected changes in regulatory requirements;
. Tariffs and other trade barriers; and
. U.S. government licensing requirements for export as licenses can be
difficult to obtain.
Cadence expects that revenue from its international operations will
continue to account for a significant portion of its total revenue.
Exposure to foreign currency transaction risk can arise when transactions
are conducted in a currency different from the functional currency of a
Cadence subsidiary. A subsidiary's functional currency is the currency in
which it primarily conducts its operations, including product pricing,
expenses and borrowings. Cadence uses foreign currency forward exchange
contracts, as part of its foreign currency hedging program, to help protect
against currency exchange risks. These contracts allow Cadence to buy or sell
specific foreign currencies at specific prices on specific dates. Under this
program, increases or decreases in the value of Cadence's foreign currency
transactions are partially offset by gains and losses on these forward
exchange contracts. Although Cadence attempts to reduce the impact of foreign
currency fluctuations, significant exchange rate movements may hurt Cadence's
results of operations as expressed in U.S. Dollars.
Foreign currency exchange risk occurs for some of Cadence's foreign
operations whose functional currency is the local currency. The primary effect
of foreign currency translation on Cadence's results of operations is a
7
reduction in revenue from a strengthening U.S. Dollar, offset by a smaller
reduction in expenses. Exchange rate gains and losses on the translation into
U.S. Dollars of amounts denominated in foreign currencies are included as a
separate component of stockholders' equity and were losses of $2.8 million in
1996, $5.3 million in 1997 and $2.2 million in 1998.
On January 1, 1999, 11 member countries of the European Union adopted the
Euro as their common legal currency and established fixed conversion rates
between their sovereign currencies and the Euro. Transactions can be made in
either the sovereign currencies or the Euro until January 1, 2002, when the
Euro must be used exclusively. Currently, only electronic transactions may be
conducted using the Euro. Cadence believes that its internal systems and
financial institution vendors are capable of handling the Euro conversion and
is in the process of examining current marketing and pricing policies and
strategies that may be affected by conversion to the Euro. The cost of this
effort is not expected to materially hurt Cadence's results of operations or
financial condition. However, Cadence cannot assure you that all issues
related to the Euro conversion have been identified and that any additional
issues would not materially hurt Cadence's results of operations or financial
condition. For example, the conversion to the Euro may have competitive
implications on Cadence's pricing and marketing strategies and Cadence may be
at risk to the extent its principal European suppliers and customers are
unable to deal effectively with the impact of the Euro conversion. Cadence has
not yet completed its evaluation of the impact of the Euro conversion on its
functional currency designations.
Research and Development
For the years 1998, 1997 and 1996, Cadence's investment in research and
development was $201.1 million, $158.7 million and $136.7 million prior to
capitalizing $21.7 million, $15.0 million and $13.6 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 1999 and beyond. Among the primary areas that Cadence is
addressing are SOC design, the design of silicon devices in the deep submicron
range, high-speed board design, architectural-level design, high-performance
logic verification technology, and hardware/software co-design. The industries
in which Cadence competes experience rapid technology developments, changes in
industry standards, changes in customer requirements and frequent new product
introductions and improvements. Currently, the electronic chip design industry
is experiencing several revolutionary trends:
. Developments in manufacturing that enable production of chips with
extremely small spacing between transistors, so-called deep submicron
chips, that challenge the fundamental laws of physics and chemistry.
. The ability of manufacturers to produce chips from 12 inch silicon wafers
as opposed to today's eight inch wafers. This ability to place millions
of additional transistors on each chip requires entirely new software
tools for designers to design these 12 inch chips.
. The ability to design entire electronic systems on a single chip, so-
called System-on-a-Chip or SOC, rather than a circuit board greatly
increases design complexity and requires the ability to design both
hardware and software on a single chip.
If Cadence is unable to respond quickly and successfully to these
developments and changes, Cadence may lose its competitive position and its
products or technologies may become uncompetitive or obsolete. In order to
compete successfully, Cadence must develop or acquire new products and improve
its existing products and processes on a schedule that keeps pace with
technological developments in its industries. Cadence must also be able to
support a range of changing computer software, hardware platforms and customer
preferences. There is no guarantee that Cadence will be successful in this
regard.
8
Cadence's advanced research and development group, Cadence Laboratories, is
committed to new technological development. This group is chartered with
identifying and developing prototype technologies in emerging design areas
that will offer substantially improved alternatives to current EDA solutions.
Competition
The electronic design automation software and the commercial electronic
design and consulting services industries are highly competitive. If Cadence
is unable to compete successfully in these industries, it could seriously harm
Cadence's business, operating results and financial condition. To compete in
these industries, Cadence must identify and develop innovative and cost
competitive electronic design automation software products and market them in
a timely manner. It must also gain industry acceptance for its professional
services and offer better strategic concepts, technical solutions, prices and
response time, or a combination of these factors, than those of other design
companies and the internal design departments of electronics manufacturers.
Cadence cannot assure you that it will be able to compete successfully in
these industries. Factors which could affect Cadence's ability to succeed
include:
. The development of competitive software products and design and
consulting services could result in a shift of customer preferences away
from Cadence's products and services and cause a significant decrease in
revenue;
. The electronics design and consulting services industries are relatively
new industries and electronics design companies and manufacturers are
only beginning to purchase these services from outside vendors; and
. There are a significant number of current and potential competitors in
the electronic design automation software industry and the cost of entry
is low.
In the electronic design automation software industry, Cadence currently
competes with a number of large companies, including Avant! Corporation,
Mentor Graphics Corporation, Synopsys, Inc. and Zuken-Redac, and numerous
small companies. Cadence also competes with manufacturers of electronic
devices that have developed or have the capability to develop their own
electronic design automation software. Many manufacturers of electronic
devices may be reluctant to purchase services from independent vendors like
Cadence because they wish to promote their own internal design departments. In
the electronics design and consulting services industries, Cadence competes
with numerous electronic design and consulting companies as well as with the
internal design capabilities of electronics manufacturers. Other electronics
companies and management consulting firms continue to enter the electronic
design and consulting industry.
Proprietary Technology
Cadence's success depends, in part, upon its proprietary technology. Many
of Cadence's products include software or other intellectual property licensed
from third parties, and Cadence may have to seek new or renew existing
licenses for this software and other intellectual property in the future.
Cadence's design services business also requires it to license software or
other intellectual property of third parties. Cadence's failure to obtain for
its use software or other intellectual property licenses or other intellectual
property rights on favorable terms, or the need to engage in litigation over
these licenses or rights, could seriously harm Cadence's business, operating
results and financial condition.
Also, Cadence generally relies on patents, copyrights, trademarks and trade
secret laws to establish and protect its proprietary rights in technology and
products. Despite precautions Cadence may take to protect its intellectual
property, Cadence cannot assure you that third parties will not try to
challenge, invalidate or circumvent these patents. Cadence also cannot assure
you that the rights granted under its patents will provide it with any
competitive advantages, patents will be issued on any of its pending
applications or future patents will be sufficiently broad to protect Cadence's
technology. Furthermore, the laws of foreign countries may not protect
9
Cadence's proprietary rights in those countries to the same extent as U.S. law
protects these rights in the United States.
Cadence cannot assure you that its reliance on licenses from or to third
parties, or patent, copyright, trademark and trade secret protection, will be
enough to be successful and profitable in the industries in which Cadence
competes.
There are numerous patents in the electronic design automation software
industry and new patents are being issued at a rapid rate. It is not always
economically practicable to determine in advance whether a product or any of
its components infringes the patent rights of others. As a result, from time
to time, Cadence may be forced to respond to or prosecute intellectual
property infringement claims to protect its rights or defend a customer's
rights. These claims, regardless of merit, could consume valuable management
time, result in costly litigation or cause product shipment delays, all of
which could seriously harm Cadence's business, operating results and financial
condition. In settling these claims, Cadence may be required to enter into
royalty or licensing agreements with the third parties claiming infringement.
These royalty or licensing agreements, if available, may not have terms
acceptable to Cadence. Being forced to enter into a license agreement with
unfavorable terms could seriously harm Cadence's business, operating results
and financial condition.
Manufacturing
Cadence's software production operations consist of configuring the proper
version of a product, outsourcing the recording of the product 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. Product shipments are generally made within two weeks of receiving an
order.
Cadence has generally been able to obtain adequate manufacturing supplies
in a timely manner from existing sources, or where necessary, from alternative
sources of supply. A reduction or interruption in supply or a significant
increase in the price of one or more components would adversely affect
Cadence's business, operating results and financial condition and could damage
customer relationships.
Employees
As of March 5, 1999, Cadence employed approximately 4,200 persons,
including approximately 2,300 in sales, services, marketing, support and
manufacturing activities, 1,300 in product development and 600 in management,
administration and finance. None of Cadence's employees is represented by
labor unions, and Cadence has experienced no work stoppages. Cadence believes
that its employee relations are good.
The competition for highly skilled employees is intense. Cadence's business
depends on 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. Cadence's failure to attract, train,
motivate and retain such employees would impair its development of new
products, its ability to provide design and consulting services and the
management of its businesses. This would seriously harm Cadence's business,
operating results and financial condition.
ITEM 2. PROPERTIES
Cadence's headquarters are located in San Jose, California, and Cadence
owns the related land and buildings. The total square footage of the buildings
comprising Cadence's headquarters is approximately 642,000 square feet. In
addition, in the first quarter of 1999, Cadence purchased a building adjacent
to its San Jose, California campus with an estimated square footage of
approximately 136,000 square feet, which it expects to occupy in the third
quarter of 1999.
10
In 1998, Cadence completed a new research and development facility in
Noida, India and began construction on a new design center in Edinburgh,
Scotland.
Cadence leases additional facilities for its sales offices in the United
States and various foreign countries, and research and development and design
services facilities in California, Texas, Massachusetts, North Carolina and in
the United Kingdom, France, Canada, Taiwan and Sweden.
Cadence believes that these facilities and the undeveloped land it owns
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 Cadence's operations.
ITEM 3. LEGAL PROCEEDINGS
From time to time Cadence is involved in various disputes and litigation
matters that arise in the ordinary course of business. These include disputes
and lawsuits related to intellectual property, licensing, contract law,
distribution arrangements and employee relations matters.
Cadence filed a complaint in the United States District Court for the
Northern District of California (the District Court) on December 6, 1995
against Avant! Corporation (Avant!) and certain of its employees for
misappropriation of trade secrets, copyright infringement, conspiracy and
other illegal acts.
On January 16, 1996, Avant! filed various counterclaims against Cadence and
Cadence's former President and Chief Executive Officer, and with leave of the
court, on January 29, 1998, filed a second amended counterclaim. The second
amended counterclaim alleges, inter alia, that Cadence and its former
President and Chief Executive Officer had cooperated with the Santa Clara
County, California, District Attorney and initiated and pursued its complaint
against Avant! for anticompetitive 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 second amended counterclaim also alleges that certain Cadence insiders
engaged in illegal insider trading with respect to Avant!'s stock. Cadence and
its former President and Chief Executive Officer 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 counterclaim from Cadence's complaint and stayed the counterclaim
pending resolution of Cadence's complaint. The counterclaim remains stayed.
On April 19, 1996, Cadence filed a motion seeking a preliminary injunction
to prevent further use of Cadence copyrighted code and trade secrets by
Avant!. On March 18, 1997, the District Court issued an order in which it
granted in part and denied in part that motion. On September 23, 1997, the
United States Court of Appeals for the Ninth Circuit reversed the District
Court's decision and directed the District Court (a) to issue an order
enjoining the sale of Avant!'s ArcCell products and (b) to determine whether
Avant!'s Aquarius software infringes Cadence's code and, if so, to enter an
order enjoining the sale of that software. In an order issued on December 19,
1997, as modified on January 26, 1998, the District Court entered a
preliminary injunction barring any further infringement of Cadence's
copyrights in Design Framework II software, or selling, licensing or copying
such product derived from Design Framework II, including but not limited to,
Avant!'s ArcCell products. On February 19, 1998, Avant! filed a petition for
writ of certiorari to the United States Supreme Court, requesting a review of
the Ninth Circuit Court's decision. The Supreme Court denied that petition
without comment. On July 9, 1998, Cadence filed further motions to enjoin
Avant!'s Aquarius product line on copyright and trade secret grounds. On
December 7, 1998, the District Court issued a further preliminary injunction,
which enjoined Avant! from selling its Aquarius product line. Cadence posted a
$10 million bond in connection with the issuance of the preliminary
injunction.
By an order dated July 22, 1997, the District Court stayed most activity in
the case pending in that Court and ordered Avant! to post a $5.0 million bond,
in light of related criminal proceedings pending against Avant! and several of
its executives. The District Court's December 7, 1998 order lifted that stay
in part, allowing the
11
matter to proceed to trial as to certain allegations against Avant! only, but
not with respect to certain matters involving the Avant! executives and other
individuals against whom criminal charges are pending. Cadence 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
Cadence's business, operating results or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
12
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Cadence's Common Stock is traded on the New York Stock Exchange under the
symbol CDN. Cadence has never declared or paid any cash dividends on its
Common Stock in the past, and none is planned to be paid in the future. As of
March 31, 1999, Cadence had approximately 1,595 stockholders of record, not
including those shares 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 January 2, 1999:
High Low
------ ------
1998:
First Quarter................................................ $37.44 $22.75
Second Quarter............................................... $38.00 $27.63
Third Quarter................................................ $31.13 $20.69
Fourth Quarter............................................... $30.63 $19.19
1997:
First Quarter................................................ $21.94 $15.69
Second Quarter............................................... $19.00 $13.38
Third Quarter................................................ $27.50 $16.75
Fourth Quarter............................................... $28.75 $22.31
ITEM 6. SELECTED FINANCIAL DATA
Five fiscal years ended January 2, 1999:
------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- -------- -------- --------
(In thousands, except per share amounts)
Revenue...................... $1,216,070 $ 926,369 $779,064 $571,860 $444,617
Unusual items (1)............ $ 263,594 $ 44,053 $100,543 $ -- $ 14,707
Income from operations....... $ 105,188 $ 232,545 $ 98,239 $119,680 $ 45,150
Income before cumulative
effect of change in
accounting method (2)....... $ 31,982 $ 180,376 $ 34,310 $ 98,599 $ 37,292
Net income(3)................ $ 31,982 $ 168,100 $ 34,310 $ 98,599 $ 37,292
Net income per share--
assuming dilution........... $0.14 $0.77 $0.16 $0.47 $0.17
Total assets................. $1,405,958 $1,023,850 $769,172 $411,526 $369,405
Long-term obligations........ $ 136,380 $ 1,599 $ 20,292 $ 1,619 $ 2,098
- --------
(1) Unusual items are as follows for each of the fiscal years 1998, 1997, 1996
and 1994. There were no unusual items in 1995:
1998 1997 1996 1994
-------- ------- -------- -------
(In thousands)
Write-off of acquired in-process
technology.............................. $194,100 $ 6,571 $ 95,700 $ 4,653
Restructuring charges.................... 69,494 34,417 2,119 --
Write-off of capitalized software
development costs....................... -- 3,065 2,724 --
Provision for settlement of litigation... -- -- -- 10,054
-------- ------- -------- -------
$263,594 $44,053 $100,543 $14,707
======== ======= ======== =======
(2) Income before cumulative effect of change in accounting method in 1997
excluded a $12.3 million charge, net of taxes of $5.3 million, for
reengineering project costs that had been previously capitalized by
Cadence associated with its implementation of enterprise-wide information
systems.
(3) Net income included a $9.2 million and a $13.6 million after tax gain on
the sale of stock of a subsidiary in 1997 and 1995, respectively. A $3.1
million after tax gain on the sale of an equity investment was included in
net income for 1994.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the five-year
summary of selected financial data and Cadence Design Systems, Inc.'s
consolidated financial statements and notes thereto included elsewhere herein.
All references to years represent fiscal years unless otherwise noted. Except
for the historical information contained herein, the following discussion
contains forward looking statements based on current expectations that involve
certain risks and uncertainties. Cadence's actual results could differ
materially from those discussed herein. Factors that could cause actual
results or performance to differ materially or contribute to such differences
include, but are not limited to, those discussed below in "Factors That May
Affect Future Results," "Disclosures about Market Risk" and "Liquidity and
Capital Resources."
Overview
Cadence provides software technology and comprehensive design and
consulting services and technology for the product development requirements of
the world's leading electronics companies. Cadence licenses its leading-edge
electronic design automation software technology and provides a range of
professional services to companies throughout the world ranging from
consulting services to help optimize performance of the customers' product to
design services to create the actual design of the electronic system for the
customer's product. Cadence is a supplier of "design realization" solutions,
which are used by companies to design and develop complex chips and electronic
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 1998, Cadence entered into a merger agreement with Quickturn
Design Systems, Inc., a Delaware corporation (Quickturn). Quickturn designs,
manufactures, sells and supports products that verify the design of computer
chips and electronic systems. Cadence will acquire Quickturn in a tax-free,
stock-for-stock transaction. Each share of Quickturn common stock will be
converted into $15 worth of Cadence Common Stock. Cadence Common Stock will be
valued at the average of its closing prices over a five day period that ends
two business days before the merger closes. There were 18,380,083 shares of
Quickturn common stock outstanding as of March 12, 1999. In addition, Cadence
will assume outstanding stock options of Quickturn. The merger is expected to
be accounted for as a pooling of interests. The consummation of the merger is
subject to various conditions, including the approval of Quickturn's
stockholders. There can be no assurance that stockholder approval will be
obtained, or the other conditions will be satisfied, and that the merger will
be consummated.
In September 1998, Cadence acquired all of the outstanding stock of Ambit
Design Systems, Inc., a California corporation (Ambit), for cash. Ambit is a
leading developer of design automation technology used in system-on-a-chip
(SOC) design. The total purchase price was $255 million, and the acquisition
was accounted for as a purchase.
In September 1998, Cadence acquired the Bell Labs' Integrated Circuit
Design Automation Group of Lucent Technologies Inc. (BLDA) for cash. The total
purchase price was $58 million and the acquisition was accounted for as a
purchase. BLDA is a design automation development organization that focuses on
the complex verification challenges companies face when designing integrated
circuits and next-generation SOC.
In March 1998, Cadence acquired all of the outstanding stock of Excellent
Design, Inc., a Japanese corporation (EXD), for cash. The total purchase price
was $40.9 million and the acquisition was accounted for as a purchase. EXD
provides ASIC and SOC design and library development.
In February 1998, Cadence acquired all of the outstanding stock of
Symbionics Group Limited, a United Kingdom corporation (Symbionics), for
approximately 1 million shares of Cadence's common stock and $21.3 million of
cash. Symbionics provides product development design services to leading
electronics manufacturers. The total purchase price was $46.1 million and the
acquisition was accounted for as a purchase.
14
In May 1997, Cadence merged with Cooper & Chyan Technology, Inc. (CCT),
whose software products are used to design sophisticated integrated circuits
and high-speed printed circuit boards. In connection therewith, Cadence issued
approximately 22.8 million shares of common stock. The merger was accounted
for using the pooling of interests method of accounting. At the time of the
transaction, Cadence believed that the operations of CCT were not material to
Cadence's consolidated operations and financial position. Therefore, prior
period consolidated financial statements were not restated and the results of
CCT were only recorded in Cadence's consolidated financial statements
prospectively from the date of acquisition. Following discussions with the
staff of the Securities and Exchange Commission, Cadence has restated all
prior period financial statements as if the merger took place at the beginning
of such periods, in accordance with the required pooling of interests
accounting and disclosures. See additional information in Notes to
Consolidated Financial Statements under "Acquisitions."
In February 1997, Cadence and its subsidiary, Integrated Measurement
Systems, Inc. (IMS), sold to the public 1.7 million shares of IMS common
stock, of which approximately 1 million shares were sold by Cadence, netting
Cadence approximately $18.6 million in cash. As a result of the offering and
sale of shares by Cadence, Cadence's ownership interest in IMS decreased to
approximately 37% from approximately 55%. Accordingly, Cadence changed the
accounting for its investment in IMS from consolidation to the equity method
of accounting in fiscal 1997. The consolidated financial statements of Cadence
for fiscal year 1996 included the accounts of IMS after elimination of
intercompany accounts and transactions and minority interest adjustments.
Although Cadence has no current intent to enter into similar transactions, the
likelihood of such transactions in the future is dependent upon the state of
the financial markets as well as liquidity and other considerations of each of
Cadence and IMS. IMS manufactures and markets verification systems used in
testing prototype ASICs.
In December 1996, Cadence acquired all of the outstanding stock of High
Level Design Systems, Inc. (HLDS), whose software products are used to design
high density, high performance integrated circuits. In connection with the
acquisition, Cadence issued approximately 5.2 million shares of common stock.
The total purchase price was approximately $101.4 million, and the acquisition
was accounted for as a purchase.
In November 1996, Cadence consummated a secondary public offering in which
11.5 million shares of Common Stock were issued and sold, generating $202.1
million of net proceeds.
Results of Operations
Revenue
% Change
-----------
1998 1997 1996 98/97 97/96
--------- ------------- ------- ----- -----
(In millions)
Product......................... $ 695.0 $ 537.5 $ 441.3 29% 22%
Services........................ 255.8 160.9 114.6 59% 40%
Maintenance..................... 265.3 228.0 223.2 16% 2%
--------- ------- -------
Total revenue................. $ 1,216.1 $ 926.4 $ 779.1 31% 19%
========= ======= =======
Sources of Revenue as a Percent of Total Revenue
1998 1997 1996
--------- ------------- -------
Product......................... 57% 58% 56%
Services........................ 21% 17% 15%
Maintenance..................... 22% 25% 29%
In 1998, strong demand for Cadence's products, services and maintenance
generated a 31% increase in total revenue as compared to the prior year.
15
Product revenue increased $157.5 million in 1998, as compared to 1997, due
primarily to increased demand for placement and routing and physical design
tools used to design deep submicron integrated circuits. Product revenue
increased $96.2 million in 1997, as compared to 1996, primarily due to
increased customer demand for placement and routing and physical design
products. Product revenue would have increased $136.5 or 34% in 1997, as
compared to 1996, excluding $40.3 million of product revenue from IMS in 1996
for which there were no similar reported revenues in 1997.
Services revenue increased $94.9 million in 1998 and $46.3 million in 1997,
as compared to each prior year, primarily due to the increased demand for
Cadence's consulting and design services offerings.
Maintenance revenue increased $37.3 million in 1998 and $4.8 million in
1997, as compared to each prior year, primarily due to continued growth of the
installed customer base and the renewal of maintenance and support contracts.
Revenue by Geography
% Change
-----------
1998 1997 1996 98/97 97/96
-------- ------ ------- ----- -----
(In millions)
Domestic................................. $ 613.0 $439.0 $ 405.9 40% 8%
International............................ 603.1 487.4 373.2 24% 31%
-------- ------ -------
Total revenue.......................... $1,216.1 $926.4 $ 779.1 31% 19%
======== ====== =======
Revenue by Geography as a Percent of Total Revenue
1998 1997 1996
-------- ------ -------
Domestic................................. 50% 47% 52%
International............................ 50% 53% 48%
Revenue from international sources increased $115.7 million in 1998 and
$114.2 million in 1997, as compared to each prior year. The increase in 1998,
as compared to 1997, was primarily due to increased demand for Cadence's
products and services in Europe and for Cadence's services in Japan, offset
somewhat by a decline in product revenue in Japan. To a lesser extent, revenue
growth in 1998 was also due to additional maintenance and support contracts in
Asia and Canada. The increase in 1997, as compared to 1996, was primarily due
to product revenue growth in all regions, except Japan, and new services and
support contracts in all regions.
Differences in the rate of growth of domestic and international revenue,
over the years presented and as compared geographically, are primarily due to
fluctuations in demand and resulting sales volume of place-and-route and
physical design products and for Cadence's consulting and design services
offerings.
Foreign currency exchange rates adversely affected reported revenue by
$15.6 million and $32.4 million in 1998 and 1997, respectively, primarily due
to the weakening of the Japanese yen in relation to the U.S. dollar.
Additional information about revenues by geographic areas can be found under
"Segment Reporting" in the Notes to Consolidated Financial Statements.
Cost of Revenue
% Change
-----------
1998 1997 1996 98/97 97/96
------ ------ ----- ----- -----
(In millions)
Product...................................... $ 51.5 $ 40.1 $49.5 29% (19)%
Services..................................... $185.7 $114.7 $81.0 62% 42 %
Maintenance.................................. $ 43.5 $ 27.8 $25.1 56% 11 %
16
Cost of Revenue as a Percent of Related Revenue
1998 1997 1996
---- ---- ----
Product..................................................... 7% 7% 11%
Services.................................................... 73% 71% 71%
Maintenance................................................. 16% 12% 11%
Cost of product revenue includes costs of production personnel, packaging
and documentation, and amortization of capitalized software development costs.
Cost of product revenue increased $11.4 million or 29% from 1997 to 1998. The
increase was primarily due to increases in amortization of capitalized
software development costs of $7 million and royalty expenses of $3.4 million.
Cost of product revenue decreased $9.4 million or 19% from 1996 to 1997. The
decrease was primarily due to $14.1 million of product cost related to IMS'
automated test equipment hardware business in 1996 for which there were no
similar reported costs in 1997. Offsetting this decrease were additional costs
incurred for Cadence's new European manufacturing facility of $1.2 million,
increases in amortization of capitalized software development costs of $1.4
million and royalty expenses of $1.2 million. If IMS costs had been excluded
from the costs incurred in 1996, cost of product revenue would have increased
$4.7 million or 13% from 1996 to 1997 and cost of product revenue as a
percentage of product sales would have been 9% in 1996. The decrease in cost
of product revenue as a percentage of product revenue in 1997, as compared to
1996, was primarily due to revenue growing at a faster rate than costs.
Cost of services revenue includes personnel and related costs associated
with providing services, primarily salaries, as well as costs to recruit,
develop and retain personnel and maintain the infrastructure to manage a
services organization. Cost of services revenue increased $71.0 million or 62%
in 1998, as compared to 1997. This increase was due to investments made in
services capacity, primarily the addition of services professionals by Cadence
of $68.2 million. Cost of services revenues increased $33.7 million or 42% in
1997, as compared to 1996. These increases were due to investments made in
services capacity, primarily due to the addition of services professionals by
Cadence of $28.9 million.
The decrease in services gross margins to 27% in 1998, as compared to 29%
in 1997 and 1996, was primarily due to increased services capacity that was
not fully utilized. Services gross margins have been and may continue to be
adversely affected by the cost of integrating new service professionals as
well as Cadence's inability to fully utilize these resources. In addition,
services gross margins may continue to be adversely affected by Cadence's
inability to achieve operating efficiencies with its resources when
implementing a growing number of services offerings.
Cost of maintenance revenue includes the costs of customer services, such
as hot-line and on-site support, and the production cost of the maintenance
renewal process. Cost of maintenance revenue increased $15.7 million or 56% in
1998, as compared to 1997. This increase was primarily due to the investment
in a new centralized customer response center and increased support levels on
a per customer basis. Cost of maintenance revenue increased $2.7 million or
11% in 1997, as compared to 1996, primarily due to increased support costs
necessary to support a larger installed base.
Amortization of Acquired Intangibles
1998 1997 1996
----- ---- ----
(In millions)
Amortization of acquired intangibles......................... $17.4 $1.9 $0.9
Amortization of Acquired Intangibles as a Percent of Total Revenue
1998 1997 1996
----- ---- ----
Amortization of acquired intangibles......................... 1% 0% 0%
Amortization of acquired intangibles increased $15.5 million in 1998, as
compared to 1997, primarily due to $7.2 million, $1.5 million, $2.7 million
and $3.1 million associated with Cadence's acquisitions of Ambit,
17
BLDA, Symbionics and EXD, respectively. Amortization of acquired intangibles
increased $1 million in 1997, as compared to 1996, primarily due to $0.8
million associated with Cadence's acquisition of HLDS. For additional
information regarding these acquisitions see below under "Acquisitions and In-
Process Technology."
Operating Expenses
% Change
-----------
1998 1997 1996 98/97 97/96
------- ------------- ------- ----- -----
(In millions)
Marketing and sales............. $ 302.3 $ 263.1 $ 240.7 15% 9 %
Research and development........ $ 179.4 $ 143.7 $ 123.1 25% 17 %
General and administrative...... $ 67.4 $ 58.4 $ 60.0 15% (3)%
Operating Expenses as a Percent of Total Revenue
1998 1997 1996
------- ------------- -------
Marketing and sales............. 25% 28% 31%
Research and development........ 15% 16% 16%
General and administrative...... 6% 6% 8%
General
Operating expenses incurred in 1998 and 1997 excluded expenses from IMS.
Marketing and Sales
The increase in marketing and sales expenses of $39.2 million for 1998, as
compared to 1997, was primarily the result of an increase in employee related
expenses resulting from increased headcount and commissions of $28.6 million,
a higher volume of pre-sales activities of $10 million and an increase in
consulting and outside services costs of $8.4 million. These increases were
partially offset by the weakening of certain foreign currencies, primarily the
Japanese yen, in relation to the U.S. dollar which favorably affected
marketing and sales expense by approximately $6.2 million in 1998, as compared
to the prior year. The increase in marketing and sales expense of $22.4
million for 1997, as compared to 1996, was primarily due to an increase in
employee related expenses attributable to increased headcount and commissions
of $24.1 million, consulting and outside services costs of $6.1 million,
management information systems costs of $5.9 million and costs associated with
business trips of $5.8 million. These increases were partially offset by a
decrease of $11.9 million related to the deconsolidation of IMS and by the
weakening of certain foreign currencies, particularly the Japanese yen, which
resulted in a favorable effect of $5.6 million.
Research and Development
Cadence's investment in research and development, prior to the reduction
for capitalization of software development costs, was $201.1 million, $158.7
million and $136.7 million for 1998, 1997 and 1996, respectively, representing
17%, 17% and 18% of total revenue for 1998, 1997 and 1996, respectively. The
increase of $42.4 million for 1998, as compared to 1997, was primarily
attributable to higher employee related costs of $19.2 million due to
increases in headcount, facility related costs of $12.2 million, consulting
and other services of $8 million and management information systems costs of
$3 million. The increase of $22 million for 1997, as compared to 1996, was
primarily attributable to higher employee related costs of $22.5 million due
to increases in headcount and management information systems costs of $9.7
million. These increases were partially offset by a decrease of $7.5 million
related to the deconsolidation of IMS. Cadence capitalized approximately
$21.7 million, $15.0 million and $13.6 million of software development costs
in the years 1998, 1997 and 1996, respectively, which represented
approximately 11%, 9% and 10% of total research and development expenditures
18
incurred 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 expense increased $9.0 million in 1998, as
compared to 1997, primarily as a result of increases in bad debt reserves of
$7.3 million and consulting and outside services costs of $2.4 million.
General and administrative expenses decreased $1.6 million in 1997, as
compared to 1996, primarily resulting from the deconsolidation of IMS.
Unusual Items
Described below are unusual item charges in 1998, 1997 and 1996.
1998 1997 1996
------ ----- ------
(In millions)
Write-off of acquired in-process technology............. $194.1 $ 6.6 $ 95.7
Restructuring charges................................... 69.5 34.4 2.1
Write-off of capitalized software development costs..... -- 3.1 2.7
------ ----- ------
Total unusual items................................... $263.6 $44.1 $100.5
====== ===== ======
During the year ended January 2, 1999, Cadence made a number of
acquisitions accounted for under the purchase method. The consolidated
financial statements include the operating results of each business from the
date of acquisition. A summary of these acquisitions and values assigned to
acquired in-process technology and projected costs to complete the ongoing
development for the year ended January 2, 1999, follows:
Estimated
Cost to
In-Process Complete
Purchase Technology In-Process
Price Charge Technology
-------- ---------- ----------
(In millions)
Ambit Design Systems, Inc.:
Buildgates synthesis......................... $ 106.5 $ 15.0
------- ------- ------
Total...................................... $ 255.0 $ 106.5 $ 15.0
======= ======= ======
Bell Labs' Integrated Circuit
Design Automation Group:
Formal verification.......................... $ 14.0 $ 2.0
Physical extraction.......................... 16.3 3.0
------- ------- ------
Total...................................... $ 58.0 $ 30.3 $ 5.0
======= ======= ======
Excellent Design, Inc.:
Process libraries/intellectual property...... $ 20.5 $ 4.0
Process specific tools....................... 7.9 3.0
------- ------- ------
Total...................................... $ 40.9 $ 28.4 $ 7.0
======= ======= ======
Symbionics Group Limited:
Digital television........................... $ 13.2 $ 2.5
Wireless communications...................... 15.3 3.5
------- ------- ------
Total...................................... $ 46.1 $ 28.5 $ 6.0
======= ======= ======
19
Acquisitions and In-Process Technology
In September 1998, Cadence acquired all of the outstanding stock of Ambit,
for cash. Ambit was a leading developer of design automation technology used
in SOC design. The total purchase price was $255 million, and the acquisition
was accounted for as a purchase.
Upon consummation of the Ambit acquisition, Cadence immediately charged to
expense $106.5 million representing acquired in-process technology that had
not yet reached technological feasibility and had no alternative future use.
See "Notes to Consolidated Financial Statements." The value was determined by
estimating the costs to develop the acquired in-process technology into
commercially viable products, estimating the resulting net cash flows from
such projects, and discounting the net cash flows back to their present value.
The discount rate includes a factor that takes into account the uncertainty
surrounding the successful development of the acquired in-process technology.
The in-process technology is expected to be commercially viable in 1999.
Expenditures to complete the in-process technology are expected to total
approximately $15 million. These estimates are subject to change, given the
uncertainties of the development process, and no assurance can be given that
deviations from these estimates will not occur. Additionally, these projects
will require maintenance research and development after they have reached a
state of technological and commercial feasibility.
At the time of its acquisition by Cadence, Ambit was working on several
significant research and development projects that were intended to provide
the next generation version of its existing product, Buildgates 2.2. The
nature of the efforts to complete the next generation version of Buildgates
relate to the completion of all planning, designing, prototyping, verification
and testing activities that are necessary to establish that the proposed
technologies meet their design specifications including functional, technical
and economic performance requirements.
Cadence expects Ambit's creation of a fundamentally new approach to
synthesis in deep submicron and in SOC to create the opportunity for
additional consulting services revenue.
In September 1998, Cadence acquired BLDA for cash. The total purchase price
was $58 million and the acquisition was accounted for as a purchase.
Upon consummation of the BLDA acquisition, Cadence immediately charged to
expense $30.3 million representing acquired in-process technology that had not
yet reached technological feasibility and had no alternative future use. See
"Notes to Consolidated Financial Statements." The value was determined by
estimating the costs to develop the acquired in-process technology into
commercially viable products, estimating the resulting net cash flows from
such projects and discounting the net cash flows back to their present value.
The discount rate includes a factor that takes into account the uncertainty
surrounding the successful development of the acquired in-process technology.
The in-process technology is expected to be commercially viable in 2000.
Expenditures to complete these projects are expected to total approximately $5
million. These estimates are subject to change, given the uncertainties of the
development process, and no assurance can be given that deviations from these
estimates will not occur. Additionally, these projects will require
maintenance research and development after they have reached a state of
technological and commercial feasibility.
BLDA's in-process research and development projects are related to its
Formalcheck and Clover technologies. BLDA has two major enhancements underway
for Formalcheck. This effort is expected to yield a revenue-generating product
by the year 2000. BLDA's research and development related to Clover involved
the design and development of new Design Rule Checking and Parasitic
Extraction tools, which are expected to substantially improve the performance
and functionality of the technology. This effort is expected to be complete by
late 1999. The nature of the efforts to complete the next generation version
of Formalcheck and Clover relate to the completion of all planning, designing,
prototyping, verification and testing activities that are necessary to
establish that the proposed technologies meet their design specifications
including functional, technical and economic performance requirements.
20
As evidenced by their continued support for these projects, management
believes Cadence is well positioned to successfully complete each of the major
research and development programs. However, there is risk associated with the
completion of the projects and there is no assurance that each will meet with
either technological or commercial success.
The net cash flows resulting from the projects underway at Ambit and BLDA,
which were used to value the purchased research and development, were based on
management's estimates of revenue, cost of revenue, research and development
costs, selling, general and administrative costs and income taxes from such
projects. The revenue projections are based on the potential market size that
the projects are addressing, Cadence's ability to gain market acceptance in
these segments and the life cycle of in-process technology.
Estimated total revenue from the acquired in-process product areas peak in
years 2003-2004 and decline rapidly in years 2005-2006 as other new products
are expected to enter the market. In addition, a portion of the anticipated
revenue has been attributed to enhancements of the base technology under
development, and has been excluded from net cash flow calculations. Existing
technology was valued at $50.3 million and $23.2 million in connection with
the Ambit and BLDA acquisitions, respectively. There can be no assurance that
these assumptions will prove accurate, or that Cadence will realize the
anticipated benefit of the acquisitions. See "Factors That May Affect Future
Results." The net cash flows generated from the in-process technology are
expected to reflect earnings before interest, taxes and depreciation of
approximately 38% to 49% for the sales generated from in-process technology.
The discount of the net cash flows to their present value is based on the
weighted average cost of capital (WACC). The WACC calculation produces the
average required rate of return of an investment in an operating enterprise,
based on various required rates of return from investments in various areas of
the enterprise. The discount rates used to discount the net cash flows from
the business enterprise, specifically acquired in-process technology, were 28%
and 25% for Ambit and BLDA, respectively. These discount rates reflect the
uncertainty surrounding the successful development of the acquired in-process
technology, the useful life of such technology, the profitability levels of
such technology, if any, and the uncertainty of technological advances, all of
which are unknown at this time.
If these projects are not successfully developed, Cadence's business,
operating results and financial condition may be negatively affected in future
periods. In addition, the value of other intangible assets acquired may become
impaired.
To date, Ambit's and BLDA's results have not differed significantly from
the forecast assumptions. Cadence's research and development expenditures
since the acquisitions have not differed materially from expectations. The
risks associated with the research and development are still considered high
and no assurance can be made that upcoming products will meet market
expectations.
In March 1998, Cadence acquired all of the outstanding stock of EXD for
cash. The total purchase price was $40.9 million, and the acquisition was
accounted for as a purchase.
Upon consummation of the EXD acquisition, Cadence immediately charged to
expense $28.4 million representing aquired in-process technology that had not
yet reached technological feasibility and had no alternative future use. See
"Notes to Consolidated Financial Statements." The value was determined by
estimating the costs to develop the aquired in-process technology into
commercially viable products, estimating the resulting net cash flows from
such projects and discounting the net cash flows back to their present value.
The discount rate included a factor that took into account the uncertainty
surrounding the successful development of the acquired in-process technology.
The in-process projects were expected to be commercially viable on dates
ranging from the end of 1998 through the year 2000. Expenditures to complete
these projects are expected to total approximately $7 million.
At the time of its acquisition by Cadence, EXD was working on several
significant research and development projects that, if successful, would
represent the introduction of new products and technologies to meet tomorrow's
market needs. These efforts included the development of new tools for library
generation, delay
21
calculation, memory compilation and semiconductor intellectual property
technology. These new technologies were intended to be fully supportive of
deep submicron design functions, which are a critical market requirement. The
nature of the efforts required to complete the research and development
projects relate, to varying degrees, to the completion of all planning,
designing, prototyping, verification and testing activities that are necessary
to establish that the proposed technologies meet their design specifications
including functional, technical and economic performance requirements.
In February 1998, Cadence acquired all of the outstanding stock of
Symbionics for approximately 1 million shares of Cadence's common stock and
$21.3 million of cash. The total purchase price was $46.1 million, and the
acquisition was accounted for as a purchase.
Upon consummation of the Symbionics acquisition, Cadence immediately
charged to expense $28.5 million representing acquired in-process technology
that had not yet reached technological feasibility and had no alternative
future use. See "Notes to Consolidated Financial Statements." The value was
determined by estimating the costs to develop the acquired in-process
technology into commercially viable products, estimating the resulting net
cash flows from such projects and discounting the net cash flows back to their
present value. The discount rate includes a factor that took into account the
uncertainty surrounding the successful development of the acquired in-process
technology. The in-process projects were expected to be commercially viable on
dates ranging from the end of 1998 through the year 2000. Expenditures to
complete these projects are expected to total approximately $6 million.
At the time of its acquisition by Cadence, Symbionics was working on
several significant research and development projects that, if successful,
would meet future market needs. These efforts involve digital television,
wireless home networking, cellular roaming and digital voice technologies,
which were intended to ensure the long-term success and survival of the
organization. The nature of the efforts required to complete the research and
development projects relate, to varying degrees, to the completion of all
planning, designing, prototyping, verification and testing activities that are
necessary to establish that the proposed technologies meet their design
specifications including functional, technical and economic performance
requirements.
As evidenced by their continued support for these projects, management
believes Cadence is well positioned to successfully complete the remaining
major research and development programs. However, there is risk associated
with the completion of the projects and there is no assurance that each will
meet with either technological or commercial success.
The net cash flows resulting from the projects underway at EXD and
Symbionics, which were used to value the acquired in-process technology, were
based on management's estimates of revenue, cost of revenue, research and
development costs, selling, general and administrative costs and income taxes
from such projects. The revenue projections are based on the potential market
size that the projects are addressing, Cadence's ability to gain market
acceptance in these segments and the life cycle of in-process technology.
Estimated total revenue from the acquired in-process product areas peak in
years 2001-2002 and decline rapidly thereafter as other new products are
expected to enter the market. In addition, a portion of the anticipated
revenue has been attributed to enhancements of the base technology under
development, and has been excluded from net cash flow calculations. Existing
technology was valued at $9.1 million and $6 million related to the EXD and
Symbionics acquisitions, respectively. There can be no assurance that these
assumptions will prove accurate, or that Cadence will realize the anticipated
benefit of the acquisitions. The net cash flows generated from the in-process
technology are expected to reflect earnings before interest and taxes are
estimated to be approximately 31% to 39% for the sales generated from EXD's
and Symbionics' in-process technology.
The discount applied to the net cash flows to calculate their present value
was based on the WACC. The discount rates used to discount the net cash flows
from acquired in-process technology range from 22% to 30% for EXD and
Symbionics. The discount rates are sometimes higher than the WACC due to the
inherent uncertainties in the estimates, including the uncertainty surrounding
the successful development of the acquired
22
in-process technology, the useful life of such technology, the profitability
levels of such technology, if any, and the uncertainty of technological
advances, all of which are unknown at this time.
If these projects are not successfully developed, Cadence's business,
operating results and financial condition may be adversely affected in future
periods. In addition, the value of other intangible assets acquired may become
impaired.
To date, EXD's and Symbionics' results have not differed significantly from
the forecast assumptions. Cadence's research and development expenditures
since the acquisitions have not differed materially from expectations. The
risks associated with the research and development are still considered high,
and no assurance can be made that upcoming products will meet market
expectations.
In 1997, Cadence wrote off $6.6 million of acquired in-process technology
associated with its acquisitions of Synthesia AB and Advanced
Microelectronics. These costs reflected in-process technology that had not
reached technological feasibility and, in management's opinion, had no
probable alternative future use.
In December 1996, Cadence acquired all of the outstanding stock of HLDS,
for approximately 5.2 million shares of Cadence's common stock. The total
purchase price was approximately $101.4 million and the transaction was
accounted for as a purchase.
Upon consummation of the HLDS acquisition, Cadence immediately charged to
expense $95.7 million representing acquired in-process technology that had not
yet reached technological feasibility and had no alternative future use. The
value was determined by estimating the costs to develop the acquired in-
process technology into commercially viable products, estimating the resulting
net cash flows from such projects and discounting the net cash flows back to
their present value. The discount rate includes a factor that takes into
account the uncertainty surrounding the successful development of the acquired
in-process technology.
At the time of its acquisition by Cadence, HLDS was developing new design
planning technology, with the goal of delivering an integrated register
transfer level-to-silicon deep submicron design technology. This research and
development project was intended to enable the creation, verification and
integration of complex functional blocks onto system-level chips. This project
required the creation of a completely new product architecture as well as
advanced, new design planning delay calculation methodologies. The nature of
the efforts required to complete the research and development projects relate,
to varying degrees, to the completion of all planning, designing, prototyping,
verification and testing activities that are necessary to establish that the
proposed technologies meet their design specifications including functional,
technical and economic performance requirements.
The net cash flows of the projects underway at HLDS, which were used to
value the acquired in-process technology, were based on management's estimates
of revenue, cost of revenue, research and development costs, selling, general
and administrative costs, and income taxes from such projects. The revenue
projections were based on the potential market size that the projects
addressed, Cadence's ability to gain market acceptance in these segments and
the life cycle of in-process technology. Estimated total revenue from the
acquired in-process product areas were expected to peak in 2001 and decline
rapidly thereafter as other new products are expected to enter the market. In
addition, a portion of the anticipated revenue has been attributed to
enhancements of the base technology under development and has been excluded
from net cash flow calculations.
The net cash flows generated from the in-process technology were expected
to reflect earnings before interest, taxes and depreciation at approximately
45% to 60% for the sales generated from the in-process technology. The
discount rate used to discount the net cash flows from acquired in-process
technology was 25%. Cadence believes that expenses incurred to date associated
with the development of the in-process technology projects are approximately
consistent with Cadence's previous estimates.
To date, HLDS's results have not differed significantly from the forecast
assumptions. Cadence's research and development expenditures since the HLDS
acquisition have not differed materially from expectations.
23
Restructuring
In 1998, Cadence recorded $69.5 million of restructuring charges primarily
associated with Cadence's worldwide restructuring plan in the second half of
1998. Cadence's restructuring plans and associated costs consisted of $36.9
million to terminate approximately 700 employees, $29.9 million to downsize
and close excess facilities and $2.7 million of other restructuring expenses.
Cadence's restructuring plan was primarily aimed at reducing the cost of
excess personnel and capacity in its Services business. A discussion about
Cadence's gross margin trends for its services business can be found under
"Cost of Revenue" within this section. Cadence anticipates that the
restructuring actions will save approximately $75 million in fiscal 1999.
Severance costs of $36.9 million include severance benefits, notice pay and
outplacement services. Approximately $10.1 million of these costs resulted
from the acceleration of stock option vesting under employment agreements. All
terminations and termination benefits were communicated to the affected
employees prior to year-end, and severance benefits are expected to be paid by
1999.
Cadence also incurred charges totaling $29.9 million in connection with the
closure of 58 sales and engineering facilities, including $16.7 million to
downsize and close facilities and $13.2 million in abandonment costs for the
related leasehold improvements. Closure and exit costs include payments
required under lease contracts (less any applicable sublease income) after the
properties were abandoned, lease buyout costs, restoration costs associated
with certain lease arrangements and costs to maintain facilities during the
period after abandonment. Asset related costs written-off consist of leasehold
improvements to facilities that were abandoned and whose estimated fair market
value is zero. Through the first quarter of 1999, 90% of the sites have been
vacated and the remaining sites will be downsized or vacated during the second
and third quarter of 1999. Noncancelable lease payments on vacated facilities
will be paid out through 2008.
Cadence also recorded $2.7 million of other restructuring charges
consisting primarily of cancellation fees associated with certain vendor and
conference arrangements and abandoned software.
In 1997, Cadence recorded restructuring charges of $34.4 million. These
charges relate to restructuring plans primarily aimed at reducing costs after
Cadence merged with CCT and acquired HLDS. Cadence's restructuring plans and
associated costs consisted of $11.9 million to terminate approximately 230
employees, $4.4 million to close duplicate and excess facilities and $3.7
million of other expenses associated with the business combinations. Also
included in the restructuring costs were fees of $14.4 million related to the
CCT combination for financial advisors, attorneys and accountants. The
remaining severance balances were paid out in 1998 and all facilities were
vacated. Noncancelable lease payments on vacated facilities will be paid out
through the year 2000.
In 1996, Cadence recorded restructuring charges of $2.1 million consisting
of employee termination costs associated with the outsourcing of the Company's
management information technology services and costs associated with excess
facilities.
Liabilities for excess facilities and other restructuring charges are
included in other current and non-current liabilities, while severance and
benefits liabilities are included in payroll and payroll related accruals.
Actual amounts of termination benefits, facilities and other restructuring
related payments can be found in Notes to Consolidated Financial Statements
under "Restructuring."
Capitalized Software Development Costs
In 1997 and 1996, Cadence wrote-off capitalized software development costs
of $3.1 and $2.7 million, respectively, for products developed by Cadence that
were replaced by CCT and HLDS products or by license of replacement
technology.
24
Other Income, net
Other income, net for 1998, 1997 and 1996 is as follows:
1998 1997 1996
----- ----- -----
(In millions)
Interest income......................................... $10.5 $18.5 $ 5.4
Gain (loss) on foreign exchange......................... 2.6 (1.4) 0.2
Equity earnings from investments........................ (0.9) 1.9 --
Gain on sale of IMS stock............................... -- 13.1 --
Minority interest expense............................... (0.3) (0.4) (3.0)
Other expense, net...................................... (0.8) (3.0) (0.5)
Interest expense........................................ (3.6) (2.5) (1.9)
----- ----- -----
Total other income, net............................... $ 7.5 $26.2 $ 0.2
===== ===== =====
Interest income decreased in 1998, as compared to 1997, by $8 million,
primarily due to lower average cash and investment balances throughout 1998,
due in part to the payments made for acquisitions. The increase in 1997 of
$13.1 million, as compared to 1996, was primarily attributable to higher
average cash and investment balances throughout 1997.
In February 1997, Cadence and IMS sold to the public 1.7 million shares of
IMS common stock at $20.75 per share, of which 1 million shares were sold by
Cadence, netting Cadence $18.6 million in cash. In connection with this
transaction, Cadence recorded a pre-tax realized gain of $13.1 million, which
is included in other income, net in the consolidated statements of operations.
Cadence also recorded a $2.3 million unrealized gain, net of deferred taxes,
which represented Cadence's proportionate share of IMS' equity as a result of
IMS' sale of stock. This unrealized gain is reflected in the consolidated
statements of stockholders' equity. Although Cadence has no current intent to
enter into similar transactions, the likelihood of such transactions in the
future is dependent upon the state of financial markets as well as liquidity
and other considerations of each of Cadence and IMS.
The gain on foreign exchange increased in 1998, as compared to 1997, due to
favorable exchange rate movements for Asian currencies, primarily the Japanese
yen. The loss on foreign exchange in 1997 was attributable to unfavorable
exchange rate movements for Asian currencies, primarily the Japanese yen and
Korean won, as compared to 1996. Other expense in 1998, 1997 and 1996, was due
primarily to investment losses from a venture capital partnership.
Income Taxes
The provision for income taxes and the effective tax rates for 1998, 1997
and 1996 are as follows:
1998 1997 1996
----- ----- -----
(In millions)
Provision for income taxes (1)............................ $80.7 $73.1 $64.2
Effective tax rate........................................ 72% 30% 65%
- --------
(1) Includes tax benefit in 1997 of $5.3 million on cumulative effect of
change in accounting method.
At January 2, 1999, Cadence had total net deferred tax assets of
approximately $63.3 million. Realization of the deferred tax assets will be
dependent on generating sufficient taxable income prior to the expiration of
certain net operating loss and tax credit carryforwards. The net valuation
allowance increased by $15.4 million in 1998 due to the uncertainty of certain
foreign subsidiaries generating sufficient taxable income to realize certain
foreign deferred tax assets. Although realization is not assured, management
believes that it is more likely than not that the net deferred tax assets will
be realized. The amount of the net deferred tax assets, however,
25
could be reduced or increased in the near term if actual facts, including the
estimate of future taxable income, differ from those estimated.
The effective tax rate for 1998, 1997 and 1996, includes the write-off of
in-process technology of approximately $194.1 million, $6.6 million and $95.7
million, respectively. The 1998, 1997 and 1996 effective tax rates, excluding
the write-off of acquired in-process technology, are 28.5%, 30%, and 33%,
respectively. The decrease in the 1998 effective tax rate, as compared to
1997, was primarily due to differences in tax rates between domestic and
foreign operations being applied to proportionally changing amounts of
domestic and foreign taxable income and to non-deductible acquisition costs of
the CCT merger in 1997. The decrease in the 1997 effective tax rate, as
compared to the 1996 effective tax rate, was primarily due to foreign earnings
generating a higher proportion of total earnings in 1997, and those earnings
being taxed at a lower rate.
Change in Accounting Method
In November 1997, the Emerging Issues Task Force of the Financial
Accounting Standards Board issued Ruling 97-13 "Accounting for Costs Incurred
in Connection with a Consulting Contract or an Internal Project That Combines
Business Process Reengineering and Information Technology Transformation,"
which requires companies to expense costs incurred for business process
reengineering projects. As a result, Cadence recorded a $12.3 million charge
in 1997, net of taxes of $5.3 million, as a cumulative effect of change in
accounting method for reengineering project costs that had been previously
capitalized by Cadence associated with its implementation of enterprise-wide
information systems.
Disclosures About Market Risk
Interest Rate Risk
Cadence's exposure to market risk for changes in interest rates relates
primarily to its investment portfolio and long-term debt obligations.
Cadence places its investments with high quality credit issuers and, by
policy, limits the amount of credit exposure to any one issuer. As stated in
its policy, Cadence's first priority is to reduce the risk of principal loss.
Consequently, Cadence seeks to preserve its invested funds by limiting default
risk, market risk and reinvestment risk. Cadence mitigates default risk by
investing in only high quality credit securities that it believes to be low
risk and by positioning its portfolio to respond appropriately to a
significant reduction in a credit rating of any investment issuer or
guarantor. The portfolio includes only marketable securities with active
secondary or resale markets to ensure portfolio liquidity.
In October 1998, Cadence entered into a senior unsecured credit facility
(the 1998 Facility) with a syndicate of banks that allows Cadence to borrow up
to $355 million. The 1998 Facility is divided between a $177.5 million three
year revolving credit facility (the Three Year Facility) and a $177.5 million
364-day revolving credit facility convertible to a three year term loan (the
364-Day Facility). The Three Year Facility expires September 29, 2001. The
364-Day Facility will either expire on September 29, 1999 and be converted to
a three year term loan with a maturity date of September 29, 2002 or, at the
option of the bank group, be renewed for an additional one year period.
Cadence has the option to pay interest based on LIBOR plus a spread of between
0.50% and 1.00%, based on a pricing grid tied to a financial covenant, or the
higher of the Federal Funds Rate plus 0.50% or the prime rate. As a result,
Cadence's interest rate expenses associated with this borrowing will vary with
market rates. In addition, commitment fees are payable on the unutilized
portions of the Three Year Facility at rates between 0.18% and 0.30% based on
a pricing grid tied to a financial covenant and on the unutilized portion of
the 364-Day Facility at a fixed rate of 0.10%. The 1998 Facility contains
certain financial and other covenants.
26
The table below presents the carrying value and related weighted average
interest rates for Cadence's investment portfolio and its long-term debt
obligations. The carrying value approximates fair value at January 2, 1999.
All investments mature in one year or less.
Average
Carrying Interest
Value Rate
------------- --------
(In millions)
Investment Securities:
Cash equivalents--fixed rate........................... $ 16.0 3.61%
Short-term investments--fixed rate..................... 26.7 5.71%
------
Total investment securities.......................... 42.7 4.25%
Cash equivalents--variable rate........................ 53.4 4.38%
------
Total interest bearing instruments................... $ 96.1 4.32%
======
Debt:
Revolving credit facility.............................. $135.0 6.07%
======
Interest Rate Swap Risk
Cadence entered into a 4.8% fixed interest rate-swap in connection with its
accounts receivable financing program to modify the interest rate
characteristics of the receivables sold to a financing institution on a non-
recourse basis. At January 2, 1999, the maturity distribution of the $26
million notional amount payable to Cadence by the institution was in quarterly
installments of approximately $2.2 million commencing in January 1999 and
ending in October 2001. The estimated fair value at January 2, 1999 was
negligible.
Foreign Currency Risk
Cadence transacts business in various foreign currencies, primarily in
Japanese yen and certain European currencies. Cadence has established a
foreign currency hedging program, utilizing foreign currency forward exchange
contracts (forward contracts) to hedge certain foreign currency transaction
exposures in Japan, Canada, Asia and certain European countries. Under this
program, increases or decreases in Cadence's foreign currency transactions are
partially offset by gains and losses on the forward contracts, so as to
mitigate the possibility of foreign currency transaction gains and losses.
Cadence does not use forward contracts for trading purposes. All outstanding
forward contracts at the end of a period are marked-to-market with unrealized
gains and losses included in other income, net, and thus are recognized in
income in advance of the actual foreign currency cash flows. As these forward
contracts mature, the realized gains and losses are recorded and are included
in net income as a component of other income, net. Cadence's ultimate realized
gain or loss with respect to currency fluctuations will depend on the currency
exchange rates and other factors in effect as the contracts mature.
The table below provides information as of January 2, 1999 about Cadence's
material forward contracts. The information is provided in U.S. dollar
equivalent amounts. The table presents the notional amounts (at contract
exchange rates) and the weighted average contractual foreign currency exchange
rates. These forward contracts mature prior to March 31, 1999.
Average
Notional Contract
Amount Rate
------------- --------
(In millions)
Forward Contracts:
Japanese yen....................................... $36.2 117.63
British pound sterling............................. $10.1 1.67
French francs...................................... $(4.9) 5.50
Italian lira....................................... $ 4.1 1,627.45
Canadian dollars................................... $(2.8) 1.54
German deutschemarks............................... $ 1.8 1.65
Dutch guilder...................................... $(1.5) 1.85
27
The unrealized gain (loss) on the outstanding forward contracts at January
2, 1999 was immaterial to Cadence's consolidated financial statements. Due to
the short-term nature of the forward contracts, the fair value at January 2,
1999 was negligible. The realized gain (loss) on these contracts as they
matured was not material to the consolidated operations of Cadence.
Equity Price Risk
As part of its authorized repurchase program, Cadence has sold put warrants
through private placements. Additionally, Cadence has purchased call options
that entitle Cadence to buy on a specified day one share of common stock at a
specified price to satisfy anticipated stock repurchase requirements under
Cadence's seasoned systematic repurchase programs.
Cadence repurchases shares of its common stock under stock repurchase
programs in order to make sure it has enough shares for issuance under its
Employee Stock Purchase Plan (ESPP), its 1997 Stock Option Plan (the 1997
Plan) and for other corporate purposes. This may result in sales of a large
number of shares and consequent decline in the market price of Cadence common
stock. As part of these repurchase programs, Cadence has purchased and will
purchase call options or has sold and will sell put warrants.
. Call options allow Cadence to buy shares of its stock on a specified day
at a specified price. If the market price of the stock is greater than
the exercise price of a call option, Cadence will typically exercise the
option and receive shares of stock. If the market price of the stock is
less than the exercise price of a call option, Cadence typically will not
exercise the option.
. Call option issuers may accumulate a substantial number of shares of
Cadence common stock in anticipation of Cadence's exercising its call
option and may dispose of these shares if and when Cadence fails to
exercise its call option. This could cause the market price of Cadence
common stock to fall.
. Put warrants allow the holder to sell to Cadence shares of Cadence Common
Stock on a specified day at a specified price. Cadence has the right to
settle the put warrants with shares of Cadence common stock valued at the
difference between the exercise price and the fair value of the stock at
the date of exercise.
. Depending on the exercise price of the put warrants and the market price
of the stock at the time of exercise, settlement of the put warrants with
stock could cause Cadence to issue a substantial number of shares to the
holder of the put warrant. The holder may sell these shares in the
market, which could cause the price of Cadence common stock to fall.
. Put warrant holders may accumulate a substantial number of shares of
stock in anticipation of exercising their put warrants and may dispose of
these shares if and when they exercise their put warrants and Cadence
issues shares in settlement of their put warrants. This could also cause
the market price of Cadence common stock to fall.
28
The table below provides information at January 2, 1999 about Cadence's put
warrants and call options. The table presents the contract amounts and the
weighted average strike prices. The put warrants and call options expire at
various dates through November 1999 and Cadence has the contractual ability to
settle the options prior to their maturity.
1999 Estimated
Maturity Fair Value
-------- ----------
(Shares and
contract
amounts in
millions)
Put Warrants:
Shares................................................. 4.2
Weighted average strike price.......................... $27.22
Contract amount........................................ $114.3 $16.6
Call Options:
Shares................................................. 2.9
Weighted average strike price.......................... $27.19
Contract amount........................................ $ 78.8 $20.9
Year 2000 Update
The Year 2000 computer issue creates risks for Cadence, the full extent and
scope of which have not yet been fully assessed. In the event that internal
products and systems, or those products and systems provided by, or utilized
by third parties, do not correctly recognize and process date data information
beyond the year 1999, it could have a material adverse effect on Cadence's
business, operating results and financial condition.
To address Year 2000 issues, Cadence initiated a program designed to
address the most critical Year 2000 items that would affect Cadence's
products, its worldwide business systems and the operations of the following
functions: research and development, finance, sales, manufacturing and human
resources. Assessment and remediation efforts regarding these critical items
are proceeding in parallel. Cadence is also creating a plan to work with
critical suppliers and customers to determine that such suppliers' and
customers' operations and the products and services they provide are Year 2000
capable or to monitor their progress towards Year 2000 capability. Cadence has
commenced work on contingency plans to address potential problems with its
internal systems or with suppliers, customers and other third parties.
In 1997, Cadence commenced a program to inventory, assess, remediate and
test the Year 2000 capability of its products. As a result of those efforts,
Cadence believes that the most current release of Cadence's software products,
as set forth in the Year 2000 Software Compliance List (available on Cadence's
web site), are Year 2000 Compliant. Cadence defines the term "Year 2000
Compliant" to mean that the software will not: (A) cease to perform due solely
to a change in date to or after January 1, 2000, nor (B) generate incorrect or
ambiguous data or results with respect to same-century and/or multi-century
formulas, functions, date values and date data interfaces. Cadence does not
believe that customers are using a significant amount of products that are not
determined to be Year 2000 Compliant. Cadence continues to further validate
current products, as well as new products, products acquired through
acquisitions, such as Ambit and BLDA, and releases through testing and code
reviews. All Cadence Year 2000 activities concerning Cadence's products are
expected to be completed by October 1999.
In 1995, Cadence also commenced a worldwide business systems replacement
project with systems that use programs primarily from SAP America, Inc. (SAP),
PeopleSoft, Inc. (PeopleSoft), and Siebel Systems, Inc. (Siebel). The new
systems are expected to make approximately 70% of Cadence's business computer
systems Year 2000 Compliant. In addition, during September 1997, Cadence
commenced an investigation of the condition of Year 2000 readiness for all of
its other internal business applications. This effort began with an inventory
to identify current business applications, an evaluation of their Year 2000
readiness status and development of plans for remediation and testing of all
discovered issues. As of February 1999, of the 60 business application systems
that had been identified, 54 had been modified or replaced and determined to
be
29
Year 2000 ready. Recently, Cadence has identified additional areas requiring
Year 2000 assessment, remediation and testing, specifically software
interfaces and applications used to interact with vendors, as well as
applications that are unique to the various international operations. Cadence
expects that all business critical applications shall be Year 2000 Compliant
by the third quarter of 1999.
In July 1998, Cadence established a cross functional Year 2000 Project Team
to identify and resolve all remaining Year 2000 readiness issues. The primary
remaining issues consist of assessing the Year 2000 impact for outside
vendors, customers, facilities and the remaining internal business systems
that are not yet assessed as Year 2000 compliant. Project plans have been
developed and include the process of identifying and prioritizing critical
suppliers and customers at the direct interface level and communicating with
them about their plans and progress in addressing Year 2000 issues. Detailed
evaluations of the most critical third parties have been initiated. It is
expected that all Year 2000 project inventories will be completed by the end
of the second quarter of 1999. This effort is being followed by each business
function conducting a focused level of ranking and functional assessment of
its inventory to establish the methods and actions required to resolve any
Year 2000 issues discovered. The assessment efforts are estimated to be
completed by the second quarter of 1999. The remediation (modification or
replacement of existing software or systems) efforts are expected to be
completed by the third quarter of 1999 and the testing phases of the Year 2000
Project Plans are expected to take place throughout most of 1999 and estimated
to be completed, for all business critical items, by the fourth quarter of
1999. All remaining issues (which are considered low priority or low risk to
the business) are planned to be addressed as time permits and could continue
through the first half of 2000.
It is estimated that the 1999 budget for Year 2000 related costs to resolve
remaining readiness issues will be approximately $13.0 million. The costs of
implementing the SAP, PeopleSoft and Siebel business application systems are
not included in these cost estimates. The total cost associated with required
modifications to become Year 2000 compliant is not expected to have a material
adverse effect on Cadence's business, operating results and financial
condition. Cadence's current estimates of the amount of time and costs
necessary to implement and test its systems are based on the facts and
circumstances existing at this time. The estimates were derived utilizing
multiple assumptions of future events including the continued availability of
certain resources, implementation success and other factors. New developments
may occur that could affect Cadence's estimates for Year 2000 compliance.
These developments include, but are not limited to: (a) the availability and
cost of personnel trained in this area, (b) the ability to locate and correct
all relevant computer code and equipment, and (c) the planning and
modification success needed to achieve full implementation.
Readers are cautioned that the foregoing discussion regarding Year 2000
Update contains forward-looking statements based on current expectations that
involve risks and uncertainties and should be considered in conjunction with
the following. The failure to correct a material Year 2000 problem could
result in an interruption in, or a failure of, certain normal business
activities or operations of Cadence. Such failures could materially and
adversely affect Cadence's business, operating results and financial
condition. Due in large part to the uncertainty of the Year 2000 readiness of
third-party suppliers and customers, as well as the lack of remediation and
testing for the remaining internal business systems that are not yet assessed
as Year 2000 Compliant, Cadence is currently unable to determine whether the
consequences of Year 2000 issues will have a material impact on Cadence's
business, operating results or financial condition.
Cadence's risks associated with non-information technology systems and
embedded systems are generally limited to systems that typically involve
environmental control systems, interruptible power systems, elevator systems
and security systems. Cadence feels confident that through its research,
testing and corrective actions, the realized risks from embedded systems will
be low.
The reasonably likely worst case scenario of a Year 2000 problem for all of
Cadence's material systems is that Cadence's operations could be disrupted for
a few days before the problem could be identified and remediated. The
reasonably likely worst case scenario associated with Cadence products for a
Year 2000 problem is that a customer project could be delayed for a short
period of time before the problem can be identified and
30
remediated by Cadence's support process. Because of the small amount of
software code that could be involved, it is anticipated that problems will be
remediated within 5 business days from when the problem is recreated by
Cadence's support organization. Cadence uses contract terms to limit indirect
damages that may be incurred by customers, although no assurance can be given
that such terms are enforceable.
The Year 2000 Project is expected to significantly reduce Cadence's level
of uncertainty regarding Year 2000 issues and, in particular, about the Year
2000 readiness of its material internal operations and external agents. In
addition, Cadence believes that the current Year 2000 activities surrounding
Cadence's software products and internal systems have significantly reduced
the risk of any interruption caused by any Year 2000 issues in these areas.
However, because of uncertainties with Year 2000 issues, Cadence is currently
unable to determine whether and to what extent the Year 2000 problem will harm
its business, operating results or financial condition.
Liquidity and Capital Resources
At January 2, 1999, Cadence's principal sources of liquidity consisted of
$209.8 million of cash and cash equivalents and short-term investments, as
compared with $304.2 million and $318.4 million at January 3, 1998 and
December 28, 1996, respectively, and a new $355.0 million senior unsecured
credit facility entered into in October 1998. As of January 2, 1999, Cadence
had outstanding borrowings of $135.0 million under the credit facility.
Cash provided by operating activities increased $44.3 million to $246.1
million in the year ended January 2, 1999, as compared to the year ended
January 3, 1998, primarily due to increases in net income before unusual
items, prepaid expenses and other, depreciation and amortization and a
decrease in accounts payable and accrued liabilities, partially offset by
increases in receivables and installment contract receivables. Cash provided
by operating activities increased $22.7 million to $201.8 million for the year
ended January 3, 1998, as compared to the year ended December 28, 1996. The
increase was primarily due to increases in net income before unusual items,
accrued liabilities and payables, and income taxes payable, partially offset
by increases in receivables and installment contract receivables and deferred
income taxes.
At January 2, 1999, Cadence had net working capital of $251.8 million, as
compared with $340.3 million at January 3, 1998. The primary reasons for the
decrease were decreases in short-term investments of $70.5 million, cash and
cash equivalents of $24 million, and accounts receivable of $13.3 million and
increases in accounts payable and accrued liabilities of $54.8 million,
partially offset by an increase in installment contract receivables, current
of $86.9 million. The increase in accounts payable and accrued liabilities was
primarily attributable to bonus and commissions payments to be paid in early
1999, restructuring charges, sales taxes, and withholdings for issuance of
stock under Cadence's ESPP.
In addition to its short-term investments, Cadence's primary investing
activities were acquisitions and the related acquired intangibles, purchases
of property and equipment, capitalization of software development costs and
venture capital partnership investments, which combined represented $587.1
million, $95.8 million and $98.0 million of cash used for investing activities
in the years ended January 2, 1999, January 3, 1998 and December 28, 1996,
respectively.
In the first quarter of 1999, Cadence completed the construction of a new
building and improvements on the San Jose, California campus with an estimated
total cost of approximately $15.4 million. Also in the first quarter of 1999,
Cadence purchased an additional facility adjacent to its San Jose, California
campus for $27.5 million, which it expects to occupy in the third quarter of
1999. Additionally, the construction of a new Cadence design center was
commenced in 1998 in Scotland.
In May 1997, Cadence announced that its board of directors had rescinded
Cadence's previously-announced stock repurchase program, with the exception of
continued systematic stock repurchases under its seasoned stock repurchase
program for Cadence's ESPP. Cadence rescinded the stock repurchase program in
connection with
31
its merger with CCT in order to comply with requirements for the pooling of
interests accounting treatment. Cadence announced a new seasoned systematic
stock repurchase program in September of 1997 in connection with the
establishment of the 1997 Plan. The shares acquired by Cadence under this new
program will be used to meet the recurring share issuance requirements of the
1997 Plan. The repurchase authorization for the 1997 Plan is 4 million shares
over a two year period; 2.4 million additional shares are authorized for
repurchase for the ESPP over a two year period. In November 1997, Cadence
announced a new 10 million share stock repurchase program.
In connection with and prior to the consummation of the merger with
Quickturn, Cadence will rescind its stock repurchase program, with the
exception of continued systematic stock repurchases under its seasoned stock
repurchase programs for Cadence's 1997 Plan and ESPP.
Since 1994, as part of its previously discussed authorized stock repurchase
program, Cadence has sold put warrants and purchased call options through
private placements. Cadence had a maximum potential obligation related to the
put warrants at January 2, 1999 to buy back 4.2 million shares of its common
stock at an aggregate price of approximately $114.3 million. The put warrants
will expire at various dates through November 1999 and Cadence has the
contractual ability to settle the options prior to their maturity. Cadence has
the ability to settle these put warrants with stock and, therefore, no amount
was classified out of stockholders' equity in the consolidated balance sheets.
The effect of the exercise of these put warrants and call options is reported
in the line titled "Purchase of treasury stock" within the consolidated
statements of stockholders' equity.
Anticipated cash requirements for 1999 include the repurchase of stock for
Cadence's stock repurchase programs and the contemplated additions of
property, plant and equipment of approximately $152 million.
As part of its overall investment strategy, Cadence has committed to invest
$50 million in a venture capital partnership as a limited partner over the
next three to four years. At January 2, 1999, Cadence had contributed
approximately $26 million of this amount, which is reflected in other assets
in the consolidated balance sheets, net of operating losses.
Cadence anticipates that current cash and short-term investment balances,
cash flows from operations and the remaining amounts available under its $355
million revolving line of credit should be sufficient to meet its working
capital and capital expenditure requirements on a short- and long-term basis.
New Accounting Standards
In 1998, Cadence adopted Statement on Financial Accounting Standards (SFAS)
No. 131, "Disclosures about Segments of an Enterprise and Related
Information," issued by the Financial Accounting Standards Board (FASB), which
requires companies to report financial and descriptive information about its
reportable operating segments, including segment profit or loss, certain
specific revenue and expense items and segment assets, as well as information
about the revenue derived from Cadence's products and services, the countries
in which Cadence earns revenue and holds assets, and major customers. SFAS No.
131 did not have a material impact on Cadence's consolidated financial
statements.
In 1998, Cadence adopted Statement of Position (SOP) 97-2, "Software
Revenue Recognition" issued by the Accounting Standards Executive Committee of
the American Institute of Certified Public Accountants. SOP 97-2 provides
guidance on applying generally accepted accounting principles in recognizing
revenue on software transactions. The adoption of SOP 97-2 did not have a
material impact on Cadence's consolidated financial position or results of
operations.
In 1998, Cadence adopted SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." Adoption of SOP 98-1 did not
have a material impact on its consolidated financial statements.
32
In 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
It requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met and
that a company must formally document, designate and assess the effectiveness
of transactions that receive hedge accounting. SFAS No. 133 is effective for
fiscal years beginning after June 15, 1999 and cannot be applied
retroactively. Cadence has not yet determined the impact SFAS No. 133 will
have on its financial position, results of operations or cash flows.
In 1998, Cadence adopted SFAS No. 130, "Comprehensive Income," which
requires companies to report a new, additional measure of income on the income
statement or to create a new financial statement that has the new measure of
income on it. SFAS No. 130 did not have a material impact on Cadence's
consolidated financial statements.
Factors That May Affect Future Results
Certain statements contained in this Annual Report on Form 10-K, including,
without limitation, statements containing the words "believes," "anticipates,"
"estimates," "intends," "expects," and words of similar import, constitute
forward-looking statements within the meaning of the Private Securities Reform
Act of 1995. Actual results could vary materially from those expressed in
those statements. Readers are referred to "Marketing and Sales," "Research and
Development," "Competition," "Proprietary Technology," "Manufacturing," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" sections contained herein as well as the factors described below,
which identify some of the important factors or events that could cause actual
results or performances to differ materially from those contained in the
forward-looking statements.
Cadence lacks long-term experience in its electronics design and consulting
services business
Cadence only recently began to focus on offering electronics design and
consulting services and therefore may not be as experienced in this business
as others. The market for these services is relatively new and rapidly
evolving. Cadence's failure to succeed in these services businesses may
seriously harm Cadence's business, operating results and financial condition.
The success of Cadence's electronic design and consulting services businesses
depends on many factors that are beyond its control
In order to be successful with its electronics design and consulting
services, Cadence must overcome several factors that are beyond its control,
including the following:
. Many service contracts generally represent large amounts of revenue.
Cadence's electronics design and consulting services contracts generally
represent a relatively large amount of revenue per order. Therefore, the
loss of individual orders could seriously hurt Cadence's revenue and
operating results.
. Many service contracts are at a fixed price. A substantial portion of
these service contracts are fixed-price contracts. This means that the
customer pays a fixed price that has been agreed upon ahead of time, no
matter how much time or how many resources Cadence must devote to
perform the contract. If Cadence's cost in performing the services
consistently and significantly exceeds the amount the customer has
agreed to pay, it could seriously harm Cadence's business, operating
results and financial condition.
. Cadence's cost of service personnel is high and reduces gross margin.
Gross margins represent the difference between the amount of revenue
from the sale of services and Cadence's cost of providing those
services. Cadence must pay high salaries to professional services
personnel to attract and retain them. This results in lower gross
margins than the gross margins in Cadence's software business. In
addition, the high cost of training new services personnel or not fully
utilizing these personnel can significantly lower gross margins.
33
Fluctuations in quarterly results of operations could hurt Cadence's business
and the market price of its stock
Cadence has experienced, and may continue to experience, varied quarterly
operating results. Various factors affect Cadence's quarterly operating results
and some of them are not within Cadence's control, including the mix of
products and services sold and the timing of significant orders for its
software products by customers. Quarterly operating results are affected by the
mix of products sold because there are significant differences in margins from
the sale of products and services. Cadence realizes gross margins on product
sales of approximately 90% but realizes gross margins of approximately 30% on
its performance of services. In addition, Cadence's quarterly operating results
are affected by the timing of significant orders for its software products
because a significant number of contracts for software products are in excess
of $5 million. The failure to close a contract for the sale of one or more
orders of Cadence's software products could seriously hurt its quarterly
operating results.
In addition, Cadence bases its expense budgets partially on its expectations
of future revenue. However, it is difficult to predict revenue levels or
growth. Revenue levels that are below Cadence's expectations could seriously
hurt Cadence's business, operating results and financial condition. If revenue
or operating results fall short of the levels expected by public market
analysts and investors, the trading price of Cadence Common Stock could decline
dramatically. Also, because of the large order size and its customers' buying
patterns, Cadence may not learn of revenue shortfalls, earnings shortfalls or
other failures to meet market expectations until late in a fiscal quarter,
which could cause even more immediate and serious harm to the trading price of
Cadence Common Stock.
Because Cadence's focus on providing services is relatively recent, it
believes that quarter-to-quarter comparisons of its results of operations may
not be meaningful. Therefore, stockholders should not view Cadence's historical
results of operations as reliable indicators of its future performance.
Cadence expects to acquire other companies and may not successfully integrate
them
Cadence has acquired other businesses before and may do so again. While
Cadence expects to analyze carefully all potential transactions before
committing to them, Cadence cannot assure you that any transaction that is
completed will result in long-term benefits to Cadence or its stockholders or
that Cadence's management will be able to manage the acquired businesses
effectively. In addition, growth through acquisition involves a number of
risks. If any of the following events occurs after Cadence acquires another
business, it could seriously harm Cadence's business, operating results and
financial condition:
. Difficulties in combining previously separate businesses into a single
unit;
. The substantial diversion of management's attention from day-to-day
business when negotiating these transactions and later integrating an
acquired business;
. The discovery after the acquisition has been completed of liabilities
assumed from the acquired business;
. The failure to realize anticipated benefits such as cost savings and
revenue enhancements;
. Difficulties related to assimilating the products of an acquired business.
For example, in distribution, engineering, and customer support areas; and
. The failure to identify or correct a material Year 2000 problem of an
acquired business.
Failure to obtain export licenses could harm Cadence's business
Cadence must comply with United States Department of Commerce regulations in
shipping its software products and other technologies outside the United
States. Although Cadence has not had any significant difficulty complying with
these regulations so far, any significant future difficulty in complying could
harm Cadence's business, operating results and financial condition.
34
"Year 2000 computer problems" could interrupt Cadence's business operations.
The so-called Year 2000 problem occurs when computer programs and embedded
microprocessors fail to process date information correctly beginning in 1999.
If Cadence experiences a Year 2000 problem, it could result in an interruption
in, or a failure of, normal business operations. This could seriously harm
Cadence's business, operating results and financial condition.
While Cadence has established a Year 2000 project team to identify and
resolve its potential Year 2000 issues, Cadence has not fully assessed the
risks the Year 2000 problem poses to its business. Cadence believes that its
own internally-developed software products generally will not have Year 2000
problems. However, Cadence is uncertain as to the Year 2000 readiness of
third-party suppliers and customers, approximately 30% of its internal
information business systems, and products acquired through recent
acquisitions. Because of these uncertainties, Cadence is currently unable to
determine whether and to what extent the Year 2000 problem will harm its
business, operating results or financial condition.
Anti-takeover defenses in Cadence's charter and under Delaware law could
prevent an acquisition of Cadence or limit the price that investors might be
willing to pay for Cadence Common Stock
Provisions of the Delaware General Corporation Law that apply to Cadence
and its Certificate of Incorporation could make it difficult for another
company to acquire control of Cadence. For example:
. Section 203 of the Delaware General Corporation Law generally prohibits a
Delaware corporation from engaging in any business combination with a
person owning 15% or more of the voting stock of the corporation, or who
is affiliated with the corporation and owned 15% or more of its voting
stock at any time within 3 years prior to the proposed business
combination, for a period of three years from the date the person became
a 15% owner, unless specified conditions are met.
. Cadence's Certificate of Incorporation allows the Cadence Board of
Directors to issue at any time and without stockholder approval,
preferred stock with such terms as it may determine. No shares of Cadence
preferred stock are currently outstanding. However, the rights of holders
of any Cadence preferred stock that may be issued in the future may be
superior to the rights of holders of Cadence Common Stock.
. Cadence has a rights plan, commonly known as a "poison pill," which would
make it difficult for someone to acquire Cadence without the approval of
Cadence's Board of Directors. Cadence's rights plan is described in more
detail in "Cadence Capital Stock and Comparison of Stockholder Rights--
Description of Cadence Capital Stock--Cadence Rights Plan."
All of these factors could limit the price that certain investors would be
willing to pay for shares of Cadence Common Stock and could delay, prevent or
allow the Board of Directors of Cadence to resist an acquisition of Cadence,
even if the proposed transaction was favored by a majority of Cadence's
independent stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 7A is incorporated by reference from the
section entitled "Disclosures About Market Risk" found in Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
35
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
Previously Reported Quarterly Results
The following table represents the quarterly results of Cadence as
previously reported, excluding the restatement of prior period financial
statements for the CCT merger and adjustments to reduce the amounts of in-
process technology previously charged to expense.
1998 1997
----------------------------------------- -----------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
-------- ----------- -------- ---------- -------- -------- -------- --------
(In thousands, except per share amounts)
Revenue................. $345,452 $ 308,607 $291,788 $ 270,223 $283,013 $234,866 $210,466 $187,548
Cost of revenue......... $ 75,987 $ 78,013 $ 70,913 $ 62,334 $ 53,795 $ 46,812 $ 43,592 $ 38,897
Income (loss) from
operations (1)......... $ 71,260 $ (185,305) $ 90,245 $ (5,541) $ 83,733 $ 74,615 $ 37,382 $ 38,277
Income (loss) before
cumulative effect of
change in accounting
method (2)............. $ 51,634 $ (192,762) $ 66,367 $ (25,459) $ 60,873 $ 55,301 $ 28,446 $ 37,122
Net income (loss) (3)... $ 51,634 $ (192,762) $ 66,367 $ (25,459) $ 48,597 $ 55,301 $ 28,446 $ 37,122
Net income (loss) per
share--diluted......... $ 0.22 $ (0.91) $ 0.28 $ (0.12) $ 0.21 $ 0.24 $ 0.13 $ 0.19
Restated Quarterly Results (1)
The following table represents restated quarterly results reflecting the
merger of Cadence and CCT and adjustments to reduce the amount of in-process
technology previously charged to expense.
1998 1997
------------------------------------ -----------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
-------- -------- -------- -------- -------- -------- -------- --------
(In thousands, except per share amounts)
Revenue................. $345,452 $308,607 $291,788 $270,223 $283,013 $234,866 $212,204 $196,286
Cost of revenue......... $ 72,554 $ 76,602 $ 69,731 $ 61,788 $ 53,264 $ 46,319 $ 43,474 $ 39,556
Amortization of acquired
intangibles............ $ 11,414 $ 2,856 $ 2,627 $ 546 $ 529 $ 493 $ 493 $ 431
Income (loss) from
operations (2)......... $ 63,279 $(66,450) $ 88,800 $ 19,559 $ 83,733 $ 74,615 $ 35,226 $ 38,971
Income (loss) before
cumulative effect of
change in accounting
method (3)............. $ 45,906 $(78,677) $ 65,112 $ (359) $ 60,873 $ 55,301 $ 27,192 $ 37,010
Net income (loss) (4) $ 45,906 $(78,677) $ 65,112 $ (359) $ 48,597 $ 55,301 $ 27,192 $ 37,010
Net income (loss) per
share-diluted.......... $ 0.20 $ (0.37) $ 0.28 $ -- $ 0.21 $ 0.24 $ 0.13 $ 0.16
36
- --------
(1) In 1998, the Company acquired Ambit, BLDA, EXD and Symbionics. The
acquisitions were accounted for as business combinations using the
purchase method of accounting. The estimated fair value of the acquired
in-process technology (IPR&D) of $214.4 million and $42.7 million for
Ambit and BLDA, respectively, was charged to expense in the quarter ended
October 3, 1998 and the estimated fair value of the IPR&D of $42.0 and
$40.0 for EXD and Symbionics, respectively, was charged to expense in the
quarter ended April 4, 1998 (the periods in which the acquisitions were
consummated). Subsequent to the Securities and Exchange Commission's
letter to the AICPA, dated September 9, 1998, regarding its views on
IPR&D, the Company had discussions with the staff of the Securities and
Exchange Commission and revised the purchase price allocations and
restated its financial statements. As a result, the Company has made
adjustments to decrease the amounts previously expensed as IPR&D in 1998
and to increase goodwill and intangible assets by similar amounts.
(2) Income (loss) from operations for 1998 and 1997 included certain unusual
item charges for $263.6 million and $44.1 million, respectively, which
follow:
4th 3rd 2nd 1st
-------- --------- ------- --------
(In thousands)
1998:
Write-off of acquired in-process
technology.......................... $ -- $ 137,200 $ -- $ 56,900
Restructuring charges................ 44,704 20,833 -- 3,957
-------- --------- ------- --------
$ 44,704 $ 158,033 $ -- $ 60,857
======== ========= ======= ========
1997:
Write-off of acquired in-process
technology.......................... $ 1,711 $ -- $ -- $ 4,860
Restructuring charges................ 6,372 -- 21,157 6,888
Write-off of capitalized software
development costs................... 1,856 -- 1,209 --
-------- --------- ------- --------
$ 9,939 $ -- $22,366 $ 11,748
======== ========= ======= ========
(3) For the fourth quarter ended January 3, 1998 income before cumulative
effect of change in accounting method excluded a $12.3 million charge, net
of taxes of $5.3 million, for reengineering project costs that had been
previously capitalized by Cadence associated with its implementation of
enterprise-wide information systems.
(4) Net income included a $13.1 million pre-tax gain on the sale of stock of a
subsidiary in the first quarter ended March 28, 1997.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
37
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 as to directors is incorporated by
reference from the sections entitled "Election of Directors" and "Compliance
with the Reporting Requirements of Section 16(a)" in Cadence's definitive
Proxy Statement for its 1999 annual stockholders' meeting.
The executive officers of Cadence are as follows:
Name Age Positions and Offices
- -------------------- --- -----------------------------------------------------------------------
John R. Harding 43 President, Chief Executive Officer, and Director
H. Raymond Bingham 53 Executive Vice President, Chief Financial Officer, and Director
John F. Olsen 47 Executive Vice President, Worldwide Field Operations
Shane V. Robison 44 Executive Vice President, Research and Development
R.L. Smith McKeithen 55 Senior Vice President, General Counsel, and Secretary
William Porter 44 Corporate Vice President, Corporate Controller, and Assistant Secretary
Executive officers are appointed by the Board of Directors and serve at the
discretion of the Board.
JOHN R. HARDING has served as President and Chief Executive Officer and a
director of Cadence since October 1997. Mr. Harding joined Cadence in May 1997
as Senior Vice President, Strategic Business Units. Prior to joining Cadence,
Mr. Harding served as President and Chief Executive Officer of Cooper & Chyan
Technology, Inc. (CCT), a software company, from December 1994 until its
merger with Cadence in May 1997. Before joining CCT, Mr. Harding was with
Zycad Corporation, an electronic design automation company, as Executive Vice
President, Worldwide Sales and Marketing, for three years.
H. RAYMOND BINGHAM has served as Executive Vice President and Chief
Financial Officer of Cadence since 1993. Mr. Bingham has been a director of
Cadence since November 1997. Prior to joining Cadence, Mr. Bingham was
Executive Vice President and Chief Financial Officer of Red Lion Hotels and
Inns, an owner operator of a chain of hotels, for eight years. Mr. Bingham is
a director of Sunstone Hotel Investors, Inc., Integrated Measurement Systems,
Inc., and Legato Systems, Inc.
JOHN F. OLSEN joined Cadence in May 1994 as Senior Vice President, Field
Operations, and in July 1998 became Executive Vice President, Worldwide Field
Operations. Prior to joining Cadence, Mr. Olsen served as a partner for KPMG
Peat Marwick LLP, a public accounting firm, for five years.
SHANE V. ROBISON joined Cadence in July 1995 as Senior Vice President,
Engineering, and in November 1997 became Executive Vice President, Research
and Development. Prior to joining Cadence, Mr. Robison served as Vice
President and General Manager of the Personal Interactive Electronics Division
of Apple Computer, Inc., a personal computer manufacturer, for more than seven
years.
R.L. SMITH MCKEITHEN joined Cadence in June 1996 as Vice President, General
Counsel, and Secretary and in July 1998 became Senior Vice President, General
Counsel, and Secretary. From 1994 to 1996, he served as Vice President,
General Counsel, and Secretary of Strategic Mapping, Inc., a computer based
mapping and demographic database company. Before joining Strategic Mapping,
Inc., Mr. McKeithen served as Vice President, General Counsel, and Secretary
of Silicon Graphics, Inc., a manufacturer of workstations, servers, and
microprocessors for six years.
WILLIAM PORTER joined Cadence in February 1994 as Vice President, Corporate
Controller, and Assistant Secretary and in November 1998 became Corporate Vice
President, Corporate Controller, and Assistant
38
Secretary. Prior to joining Cadence, Mr. Porter served as Technical Accounting
and Reporting Manager and most recently as Controller of Cupertino Operations
with Apple Computer, Inc., a personal computer company for six years.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the
section entitled "Director and Executive Compensation" in Cadence's definitive
Proxy Statement for its 1999 annual stockholders' meeting.
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 Cadence's definitive Proxy Statement for its 1999 annual
stockholders' meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the
section entitled "Certain Transactions" in Cadence's definitive Proxy
Statement for its 1999 annual stockholders' meeting.
39
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
Page
----
(a) 1. Financial Statements:
.Reports of Independent Public Accountants. 45
.Consolidated Balance Sheets at January 2, 1999 and January 3, 1998. 47
.Consolidated Statements of Operations for the three fiscal years ended
January 2, 1999. 48
.Consolidated Statements of Stockholders' Equity for the three fiscal
years ended January 2, 1999. 49
.Consolidated Statements of Cash Flows for the three fiscal years ended
January 2, 1999. 50
.Notes to Consolidated Financial Statements. 51
(a) 2. Financial Statement Schedule:
II.Valuation and Qualifying Accounts and Reserves 77
All other schedules are omitted because they are not required or the
required information is shown in the financial statements or notes thereto.
(a) 3. Exhibits:
The following exhibits are filed herewith:
Exhibit
Number Exhibit Title
------- -------------
2.01 Agreement and Plan of Merger dated as of December 8, 1998 among the
Registrant, Quickturn Design Systems, Inc. and CDSI Acquisition, Inc.
as amended on December 16, 1998 and January 4, 1999 (incorporated by
reference to Exhibit 2.01 to the Registrant's Form S-4 Registration
Statement (File No. 333-69589). The Disclosure Schedules related to
the Merger Agreement have been omitted but will be provided to the
Commission upon its request pursuant to Item 601 (b)(2) of Regulation
S-K (the 1999 Form S-4).
3.01 (a) 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)).
(b) The Registrant's Certificate of Designation 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 Current Report on Form 8-K (No. 0-
15867) originally filed on June 12, 1989 (the 1989 Form 8-K)).
(c) 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 (No. 1-10606) for
the year ended December 31, 1991).
(d) The Registrant's Certificate of Amendment of Certificate of
Incorporation as filed with the Secretary of State of the State of
Delaware on May 13, 1998 (incorporated by reference to Exhibit 3.01(i)
to the 1998 Second Quarter Form 10-Q).
(e) The Registrant's Restated Certificate of Incorporation as filed
with the Secretary of State of the State of Delaware on May 13, 1998
(incorporated by reference to Exhibit 3.01(j) to the 1998 Second
Quarter Form 10-Q).
3.02 The Registrant's Bylaws, as currently in effect (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).
40
Exhibit
Number Exhibit Title
------- -------------
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 Designation for the Series A Junior Participating
Preferred Stock, the form of Rights Certificate, and the Summary of
Rights to Purchase Preferred Shares (incorporated by reference to
Exhibit 1A, 1B, and 1C to the Registrant's Current Report on Form 8-K
filed on February 16, 1996).
10.01 The Registrant's 1987 Stock Option Plan, as amended and restated on
February 23, 1998 (incorporated by reference to the Registrant's
Preliminary Proxy Statement filed on March 16, 1998 (the 1998
Preliminary Proxy Statement)).
10.02 Form of Stock Option Agreement and Form of Stock Option Exercise
Request, as currently in effect under the Registrant's 1987 Stock
Option Plan (incorporated by reference to Exhibit 4.01 to the
Registrant's Form S-8 Registration Statement (No. 33-22652) filed on
June 20, 1988).
10.03 The Registrant's 1988 Directors Stock Option Plan, as amended to date,
including the Stock Option Grant and Form of Stock Option Exercise
Notice and Agreement (the first document is incorporated by reference
to Exhibit 4.02 to the Registrant's Form S-8 Registration Statement
(No. 33-53913) filed on May 31, 1994 (the 1994 Form S-8) and the
latter two documents are incorporated by reference to Exhibit 10.08--
10.10 to the 1988 Form S-1).
10.04 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).
10.05 The Registrant's 1995 Directors Stock Option Plan including the Form
of Stock Option Grant (incorporated by reference to Exhibit 10.05 to
the Registrant's Form 10-K for the fiscal year ended December 30, 1995
(the 1995 Form 10-K)).
10.06 The Registrant's 1990 Employee Stock Purchase Plan, as amended on
March 4, 1997 (incorporated by reference to Exhibit 10.07 to the
Registrant's Form 10-K for the fiscal year ended December 28, 1996).
10.07 The Registrant's Senior Executive Bonus Plan for 1995 (incorporated by
reference to Exhibit 10.08 of the Registrant's Form 10-K for the
fiscal year ended December 31, 1994 (the 1994 Form 10-K)).
10.08 The Registrant's Senior Executive Bonus Plan for 1996 (incorporated by
reference to Exhibit 10.08 to the 1995 Form 10-K).
10.09 The Registrant's Senior Executive Bonus Plan (previously the Chief
Executive Officer Bonus Plan for 1996), as amended January 1, 1998
(incorporated by reference to the 1998 Preliminary Proxy Statement).
10.10 The Registrant's Deferred Compensation Plan for 1994 (incorporated by
reference to Exhibit 10.09 to the 1994 Form 10-K).
10.11 The Registrant's 1996 Deferred Compensation Venture Investment Plan
(incorporated by reference to Exhibit 10.11 to the 1995 Form 10-K).
10.12 Amended and Restated Lease, dated June 29, 1989, by and between River
Oaks Place Associates (ROPA), a California limited partnership, and
the Registrant, for the Registrant's offices at 555 River Oaks
Parkway, San Jose, California (incorporated by reference to Exhibit
10.14 to the Registrant's Form 10-K (No. 1-10606) for the year ended
December 31, 1990 (the 1990 Form 10-K)).
10.13 Lease, dated June 29, 1989, by and between ROPA and the Registrant for
the Registrant's offices at 575 River Oaks Parkway, San Jose,
California (incorporated by reference to Exhibit 10.16 to the 1990
Form 10-K).
41
Exhibit
Number Exhibit Title
10.14 Lease, dated June 29, 1989, by and between ROPA and the Registrant for
the Registrant's offices at 535 and 545 River Oaks Parkway, San Jose,
California (incorporated by reference to Exhibit 10.17 to the 1990
Form 10-K) .
10.15 Lease, dated December 19, 1988, by and among the Richard T. Peery and
John Arrillaga Separate Trusts and Valid Logic Systems Incorporated
(Valid) (which merged into the registrant) for the Registrant's
offices at 2835 North First Street, San Jose, California (incorporated
by reference to Exhibit 10.18 to the Form 10-K (No. 0-11974) for Valid
for the fiscal year ended December 30, 1990).
10.16 Form of Executive Compensation Agreement dated May 1989 between
Registrant and Mr. Joseph B. 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).
10.17 Offer letter to H. Raymond Bingham, dated May 12, 1993 (incorporated
by reference to Exhibit 10.24 to the Form 10-K for the year ended
December 31, 1993 (the 1993 Form 10-K)).
10.18 Offer letter to M. Robert Leach, dated May 17, 1993 (incorporated by
reference to Exhibit 10.25 to the 1993 Form 10-K).
10.19 The 1993 Non-Statutory Stock Option Plan (incorporated by reference to
Exhibit 4.05 to the 1994 Form S-8).
10.20 Consulting agreement, dated October 26, 1993, with Alberto Sangiovanni-
Vincentelli (incorporated by reference to Exhibit 10.29 to the
Registrant's Form 10-Q for the second quarter ended June 30, 1994).
10.21 The Registrant's amended and restated 401(k) Plan (incorporated by
reference to Exhibit 10.29 of the Registrant's Form 10-Q for the first
quarter ended March 30, 1996 (the 1996 First Quarter Form 10-Q)).
10.22 Amendment, dated May 3, 1996 (incorporated by reference to Exhibit
10.30 to the 1996 First Quarter Form 10-Q), to Registrant's 1993 Non-
Statutory Stock Option Plan.
10.23 Revolving Credit Agreement, dated April 11, 1996, by and between the
Registrant and Credit Lyonnais (incorporated by reference to Exhibit
10.31 to the 1996 First Quarter Form 10-Q).
10.24 Term Loan Agreement, 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
Exhibit 10.32 to the Registrant's Form 10-Q for the second quarter
ended June 29, 1996 (the 1996 Second Quarter Form 10-Q)).
10.25 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 Exhibit 10.33 to the 1996
Second Quarter Form 10-Q).
10.26 Assignment of Leases and Rents, dated May 31, 1996, Schedule to Term
Loan (incorporated by reference to Exhibit 10.34 to the 1996 Second
Quarter Form 10-Q).
10.27 Assignment of Partnership Interests by Seely Properties, Inc., dated
May 31, 1996, Schedule to Term Loan (incorporated by reference to
Exhibit 10.35 to the 1996 Second Quarter Form 10-Q).
10.28 Assignment of Partnership Interests by the Registrant, dated May 31,
1996, Schedule to Term Loan (incorporated by reference to Exhibit
10.36 to the 1996 Second Quarter Form 10-Q).
10.29 Environmental Indemnity, dated May 31, 1996, Schedule to Term Loan
(incorporated by reference to Exhibit 10.37 to the 1996 Second Quarter
Form 10-Q).
10.30 Amendment, dated August 2, 1996 to the Registrant's 1993 Non-Statutory
Stock Option Plan, (incorporated by reference to Exhibit 10.39 to the
1996 Second Quarter Form 10-Q).
42
Exhibit Number
Exhibit Title
10.31 Amendment Number 1, dated May 31, 1996, (incorporated by reference to
Exhibit 10.40 to the 1996 Second Quarter Form 10-Q), to Lease Agreement
for the Registrant's 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).
10.32 Amendment Number 2, dated May 31,1996, (incorporated by reference to
Exhibit 10.41 to the 1996 Second Quarter Form 10-Q), to Lease Agreement
for the Registrant's 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).
10.33 Amendment Number 1, dated May 31, 1996, (incorporated by reference to
Exhibit 10.42 to the 1996 Second Quarter 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).
10.34 Amendment Number 2, dated May 31, 1996, (incorporated by reference to
Exhibit 10.43 to the 1996 Second Quarter 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).
10.35 Amendment Number 1, dated May 31, 1996, (incorporated by reference to
Exhibit 10.44 to the 1996 Second Quarter 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).
10.36 Amendment Number 2, dated May 31, 1996, (incorporated by reference to
Exhibit 10.45 to the 1996 Second Quarter 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).
10.37 Agreement and Plan of Merger and Reorganization dated as of October 3,
1996, among the Registrant, High Level Design Systems, Inc., a Delaware
corporation, and Harbor Acquisition Sub, Inc., a Delaware corporation
(incorporated by reference to Exhibit 2.1 to the Registrant's Current
Report on Form 8-K filed November 7, 1996).
10.38 Distribution Agreement, dated April 28, 1997, among Cadence Design
Systems (Ireland) Ltd., Cadence Design Systems K.K., and Cadence Design
Systems (Japan) B.V. (incorporated by reference to Exhibit 10.48 to the
Registrant's Form 10-Q for the second quarter ended June 28, 1997).
10.39 Agreement and Plan of Merger and Reorganization, dated as of October
28, 1996, among Registrant, Cooper & Chyan Technology, Inc. (CCT), and
Wyoming Acquisition Sub, Inc. (incorporated by reference to Exhibit 2.2
to the November 7, 1996 Form 8-K).
10.40 CCT 1993 Equity Incentive Plan, Form of Equity Incentive Plan Stock
Option Agreement, Form of Exercise of Equity Incentive Plan Stock
Option and Form of Equity Incentive Plan Stock Option Exercise
Agreement (incorporated by reference to Exhibit 10.49 to the
Registrant's Form S-4 Registration Statement (No. 333-16779) originally
filed on November 27, 1996).
10.41 Employment Agreement, dated October 19, 1997, between the Registrant
and John R. Harding (incorporated by reference to Exhibit 10.41 to the
Registrant's Form 10-K for the fiscal year ended January 3, 1998 (the
1997 Form 10-K)).
10.42 Letter Agreement, dated December 5, 1997, between the Registrant and
Joseph B. Costello (incorporated by reference to Exhibit 10.42 to the
1997 Form 10-K).
10.43 Form of Executive Severance Agreement (incorporated by reference to
Exhibit 10.43 to the 1997 Form 10-K).
43
Exhibit
Number Exhibit Title
10.44 Indemnity Agreement, dated October 19, 1997, by and between the
Registrant and John R. Harding (incorporated by reference to Exhibit
10.44 to the 1997 Form 10-K).
10.45 Revolving Credit Agreement, dated September 30, 1998, by and between
ABN-AMBRO Bank and the Registrant (incorporated by reference to
Exhibit 10.45 from the Registrant's Form 10-Q for the third quarter
ended October 3, 1998 (the 1998 Third Quarter Form 10-Q)).
10.46 Amendment, dated October 16, 1998, to the Revolving Credit Agreement,
by and between ABN-AMRO Bank and the Registrant (incorporated by
reference to Exhibit 10.46 from the 1998 Third Quarter Form 10-Q).
10.47 Agreement and Plan of Reorganization, dated September 3, 1998, by and
among the Registrant, Ambit Design Systems, Inc., and Adirondack
Transaction Corp. (incorporated by reference to Exhibit 2.01 to the
Registrant's Current Report on Form 8-K (No. 001-10606) originally
filed on September 30, 1998).
21.01 Subsidiaries of the Registrant.
23.01 Consent of Arthur Andersen LLP.
23.02 Consent of Ernst & Young LLP.
27.01 Financial data schedule for the year ended January 2, 1999.
(b) Reports on Form 8-K:
On August 4, 1998, the Registrant filed a Current Report on Form 8-K
reporting that Cadence issued shares of common stock and the related
acquisition of Esperan Limited, a United Kingdom corporation.
On October 13, 1998 and amended on December 11, 1998, the Registrant filed a
Current Report on Form 8-K reporting Cadence's completion of the acquisition
of Ambit Design Systems, Inc., a California corporation.
On October 13, 1998, the Registrant filed a Current Report on Form 8-K
reporting Cadence's completion of the acquisition of certain assets and
liabilities of Bell Labs' Integrated Circuit Design Automation Group of
Lucent Technologies, Inc.
On December 10, 1998 and amended on December 22, 1998 and January 6, 1999,
the Registrant filed a Current Report on Form 8-K reporting Cadence's
agreement to acquire Quickturn Design Systems, Inc., a Delaware corporation.
(c) Exhibits:
Cadence hereby files as part of this Form 10-K the Exhibits listed in Item
14. (a) 3 above.
(d) Financial Statement Schedule:
See Item 14. (a) 2. of this Form 10-K.
44
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 January
2, 1999 and January 3, 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years
in the period ended January 2, 1999. These financial statements and the
schedule referred to below are the responsibility of Cadence's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits. We did not audit the financial statements of
Cooper & Chyan Technology, Inc., for the year ended December 31, 1996, a
company acquired during 1997 in a transaction accounted for as a pooling of
interests, as discussed in Acquisitions in the Notes to the Consolidated
Financial Statements. Such statements are included in the consolidated
financial statements of Cadence Design Systems, Inc. and reflect total
revenues of five percent of the related consolidated total for the year ended
December 28, 1996. These statements were audited by other auditors whose
report has been furnished to us and our opinion, insofar as it relates to
amounts included for Cooper & Chyan Technology, Inc., is based solely upon the
report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits and the
report of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Cadence Design Systems, Inc. and
subsidiaries as of January 2, 1999 and January 3, 1998, and the results of
their operations and their cash flows for each of the three years in the
period ended January 2, 1999, in conformity with generally accepted accounting
principles.
As explained in Cumulative Change in Accounting Method in the Notes to
Consolidated Financial Statements, effective November 1997, Cadence changed
its method of accounting for costs incurred for business process reengineering
projects. Also, as explained in the Summary of Significant Accounting Policies
in the Notes to Consolidated Financial Statements, Cadence has given
retroactive effect to the change in accounting for its merger with Cooper &
Chyan Technology, Inc.
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
March 26, 1999
45
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Cooper & Chyan Technology, Inc.
We have audited the consolidated statement of income, stockholders' equity,
and cash flows of Cooper & Chyan Technology, Inc. for the year ended December
31, 1996 (not presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of Cooper &
Chyan Technology, Inc.'s operations and its cash flows for year ended December
31, 1996, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Ernst & Young LLP
Palo Alto, California
January 21, 1997
46
CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
January 2, 1999 and January 3, 1998
(In thousands, except per share amounts)
1998 1997
---------- ----------
ASSETS
Current Assets:
Cash and cash equivalents............................ $ 183,066 $ 207,024
Short-term investments............................... 26,686 97,180
Receivables, net..................................... 277,599 205,006
Prepaid expenses and other........................... 92,359 99,849
---------- ----------
Total current assets............................... 579,710 609,059
Property, plant and equipment, net..................... 262,675 197,421
Software development costs, net........................ 13,045 15,068
Acquired intangibles, net.............................. 282,489 10,117
Installment contract receivables....................... 100,529 61,326
Other assets........................................... 167,510 130,859
---------- ----------
$1,405,958 $1,023,850
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable and current portion of capital leases.. $ 1,273 $ 794
Accounts payable and accrued liabilities............. 211,220 156,426
Income taxes payable................................. 19,133 5,161
Deferred revenue..................................... 96,286 106,414
---------- ----------
Total current liabilities.......................... 327,912 268,795
---------- ----------
Long-Term Liabilities:
Long-term debt and capital leases.................... 136,380 1,599
Deferred income taxes................................ 58,927 --
Minority interest liability.......................... 377 121
Other long-term liabilities.......................... 24,883 26,238
---------- ----------
Total long-term liabilities........................ 220,567 27,958
---------- ----------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock--$0.01 par value; authorized 400
shares in 1998 and 1997, none issued or
outstanding......................................... -- --
Common stock and capital in excess of $0.01 par value
Authorized: 600,000 shares
Issued: 224,585 shares in 1998 and 214,405 shares
in 1997
Outstanding: 214,438 shares in 1998 and 207,666
shares in 1997.................................... 725,325 502,602
Treasury stock at cost: 10,147 shares in 1998 and
6,739 shares in 1997................................ (219,417) (97,285)
Retained earnings.................................... 360,916 328,934
Accumulated other comprehensive loss................. (9,345) (7,154)
---------- ----------
Total stockholders' equity......................... 857,479 727,097
---------- ----------
$1,405,958 $1,023,850
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
47
CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three fiscal years ended January 2, 1999
(In thousands, except per share amounts)
1998 1997 1996
---------- --------- --------
Revenue:
Product........................................ $ 695,036 $ 537,490 $441,263
Services....................................... 255,787 160,890 114,620
Maintenance.................................... 265,247 227,989 223,181
---------- --------- --------
Total revenue................................ 1,216,070 926,369 779,064
---------- --------- --------
Costs and Expenses:
Cost of product................................ 51,539 40,064 49,469
Cost of services............................... 185,683 114,711 80,963
Cost of maintenance............................ 43,453 27,838 25,067
Amortization of acquired intangibles........... 17,443 1,946 929
Marketing and sales............................ 302,332 263,054 240,740
Research and development....................... 179,394 143,746 123,065
General and administrative..................... 67,444 58,412 60,049
Unusual items.................................. 263,594 44,053 100,543
---------- --------- --------
Total costs and expenses..................... 1,110,882 693,824 680,825
---------- --------- --------
Income from operations........................... 105,188 232,545 98,239
Other income, net.............................. 7,479 26,215 226
---------- --------- --------
Income before provision for income taxes and
cumulative effect of change in accounting
method.......................................... 112,667 258,760 98,465
Provision for income taxes..................... 80,685 78,384 64,155
---------- --------- --------
Income before cumulative effect of change in
accounting method............................... 31,982 180,376 34,310
Cumulative effect of change in accounting
method, net of taxes of $5,261 in 1997........ -- 12,276 --
---------- --------- --------
Net income....................................... $ 31,982 $ 168,100 $ 34,310
========== ========= ========
Basic Net Income Per Share:
Net income before cumulative effect of change
in accounting method.......................... $ 0.15 $ 0.93 $ 0.19
========== ========= ========
Net income................................... $ 0.15 $ 0.86 $ 0.19
========== ========= ========
Diluted Net Income Per Share:
Net income before cumulative effect of change
in accounting method.......................... $ 0.14 $ 0.82 $ 0.16
========== ========= ========
Net income................................... $ 0.14 $ 0.77 $ 0.16
========== ========= ========
Weighted average common shares outstanding....... 211,975 194,900 178,399
========== ========= ========
Weighted average common and potential common
shares outstanding--assuming dilution........... 233,647 219,552 208,444
========== ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
48
CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the three fiscal years ended January 2, 1999
(In thousands)
Common Stock
------------------
Par Value
and Accumulated
Capital Treasury Stock Other
Comprehensive In Excess ------------------ Retained Comprehensive
Income Shares of Par Shares Amount Earnings Loss
------------- ------- --------- ------- --------- -------- -------------
BALANCE, DECEMBER 30,
1995................... 248,536 $324,957 (70,460) $(290,884) $128,451 $ 972
Purchase of treasury
stock................. -- -- (10,314) (124,204) -- --
Issuance of common
stock................. 9,920 34,235 1,205 5,401 (17) --
Tax benefits from
employee stock
transactions.......... -- 60,418 -- -- -- --
Purchase of warrant.... -- (2,437) -- -- (1,910) --
Treasury stock issued
in connection with
acquisitions.......... -- 73,492 5,124 25,906 -- --
Stock issued in
secondary offering,
net of expenses....... -- 143,915 11,500 58,144 -- --
Amortization of
deferred
compensation.......... -- 96 -- -- -- --
Net income............. $ 34,310 -- -- -- -- 34,310 --
Translation loss....... (2,807) -- -- -- -- -- (2,807)
-------- ------- -------- ------- --------- -------- -------
$ 31,503
========
BALANCE, DECEMBER 28,
1996................... -- 258,456 634,676 (62,945) (325,637) 160,834 (1,835)
Purchase of treasury
stock................. -- (720) (4,592) (104,526) -- --
Issuance of common
stock................. 15,452 67,196 1,167 7,308 -- --
Tax benefits from
employee stock
transactions.......... -- 123,180 -- -- -- --
Retirement of treasury
stock in connection
with the CCT
acquisition........... (22,778) (32,429) 22,778 32,429 -- --
Treasury stock issued
in connection with
acquisitions.......... -- -- 128 1,755 -- --
Unrealized gain on
investment in
subsidiary............ -- 2,304 -- -- -- --
Use of treasury stock
for common stock
dividend.............. (36,725) (291,636) 36,725 291,386 -- --
Amortization of
deferred
compensation.......... -- 31 -- -- -- --
Net income............. $168,100 -- -- -- -- 168,100 --
Translation loss....... (5,319) -- -- -- -- -- (5,319)
-------- ------- -------- ------- --------- -------- -------
$162,781
========
BALANCE, JANUARY 3,
1998................... 214,405 502,602 (6,739) (97,285) 328,934 (7,154)
Purchase of treasury
stock................. -- (121) (6,231) (170,710) -- --
Issuance of common
stock................. 10,180 83,727 1,568 28,939 -- --
Tax benefits from
employee stock
transactions.......... -- 109,344 -- -- -- --
Treasury stock issued
in connection with
acquisitions.......... -- 29,451 1,155 19,639 -- --
Treasury stock issued
in connection with
warrants exercised.... -- 322 100 -- -- --
Net income............. $ 31,982 -- -- -- -- 31,982 --
Translation loss....... (2,191) -- -- -- -- -- (2,191)
-------- ------- -------- ------- --------- -------- -------
$ 29,791
========
BALANCE, JANUARY 2,
1999................... 224,585 $725,325 (10,147) $(219,417) $360,916 $(9,345)
======= ======== ======= ========= ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
49
CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three fiscal years ended January 2, 1999
(In thousands)
1998 1997 1996
-------- -------- --------
Cash and Cash Equivalents at Beginning of Year... $207,024 $289,118 $ 88,454
-------- -------- --------
Cash Flows From Operating Activities:
Net income...................................... 31,982 168,100 34,310
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 102,414 57,116 53,214
Gain on sale of stock of subsidiary............. -- (13,061) --
Deferred income taxes........................... 29,229 (68,465) (16,394)
Write-off of acquired in-process technology..... 194,100 6,571 95,700
Write-off of capitalized software development
costs.......................................... -- 3,065 2,724
Write-off of business process re-engineering
costs.......................................... -- 17,537 --
Equity income from investments.................. 889 (1,934) --
Increase in other long-term liabilities and
minority interest expense...................... (1,697) 2,691 5,734
Write-offs of equipment and other long-term
assets......................................... 4,037 1,087 1,719
Provisions for doubtful accounts and inventory
write-offs..................................... 7,687 12,428 2,672
Non-cash restructuring charges.................. 13,321 2,347 --
Changes in current assets and liabilities, net
of effect of acquired and disposed businesses:
Receivables.................................... (189,769) (33,354) (65,751)
Inventories.................................... -- -- (981)
Prepaid expenses and other..................... 20,946 (29,452) (35,399)
Installment contract receivables............... (126,128) (105,711) --
Accounts payable and accrued liabilities....... 45,982 60,102 34,040
Income taxes payable........................... 125,001 127,068 50,552
Deferred revenue............................... (11,923) (4,356) 16,920
-------- -------- --------
Net cash provided by operating activities..... 246,071 201,779 179,060
Cash Flows From Investing Activities:
Maturities of short-term investments--held-to-
maturity....................................... 60,367 37,039 18,618
Purchases of short-term investments--held-to-
maturity....................................... (35,872) (82,204) (7,859)
Maturities of short-term investments--available-
for-sale....................................... 537,552 128,170 26,940
Purchases of short-term investments--available-
for-sale....................................... (491,553) (185,917) (31,778)
Purchases of property, plant, and equipment..... (114,433) (92,428) (63,688)
Capitalization of software development costs.... (21,695) (15,011) (13,560)
Increase in acquired intangibles and other
assets......................................... (91,042) (4,586) (13,326)
Net proceeds from sale of subsidiary stock...... -- 18,582 --
Effect of deconsolidation on cash............... -- (25,118) --
Investment in venture capital partnership....... (7,596) (10,974) (7,471)
Net cash paid for acquisitions.................. (352,326) 27,227 --
Sale of put warrants............................ 14,812 19,016 13,870
Purchase of call options........................ (14,812) (19,016) (13,870)
-------- -------- --------
Net cash used for investing activities........ (516,598) (205,220) (92,124)
-------- -------- --------
Cash Flows From Financing Activities:
Proceeds from line of credit and long-term
debt........................................... 150,000 53 19,763
Principal payments on line of credit and long-
term debt...................................... (16,662) (22,921) (2,676)
Sale of common stock............................ 81,325 56,558 230,487
Purchases of treasury stock..................... (170,831) (105,118) (124,204)
Proceeds from transfer of financial assets in
exchange for cash.............................. 204,841 -- --
Purchase of warrant............................. -- -- (4,347)
-------- -------- --------
Net cash provided by (used for) financing
activities................................... 248,673 (71,428) 119,023
-------- -------- --------
Effect of exchange rate changes on cash.......... (2,104) (7,225) (5,295)
-------- -------- --------
Increase (decrease) in cash and cash
equivalents..................................... (23,958) (82,094) 200,664
-------- -------- --------
Cash and Cash Equivalents at End of Year......... $183,066 $207,024 $289,118
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
50
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 2, 1999
CADENCE
Cadence Design Systems, Inc. (Cadence(R)) provides software technology and
comprehensive design and consulting services and technology for the product
development requirements of the world's leading electronics companies. Cadence
licenses its leading-edge electronic design automation software technology and
provides a range of professional services to companies throughout the world
ranging from consulting services to help optimize the customer's product to
design services to create the actual design of the electronic system for the
customer's product. Cadence is a supplier of "design realization" solutions,
which are used by companies to design and develop complex chips and electronic
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 Cadence and
its majority-owned subsidiaries after elimination of intercompany accounts and
transactions. Investments in companies in which ownership interests range from
20 to 50 percent are accounted for using the equity method of accounting.
Cadence's fiscal year end is the Saturday closest to December 31. Certain
prior year consolidated financial statement balances have been reclassified to
conform to the 1998 presentation.
In May 1997, Cadence merged with Coopers & Chyan Technology, Inc. (CCT),
whose software products are used to design sophisticated integrated circuits
and high-speed printed circuit boards. In connection therewith, Cadence issued
approximately 22.8 million shares of common stock. The merger was accounted
for using the pooling of interests method of accounting. At the time of the
transaction, Cadence believed that the operations of CCT were not material to
Cadence's consolidated operations and financial position. Therefore, prior
period consolidated financial statements were not restated and the results of
CCT were only recorded in Cadence's consolidated financial statements
prospectively from the date of acquisition. Following discussions with the
staff of the Securities and Exchange Commission, Cadence has restated all
prior period financial statements as if the merger took place at the beginning
of such periods, in accordance with required pooling of interests accounting
and disclosures. See additional information in Notes to Consolidated Financial
Statements under "Acquisitions."
Stock Splits
In October 1997, Cadence's Board of Directors declared a two-for-one stock
split, payable in the form of a dividend of one additional share of Cadence's
Common Stock for every share owned by stockholders. Par value remained at
$0.01 per share. The stock split resulted in the issuance of approximately
104.4 million additional shares of common stock from authorized but unissued
shares and treasury shares. In May 1996, Cadence's Board of Directors effected
a three-for-two stock split payable in the form of a dividend of one
additional share of Cadence's Common Stock for every two shares owned by
stockholders. The stock split resulted in the issuance of approximately 51.6
million additional shares of common stock from authorized but unissued shares.
Accordingly, all share and per share data have been adjusted to retroactively
reflect the stock splits.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets
51
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries, where the functional
currency is the local currency, are translated using exchange rates in effect
at the end of the period and revenue and costs are translated using average
exchange rates for the period. Gains and losses on the translation into U.S.
dollars of amounts denominated in foreign currencies are included in net
income for those operations whose functional currency is the U.S. dollar, and
as a separate component of stockholders' equity for those operations whose
functional currency is the local currency.
Derivative Financial Instruments
Cadence enters into foreign currency forward exchange contracts (forward
contracts) to manage exposure related to certain foreign currency
transactions. Cadence does not enter into derivative financial instruments for
trading purposes. All outstanding forward contracts at the end of the period
are marked-to-market, with unrealized gains and losses included in net income
as a component of other income, net. Cadence may, from time to time, adjust
its foreign currency hedging position by taking out additional contracts or by
terminating or offsetting existing forward contracts. These adjustments may
result from changes in the underlying foreign currency exposures or from
fundamental shifts in the economics of particular exchange rates. Realized
gains and losses on terminated forward contracts, or on contracts that are
offset, are recognized in income in the period of contract termination or
offset.
Revenue Recognition
Effective January 4, 1998, Cadence adopted SOP 97-2, "Software Revenue
Recognition." SOP 97-2 provides guidance on applying generally accepted
accounting principles in recognizing revenue on software transactions. The
adoption of SOP 97-2 did not have a material impact on Cadence's financial
position, results of operations or cash flows.
Product revenue consists principally of revenue earned under fixed-term and
perpetual software license agreements and is generally recognized upon
shipment of the software if collection of the resulting receivable is
probable, the fee is fixed or determinable, and vendor-specific objective
evidence exists to allocate the total fee to all delivered and undelivered
elements of the arrangement. Installment contract receivables result from
customer contracts with Cadence's top-rated credit customers. Cadence uses
installment contracts as a standard business practice and has a history of
successfully collecting under the original payment terms without making
concessions on payments, products or services. Revenue from subscription
license agreements which include software, and may include rights to exchange
licensed products for future software products, and maintenance is deferred
and recognized ratably over the term of the subscription period. Test
equipment revenue was recognized upon shipment.
Services revenue consists primarily of revenue received for performing
consulting and design services. Fixed-price consulting and design service
contracts are accounted for using contract accounting, which is generally the
percentage-of-completion method versus the completed-contract method, and time
and materials contracts are accounted for on a monthly basis as work is
performed. In addition, for small fixed-price-projects, such as training
classes and small, standard consulting service engagements of approximately
$10,000 in size, revenue is recognized when the work is completed.
52
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Maintenance revenue consists of fees for providing technical support for
software products and software product updates and is recognized ratably over
the term of the support agreement.
Comprehensive Income
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income," which was adopted by Cadence in the first quarter of 1998. SFAS No.
130 establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of this Statement had no
impact on Cadence's results of operations or stockholders' equity. SFAS No.
130 requires companies to report a new, additional measure of income on the
income statement or to create a new financial statement that has the new
measure of income on it. "Comprehensive income" includes foreign currency
translation gains and losses and other unrealized gains and losses that have
been previously excluded from net income and reflected instead in equity.
Cadence has reported the components of comprehensive income on its
consolidated statements of stockholders' equity.
Net Income Per Share
Basic net income per share is calculated by dividing net income by the
weighted average shares of common stock outstanding during the year, and for
diluted net income per share, net income is divided by the weighted average
shares of common stock outstanding and potential common shares outstanding
during the year. Potential common shares outstanding included in the dilution
calculation consist of dilutive shares issuable upon the exercise of
outstanding common stock options, warrants, contingent issuances of common
stock and put warrants computed using the treasury stock method.
Cash, Cash Equivalents, and Short-Term Investments
Cadence 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 equivalents.
Investments with original maturities greater than ninety days and less than
one year are classified as short-term investments. At January 2, 1999, there
were no investments with maturities greater than one year.
Management determines the appropriate classification of its investments in
debt and marketable equity securities at the time of purchase. Cadence has
classified all marketable debt securities as held-to-maturity and has
accounted for these investments at amortized cost. Cadence has classified its
auction rate securities as available-for-sale. These securities are carried at
fair value, with the unrealized gains and losses reported as a component of
stockholders' equity when these unrealized gains and losses are material to
consolidated financial operations of Cadence.
Property, Plant, and Equipment
Land, property, plant and equipment is stated at cost. Depreciation and
amortization are provided over the estimated useful lives, using the straight-
line method, as follows:
Buildings........................................ 10-32 years
Leasehold and building improvements.............. Shorter of the lease term
or the estimated useful life
Software......................................... 3-8 years
Equipment........................................ 3-5 years
Furniture and fixtures........................... 3-5 years
53
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Software Development Costs and Acquired Intangibles
Cadence capitalizes software development costs in compliance with 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. Technological
feasibility is established at the completion of detail program design and
testing. 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 computed on a straight-line basis over the
remaining estimated economic life of the product, which is generally three
years.
Acquired intangibles represent purchase price in excess of acquired
tangible assets and in-process technology in connection with business
combinations accounted for as purchases and are amortized on a straight-line
basis over the remaining estimated economic life of the underlying products
and technologies (original lives assigned are one to seven years).
It is reasonably possible that the estimates of anticipated future gross
revenue, the remaining estimated economic life of the products and
technologies, 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 both the software development costs and acquired
intangibles in the near term.
Long-lived Assets
Cadence reviews long-lived assets, certain identifiable intangibles and
goodwill related to these assets for impairment in accordance with SFAS No.
121, "Accounting for the Impairment of Long-lived Assets and For Long-lived
Assets to be Disposed Of."
For assets to be held and used, including acquired intangibles, Cadence
initiates its review whenever events or changes in circumstances indicate that
the carrying amount of a long-lived asset may not be recoverable.
Recoverability of an asset is measured by comparison of its carrying amount to
the future undiscounted cash flows that the asset is expected to generate. Any
impairment to be recognized is measured by the amount by which the carrying
amount of the asset exceeds its fair market value.
Assets to be disposed of and for which management has committed to a plan
to dispose of the assets, whether through sale or abandonment, are reported at
the lower of carrying amount or fair value less cost to sell.
Concentrations of Credit Risk
Financial instruments, including derivative financial instruments, that may
potentially subject Cadence to concentrations of credit risk, consist
principally of cash investments, short-term investments, accounts receivable,
forward contracts and call options purchased in conjunction with Cadence's
stock repurchase program. Cadence'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
Cadence's customer base and their dispersion across geographies. Credit
exposure related to the forward contracts and the call options is limited to
the unrealized gains on these contracts. All financial instruments are
executed with financial institutions with strong credit ratings, which
minimizes risk of loss due to nonpayment. Cadence has not experienced any
losses due to credit impairment related to its financial instruments.
54
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
It requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met and
that a company must formally document, designate and assess the effectiveness
of transactions that receive hedge accounting. SFAS No. 133 is effective for
fiscal years beginning after June 15, 1999 and cannot be applied
retroactively. Cadence has not yet determined the effect SFAS No. 133 will
have on its financial position, results of operations or cash flows.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The adoption of SOP 98-1 in
1998 did not have a material impact on Cadence's financial position, results
of operations or cash flows.
55
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
BALANCE SHEET COMPONENTS
A summary of balance sheet components follows:
1998 1997
--------- ---------
(In thousands)
Receivables:
Accounts receivables..................................... $ 168,514 $ 181,821
Installment contract receivables--current................ 131,310 44,385
--------- ---------
Total receivables...................................... 299,824 226,206
Less: Allowances......................................... 22,225 21,200
--------- ---------
Receivables, net....................................... $ 277,599 $ 205,006
========= =========
Property, Plant and Equipment:
Computer equipment and related software.................. $ 201,329 $ 153,196
Leasehold and building improvements...................... 50,508 28,232
Land..................................................... 48,485 47,754
Furniture and fixtures................................... 47,527 28,282
Buildings................................................ 46,672 45,324
Equipment................................................ 38,398 8,830
Construction in progress................................. 22,264 23,028
--------- ---------
Total cost............................................. 455,183 334,646
Less: Accumulated depreciation and amortization.......... 192,508 137,225
--------- ---------
Property, plant and equipment, net..................... $ 262,675 $ 197,421
========= =========
Software Development Costs:
Cost..................................................... $ 39,254 $ 40,545
Less: Accumulated amortization........................... 26,209 25,477
--------- ---------
Software development costs, net........................ $ 13,045 $ 15,068
========= =========
Acquired Intangibles:
Cost..................................................... $ 324,500 $ 31,888
Less: Accumulated amortization........................... 42,011 21,771
--------- ---------
Acquired intangibles, net.............................. $ 282,489 $ 10,117
========= =========
Other Assets:
Deferred income taxes.................................... $ 99,562 $ 74,860
Other assets............................................. 67,948 55,999
--------- ---------
Other assets........................................... $ 167,510 $ 130,859
========= =========
Accounts Payable and Accrued Liabilities:
Payroll and payroll related accruals..................... $ 117,174 $ 87,076
Other accrued liabilities................................ 75,433 47,402
Accounts payable......................................... 18,613 21,948
--------- ---------
Accounts payable and accrued liabilities............... $ 211,220 $ 156,426
========= =========
56
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FINANCIAL INSTRUMENTS
Short-Term Investments
A summary of Cadence's held-to-maturity and available-for-sale investment
portfolios follows:
1998 1997
------- -------
(In thousands)
Held-to-maturity:
Corporate debt securities................................ $11,607 $18,020
Foreign debt securities.................................. 10,080 8,602
Repurchase agreements.................................... 8,000 60,094
Commercial paper......................................... 7,992 23,732
U.S. Government notes.................................... 4,999 7,488
State and local municipalities notes..................... -- 6,075
Corporate equity securities.............................. -- 3,000
Certificates of deposit.................................. -- 1,000
------- -------
Total held-to-maturity................................. 42,678 128,011
Available-for-sale:
Auction rate securities.................................. -- 51,000
------- -------
Total available-for-sale............................... -- 51,000
------- -------
Total investment securities.......................... 42,678 179,011
Less: Cash equivalents..................................... 15,992 81,831
------- -------
Total short-term investments....................... $26,686 $97,180
======= =======
The cost of the securities held is based on the specific identification
method. The carrying value of cash and cash equivalents and short-term
investments approximate the fair value (based on quoted market prices) of such
investments. Accordingly, unrealized gains and losses were immaterial at
January 2, 1999.
Financing
Cadence has entered into agreements whereby it may transfer qualifying
accounts receivables, for which Cadence has recognized the related revenue, to
certain financing institutions on a non-recourse basis. These transfers are
recorded as sales and accounted for in accordance with SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." During the year ended January 2, 1999,
Cadence transferred accounts receivable totaling $204.9 million, which
approximated fair value, to financing institutions on a non-recourse basis.
Transfers of accounts receivable for cash are reported in Cadence's statements
of cash flows as a financing activity.
Derivative Financial Instruments
Cadence enters into forward contracts to hedge the impact of foreign
currency fluctuations. Cadence does not enter into derivative financial
instruments for trading purposes. At January 2, 1999, Cadence had outstanding
forward contracts with notional amounts totaling approximately $44.9 million.
These contracts, which mature in less than thirty days from year-end, are
hedges of certain foreign currency transaction exposures in the British pound
sterling, Canadian dollar, Dutch guilder, French franc, German deutschemark,
Italian lira and Japanese yen. The estimated fair value of the contracts at
January 2, 1999 was negligible.
57
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
ACQUISITIONS
Quickturn Design Systems, Inc.
During the fourth quarter of 1998, Cadence entered into a merger agreement
with Quickturn Design Systems, Inc., a Delaware corporation (Quickturn).
Quickturn designs, manufactures, sells and supports products that verify the
design of computer chips and electronic systems. Cadence will acquire
Quickturn in a tax-free, stock-for-stock transaction. Each share of Quickturn
common stock will be converted into $15 worth of Cadence common stock. Cadence
common stock will be valued at the average of its closing prices over a five
day period that ends two business days before the merger closes. There were
18,380,083 shares of Quickturn common stock outstanding as of March 12, 1999.
In addition, Cadence will assume outstanding stock options of Quickturn. The
merger, which is subject to various conditions, including the approval of
Quickturn stockholders, is expected to be accounted for as a pooling of
interests. There can be no assurance that Quickturn stockholder approval will
be obtained, or the other conditions will be satisfied, and that the merger
will be consummated.
Ambit Design Systems, Inc.
In September 1998, Cadence acquired all of the outstanding stock of Ambit
Design Systems, Inc., a California corporation (Ambit), for cash. The total
purchase price was $255 million, and the acquisition was accounted for as a
purchase. The results of operations of Ambit and the estimated fair value of
the assets acquired and liabilities assumed are included in Cadence's
financial statements from the date of acquisition. Intangibles arising from
the acquisition are being amortized on a straight-line basis over seven years.
Management estimates that $106.5 million of the purchase price represents
acquired in-process technology that has not yet reached technological
feasibility and has no alternative future use. Accordingly, this amount was
immediately charged to expense upon consummation of the acquisition. The value
assigned to acquired in-process technology was determined by identifying
research projects in areas for which technological feasibility has not been
established. The value was determined by estimating the costs to develop the
acquired in-process technology into commercially viable products, estimating
the resulting net cash flows from such projects, and discounting the net cash
flows back to their present value. The discount rate includes a factor that
takes into account the uncertainty surrounding the successful development of
the acquired in-process technology. If these projects are not successfully
developed, future revenue and profitability of Cadence may be adversely
affected. Additionally, the value of other intangible assets acquired may
become impaired.
In connection with the acquisition, net assets acquired were as follows:
(In thousands)
Acquired intangibles, including in-process technology..... $308,678
Property, plant and equipment, net and other non-current
assets................................................... 9,333
Cash, receivables and other current assets................ 8,349
Current liabilities assumed............................... (13,605)
Deferred income taxes..................................... (57,765)
--------
Net assets acquired..................................... $254,990
========
The following table represents unaudited consolidated pro forma financial
information as if Cadence and Ambit had been combined as of the beginning of
the periods presented. The pro forma data are presented for illustrative
purposes only and are not necessarily indicative of the combined financial
position or results of operations of future periods or the results that
actually would have resulted had Cadence and Ambit been a
58
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
combined company during the specified periods. The pro forma results include
the effects of the amortization of acquired intangible assets and adjustments
to the income tax provision. The pro forma combined results exclude
acquisition-related charges for acquired in-process technology related to
Ambit.
Fiscal Year Ended
---------------------
January 2, January 3,
1999 1998
---------- ----------
(In thousands, except
per share amounts)
Revenue........................................ $1,226,886 $ 929,282
========== =========
Net income..................................... $ 119,630 $ 143,588
========== =========
Net income per common share:
Basic........................................ $.56 $0.74
========== =========
Diluted...................................... $.51 $0.65
========== =========
Bell Labs' Integrated Circuit Design Automation Group
In September 1998, Cadence acquired Bell Labs' Integrated Circuit Design
Automation Group of Lucent Technologies Inc. (BLDA) for cash. The total
purchase price was $58.0 million, and the acquisition was accounted for as a
purchase. The results of operations of BLDA and the estimated fair value of
the assets acquired and liabilities assumed are included in Cadence's
financial statements from the date of acquisition. Intangibles arising from
the acquisition are being amortized on a straight-line basis over five years.
Management estimates that $30.3 million of the purchase price represents
acquired in-process technology that has not yet reached technological
feasibility and has no alternative future use. Accordingly, this amount was
immediately charged to expense upon consummation of the acquisition. The value
assigned to acquired in-process technology was determined by identifying
research projects in areas for which technological feasibility has not been
established. The value was determined by estimating the costs to develop the
acquired in-process technology into commercially viable products, estimating
the resulting net cash flows from such projects and discounting the net cash
flows back to their present value. The discount rate includes a factor that
takes into account the uncertainty surrounding the successful development of
the acquired in-process technology. If these projects are not successfully
developed, future revenue and profitability of Cadence may be adversely
affected. Additionally, the value of other intangible assets acquired may
become impaired.
Excellent Design, Inc.
In March 1998, Cadence acquired all of the outstanding stock of Excellent
Design, Inc., a Japanese corporation (EXD), for cash. The total purchase price
was $40.9 million, and the acquisition was accounted for as a purchase. The
results of operations of EXD and the estimated fair value of the assets
acquired and liabilities assumed are included in Cadence's financial
statements from the date of acquisition. Intangibles arising from the
acquisition are being amortized on a straight-line basis over five years.
Management estimates that $28.4 million of the purchase price represents
acquired in-process technology that has not yet reached technological
feasibility and has no alternative future use. Accordingly, this amount was
immediately charged to expense in the consolidated statements of operations
upon consummation of the acquisition. The value assigned to acquired in-
process technology was determined by identifying research projects in areas
for which technological feasibility has not been established. The value was
determined by estimating the costs to develop the acquired in-process
technology into commercially viable products, estimating
59
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the resulting net cash flows from such projects and discounting the net cash
flows back to their present value. The discount rate includes a factor that
takes into account the uncertainty surrounding the successful development of
the acquired in-process technology. If these projects are not successfully
developed, future revenue and profitability of Cadence may be adversely
affected. Additionally, the value of other intangible assets acquired may
become impaired.
Symbionics Group Limited
In February 1998, Cadence acquired all of the outstanding stock of
Symbionics Group Limited, a U.K. corporation (Symbionics), for approximately 1
million shares of Cadence's Common Stock and $21.3 million of cash. The total
purchase price was $46.1 million, and the acquisition was accounted for as a
purchase. The results of operations of Symbionics and the estimated fair value
of the assets acquired and liabilities assumed are included in Cadence's
financial statements from the date of acquisition. Intangibles arising from
the acquisition are being amortized on a straight-line basis over five years.
Management estimates that $28.5 million of the purchase price represents
acquired in-process technology that has not yet reached technological
feasibility and has no alternative future use. Accordingly, this amount was
immediately charged to expense in the consolidated statements of operations
upon consummation of the acquisition. The value assigned to acquired in-
process technology was determined by identifying research projects in areas
for which technological feasibility has not been established. The value was
determined by estimating the costs to develop the acquired in-process
technology into commercially viable products, estimating the resulting net
cash flows from such projects and discounting the net cash flows back to their
present value. The discount rate includes a factor that takes into account the
uncertainty surrounding the successful development of the acquired in-process
technology. If these projects are not successfully developed, future revenue
and profitability of Cadence may be adversely affected. Additionally, the
value of other intangible assets acquired may become impaired.
Comparative pro forma financial information has not been presented as the
results of operations of BLDA, EXD and Symbionics were not material to
Cadence's consolidated financial statements, either individually or in the
aggregate.
Advanced Microelectronics
In October 1997, Cadence acquired certain assets and related business from
the Advanced Microelectronics division of the Institute for Technology
Development, a non-profit corporation organized to conduct and transfer
scientific research into usable high technology for commercial application.
This division provided contract engineering services on a time-and-materials
basis for the design and development of integrated circuits. The total
purchase price was $2.4 million and the acquisition was accounted for as a
purchase; accordingly, the results of Advanced Microelectronics from the date
of acquisition forward have been included in the consolidated financial
statements. The excess of purchase price over net assets acquired was $2.1
million, of which $1.7 million related to the write-off of in-process
technology that had not reached technological feasibility and, in management's
opinion, had no probable alternative future use. Comparative pro forma
financial information has not been presented as the results of operations of
Advanced Microelectronics were not material to Cadence's consolidated
financial statements.
Cooper & Chyan Technology, Inc.
In May 1997, Cadence merged with Cooper & Chyan Technology, Inc. (CCT),
whose software products are used to design sophisticated integrated circuits
and high-speed printed circuit boards. In connection therewith,
60
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cadence issued approximately 22.8 million shares of common stock. The merger
was accounted for using the pooling of interests method of accounting. At the
time of the transaction, Cadence believed that the operations of CCT were not
material to Cadence's consolidated operations and financial position.
Therefore, prior period consolidated financial statements were not restated
and the results of CCT were only recorded in Cadence's consolidated financial
statements prospectively from the date of acquisition. Following discussions
with the staff of the Securities and Exchange Commission, Cadence has restated
all prior period financial statements as if the merger took place at the
beginning of such periods, in accordance with required pooling of interests
accounting and disclosures. Reconciliation of the current consolidated
financial statements with previously reported separate company information is
presented below:
1997 1996
-------- --------
(In thousands)
Revenue
Cadence............................................... $915,893 $741,459
CCT................................................... 10,476 37,605
-------- --------
Combined and restated............................... $926,369 $779,064
======== ========
Net Income (Loss)
Cadence............................................... $169,466 $ 29,038
CCT................................................... (1,366) 5,272
-------- --------
Combined and restated............................... $168,100 $ 34,310
======== ========
Synthesia AB
In February 1997, Cadence acquired all of the outstanding stock of
Synthesia AB (Synthesia) for 115,166 shares of Cadence's Common Stock and
cash. The total purchase price was $4.7 million, and the acquisition was
accounted for as a purchase; accordingly, the results of Synthesia from the
date of acquisition forward have been included in the consolidated financial
statements. In connection with the acquisition, net intangibles of $5.6
million were acquired, of which $4.9 million was reflected as a one-time
charge to operations for the write-off of in-process technology that had not
reached technological feasibility and, in management's opinion, had no
probable alternative future use. Comparative pro forma financial information
has not been presented as the results of operations of Synthesia were not
material to Cadence's consolidated financial statements.
High Level Design Systems, Inc.
In December 1996, Cadence acquired all of the outstanding stock of High
Level Design Systems, Inc. (HLDS) for approximately 5.2 million shares of
Cadence'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 Cadence's
consolidated financial statements. The results of operations of HLDS and the
estimated fair value of the assets acquired and liabilities assumed are
included in Cadence's consolidated financial statements from the date of
acquisition. Intangibles arising from the acquisition are being amortized on a
straight-line basis over five years.
Management estimates that $95.7 million of the purchase price represents
acquired in-process technology that has not yet reached technological
feasibility and has no alternative future use. Accordingly, this amount was
immediately charged to expense in the consolidated statements of operations
upon consummation of the acquisition. The value assigned to acquired in-
process technology was determined by identifying research projects in areas
for which technological feasibility has not been established. The value was
determined by
61
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
estimating the costs to develop the acquired in-process technology into
commercially viable products, estimating the resulting net cash flows from
such projects, and discounting the net cash flows back to their present value.
The discount rate includes a factor that takes into account the uncertainty
surrounding the successful development of the acquired in-process technology.
If these projects are not successfully developed, future revenue and
profitability of Cadence may be adversely affected. Additionally, the value of
other intangible assets acquired may become impaired.
CREDIT FACILITY AND LONG-TERM DEBT
In October 1998, Cadence entered into a senior unsecured credit facility
(the 1998 Facility) with a syndicate of banks that allows Cadence to borrow up
to $355 million. The 1998 Facility is divided between a $177.5 million three
year revolving credit facility (the Three Year Facility) and a $177.5 million
364-day revolving credit facility convertible to a three year term loan (the
364-Day Facility). The Three Year Facility expires September 29, 2001 and the
364-Day Facility will either expire on September 29, 1999 and be converted to
a three year term loan with a maturity date of September 29, 2002 or, at the
option of the bank group, be renewed for an additional one year period.
Cadence has the option to pay interest based on LIBOR plus a spread of between
0.50% and 1.00%, based on a pricing grid tied to a financial covenant or the
higher of the Federal Funds Rate plus 0.50% or the prime rate. In addition,
commitment fees are payable on the unutilized portions of the Three Year
Facility at rates between 0.18% and 0.30% based on a pricing grid tied to a
financial covenant and on the unutilized portion of the 364-Day Facility at a
fixed rate of 0.10%. The 1998 Facility contains certain financial and other
covenants. As of January 2, 1999, Cadence had $135 million outstanding under
the Three Year Facility at a weighted average interest rate of 6.07%.
In April 1996, Cadence entered into a senior secured revolving credit
facility (the 1996 Facility) which allowed Cadence to borrow up to $120
million through April 1999. As a result of Cadence securing the 1998 Facility,
the 1996 Facility was terminated in September 1998.
A summary of long-term debt and capital leases follows:
1998 1997
-------- ------
(In thousands)
Revolving credit facility................................... $135,000 $ --
Capital lease obligations................................... 2,653 1,693
Other long-term debt........................................ -- 700
-------- ------
Total..................................................... 137,653 2,393
Less: Current portion....................................... 1,273 794
-------- ------
Long-term debt............................................ $136,380 $1,599
======== ======
62
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
COMMITMENTS
Equipment and facilities are leased under various capital and operating
leases expiring at various dates through the year 2008. Certain of these
leases contain renewal options. Rental expense was $20.8 million,
$15.9 million, and $12.3 million for 1998, 1997 and 1996, respectively.
At January 2, 1999, 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:
1999................................................... $1,319 $ 32,493
2000................................................... 1,020 25,852
2001................................................... 377 20,444
2002................................................... 7 13,749
2003................................................... 1 10,305
Thereafter............................................. -- 53,574
------ --------
Total lease payments................................. 2,724 $156,417
========
Less: Amount representing interest (Average interest rate
of 4.0%)................................................ 71
------
Present value of lease payments........................ 2,653
Less: Current portion.................................... 1,273
------
Long-term portion...................................... $1,380
======
The cost of equipment under capital leases included in the consolidated
balance sheets as property, plant and equipment at January 2, 1999 and January
3, 1998 was approximately $6 million and $3.6 million, respectively.
Accumulated amortization of the leased equipment at January 2, 1999 and
January 3, 1998 was approximately $3.5 million and $2 million, respectively.
In the first quarter of 1999, Cadence completed the construction of a new
building and improvements on the San Jose, California campus with an estimated
cost of approximately $15.4 million. Also in the first quarter of 1999,
Cadence purchased an additional facility adjacent to its San Jose campus for
$27.5 million, which it expects to occupy in the third quarter of 1999.
CONTINGENCIES
From time to time, Cadence is involved in various disputes and litigation
matters which arise in the ordinary course of business. These include disputes
and lawsuits related to intellectual property, licensing, contract law,
distribution arrangements and employee relations matters.
Cadence filed a complaint in the United States District Court for the
Northern District of California (the District Court) on December 6, 1995
against Avant! Corporation (Avant!) and certain of its employees for
misappropriation of trade secrets, copyright infringement, conspiracy, and
other illegal acts.
On January 16, 1996, Avant! filed various counterclaims against Cadence and
Cadence's former President and Chief Executive Officer, and with leave of the
court, on January 29, 1998, filed a second amended counterclaim. The second
amended counterclaim alleges, inter alia, that Cadence and its former
President and Chief Executive Officer had cooperated with the Santa Clara
County, California, District Attorney and initiated
63
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and pursued its complaint against Avant! for anticompetitive 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 second amended counterclaim also alleges that
certain Cadence insiders engaged in illegal insider trading with respect to
Avant!'s stock. Cadence and its former President and Chief Executive Officer
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 counterclaim from Cadence's complaint and stayed the
counterclaim pending resolution of Cadence's complaint. The counterclaim
remains stayed.
On April 19, 1996, Cadence filed a motion seeking a preliminary injunction
to prevent further use of Cadence copyrighted code and trade secrets by
Avant!. On March 18, 1997, the District Court issued an order in which it
granted in part and denied in part that motion. On September 23, 1997, the
United States Court of Appeals for the Ninth Circuit reversed the District
Court's decision and directed the District Court (a) to issue an order
enjoining the sale of Avant!'s ArcCell products and (b) to determine whether
Avant!'s Aquarius software infringes Cadence's code and, if so, to enter an
order enjoining the sale of that software. In an order issued on December 19,
1997, as modified on January 26, 1998, the District Court entered a
preliminary injunction barring any further infringement of Cadence's
copyrights in Design Framework II software, or selling, licensing, or copying
such product derived from Design Framework II, including but not limited to,
Avant!'s ArcCell products. On February 19, 1998, Avant! filed a petition for
writ of certiorari to the United States Supreme Court, requesting a review of
the Ninth Circuit Court's decision. The Supreme Court denied that petition
without comment. On July 9, 1998, Cadence filed further motions to enjoin
Avant!'s Aquarius product line on copyright and trade secret grounds. On
December 7, 1998, the District Court issued a further preliminary injunction,
which enjoined Avant! from selling its Aquarius product line. Cadence posted a
$10 million bond in connection with the issuance of the preliminary
injunction.
By an order dated July 22, 1997, the District Court stayed most activity in
the case pending in that Court and ordered Avant! to post a $5 million bond,
in light of related criminal proceedings pending against Avant! and several of
its executives. The District Court's December 7, 1998 order lifted that stay
in part, allowing the matter to proceed to trial as to certain allegations
against Avant! only, but not with respect to certain matters involving the
Avant! executives and other individuals against whom criminal charges are
pending. Cadence 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 impact on
Cadence's business, operating results or financial condition.
STOCKHOLDERS' EQUITY
Repricing of Stock Options
In order to continue to attract and retain employees, the Board of
Directors authorized the repricing of options to purchase shares of common
stock effective as of the close of business on September 4, 1998 to the then
fair market value of $22.59 per share. Under the terms of the repricing,
optionees were required to extend their existing vesting schedules in exchange
for the repriced options. All repriced options maintained the same expiration
terms. Approximately 3.7 million options were repriced under this program
which accounted for approximately 9% of options outstanding as of the
effective date. The Board of Directors and Executive Officers were excluded
from the repricing.
64
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net Income per Share
The following is a reconciliation of the weighted average common shares
used to calculate basic net income per share to the weighted average common
and potential common shares used to calculate diluted net income per share for
the years 1998, 1997 and 1996:
1998 1997 1996
------- ------- -------
(In thousands)
Weighted average common shares used to calculate
basic net income per share........................ 211,975 194,900 178,399
Options.......................................... 21,206 24,362 29,541
Puts............................................. 258 58 163
Warrants and other contingent common shares...... 208 232 341
------- ------- -------
Weighted average common and potential common shares
used to calculate diluted net income per share.... 233,647 219,552 208,444
======= ======= =======
Options to purchase 432,598 shares of common stock at the weighted average
price of $33.86 per share were outstanding at January 2, 1999, but were not
included in the computation of diluted net income per share because the
options' exercise prices were greater than the average market price of the
common shares. The options, which expire in 2007 and 2008, remained
outstanding at January 2, 1999. Warrants to purchase 170,400 shares of common
stock at the weighted average price of $28.79 were outstanding at January 2,
1999, but were not included in the computation of diluted income per share
because the warrants' exercise prices were greater than the average market
price of the common shares. The warrants outstanding expire in August 1999.
Put warrants to purchase 2,588,820 shares of common stock at the weighted
average price of $22.75 per share were outstanding at January 2, 1999, but
were not included in the computation of diluted income per share because the
put warrants' exercise prices were less than the average market price of the
common shares. The put warrants outstanding expire at various dates through
November 1999.
Stock Compensation Plans
Fixed Stock Option Plans
Cadence's 1997 Nonstatutory Stock Option Plan (the 1997 Plan) provides for
the issuance of non-qualified options to its employees to purchase up to
20,000,000 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 1997
Plan become exercisable over periods up to five years, with, generally, one-
fifth of the shares vesting one year from the vesting commencement date with
respect to initial grants, and the remaining shares vesting in 48 equal
monthly installments. Options under the 1997 Plan generally expire ten years
from the date of grant.
Cadence's Employee Stock Option Plan (the 1987 Plan) provides for the
issuance of either incentive or non-qualified options to its employees to
purchase up to 71,370,100 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 1987 Plan become exercisable over periods of up to five years and
expire five to ten years from the date of grant.
Cadence's Non-Statutory Stock Option Plan (the 1993 Non-Statutory Plan)
provides for the issuance of non-qualified options to its employees to
purchase up to 24,750,000 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 1993 Non-Statutory Plan generally expire ten years from the date of
grant.
65
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under the Directors' Stock Option Plans (the Directors' Plans), Cadence may
grant non-qualified options to its non-employee directors for up to 3,352,496
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.
Cadence has assumed certain options granted to former employees of acquired
companies (Acquired Options). The Acquired Options were assumed by Cadence
outside of its stock option plans, and all are administered as if issued under
their original plans. All of the Acquired Options have been adjusted to
effectuate the conversion under the terms of the Agreements and Plans of
Reorganization between Cadence and the companies acquired. The Acquired
Options generally become exercisable over a four or five 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 Cadence's fixed stock option plans as of
and during the years ended January 2, 1999, January 3, 1998 and December 28,
1996 follows:
1998 1997 1996
--------------------- --------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- -------- ----------- -------- ---------- --------
Outstanding at beginning
of year................ 42,570,821 $11.75 42,714,932 $ 6.57 44,942,888 $ 3.95
Assumption of acquired
companies options..... 816,334 $ 2.83 -- $ -- 1,012,220 $ 7.45
Granted................ 10,204,758 $21.21 17,524,449 $17.31 8,171,771 $16.00
Exercised.............. (10,746,041) $ 7.27 (15,203,465) $ 3.47 (9,496,992) $ 2.55
Forfeited.............. (4,862,434) $16.61 (2,465,095) $12.55 (1,914,955) $ 6.54
----------- ----------- ----------
Outstanding at end of
year................... 37,983,438 $15.15 42,570,821 $11.75 42,714,932 $ 6.57
=========== =========== ==========
Options exercisable at
year end............... 15,530,044 15,863,817 20,298,078
Options available for
future grant........... 19,261,461 14,853,922 9,955,568
Weighted average fair
value of options
granted during the
year................... $ 16.23 $ 7.52 $ 5.90
A summary of the status of all of Cadence's fixed stock option plans at
January 2, 1999 follows:
Options Outstanding Options Exercisable
------------------------------------- --------------------
Weighted Weighted
Number Weighted Average Average Number Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices at 1/2/99 Contractual Life Price at 1/2/99 Price
--------------- ----------- ---------------- -------- ----------- --------
$ 0.14 - $ 5.00 5,480,463 4.9 $ 2.32 5,033,209 $ 2.35
$ 5.01 - $10.00 5,401,384 6.5 $ 7.69 4,193,744 $ 7.63
$10.01 - $15.00 7,956,869 7.3 $14.38 2,972,910 $14.26
$15.01 - $20.00 8,067,746 7.7 $17.68 2,303,524 $17.50
$20.01 - $25.00 9,089,335 8.6 $22.67 762,321 $22.68
$25.01 - $30.00 1,727,491 9.2 $25.58 260,336 $25.18
$30.01 - $35.00 229,350 9.4 $33.29 -- $ --
$35.01 - $40.00 30,800 9.3 $35.07 4,000 $35.06
---------- ----------
Total 37,983,438 15,530,044
========== ==========
66
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Repurchase Plan
Cadence has authorized two seasoned systematic stock repurchase programs
under which it repurchases common stock to satisfy estimated requirements for
shares to be issued under its Employee Stock Purchase Plan (ESPP) and the 1997
Plan, respectively. Such repurchases are intended to cover Cadence's expected
reissuances under the ESPP and the 1997 Plan for the next 12 months and 24
months, respectively.
As part of its authorized repurchase program, Cadence has sold put warrants
through private placements. At January 2, 1999, there were 4.2 million put
warrants outstanding that entitle the holder to sell one share of common stock
to Cadence on a specified date and at a specified price ranging from $20.88 to
$35.14 per share. Additionally, during this same period, Cadence purchased
call options that entitle Cadence to buy one share of common stock at a
specified price to satisfy anticipated stock repurchase requirements under
Cadence's systematic repurchase programs. At January 2, 1999, Cadence had 2.9
million call options outstanding at prices ranging from $21.13 to $35.39 per
share. The put warrants and call options outstanding at January 2, 1999 are
exercisable on various dates through November 1999 and Cadence has the
contractual ability to settle the options prior to their maturity. At January
2, 1999, the fair value of the call options was approximately $20.9 million
and the fair value of the put warrants was approximately $16.6 million. The
fair value of put warrants and call options was estimated by Cadence's
investment bankers.
If exercised, Cadence has the right to settle the put warrants with stock
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
Cadence to issue a substantial number of shares, depending on the exercise
price of the put warrants and the per share fair value of Cadence's Common
Stock at the time of exercise. In addition, settlement of put warrants in
stock could lead to the disposition by put warrant holders of shares of
Cadence's Common Stock that such holders may have accumulated in anticipation
of the exercise of the put warrants or call options, which may adversely
affect the price of Cadence's Common Stock. At January 2, 1999, Cadence had
the ability to settle these put warrants with stock and, therefore, no amount
was classified out of stockholders' equity in the consolidated balance sheets.
The effect of the exercise of these put warrants and call options is reported
in the line titled "Purchase of treasury stock" within the consolidated
statements of stockholders' equity.
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan (ESPP), Cadence is authorized to
issue up to 17,500,000 shares of common stock to its employees. Under the
terms of the ESPP, each six month offering period employees can choose to have
up to 12% of their annual base earnings plus bonuses withheld to purchase
Cadence'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 offering
periods. Under the ESPP, Cadence issued 1,001,702, 1,167,474 and 1,211,074
shares to employees in 1998, 1997 and 1996, respectively. The weighted average
purchase price and the weighted average fair value of shares issued in 1998
was $21.82 and $28.38, respectively.
In November 1998, Cadence amended its ESPP providing for concurrent 24
month offering periods with a new 24 month offering period starting every six
months. Each offering period will be divided into four consecutive six month
purchase periods commencing in February 1999.
Pro Forma Information
This information is required to illustrate the financial results of
operations as if Cadence had accounted for its grants of employee stock
options under the fair value method of SFAS No. 123. The fair value of
Cadence's options granted and shares purchased under the ESPP program for
years ended January 2, 1999, January 3, 1998,
67
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and December 28, 1996 reported below was estimated at the date of grant using
a Black-Scholes option pricing model with the following weighted average
assumptions assuming a dividend yield of zero for all periods:
1998 1997 1996
------- ------- -------
Risk-free interest rate............................ 5.22% 6.20% 6.16%
Volatility factors of the expected market price of
Cadence's Common Stock............................ 59% 44% 35%
Weighted average expected life of an option........ 4 Years 4 Years 4 Years
The Black-Scholes option valuation model was developed by the financial
markets for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. Cadence's options have characteristics
significantly different from those of exchange traded options, and changes in
the subjective input assumptions can materially affect the fair value
estimate. In management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its stock options
granted to its employees.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. Had Cadence's fixed
stock option and employee stock purchase plans been accounted for under SFAS
No. 123, net income (loss) and earnings per share would have been adjusted to
the following pro forma amounts:
1998 1997 1996
------------- ------------- -------------
(In thousands, except per share amounts)
Net income (loss):
As reported.................... $ 31,982 $ 168,100 $ 34,310
============= ============= ============
Pro forma...................... $ (47,735) $ 126,004 $ 10,451
============= ============= ============
Basic net income (loss) per
share:
As reported.................... $ 0.15 $ 0.86 $ 0.19
============= ============= ============
Pro forma...................... $ (0.23) $ 0.65 $ 0.06
============= ============= ============
Diluted net income (loss) per
share:
As reported.................... $ 0.14 $ 0.77 $ 0.16
============= ============= ============
Pro forma...................... $ (0.23) $ 0.57 $ 0.05
============= ============= ============
The effects of applying SFAS No. 123 on pro forma disclosures of net income
(loss) and net income (loss) per share for 1998, 1997 and 1996 are not likely
to be representative of the pro forma effects on net income and earnings per
share in future years.
Warrants
In connection with the acquisition of High Level Design Systems, Inc., in
December 1996, Cadence issued a warrant to Goldman, Sachs & Co. (Goldman
warrant) to purchase 170,400 shares of Cadence's Common Stock at $28.79 per
share. The warrant expires in August 1999 and can be exercised at any time, in
whole or in part. The warrant was valued at the time of the acquisition at
approximately $0.6 million and was included as part of the total purchase
price of HLDS.
In connection with the purchase of the business and certain assets of
Comdisco Systems, Inc. (Comdisco), a subsidiary of Comdisco, Inc., in June
1993, Cadence issued a warrant (Comdisco Warrant) to purchase
68
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5,850,000 shares of Cadence's Common Stock at $3.23 per share. Pursuant to the
original terms of the warrant agreement, during 1996 and 1995, Cadence
repurchased portions of the warrant applicable to 300,000 and 5,310,000
shares, respectively, for approximately $4.3 million and $17.2 million,
respectively. In 1998, Comdisco exercised 100,000 warrants. The warrant for
the remaining 140,000 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
At January 2, 1999, Cadence had reserved the following shares of authorized
but unissued common stock for future issuance:
Shares
----------
Employee stock option plans..................................... 55,735,229
ESPP............................................................ 4,525,122
Put warrants.................................................... 4,197,379
Directors stock option plans.................................... 1,502,170
Goldman warrant................................................. 170,400
Comdisco warrant................................................ 140,000
Other option agreements......................................... 7,500
----------
Total......................................................... 66,277,800
==========
Stockholder Rights Plan
In February 1996, Cadence adopted a new Stockholder Rights Plan to protect
stockholders' rights in the event of a proposed or actual acquisition of 15%
or more of the outstanding shares of Cadence's Common Stock. As part of this
plan, each share of Cadence'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 $0.01 per share, of Cadence 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
$0.01 per Right until the occurrence of certain events. The Rights expire on
February 20, 2006.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD
In November 1997, the FASB Emerging Issues Task Force issued Ruling 97-13
"Accounting for Costs Incurred in Connection with a Consulting Contract or an
Internal Project That Combines Business Process Reengineering and Information
Technology Transformation," which requires companies to expense costs incurred
for business process reengineering projects. As a result, Cadence recorded a
$12.3 million charge in 1997, net of income taxes of $5.3 million, as a
cumulative effect of change in accounting method for reengineering project
costs that had been previously capitalized by Cadence associated with its
implementation of enterprise-wide information systems. This change in
accounting method reduced basic net income per share and diluted net income
per share by $0.07 and $0.05, respectively.
69
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
INCOME TAXES
The provision for income taxes consisted of the following components:
1998 1997 1996
-------- -------- --------
(In thousands)
Current:
Federal....................................... $ 71,094 $106,548 $ 61,941
State......................................... 14,879 15,772 10,325
Foreign....................................... 27,664 19,268 8,283
-------- -------- --------
Total current................................ 113,637 141,588 80,549
-------- -------- --------
Deferred (prepaid):
Federal....................................... (34,650) (64,363) (15,700)
State......................................... (5,681) (2,818) (810)
Foreign....................................... 7,379 (1,284) 116
-------- -------- --------
Total deferred (prepaid)..................... (32,952) (68,465) (16,394)
-------- -------- --------
Total provision for income taxes............ $ 80,685 $ 73,123 $ 64,155
======== ======== ========
Income before income taxes for 1998, 1997 and 1996 included income (loss)
of approximately $(2.4) million, $144.3 million and $25.3 million,
respectively, from Cadence's foreign subsidiaries.
The provision for income taxes is net of the benefit of operating loss
carryforwards totaling $3.9 million, $3.6 million, and $2.6 million for 1998,
1997 and 1996, 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:
1998 1997 1996
-------- -------- --------
(In thousands)
Provision computed at federal statutory
rate....................................... $ 39,434 $ 84,733 $ 34,463
State income tax, net of federal tax
effect..................................... 8,147 10,251 6,323
Write-off of in-process technology.......... 46,615 -- 33,495
Change in valuation allowance............... 15,371 (1,714) (11,835)
Foreign withholding taxes................... 1,110 5,049 2,823
Amortization of acquired intangibles........ 1,020 706 897
Foreign tax credit.......................... (1,110) (5,049) --
Acquisition costs........................... (2,679) 6,005 --
Research and development tax credit......... (6,109) (4,112) (352)
Foreign income tax at a lower rate.......... (21,768) (25,608) --
Other....................................... 654 2,862 (1,659)
-------- -------- --------
Provision for income taxes................. $ 80,685 $ 73,123 $ 64,155
======== ======== ========
Effective tax rate.......................... 72% 30% 65%
======== ======== ========
70
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of deferred tax assets and liabilities consisted of the
following:
1998 1997
-------- --------
(In thousands)
Deferred Tax Assets:
Accrued intercompany royalty............................ $ 37,430 $ 24,714
Intangibles............................................. 27,520 2,613
Sales returns and allowance............................. 19,890 14,412
Accruals and reserves................................... 15,196 8,408
Net operating losses.................................... 14,959 2,802
Tax credits............................................. 14,809 27,622
Depreciation and amortization........................... 13,692 7,969
Restructure reserves.................................... 12,920 3,431
Other................................................... 9,110 7,603
-------- --------
Total deferred tax assets.............................. 165,526 99,574
Valuation allowance--provision for income taxes.......... (9,676) --
Valuation allowance--equity and intangibles.............. (5,695) --
-------- --------
Net deferred tax assets................................ 150,155 99,574
-------- --------
Deferred Tax Liabilities:
Intangibles............................................. (58,928) --
Accrued intercompany royalty............................ (10,694) --
Capitalized software.................................... (7,483) (9,127)
Other................................................... (9,744) (2,337)
-------- --------
Total deferred tax liabilities......................... (86,849) (11,464)
-------- --------
Total net deferred tax assets......................... $ 63,306 $ 88,110
======== ========
Cadence provides United States income taxes on the earnings of foreign
subsidiaries unless they are considered permanently invested outside of the
United States. At January 2, 1999, the cumulative amount of earnings upon
which United States income taxes have not been provided are approximately
$115.8 million. At January 2, 1999, the unrecognized deferred tax liability
for these earnings was approximately $29.3 million.
The net valuation allowance increased by $15.4 million in 1998. The
increase in valuation allowance--provision for income taxes and valuation
allowance--equity and intangibles of $15.4 million is due to the uncertainty
of certain foreign subsidiaries generating sufficient taxable income to
realize certain foreign deferred tax assets. A portion of the valuation
allowance, if realizable, may reduce other intangibles and may not be
available to offset future provision for income taxes and is identified in the
above table as "valuation allowance--equity and intangibles."
The remaining net operating loss carryforwards will expire at various dates
from 1999 through 2018 and federal tax credit carryforwards will expire at
various dates from 1999 through 2013.
Cadence'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. Cadence is contesting these adjustments and
is pursuing administrative remedies. Management believes that adequate
provision has been made for any deficiency that may result from this
examination and that the resolution of this matter will not have a material
adverse impact on Cadence's consolidated financial position or results of
operations.
71
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
STATEMENT OF CASH FLOWS
The supplemental cash flow information for 1998, 1997 and 1996 follows:
1998 1997 1996
-------- -------- --------
(In thousands)
Cash Paid During the Year for:
Interest....................................... $ 3,043 $ 1,229 $ 2,185
======== ======== ========
Income taxes (including foreign withholding
tax).......................................... $ 11,987 $ 13,204 $ 26,025
======== ======== ========
Non-Cash Investing and Financing Activities:
Capital lease obligations incurred for
equipment..................................... $ 1,505 $ 2,570 $ 3,070
======== ======== ========
Common and treasury stock issued under the ESPP
and for acquisitions.......................... $ 70,955 $ 52,594 $110,607
======== ======== ========
Tax benefits from employee stock transactions... $109,344 $123,180 $ 60,418
======== ======== ========
INTEGRATED MEASUREMENT SYSTEMS, INC.
In February 1997, Cadence and its subsidiary, Integrated Measurement
Systems, Inc. (IMS), sold to the public 1.7 million shares of IMS common
stock, of which approximately 1 million shares were sold by Cadence, netting
Cadence approximately $18.6 million in cash. As a result of the offering and
sale of shares by Cadence, Cadence's ownership interest in IMS decreased to
approximately 37% from approximately 55%. Accordingly, Cadence changed the
accounting for its investment in IMS from consolidation to the equity method
of accounting in fiscal 1997. The consolidated financial statements of Cadence
for fiscal year 1996 included the accounts of IMS after elimination of
intercompany accounts and transactions and minority interest adjustments.
Although Cadence has no current intent to enter into similar transactions, the
likelihood of such transactions in the future is dependent upon the state of
the financial markets as well as liquidity and other considerations of each of
Cadence and IMS. IMS manufactures and markets verification systems used in
testing prototype ASICs.
UNUSUAL ITEMS AND RESTRUCTURING
Described below are unusual items and restructuring charges in 1998, 1997
and 1996:
1998 1997 1996
-------- ------- --------
(In millions)
Write-off of acquired in-process technology...... $194,100 $ 6,571 $ 95,700
Restructuring charges............................ 69,494 34,417 2,119
Write-off of capitalized software development
costs........................................... -- 3,065 2,724
-------- ------- --------
Total unusual items............................. $263,594 $44,053 $100,543
======== ======= ========
Restructuring
In 1998, Cadence recorded $69.5 million of restructuring charges primarily
associated with Cadence's worldwide restructuring plan in the second half of
1998. Cadence's restructuring plans and associated costs consisted of $36.9
million to terminate approximately 700 employees, $29.9 million to downsize
and close excess facilities and $2.7 million of other restructuring expenses.
Cadence's restructuring plan was primarily aimed at reducing the cost of
excess personnel and capacity in its services business.
72
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Severance costs of $36.9 million include severance benefits, notice pay,
and outplacement services. Approximately $10.1 million of these costs resulted
from the acceleration of stock options vesting under employment agreements and
are reflected as non-cash charges in the following table of restricting
activity. All terminations and termination benefits were communicated to the
affected employees prior to year-end and severance benefits are expected to be
paid in 1999.
Cadence also incurred charges totaling $29.9 million in connection with the
closure of 58 sales and engineering facilities--including $16.7 million to
downsize and close facilities and $13.2 million in abandonment costs for the
related leasehold improvements. Closure and exit costs include payments
required under lease contracts (less any applicable sublease income) after the
properties were abandoned, lease buyout costs, restoration costs associated
with certain lease arrangements, and costs to maintain facilities during the
period after abandonment. Asset related costs written-off consist of leasehold
improvements to facilities that were abandoned and whose estimated fair market
value is zero. Through the first quarter of 1999, 90% of the sites have been
vacated and the remaining sites will be downsized or vacated primarily during
the second and third quarter of 1999. Noncancelable lease payments on vacated
facilities will be paid out through 2008.
Cadence also recorded $2.7 million of other restructuring charges
consisting primarily of cancellation fees associated with certain vendor and
conference arrangements and abandoned software.
In 1997, Cadence recorded restructuring charges of $34.4 million. These
charges relate to restructuring plans primarily aimed at reducing costs after
Cadence merged with CCT and acquired HLDS. Cadence's restructuring plans and
associated costs consisted of $11.9 million to terminate approximately 230
employees, $4.4 million to close duplicate and excess facilities and $3.7
million of other expenses associated with the business combinations. Also
included in the restructuring costs were fees related to the CCT combination
for financial advisors, attorneys, and accountants of $14.4 million. The
remaining severance balances were paid out in 1998 and all facilities were
vacated. Noncancelable lease payments on vacated facilities will be paid out
through the year 2000.
In 1996, Cadence recorded restructuring charges of $2.1 million consisting
of employees termination costs associated with the outsourcing of Cadence's
management information technology services and costs associated with excess
facilities.
Liabilities for excess facilities and other restructuring charges are
included in other current and non-current liabilities, while severance and
benefits liabilities are included in payroll and payroll related accruals. The
following table summarizes the Company's restructuring activity during the
fiscal years 1998, 1997 and 1996:
Severance
and Excess Other
Benefits Facilities Restructuring Assets Total
--------- ---------- ------------- ------- -------
(In thousands)
Balance, December 30,
1995................... $ -- $ -- $ -- $ -- $ --
1996 restructuring
charges.............. 1,047 1,072 -- -- 2,119
Cash charges.......... (392) -- -- -- (392)
------- ------- ------- ------- -------
Balance, December 28,
1996................... 655 1,072 -- -- 1,727
1997 restructuring
charges.............. 11,895 2,102 18,073 2,347 34,417
Non-cash charges...... -- -- -- (2,347) (2,347)
Cash charges.......... (10,263) (536) (14,223) -- (25,022)
------- ------- ------- ------- -------
Balance, January 3,
1998................... 2,287 2,638 3,850 -- 8,775
1998 restructuring
charges.............. 36,859 16,749 2,718 13,168 69,494
Non-cash charges...... (10,095) (1,364) -- (1,862) (13,321)
Cash charges.......... (15,937) (3,527) (4,355) (2) (23,821)
------- ------- ------- ------- -------
Balance, January 2,
1999................... $13,114 $14,496 $ 2,213 $11,304 $41,127
======= ======= ======= ======= =======
73
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Capitalized Software Development Costs
In 1997 and 1996, Cadence wrote-off capitalized software development costs
of $3.1 and $2.7 million, respectively, for products developed by Cadence
which were replaced by CCT and HLDS products or by license of replacement
technology.
OTHER INCOME, NET
Other income, net components for 1998, 1997 and 1996 follows:
1998 1997 1996
------- ------- -------
(In thousands)
Interest income................................... $10,468 $18,552 $ 5,474
Gain (loss) on foreign exchange................... 2,637 (1,424) 164
Equity earnings from investments.................. (889) 1,934 --
Gain on sale of IMS stock......................... -- 13,061 --
Minority interest expense......................... (256) (353) (3,016)
Other expense, net................................ (878) (3,047) (456)
Interest expense.................................. (3,603) (2,508) (1,940)
------- ------- -------
Total other income, net......................... $ 7,479 $26,215 $ 226
======= ======= =======
SEGMENT REPORTING
In 1998, Cadence adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." Cadence currently operates in three
operating segments: Products, Services and Maintenance. Operating segments are
defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker when deciding how to allocate resources and when assessing
performance. Cadence's chief operating decision making group is the Executive
Staff, which is comprised of the Chief Executive Officer and Executive Vice
Presidents.
Cadence's business activities are organized on the basis of differences in
its related products and services. The Products segment designs and sells a
variety of electronic design automation software tools that are licensed to
customers. The Services segment offers design and consulting services to
either assist companies in developing electronic designs or to assume
responsibility for the design effort when customers wish to outsource this
work. The Maintenance segment is primarily a technical support organization
and maintenance agreements are offered to customers either as part of our
product license agreements or separately. Cadence's organizational structure
reflects this segmentation, and segments have not been aggregated for purposes
of this disclosure.
Segment income from operations is defined as gross margin under generally
accepted accounting principles and excludes operating expenses, unusual items,
other income, net, and income taxes. Profitability information about Cadence's
segments is available only to the extent of gross margin by segment, and
operating expenses and other income and expense items are managed on a
functional basis. There are no differences between the accounting policies
used to measure profit and loss for segments and those used on a consolidated
basis. Revenues are defined as revenues from external customers and there are
no intersegment revenues or expenses.
Cadence's management does not identify or allocate its assets, including
capital expenditures, by operating segment. Accordingly, assets are not being
reported by segment because the information is not available by segment and is
not reviewed by Cadence's Executive Staff to make decisions about resources to
be allocated to the segments and when assessing their performance.
Depreciation and amortization is allocated to the segments in order to
determine the segments' gross margin.
74
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables present information about reported segments for the
years ended January 2, 1999, January 3, 1998 and December 28, 1996:
Product Services Maintenance Other Total
--------- -------- ----------- ---------- ----------
(In thousands)
1998:
Revenue......................... $ 695,036 $255,787 $ 265,247 $ -- $1,216,070
Cost of revenue................ 51,539 185,683 43,453 -- 280,675
Amortization of acquired
intangibles................... 13,771 3,672 -- 17,443
--------- -------- --------- ---------- ----------
Gross margin................. 629,726 66,432 221,794 -- 917,952
Marketing and sales............ -- -- -- (302,332) (302,332)
Research and development....... -- -- -- (179,394) (179,394)
General and administrative..... -- -- -- (67,444) (67,444)
Unusual items.................. -- -- -- (263,594) (263,594)
Other income, net.............. -- -- -- 7,479 7,479
--------- -------- --------- ---------- ----------
Income (loss) before provision
for income taxes and
cumulative effect of change in
accounting method............. $ 629,726 $ 66,432 $ 221,974 $ (805,285) $ 112,667
========= ======== ========= ========== ==========
Depreciation and amortization.. $ 40,024 $17,106 $ 2,021 $ 43,263 $ 102,414
========= ======== ========= ========== ==========
1997:
Revenue........................ $ 537,490 $160,890 $ 227,989 $ -- $ 926,369
Cost of revenue................ 40,064 114,711 27,838 -- 182,613
Amortization of acquired
intangibles................... 1,910 36 -- -- 1,946
--------- -------- --------- ---------- ----------
Gross margin................. 495,516 46,143 200,151 -- 741,810
Marketing and sales............ -- -- -- (263,054) (263,054)
Research and development....... -- -- -- (143,746) (143,746)
General and administrative..... -- -- -- (58,412) (58,412)
Unusual items.................. -- -- -- (44,053) (44,053)
Other income, net.............. -- -- -- 26,215 26,215
--------- -------- --------- ---------- ----------
Income (loss) before provision
for income taxes and
cumulative effect of change in
accounting method............. $ 495,516 $ 46,143 $ 200,151 $ (483,050) $ 258,760
========= ======== ========= ========== ==========
Depreciation and amortization.. $ 21,408 $ 8,066 $ 1,466 $ 26,176 $ 57,116
========= ======== ========= ========== ==========
1996: (1)
Revenue........................ $ 400,945 $114,620 $ 223,181 $ 40,318 $ 779,064
Cost of revenue................ 35,343 80,963 25,067 14,126 155,499
Amortization of acquired
intangibles................... 929 -- -- -- 929
Gross margin................. 364,673 33,657 198,114 26,192 622,636
Marketing and sales............ -- -- -- (240,740) (240,740)
Research and development....... -- -- -- (123,065) (123,065)
General and administrative..... -- -- -- (60,049) (60,049)
Unusual items.................. -- -- -- (100,543) (100,543)
Other income, net.............. -- -- -- 226 226
--------- -------- --------- ---------- ----------
Income (loss) before provision
for income taxes and cumula-
tive effect of change in ac-
counting method............... $ 364,673 $ 33,657 $ 198,114 $ (497,979) $ 98,465
========= ======== ========= ========== ==========
Depreciation and amortization.. $ 21,212 $ 7,582 $ 1,120 $ 23,300 $ 53,214
========= ======== ========= ========== ==========
- --------
(1) In February 1997, Cadence reduced its ownership in IMS from 55% to 37%
resulting from a public offering. As a result of this offering, the
operations of IMS were no longer consolidated with Cadence's results of
operations and internal management reporting for 1996 was restated to
exclude the historical operations of IMS from its segment reporting.
75
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Internationally (excluding Japan), Cadence markets and supports its
products and services primarily through its subsidiaries and various
distributors. Following a reorganization of Cadence's distribution channel in
Japan in 1997, Cadence now licenses its products through Innotech Corporation
(Innotech), in which Cadence is an approximately 18% stockholder. Cadence
markets its consulting and design services through a wholly-owned subsidiary.
Revenues are attributed to geographic areas based on the country in which
the customer is domiciled. In 1998 and 1997, no one customer accounted for
more than 10% of total revenues. In 1996, licensing royalties from Innotech
accounted for 13% of total revenue, which is reported within Cadence's Product
segment. Long-lived assets are attributed to geographic areas based on the
country where the assets are located.
The following table presents a summary of revenue and long-lived assets by
geographic region for years ended January 2, 1999, January 3, 1998, and
December 28, 1996:
1998 1997 1996
--------------------- -------------------- --------------------
Long Lived Long Lived Long Lived
Revenues Assets Revenues Assets Revenues Assets
---------- ---------- --------- ---------- --------- ----------
North America:
United States.......... $ 612,968 $ 222,453 $ 439,047 $ 181,145 $ 405,874 $ 152,006
Other.................. 31,420 3,995 15,847 2,164 16,843 415
---------- --------- --------- --------- --------- ---------
Total North
America.............. $ 644,388 $ 226,448 $ 454,894 $ 183,309 $ 422,717 $ 152,421
---------- --------- --------- --------- --------- ---------
Europe:
United Kingdom......... $ 83,764 $ 21,128 $ 38,143 $ 2,530 $ 38,840 $ 1,611
Germany................ 50,793 1,233 49,090 1,234 38,699 1,138
Other.................. 124,056 4,132 96,413 3,089 49,873 2,510
---------- --------- --------- --------- --------- ---------
Total Europe.......... $ 258,613 $ 26,493 $ 183,646 $ 6,853 $ 127,412 $ 5,259
---------- --------- --------- --------- --------- ---------
Japan and Asia:
Japan.................. $ 238,861 $ 1,809 $ 229,428 $ 1,799 $ 178,506 $ 3,435
Asia................... 74,208 7,925 58,401 5,460 50,429 3,042
---------- --------- --------- --------- --------- ---------
Total Japan
and Asia............. $ 313,069 $ 9,734 $ 287,829 $ 7,259 $ 228,935 $ 6,477
Total............... $1,216,070 $ 262,675 $ 926,369 $ 197,421 $ 779,064 $ 164,157
========== ========= ========= ========= ========= =========
76
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
JANUARY 2, 1999
Schedule II
CADENCE DESIGN SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)
Additions
-----------------------
Balance at Charged to Charged Balance at
Beginning Costs and to Other End of
Description of Period Expenses Accounts(2) Deductions(1) Period
- ----------- ---------- ---------- ------------ ------------- ----------
Deducted from asset
accounts:
Allowance for doubtful
accounts:
Year Ended January 2,
1999................. $ 21,200 $ 7,687 $ 5,321 $ (11,983) $ 22,225
Year Ended January 3,
1998................. $ 8,772 $ 438 $ 27,270 $ (15,280) $ 21,200
Year Ended December
28, 1996............. $ 7,420 $ 1,621 $ -- $ (269) $ 8,772
- --------
(1) Uncollectible accounts written-off, net of recoveries, deconsolidation of
Integrated Measurement Systems, Inc., and decrease in returns allowance
offset against revenues.
(2) Additions resulting from an increase in returns allowance offset against
revenue.
77
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.
CADENCE DESIGN SYSTEMS, INC.
/s/ John R. Harding
___________________________________
John R. Harding
President & Chief Executive Officer
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Name/Title Date
---------- ----
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND DIRECTOR
(Principal Executive Officer)
/s/ John R. Harding April 2, 1999
____________________________________________________
John R. Harding
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER,
AND DIRECTOR
(Principal Financial Officer)
/s/ H. Raymond Bingham April 2, 1999
____________________________________________________
H. Raymond Bingham
CORPORATE VICE PRESIDENT, CONTROLLER
AND ASSISTANT SECRETARY
(Principal Accounting Officer)
/s/ William Porter April 2, 1999
____________________________________________________
William Porter
78
ADDITIONAL DIRECTORS
/s/ Donald L. Lucas April 2, 1999
____________________________________________________
Donald L. Lucas
/s/ Carol Bartz April 2, 1999
____________________________________________________
Carol Bartz
/s/ Dr. Leonard Y. W. Liu April 2, 1999
____________________________________________________
Dr. Leonard Y. W. Liu
/s/ Dr. Alberto Sangiovanni-Vincentelli April 2, 1999
____________________________________________________
Dr. Alberto Sangiovanni-Vincentelli
/s/ George M. Scalise April 2, 1999
____________________________________________________
George M. Scalise
/s/ Dr. John B. Shoven April 2, 1999
____________________________________________________
Dr. John B. Shoven
/s/ Roger Siboni April 2, 1999
____________________________________________________
Roger Siboni
79