Back to GetFilings.com
1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 DECEMBER 30, 2000
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 SHARE NEW YORK STOCK EXCHANGE
(TITLE OF EACH CLASS) (NAMES OF EACH EXCHANGE ON WHICH 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 3, 2001 by
non-affiliates of the registrant: $6,081,210,144
Number of shares of common stock outstanding at March 3, 2001: 244,716,706
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 2001 Annual Meeting to
be held on May 16, 2001, are incorporated by reference into Part III hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
CADENCE DESIGN SYSTEMS, INC.
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
PAGE
----
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 21
Item 3. Legal Proceedings........................................... 21
Item 4. Submission of Matters to a Vote of Security Holders......... 24
PART II
Item 5. Market for the Registrant's Common Equity and Related 26
Stockholder Matters.........................................
Item 6. Selected Financial Data..................................... 27
Item 7. Management's Discussion and Analysis of Financial Condition 28
and Results of Operations...................................
Item 7A. Quantitative and Qualitative Disclosures About Market 45
Risk........................................................
Item 8. Financial Statements and Supplementary Data................. 46
Item 9. Changes and Disagreements with Accountants on Accounting and 46
Financial Disclosure........................................
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 47
Item 11. Executive Compensation...................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and 47
Management..................................................
Item 13. Certain Relationships and Related Transactions.............. 47
PART IV
Item 14. Exhibits, Financial Statements, Schedules, and Reports on 48
Form 8-K....................................................
Signatures.................................................. 93
2
3
PART I.
ITEM 1. BUSINESS
Certain statements contained in this Annual Report on Form 10-K, including,
without limitation, statements containing the words "believes," "anticipate,"
"estimates," "expects," "intends," and words of similar import, constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Actual results could vary materially from those
expressed in these statements. Readers are referred to "Marketing and Sales,"
"Research and Development," "Competition," "Proprietary Technology,"
"Manufacturing," and "Factors That May Affect Future Results" sections contained
in this Annual Report on Form 10-K, which identify important risk factors that
could cause actual results to differ from those contained in the forward-looking
statements.
OVERVIEW
Cadence Design Systems, Inc., provides comprehensive software and other
technology and offers design and methodology services for the product
development requirements of the world's leading electronics companies. Cadence
licenses its leading-edge electronic design automation, or EDA, software and
hardware technology and provides a range of services to companies throughout the
world to help optimize their product development processes. Cadence is a
supplier of end-to-end products and services 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 headquarters are
located at 2655 Seely Avenue, Building 5, San Jose, California 95134. Its
telephone number at that location is (408) 943-1234.
FACTORS DRIVING ELECTRONIC DESIGN AUTOMATION INDUSTRY
The worldwide electronics industry has experienced expansion driven
primarily by the communications (networking and wireless) markets. The rise in
Internet and cell phone use pressures electronics suppliers to provide equipment
that meets the ever-increasing demand for bandwidth. The advent of technologies
such as third generation cellular, wireless networking, and optical networking
are converging the Internet and the cell phone. The next step, pervasive
connection of consumer electronic devices, appears closer to becoming reality.
On the electronics production side, ever-decreasing silicon manufacturing
process geometries coupled with the move to 300mm wafer production is driving
integrated circuit, or IC, costs, volumes, and increasingly higher complexities.
These market and technology forces pose major challenges for the global
electronics design community, and consequently create significant opportunities
and challenges for EDA tools and services providers.
The electronics industry is faced with increasing complexity of electronic
devices. Design teams face two major challenges in deep submicron design and
system-on-chip, or SOC, design.
Deep submicron design refers to the design of integrated circuits that will
have feature sizes smaller than 1/2 micron. IC feature sizes for wires,
transistors, and contacts decrease with each advance in the semiconductor
manufacturing process. Each successive move to a smaller feature size (e.g.,
decreasing from .25 microns to .18 microns and smaller) requires introducing new
capabilities throughout the entire design and manufacturing flow to account for
new physical effects that emerge from the decrease in size. Deep submicron
design represents a major challenge for the entire semiconductor industry.
SOC design refers to implementing an entire electronics sub-system on a
single IC. Smaller feature sizes make it more economical to put additional
circuitry on a single die. The chips fabricated with these dies include one or
more processors (microprocessors and digital signal processors), a
high-performance bus, numerous memory devices and peripherals, custom digital
logic, custom analog logic, and millions of lines of software code. Such devices
offer huge benefits in terms of price, performance, power, and size. However,
they
3
4
are extremely difficult to design, and it is even more difficult to ensure that
they exhibit the correct behavior under all circumstances, a process known as
functional verification.
These trends pose significant new challenges for electronic design teams.
Deep submicron design requires designers to take into account many physical
effects they previously ignored. SOC design requires new approaches to managing
complexity and its related risks. The industry addresses these challenges in a
number of ways, including utilizing new EDA tools, and upgrading design
methodologies.
ELECTRONIC DESIGN
The electronic design process involves describing the behavioral,
architectural, functional, and structural attributes of an IC or electronic
system. The process is one of successive refinement where the design team adds a
level of detail to the design and verifies the results of the addition before
proceeding to add each next level of detail. Design teams begin with very
abstract behavioral models of their system and end with a physical description
of millions of transistors and their interconnections. Semiconductor foundries
use the physical description to create the masks and test programs needed to
manufacture the ICs. EDA tools aid the design team in capturing its design
intent, creating the next level of detail, and verifying the results. Problems
are often found at one level that can only be resolved by revising a previous
level of description. These iterations introduce delay and risk into the design
process.
System Level Design
Decisions made during system level design, including behavioral,
algorithmic, and architectural definition, determine a substantial majority of
an electronic system's final performance and cost. The behavioral definition
specifies which functions the system needs to perform. The algorithmic
definition is a mathematical model that describes any signal processing
necessary to condition video and audio data streams. The architectural
definition specifies the high-level structure of the design's implementation.
This includes hardware/software partitioning, a process which specifies whether
each behavioral and algorithmic function is to be implemented in hardware or
software.
Many companies are adopting a platform-based design approach to address the
complexity of SOC design. Platform-based design defines a robust, flexible
platform of pre-verified virtual components including processors, memories, and
peripherals tuned for a particular application or set of applications (e.g.,
digital video or cellular communications). Once established, design teams create
a new SOC rapidly using mostly existing virtual components and complete the
design without requiring much new circuitry or new software. This approach can
reduce time-to-market and risk dramatically, but also poses a series of new
methodology and automation challenges.
Functional Verification
The first step in digital hardware design is to create a detailed
functional specification using a hardware description language, or HDL,
generally using VERILOG(R) or VHDL(R). The functional specification does not
include physical attributes such as timing, power, and size. Both Verilog and
VHDL specify functionality at various levels of abstraction, from behavioral
(most abstract) to gate-level (most detailed). Many design teams begin with a
behavior specification, as it can be written and functionally verified quickly.
Afterwards, these teams manually rewrite the specification at the
register-transfer-level, or RTL, of abstraction, which specifies the
functionality between each of the individual storage elements, also known as
registers, within the design. Many design teams skip the behavioral design and
verification phase and begin with RTL.
To verify their designs, teams create elaborate testbenches. Testbenches
are tests that simulate the inputs a design will likely experience in its actual
application. Testbenches often include environmental models (e.g., channel
distortion effects for wireless designs), processor models running
representative software, models for other hardware in the system, and checks
that determine whether or not the design exhibits the appropriate behavior.
Teams perform functional verification by simulating their design and its
testbench, thus identifying logical errors to be corrected. Design teams can
proceed to implement the design using automated digital or custom design
techniques after extensive, error-free RTL functional verification. Any
undetected functional
4
5
error potentially requires a very expensive design change that requires
discarding any silicon manufactured to date and manufacturing new silicon with
the change. Since even the fastest software-based simulation runs many orders of
magnitude slower than the eventual silicon implementation, design teams
increasingly employ specialized hardware to increase the process speed by up to
a few orders of magnitude.
Automated Digital IC Design
Most design teams use an automated digital methodology for the majority of
their digital hardware design. Although designers write the RTL and specify the
design's physical constraints, they use tools to automatically create the
detailed implementation. Digital design flows let teams gain better
time-to-market than full-custom design, but sacrifices silicon performance,
power, and size.
The first step in a automated digital methodology (i.e., mostly automated)
is the use of a logic synthesis tool to create a gate-level version of the
design. At the gate level, the functionality between registers is elaborated to
logic gates, or standard cells. At this point the design is a network of
interconnected standard cells and hard cores, or previously implemented logic.
Both the standard cells and the cores are based on a specific manufacturing
process technology for a specific foundry. Design teams verify that the
gate-level description is functionally equivalent to the original RTL
specification to identify any potential problems that occurred during this logic
synthesis.
The next step in automated digital design is the design layout. Designers
determine where the major blocks of circuitry should be located on the physical
die to provide the lowest cost chips meeting the requisite performance
requirements. They use this floorplan to guide an automated placement and
routing tool to determine the precise location for every cell, and then connect
the cells. This step is commonly referred to as place-and-route. Since the
precise physical implementation is unknown prior to layout, it is impossible to
accurately predict the IC's physical characteristics before this stage. Rough
estimates are available at the gate level, but with deep submicron physical
effects, these estimates are not sufficiently accurate to ensure the design will
work properly in silicon. At the level of approximately 0.18 micron, logic
synthesis tools must take placement and routing into account and place-and-route
tools must be able to re-optimize the logic to converge on the design's
performance requirements.
Physical verification and analysis is the final step before release of a
design to manufacturing. Physical verification ensures that the design abides by
all of the detailed rules and parameters that the foundry specifies for its
manufacturing process. Violating a single foundry rule can result in silicon
that does not work. Physical analysis is a set of capabilities, such as
cross-talk analysis, that guard against new physical effects that are important
to consider in deep submicron design.
Custom IC (Analog and Mixed-Signal) Design
In general, it is possible to achieve considerably higher-performance,
lower-cost digital circuits by designing them directly at the layout level. This
approach is known as custom design because designers can craft every cell by
hand and every interconnection between cells. For a design with millions of
cells, this process is extremely time-consuming and risks of error are
significant. Automated custom physical design techniques considerably speed the
process by automating many common layout tasks and by making intelligent,
incremental implementation decisions the designer can accept or reject. Design
teams generally use this custom design approach for designs that are very
performance and cost-sensitive, such as microprocessors, memories, and
field-programmable gate arrays. Even in these cases, teams often use automated
digital techniques where possible.
Analog design is a form of custom design for analog circuits which requires
specialized tools and techniques. Analog designers use a "bottom-up" approach
rather than the "top-down" approach automated digital designers use. They
handcraft each analog component based on very detailed, process-specific
analysis, then repeat the process when they combine the components into an
analog circuit. Unlike digital designs, in which signals are clearly either on
or off beyond a specified threshold, the exact value of a signal is almost
always critical in analog design. Analog circuits are extremely sensitive to any
variation in the surrounding circuitry and environment (e.g., heat, power, and
electromagnetic effects). Despite these problems, design
5
6
teams are combining more and more analog and digital circuitry on the same
design, known as mixed-signal design, to take advantage of the performance,
cost, reliability, size, and power advantages inherent in mixed signal designs.
Printed Circuit Board Design and IC Packaging
Electronic systems invariably consist of one or more printed circuit
boards, or PCBs. In addition to their mechanical role, PCBs interconnect and
provide power to individual ICs. As IC performance and complexity increase,
designing the board that interconnects the ICs becomes increasingly difficult.
The challenge starts with the IC package itself. As IC input/output densities
and speeds increase, IC packages become an integral part of system-level
performance. High-speed package design is no longer just a mechanical task, but
involves precise layout, modeling, and analysis. Likewise, high-speed PCB design
involves more than layout. It requires analysis to ensure each signal reaches
its destination on time and to identify potential signal integrity problems.
CADENCE ELECTRONIC DESIGN AUTOMATION TOOLS
Cadence offers the most comprehensive set of EDA tools in its industry.
Cadence tools improve designer productivity and design quality throughout the
electronic design process.
System-level Design Tools
Cadence system-level design tools help design teams optimize their designs
and provide a smooth path to detailed hardware design. The CADENCE(R) Virtual
Component Co-design, or VCC, toolset lets designers capture and verify system
behavior independent of the hardware and software implementation. Designers can
then map the behavior to a variety of architectural implementations and analyze
the results of each. Using this rapid exploration, teams can optimize their
overall system level design including critical hardware/software partitioning.
VCC is also an ideal environment for platform-based design. For those portions
of the behavior that are algorithmic in nature, Cadence's SPW(R) toolset
provides a specialized environment for capturing and analyzing floating-point
and fixed-point algorithms. It also serves as an excellent system-level
testbench environment, especially for communications and multimedia
applications.
Functional Verification Tools
Design teams need a range of simulation and hardware-based acceleration
tools to verify the functionality of their designs. Cadence offers the
industry's most complete set of simulators and emulators for behavioral,
register-transfer-level, and gate-level functional verification. The Cadence
lineup of digital simulators includes the NC-VERILOG(R) simulator for the
VERILOG language, NC-VHDL for the VHDL language, and NC-Sim that simultaneously
supports both languages. These simulators provide designers with the simulation
performance and capacity they need to verify the functionality of today's most
complex designs.
For teams that require hardware-accelerated verification, the Cadence
Quickturn division offers the industry's most mature solutions. MERCURYPLUS(TM)
and COBALT(TM) provide FPGA-based emulation and custom processor-based
acceleration, respectively. Cadence also offers specialized kits that provide a
complete verification environment for popular applications such as 3G wireless
communication and Gigabit Ethernet networking. Most recently, Cadence introduced
the Quickturn Rapid Prototyping System, or RPS, for rapidly prototyping
platform-based designs. Each of these systems enable design teams to identify
hardware and software problems that they would otherwise not find until the
design is implemented in silicon.
Automated Digital IC Design Tools
Our unified synthesis, placement-and-routing system, or SP&R, provides a
complete implementation path from RTL through final layout for the most advanced
designs. The SP&R system consists of Physically Knowledgeable Synthesis, or PKS,
physical synthesis for front-end logic design and SILICON ENSEMBLE(R) PKS,
optimization-place-and-route for back-end physical design. PKS provides
simultaneous logic synthesis, placement, and global routing. SILICON ENSEMBLE
PKS provides a complete place-and-route environment, including the ability to
re-optimize a design's logic to meet new physical constraints. These tools
6
7
have common timing, optimization, placement, and routing engines to ensure
single-pass accuracy as the design progresses from RTL to final layout. Cadence
recently introduced power optimization, test synthesis, and datapath compilation
capabilities for automated digital design. For leading-edge physical
verification, Cadence offers the ASSURA(TM) physical verification toolset
created specifically for deep submicron designs.
Cadence also offers traditional logic synthesis with its BUILDGATES(R)
software, SILICON ENSEMBLE place-and-route software, and DRACULA(R) physical
verification tools that are highly effective for designs to about 0.25 micron.
Custom and Analog Design Tools
Cadence is the leader in custom design, analog design, and mixed-signal
design. Cadence's VIRTUOSO(R) Custom Designer, or CD, toolset is based on its
flagship VIRTUOSO custom layout tool. The VIRTUOSO CD toolset is a highly
integrated custom design environment that includes layout editing, placement,
routing, and physical verification. By automating many aspects of custom design,
designers become more productive than those using previous generation custom
layout tools. The VIRTUOSO CD toolset includes Cadence ASSURA physical
verification, which offers automated, interactive physical and batch IC layout
verification, extraction, and layout enhancements for manufacturing. The ASSURA
tools utilize patented hierarchical processing techniques to significantly
reduce verification cycle times and provide effective debugging capabilities.
Cadence also offers a complete line of analog and mixed-signal design
tools. Cadence Analog Design Environment is the industry's only complete
front-to-back analog design automation solution for full-custom analog and
digital, mixed-signal, and radio frequency, or RF, IC design. Within that
environment, designers can choose SPECTRE(R) Circuit Simulator solutions. The
SPECTRE Circuit Simulator utilizes state-of-the-art direct method circuit
simulation to provide increased speed, accuracy, and capacity over SPICE
simulators. The SPECTRE RF simulator is the first RF simulator with the speed
and capacity to handle full-chip, transistor-level circuit simulation of RF
designs with 5,000+ devices on desktop workstations. Design teams can use the
Cadence Accelerated Transistor-Level Simulator, or ATS, for full chip,
transistor-level simulation of either pure digital or mixed analog and digital
designs.
For years analog/mixed-signal design teams have been seeking to move to a
top-down approach. The Cadence AMS designer enables them to do so. It is a
mixed-signal environment and analog/mixed-signal simulator, the latter of which
is based on Cadence's popular NC-Sim and SPECTRE simulators.
Printed Circuit Board Design Tools
Cadence offers a range of tools to address the wide variety of PCB designs.
The OrCAD product line delivers personal productivity for individual engineers.
OrCAD products include capture, layout, and board-level simulation capabilities.
For teams creating state-of-the-art designs, Cadence offers software under the
ALLEGRO(R), SPECCTRA(R), and SPECCTRAQUEST(TM) brands. The ALLEGRO program is a
correct-by-design system for physical design and analysis of printed circuit
boards, multi-chip modules, hybrids, and Multiwire(TM) board designs. The
SPECCTRA product line provides placement editing, automatic shape-based routing
and a route editor. SPECCTRAQUEST software provides advanced system design and
analysis capabilities. Using SPECCTRAQUEST software, designers can explore and
make choices between timing, signal integrity, crosstalk, power delivery and
EMI, to optimize electrical performance and reliability before manufacturing.
The Cadence Advanced Packaging Ensemble provides package layout and analysis so
design teams can ensure quality interconnects between IC dies.
Third-Party Tool Support
Cadence supports the integration of third-party and in-house proprietary
tools through its ALANZA(TM) services. The ALANZA engineers work with customers,
foundries, application-specific integrated circuit, or ASIC, vendors, and other
EDA companies to ensure that Cadence tools work well in any design environment.
To date, more than 125 companies have integrated their tools with Cadence
software.
7
8
ELECTRONIC DESIGN AUTOMATION SERVICES
To complement its tools, Cadence provides a range of EDA services that keep
electronic design teams as productive as possible. These include educational
services, support services, design services, and methodology services. The
company's educational services include Internet, classroom, and custom courses
that teach everything from how to use the most recent tool features to the
latest design techniques. Support services include product maintenance and
updates, and telephone and Internet-based technical support. Cadence also offers
custom support services, which may include one or more of its standard support
services plus account technical management, application and educational
services, and metrics reporting. Maintenance and support agreements are offered
to customers either as part of our product license agreement or under a separate
maintenance agreement.
Design Services (Tality)
On July 17, 2000, Cadence announced its plan to separate its electronics
design services group into a new company named Tality Corporation, or Tality.
Tality's separation from Cadence was substantially completed on October 4, 2000,
and accordingly the electronic design services business now operates as a
majority-owned subsidiary of Cadence. Tality filed a registration statement with
the Securities and Exchange Commission for Tality's initial public offering, or
IPO. On October 9, 2000, Cadence announced the postponement of Tality's IPO due
to unfavorable market conditions. Therefore, the financial statements and
financial information in this Annual Report on Form 10-K do not give effect to
the IPO.
Tality is a leading global provider of engineering services for the design
of complex electronic systems and integrated circuits. Tality focuses its
offerings primarily on the growing communications market. Targeted segments of
this market include wireline and wireless communications infrastructure,
high-speed data access equipment and consumer communication products. Tality
provides engineering services that extend from product concept through
manufacturing to help communications companies realize their product visions.
- Concept
Tality assists clients in refining a product concept and mapping
technology options.
- Specification
Tality maps its clients' product concept into technology, partitions it
into software and hardware, and defines how each component will operate.
- Implementation
Tality physically implements specifications into advanced integrated
circuits, complex printed circuit boards and complete systems.
- Prototype
Tality works with third-party manufacturers to develop and deliver
product prototypes for testing to identify and resolve remaining design
issues.
- Manufacturing support
Tality assists clients through the process of moving to volume
manufacturing.
Tality has over 1,000 engineers located at 14 design sites in the United
States, Canada, the United Kingdom, and India. Since the beginning of 1998,
Tality has completed over 500 design projects. Its clients include both leading
and emerging electronic systems companies and integrated circuit manufacturers.
Tality's design solutions enable customers to address the pressures of
increasing business and technological complexity, growing competition, resource
constraints and the need to decrease time-to-market. Its engineering team has
expertise in targeted segments of the communications market. Tality also has
experience in systems design, embedded software and firmware design, printed
circuit board and chip-level design and full systems integration. In addition,
through its internal research and development efforts and its design projects,
Tality has accumulated a growing portfolio of intellectual property that it may
offer customers as part of its
8
9
electronics design services. To every design engagement, Tality brings an
established design infrastructure comprised of the design automation tools,
computing infrastructure and laboratory environments necessary for the
development of clients' products. Tality also assists customers by providing
project management services to address the growing complexities of the design
phase of product development and offers assistance in the management of clients'
supply chains through the application of its in-depth knowledge of and
experience in technical and business management processes.
Methodology Services
Cadence's methodology services group offers a variety of services to help
customers address electronic design challenges. It leverages Cadence's
cumulative experience and knowledge of industry best practices to improve design
productivity.
MARKETING AND SALES
Cadence generally uses a direct sales force consisting of sales people and
applications engineers to license its products and market its consulting and
design services to prospective customers. Applications engineers provide
technical pre-sales as well as post-sales support for software products. The
Cadence Methodology Services group provides on-site capabilities to help
customers improve productivity with Cadence and other EDA products. Tality
offers complete design services to its customers. Due to the complexity of EDA
products and the electronic design process in general, the sales cycle is
generally long (three to six months or more). During the sales cycle, the
Cadence direct sales force generally provides technical presentations, product
demonstrations, and on-site customer evaluations of Cadence software. Cadence
also uses traditional marketing approaches to promote its products and services,
including advertising, direct mail, telemarketing, trade shows, public
relations, and the Internet.
Cadence markets and supports its products and services internationally
(except in Japan) through its subsidiaries and various distributors. Cadence
markets its consulting and design services in Japan through a wholly-owned
subsidiary. Since the reorganization of Cadence's distribution channel in Japan
in 1997, Cadence has licensed its products through Innotech Corporation, in
which Cadence is an approximately 15% stockholder as of December 30, 2000.
A summary of Cadence's net revenue and long-lived assets by geographic area
is set forth in the "Segment Reporting" note to the Consolidated Financial
Statements, which information is incorporated herein by reference. Prices for
international customers are quoted in a local currency from an 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.
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. Cadence uses foreign currency forward exchange contracts and
purchases foreign currency put options to help protect against currency exchange
risks. 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. 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 reflected losses of
$4.7 million in 2000, $2.5 million in 1999, and $1.4 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 is in the process of upgrading its internal
systems and believes that its financial institution vendors are capable of
handling the
9
10
euro conversion and Cadence 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 harm 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 harm 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.
Cadence's international operations may also be subject to other risks,
including:
- The adoption and expansion of government trade restrictions;
- 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.
RESEARCH AND DEVELOPMENT
Cadence's investment in research and development was $292.4 million in
2000, $244.9 million in 1999, and $224.5 million in 1998, prior to capitalizing
software development costs of $28.4 million, $25.7 million, and $21.7 million,
respectively. See "Notes to Consolidated Financial Statements" for a more
complete description of Cadence's capitalization of certain software development
costs.
The primary areas of research include 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.
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 non-competitive or obsolete, in which case, revenues
would be materially and adversely affected. 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 respect.
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 product market and the commercial
electronic design and methodology 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
10
11
industries, Cadence must identify and develop innovative and cost-competitive
EDA products and market them in a timely manner. It must also gain industry
acceptance for its design and methodology services and offer better strategic
concepts, technical solutions, prices and response time, or a combination of
these benefits, 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 that could affect
Cadence's ability to succeed include:
- The development of competitive EDA products and design and methodology
services could result in a shift of customer preferences away from
Cadence's products and services and significantly decrease revenue;
- The electronics design and methodology services industries are relatively
new and electronics design companies and manufacturers are only beginning
to purchase these services from outside vendors;
- The pace of technology change demands continuous technological
development to meet the requirements of next-generation design
challenges; and
- There are a significant number of current and potential competitors in
the EDA industry and the cost of entry is low.
In the EDA products industry, Cadence currently competes with three large
companies, Avant! Corporation, Mentor Graphics Corporation, and Synopsys, Inc.,
and numerous smaller companies. Cadence also competes with manufacturers of
electronic devices that have developed or have the capability to internally
develop their own EDA products. In the electronics design and methodology
services industries, Cadence competes with numerous electronic design and
consulting companies as well as with the internal design capabilities of
electronics manufacturers. Many manufacturers of electronic devices may be
reluctant to purchase services from independent vendors such as Cadence because
they wish to promote their own internal design departments. Electronics
companies and management consulting firms continue to enter the electronics
design and methodology services industries.
PROPRIETARY TECHNOLOGY
Cadence's success depends, in part, upon its proprietary technology. Many
Cadence products include software or other intellectual property licensed from
third parties. 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 Cadence's
proprietary rights in those countries to the same extent as U.S. law protects
these rights in the U.S. Cadence may have to seek new or renew existing licenses
for this software and other intellectual property in the future. The Cadence
design services business also requires it to license the 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.
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 EDA 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, 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
11
12
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 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 allowing customers to use
licensed products. User manuals and other documentation are generally available
on CD-ROM, but are occasionally supplied in hard copy format. Software and
documentation are also made available to selected customers by electronic
distribution over the Internet.
Cadence performs final assembly and test of its emulation products in San
Jose, California. Subcontractors manufacture all major subassemblies, including
all individual printed circuit boards and custom integrated circuits, and supply
them to Cadence for qualification and testing prior to their incorporation into
the assembled product.
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. However, 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 February 28, 2001, Cadence employed approximately 5,650 persons, with
approximately 3,250 in sales, services, marketing, support and manufacturing
activities, 1,600 in product development and 800 in management, administration
and finance. None of Cadence's employees is represented by a labor union, and
Cadence has experienced no work stoppages. Cadence believes that its employee
relations are good.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The following risk factors and other information included in this Annual
Report on Form 10-K should be carefully considered. The risks and uncertainties
described below are not the only ones Cadence faces. Additional risks and
uncertainties not currently known to Cadence or that Cadence currently deems
immaterial also may impair Cadence's business operations. If any of the
following risks actually occurs, Cadence's business, operating results, and
financial condition could be materially harmed. The risk factors affecting
Tality Corporation which is, and immediately after its initial public offering
will remain, a subsidiary of Cadence, are described in detail in the
Registration Statement on Form S-1 filed by Tality Corporation with the
Securities and Exchange Commission on July 17, 2000, as amended. Unless
specifically noted, references to Cadence in the discussion below are references
to Cadence and its subsidiaries, including Tality Corporation and its
subsidiaries.
CADENCE IS SUBJECT TO THE CYCLICAL NATURE OF THE INTEGRATED CIRCUIT INDUSTRY AND
THE ELECTRONICS SYSTEMS INDUSTRY,
AND THE CURRENT DOWNTURN OR ANY FUTURE DOWNTURNS MAY REDUCE OUR REVENUE
Purchases of our products and services are highly dependent upon the
commencement of new design projects by integrated circuit manufacturers and
electronics systems companies. The integrated circuit industry is highly
cyclical and is characterized by constant and rapid technological change, rapid
product obsolescence and price erosion, evolving standards, short product life
cycles, and wide fluctuations in product supply and demand. The integrated
circuit and electronics systems industries have experienced significant
downturns, often connected with, or in anticipation of, maturing product cycles
of both these companies' and their customers' products and a decline in general
economic conditions. These downturns have been characterized by diminished
product demand, production over capacity, high inventory levels and accelerated
erosion of average selling prices. During these downturns, the number of new
design projects may decrease. Certain integrated circuit manufacturers and
electronics systems companies have recently announced a
12
13
slowdown of demand and production. The current slowdown and any future downturns
may reduce our revenue and harm our results of operations.
CADENCE HAS REORGANIZED ITS DESIGN SERVICES GROUP AS A SEPARATE COMPANY, WHICH
MAY IMPACT ITS FINANCIAL
RESULTS
Since 1995, Cadence has operated an internal electronics design services
group. On July 17, 2000, Cadence announced its plan to separate its design
services group into a separate company focused on providing design solutions and
proprietary technology to electronics product companies and integrated circuit
manufacturers, and announced the planned initial public offering of the separate
company. The separation was substantially completed on October 4, 2000. On
October 9, 2000, Cadence announced that it had postponed Tality's initial public
offering due to unfavorable market conditions. Upon completion of the planned
initial public offering of Tality, Cadence expects that it will hold
approximately 80% of the voting power of Tality. While Cadence does not
currently plan to distribute to Cadence stockholders its equity interests in
Tality Corporation or Tality's subsidiaries, it will have the right at any time
to sell some or all of these equity interests. Cadence has agreed with the
underwriters not to transfer its equity interests in Tality Corporation and
limited partnership units in Tality, LP for 180 days after the date of the
initial public offering of Tality Corporation, except with the prior written
consent of Goldman, Sachs & Co. After the expiration of this 180-day period,
Cadence will no longer be restricted from transferring any of its common stock
of Tality Corporation or limited partnership units in Tality, LP to the public
or its stockholders. Cadence currently expects that the principal factors that
it would consider in determining whether and when to exchange, convert, sell or
distribute to its stockholders any of its shares or partnership units include:
- The relative market prices of Tality's common stock and Cadence's common
stock;
- The ability of an affiliate of Tality to make sales under Rule 144 of the
Securities Act of 1933 or under an effective registration statement
covering Cadence's shares of Tality's common stock;
- The absence of any court order or other regulation prohibiting or
restricting such sales; and
- Other conditions affecting Tality's business or Cadence's other
businesses.
CADENCE HAS AGREED TO GRANT CERTAIN RIGHTS AND PROVIDE CERTAIN SERVICES TO
TALITY ON TERMS THAT ARE MORE
FAVORABLE TO TALITY THAN TERMS THAT WOULD BE OFFERED TO AN UNRELATED PARTY
In connection with the separation of Tality, Cadence entered into a number
of agreements governing its business relationships with Tality and Cadence's
provision of certain services to Tality, including provision of certain
facilities, and accounting, finance, legal, human resources, and other
administrative services, on terms that are more favorable to Tality than terms
that would be offered to an unrelated entity. As a result, Cadence is obligated
to provide certain services to Tality for the periods defined in the various
agreements, some of which have long or unspecified terms, which may impact our
financial results.
CADENCE HAS HISTORICALLY SUFFERED LOSSES IN ITS ELECTRONICS DESIGN AND
METHODOLOGY SERVICES BUSINESS
The market for electronics design and methodology services is relatively
new and rapidly evolving. Cadence's expenses of the design services business
increased substantially in connection with the completion of Tality's separation
from Cadence and its expenses may continue to increase as it seeks to expand its
business. The rate of growth of Tality's revenue over prior periods may not
continue or increase at all, and its separation and expansion may prove more
expensive than Cadence anticipates. If Tality fails to increase its revenue to
offset its expenses, Tality will continue to experience losses. Cadence's or
Tality's failure to succeed in these services businesses may seriously harm
Cadence's business, operating results, and financial condition.
13
14
THE SUCCESS OF CADENCE'S ELECTRONIC DESIGN AND METHODOLOGY SERVICES BUSINESSES
DEPEND ON MANY FACTORS THAT ARE BEYOND ITS CONTROL
In order to be successful with its electronics design and methodology
services, Cadence must overcome several factors that are beyond its control,
including the following:
- Cadence's cost of services personnel is high and reduces gross
margin. Gross margin represents 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 attract and retain
professional services personnel. This results in a lower gross margin
than the gross margin 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 margin.
- A substantial portion of these services 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 FAILURE TO RESPOND QUICKLY TO TECHNOLOGICAL DEVELOPMENTS COULD MAKE
ITS PRODUCTS UNCOMPETITIVE AND OBSOLETE
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:
- The size of features such as wires, transistors, and contacts on chips is
shrinking due to advances in semiconductor manufacturing processes.
Process feature sizes refer to the width of the transistors and the width
and spacing of the interconnect on the chip. Feature size is normally
identified by the headline transistor length, which is shrinking from
0.35 microns to 0.18 microns and smaller. This is commonly referred to in
the semiconductor industry as the migration to deep submicron and it
represents a major challenge for all levels of the semiconductor industry
from chip design and design automation to design of manufacturing
equipment and the manufacturing process itself. Shrinkage of transistor
length to such infinitesimal proportions (for reference, the diameter of
the period at the end of this sentence is approximately 400 microns) is
challenging fundamental laws of physics and chemistry.
- The ability to design very large chips, in particular integration of
entire electronic systems onto a single chip instead of a circuit board
(a process that is referred to in the industry as "SOC"), increases the
complexity of managing a design that at the lowest level is represented
by billions of shapes on the fabrication mask. In addition, systems
typically incorporate microprocessors and digital signal processors that
are programmed with software, requiring simultaneous design of the
silicon chip and the related embedded software on the 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.
CADENCE'S FAILURE TO OBTAIN SOFTWARE OR OTHER INTELLECTUAL PROPERTY LICENSES OR
ADEQUATELY PROTECT ITS PROPRIETARY RIGHTS COULD SERIOUSLY HARM ITS BUSINESS
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
14
15
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 Cadence's
proprietary rights in those countries to the same extent as U.S. law protects
these rights in the U.S.
Cadence cannot assure you that its reliance on licenses from or to third
parties, or that patent, copyright, trademark, and trade secret protections,
will be enough to be successful and profitable in the industries in which
Cadence competes.
INTELLECTUAL PROPERTY INFRINGEMENT BY OR AGAINST CADENCE COULD SERIOUSLY HARM
ITS BUSINESS
There are numerous patents in the EDA 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. Any potential intellectual property
litigation could force us to do one or more of the following:
- Pay damages to the party claiming infringement;
- Stop licensing, or providing services that use, the challenged
intellectual property;
- Obtain a license from the owner of the infringed intellectual property to
sell or use the relevant technology, which license may not be available
on reasonable terms, or at all; or
- Redesign the challenged technology, which could be time-consuming and
costly.
If we were forced to take any of these actions, our business and results of
operations may be harmed.
CADENCE OBTAINS KEY COMPONENTS FOR ITS HARDWARE PRODUCTS FROM A LIMITED NUMBER
OF SUPPLIERS
Cadence depends on several suppliers for certain key components and board
assemblies used in its hardware-based verification products. Cadence's inability
to develop alternative sources or to obtain sufficient quantities of these
components or board assemblies could result in delays or reductions in product
shipments. In particular, Cadence currently relies on Taiwan Semiconductor
Manufacturing Corporation for the supply of key integrated circuits and on IBM
for the hardware components for both Cadence's COBALT(TM) product and
MERCURYPLUS(TM). Other disruptions in supply may also occur. If there were such
a reduction or interruption, Cadence's results of operations would be seriously
harmed. Even if Cadence can eventually obtain these components from alternative
sources, a significant delay in Cadence's ability to deliver products would
result.
15
16
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, the mix of licenses used to sell products and the timing of
significant orders for its software products and services by customers.
Quarterly operating results are affected by the mix of products and services
sold because there are significant differences in margins from the sale of
hardware and software products and services. For example, based on a three-year
average in 1999, Cadence had realized gross margins on software product sales of
approximately 87% but realized gross margins of approximately 64% on hardware
product sales and 30% on its performance of services. In 2000, realized gross
margins decreased to approximately 78% for software products, remained flat at
64% for hardware products and increased to approximately 31% for services. In
addition, Cadence's quarterly operating results are affected by the mix of
licenses entered into in connection with the sale of software products. Cadence
has three basic licensing models: perpetual, fixed-term, and subscription.
Perpetual and fixed-term licenses recognize a larger portion of the revenue at
the beginning of the license period and subscription licenses recognize revenue
ratably over each quarter of the term of the license. As Cadence customers
purchase more software products pursuant to subscription agreements, future
operating results may be lower than that of comparable quarters in which
perpetual and fixed-term licenses were in greater use for software product
transactions. Finally, 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 harm its quarterly operating results.
Sales of Cadence's hardware products depend, in significant part, upon the
decision of the prospective customer to commence a project for the design and
development of complex computer chips and systems. These projects often require
significant commitments of time and capital. Cadence's hardware sales may be
delayed if customers delay commencement of projects. Lengthy hardware sales
cycles subject Cadence to a number of significant risks over which Cadence has
little or no control, including insufficient, excess or obsolescent inventory,
variations in inventory valuation and fluctuations in 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 timing of large orders 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.
Cadence believes that quarter-to-quarter comparisons of the results of
operations of its services business segments may not be meaningful. Therefore,
stockholders should not view Cadence's historical results of operations as
reliable indicators of its future performance. In addition, many of our services
engagements are terminable with little or no advance notice and without penalty.
Since a significant portion of our costs is fixed, we may not be able to reduce
our costs in a timely manner in connection with the unanticipated revenue loss
when one or more projects is terminated.
THE LENGTHY SALES CYCLE OF CADENCE'S PRODUCTS AND SERVICES MAKES THE TIMING OF
ITS REVENUE DIFFICULT TO PREDICT AND MAY CAUSE ITS OPERATING RESULTS TO
FLUCTUATE UNEXPECTEDLY
Cadence has a lengthy sales cycle that generally extends at least three to
six months. The length of our sales cycle may cause our revenue and operating
results to vary unexpectedly from quarter to quarter. The complexity and expense
associated with our business generally requires a lengthy customer education and
approval process. Consequently, we may incur substantial expenses and devote
significant management effort and expense to develop potential relationships
that do not result in agreements or revenue and may prevent us from pursuing
other opportunities.
16
17
In addition, sales of our products and services may be delayed if customers
delay approval or commencement of projects because of:
- Customers' budgetary constraints and internal acceptance review
procedures;
- The timing of customers' budget cycles; and
- The timing of customers' competitive evaluation processes.
If customers experience delays in their approval or project commencement
activities, we may not learn of, and therefore be able to communicate to the
public, revenue or earnings shortfalls until late in a fiscal quarter.
CADENCE EXPECTS TO ACQUIRE OTHER COMPANIES AND MAY NOT SUCCESSFULLY INTEGRATE
THEM OR THE COMPANIES IT HAS RECENTLY ACQUIRED
Cadence has acquired other businesses before and is likely to 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 then 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;
- The failure to retain key personnel of the acquired business;
- Difficulties related to assimilating the products of an acquired business
in, for example, distribution, engineering, and customer support areas;
- Unanticipated costs;
- Adverse effects on existing relationships with suppliers and customers;
and
- Failure to understand and compete effectively in markets in which we have
limited previous experience.
CADENCE'S INTERNATIONAL OPERATIONS MAY SERIOUSLY HARM ITS FINANCIAL CONDITION
BECAUSE OF SEVERAL WEAK FOREIGN ECONOMIES AND THE EFFECT OF FOREIGN
EXCHANGE RATE FLUCTUATIONS
Cadence has significant operations outside the United States. Cadence's
revenue from international operations as a percentage of total revenue was
approximately 44% for fiscal 2000 and 52% for fiscal 1999. Cadence also
transacts business in various foreign currencies. Recent economic uncertainty
and the volatility of foreign currencies in certain parts of 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 the U.S. dollar 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
17
18
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 which make licenses
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 and
purchases foreign currency put options to help protect against currency exchange
risks. These forward contracts and put options allow Cadence to buy or sell
specific foreign currencies at specific prices on specific dates. Increases or
decreases in the value of Cadence's foreign currency transactions are partially
offset by gains and losses on these forward contracts and put options. 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
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.
FAILURE TO OBTAIN EXPORT LICENSES COULD HARM CADENCE'S BUSINESS
Cadence must comply with U.S. Department of Commerce regulations in
shipping its software products and other technologies outside the U.S. 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.
CADENCE'S INABILITY TO COMPETE IN ITS INDUSTRIES COULD SERIOUSLY HARM ITS
BUSINESS
The EDA market and the commercial electronics design and methodology
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 design and methodology 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 manufactur-
18
19
ers. Cadence cannot assure you that it will be able to compete successfully in
these industries. Factors that could affect Cadence's ability to succeed
include:
- The development of competitive EDA products and design and methodology
services could result in a shift of customer preferences away from
Cadence's products and services and significantly decrease revenue;
- The electronics design and methodology services industries are relatively
new and electronics design companies and manufacturers are only beginning
to purchase these services from outside vendors;
- The pace of the technology change demands continuous technological
development to meet the requirements of next-generation design
challenges; and
- There are a significant number of current and potential competitors in
the EDA industry and the cost of entry is low.
In the EDA products industry, Cadence currently competes with three large
companies, Avant! Corporation, Mentor Graphics Corporation, and Synopsys, Inc.,
and numerous smaller companies. Cadence also competes with manufacturers of
electronic devices that have developed or have the capability to develop their
own EDA products. Many manufacturers of electronic devices may be reluctant to
purchase services from independent vendors such as Cadence because they wish to
promote their own internal design departments. In the electronics design and
methodology 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 methodology
services industries.
CADENCE'S FAILURE TO ATTRACT, TRAIN, MOTIVATE, AND RETAIN KEY EMPLOYEES MAY HARM
ITS BUSINESS
Competition for highly skilled employees is very 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. The high cost of training new
personnel, not fully utilizing these personnel, or losing trained personnel to
competing employers could reduce our gross margins and harm our business and
operating results. Competition for these personnel is intense, particularly in
geographic areas recognized as high technology centers such as the Silicon
Valley area, where our principal offices are located, and the other locations
where we maintain large facilities. To attract and retain individuals with the
requisite expertise, we may be required to grant large numbers of stock options
or other stock-based incentive awards, which may be dilutive to existing
stockholders. We may also be required to pay significant base salaries and cash
bonuses, which could harm our operating results. If we do not succeed in hiring
and retaining candidates with appropriate qualifications, we will not be able to
grow our business and our operating results will suffer. Cadence's failure to
attract, train, motivate, and retain key employees would impair its development
of new products, its ability to provide design and methodology services and the
management of its businesses. This would seriously harm Cadence's business,
operating results, and financial condition.
IF CADENCE BECOME SUBJECT TO UNFAIR HIRING CLAIMS, CADENCE COULD BE PREVENTED
FROM HIRING NEEDED PERSONNEL, INCUR LIABILITY FOR DAMAGES AND INCUR
SUBSTANTIAL COSTS IN DEFENDING ITSELF
Companies in Cadence's industry whose employees accept positions with
competitors frequently claim that these competitors have engaged in unfair
hiring practices or that the employment of these persons would involve the
disclosure or use of trade secrets. These claims could prevent us from hiring
personnel or cause us to incur liability for damages. Cadence could also incur
substantial costs in defending ourselves or its employees against these claims,
regardless of their merits. Defending ourselves from these claims could also
divert the attention of Cadence's management away from its operations.
ERRORS OR DEFECTS IN CADENCE DESIGNS COULD EXPOSE IT TO LIABILITY AND HARM OUR
REPUTATION
Cadence's customers use its products and services in designing and
developing products that involve a high degree of technological complexity, each
of which has its own specifications and is based on various
19
20
industry standards. Because of the complexity of the systems and products with
which Cadence works, some of its products and designs can be adequately tested
only when put to full use in the marketplace. As a result, its customers or
their end users may discover errors or defects in Cadence's software or the
systems Cadence designs, or the products or systems incorporating its design and
intellectual property may not operate as expected. Errors or defects could
result in:
- Loss of current customers and loss of or delay in revenue and loss of
market share;
- Failure to attract new customers or achieve market acceptance;
- Diversion of development resources to resolving the problem;
- Increased service costs; and
- Liability for damages.
WE RELY ON A CONTINUOUS POWER SUPPLY TO CONDUCT OUR OPERATIONS, AND CALIFORNIA'S
CURRENT ENERGY CRISIS COULD DISRUPT OUR OPERATIONS AND INCREASE OUR
EXPENSES.
California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. In the event of an acute power shortage,
that is, when power reserves for the State of California fall below 1.5%,
California has on some occasions implemented, and may in the future continue to
implement, rolling blackouts throughout California. We currently have backup
generators or alternate sources of power for critical operations in the event of
a blackout. If blackouts interrupt our power supply, however, we may be
temporarily unable to continue operations at our facilities. Any such
interruption in our ability to continue operations at our facilities could
damage our reputation, harm our ability to retain existing customers and to
obtain new customers, and could result in lost revenue, any of which could
substantially harm our business and results of operations. Our current insurance
does not provide coverage for any damages we or our customers may suffer as a
result of any interruption in our power supply.
ANTI-TAKEOVER DEFENSES IN CADENCE'S CHARTER, BY-LAWS, 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 its voting stock, or who is affiliated with
the corporation and owned 15% or more of its voting stock at any time
within three 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 Cadence's Board of
Directors to issue, at any time and without stockholder approval,
preferred stock with such terms as it may determine. No shares of
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 its 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.
All or any one 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 Cadence's Board of Directors to resist an acquisition of
Cadence, even if the proposed transaction was favored by a majority of Cadence's
independent stockholders.
20
21
ITEM 2. PROPERTIES
Cadence's headquarters are located in San Jose, California, and Cadence
owns the related land and buildings. Additionally, Cadence owns buildings in
India and land and buildings in Scotland. The total square footage of Cadence's
owned buildings is approximately 984,000 square feet.
Cadence leases additional facilities for its sales offices in the U.S. and
various foreign countries, and its research and development and design services
facilities in California and other states and in foreign countries including
Scotland, India, Canada, England, and Japan.
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 any 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, mergers and acquisitions,
licensing, contract law, distribution arrangements, and employee relations
matters.
Cadence filed a complaint in the U.S. District Court for the Northern
District of California on December 6, 1995 against Avant! Corporation 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
Joseph B. Costello, 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 Mr. Costello had cooperated with the Santa Clara County, California,
District Attorney and initiated and pursued its complaint against Avant! for
anti-competitive reasons, engaged in wrongful activity in an attempt to
manipulate Avant!'s stock price, and utilized certain pricing policies and other
acts to unfairly compete against Avant! in the marketplace. The second amended
counterclaim also alleges that certain Cadence insiders engaged in illegal
insider trading with respect to Avant!'s stock. Cadence and Mr. Costello believe
that they have 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.
In an order issued on December 19, 1997, as modified on January 26, 1998,
the District Court entered a preliminary injunction barring Avant! from any
further infringement of Cadence's copyrights in DESIGN FRAMEWORKII(R) software,
or selling, licensing or copying such product derived from DESIGN FRAMEWORK II,
including, but not limited to, Avant!'s ArcCell products. 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. On July 30, 1999,
the U.S. Court of Appeals for the Ninth Circuit affirmed 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.
On September 7, 1999, the District Court ruled on the parties' Motions for
Summary Adjudication, and granted in part, and denied in part, each party's
motion regarding the scope of a June 6, 1994 Release Agreement between the
parties. The court held that Cadence's copyright infringement claim against
Avant! is not barred by the release and that Cadence may proceed on that claim.
The court also held that Cadence's trade secret claim based on Avant!'s use of
Cadence's DESIGN FRAMEWORK II source code is barred by the release. The Ninth
Circuit has agreed to hear both parties' appeal from the District Court's order.
The trial date has been vacated pending a decision on the appeal and the outcome
of the criminal case, for which the trial is scheduled to begin in April 2001.
21
22
In February 1998, Aptix Corporation and Meta Systems, Inc. filed a lawsuit
against Quickturn Design Systems, Inc. in the U.S. District Court for the
Northern District of California. In this lawsuit, entitled Aptix Corporation and
Meta Systems, Inc. v. Quickturn Design Systems, Civil Action No. C 98-00762 WHA,
Aptix and Meta Systems alleged that Quickturn infringed a U.S. patent owned by
Aptix and licensed to Meta. Quickturn filed a counterclaim requesting the
District Court to declare the Aptix patent invalid in view of the prior art and
unenforceable based on inequitable conduct during the prosecution of the patent.
In June 2000 the District Court entered judgment in favor of Quickturn,
dismissing the complaint and declaring the patent unenforceable. On September 8,
2000 the Court ordered Aptix to pay $4.2 million to Quickturn as reimbursement
to Quickturn of the attorneys' fees and costs it incurred in the litigation.
Aptix has appealed the District's Court's judgment and, in the meantime, has
agreed to post a $2 million bond to secure the judgment.
On January 7, 1999, in the suit captioned Mentor Graphics Corporation, et.
al. v. Lobo, et. al., Delaware Chancery Court, New Castle County, Civ. Action
No. 16843-NC ("Mentor v. Lobo"), an amended complaint was filed and served by
Mentor asserting claims against Cadence, Quickturn Design Systems, Inc. and its
Board of Directors for declaratory and injunctive relief for various alleged
breaches of fiduciary duty purportedly owned by Quickturn and its Board of
Directors to Quickturn's shareholders in connection with the merger between
Quickturn and Cadence. Mentor alleged that Cadence aided and abetted Quickturn
and its Board of Directors in those purported breaches. Mentor has not
prosecuted the matter since January 1999. In May 2000, Mentor advised the
Delaware Chancery Court of its objection to the settlement of a companion action
brought on behalf of certain Quickturn shareholders. Mentor further advised the
court that it would seek an award of attorneys' fees related to its prosecution
of the Mentor v. Lobo action. At the request of the court, on July 28, 2000,
Mentor filed its brief in support of its standing to seek such an award.
Cadence, Quickturn and the individual defendants have opposed Mentor's request.
A hearing on the matter was held on February 1, 2001. The court has taken the
matter under submission.
On April 30, 1999, Cadence and several of its officers and directors were
named as defendants in a lawsuit filed in the U.S. District Court for the
Northern District of California, entitled Spett v. Cadence Design Systems, et
al., civil action no. C 99-2082. The action was brought on behalf of a class of
stockholders who purchased Cadence common stock between November 4, 1998 and
April 20, 1999, and alleges violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. The lawsuit arises out of Cadence's
announcement of its first quarter 1999 financial results. On September 18, 2000
the District Court granted Cadence's Motion to Dismiss Plaintiffs' Claims with
leave to amend. To date, no amended complaint has been filed. Should an amended
complaint be filed, Cadence and the individual defendants intend to continue
their vigorous defense of the allegations.
In early 1999, Cadence entered into negotiations with Intelect
Communications, Inc., and Intelect's wholly-owned subsidiary, DNA Enterprises,
Inc., with respect to a potential purchase of substantially all the assets of
DNA. The transaction was not consummated and, in July 1999, Intelect and DNA
filed suit against Cadence in a Texas state court alleging breach of contract,
fraud, negligent misrepresentation and breach of fiduciary duty, seeking
unspecified compensatory and punitive damages. Cadence has answered, denying
liability, and discovery has commenced. A trial date has been schedule for
October 2001. Cadence believes that it has defenses to and disputes the
allegations made by Intelect and DNA, including the allegation that a purchase
contract was entered into, and intends to defend the action vigorously.
On July 21, 1999, Mentor filed suit against Quickturn in the U.S. District
Court for the District of Delaware, alleging that Quickturn's MERCURY(TM)
hardware emulation systems infringe U.S. Patent Nos. 5,777,489 and 5,790,832
allegedly assigned to Mentor. At Quickturn's request, Cadence was added as a
party defendant. Mentor has since asserted that Quickturn's MERCURYPLUS(TM)
emulation systems also infringe U.S. Patent Nos. 5,777,489 and 5,790,832. The
complaint seeks a permanent injunction and unspecified damages. Cadence intends
to vigorously defend itself against these claims. On December 14, 1999, this
action was transferred to the U.S. District Court for the Northern District of
California, and renumbered Civil Action No. C 99-5464 SI.
22
23
On February 25, 2000, Cadence and several of its officers were named as
defendants in a lawsuit filed in the U.S. District Court for the Northern
District of California, entitled Maxick v. Cadence Design Systems, Inc., File
No. C 00 0658PJH. The action was brought on behalf of a class of shareholders of
OrCAD, Inc., and alleges violations of Section 14(d)(7) of the Securities
Exchange Act of 1934, as amended, and Rule 14d-10 thereunder. The lawsuit arises
out of Cadence's acquisition of OrCAD, which was completed in August 1999.
Cadence's Motion to Dismiss plaintiffs' claims was denied. Discovery is
continuing. The defendants believe the complaint is without merit and intend to
continue their vigorous defense of the allegations.
On March 24, 2000, Mentor and Meta and several founders of Meta filed suit
against Quickturn and Cadence and a former Quickturn employee in the U.S.
District Court for the Northern District of California, Civil Action No. C
00-01030 WHA. The suit alleges patent infringement of a U.S. Patent allegedly
assigned to Mentor, misappropriation of trade secrets and breach of confidence,
and seeks unspecified damages, injunctive relief and the assignment to Mentor of
a patent previously issued to Quickturn. Cadence intends to vigorously defend
itself against these claims, and has filed a counterclaim for declaratory
judgment of invalidity of several patents allegedly assigned to Mentor.
Following a motion by Cadence, the former Quickturn employee was dismissed as a
party to the action. Discovery in the action has subsequently been consolidated
with discovery in Civil Action No. C 99-5464, the Mentor v. Quickturn suit
transferred from Delaware.
In April 2000, Cadence filed suit against a former design services
customer, IMI Telecommunications, Inc., for breach of contract relating to IMI
Telecommunications' failure to make payments due and fulfill its obligations
under a services agreement. Damages claimed by Cadence are approximately $1
million. The defendant countersued, alleging breach of oral contract,
rescission, negligent misrepresentation and fraud by Cadence and claiming
damages exceeding $100 million and seeking punitive damages exceeding $500
million. Cadence filed a motion to dismiss the defendant's counterclaims, and a
hearing on this motion was held on October 2, 2000. A ruling has not yet been
issued. Cadence believes that it has defenses to and disputes the allegations
made by IMI Telecommunications and intends to defend the action vigorously.
On September 11, 2000, Mentor filed a complaint against Quickturn and
Cadence in the U.S. District Court for the Northern District of California (Case
No. C-00-03291) accusing Quickturn and Cadence of infringing U.S. Patent No.
5,574,388, purportedly owned by Mentor and seeking unspecified damages and
injunctive relief. Quickturn and Cadence believe the complaint filed by Mentor
is without substance and that the patent that is the subject of this suit in
invalid and not infringed. Cadence and Quickturn are vigorously defending the
claim. On November 3, 2000, Mentor filed a motion for preliminary injunction,
asking the Court to prohibit the sale of Quickturn's MERCURYPLUS emulation
systems prior to trial of this action. The hearing on that motion is scheduled
for March 30, 2001. The parties have agreed to consolidate this action with
Civil Action Nos. C 99-5464 and C 00-01030 WHA, described above, for purposes of
discovery and pre-trial motions. A trial date of October 7, 2002 has been set
for all three actions.
On November 2, 2000, Mentor and Meta filed a complaint for declaratory
judgment against Quickturn and Cadence in the U.S. District Court for the
District of Oregon (Case No. C-00-1489) seeking a ruling that Mentor's proposed
design verification approach (in which chip designers would use U.S.-based
computer terminals to operate SimExpress emulation systems located overseas)
will not infringe Quickturn's patents and will not violate the permanent
injunction entered by the Oregon District Court on July 7, 1999 in Civil Action
No. C-96-00342. On January 5, 2001, Quickturn and Cadence answered the
complaint. In their answer, Quickturn and Cadence denied Mentor and Meta's
contention, and asserted that Mentor and Meta's complaint lacks subject matter
jurisdiction and is barred by res judicata and collateral estoppel. Quickturn
and Cadence intend to vigorously contest this action.
On November 22, 2000, a former design services customer, Uniden
Corporation, filed an action for fraud, negligent misrepresentation and breach
of contract in the State Court of Texas against Cadence, and alleged those
causes of action as well as others against Intel Corporation and entities
related to Intel. Uniden seeks compensatory and punitive damages in an
unspecified amount. The suit was filed after Cadence demanded payment of
approximately $1 million for design services rendered to Uniden. Cadence since
has filed a counterclaim to recover the approximate $1 million owed for services
rendered. Intel has filed a motion for
23
24
forum non conviens requesting that the action be moved to California. Cadence
has joined in that motion. Cadence intends to vigorously defend the action
brought by Uniden.
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. However, were an
unfavorable ruling to occur in any specific period, there exists the possibility
of a material adverse impact on the result of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF CADENCE
The executive officers of Cadence are as follows:
NAME AGE POSITIONS AND OFFICES
---- --- ---------------------
H. Raymond Bingham..................... 55 President, Chief Executive Officer, and Director
Ronald R. Barris....................... 58 Senior Vice President, Services
Kevin Bushby........................... 45 Senior Vice President, Worldwide Field Operations
R.L. Smith McKeithen................... 57 Senior Vice President, General Counsel, and
Secretary
William Porter......................... 46 Senior Vice President and Chief Financial Officer
Robert P. Wiederhold................... 41 President and Chief Executive Officer of Tality
Corporation
Robert A. Promm........................ 49 Vice President and Corporate Controller
Executive officers are appointed by the Board of Directors and serve at the
discretion of the Board.
H. RAYMOND BINGHAM has served as President and Chief Executive Officer of
Cadence since April 1999. Mr. Bingham has been a director of Cadence since
November 1997. From 1993 to April 1999, Mr. Bingham served as Executive Vice
President and Chief Financial Officer of Cadence. 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 Legato Systems, Inc., Onyx Software Corporation,
TenFold Corporation, and KLA-Tencor Corporation.
RONALD R. BARRIS joined Cadence in December 1999 as Senior Vice President,
Strategy and became Senior Vice President, Services in August 2000. From 1993 to
1999 Mr. Barris served as a partner for Coopers & Lybrand in its high technology
practice and subsequently in PricewaterhouseCoopers as the managing partner of
its semiconductor practice. Mr. Barris previously worked at General Electric,
FMC, Union Metal and Alliance Automation.
KEVIN BUSHBY joined Cadence in 1995 as Vice President and General Manager,
European Operations and became Senior Vice President, Worldwide Field Operations
in 2000. From 1990 to 1995 Mr. Bushby held several positions with Unisys
Corporation, most recently as Vice President Sales and Marketing, Client Server
Systems Division. Prior to this Mr. Bushby held positions in Convergent
Technologies and Hewlett-Packard.
R.L. SMITH McKEITHEN joined Cadence in 1996 as Vice President, General
Counsel, and Secretary and became Senior Vice President, General Counsel, and
Secretary in 1998. From 1994 to 1996, he served as Vice President, General
Counsel, and Secretary of Strategic Mapping, Inc. From 1988 to 1994, he served
as Vice President, General Counsel, and Secretary of Silicon Graphics, Inc.
WILLIAM PORTER joined Cadence in 1994 as Vice President, Corporate
Controller, and Assistant Secretary and became Senior Vice President and Chief
Financial Officer in May 1999. From 1988 to 1994, 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.
ROBERT P. WIEDERHOLD joined Cadence in 1996 as Vice President and General
Manager of the Deep Submicron Business Unit and became Senior Vice President of
Cadence Worldwide Design Services
24
25
Group in July 1998. In July 2000, Mr. Wiederhold became President and Chief
Executive Officer of Tality Corporation, a subsidiary of Cadence. From 1994 to
1996, he served as Executive Vice President, Chief Operating Officer, and
Director of High Level Design Systems, Inc. From 1985 to 1994, he held various
positions with Cadence Design Systems, Inc., most recently as Vice President,
Marketing for the Systems Division.
ROBERT A. PROMM joined Cadence in December 1999 as Vice President and
Corporate Controller. From November 1997 to December 1999, Mr. Promm served as
Vice President, Corporate Controller of Kaiser Foundation Health Plan, Inc.
Prior to November 1997, Mr. Promm held several positions with Apple Computer,
Inc., most recently as Vice President and Financial Controller.
25
26
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Cadence 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 does not plan to pay cash dividends in the foreseeable
future. As of March 6, 2001, Cadence had approximately 1,464 registered
stockholders and estimates that it had approximately 42,007 beneficial owners of
its common stock.
The following table sets forth the high and low sales price for Cadence
common stock for each calendar quarter in the two-year period ended December 30,
2000:
HIGH LOW
------ ------
2000:
First Quarter............................................... $24.00 $18.13
Second Quarter.............................................. $20.81 $13.50
Third Quarter............................................... $27.13 $19.50
Fourth Quarter.............................................. $28.69 $21.25
1999:
First Quarter............................................... $34.13 $21.63
Second Quarter.............................................. $26.63 $10.63
Third Quarter............................................... $16.75 $ 9.19
Fourth Quarter.............................................. $24.06 $13.31
26
27
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes thereto and
the information contained herein in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operation." Historical results
are not necessarily indicative of future results.
FIVE FISCAL YEARS ENDED DECEMBER 30, 2000
------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenue............................... $1,279,550 $1,093,303 $1,320,180 $1,036,773 $888,642
Net income (loss)..................... $ 49,977 $ (14,075) $ 25,124 $ 165,122 $ 48,441
Net income (loss) per
share -- assuming dilution.......... $ 0.19 $ (0.06) $ 0.10 $ 0.68 $ 0.21
Total assets.......................... $1,477,321 $1,459,659 $1,481,916 $1,153,247 $875,754
Long-term obligations................. $ 3,298 $ 25,024 $ 136,380 $ 1,599 $ 20,292
Stockholders' equity.................. $ 909,465 $ 986,149 $ 947,830 $ 821,363 $552,083
27
28
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 the Consolidated Financial Statements and
notes thereto included elsewhere in this Annual Report on Form 10-K. All
references to years represent fiscal years unless otherwise noted. Except for
the historical information contained in this Annual Report on Form 10-K, 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
"Disclosures about Market Risk", and "Liquidity and Capital Resources".
OVERVIEW
Cadence provides comprehensive software and other technology and offers
design and methodology services for the product development requirements of the
world's leading electronics companies. Cadence licenses its leading-edge
electronic design automation, or EDA, software and hardware technology and
provides a range of services to companies throughout the world to help its
customers optimize their product development processes. Cadence is a supplier of
end-to-end products and services, 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.
The worldwide electronics industry has experienced expansion driven
primarily by the communications (networking and wireless) markets. However, the
industry recently experienced a slowdown commencing in late 2000 and the
severity of which has increased in early 2001. The electronics industry
slowdown, especially in the semiconductor industry, may reduce our revenue and
harm our results of operations.
On July 17, 2000, Cadence announced its plan to separate its electronics
design services group into a new company named Tality Corporation, or Tality.
Tality's separation from Cadence was substantially completed on October 4, 2000,
and accordingly the electronic design services business now operates as a
majority-owned subsidiary of Cadence. Tality filed a registration statement with
the Securities and Exchange Commission for Tality's initial public offering, or
IPO. On October 9, 2000, Cadence announced the postponement of Tality's IPO due
to unfavorable market conditions. The financial statements and financial
information in this Annual Report on Form 10-K do not give effect to the IPO.
On December 29, 2000, Cadence entered into a definitive agreement to
acquire CadMOS Design Technology, Inc., a privately held design tools firm
headquartered in San Jose. CadMOS provides solutions to the noise problems
experienced in ultra-deep submicron, or UDSM, processes. Its noise-analysis
solutions are targeted at both digital and mixed signal designers working in
microprocessors, DRAMs, mixed-signal SOC, and ASICs. The acquisition was
completed on February 28, 2001, in which Cadence acquired all of the outstanding
stock of CadMOS and assumed all outstanding stock options. The acquisition will
be accounted for as a purchase.
In December 1999, Cadence acquired all of the outstanding stock of Diablo
Research Company LLC for cash and assumed all outstanding stock options of
Diablo. Diablo was a high-technology engineering services firm with expertise in
wireless communication, global positioning satellite solutions, and data
transfer and home automation markets. The total purchase price was $39.9 million
and the acquisition was accounted for as a purchase.
In August 1999, Cadence acquired OrCAD, Inc., a supplier of computer-aided
engineering and computer-aided design software and services for the printed
circuit board industry, for cash. Cadence acquired all of the outstanding stock
of OrCAD and assumed all outstanding stock options. The purchase price was
$131.4 million and the acquisition was accounted for as a purchase.
In May 1999, Cadence completed its merger with Quickturn Design Systems,
Inc. Quickturn designed, manufactured, sold, and supported hardware and software
products that verify the design of computer chips and electronic systems.
Cadence acquired all of the outstanding shares of Quickturn common stock in a
tax-
28
29
free, stock-for-stock transaction for approximately 24.6 million shares of
Cadence common stock. The acquisition was accounted for as a
pooling-of-interests. In addition, Cadence assumed all outstanding stock options
and warrants of Quickturn. All prior period consolidated financial statements
were restated as if the merger took place at the beginning of such periods, in
accordance with required pooling of interests accounting and disclosures.
In January 1999, Cadence acquired Design Acceleration, Inc., or DAI, a
supplier of design verification technology used in system-on-a-chip, or SOC,
design. Cadence acquired all of the outstanding stock of DAI for approximately
0.6 million shares of Cadence common stock and $2.9 million of cash. The total
purchase price was $25.7 million and the acquisition was accounted for as a
purchase.
In September 1998, Cadence acquired all of the outstanding stock of Ambit
Design Systems, Inc. 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.
In September 1998, Cadence acquired the Bell Labs' Integrated Circuit
Design Automation Group of Lucent Technologies Inc., or BLDA, for cash. BLDA was
a design automation development organization that focused on the complex
verification challenges companies face when designing integrated circuits and
next-generation SOC. The total purchase price was $58 million and the
acquisition was accounted for as a purchase.
In March 1998, Cadence acquired all of the outstanding stock of Excellent
Design, Inc., or EXD, for cash. EXD provided ASIC and SOC design and library
development. The total purchase price was $40.9 million and the acquisition was
accounted for as a purchase.
In February 1998, Cadence acquired all of the outstanding stock of
Symbionics Group Limited for approximately 1 million shares of Cadence common
stock and $21.3 million of cash. Symbionics provided product development design
services to leading electronics manufacturers. The total purchase price was
$56.1 million and the acquisition was accounted for as a purchase.
RESULTS OF OPERATIONS
REVENUE
% CHANGE
-------------
2000 1999 1998 00/99 99/98
-------- -------- -------- ----- -----
(IN MILLIONS)
Product...................................... $ 627.4 $ 505.4 $ 760.5 24% (34)%
Services..................................... 336.0 294.9 265.2 14% 11%
Maintenance.................................. 316.2 293.0 294.5 8% (1)%
-------- -------- --------
Total revenue...................... $1,279.6 $1,093.3 $1,320.2 17% (17)%
======== ======== ========
SOURCES OF REVENUE AS A PERCENT OF TOTAL REVENUE
2000 1999 1998
---- ---- ----
Product..................................................... 49% 46% 58%
Services.................................................... 26% 27% 20%
Maintenance................................................. 25% 27% 22%
Product revenue increased $122 million in 2000, when compared to 1999,
primarily due to an overall increase in price and volume of license renewals
with major customers. The increases in sales volume of products was primarily
attributable to increased sales of intellectual property creation products,
which include mixed signal and simulation products, integrated circuit
implementation products, which include place and route, physical design, and
physical verification products, and printed circuit board related products.
Product revenue decreased $255.1 million in 1999, when compared to 1998,
primarily due to the implementation of Cadence's new software subscription
licensing model during the third quarter of 1999 and
29
30
to a lesser extent a decrease in sales volume of Cadence's software products.
These decreases were partially offset by an increase in emulation hardware
product revenue in the same periods and the favorable impact of foreign currency
exchange rate differences, primarily the Japanese yen. Revenue associated with
software products under subscription licenses is recognized ratably over the
license period because the agreements allow customers to exchange licensed
products for unspecified future technology.
Services revenue increased $41.1 million in 2000, when compared to 1999,
primarily due to an increase in Tality revenue of $69.5 million, partially
offset by a decrease of $28.4 million in methodology services revenue. Tality's
revenue increase is primarily due to increases in the total size of active
client engagements and total client service hours billed. The decrease in
methodology services engagements is primarily due to lower staffing levels.
Services revenue increased $29.7 million in 1999, when compared to 1998,
primarily due to an increase in Tality revenue of $23.6 million. Tality's
increase is primarily due to an increase in the total size of active client
engagements and an increase in total client service hours billed.
Maintenance revenue increased $23.2 million in 2000 when compared to 1999,
primarily due to the growth of the installed customer base. Maintenance revenue
was relatively flat in 1999 compared to 1998.
REVENUE BY GEOGRAPHY
% CHANGE
--------------
2000 1999 1998 00/99 99/98
-------- -------- -------- ----- -----
(IN MILLIONS)
Domestic............................. $ 720.8 $ 526.8 $ 676.6 37% (22)%
International........................ 558.8 566.5 643.6 (1)% (12)%
-------- -------- --------
Total revenue.............. $1,279.6 $1,093.3 $1,320.2 17% (17)%
======== ======== ========
REVENUE BY GEOGRAPHY AS A PERCENT OF TOTAL REVENUE
2000 1999 1998
---- ---- ----
Domestic.................................................... 56% 48% 51%
International............................................... 44% 52% 49%
International revenue decreased $7.7 million in 2000 when compared to 1999,
primarily due to decreases in product revenue in Japan and services revenue in
Europe and Japan, partially offset by an increase in product and maintenance
revenue in Europe.
International revenue decreased $77.1 million in 1999 when compared to
1998, primarily due to decreases in product revenue in all international regions
resulting from the implementation of Cadence's new subscription licensing model
during the third quarter of 1999. The decrease in international product revenue
was partially offset by an increase in services revenue in all international
regions except Asia.
Other differences in the rate of revenue growth over the years presented
and as compared geographically are primarily due to fluctuations in sales volume
of place and route and physical design products and for Cadence's design and
methodology services offerings.
Foreign currency exchange rates negatively affected reported revenue by
$3.8 million in 2000, primarily due to the weakening of the British pound and
German mark in relation to the U.S. dollar, partially offset by the
strengthening of the Japanese yen in relation to the U.S. dollar. Foreign
currency exchange rates positively affected reported revenue by $16.2 million in
1999, primarily due to the strengthening of the Japanese yen in relation to the
U.S. dollar. Additional information about revenue by geographic areas can be
found under "Segment Reporting" in the Notes to Consolidated Financial
Statements.
30
31
COST OF REVENUE
% CHANGE
-------------
2000 1999 1998 00/99 99/98
------ ------ ------ ----- -----
(IN MILLIONS)
Product.......................................... $ 89.9 $ 79.5 $ 77.5 13% 3%
Services......................................... $215.6 $191.8 $188.8 12% 2%
Maintenance...................................... $ 63.3 $ 53.6 $ 52.4 18% 2%
COST OF REVENUE AS A PERCENT OF RELATED REVENUE
2000 1999 1998
---- ---- ----
Product..................................................... 14% 16% 10%
Services.................................................... 64% 65% 71%
Maintenance................................................. 20% 18% 18%
Cost of product revenue includes costs of production personnel, packaging
and documentation, royalties, and amortization of capitalized software
development costs for software products. Manufacturing costs associated with
hardware emulation system products include materials, labor, and overhead.
Cost of product revenue increased $10.4 million or 13% in 2000 when
compared to 1999. The increase was primarily due to increases in manufacturing
expenses associated with emulation system products and amortization of
capitalized software development costs. Cost of product revenue increased $2
million or 3% in 1999 when compared to 1998. The increase was primarily due to
increases in manufacturing expenses associated with emulation system products,
the acquisition of OrCAD in 1999, and amortization of capitalized software
development costs. These costs were offset partially by inventory obsolescence
charges of $5.7 million associated with the introduction of the MERCURY Design
Verification System recorded in 1998, reductions in purchased software
amortization, and third-party royalty expenses.
Because the majority of Cadence's cost of software product revenue does not
vary significantly with changes in revenue, product gross margin increased in
2000 when compared to 1999, due primarily to increased sales of software
products and the introduction of the new subscription licensing model during the
third quarter of 1999.
Cost of services revenue includes costs associated with providing services
to customers, primarily salaries and benefits, costs to recruit, develop and
retain personnel, cost of software, depreciation, facilities and project
management, and costs to maintain the infrastructure necessary to manage a
services organization. Cost of services revenue increased $23.8 million or 12%
in 2000, when compared to 1999, primarily due to an increase in the number of
design engineers. Cost of services revenue increased $3 million or 2% in 1999,
when compared to 1998, primarily due to increases in amortization of purchased
software and distributor commission costs for methodology services in Japan,
offset partially by a decrease in employee related costs, including incentive
pay, associated primarily with Cadence's 1998 restructuring and lower revenues.
Services gross margins remained relatively flat in 2000 as compared to
1999. The increase in services gross margins to 35% in 1999, as compared to 29%
in 1998, was primarily due to increased utilization of services capacity and the
management of expenses. Services gross margins have been and may continue to be
adversely affected by the cost of integrating new services 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 service offerings.
Cost of maintenance revenue includes the cost of customer services, such as
hot-line and on-site support, production personnel, packaging, and documentation
of maintenance updates. Cost of maintenance revenue increased $9.7 million or
18% in 2000, when compared to 1999, primarily due to costs associated with the
OrCAD acquisition which was completed in the third quarter of 1999, for which
there were no similar costs in the first seven months of 1999, and increases in
employee-related costs and costs to invest in customer service.
31
32
Cost of maintenance revenue in absolute dollars and as a percent of related
revenue remained relatively flat in 1999 when compared to 1998.
AMORTIZATION OF ACQUIRED INTANGIBLES
2000 1999 1998
----- ----- -----
Amortization of acquired intangibles........................ $80.5 $61.8 $18.5
AMORTIZATION OF ACQUIRED INTANGIBLES AS A PERCENT OF TOTAL REVENUE
2000 1999 1998
---- ---- ----
Amortization of acquired intangibles........................ 6% 6% 1%
Amortization of acquired intangibles increased $18.7 million in 2000, when
compared to 1999, primarily due to a full year's amortization related to
Cadence's 1999 acquisitions of OrCAD and Diablo, partially offset by the
decrease in amortization related to the $13.3 million asset impairment charge of
EXD in the fourth quarter of 1999. Amortization of acquired intangibles
increased $43.3 million in 1999, when compared to 1998, primarily due to the
1999 acquisitions of OrCAD and DAI, and a full year's amortization related to
Cadence's 1998 acquisitions of Ambit, BLDA, EXD, and Symbionics. For additional
information regarding these acquisitions see below under "In-Process
Technology."
OPERATING EXPENSES
% CHANGE
--------------
2000 1999 1998 00/99 99/98
------ ------ ------ ----- -----
(IN MILLIONS)
Marketing and sales...................... $390.1 $354.2 $340.3 10% 4%
Research and development................. $263.9 $219.2 $202.8 20% 8%
General and administrative............... $ 94.5 $ 86.7 $ 86.8 9% 0%
OPERATING EXPENSES AS A PERCENT OF TOTAL REVENUE
2000 1999 1998
---- ---- ----
Marketing and sales......................................... 30% 32% 26%
Research and development.................................... 21% 20% 15%
General and administrative.................................. 7% 8% 7%
MARKETING AND SALES
The increase in marketing and sales expenses of $35.9 million for 2000,
when compared to 1999, was primarily due to an increase in employee-related
costs, the acquisition of OrCAD, and marketing program costs, partially offset
by lower consulting costs. Foreign currency exchange rates positively affected
marketing and sales expenses by $2.7 million in 2000, when compared to 1999,
primarily due to the weakening of the German mark, the French franc, and the
British pound in relation to the U.S. dollar, partially offset by the
strengthening of the Japanese yen in relation to the U.S. dollar. The increase
in marketing and sales expenses of $13.9 million for 1999, when compared to
1998, was primarily due to an increase in sales support costs, the acquisition
of OrCAD, and marketing program costs, partially offset by lower
employee-related costs, resulting from Cadence's 1998 restructuring, lower
employee training and education costs, and travel costs. Foreign currency
exchange rates negatively affected marketing and sales expenses by $4.6 million
in 1999, when compared to 1998, primarily due to the strengthening of the
Japanese yen in relation to the U.S. dollar.
32
33
RESEARCH AND DEVELOPMENT
The increase in net research and development expenses of $44.7 million for
2000, when compared to 1999, was primarily attributable to higher
employee-related costs, the acquisition of OrCAD which was completed in the
third quarter of 1999 and for which there were no similar costs in the first
seven months of 1999, and consulting and other services. The increase in net
research and development expenses of $16.4 million for 1999, when compared to
1998, was primarily attributable to higher employee-related costs due to
increases in headcount from Cadence's acquisition of OrCAD in 1999 and the
acquisitions of Ambit and BLDA in the third quarter of 1998, partially offset by
increased capitalization of software development expenses.
Cadence's expenses in research and development, prior to the reduction for
capitalization of software development costs, was $292.4 million for 2000,
$244.9 million for 1999, and $224.5 million for 1998, representing 23% of total
revenue for 2000, 22% for 1999, and 17% for 1998. Cadence capitalized software
development costs of approximately $28.4 million for 2000, $25.7 million for
1999, and $21.7 million for 1998, which represented approximately 10% of total
research and development expenditures for 2000, 1999, and 1998. The increase in
capitalized software development costs in each of these three years resulted
primarily from general increases in new product development. The amount of
capitalized software development costs in any given period may vary depending on
the exact nature of the development performed.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased $7.7 million in 2000, when
compared to 1999, primarily due to employee-related costs, partially offset by
decreases in bad debt expense and consulting and outside services costs. General
and administrative expenses remained relatively flat in 1999 when compared to
1998.
AMORTIZATION OF DEFERRED STOCK COMPENSATION
2000 1999 1998
----- ---- ----
Amortization of deferred stock compensation................. $11.4 $-- $--
AMORTIZATION OF DEFERRED STOCK COMPENSATION AS A PERCENT OF TOTAL REVENUE
2000 1999 1998
---- ---- ----
Amortization of deferred stock compensation................. 1% 0% 0%
Deferred stock compensation represents the difference between the exercise
price of stock option grants to Tality employees and directors, and restricted
stock sales to certain Cadence executives and key employees, and the deemed fair
market value of Tality's common stock at the time of those grants and sales. For
the year ended December 30, 2000, Cadence recorded a total of $72.4 million of
deferred stock compensation, $64.1 million related to the stock option grants,
and $8.3 million related to the restricted stock sales. Cadence is amortizing
deferred stock compensation to expense over the period during which the stock
options and restricted stock vest, four years and one year, respectively.
33
34
UNUSUAL ITEMS
Described below are unusual item charges in 2000, 1999, and 1998.
2000 1999 1998
---- ----- ------
(IN MILLIONS)
Separation costs............................................ $6.8 $ -- $ --
Write-off of acquired in-process technology................. -- 20.7 194.1
Asset impairment............................................ -- 19.9 --
Restructuring charges....................................... -- 13.3 69.5
Merger costs................................................ -- 8.4 --
Litigation settlement....................................... -- (3.0) --
---- ----- ------
Total unusual items............................... $6.8 $59.3 $263.6
==== ===== ======
Separation Costs
In the year ended December 30, 2000, Cadence recorded $6.8 million in
separation costs related to the separation of its design services business, and
the related planned IPO of Tality, Cadence's newly formed subsidiary. These
costs primarily include legal and accounting services, strategic business
planning, information systems separation, development of compensation and
benefits strategies, and recruitment and formation of Tality's senior management
team.
In-Process Technology
In August 1999, Cadence acquired OrCAD, Inc., a supplier of computer-aided
engineering and computer-aided design software and services for the printed
circuit board industry, for cash. Cadence acquired all of the outstanding stock
of OrCAD and assumed all outstanding OrCAD stock options. The purchase price was
$131.4 million and the acquisition was accounted for as a purchase.
Upon consummation of the OrCAD acquisition, Cadence immediately charged to
expense $11.8 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 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 included a factor that took into account the uncertainty
surrounding the successful development of the acquired in-process technology.
Certain acquired in-process technology was commercially viable in 1999 and other
acquired in-process technology became commercially viable in 2000. Expenditures
to complete this acquired in-process technology did not exceed $2.3 million.
At the time of its acquisition by Cadence, OrCAD's in-process research and
development projects in the schematic entry area were related to the development
of an online component catalog and a new schematic design entry interface.
In-process research and development projects in the simulation area were related
to a rearchitecture of the simulation engine and replacement of the simulation
engine. Additional features under development included randomized expressions
and no selection limits. The nature of the efforts to complete these projects
related, in varying degrees, to the completion of all planning, designing,
prototyping, verification, and testing activities that were necessary to
establish that the proposed technologies meet their design specifications
including functional, technical, and economic performance requirements.
The net cash flows resulting from the projects underway at OrCAD 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 were based on the potential market size that the projects
address, Cadence's ability to gain market acceptance in these segments, and the
life cycle of this in-process technology.
34
35
Estimated total revenue from the acquired in-process technology is 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
had been attributed to enhancements of the base technology under development,
and had been excluded from net cash flow calculations. Existing technology was
valued at $10.8 million. The net cash flows generated from the acquired
in-process technology were expected to reflect earnings before interest, taxes,
and depreciation of approximately 32% of the sales generated from in-process
technology. However, there can be no assurance that these assumptions will prove
accurate, or that Cadence will realize the anticipated benefit of the
acquisition.
The discount of the net cash flows to their present value was based on the
weighted average cost of capital, or WACC. The WACC calculation produces the
average required rate of return of an investment in an operating enterprise,
based on the required rates of return from investments in various areas of the
enterprise. The rate used to discount the net cash flows from purchased
in-process technology was 22%. The discount rate is sometimes higher than the
WACC due to the inherent uncertainties in the estimates, including the
uncertainty surrounding the successful development of the acquired in-process
technology, the useful life of such technology, the profitability levels of such
technology, if any, and the uncertainty of technological advances, all of which
were unknown at that time.
In January 1999, Cadence acquired DAI, a supplier of design verification
technology used in SOC design. Cadence acquired all of the outstanding stock of
DAI for approximately 0.6 million shares of Cadence common stock and $2.9
million of cash. The total purchase price was $25.7 million and the acquisition
was accounted for as a purchase.
Upon consummation of the DAI acquisition, Cadence immediately charged to
expense $8.9 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 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 included a factor that took into account the uncertainty
surrounding the successful development of the acquired in-process technology.
Certain acquired in-process technology under development at the time of
acquisition was initially expected to become commercially viable in 1999, but
instead became viable in 2000. Expenditures to complete this in-process
technology did not exceed $1.5 million.
At the time of its acquisition by Cadence, DAI had several significant
research and development projects in process that were intended to provide a
next generation environment for design verification and analysis. These efforts
included the development of a highly automated approach for high-level test
bench creation and analysis, a waveform viewer capable of supporting analog and
mixed signal designs, and a tool designed to analyze verification code coverage
at the transactional level. The nature of the efforts to complete these
in-process research and development projects related, in varying degrees, to the
completion of all planning, designing, prototyping, verification, and testing
activities that were necessary to establish that the proposed in-process
technologies meet their design specifications, which include functional,
technical, and economic performance requirements.
The net cash flows generated by the projects underway at DAI 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 these projects address,
Cadence's ability to gain market acceptance for these projects, and the life
cycle of this in-process technology.
Estimated total revenue from the acquired in-process technology is expected
to peak in 2001 through 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 $11.4 million. The net cash flows generated
from the acquired in-process technology are expected to reflect
35
36
earnings before interest, taxes, and depreciation of approximately 60% of the
sales generated from in-process technology. However, there can be no assurance
that these assumptions will prove accurate, or that Cadence will realize the
anticipated benefits of this acquisition.
The discount applied to the net cash flows to calculate the present value
of such net cash flows was based on the WACC. The rate used to discount the net
cash flows from purchased in-process technology was 22%.
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 included a factor that took into account the uncertainty
surrounding the successful development of the acquired in-process technology.
The acquired in-process technology was commercially viable in 1999, with the
exception of one module, called Datapath Compiler, which became commercially
viable in 2000. BUILDGATES 3.0 software and Physically Knowledgeable Synthesis
were commercially viable in 1999. Expenditures to complete all in-process
technology did not exceed $15 million.
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 related to the
completion of all planning, designing, prototyping, verification, and testing
activities that were 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
revenue through the creation of an integrated, next generation version of
BUILDGATES software.
In September 1998, Cadence acquired BLDA for cash. BLDA was a design
automation development organization that focused on the complex verification
challenges companies face when designing integrated circuits and next-generation
SOC. 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 took into account the uncertainty
surrounding the successful development of the acquired in-process technology.
The acquired in-process technology became commercially viable in 2000.
Expenditures to complete this in-process technology did not exceed $5 million.
BLDA's in-process research and development projects were related to its
FORMALCHECK(R) and CLOVER(R) technologies. BLDA had two major enhancements
underway for FORMALCHECK. This effort resulted in a revenue-generating product
in 2000. BLDA's research and development related to CLOVER technology involved
the design and development of new parasitic extraction tools, which were
expected to substantially improve the performance and functionality of the
technology. The parasitic extraction tools began generating revenue in 2000.
The net cash flows resulting from the projects underway at Ambit and BLDA
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
36
37
revenue projections were based on the potential market size that the projects
address, Cadence's ability to gain market acceptance for these projects, and the
life cycle of this in-process technology.
Estimated total revenue from the acquired in-process technology is expected
to peak in 2001 through 2002 and decline rapidly in 2003 and 2004 as other new
products 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 in connection with the Ambit acquisition and $23.2
million in connection with the BLDA acquisition. 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
acquired in-process technology are expected to reflect earnings before interest,
taxes, and depreciation of approximately 38% to 49% of the sales generated from
this in-process technology.
The discount of the net cash flows to their present value was based on the
WACC. The discount rates used to discount the net cash flows from acquired
in-process technology were 28% for Ambit and 25% for BLDA. These discount rates
reflected 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 were unknown at that time.
In March 1998, Cadence acquired all of the outstanding stock of EXD. EXD
provided ASIC and SOC design and library development. The total purchase price
was $40.9 million in cash and the acquisition was accounted for as a purchase.
Upon consummation of the EXD acquisition, Cadence immediately charged to
expense $28.4 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 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 2000. However, the progression of these projects
became impaired in the fourth quarter of 1999 as discussed further below.
At the time of its acquisition by Cadence, EXD had several significant
research and development projects in process that, if successful, would have
represented the introduction of new products and technologies to meet future
market needs. These efforts included the development of new tools for library
generation, delay 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 these research and
development projects related, to varying degrees, to the completion of all
planning, designing, prototyping, verification, and testing activities that were
necessary to establish that the proposed technologies meet their design
specifications, including functional, technical, and economic performance
requirements.
The successful completion of the EXD acquired in-process projects has been
impaired and as a result differed significantly from the forecasted assumptions.
In the fourth quarter of 1999, Cadence recorded a $13.3 million asset impairment
charge. This asset impairment charge resulted from reduced Japanese market
opportunities and the loss of key EXD employees resulting in diminished cash
flow projections. Cadence entered into certain support agreements with external
parties to provide support for EXD software tools previously sold to Cadence
customers. The fair value of the EXD acquired intangibles was based on an
evaluation of the present value of their estimated expected future cash flows,
discounted at 16%.
In February 1998, Cadence acquired all of the outstanding stock of
Symbionics for approximately 1 million shares of Cadence common stock and $21.3
million of cash. Symbionics provided product development design services to
leading electronics manufacturers. The total purchase price was $56.1 million
and the acquisition was accounted for as a purchase.
37
38
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 included a factor that took into account the uncertainty
surrounding the successful development of the acquired in-process technology.
The in-process projects were commercially viable by the end of 1999.
Expenditures to complete these projects did not exceed $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
related, to varying degrees, to the completion of all planning, designing,
prototyping, verification, and testing activities that were necessary to
establish that the proposed technologies meet their design specifications,
including functional, technical, and economic performance requirements.
The net cash flows resulting from the projects which were underway at
Symbionics used to value the acquired in-process technology at the time of
acquisition 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 address, Cadence's ability to gain
market acceptance in these segments and the life cycle of this in-process
technology.
Estimated total revenue from the acquired in-process technology is expected
to peak in 2001 and 2002 and decline rapidly thereafter as other new products
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
$6 million. There can be no assurance that these assumptions will prove
accurate, or that Cadence will realize the anticipated benefit of the
acquisition. The net cash flows generated from the acquired in-process
technology are expected to reflect earnings before interest and taxes of
approximately 39% of the sales generated from Symbionics' in-process technology.
The discount applied to the net cash flows to calculate their present value
was based on the WACC at the time of acquisition. The discount rates used to
discount the net cash flows from the acquired in-process technology range from
22.5% to 27.5%. 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 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 were unknown at that
time.
Asset Impairment
In 1999, Cadence incurred charges totaling $19.9 million in asset
impairment charges. Of this amount, $13.3 million represented asset impairment
of acquired intangibles from the EXD acquisition. This asset impairment charge
resulted from reduced Japanese market opportunities and the loss of key EXD
employees resulting in diminished cash flow projections. Cadence entered into
certain support agreements with external parties to provide support for EXD
software tools previously sold to Cadence customers. The fair value of the EXD
acquired intangibles was based on an evaluation of the present value of the
estimated expected future cash flows, discounted at 16%. The remaining $6.6
million in asset impairment charges were incurred in connection with the
cancellation of an information technology services contract with a third-party,
the abandonment of capitalized software development costs associated with
certain Cadence products that will no longer be sold, and the abandonment of
certain third-party software licenses that will no longer be used by Cadence's
design services business.
38
39
Restructuring
In 1999, Cadence recorded $13.3 million of restructuring charges that
consisted of $11.3 million to terminate approximately 100 employees and $2
million to downsize and close excess facilities. Cadence's restructuring plans
were primarily aimed at reducing costs after Cadence merged with Quickturn,
further restructuring of Cadence's services business in Japan, and severance
resulting from the resignation of Cadence's former Chief Executive Officer.
Severance costs include severance benefits, notice pay, and outplacement
services. All terminations and termination benefits were communicated to the
affected employees prior to year-end and substantially all remaining severance
benefits were paid in 2000.
Facilities consolidation charges of $2 million were incurred in connection
with the closure of 15 Quickturn facilities, including $1 million to close
duplicate and excess facilities and $1 million of 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 write-offs consist of leasehold improvements of
facilities that were abandoned and whose estimated fair market value is zero. As
of December 30, 2000, 13 of the 15 Quickturn sites had been vacated.
Noncancelable lease payments on vacated facilities will be paid out through
2003.
In 1998, Cadence recorded $69.5 million of restructuring charges primarily
associated with Cadence's worldwide restructuring plan announced 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. Severance costs included severance benefits,
notice pay, and outplacement services. In 1998, approximately $10.1 million of
these costs resulted from the acceleration of stock options vesting under
employment agreements. All terminations and termination benefits were
communicated to the affected employees prior to year-end and all remaining
severance benefits were substantially paid in 1999.
Facilities consolidation charges of $29.9 million were incurred 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 included
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 of facilities that were abandoned and whose estimated
fair market value is zero. As of December 30, 2000, all but one of the 58 sites
had been vacated. 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.
Liabilities for excess facilities and other restructuring charges are
included in accrued and other long-term 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."
Merger Costs
In connection with the acquisition of Quickturn in 1999 Cadence charged to
expense merger costs of $8.4 million, representing professional fees for
financial advisors, attorneys, and accountants.
Litigation Settlement
In 1999, Cadence and Mentor announced the settlement of a patent
infringement action pending in the U.S. District Court for the District of
Oregon. As a result, the Court entered a judgment declaring that certain
Quickturn patents are valid, enforceable, and were infringed by Mentor's sale of
SimExpress products in the
39
40
U.S. Mentor is permanently enjoined from producing, marketing, or selling
SimExpress emulation systems in the U.S. In connection with the settlement,
Mentor paid Cadence $3 million.
OTHER INCOME, NET
Other income, net for 2000, 1999, and 1998 is as follows:
2000 1999 1998
----- ----- -----
(IN MILLIONS)
Gain (loss) on foreign exchange............................. $ 5.1 $(0.6) $ 2.8
Interest income............................................. 4.6 5.4 13.5
Equity income (loss) from investments....................... 1.1 0.1 (0.9)
Minority interest income (expense).......................... 0.6 0.1 (0.2)
Interest expense............................................ (2.4) (3.3) (3.7)
Other expense, net.......................................... (4.4) (0.3) (0.9)
----- ----- -----
Total other income, net........................... $ 4.6 $ 1.4 $10.6
===== ===== =====
Other income, net, increased $3.2 million in 2000, when compared to 1999,
primarily due to an increase in foreign exchange gains, partially offset by $2.2
million of investment losses from a venture capital partnership shown in other
expense, net. Other income, net, decreased $9.2 million in 1999, when compared
to 1998, primarily due to interest income reductions of $8.1 million and loss on
foreign exchange of $3.4 million. The decrease in interest income was primarily
due to lower average cash and investment balances due in part to the payments
made for acquisitions. The loss on foreign exchange was due to the expense of
option premiums in relation to Cadence's hedging program.
INCOME TAXES
The provision for income taxes and the effective tax rates for 2000, 1999,
and 1998 are as follows:
2000 1999 1998
----- ------ -----
(DOLLARS IN MILLIONS)
Provision for income taxes................................. $18.0 $ 2.7 $74.9
Effective tax rate......................................... 26.5% (23.7)% 74.9%
As of December 30, 2000, Cadence had total net deferred tax assets of
approximately $82.7 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. 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, 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 includes the write-off of acquired in-process
technology of approximately $20.7 million for 1999 and $194.1 million for 1998.
The effective tax rates, excluding the write-off of acquired in-process
technology, were 28.9% for 1999 and 28.4% for 1998.
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. While
Cadence is exposed with respect to interest rate fluctuations in many of the
world's leading industrialized countries, Cadence's interest income and expense
is most sensitive to fluctuations in the general level of U.S. interest rates.
In this regard, changes in U.S. interest rates affect the interest earned on
Cadence's cash and cash equivalents, short-term and long-term investments, and
interest paid on its long-term debt obligations as well as costs associated with
foreign currency hedges.
40
41
Cadence invests in high quality credit issuers and, by policy, limits the
amount of its 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.
On September 29, 2000, Cadence entered into two syndicated senior unsecured
credit facilities that allow Cadence to borrow up to $350 million, referred to
as the 2000 Facilities. The 2000 Facilities replace a prior $355 million
revolving credit facility consisting of a $177.5 million two-year revolving
credit facility, which was terminated on September 27, 2000, and a $177.5
million 364-day revolving credit facility, which was terminated immediately
prior to consummation of the 2000 Facilities. One of the new 2000 Facilities is
a $100 million three-year revolving credit facility, referred to as the
Three-Year Facility. The other new facility is a $250 million 364-day revolving
credit facility convertible into a two-year term loan, referred to as the
364-Day Facility. The Three-Year Facility terminates on September 29, 2003. The
364-Day Facility will terminate on September 28, 2001, at which time the 364-Day
Facility may be converted to a two-year term loan with a maturity date of
September 29, 2003, or, at the request of Cadence and with the consent of
members of the bank group that wish to do so, the termination date of the
364-Day Facility may be extended for one additional 364-day period with respect
to the portion of the 364-Day Facility that a consenting bank holds. For both
the 2000 Facilities, Cadence has the option to pay interest based on LIBOR plus
a spread of between 1.25% and 1.50%, based on a pricing grid tied to a financial
covenant, or the higher of the (i) Federal Funds Rate plus 0.50% and (ii) prime
rate. As a result, Cadence's interest expenses associated with this borrowing
will vary with market rates. In addition, commitment fees are payable on the
unused portion of the Three-Year Facility at rates between 0.25% and 0.34% based
on a pricing grid tied to a financial covenant and on the unused portion of the
364-Day Facility at a fixed rate of 0.20%. Cadence may not borrow under the
364-Day Facility at any time that any portion of the Three-Year Facility remains
unused. The 2000 Facilities contain certain financial and other covenants. As of
December 30, 2000, Cadence had no outstanding borrowings under these credit
facilities.
The table below presents the carrying value and related weighted average
interest rates for Cadence's interest bearing instruments. All highly liquid
investments with an original maturity of three months or less at the date of
purchase are considered to be cash equivalents; investments with original
maturities between three and 12 months are considered to be short-term
investments. Investments with original maturities greater than 12 months are
considered long-term investments. As of December 30, 2000, all of Cadence's
investments have maturities of less than 12 months. The carrying value
approximated fair value at December 30, 2000.
CARRYING AVERAGE
VALUE INTEREST RATE
------------- -------------
(IN MILLIONS)
Interest Bearing Instruments:
Short-term investments -- fixed rate................... $51.7 5.20%
Cash -- variable rate.................................. 21.3 3.57%
Cash equivalents -- variable rate...................... 7.0 6.45%
Cash -- fixed rate..................................... 2.5 7.09%
Cash equivalents -- fixed rate......................... 2.2 6.75%
-----
Total interest bearing instruments................ $84.7 4.99%
=====
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. As of December 30, 2000, the notional amount payable was $8.7
million that will be amortized
41
42
in quarterly installments of approximately $2.2 million through October 2001.
The estimated fair value at December 30, 2000 was negligible.
Foreign Currency Risk
Cadence's operations include transactions in foreign currencies and, as
such, Cadence benefits from a weaker dollar and is adversely affected by a
stronger dollar relative to major currencies worldwide. Accordingly, the primary
effect of foreign currency transactions on Cadence's results of operations is a
reduction in revenue from a strengthening U.S. dollar, offset by a smaller
reduction in expenses.
Cadence enters into foreign currency forward exchange contracts and
purchases foreign currency put options with financial institutions primarily to
protect against currency exchange risks associated with existing assets and
liabilities and probable but not firmly committed transactions, respectively.
Forward contracts are not accounted for as hedges and, therefore, the unrealized
gains and losses are recognized in other income, net in advance of the actual
foreign currency cash flows with the fair value of these forward contracts being
recorded as accrued liabilities.
Cadence purchases put options to hedge the currency exchange risks
associated with probable but not firmly committed transactions. Probable but not
firmly committed transactions consist of revenue from Cadence's products and
maintenance contracts in a currency other than the functional currency. These
transactions are made through Cadence's subsidiaries in Ireland and Japan. The
premium costs of the put options are recorded in other current assets while the
gains and losses are deferred and recognized in income in the same period as the
hedged transaction. Gains and losses on accounting hedges realized before the
settlement date of the related hedged transaction are also generally deferred
and recognized in income in the same period as the hedged transaction. Cadence
does not use forward contracts and put options for trading purposes. 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 forward
contracts and put options mature.
The table below provides information as of December 30, 2000 about
Cadence's forward contracts. As of December 30, 2000, there were no put options
outstanding. 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 May 17, 2001.
NOTIONAL WEIGHTED AVERAGE
AMOUNT CONTRACT RATE
------------- ----------------
(IN MILLIONS)
Forward Contracts:
British pound sterling............................... $ 51.4 1.44
Japanese yen......................................... 36.2 107.86
Canadian dollars..................................... 21.6 1.53
Euro................................................. 19.0 0.88
Swedish krona........................................ 2.3 9.69
------
$130.5
======
Estimated fair value................................. $ 2.7
======
While Cadence actively manages its foreign currency risks on an ongoing
basis, there can be no assurance that Cadence's foreign currency hedging
activities will substantially offset the impact of fluctuations in currency
exchange rates on its results of operations, cash flows, and financial position.
On a net basis, foreign currency fluctuations did not have a material impact on
Cadence's results of operations and financial position during the year ended
December 30, 2000. The realized gain (loss) on the forward 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
and purchased call options through equity derivative transactions. The put
warrants, if exercised and settled by physical delivery of shares,
42
43
would entitle the holder to sell shares of Cadence common stock to Cadence at a
specified price. Similarly, the call options entitle Cadence to buy shares of
Cadence common stock at a specified price. Cadence has the option to elect "net
share settlement", rather than physical settlement, of put warrants it issues
that are exercised; that is, Cadence has the right to settle the exercised 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.
Cadence repurchases shares of its common stock under stock repurchase
programs for issuance under its Employee Stock Purchase Plan, or ESPP, its 1997
Stock Option Plan, referred to as the 1997 Plan, and its 2000 Stock Option Plan,
referred to as the 2000 Plan, adopted in January 2000. As part of these
repurchase programs, Cadence has purchased and will purchase call options or has
sold and will sell put warrants. These transactions may result in sales of a
large number of shares and consequent decline in the market price of Cadence
common stock. Cadence's stock repurchase program includes the following
characteristics:
- Call options allow Cadence to buy shares of its common 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 its stock. If the market price
of the common 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.
- Depending on the exercise price of the put warrants and the market price
of Cadence common stock at the time of exercise, "net share settlement"
of the put warrants with Cadence common 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 open market, which could cause
the price of Cadence common stock to fall.
- Put warrant holders may accumulate a substantial number of shares of
Cadence common 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.
The table below provides information as of December 30, 2000 about
Cadence's outstanding put warrants and call options. The table presents the
contract amounts and the weighted average strike prices. The put warrants and
call options expire on various dates through November 2001 and Cadence has the
contractual ability to settle the options prior to their maturity.
2001 ESTIMATED
MATURITY FAIR VALUE
-------- ----------
(SHARES AND CONTRACT
AMOUNTS IN MILLIONS)
Put Warrants:
Shares.................................................... 5.5
Weighted average strike price............................. $22.90
Contract amount........................................... $125.9 $ 8.3
Call Options:
Shares.................................................... 4.0
Weighted average strike price............................. $23.14
Contract amount........................................... $ 93.7 $26.2
LIQUIDITY AND CAPITAL RESOURCES
At December 30, 2000, Cadence's principal sources of liquidity consisted of
$137 million of cash and cash equivalents and short-term investments, as
compared with $118.8 million at January 1, 2000, and $249.5 million at January
2, 1999, and the 2000 Facilities. As of December 30, 2000, Cadence had no
outstanding borrowings under these credit facilities.
43
44
Cash provided by operating activities increased $14.9 million to $142.1
million in the year ended December 30, 2000 as compared to the year ended
January 1, 2000, primarily due to increases in collections on outstanding
receivables and net income before unusual items. Cash provided by operating
activities decreased $99.9 million to $127.2 million in the year ended January
1, 2000 as compared to the year ended January 2, 1999, primarily due to
decreases in net income before unusual items, accounts payable and accrued
liabilities, and receivables, partially offset by increases in installment
contract receivables and deferred revenue.
At December 30, 2000, Cadence had net working capital of $65.3 million, as
compared with $58.4 million at January 1, 2000. The primary reasons for the
increase were increases in short-term investments of $44.4 million and accounts
receivable of $41.4 million, partially offset by an increase in deferred revenue
of $63.7 million.
In addition to its short-term investments, Cadence's primary investing
activities consisted of acquisitions and the related acquired intangibles,
purchases of property, plant, and equipment, capitalization of software
development costs, and venture capital partnership investments, which combined
represented $183.7 million at December 30, 2000, $306.8 million at January 1,
2000, and $591.3 million at January 2, 1999 of cash used for investing
activities.
Cadence sells put warrants and purchases call options through private
placements. See "Notes to Consolidated Financial Statements." At December 30,
2000, Cadence had a maximum potential obligation related to put warrants to buy
back 5.5 million shares of its common stock at an aggregate price of
approximately $125.9 million. These put warrants expire at various dates through
November 2001 and Cadence has the contractual ability to settle the put warrants
and call options prior to their maturity. Cadence has the ability to settle
these put warrants with its stock and, therefore, no amount was classified out
of stockholders' equity in Cadence's consolidated balance sheets.
As part of its overall investment strategy, Cadence has become a limited
partner in a venture capital fund and is committed to invest up to $100 million.
As of December 30, 2000, Cadence had contributed approximately $49.8 million to
this partnership for venture funding, which is reflected in other assets in the
accompanying consolidated balance sheets, net of operating losses.
On September 29, 2000, Cadence entered into two syndicated senior unsecured
credit facilities that allow Cadence to borrow up to $350 million, referred to
as the 2000 Facilities. The 2000 Facilities replace a prior $355 million
revolving credit facility consisting of a $177.5 million two-year revolving
credit facility, which was terminated on September 27, 2000, and a $177.5
million 364-day revolving credit facility, which was terminated immediately
prior to consummation of the 2000 Facilities. One of the new 2000 Facilities is
a $100 million three-year revolving credit facility, referred to as the
Three-Year Facility. The other new facility is a $250 million 364-day revolving
credit facility convertible into a two-year term loan, referred to as the
364-Day Facility. The Three-Year Facility terminates on September 29, 2003. The
364-Day Facility will terminate on September 28, 2001, at which time the 364-Day
Facility may be converted to a two-year term loan with a maturity date of
September 29, 2003, or, at the request of Cadence and with the consent of
members of the bank group that wish to do so, the termination date of the
364-Day Facility may be extended for one additional 364-day period with respect
to the portion of the 364-Day Facility that a consenting bank holds. For both
the 2000 Facilities, Cadence has the option to pay interest based on LIBOR plus
a spread of between 1.25% and 1.50%, based on a pricing grid tied to a financial
covenant, or the higher of the (i) Federal Funds Rate plus 0.50% and (ii) prime
rate. As a result, Cadence's interest expenses associated with this borrowing
will vary with market rates. In addition, commitment fees are payable on the
unused portion of the Three-Year Facility at rates between 0.25% and 0.34% based
on a pricing grid tied to a financial covenant and on the unused portion of the
364-Day Facility at a fixed rate of 0.20%. Cadence may not borrow under the
364-Day Facility at any time that any portion of the Three-Year Facility remains
unused. The 2000 Facilities contain certain financial and other covenants. As of
December 30, 2000 Cadence had no outstanding borrowings under these credit
facilities.
Cadence anticipates that current cash and short-term investment balances,
cash flow from operations, and the remaining amounts available under the 2000
Facilities will be sufficient to meet its working capital and capital
requirements on a short-and long-term basis.
44
45
NEW ACCOUNTING STANDARDS
In September 2000, the Emerging Issues Task Force, or EITF, published their
consensus on EITF Issue No. 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock,"
which was taken up to address implementation of the EITF's March 2000 final
consensus of EITF Issue No. 00-7, "Application of EITF Issue No. 96-13 to Equity
Derivative Instruments That Contain Certain Provisions That Require Net Cash
Settlement If Certain Events Outside the Control of the Issuer Occur." The final
consensus in Issue 00-7 generally stated that equity derivative contracts that
contain provisions that implicitly or explicitly require net cash settlement
outside of the control of the company must be treated as assets and liabilities
and carried at fair value with changes in fair value recognized in earnings
rather than equity instruments carried at original cost and reported as part of
permanent equity. This interpretation becomes effective June 30, 2001 and is not
expected to have a material effect on Cadence's consolidated financial position,
results of operations, or cash flows.
In September 2000, the FASB issued Statement of Financial Accounting
Standards, or SFAS, No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." SFAS No. 140 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities. It requires a company, after a
transfer of financial assets, to recognize the financial and servicing assets it
controls and the liabilities it has incurred, derecognize financial assets when
control has been surrendered, and derecognize liabilities when extinguished.
This statement is effective for transfer and servicing of financial assets and
extinguishments after March 31, 2001, as well as for disclosures relating to
securitization transactions for fiscal years ending after December 15, 2000. The
adoption of this statement is not expected to have a material effect on
Cadence's consolidated financial position, results of operations, or cash flows.
In March 2000, the Financial Accounting Standards Board, or FASB, issued
interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation", an interpretation of Accounting Principles Board, or APB, Opinion
No. 25. This interpretation provides guidance regarding the application of APB
Opinion No. 25 to stock compensation involving employees. This interpretation
was effective July 1, 2000 and did not have a material effect on Cadence's
consolidated financial position, results of operations, or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin, No. 101, "Revenue Recognition in Financial Statements," or
SAB 101, which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements. Cadence adopted SAB 101 in the
fourth quarter of its fiscal 2000. The adoption of this statement did not have a
material effect on Cadence's consolidated financial position, results of
operations, or cash flows.
In June 1998, the FASB issued Statement of Financial Accounting Standards,
or 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. In June 1999, SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133," was issued. The statement defers the effective date of SFAS
No. 133 until the first quarter of fiscal 2001. The adoption of this statement
is not expected to have a material effect on Cadence's consolidated financial
position, results of operations, or cash flows.
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."
45
46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by Item 8 are submitted as a separate
section of this Annual Report on Form 10-K. See Item 14.
SUMMARY QUARTERLY DATA -- UNAUDITED
2000 1999
----------------------------------------- -----------------------------------------
4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenue............... $390,914 $332,461 $298,682 $257,493 $268,022 $225,897 $264,193 $335,191
Cost of revenue....... $101,072 $ 96,105 $ 88,012 $ 83,668 $ 82,734 $ 81,577 $ 81,838 $ 78,694
Amortization of
acquired
intangibles......... $ 20,321 $ 20,648 $ 19,868 $ 19,666 $ 19,385 $ 16,833 $ 12,856 $ 12,714
Gross margin.......... $269,521 $215,708 $190,802 $154,159 $165,903 $127,487 $169,499 $243,783
Net income (loss)..... $ 42,489 $ 13,671 $ 5,626 $(11,809) $(22,484) $(41,446) $ (3,007) $ 52,862
Net income (loss) per
share -- diluted.... $ 0.16 $ 0.05 $ 0.02 $ (0.05) $ (0.09) $ (0.17) $ (0.01) $ 0.20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
46
47
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 2001 annual stockholders' meeting to be held on May 16, 2001.
The executive officers of Cadence are listed at the end of Part I of this
Annual Report on Form 10-K.
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 2001 annual stockholders' meeting to be held on May 16,
2001.
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 2001 annual
stockholders' meeting to be held on May 16, 2001.
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 2001 annual stockholders' meeting to be held on May 16, 2001.
47
48
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
PAGE
----
- Report of Independent Public Accountants.................. 54
- Report of Independent Accountants, related to Quickturn
Design Systems, Inc., as of and for the fiscal year ended
December 31, 1998......................................... 55
- Consolidated Balance Sheets at December 30, 2000 and
January 1, 2000........................................... 56
- Consolidated Statements of Operations for the three fiscal
years ended
December 30, 2000......................................... 57
- Consolidated Statements of Stockholders' Equity for the
three fiscal years ended December 30, 2000................ 58
- Consolidated Statements of Cash Flows for the three fiscal
years ended
December 30, 2000......................................... 59
- Notes to Consolidated Financial Statements................ 60
(a) 2. Financial Statement Schedules:
II. Valuation and Qualifying Accounts and Reserves.......... 92
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 with this Annual Report on Form 10-K:
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 8-K filed on 12/10/98, as amended
by Forms 8-K/A filed on 12/22/98, 1/6/99, and 5/20/99. 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.
2.02 Master Separation Agreement, dated as of July 14, 2000 by
and among the registrant, Cadence Holdings, Inc. and Tality
Corporation (Incorporated by reference to Exhibit 2.01 from
the Registrant's Form 10-Q for the second quarter ended July
1, 2000 (the 2000 Second Quarter Form 10-Q)).
2.03 Amended and Restated Agreement of Limited Partnership of
Tality, LP dated October 4, 2000, between Tality Corporation
and Cadence Holdings, Inc (Incorporated by reference to
Exhibit 2.01 from the Registrant's Form 10-Q for the third
quarter ended September 30, 2000 (the 2000 Third Quarter
Form 10-Q)).
2.04 Amended and Restated Master Separation Agreement dated as of
October 4, 2000 by and among Tality Corporation, the
Registrant, Cadence Holdings, Inc. and Tality LP
(Incorporated by reference to Exhibit 2.02 from the 2000
Third Quarter Form 10-Q).
2.05 General Assignment and Assumption Agreement dated as of
October 4, 2000 by and among Tality Corporation, the
Registrant, Cadence Holdings, Inc. and Tality, LP
(Incorporated by reference to Exhibit 2.03 from the 2000
Third Quarter Form 10-Q).
48
49
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
2.06 Master Intellectual Property Ownership and License Agreement
dated as of October 4, 2000 by and among Tality Corporation,
the Registrant, Cadence Holdings, Inc. and Tality, LP
(Incorporated by reference to Exhibit 2.04 from the 2000
Third Quarter Form 10-Q).
2.07 Employee Matters Agreement dated as of October 4, 2000 by
and among Tality Corporation, the Registrant, Cadence
Holdings, Inc. and Tality, LP (Incorporated by reference to
Exhibit 2.05 from the 2000 Third Quarter Form 10-Q).
2.08 Master Corporate Services Agreement dated as of October 4,
2000 by and among Tality Corporation, the Registrant,
Cadence Holdings, Inc. and Tality, LP (Incorporated by
reference to Exhibit 2.06 from the 2000 Third Quarter Form
10-Q).
2.09 Real Estate Matters Agreement dated as of October 4, 2000 by
and among Tality Corporation, the Registrant, Cadence
Holdings, Inc. and Tality, LP (Incorporated by reference to
Exhibit 2.07 from the 2000 Third Quarter Form 10-Q).
2.10 Master Confidentiality Agreement dated as of October 4, 2000
by and among Tality Corporation, the Registrant, Cadence
Holdings, Inc. and Tality, LP (Incorporated by reference to
Exhibit 2.08 from the 2000 Third Quarter Form 10-Q).
2.11 Indemnification and Insurance Matters Agreement dated as of
October 4, 2000 by and among Tality Corporation, the
Registrant, Cadence Holdings, Inc. and Tality, LP
(Incorporated by reference to Exhibit 2.09 from the 2000
Third Quarter Form 10-Q).
2.12 Asset Purchase Agreement dated as of October 4, 2000 by and
among the Registrant, Cadence Design System (Canada) Limited
and Tality Canada Corporation (Incorporated by reference to
Exhibit 2.10 from the 2000 Third Quarter Form 10-Q).
2.13 Asset Purchase Agreement dated as of October 3, 2000 by and
among Symbionics Limited, the Registrant and Cadence Design
Systems Limited (Incorporated by reference to Exhibit 2.11
from the 2000 Third Quarter Form 10-Q).
2.14 Fixed Term License Agreement dated as of October 4, 2000
between the Registrant and Tality, LP (Incorporated by
reference to Exhibit 2.12 from the 2000 Third Quarter Form
10-Q).
2.15 Joint Technology Development and Support Agreement dated as
of October 4, 2000 by and among Tality Corporation, the
Registrant, Cadence Holdings, Inc. and Tality, LP
(Incorporated by reference to Exhibit 2.13 from the 2000
Third Quarter Form 10-Q).
2.16 Joint Sales Agreement dated as of October 4, 2000 by and
among Tality Corporation, the Registrant, Cadence Holdings,
Inc. and Tality, LP (Incorporated by reference to Exhibit
2.14 from the 2000 Third Quarter Form 10-Q).
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) 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 amended on February
1, 2000, 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) filed on June 12, 1989 (the 1989 Form 8-K) and
amended by Exhibit 4.01 to this Form 10-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 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 Registrant's Form 10-Q for the
quarter ended July 4, 1998 (the 1998 Second Quarter Form
10-Q)).
49
50
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
(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 and
Exhibit 3.01 to the Registrant's Form 10-Q for the quarter
ended April 3, 1999).
4.01 Specimen Certificate of the Registrant's Common Stock
(Incorporated by reference to Exhibit 4.01 to the
Registrant's Form S-4 Registration Statement (No. 33-43400)
filed October 17, 1991).
4.02 Amended and Restated Rights Agreement, dated as of February
1, 2000, between the Registrant and ChaseMellon Shareholder
Services, L.L.C. 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 4.02 to the
Registrant's 2000 Annual Report on Form 10-K).
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, 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 (previously the
Chief Executive Officer Bonus Plan for 1996), as amended
January 1, 1998 (Incorporated by reference to the 1998
Preliminary Proxy Statement).
10.08 The Registrant's Deferred Compensation Plan for 1994
(Incorporated by reference to Exhibit 10.09 to the 1994 Form
10-K).
10.09 The Registrant's 1996 Deferred Compensation Venture
Investment Plan (Incorporated by reference to Exhibit 10.11
to the 1995 Form 10-K).
10.10 The 1993 Non-Statutory Stock Option Plan (Incorporated by
reference to Exhibit 4.05 to the 1994 Form S-8).
10.11 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)).
10.12 Amendment, dated May 3, 1996 to Registrant's 1993
Non-Statutory Stock Option Plan (Incorporated by reference
to Exhibit 10.30 to the 1996 First Quarter Form 10-Q).
50
51
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
10.13 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).
10.14 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).
10.15 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) filed on November 27,
1996).
10.16 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)).
10.17 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).
10.18 Form of Executive Severance Agreement (Incorporated by
reference to Exhibit 10.43 to the 1997 Form 10-K).
10.19 Revolving Credit Agreement, dated September 30, 1998, by and
between ABN-AMRO 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)).
10.20 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).
10.21 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 originally filed on September 30, 1998).
10.22 Consulting Agreement, dated March 8, 1999, between the
Registrant and George M. Scalise (Incorporated by reference
to Exhibit 10.36 to the 1999 Form 10-K).
10.23 Executive Termination and Release Agreement, dated May 24,
1999, between Cadence and John R. Harding (Incorporated by
reference to Exhibit 10.48 from the Registrant's Form 10-Q
for the second quarter ended July 3, 1999 (the 1999 Second
Quarter Form 10-Q)).
10.24 The Registrant's 1995 Directors Stock Option Plan, as
amended May 5, 1999 (Incorporated by reference to Exhibit
10.49 from the 1999 Second Quarter Form 10-Q).
10.25 The Registrant's 1990 Employee Stock Purchase Plan, as
amended May 5, 1999 (Incorporated by reference to Exhibit
10.50 from the 1999 Second Quarter Form 10-Q).
10.26 Employment Agreement, dated September 16, 1999, between the
Registrant and H. Raymond Bingham (Incorporated by reference
to Exhibit 10.51 from the Registrant's Form 10-Q for the
third quarter ended October 2, 1999 (the 1999 Third Quarter
Form 10-Q)).
10.27 Consulting Agreement, dated July 1999, between the
Registrant and Alberto Sangiovanni-Vincentelli (Incorporated
by reference to Exhibit 10.52 from the 1999 Third Quarter
Form 10-Q).
10.28 Design Acceleration, Inc. 1994 Stock Option Plan
(Incorporated by reference to Exhibit 99 to the Registrant's
Form S-8 Registration Statement (No. 333-71717) originally
filed on February 3, 1999).
10.29 Quickturn Design Systems, Inc. 1988 Stock Option Plan, as
amended, (Incorporated by reference to Exhibit 99.1 to the
Registrant's Form S-8 Registration Statement (No. 333-69589)
filed on June 7, 1999).
51
52
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
10.30 Pi Design Systems, Inc. 1990 Stock Option Plan, as amended,
(Incorporated by reference to Exhibit 99.2 to the
Registrant's Form S-8 Registration Statement (No. 333-69589)
filed on June 7, 1999).
10.31 Quickturn Design Systems, Inc. 1992 Key Executive Stock
Option Plan, as amended, (Incorporated by reference to
Exhibit 99.3 to the Registrant's Form S-8 Registration
Statement (No. 333-69589) filed on June 7, 1999).
10.32 Quickturn Design Systems, Inc. 1993 Employee Qualified Stock
Purchase Plan, as amended, (Incorporated by reference to
Exhibit 99.4 to the Registrant's Form S-8 Registration
Statement (No. 333-69589) filed on June 7, 1999).
10.33 Quickturn Design Systems, Inc. 1994 Outside Director Stock
Option Plan (Incorporated by reference to Exhibit 99.7 to
the Registrant's Form S-8 Registration Statement (No.
333-69589) filed on June 7, 1999).
10.34 Quickturn Design Systems, Inc. 1996 Supplemental Stock Plan,
as amended, (Incorporated by reference to Exhibit 99.5 to
the Registrant's Form S-8 Registration Statement (No.
333-69589) filed on June 7, 1999).
10.35 Quickturn Design Systems, Inc. 1997 Stock Option Plan, as
amended, (Incorporated by reference to Exhibit 99.6 to the
Registrant's Form S-8 Registration Statement (No. 333-69589)
filed on June 7, 1999).
10.36 SpeedSim, Inc. 1995 Incentive and Nonqualified Stock Option
Plan (Incorporated by reference to Exhibit 99.8 to the
Registrant's Form S-8 Registration Statement (No. 333-69589)
filed on June 7, 1999).
10.37 OrCAD, Inc. 1991 Non-Qualified Stock Option Plan
(Incorporated by reference to Exhibit 99.1 to the
Registrant's Form S-8 Registration Statement (No. 333-85591)
filed on August 19, 1999).
10.38 OrCAD, Inc. 1995 Stock Option Plan (Incorporated by
reference to Exhibit 99.2 to the Registrant's Form S-8
Registration Statement (No. 333-85591) filed on August 19,
1999).
10.39 OrCAD, Inc. Amended 1995 Stock Incentive Plan (Incorporated
by reference to Exhibit 99.3 to the Registrant's Form S-8
Registration Statement (No. 333-85591) filed on August 19,
1999).
10.40 Form of Executive Retention Agreement between the Registrant
and Key Executives of the Registrant (Incorporated by
reference to Exhibit 10.57 to the 1999 Form 10-K).
10.41 Diablo Research Company LLC 1997 Stock Option Plan
(Incorporated by reference to Exhibit 99.1 to the
Registrant's Form S-8 Registration Statement (No. 333-93609)
filed on December 24, 1999).
10.42 Diablo Research Company LLC 1999 Stock Option Plan
(Incorporated by reference to Exhibit 99.2 to the
Registrant's Form S-8 Registration Statement (No. 333-93609)
filed on December 24, 1999).
10.43 The Registrant's 2000 Non-Statutory Equity Incentive Plan
(Incorporated by reference to Exhibit 99.1 to the
Registrant's Form S-8 Registration Statement filed on March
27, 2000).
10.44 Form of Indemnity Agreement between Cadence Design Systems,
Inc. and its directors and executive officers (Incorporated
by reference to Exhibit 10.01 from the 2000 Second Quarter
Form 10-Q).
10.45 Credit Agreement, dated as of September 29, 2000, by and
among the Registrant and ABN AMRO Bank N.V., Bank One, N.A.,
KeyBank National Association and UBS AG, Stamford Branch
(Incorporated by reference to Exhibit 10.01 from the 2000
Third Quarter Form 10-Q).
10.46 364 Day Credit Agreement, dated as of September 29, 2000, by
and among the Registrant and ABN AMRO Bank N.V., Bank One,
N.A., KeyBank National Association and UBS AG, Stamford
Branch (Incorporated by reference to Exhibit 10.02 from the
2000 Third Quarter Form 10-Q).
10.47 The Registrant's 1997 Stock Option Plan, as amended on
November 1, 2000 (Incorporated by reference to Exhibit 10.03
from the 2000 Third Quarter Form 10-Q).
52
53
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
10.48 The Registrant's 2000 Non-Statutory Equity Incentive Plan,
as amended (Incorporated by reference to the Registrant's
Form S-8 Registration Statement filed on November 13, 2000).
10.49 Employment Agreement between Tality Corporation and Robert
P. Wiederhold dated as of July 14, 2000 (Incorporated by
reference to Exhibit 10.05 from the 2000 Third Quarter Form
10-Q).
10.50 Tality Corporation 2000 Equity Incentive Plan, as amended
(Incorporated by reference to Exhibit 10.06 from the 2000
Third Quarter Form 10-Q).
10.51 Tality Corporation Directors Stock Option Plan (Incorporated
by reference to Exhibit 10.07 from the 2000 Third Quarter
Form 10-Q).
10.52 Employment Agreement between Ronald R. Barris and the
Registrant, dated July 1, 2000.
10.53 Description of the Registrant's Stock Purchase Program.
10.54 Form of Promissory Note and Pledge Agreement for employees
of the Registrant delivered in connection with purchases of
shares of Tality Corporation restricted common stock.
10.55 Form of Promissory Note between Ronald R. Barris and the
Registrant, dated September 18, 2000.
21.01 Subsidiaries of the Registrant.
23.01 Consent of Arthur Andersen LLP.
23.02 Consent of PricewaterhouseCoopers LLP.
(b) Reports on Form 8-K:
On March 15, 2000, the Registrant filed a Current Report on Form 8-K
reporting the date of the Registrant's 2000 Annual Meeting of Stockholders and
the record date for determining stockholders entitled to a vote at the annual
meeting.
Cadence filed a Current Report on Form 8-K dated July 17, 2000 attaching
Cadence's press release reporting the separation and initial public offering of
Tality.
Cadence filed a Current Report on Form 8-K dated October 9, 2000 attaching
Cadence's press release announcing the delay of the initial public offering of
Tality.
(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.
53
54
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Cadence Design Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Cadence
Design Systems, Inc. (a Delaware corporation) and subsidiaries as of December
30, 2000 and January 1, 2000, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three fiscal
years in the period ended December 30, 2000. 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
Quickturn Design Systems, Inc., for the fiscal year ended December 31, 1998, a
company acquired during 1999 in a transaction accounted for as a pooling of
interests, as discussed in Acquisitions in the Notes to Consolidated Financial
Statements. Such statements are included in the consolidated financial
statements of Cadence Design Systems, Inc. and reflect total revenues of eight
percent of the related consolidated total for the fiscal year ended January 2,
1999. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to amounts included for
Quickturn Design Systems, Inc., is based solely on the report of the other
auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Cadence Design Systems, Inc. and
subsidiaries as of December 30, 2000 and January 1, 2000, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended December 30, 2000, in conformity with accounting principles
generally accepted in the United States.
Our audits were 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 consolidated financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic consolidated 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 consolidated financial statements taken
as a whole.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
San Jose, California
January 19, 2001
(Except for the matter
discussed in Subsequent
Event, as to which the
date is February 28, 2001)
54
55
REPORT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Quickturn Design Systems, Inc.:
In our opinion, the consolidated statements of operations, comprehensive
loss, stockholders' equity and cash flows of Quickturn Design Systems, Inc. and
its subsidiaries (not presented separately herein) present fairly, in all
material respects, the results of their operations and their cash flows for the
year ended December 31, 1998, in conformity with accounting principles generally
accepted in the United States of America. 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
of these statements in accordance with auditing standards generally accepted in
the United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. We have not audited the
consolidated financial statements of Quickturn Design Systems, Inc. for any
period subsequent to December 31, 1998.
/s/ PricewaterhouseCoopers LLP
San Jose, California
January 15, 1999
55
56
CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 30, 2000 AND JANUARY 1, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
2000 1999
---------- ----------
Current Assets:
Cash and cash equivalents................................. $ 85,220 $ 111,401
Short-term investments.................................... 51,749 7,357
Receivables, net.......................................... 289,468 248,034
Inventories, net.......................................... 20,149 19,872
Prepaid expenses and other................................ 110,262 93,248
---------- ----------
Total current assets.............................. 556,848 479,912
Property, plant and equipment, net.......................... 368,879 330,409
Software development costs, net............................. 10,738 10,692
Acquired intangibles, net................................... 326,518 402,154
Installment contract receivables............................ 38,420 84,160
Other assets................................................ 175,918 152,332
---------- ----------
$1,477,321 $1,459,659
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable and current portion of capital leases....... $ 2,212 $ 3,924
Accounts payable and accrued liabilities.................. 273,594 265,518
Deferred revenue.......................................... 215,768 152,116
---------- ----------
Total current liabilities......................... 491,574 421,558
---------- ----------
Long-Term Liabilities:
Long-term debt and capital leases......................... 3,298 25,024
Minority interest......................................... 11,612 41
Other long-term liabilities............................... 61,372 26,887
---------- ----------
Total long-term liabilities....................... 76,282 51,952
---------- ----------
Stockholders' Equity:
Preferred stock -- $0.01 par value; authorized 400 shares
in 2000 and 1999, none issued or outstanding........... -- --
Common stock and capital in excess of $0.01 par value
Authorized: 600,000 shares
Issued: 255,637 shares in 2000 and 253,768 shares in
1999
Outstanding: 243,662 shares in 2000 and 243,328 shares
in 1999............................................... 847,099 858,189
Treasury stock at cost: 11,975 shares in 2000 and 10,440
shares in 1999......................................... (256,260) (240,748)
Deferred compensation..................................... (60,978) (229)
Retained earnings......................................... 394,224 344,247
Accumulated other comprehensive income (loss)............. (14,620) 24,690
---------- ----------
Total stockholders' equity........................ 909,465 986,149
---------- ----------
$1,477,321 $1,459,659
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
56
57
CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE FISCAL YEARS ENDED DECEMBER 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999 1998
---------- ---------- ----------
Revenue:
Product.................................................. $ 627,429 $ 505,459 $ 760,441
Services................................................. 335,967 294,916 265,211
Maintenance.............................................. 316,154 292,928 294,528
---------- ---------- ----------
Total revenue.................................... 1,279,550 1,093,303 1,320,180
---------- ---------- ----------
Costs and Expenses:
Cost of product.......................................... 89,937 79,504 77,513
Cost of services......................................... 215,605 191,760 188,793
Cost of maintenance...................................... 63,315 53,579 52,386
Amortization of acquired intangibles..................... 80,503 61,788 18,472
Marketing and sales...................................... 390,139 354,205 340,295
Research and development................................. 263,947 219,181 202,810
General and administrative............................... 94,478 86,735 86,828
Amortization of deferred stock compensation(1)........... 11,390 -- --
Unusual items............................................ 6,821 59,301 263,595
---------- ---------- ----------
Total costs and expenses......................... 1,216,135 1,106,053 1,230,692
---------- ---------- ----------
Income (loss) from operations.............................. 63,415 (12,750) 89,488
Other income, net........................................ 4,581 1,370 10,558
---------- ---------- ----------
Income (loss) before provision for income taxes............ 67,996 (11,380) 100,046
Provision for income taxes............................... 18,019 2,695 74,922
---------- ---------- ----------
Net income (loss).......................................... $ 49,977 $ (14,075) $ 25,124
========== ========== ==========
Basic Net Income (Loss) Per Share.......................... $ 0.20 $ (0.06) $ 0.11
========== ========== ==========
Diluted Net Income (Loss) Per Share........................ $ 0.19 $ (0.06) $ 0.10
========== ========== ==========
Weighted average common shares outstanding................. 244,565 242,037 234,605
========== ========== ==========
Weighted average common and potential common shares
outstanding -- assuming dilution......................... 262,696 242,037 257,862
========== ========== ==========
- ---------------
(1) Amortization of deferred stock compensation would be classified as follows:
Cost of services........................................... $ 3,445 $ -- $ --
Marketing and sales........................................ 2,131 -- --
Research and development................................... 498 -- --
General and administrative................................. 5,316 -- --
---------- ---------- ----------
$ 11,390 $ -- $ --
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
57
58
CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE FISCAL YEARS ENDED DECEMBER 30, 2000
(IN THOUSANDS)
COMMON STOCK
---------------------
PAR VALUE ACCUMULATED
AND CAPITAL TREASURY STOCK DEFERRED OTHER
COMPREHENSIVE IN EXCESS ------------------- STOCK RETAINED COMPREHENSIVE
INCOME SHARES OF PAR SHARES AMOUNT COMPENSATION EARNINGS INCOME
------------- ------- ----------- ------- --------- ------------ -------- -------------
BALANCE, JANUARY 3,
1998..................... 236,785 $593,742 (6,739) $ (97,285) $ (573) $333,198 $ (7,719)
Purchase of treasury
stock.................. -- -- (6,479) (172,171) -- -- --
Issuance of common
stock.................. 10,586 85,096 1,804 30,400 -- -- --
Tax benefits from
employee stock
transactions........... -- 109,713 -- -- -- -- --
Treasury stock issued in
connection with
acquisitions........... -- 26,957 1,155 19,639 -- -- --
Treasury stock issued in
connection with
warrants exercised..... -- 322 100 -- -- -- --
Equity adjustments
related to
acquisitions........... -- 2,494 -- -- -- -- --
Amortization of deferred
compensation........... -- -- -- -- 227 -- --
Net income............... $ 25,124 -- -- -- -- -- 25,124 --
Unrealized holding gain
on marketable
securities............. 37 37
Translation loss......... (1,371) -- -- -- -- -- -- (1,371)
-------- ------- -------- ------- --------- -------- -------- --------
$ 23,790
========
BALANCE, JANUARY 2,
1999..................... 247,371 818,324 (10,159) (219,417) (346) 358,322 (9,053)
Purchase of treasury
stock.................. -- (2) (4,585) (115,832) -- -- --
Issuance of common
stock.................. 5,126 (2,549) 3,654 80,466 -- -- --
Issuance of common stock
in connection with
warrants exercised..... 1,271 13,340 -- -- -- -- --
Tax benefits from
employee stock
transactions........... -- 10,305 -- -- -- -- --
Treasury stock issued in
connection with
acquisitions........... -- 2,089 650 14,035 -- -- --
Equity adjustments
related to
acquisitions........... -- 16,682 -- -- -- -- --
Amortization of deferred
compensation........... -- -- -- -- 117 -- --
Net loss................. $(14,075) -- -- -- -- -- (14,075) --
Unrealized holding gain
on marketable
securities............. 36,249 -- -- -- -- -- -- 36,249
Translation loss......... (2,506) -- -- -- -- -- -- (2,506)
-------- ------- -------- ------- --------- -------- -------- --------
$ 19,668
========
BALANCE, JANUARY 1,
2000..................... 253,768 858,189 (10,440) (240,748) (229) 344,247 24,690
Purchase of treasury
stock.................. -- -- (11,737) (234,418) -- -- --
Issuance of common
stock.................. 1,869 (27,893) 10,202 218,906 -- --
Tax benefits from
employee stock
transactions........... -- 11,470 -- -- -- -- --
Equity adjustments
related to
acquisitions........... -- 5,333 -- -- -- -- --
Deferred stock
compensation........... (72,369)
Amortization of deferred
compensation -- Tality... -- -- -- -- 11,390 -- --
Amortization of deferred
compensation -- other... 230
Net income............... $ 49,977 -- -- -- -- -- 49,977 --
Unrealized holding loss
on marketable
securities............. (34,567) -- -- -- -- -- -- (34,567)
Translation loss......... (4,743) -- -- -- -- -- -- (4,743)
-------- ------- -------- ------- --------- -------- -------- --------
$ 10,667
========
BALANCE, DECEMBER 30,
2000..................... 255,637 $847,099 (11,975) $(256,260) $(60,978) $394,224 $(14,620)
======= ======== ======= ========= ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
58
59
CADENCE DESIGN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE FISCAL YEARS ENDED DECEMBER 30, 2000
(IN THOUSANDS)
2000 1999 1998
--------- --------- ---------
Cash and Cash Equivalents at Beginning of Year.............. $ 111,401 $ 209,074 $ 221,030
--------- --------- ---------
Cash Flows From Operating Activities:
Net income (loss)......................................... 49,977 (14,075) 25,124
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 206,810 163,896 109,105
Asset impairment and write-off of equipment and
non-current assets.................................... -- 20,973 357
Net investment gain on sale, equity loss, and
write-downs........................................... (12,404) 5,376 6,324
Write-off of acquired in-process technology............. -- 20,700 194,100
Minority interest expense (income)...................... (638) (125) 256
Provisions for losses on trade accounts receivable...... 2,306 9,070 7,687
Changes in current assets and liabilities, net of effect
of acquired and disposed businesses:
Receivables........................................... (267,315) (153,662) (191,641)
Inventories........................................... (5,739) (9,969) (2,439)
Prepaid expenses and other............................ (16,308) 12,462 21,410
Deferred income taxes................................. (29,039) (1,431) 24,725
Installment contract receivables...................... 89,263 57,008 (127,284)
Accounts payable and accrued liabilities.............. 15,580 (22,021) 171,686
Tax benefit on stock option exercises................. 11,470 10,305 109,713
Deferred revenue...................................... 63,652 37,694 (10,925)
Other long-term liabilities........................... 34,485 (8,979) (111,045)
--------- --------- ---------
Net cash provided by operating activities.......... 142,100 127,222 227,153
--------- --------- ---------
Cash Flows From Investing Activities:
Maturities of short-term
investments -- held-to-maturity......................... 998 25,990 60,367
Purchases of short-term investments -- held-to-maturity... -- (43) (35,872)
Maturities of short-term
investments -- available-for-sale....................... 6,309 26,349 564,136
Purchases of short-term
investments -- available-for-sale....................... (49,636) (15) (513,241)
Purchases of property, plant, and equipment............... (119,471) (110,444) (121,395)
Capitalization of software development costs.............. (28,435) (25,684) (21,695)
Increase in acquired intangibles and other assets......... (37,578) (28,490) (82,856)
Investment in venture capital partnership and equity
investment.............................................. 6,321 (9,144) (13,037)
Cash effect of business acquisitions and dispositions..... (4,503) (133,055) (352,326)
Sale of put warrants...................................... 42,440 3,609 14,812
Purchase of call options.................................. (42,440) (3,609) (14,812)
--------- --------- ---------
Net cash used for investing activities............. (225,995) (254,536) (515,919)
--------- --------- ---------
Cash Flows From Financing Activities:
Proceeds from long-term notes payable..................... 60,000 267,069 150,000
Principal payments on long-term notes payable and capital
leases.................................................. (83,704) (378,320) (17,757)
Proceeds from minority interest........................... 1,375 -- --
Proceeds from issuance of common stock.................... 117,329 91,244 104,763
Purchases of treasury stock............................... (232,958) (115,832) (170,830)
Proceeds from transfer of financial assets in exchange for
cash.................................................... 201,164 167,680 211,919
--------- --------- ---------
Net cash provided by financing activities.......... 63,206 31,841 278,095
--------- --------- ---------
Effect of exchange rate changes on cash..................... (5,492) (2,200) (1,285)
--------- --------- ---------
Decrease in cash and cash equivalents....................... (26,181) (97,673) (11,956)
--------- --------- ---------
Cash and Cash Equivalents at End of Year.................... $ 85,220 $ 111,401 $ 209,074
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
59
60
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 2000
CADENCE
Cadence provides comprehensive software and other technology and offers
design and methodology services for the product development requirements of the
world's leading electronics companies. Cadence licenses its leading-edge
electronic design automation, or EDA, software and hardware technology and
provides a range of services to companies throughout the world to help its
customers optimize their product development processes. Cadence is a supplier of
end-to-end products and services, 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.
On July 17, 2000, Cadence announced its plan to separate its electronics
design services group into a new company named Tality Corporation, or Tality.
Tality's separation from Cadence was substantially completed on October 4, 2000,
and accordingly the electronic design services business now operates as a
majority-owned subsidiary of Cadence. Tality filed a registration statement with
the Securities and Exchange Commission for Tality's initial public offering, or
IPO. On October 9, 2000, Cadence announced that the postponement of Tality's IPO
due to unfavorable market conditions. Therefore, the financial statements and
financial information in this Annual Report on Form 10-K do not give effect to
the IPO.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Cadence and
its subsidiaries after elimination of intercompany accounts and transactions.
Investments in companies in which ownership interests range from 20% to 50% are
accounted for using the equity method of accounting. Cadence has one investment
with ownership interest less than 20% which is accounted for using the equity
method of accounting due to the fact Cadence has significant influence on this
investment.
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 2000 presentation.
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 and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue 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
(loss) 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.
60
61
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
Cadence enters into foreign currency forward exchange contracts and
purchases foreign currency put options with financial institutions primarily to
protect against currency exchange risks associated with existing assets and
liabilities and probable but not firmly committed transactions, respectively.
Forward contracts are not accounted for as hedges and, therefore, the unrealized
gains and losses are recognized in other income, net, in the accompanying
consolidated statements of operations, in advance of the actual foreign currency
cash flows with the fair value of these forward contracts being recorded in
accrued liabilities.
Cadence purchases put options to hedge the currency exchange risks
associated with probable but not firmly committed transactions. Probable but not
firmly committed transactions consist of revenue from Cadence's products and
maintenance contracts in a currency other than the functional currency. These
transactions are made through Cadence's subsidiaries in Ireland and Japan. The
premium costs of the put options are recorded in prepaid expenses and other
current assets while the gains and losses are deferred and recognized in income
in the same period as the hedged transaction. Gains and losses on accounting
hedges realized before the settlement date of the related hedged transaction are
also generally deferred and recognized in income in the same period as the
hedged transaction. Cadence does not use forward contracts and put options for
trading purposes. 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 forward contracts and put options mature.
REVENUE RECOGNITION
Product revenue consists principally of revenue earned under 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. If
vendor-specific objective evidence does not exist to allocate the total fee to
all delivered and undelivered elements of the arrangement, revenue is deferred
until such evidence does exist for the undelivered elements, or until all
elements are delivered, whichever is earlier. Revenue associated with software
products under subscription licenses is recognized ratably over the license
period because the agreements allow customers to exchange licensed products for
unspecified future technology. 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. Emulation hardware product
revenue is recognized upon installation.
Services revenue consists primarily of revenue received for performing
methodology and design services. Fixed-price methodology 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 methodology service engagements of approximately $10,000 in
size, revenue is recognized when the work is completed.
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 (LOSS)
Comprehensive income (loss) includes foreign currency translation gains and
losses and other unrealized gains and losses that have been previously excluded
from net income (loss) and reflected instead in equity. Cadence has reported the
components of comprehensive income (loss) on its consolidated statements of
stockholders' equity.
61
62
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 three months or less to be cash equivalents.
Investments with original maturities greater than three months and less than one
year are classified as short-term investments. Investments with original
maturities greater than one year are classified as long-term investments.
Management determines the appropriate classification of its investments at
the time of purchase. Securities classified as held-to-maturity are stated at
amortized cost based on Cadence's positive intent to hold such securities until
maturity. The cost of securities sold is determined using the specific
identification method when computing realized gains and losses. Securities
classified as available-for-sale are stated at fair value, with the unrealized
gains and losses reported as a component of stockholders' equity until realized.
The amortized cost of debt securities is adjusted for amortization of premiums
and accretion of discounts to maturity. Such amortization and accretion is
included in other income, net.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Cadence's inventories include high technology parts and components for
complex computer systems that emulate the performance and operation of computer
chips and electronic systems. These parts and components may be specialized in
nature or subject to rapid technological obsolescence. While Cadence has
programs to minimize the required inventories on hand and considers
technological obsolescence when estimating required reserves to reduce recorded
amounts to market values, it is reasonably possible that such estimates could
change in the near term.
PROPERTY, PLANT, AND EQUIPMENT
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:
Computer equipment and related software............ 3 - 8 years
Buildings.......................................... 10 - 32 years
Leasehold and building improvements................ Shorter of the lease term
or the estimated useful life
Furniture and fixtures............................. 3 - 5 years
Equipment.......................................... 3 - 5 years
Cadence capitalizes the costs of software developed for internal use in
compliance with Statement of Position 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" and with Emerging Issues Task
Force Issue 00-2 "Accounting for Web Site Development Costs". Capitalization of
software developed for internal use and web site development costs begins at the
application development phase of the project. Amortization of software developed
for internal use and web site development costs begins when the products are
placed in productive use, and is computed on a straight-line basis over the
estimated useful life of the product, generally three years.
Cadence recorded depreciation expense of property, plant, and equipment per
ABP No. 12 for the fiscal years ended December 30, 2000, January 1, 2000, and
January 2, 1999 in the amount of $76.7 million, $68.0 million, and $60.8
million, respectively.
62
63
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SOFTWARE DEVELOPMENT COSTS AND ACQUIRED INTANGIBLES
Cadence capitalizes software development costs in compliance with Statement
of Financial Accounting Standards, or 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.
Cadence recorded amortization expense for software development costs per
SFAS 86 for the fiscal years ended December 30, 2000, January 1, 2000, and
January 2, 1999 in the amount of $28.4 million, $26.6 million, and $23.7
million, respectively.
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 five 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 periodically 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 expected
future undiscounted cash flows (without interest charges) 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, long-term investments,
accounts receivable, forward contracts and put options, and call options
purchased in conjunction with Cadence's stock repurchase programs. Cadence's
investment policy primarily 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 realized and unrealized gains
on
63
64
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
ACCRUED WARRANTY
Cadence provides an accrual for future warranty costs based on the
historical relationship of revenue to warranty costs incurred.
NEW ACCOUNTING STANDARDS
In September 2000, the Emerging Issues Task Force, or EITF, published their
consensus on EITF Issue No. 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock,"
which was taken up to address implementation of the EITF's March 2000 final
consensus of EITF Issue No. 00-7, "Application of EITF Issue No. 96-13 to Equity
Derivative Instruments That Contain Certain Provisions That Require Net Cash
Settlement If Certain Events Outside the Control of the Issuer Occur." The final
consensus in Issue 00-7 generally stated that equity derivative contracts that
contain provisions that implicitly or explicitly require net cash settlement
outside of the control of the company must be treated as assets and liabilities
and carried at fair value with changes in fair value recognized in earnings
rather than equity instruments carried at original cost and reported as part of
permanent equity. This interpretation becomes effective June 30, 2001 and is not
expected to have a material effect on Cadence's consolidated financial position,
results of operations, or cash flows.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No.
140 provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities. It requires a company, after
a transfer of financial assets, to recognize the financial and servicing assets
it controls and the liabilities it has incurred, derecognize financial assets
when control has been surrendered, and derecognize liabilities when
extinguished. This statement is effective for transfer and servicing of
financial assets and extinguishments after March 31, 2001, as well as for
disclosures relating to securitization transactions for fiscal years ending
after December 15, 2000. The adoption of this statement is not expected to have
a material effect on Cadence's consolidated financial position, results of
operations, or cash flows.
In March 2000, the Financial Accounting Standards Board, or FASB, issued
interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation", an interpretation of Accounting Principles Board, or APB, Opinion
No. 25. This interpretation provides guidance regarding the application of APB
Opinion No. 25 to stock compensation involving employees. This interpretation
was effective July 1, 2000 and did not have a material effect on Cadence's
consolidated financial position, results of operations, or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin, No. 101, "Revenue Recognition in Financial Statements," or
SAB 101, which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements. Cadence adopted SAB 101 in the
fourth quarter of its fiscal 2000. The adoption of this statement did not have a
material effect on Cadence's consolidated financial position, results of
operations, or cash flows.
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. In June 1999, SFAS No. 137, "Accounting for
Derivative
64
65
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Statement No. 133," was issued. The statement defers the effective date of SFAS
No. 133 until the first quarter of fiscal 2001. The adoption of this statement
is not expected to have a material effect on Cadence's consolidated financial
position, results of operations, or cash flows.
BALANCE SHEET COMPONENTS
A summary of balance sheet components follows:
2000 1999
--------- ---------
(IN THOUSANDS)
Receivables:
Accounts receivable....................................... $ 284,322 $ 201,951
Installment contract receivables--current................. 47,148 90,671
--------- ---------
Total Receivables...................................... 331,470 292,622
Less: Allowances.......................................... (42,002) (44,588)
--------- ---------
Receivables, net....................................... $ 289,468 $ 248,034
========= =========
Inventories:
Raw materials............................................. $ 17,897 $ 19,033
Work in process........................................... 2,252 839
--------- ---------
Inventories, net....................................... $ 20,149 $ 19,872
========= =========
Prepaid Expenses and Other:
Prepaid expenses and other................................ $ 57,286 $ 61,779
Deferred income taxes..................................... 52,976 31,469
--------- ---------
Prepaid expenses and other, net........................ $ 110,262 $ 93,248
========= =========
Property, Plant, and Equipment:
Computer equipment and related software................... $ 324,678 $ 261,696
Buildings................................................. 97,169 96,735
Land...................................................... 68,544 64,745
Leasehold and building improvements....................... 65,014 61,552
Furniture and fixtures.................................... 53,572 57,488
Equipment................................................. 43,882 43,978
Construction in progress and internally developed
software............................................... 36,760 16,761
--------- ---------
Total cost............................................. 689,619 602,955
Less: Accumulated depreciation and amortization............. (320,740) (272,546)
--------- ---------
Property, plant, and equipment, net.................... $ 368,879 $ 330,409
========= =========
Software Development Costs:
Cost...................................................... $ 63,133 $ 49,298
Less: Accumulated amortization............................ (52,395) (38,606)
--------- ---------
Software development costs, net........................ $ 10,738 $ 10,692
========= =========
Acquired Intangibles:
Goodwill and other intangibles............................ $ 464,712 $ 454,805
Purchased software........................................ 62,876 58,199
Less: Accumulated amortization............................ (201,070) (110,850)
--------- ---------
Acquired intangibles, net.............................. $ 326,518 $ 402,154
========= =========
Accounts Payable and Accrued Liabilities:
Payroll and payroll related accruals...................... $ 148,051 $ 129,174
Other accrued liabilities................................. 90,219 97,902
Accounts payable.......................................... 35,324 38,442
--------- ---------
Accounts payable and accrued liabilities............... $ 273,594 $ 265,518
========= =========
65
66
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FINANCIAL INSTRUMENTS
INVESTMENTS
A summary of Cadence's held-to-maturity and available-for-sale investment
portfolios follows:
2000 1999
------- --------
(IN THOUSANDS)
Held-to-maturity:
Corporate debt securities................................. $ -- $ 998
------- --------
Total held-to-maturity............................ -- 998
------- --------
Available-for-sale:
Time Deposit.............................................. 49,750 --
Money Market Funds........................................ 6,977 40,504
Commercial paper.......................................... 2,151 --
Corporate debt securities................................. 1,999 7,163
Auction rate securities................................... -- 6,000
Repurchase agreements..................................... -- 5,000
U.S. Government notes..................................... -- 997
Foreign debt securities................................... -- 194
------- --------
Total available-for-sale............................... 60,877 59,858
------- --------
Total investment securities....................... 60,877 60,856
Less: Cash equivalents...................................... (9,128) (51,504)
------- --------
Total short-term and long-term investments........ $51,749 $ 9,352
======= ========
All investments outstanding as of December 30, 2000 will mature in fiscal
2001.
Excluding corporate debt securities, the carrying value of cash and cash
equivalents, short-term investments, and long-term investments approximates fair
value (based on quoted market prices) of such investments. Accordingly, the
gross realized and unrealized gains and losses were immaterial for each of the
two years presented. As of December 30, 2000 and January 1, 2000, the unrealized
gain on the corporate debt securities was negligible.
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 fiscal years ended December 30, 2000 and January 1,
2000, Cadence transferred accounts receivable totaling $201.2 million and $167.7
million, respectively, which approximated fair value, to financing institutions
on a non-recourse basis. Transfers of accounts receivable for cash are reported
in Cadence's consolidated statements of cash flows as a financing activity.
66
67
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
The following table shows the notional principal and fair value of
Cadence's derivative financial instruments as of December 30, 2000 and January
1, 2000:
2000 1999
------------------- --------------------
NOTIONAL FAIR NOTIONAL FAIR
PRINCIPAL VALUE PRINCIPAL VALUE
--------- ------ --------- -------
(IN THOUSANDS)
Forward contracts.................................... $35,576 $2,689 $73,135 $(2,530)
Put options.......................................... $ -- $ -- $27,779 $ 323
The estimates of fair value are based on applicable and commonly used
pricing models using prevailing financial market information as of December 30,
2000, and January 1, 2000. As of December 30, 2000 and January 1, 2000, the
credit risk associated with the forward contracts and put options was
negligible. Although the table above reflects the notional principal and fair
value amounts of Cadence's foreign exchange instruments, it does not reflect the
gains or losses associated with the underlying exposures and underlying
transactions. The amounts ultimately realized upon settlement of these financial
instruments, together with the gains and losses on the underlying exposures,
will depend on actual market conditions during the remaining life of the
instruments.
ACQUISITIONS
DIABLO RESEARCH COMPANY LLC
In December 1999, Cadence acquired all of the outstanding stock of Diablo
Research Company LLC for $39.9 million in cash in a transaction accounted for as
a purchase. Diablo was a high-technology engineering services firm with
expertise in wireless communication, global positioning satellite solutions, and
data transfer and home automation markets. In connection with the acquisition,
Cadence added approximately 100 qualified engineers with the requisite education
and experience to service existing and potential clients, develop and introduce
new technology and respond to changing design environments and standards. In
connection with the acquisition, Cadence acquired goodwill of $29.9 million
which is being amortized over five years, and acquired workforce intangibles of
$11 million, which is being amortized over three years
ORCAD, INC.
In August 1999, Cadence acquired OrCAD, Inc., a supplier of computer-aided
engineering and computer-aided design software and services for the printed
circuit board industry, for cash. Cadence acquired all of the outstanding stock
of OrCAD and assumed all outstanding stock options. The purchase price was
$131.4 million and the acquisition was accounted for as a purchase. In
connection with the acquisition, Cadence acquired net intangibles of $94
million. The results of operations of OrCAD 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
OrCAD acquisition are being amortized on a straight-line basis over five years.
Management estimated that $11.8 million of the purchase price for OrCAD
represented acquired in-process technology that had not yet reached
technological feasibility and had 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 had 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 included a factor that took into account the uncertainty
67
68
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
surrounding the successful development of the acquired in-process technology.
The acquired in-process technology became commercially viable in 1999 and 2000.
The value of other intangible assets acquired may become impaired.
Comparative pro forma financial information has not been presented because
the results of operations of Diablo and OrCAD were not material to Cadence's
consolidated financial statements, either individually or in the aggregate.
QUICKTURN DESIGN SYSTEMS, INC.
In May 1999, Cadence completed its merger with Quickturn Design Systems,
Inc. Quickturn designed, manufactured, sold, and supported hardware and software
products that verified the design of computer chips and electronic systems.
Cadence acquired all of the outstanding shares of Quickturn common stock in a
tax-free, stock-for-stock transaction for approximately 24.6 million shares of
Cadence common stock. The acquisition was accounted for as a pooling of
interests. In addition, Cadence assumed all outstanding stock options and
warrants of Quickturn. All prior period consolidated financial statements were
restated as if the merger took place at the beginning of such periods, in
accordance with required pooling of interests accounting and disclosures.
Revenue and net income (loss) of the separate companies for the fiscal year
preceding the acquisition is as follows:
YEAR ENDED
JANUARY 2, 1999
---------------
(IN THOUSANDS)
Revenue:
Cadence, as previously reported............................. $1,216,070
Quickturn................................................... 104,110
----------
Combined.................................................. $1,320,180
==========
Net Income (Loss):
Cadence, as previously reported............................. $ 31,982
Quickturn................................................... (6,858)
----------
Combined.................................................. $ 25,124
==========
DESIGN ACCELERATION, INC.
In January 1999, Cadence acquired Design Acceleration, Inc., or DAI, a
supplier of design verification technology used in system-on-a-chip design.
Cadence acquired all of the outstanding stock of DAI for approximately 0.6
million shares of Cadence common stock and $2.9 million of cash. The total
purchase price was $25.7 million and the acquisition was accounted for as a
purchase. In connection with the acquisition, Cadence acquired net intangibles
of $24.1 million. The results of operations of DAI 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 estimated that $8.9 million of the purchase price for DAI
represented acquired in-process technology that had not yet reached
technological feasibility and had 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 had 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 included a factor that took into account the uncertainty
68
69
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
surrounding the successful development of the purchased in-process technology.
The acquired in-process technology became commercially viable in 2000. The value
of other intangible assets acquired may become impaired. Comparative pro forma
financial information has not been presented because the results of operations
of DAI were not material to Cadence's consolidated financial statements.
AMBIT DESIGN SYSTEMS, INC.
In September 1998, Cadence acquired all of the outstanding stock of Ambit
Design Systems, Inc. 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 the accompanying consolidated financial statements from the date of
acquisition. Intangibles arising from the acquisition are being amortized on a
straight-line basis over seven years.
Management estimated that $106.5 million of the purchase price represented
acquired in-process technology that had not yet reached technological
feasibility and had 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 had 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 included a factor that took into account the uncertainty
surrounding the successful development of the acquired in-process technology.
The acquired in-process technology became commercially viable in 1999 and 2000.
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
period 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 combined company during the specified
period. The pro forma results include the effects of the amortization
69
70
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1999
-----------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenue..................................................... $1,330,996
==========
Net income.................................................. $ 112,772
==========
Net income per common share:
Basic..................................................... $ 0.48
==========
Diluted................................................... $ 0.44
==========
BELL LABS' INTEGRATED CIRCUIT DESIGN AUTOMATION GROUP
In September 1998, Cadence acquired Bell Labs' Integrated Circuit Design
Automation Group of Lucent Technologies Inc., or 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 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 estimated that $30.3 million of the purchase price represented
acquired in-process technology that had not yet reached technological
feasibility and had 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 had 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 included a factor that took into account the uncertainty
surrounding the successful development of the acquired in-process technology.
The acquired in-process technology became commercially viable in 2000. 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., or 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 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 estimated that $28.4 million of the purchase price represented
acquired in-process technology that had not yet reached technological
feasibility and had 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 had 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 included a factor that took into account the uncertainty
surrounding the successful development of the acquired in-process technology. In
the fourth quarter of fiscal
70
71
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1999, Cadence recorded asset impairment charges of $13.3 million. See further
discussion at "Asset Impairment."
SYMBIONICS GROUP LIMITED
In February 1998, Cadence acquired all of the outstanding stock of
Symbionics Group Limited for approximately 1 million shares of Cadence common
stock and $21.3 million of cash. Symbionics provided product development design
services and intellectual property to leading electronics manufacturers in the
wireless communications market. The total purchase price was $56.1 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 consolidated financial statements from the
date of acquisition. In connection with the acquisition, Cadence acquired
goodwill of $15.9 million and acquired intangibles of $11.5 million,
representing assembled workforce, which are being amortized over five years.
Management estimated that $28.5 million of the purchase price represented
acquired in-process technology that had not yet reached technological
feasibility and had 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 had 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 included a factor that took into account the uncertainty
surrounding the successful development of the acquired in-process technology.
The acquired in-process technology became commercially viable in 1999. 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.
CREDIT FACILITY AND LONG-TERM DEBT
On September 29, 2000, Cadence entered into two syndicated senior unsecured
credit facilities that allow Cadence to borrow up to $350 million, referred to
as the 2000 Facilities. The 2000 Facilities replace a prior $355 million
revolving credit facility, referred to below as the 1998 Facility, of which
$177.5 million terminated on September 27, 2000, and a $177.5 million was
terminated immediately prior to closing of the 2000 Facilities. One of the new
2000 Facilities is a $100 million three-year revolving credit facility, referred
to as the Three-Year Facility. The other new facility is a $250 million 364-day
revolving credit facility convertible into a two-year term loan, referred to as
the 364-day Facility. The Three-Year Facility terminates on September 29, 2003.
The 364-Day Facility will terminate on September 28, 2001, at which time the
364-Day Facility may be converted to a two-year term loan with a maturity date
of September 29, 2003, or, at the request of Cadence and with the consent of
members of the bank group that wish to do so, the termination date of the
364-Day Facility may be extended for one additional 364-day period with respect
to the portion of the 364-Day Facility that a consenting bank holds. For both
the 2000 Facilities, Cadence has the option to pay interest based on LIBOR plus
a spread of between 1.25% and 1.50%, based on a pricing grid tied to a financial
covenant, or the higher of the (i) Federal Funds Rate plus 0.50% and (ii) prime
rate. As a result, Cadence's interest expenses associated with this borrowing
will vary with market rates. In addition, commitment fees are payable on the
unused portion of the Three-Year Facility at rates between 0.25% and 0.34% based
on a pricing grid tied to a financial covenant and on the unused portion of the
364-Day Facility at a fixed rate of 0.20%. Cadence may not borrow under the
364-Day Facility at any time that any portion of the Three-Year Facility
71
72
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
remains unused. The 2000 Facilities contain certain financial and other
covenants. As of December 30, 2000, Cadence had no outstanding borrowing under
these credit facilities.
In October 1998, Cadence entered into a senior unsecured credit facility,
referred to as the 1998 Facility, with a syndicate of banks that allowed Cadence
to borrow up to $355 million. As amended in September and November of 1999, the
1998 Facility was divided between a $177.5 million two year revolving credit
facility, referred to as the Two Year Facility, and a $177.5 million 364-day
revolving credit facility convertible into a one year term loan, referred to as
the 364-Day Facility. The Two Year and 364-Day Facilities were both terminated
in September 2000 and were replaced by the new 2000 Facilities. As of January 1,
2000, Cadence had $20 million outstanding under the Two Year Facility at a
weighted average interest rate of 8.11%.
During the year ended December 30, 2000, Cadence repaid all of the $20
million outstanding under the 1998 Facility at January 1, 2000. At December 30,
2000, there were no borrowings outstanding under the 2000 Facilities.
A summary of long-term debt and capital leases follows:
2000 1999
------ -------
(IN THOUSANDS)
Capital lease obligations................................... $5,510 $ 8,948
Revolving credit facility................................... -- 20,000
------ -------
Total.................................................. 5,510 28,948
Less: Current portion....................................... 2,212 3,924
------ -------
Long-term debt and capital leases...................... $3,298 $25,024
====== =======
COMMITMENTS
Equipment and facilities are leased under various capital and operating
leases expiring at various dates through the year 2017. Certain of these leases
contain renewal options. Rental expense was $22.2 million, $25 million, and
$25.1 million for 2000, 1999, and 1998, respectively.
At December 30, 2000, 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:
2001...................................................... $2,458 $ 36,185
2002...................................................... 1,789 27,612
2003...................................................... 1,035 22,673
2004...................................................... 541 17,656
2005...................................................... 76 12,214
Thereafter................................................ -- 68,117
------ --------
Total lease payments................................... 5,899 $184,457
========
Less: Amount representing interest (Average interest rate of
9.43%).................................................... 389
------
Present value of lease payments........................ 5,510
Less: Current portion....................................... 2,212
------
Long-term portion...................................... $3,298
======
The cost of equipment under capital leases included in the consolidated
balance sheets as property, plant, and equipment at December 30, 2000 and
January 1, 2000 was approximately $11.6 million and $14 million,
72
73
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
respectively. Accumulated amortization of the leased equipment at December 30,
2000 and January 1, 2000 was approximately $6.2 million and $5.5 million,
respectively.
CONTINGENCIES
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, mergers and acquisitions,
licensing, contract law, distribution arrangements, and employee relations
matters.
Cadence filed a complaint in the U.S. District Court for the Northern
District of California on December 6, 1995 against Avant! Corporation 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
Joseph B. Costello, 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 Mr. Costello had cooperated with the Santa Clara County, California,
District Attorney and initiated and pursued its complaint against Avant! for
anti-competitive reasons, engaged in wrongful activity in an attempt to
manipulate Avant!'s stock price, and utilized certain pricing policies and other
acts to unfairly compete against Avant! in the marketplace. The second amended
counterclaim also alleges that certain Cadence insiders engaged in illegal
insider trading with respect to Avant!'s stock. Cadence and Mr. Costello believe
that they have 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.
In an order issued on December 19, 1997, as modified on January 26, 1998,
the District Court entered a preliminary injunction barring Avant! from any
further infringement of Cadence's copyrights in DESIGN FRAMEWORKII(R) software,
or selling, licensing or copying such product derived from DESIGN FRAMEWORK II,
including, but not limited to, Avant!'s ArcCell products. 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. On July 30, 1999,
the U.S. Court of Appeals for the Ninth Circuit affirmed 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.
On September 7, 1999, the District Court ruled on the parties' Motions for
Summary Adjudication, and granted in part, and denied in part, each party's
motion regarding the scope of a June 6, 1994 Release Agreement between the
parties. The court held that Cadence's copyright infringement claim against
Avant! is not barred by the release and that Cadence may proceed on that claim.
The court also held that Cadence's trade secret claim based on Avant!'s use of
Cadence's DESIGN FRAMEWORK II source code is barred by the release. The Ninth
Circuit has agreed to hear both parties' appeal from the District Court's order.
The trial date has been vacated pending a decision on the appeal and the outcome
of the criminal case, for which the trial is scheduled to begin in April 2001.
In February 1998, Aptix Corporation and Meta Systems, Inc. filed a lawsuit
against Quickturn Design Systems, Inc. in the U.S. District Court for the
Northern District of California. In this lawsuit, entitled Aptix Corporation and
Meta Systems, Inc. v. Quickturn Design Systems, Civil Action No. C 98-00762 WHA,
Aptix and Meta Systems alleged that Quickturn infringed a U.S. patent owned by
Aptix and licensed to Meta. Quickturn filed a counterclaim requesting the
District Court to declare the Aptix patent invalid in view of the prior art and
unenforceable based on inequitable conduct during the prosecution of the patent.
In June 2000 the District Court entered judgment in favor of Quickturn,
dismissing the complaint and declaring the patent
73
74
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
unenforceable. On September 8, 2000 the Court ordered Aptix to pay $4.2 million
to Quickturn as reimbursement to Quickturn of the attorneys' fees and costs it
incurred in the litigation. Aptix has appealed the District's Court's judgment
and, in the meantime, has agreed to post a $2 million bond to secure the
judgment.
On January 7, 1999, in the suit captioned Mentor Graphics Corporation, et.
al. v. Lobo, et. al., Delaware Chancery Court, New Castle County, Civ. Action
No. 16843-NC ("Mentor v. Lobo"), an amended complaint was filed and served by
Mentor asserting claims against Cadence, Quickturn Design Systems, Inc. and its
Board of Directors for declaratory and injunctive relief for various alleged
breaches of fiduciary duty purportedly owned by Quickturn and its Board of
Directors to Quickturn's shareholders in connection with the merger between
Quickturn and Cadence. Mentor alleged that Cadence aided and abetted Quickturn
and its Board of Directors in those purported breaches. Mentor has not
prosecuted the matter since January 1999. In May 2000, Mentor advised the
Delaware Chancery Court of its objection to the settlement of a companion action
brought on behalf of certain Quickturn shareholders. Mentor further advised the
court that it would seek an award of attorneys' fees related to its prosecution
of the Mentor v. Lobo action. At the request of the court, on July 28, 2000,
Mentor filed its brief in support of its standing to seek such an award.
Cadence, Quickturn and the individual defendants have opposed Mentor's request.
A hearing on the matter was held on February 1, 2001. The court has taken the
matter under submission.
On April 30, 1999, Cadence and several of its officers and directors were
named as defendants in a lawsuit filed in the U.S. District Court for the
Northern District of California, entitled Spett v. Cadence Design Systems, et
al., civil action no. C 99-2082. The action was brought on behalf of a class of
stockholders who purchased Cadence common stock between November 4, 1998 and
April 20, 1999, and alleges violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. The lawsuit arises out of Cadence's
announcement of its first quarter 1999 financial results. On September 18, 2000
the District Court granted Cadence's Motion to Dismiss Plaintiffs' Claims with
leave to amend. To date, no amended complaint has been filed. Should an amended
complaint be filed, Cadence and the individual defendants intend to continue
their vigorous defense of the allegations.
In early 1999, Cadence entered into negotiations with Intelect
Communications, Inc., and Intelect's wholly-owned subsidiary, DNA Enterprises,
Inc., with respect to a potential purchase of substantially all the assets of
DNA. The transaction was not consummated and, in July 1999, Intelect and DNA
filed suit against Cadence in a Texas state court alleging breach of contract,
fraud, negligent misrepresentation and breach of fiduciary duty, seeking
unspecified compensatory and punitive damages. Cadence has answered, denying
liability, and discovery has commenced. A trial date has been schedule for
October 2001. Cadence believes that it has defenses to and disputes the
allegations made by Intelect and DNA, including the allegation that a purchase
contract was entered into, and intends to defend the action vigorously.
On July 21, 1999, Mentor filed suit against Quickturn in the U.S. District
Court for the District of Delaware, alleging that Quickturn's MERCURY(TM)
hardware emulation systems infringe U.S. Patent Nos. 5,777,489 and 5,790,832
allegedly assigned to Mentor. At Quickturn's request, Cadence was added as a
party defendant. Mentor has since asserted that Quickturn's MERCURYPLUS(TM)
emulation systems also infringe U.S. Patent Nos. 5,777,489 and 5,790,832. The
complaint seeks a permanent injunction and unspecified damages. Cadence intends
to vigorously defend itself against these claims. On December 14, 1999, this
action was transferred to the U.S. District Court for the Northern District of
California, and renumbered Civil Action No. C 99-5464 SI.
On February 25, 2000, Cadence and several of its officers were named as
defendants in a lawsuit filed in the U.S. District Court for the Northern
District of California, entitled Maxick v. Cadence Design Systems, Inc., File
No. C 00 0658PJH. The action was brought on behalf of a class of shareholders of
OrCAD, Inc., and alleges violations of Section 14(d)(7) of the Securities
Exchange Act of 1934, as amended, and Rule 14d-10 thereunder. The lawsuit arises
out of Cadence's acquisition of OrCAD, which was completed in August 1999.
74
75
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cadence's Motion to Dismiss plaintiffs' claims was denied. Discovery is
continuing. The defendants believe the complaint is without merit and intend to
continue their vigorous defense of the allegations.
On March 24, 2000, Mentor and Meta and several founders of Meta filed suit
against Quickturn and Cadence and a former Quickturn employee in the U.S.
District Court for the Northern District of California, Civil Action No. C
00-01030 WHA. The suit alleges patent infringement of a U.S. Patent allegedly
assigned to Mentor, misappropriation of trade secrets and breach of confidence,
and seeks unspecified damages, injunctive relief and the assignment to Mentor of
a patent previously issued to Quickturn. Cadence intends to vigorously defend
itself against these claims, and has filed a counterclaim for declaratory
judgment of invalidity of several patents allegedly assigned to Mentor.
Following a motion by Cadence, the former Quickturn employee was dismissed as a
party to the action. Discovery in the action has subsequently been consolidated
with discovery in Civil Action No. C 99-5464, the Mentor v. Quickturn suit
transferred from Delaware.
In April 2000, Cadence filed suit against a former design services
customer, IMI Telecommunications, Inc., for breach of contract relating to IMI
Telecommunications' failure to make payments due and fulfill its obligations
under a services agreement. Damages claimed by Cadence are approximately $1
million. The defendant countersued, alleging breach of oral contract,
rescission, negligent misrepresentation and fraud by Cadence and claiming
damages exceeding $100 million and seeking punitive damages exceeding $500
million. Cadence filed a motion to dismiss the defendant's counterclaims, and a
hearing on this motion was held on October 2, 2000. A ruling has not yet been
issued. Cadence believes that it has defenses to and disputes the allegations
made by IMI Telecommunications and intends to defend the action vigorously.
On September 11, 2000, Mentor filed a complaint against Quickturn and
Cadence in the U.S. District Court for the Northern District of California (Case
No. C-00-03291) accusing Quickturn and Cadence of infringing U.S. Patent No.
5,574,388, purportedly owned by Mentor and seeking unspecified damages and
injunctive relief. Quickturn and Cadence believe the complaint filed by Mentor
is without substance and that the patent that is the subject of this suit in
invalid and not infringed. Cadence and Quickturn are vigorously defending the
claim. On November 3, 2000, Mentor filed a motion for preliminary injunction,
asking the Court to prohibit the sale of Quickturn's MERCURYPLUS emulation
systems prior to trial of this action. The hearing on that motion is scheduled
for March 30, 2001. The parties have agreed to consolidate this action with
Civil Action Nos. C99-5464 and C 00-01030 WHA, described above, for purposes of
discovery and pre-trial motions. A trial date of October 7, 2002 has been set
for all three actions.
On November 2, 2000, Mentor and Meta filed a complaint for declaratory
judgment against Quickturn and Cadence in the U.S. District Court for the
District of Oregon (Case No. C-00-1489) seeking a ruling that Mentor's proposed
design verification approach (in which chip designers would use U.S.-based
computer terminals to operate SimExpress emulation systems located overseas)
will not infringe Quickturn's patents and will not violate the permanent
injunction entered by the Oregon District Court on July 7, 1999 in Civil Action
No. C-96-00342. On January 5, 2001, Quickturn and Cadence answered the
complaint. In their answer, Quickturn and Cadence denied Mentor and Meta's
contention, and asserted that Mentor and Meta's complaint lacks subject matter
jurisdiction and is barred by res judicata and collateral estoppel. Quickturn
and Cadence intend to vigorously contest this action.
On November 22, 2000, a former design services customer, Uniden
Corporation, filed an action for fraud, negligent misrepresentation and breach
of contract in the State Court of Texas against Cadence, and alleged those
causes of action as well as others against Intel Corporation and entities
related to Intel. Uniden seeks compensatory and punitive damages in an
unspecified amount. The suit was filed after Cadence demanded payment of
approximately $1 million for design services rendered to Uniden. Cadence since
has filed a counterclaim to recover the approximate $1 million owed for services
rendered. Intel has filed a motion for forum non conviens requesting that the
action to be moved to California. Cadence has joined in that motion. Cadence
intends to vigorously defend the action brought by Uniden.
75
76
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. However, were an
unfavorable ruling to occur in any specific period, there exists the possibility
of a material adverse impact on the result of operations.
STOCKHOLDERS' EQUITY
NET INCOME (LOSS) PER SHARE
The following is a reconciliation of the weighted average common shares
used to calculate basic net income (loss) per share to the weighted average
common and potential common shares used to calculate diluted net income (loss)
per share for the years 2000, 1999, and 1998:
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Weighted average common shares used to calculate basic
net income (loss) per share......................... 244,565 242,037 234,605
Options............................................. 17,053 -- 22,778
Puts................................................ 400 -- 257
Warrants and other contingent common shares......... 678 -- 222
------- ------- -------
Weighted average common and potential common shares
used to calculate diluted net income (loss) per
share............................................... 262,696 242,037 257,862
======= ======= =======
Options to purchase 2,660,253 shares of common stock were outstanding at
December 30, 2000, but were not included in the computation of diluted net
income per share because their effect would be antidilutive. These options
expire at various dates through 2010. Warrants to purchase 140,000 shares of
common stock were outstanding at December 30, 2000, but were not included in the
computation of diluted net income per share because their effect would be
antidilutive. The warrants outstanding expire in June 2003. Put warrants to
purchase 5,496,807 shares of common stock were outstanding at December 30, 2000,
but were not included in the computation of diluted net income per share because
their effect would be antidilutive. The put warrants outstanding expire at
various dated through November 2001.
Options to purchase 56,181,714 shares of common stock were outstanding at
January 1, 2000, but were not included in the computation of diluted net loss
per share because their effect would be antidilutive. These options expire at
various dates through 2009. Warrants to purchase 394,237 shares of common stock
were outstanding at January 1, 2000, but were not included in the computation of
diluted loss per share because their effect would be antidilutive. The warrants
outstanding expire in February 2000 and June 2003. Put warrants to purchase
1,615,175 shares of common stock were outstanding at January 1, 2000, but were
not included in the computation of diluted loss per share because their effect
would be antidilutive. The put warrants outstanding expired in February 2000.
Options to purchase 1,161,006 shares of common stock were outstanding at
January 2, 1999, but were not included in the computation of diluted net income
per share because their effect would be antidilutive. These options expire at
various dates through 2008. Warrants to purchase 170,400 shares of common stock
were outstanding at January 2, 1999, but were not included in the computation of
diluted net income per share because their effect would be antidilutive. The
warrants outstanding expired in August 1999. Put warrants to purchase 2,588,820
shares of common stock were outstanding at January 2, 1999, but were not
included in the computation of diluted net income per share because their effect
would be antidilutive. The put warrants outstanding expired at various dated
through November 1999.
76
77
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCK COMPENSATION PLANS
Stock Option Plans
Cadence's 2000 Non-Statutory Stock Option Plan, referred to as the 2000
Plan, provides for the issuance of non-qualified options to its employees to
purchase up to 30,000,000 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 2000 Plan become exercisable over periods up to four years, generally
with one-fourth of the shares vesting one year from the vesting commencement
date with respect to initial grants, and the remaining shares vesting in 36
equal monthly installments. Options under the 2000 Plan generally expire ten
years from the date of grant.
Cadence's 1997 Non-Statutory Stock Option Plan, referred to as the 1997
Plan, provides for the issuance of non-qualified options to its employees to
purchase up to 30,000,000 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 1987 Employee Stock Option Plan, referred to as 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 generally expire five to ten years from the date of grant.
Cadence's 1993 Non-Statutory Stock Option Plan, referred to as 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 1993 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.
Under the 1995 and 1993 Directors' Stock Option Plans, referred to as the
Directors' Plans, Cadence may grant non-qualified options to its non-employee
directors for up to 2,032,502 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 terms of up to ten years. Certain of the
option grants vest one year from the date of grant, and other option grants vest
one-third on the date which is 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, referred to as 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 price 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.
77
78
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the status of all of Cadence's stock option plans as of and
during the years ended December 30, 2000, January 1, 2000, and January 2, 1999
follows:
2000 1999 1998
----------------------- ---------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------ -------- ----------- -------- ------------ --------
Outstanding at beginning of
year...................... 56,181,714 $14.29 42,678,756 $14.07 46,733,239 $11.28
Assumption of acquired
companies options...... -- -- 2,649,553 $ 5.78 816,334 $ 2.83
Granted................... 15,536,900 $19.65 25,205,953 $14.48 13,510,326 $18.64
Exercised................. (8,655,150) $ 9.87 (6,658,815) $ 7.64 (11,136,992) $ 7.11
Forfeited................. (13,063,305) $18.26 (7,693,733) $16.50 (7,244,151) $14.04
------------ ----------- ------------
Outstanding at end of
year...................... 50,000,159 $15.53 56,181,714 $14.29 42,678,756 $14.07
============ =========== ============
Options exercisable at year
end....................... 19,881,259 21,226,714 17,493,945
Options available for future
grant..................... 38,544,937 11,541,925 19,261,461
Weighted average fair value
of options granted during
the year.................. $ 10.84 $ 9.19 $ 13.52
A summary of the status of all of Cadence's stock option plans at December
30, 2000 follows:
OPTIONS OUTSTANDING
----------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ----------------------------------
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICES DECEMBER 30, 2000 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 30, 2000 EXERCISE PRICE
- --------------- ----------------- ---------------- -------------- ----------------- --------------
$ 0.14 - $ 5.00 2,179,525 2.9 $ 2.28 2,157,352 $ 2.27
$ 5.01 - $10.00 6,101,535 6.1 $ 7.08 4,748,444 $ 6.96
$10.01 - $15.00 19,286,899 7.9 $13.36 6,714,945 $13.53
$15.01 - $20.00 10,516,507 8.2 $18.08 3,430,146 $17.85
$20.01 - $25.00 9,888,640 8.7 $22.74 2,126,782 $22.67
$25.01 - $30.00 1,759,071 8.4 $26.43 487,602 $26.31
$30.01 - $35.00 237,982 7.4 $33.39 199,988 $33.80
$35.01 - $35.06 30,000 7.3 $35.06 16,000 $35.06
---------- ----------
Total 50,000,159 $15.53 19,881,259 $13.00
========== ==========
Stock Repurchase Plan
Cadence has authorized three seasoned systematic stock repurchase programs
under which it repurchases Cadence common stock to satisfy estimated
requirements for shares to be issued under its Employee Stock Purchase Plan, or
ESPP, and the 2000 and 1997 Plans. Such repurchases are intended to cover
Cadence's expected reissuances under the ESPP and the 2000 and 1997 Plans 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 December 30, 2000, there were 5.5 million put
warrants outstanding that entitle the holder to sell one share of common stock
to Cadence on a specified date and at specified prices ranging from $19.77 to
$24.39 per
78
79
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 December 30, 2000, Cadence had 4 million call options
outstanding at specified prices ranging from $20.02 to $24.64 per share. The put
warrants and call options outstanding at December 30, 2000 expire on various
dates through November 2001 and Cadence has the contractual ability to settle
the options prior to their maturity. At December 30, 2000, the estimated fair
value of the call options was approximately $26.2 million and the fair value of
the put warrants was approximately $8.3 million.
If exercised, Cadence has the right to settle the put warrants with common
stock equal to the difference between the exercise price and the fair value at
the date of exercise. Settlement of the put warrants with common 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 common stock
at the time of exercise. In addition, settlement of put warrants in common stock
could lead to the disposition by put warrant holders of shares of Cadence 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 common stock. At December 30, 2000, Cadence had the ability to settle
these put warrants with common 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 ESPP, Cadence is authorized to issue up to 23,500,000 shares of
common stock to its employees. Under the terms of the ESPP, employees can choose
to have up to 12% of their annual base earnings plus bonuses withheld to
purchase Cadence 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. The offering periods provide 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. Under
the ESPP, Cadence issued 3,168,839, 2,110,222, and 1,252,855 shares to employees
in 2000, 1999, and 1998, respectively. The weighted average purchase price and
the weighted average fair value of shares issued in 2000 was $9.36 and $20.75,
respectively.
79
80
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, "Accounting for Stock --Based
Compensation." The fair value of Cadence's options granted and shares purchased
under the ESPP program for years ended December 30, 2000, January 1, 2000, and
January 2, 1999 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:
STOCK OPTIONS
-----------------------------
2000 1999 1998
------- ------- -------
Risk-free interest rate............................... 5.07% 5.90% 5.22%
Volatility factors of the expected market price of
Cadence's common stock.............................. 59% 62% 59%
Weighted average expected life of an option........... 5 Years 5 Years 4 Years
EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
2000 1999 1998
--------- --------- ---------
Risk-free interest rate, based on weighted
average........................................... 6.03% 4.95% 5.21%
Volatility factors of the expected market price of
Cadence's common stock............................ 59% 62% 59%
Weighted average expected life of ESPP shares....... 0.5 Years 0.5 Years 0.5 Years
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. Cadence applies
Accounting Principles Board Opinion No. 25 and related Interpretations in
accounting for its plans. Had Cadence's fixed stock option and employee stock
purchase plans been accounted for under SFAS No. 123, net income (loss) and net
income (loss) per share would have been adjusted to the following pro forma
amounts:
2000 1999 1998
----------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income (loss):
As reported..................................... $ 49,977 $ (14,075) $ 25,124
======== ========= ========
Pro forma....................................... $(65,296) $(127,954) $(57,569)
======== ========= ========
Basic net income (loss) per share:
As reported..................................... $ 0.20 $ (0.06) $ 0.11
======== ========= ========
Pro forma....................................... $ (0.27) $ (0.53) $ (0.25)
======== ========= ========
Diluted net income (loss) per share:
As reported..................................... $ 0.19 $ (0.06) $ 0.10
======== ========= ========
Pro forma....................................... $ (0.27) $ (0.53) $ (0.25)
======== ========= ========
The effects of applying SFAS No. 123 on pro forma disclosures of net income
(loss) and net income (loss) per share for 2000, 1999, and 1998 are not likely
to be representative of the pro forma effects on net income (loss) and net
income (loss) per share in future years.
WARRANTS
At December 30, 2000, Cadence had warrants outstanding to purchase 140,000
shares of Cadence common stock at $3.22 per share. The warrants expire in June
2003 and can be exercised at any time in increments of not less than 50,000
shares.
80
81
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RESERVED FOR FUTURE ISSUANCE
At December 30, 2000, Cadence had reserved the following shares of
authorized but unissued common stock for future issuance:
SHARES
----------
Employee stock option plans................................. 82,647,805
ESPP........................................................ 5,493,394
Put warrants................................................ 5,496,807
Directors stock option plans................................ 1,602,170
Warrants.................................................... 140,000
Other option agreements..................................... 7,500
----------
Total.................................................. 95,387,676
==========
STOCKHOLDER RIGHTS PLAN
In February 1996, Cadence adopted a new stockholder rights plan to protect
its stockholders' rights in the event of a proposed or actual acquisition of 15%
or more of the outstanding shares of Cadence common stock. As amended in
February 2000, each share of Cadence common stock carries a right to purchase
one one-thousandth ( 1/1000) of a share of Series A Junior Participating
Preferred Stock, referred to as a 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.
DEFERRED STOCK COMPENSATION
Deferred stock compensation represents the difference between the exercise
price of stock option grants to Tality employees and directors, and restricted
stock sales to certain Cadence executives and key employees, and the deemed fair
value of Tality's common stock at the time of those grants and sales. For the
year ended December 30, 2000, Cadence recorded a total of $72.4 million of
deferred stock compensation, $64.1 million related to the stock option grants,
and $8.3 million related to the restricted stock sales. Cadence is amortizing
deferred stock compensation to expense over the period during which the stock
options and restricted stock vest, four years and one year, respectively
OTHER COMPREHENSIVE INCOME
The following table sets forth the components of other comprehensive
income, net of income tax:
2000 1999 1998
------------------------------------- ------------------------------------ -------
PRE-TAX TAX (EXPENSE) NET-OF-TAX PRE-TAX TAX (EXPENSE) NET-OF-TAX PRE-TAX
AMOUNT ON BENEFIT AMOUNT AMOUNT ON BENEFIT AMOUNT AMOUNT
-------- ------------- ---------- ------- ------------- ---------- -------
(IN THOUSANDS)
Other comprehensive
income (loss):
Unrealized holding
gains (losses) on
marketable
securities.......... $(47,030) $12,463 $(34,567) $47,509 $(11,260) $36,249 $ 147
Foreign currency
translation loss.... (6,453) 1,710 (4,743) (3,284) 778 (2,506) (5,462)
-------- ------- -------- ------- -------- ------- -------
$(53,483) $14,173 $(39,310) $44,225 $(10,482) $33,743 $(5,315)
======== ======= ======== ======= ======== ======= =======
1998
--------------------------
TAX (EXPENSE) NET-OF-TAX
ON BENEFIT AMOUNT
------------- ----------
(IN THOUSANDS)
Other comprehensive
income (loss):
Unrealized holding
gains (losses) on
marketable
securities.......... $ (110) $ 37
Foreign currency
translation loss.... 4,091 (1,371)
------ -------
$3,981 $(1,334)
====== =======
81
82
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES
The provision for income taxes consisted of the following components:
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Current:
Federal........................................... $ 39,678 $ 16,391 $ 68,854
State............................................. 6,369 1,771 14,925
Foreign........................................... 716 10,376 27,979
-------- -------- --------
Total current................................... 46,763 28,538 111,758
-------- -------- --------
Deferred (prepaid):
Federal........................................... (24,009) (22,074) (37,257)
State............................................. (3,486) (5,486) (6,958)
Foreign........................................... (1,249) 1,717 7,379
-------- -------- --------
Total deferred (prepaid)........................ (28,744) (25,843) (36,836)
-------- -------- --------
Total provision for income taxes............. $ 18,019 $ 2,695 $ 74,922
======== ======== ========
Income (loss) before income taxes included income of approximately $43.2
million for 2000, $11.5 million for 1999, and $1.6 million for 1998, from
Cadence's foreign subsidiaries. The provision for income taxes is net of the
benefit of operating loss carryforwards totaling $28.9 million for 2000, $28.3
million for 1999, and $3.9 million for 1998.
The provision for income taxes differs from the amount estimated by
applying the statutory federal income tax rate to income (loss) before income
taxes as follows:
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Provision (benefit) computed at federal statutory
rate................................................. $ 23,799 $ (3,983) $ 35,017
State income tax, net of federal tax effect............ 6,369 (539) 7,125
Separation costs....................................... 2,451 -- --
Amortization of acquired intangibles................... 1,489 (11,429) 1,020
Other.................................................. 693 (775) 948
Acquisition costs...................................... -- 2,952 (2,679)
Foreign withholding taxes.............................. -- -- 1,110
Foreign tax credit..................................... -- -- (1,110)
Write-off of in-process technology..................... -- 7,245 46,615
Research and development tax credit.................... -- (5,219) (6,891)
Foreign income tax at a higher (lower) rate............ (1,609) 3,014 (21,604)
Change in valuation allowance.......................... (15,173) 11,429 15,371
-------- -------- --------
Provision for income taxes........................... $ 18,019 $ 2,695 $ 74,922
======== ======== ========
Effective tax rate..................................... 26.5% (23.7)% 74.9%
======== ======== ========
82
83
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of deferred tax assets and liabilities consisted of the
following:
2000 1999
--------- ---------
(IN THOUSANDS)
Deferred Tax Assets:
Intangibles............................................... $ 71,726 $ 53,625
Accruals and reserves..................................... 37,194 34,939
Sales returns and allowance............................... 30,957 20,865
Tax credits............................................... 28,452 24,238
Accrued intercompany royalty.............................. 24,546 33,685
Net operating losses...................................... 10,617 12,241
Other..................................................... 10,303 15,294
Restructure reserves...................................... 6,399 10,069
Depreciation and amortization............................. -- 10,293
--------- ---------
Total deferred tax assets............................ 220,194 215,249
Valuation allowance -- provision for income taxes......... (5,932) (21,105)
Valuation allowance -- equity and intangibles............. (16,949) (19,853)
--------- ---------
Net deferred tax assets.............................. 197,313 174,291
--------- ---------
Deferred Tax Liabilities:
Intangibles............................................... (89,743) (85,856)
Other..................................................... (9,380) (17,577)
Depreciation and amortization............................. (8,927) --
Capitalized software...................................... (6,560) (7,570)
Accrued intercompany royalty.............................. -- (9,624)
--------- ---------
Total deferred tax liabilities....................... (114,610) (120,627)
--------- ---------
Total net deferred tax assets..................... $ 82,703 $ 53,664
========= =========
Cadence provides for U.S. income taxes on the earnings of foreign
subsidiaries unless they are considered permanently invested outside of the U.S.
At December 30, 2000, the cumulative amount of earnings upon which U.S. income
taxes have not been provided are approximately $228.7 million. At December 30,
2000, the unrecognized deferred tax liability for these earnings was
approximately $64.4 million.
The net valuation allowance for provision for income taxes decreased by
$15.2 million in 2000. The valuation allowance for provision for income taxes
decreased by $17.8 million due to tax planning which allowed Cadence to benefit
from certain foreign deferred tax assets against domestic taxes. The valuation
allowance for provision for income taxes also increased by $2.6 million due to
the benefit of the amortization of Tality deferred stock compensation which will
only be realized if the fair market value of Tality common stock on the date of
exercise is greater than the exercise price of the Tality stock option.
The net valuation allowance for equity and intangibles decreased by $2.9
million in 2000. The valuation allowance earmarked for equity and intangibles is
due to domestic entities generating sufficient taxable income, including the
deduction of stock options to realize certain domestic deferred tax assets. The
remaining valuation allowance-equity and intangibles of $16.9 million is due to
the uncertainty of domestic entities generating sufficient taxable income,
including the deduction for stock options to realize certain domestic deferred
tax assets. This portion of the valuation allowance, identified in the above
table as "valuation allowance -- equity and intangibles", if realizable, may
reduce other intangibles and may not be available to offset future provision for
income taxes.
The remaining net operating loss carryforwards will expire at various dates
from 2001 through 2020 and federal tax credit carryforwards will expire at
various dates from 2001 through 2015.
83
84
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A dispute between Cadence and the Internal Revenue Service regarding $15.6
million in tax credits for the tax years 1989 through 1991 was settled during
1999 with no material adjustments to the returns as originally filed.
EMPLOYEE BENEFIT PLAN
Cadence maintains 401(k) savings plans to provide retirement benefits
through tax deferred salary deductions for all its domestic employees. Cadence
may make discretionary contributions, as determined by the Board of Directors,
which cannot exceed a specified percentage of the annual aggregate salaries of
those employees eligible to participate. Cadence made total contributions to the
plans of $9.3 million, $3.9 million, and $4.2 million for 2000, 1999, and 1998,
respectively.
In January 2000, Cadence amended its 401(k) plan to provide that Cadence
will match contributions with 50% of every dollar contributed, up to a
contribution level of 6% of the salaries of those employees who participate in
the 401(k) plan.
STATEMENT OF CASH FLOWS
The supplemental cash-flow information for 2000, 1999, and 1998 follows:
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Cash Paid During the Year for:
Interest................................................ $ 1,905 $ 2,975 $ 3,181
======= ======= =======
Income taxes (including foreign withholding tax)........ $14,825 $25,330 $12,091
======= ======= =======
Non-Cash Investing and Financing Activities:
Capital lease obligations incurred for equipment........ $ 1,015 $ 7,727 $ 1,505
======= ======= =======
Common and treasury stock issued for acquisitions....... $ 5,333 $21,201 $28,971
======= ======= =======
Write-off of unearned deferred compensation............. $ -- $ -- $ 83
======= ======= =======
Notes receivables on employee investments in
subsidiary........................................... $10,759 $ -- $ --
======= ======= =======
Transfer of inventory to fixed assets................... $ 5,462 $ -- $ --
======= ======= =======
Equity investment by transfer of equipment or
software............................................. $ 8,140 $ -- $ --
======= ======= =======
Deferred stock compensation of stock options and
restricted stock..................................... $72,369 $ -- $ --
======= ======= =======
UNUSUAL ITEMS AND RESTRUCTURING
Described below are unusual items and restructuring charges in 2000, 1999,
and 1998:
2000 1999 1998
------ ------- --------
(IN THOUSANDS)
Separation costs...................................... $6,820 $ -- $ --
Write-off of acquired in-process technology........... -- 20,700 194,100
Asset impairment...................................... -- 19,891 --
Restructuring charges................................. -- 13,274 69,495
Litigation settlement................................. -- (3,000) --
Merger costs.......................................... -- 8,436 --
------ ------- --------
Total unusual items......................... $6,820 $59,301 $263,595
====== ======= ========
84
85
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Separation Costs
In the year ended December 30, 2000, Cadence recorded $6.8 million in
separation costs related to the separation of its design services business, and
the related planned IPO of Tality, Cadence's newly-formed subsidiary. These
costs primarily include legal and accounting services, strategic business
planning, information systems separation, development of compensation and
benefits strategies, and recruitment and formation of Tality's senior management
team.
In-Process Technology
Described below are the write-offs of acquired in-process technology
charges in 1999 and 1998:
1999 1998
------- --------
(IN THOUSANDS)
OrCAD....................................................... $11,800 $ --
DAI......................................................... 8,900 --
Ambit....................................................... -- 106,500
BLDA........................................................ -- 30,300
Symbionics.................................................. -- 28,500
EXD......................................................... -- 28,400
Other....................................................... -- 400
------- --------
Total unusual items............................... $20,700 $194,100
======= ========
These acquired in-process technology charges represent in-process
technology that had not reached technological feasibility and had no probable
alternative future use. See "Acquisitions."
Asset Impairment
In 1999, Cadence incurred charges totaling $19.9 million in asset
impairment charges. Of this amount, $13.3 million represented asset impairment
of acquired intangibles from the EXD acquisition. This asset impairment charge
resulted from reduced Japanese market opportunities and the loss of key EXD
employees resulting in diminished cash flow projections. Cadence entered into
certain support agreements with external parties to provide support for EXD
software tools previously sold to Cadence customers. The fair value of the EXD
acquired intangibles was based on an evaluation of the present value of the
estimated expected future cash flows, discounted at 16%. The remaining $6.6
million in asset impairment charges were incurred in connection with the
cancellation of an information technology services contract with a third-party,
the abandonment of capitalized software development costs associated with
certain Cadence products that will no longer be sold, and the abandonment of
certain third-party software licenses that will no longer be used by Cadence's
design services business.
The impairment losses recorded were the amounts by which the carrying
amounts of the intangible assets exceeded their fair market values.
Restructuring
In 1999, Cadence recorded $13.3 million of restructuring charges that
consisted of $11.3 million to terminate approximately 100 employees and $2
million to downsize and close excess facilities. Cadence's restructuring plans
were primarily aimed at reducing costs after Cadence merged with Quickturn,
further restructuring of Cadence's services business in Japan, and severance
resulting from the resignation of Cadence's former Chief Executive Officer.
Severance costs include severance benefits, notice pay, and
85
86
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
outplacement services. All terminations and termination benefits were
communicated to the affected employees prior to year-end and substantially all
remaining severance benefits were paid in 2000.
Facilities consolidation charges of $2 million were incurred in connection
with the closure of 15 Quickturn facilities, including $1 million to close
duplicate and excess facilities and $1 million of 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 write-offs consist of leasehold improvements of
facilities that were abandoned and whose estimated fair market value is zero. As
of December 30, 2000, 13 of the 15 Quickturn sites had been vacated.
Noncancelable lease payments on vacated facilities will be paid out through
2003.
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. Severance costs included
severance benefits, notice pay, and outplacement services. In 1998,
approximately $10.1 million of these costs resulted from the acceleration of
stock options vesting under employment agreements. All terminations and
termination benefits were communicated to the affected employees prior to
year-end and all remaining severance benefits were substantially paid in 1999.
Facilities consolidation charges of $29.9 million were incurred 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 included
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 of facilities that were abandoned and whose estimated
fair market value is zero. As of December 30, 2000, all but one of the 58 sites
had been vacated. 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.
86
87
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Liabilities for excess facilities and other restructuring charges are
included in accrued and other long-term liabilities, while severance and
benefits liabilities are included in payroll and payroll related accruals. The
following table summarizes Cadence's restructuring activity during fiscal years
2000, 1999, and 1998:
SEVERANCE
AND EXCESS OTHER
BENEFITS FACILITIES RESTRUCTURING ASSETS TOTAL
--------- ---------- ------------- ------- --------
(IN THOUSANDS)
Balance, January 3, 1998.................... $ 2,287 $ 2,638 $ 2,511 $ -- $ 7,436
1998 restructuring charges................ 36,860 16,749 2,718 13,168 69,495
Non-cash charges.......................... (10,095) (1,364) -- (1,862) (13,321)
Cash charges.............................. (15,937) (3,527) (3,016) (2) (22,482)
-------- ------- ------- ------- --------
Balance, January 2, 1999.................... 13,115 14,496 2,213 11,304 41,128
1999 restructuring charges................ 11,271 978 -- 1,025 13,274
Reclassifications......................... (515) 179 501 (165) --
Non-cash charges.......................... (356) (813) (241) (4,543) (5,953)
Cash charges.............................. (15,502) (8,376) (2,047) (1,760) (27,685)
-------- ------- ------- ------- --------
Balance, January 1, 2000.................... 8,013 6,464 426 5,861 20,764
Reclassifications......................... -- (1,061) 1,822 (761) --
Non-cash charges.......................... (242) (73) (744) (4,716) (5,775)
Cash charges.............................. (5,452) (392) (1,504) (104) (7,452)
-------- ------- ------- ------- --------
Balance, December 30, 2000.................. $ 2,319 $ 4,938 $ -- $ 280 $ 7,537
======== ======= ======= ======= ========
Merger Costs
In connection with the Quickturn acquisition in 1999, Cadence charged to
expense merger costs of $8.4 million representing professional fees for
financial advisors, attorneys, and accountants.
Litigation Settlement
In 1999, Cadence and Mentor announced the settlement of a patent
infringement action pending in the U.S. District Court for the District of
Oregon. As a result, the Court entered a judgment declaring that certain
Quickturn patents are valid, enforceable, and were infringed by Mentor's sale of
SimExpress products in the U.S. Mentor is permanently enjoined from producing,
marketing or selling SimExpress emulation systems in the U.S. In connection with
the settlement, Mentor paid Cadence $3 million.
OTHER INCOME, NET
Other income, net components for 2000, 1999, and 1998 follows:
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Gain (loss) on foreign exchange........................... $ 5,069 $ (600) $ 2,809
Interest income........................................... 4,558 5,406 13,501
Equity income (loss) from investments..................... 1,128 124 (889)
Minority interest income (expense)........................ 638 125 (256)
Interest expense.......................................... (2,398) (3,296) (3,735)
Other expense, net........................................ (4,415) (389) (872)
------- ------- -------
Total other income, net................................. $ 4,580 $ 1,370 $10,558
======= ======= =======
87
88
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEGMENT REPORTING
In 1998, Cadence adopted Statement of Financial Accounting Standards, or
SFAS, No. 131, "Disclosures about Segments of an Enterprise and Related
Information." Under SFAS No. 131, 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 includes Cadence's President
and Chief Executive Officer and his senior staff. Cadence's Executive Staff
reviews the Cadence consolidated results within three segments: Product,
Services, and Maintenance, and also reviews Tality's results separately as a
stand-alone entity.
The Product segment includes revenue and associated costs to design and
license to customers a variety of electronic design automation products. The
Services segment includes revenue and associated costs to offer methodology and
design services either to assist companies in developing electronic designs or
to assume responsibility for the design effort when customers wish to outsource
this work. The Maintenance segment includes revenue and associated costs
primarily for a technical support organization, and maintenance agreements are
offered to customers either as part of our product license agreements or
separately. Within the Cadence consolidated results, Tality revenue is included
in the Services segment, and associated Tality costs are reflected in each of
the three segments, consistent with the benefit derived by the respective
segments from those services.
Segment income from operations is defined as gross margin under generally
accepted accounting principles and excludes operating expenses (marketing and
sales, research and development, and general and administrative), 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.
Revenue is defined as revenue from external customers with no intersegment
revenue.
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 among the segments or to assess their performance. Depreciation and
amortization is allocated among the segments in order to determine each
segments' gross margin.
88
89
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following tables present information about reported segments for the
years ended December 30, 2000, January 1, 2000, and January 2, 1999:
CONSOLIDATED
PRODUCT SERVICES MAINTENANCE OTHER TOTAL TALITY
-------- -------- ----------- --------- ------------ ---------
(IN THOUSANDS)
2000:
Revenue................... $627,429 $335,967 $316,154 $ -- $1,279,550 $ 198,423
Cost of revenue........... 89,937 215,605 63,315 -- 368,857 152,369
Amortization of acquired
intangibles............ 65,352 15,151 -- -- 80,503 16,257
-------- -------- -------- --------- ---------- ---------
Gross margin........... 472,140 105,211 252,839 -- 830,190 29,797
Marketing and sales....... -- -- -- (390,139) (390,139) (35,661)
Research and
development............ -- -- -- (263,947) (263,947) (11,895)
General and
administrative......... -- -- -- (94,478) (94,478) (38,171)
Amortization of deferred
stock compensation..... -- -- -- (11,390) (11,390) (7,258)
Unusual items............. -- -- -- (6,821) (6,821) (4,877)
Other income, net......... -- -- -- 4,581 4,581 802
-------- -------- -------- --------- ---------- ---------
Income (loss) before
provision (benefit) for
income taxes........... $472,140 $105,211 $252,839 $(762,194) $ 67,996 $ (67,263)
======== ======== ======== ========= ========== =========
Depreciation and
Amortization........... $ 99,203 $ 30,062 $ 2,463 $ 76,752 $ 208,480 $ 30,063
======== ======== ======== ========= ========== =========
CONSOLIDATED
PRODUCT SERVICES MAINTENANCE OTHER TOTAL TALITY
-------- -------- ----------- --------- ------------ ---------
(IN THOUSANDS)
1999:
Revenue................... $505,459 $294,916 $292,928 $ -- $1,093,303 $ 128,873
Cost of revenue........... 79,504 191,760 53,579 -- 324,843 113,141
Amortization of acquired
intangibles............ 55,962 5,826 -- -- 61,788 7,114
-------- -------- -------- --------- ---------- ---------
Gross margin........... 369,993 97,330 239,349 -- 706,672 8,618
Marketing and sales....... -- -- -- (354,205) (354,205) (32,799)
Research and
development............ -- -- -- (219,181) (219,181) (9,588)
General and
administrative......... -- -- -- (86,735) (86,735) (28,546)
Unusual items............. -- -- -- (59,301) (59,301) --
Other income, net......... -- -- -- 1,370 1,370 33
-------- -------- -------- --------- ---------- ---------
Income (loss) before
provision (benefit) for
income taxes........... $369,993 $ 97,330 $239,349 $(718,052) $ (11,380) $ (62,282)
======== ======== ======== ========= ========== =========
Depreciation and
Amortization........... $ 85,843 $ 20,289 $ 2,192 $ 55,572 $ 163,896 $ 21,866
======== ======== ======== ========= ========== =========
89
90
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONSOLIDATED
PRODUCT SERVICES MAINTENANCE OTHER TOTAL TALITY
-------- -------- ----------- --------- ------------ ---------
(IN THOUSANDS)
1998:
Revenue................... $760,441 $265,211 $294,528 $ -- $1,320,180 $ 105,262
Cost of revenue........... 77,513 188,793 52,386 -- 318,692 129,257
Amortization of acquired
intangibles............ 14,800 3,672 -- -- 18,472 4,942
-------- -------- -------- --------- ---------- ---------
Gross margin........... 668,128 72,746 242,142 -- 983,016 (28,937)
Marketing and sales....... -- -- -- (340,295) (340,295) (35,862)
Research and
development............ -- -- -- (202,810) (202,810) (7,176)
General and
administrative......... -- -- -- (86,828) (86,828) (33,208)
Unusual items............. -- -- -- (263,595) (263,595) (46,317)
Other income, net......... -- -- -- 10,558 10,558 215
-------- -------- -------- --------- ---------- ---------
Income (loss) before
provision (benefit) for
income taxes........... $668,128 $ 72,746 $242,142 $(882,970) $ 100,046 $(151,285)
======== ======== ======== ========= ========== =========
Depreciation and
Amortization........... $ 40,537 $ 16,297 $ 2,307 $ 49,964 $ 109,105 $ 16,961
======== ======== ======== ========= ========== =========
Internationally, excluding Japan, Cadence markets and supports its products
and services primarily through its subsidiaries and various distributors.
Cadence licenses its products in Japan through Innotech Corporation, in which
Cadence is an approximately 15% stockholder. Cadence markets its methodology and
design services in Japan through a wholly-owned subsidiary.
Revenues are attributed to geographic areas based on the country in which
the customer is domiciled. In 2000, 1999, and 1998, no one customer accounted
for more than 10% of total revenues. Long-lived assets are attributed to
geographic areas based on the country where the assets are located.
The following table presents a summary of revenues and long-lived assets by
geographic region for years ended December 30, 2000, January 1, 2000, and
January 2, 1999:
2000 1999 1998
----------------------- ----------------------- -----------------------
LONG-LIVED LONG-LIVED LONG-LIVED
REVENUES ASSETS REVENUES ASSETS REVENUES ASSETS
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
North America:
United States.............. $ 720,789 $316,091 $ 526,824 $273,542 $ 676,567 $233,050
Other...................... 33,891 3,344 25,853 3,843 36,710 3,995
---------- -------- ---------- -------- ---------- --------
Total North America..... $ 754,680 $319,435 $ 552,677 $277,385 $ 713,277 $237,045
---------- -------- ---------- -------- ---------- --------
Europe:
United Kingdom............. $ 99,055 $ 35,729 $ 94,037 $ 37,250 $ 85,010 $ 21,349
Germany.................... 55,092 925 38,839 860 54,953 1,328
Other...................... 112,520 2,847 122,736 3,231 130,630 4,180
---------- -------- ---------- -------- ---------- --------
Total Europe............ $ 266,667 $ 39,501 $ 255,612 $ 41,341 $ 270,593 $ 26,857
---------- -------- ---------- -------- ---------- --------
Japan and Asia:
Japan...................... $ 195,793 $ 4,702 $ 223,425 $ 5,079 $ 261,239 $ 2,381
Asia....................... 62,410 5,241 61,589 6,604 75,071 7,925
---------- -------- ---------- -------- ---------- --------
Total Japan and Asia.... 258,203 9,943 285,014 11,683 336,310 10,306
---------- -------- ---------- -------- ---------- --------
Total.............. $1,279,550 $368,879 $1,093,303 $330,409 $1,320,180 $274,208
========== ======== ========== ======== ========== ========
90
91
CADENCE DESIGN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUBSEQUENT EVENT
On December 29, 2000, Cadence entered into a definitive agreement to
acquire CadMOS Design Technology, Inc., a privately held design tools firm
headquartered in San Jose. CadMOS provides solutions to the noise problems
experienced in ultra-deep submicron, or UDSM, processes. Its noise-analysis
solutions are targeted at both digital and mixed signal designers working in
microprocessors, DRAMs, mixed-signal system-on-chip, and application-specific
integrated circuits. The acquisition was completed on February 28, 2001, in
which Cadence acquired all of the outstanding stock of CadMOS and assumed all
outstanding stock options and warrants. The acquisition will be accounted for as
a purchase.
91
92
CADENCE DESIGN SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
SCHEDULE II
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:
Provisions for losses on trade accounts
receivable and sales returns:
Year Ended December 30, 2000........... $44,588 $2,306 $15,692 $(20,584) $42,002
Year Ended January 1, 2000............. $22,989 $9,070 $33,963 $(21,434) $44,588
Year Ended January 2, 1999............. $26,080 $7,687 $ 3,314 $(14,092) $22,989
- ---------------
(1) Uncollectible accounts written-off, net of recoveries, and sales returns.
(2) Sales returns allowance, offset against revenue.
92
93
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/ H. RAYMOND BINGHAM
---------------------------------------------------------
H. Raymond Bingham
President and Chief Executive Officer
Dated: March 28, 2001
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
---------- ----
/s/ H. RAYMOND BINGHAM March 28, 2001
- -----------------------------------------------------------
H. Raymond Bingham
President, Chief Executive Officer, and Director (Principal
Executive Officer)
/s/ WILLIAM PORTER March 28, 2001
- -----------------------------------------------------------
William Porter
Senior Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting
Officer)
ADDITIONAL DIRECTORS
/s/ DONALD L. LUCAS March 28, 2001
- -----------------------------------------------------------
Donald L. Lucas
/s/ CAROL BARTZ March 28, 2001
- -----------------------------------------------------------
Carol Bartz
/s/ SUSAN L. BOSTROM March 28, 2001
- -----------------------------------------------------------
Susan L. Bostrom
/s/ DR. LEONARD Y. W. LIU March 28, 2001
- -----------------------------------------------------------
Dr. Leonard Y. W. Liu
/s/ DR. ALBERTO SANGIOVANNI-VINCENTELLI March 28, 2001
- -----------------------------------------------------------
Dr. Alberto Sangiovanni-Vincentelli
/s/ GEORGE M. SCALISE March 28, 2001
- -----------------------------------------------------------
George M. Scalise
/s/ DR. JOHN B. SHOVEN March 28, 2001
- -----------------------------------------------------------
Dr. John B. Shoven
/s/ ROGER SIBONI March 28, 2001
- -----------------------------------------------------------
Roger Siboni
93
94
EXHIBIT INDEX
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 8-K filed on 12/10/98, as amended
by Forms 8-K/A filed on 12/22/98, 1/6/99, and 5/20/99. 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.
2.02 Master Separation Agreement, dated as of July 14, 2000 by
and among the registrant, Cadence Holdings, Inc. and Tality
Corporation (Incorporated by reference to Exhibit 2.01 from
the Registrant's Form 10-Q for the second quarter ended July
1, 2000 (the 2000 Second Quarter Form 10-Q)).
2.03 Amended and Restated Agreement of Limited Partnership of
Tality, LP dated October 4, 2000, between Tality Corporation
and Cadence Holdings, Inc (Incorporated by reference to
Exhibit 2.01 from the Registrant's Form 10-Q for the third
quarter ended September 30, 2000 (the 2000 Third Quarter
Form 10-Q)).
2.04 Amended and Restated Master Separation Agreement dated as of
October 4, 2000 by and among Tality Corporation, the
Registrant, Cadence Holdings, Inc. and Tality LP
(Incorporated by reference to Exhibit 2.02 from the 2000
Third Quarter Form 10-Q).
2.05 General Assignment and Assumption Agreement dated as of
October 4, 2000 by and among Tality Corporation, the
Registrant, Cadence Holdings, Inc. and Tality, LP
(Incorporated by reference to Exhibit 2.03 from the 2000
Third Quarter Form 10-Q).
2.06 Master Intellectual Property Ownership and License Agreement
dated as of October 4, 2000 by and among Tality Corporation,
the Registrant, Cadence Holdings, Inc. and Tality, LP
(Incorporated by reference to Exhibit 2.04 from the 2000
Third Quarter Form 10-Q).
2.07 Employee Matters Agreement dated as of October 4, 2000 by
and among Tality Corporation, the Registrant, Cadence
Holdings, Inc. and Tality, LP (Incorporated by reference to
Exhibit 2.05 from the 2000 Third Quarter Form 10-Q).
2.08 Master Corporate Services Agreement dated as of October 4,
2000 by and among Tality Corporation, the Registrant,
Cadence Holdings, Inc. and Tality, LP (Incorporated by
reference to Exhibit 2.06 from the 2000 Third Quarter Form
10-Q).
2.09 Real Estate Matters Agreement dated as of October 4, 2000 by
and among Tality Corporation, the Registrant, Cadence
Holdings, Inc. and Tality, LP (Incorporated by reference to
Exhibit 2.07 from the 2000 Third Quarter Form 10-Q).
2.10 Master Confidentiality Agreement dated as of October 4, 2000
by and among Tality Corporation, the Registrant, Cadence
Holdings, Inc. and Tality, LP (Incorporated by reference to
Exhibit 2.08 from the 2000 Third Quarter Form 10-Q).
2.11 Indemnification and Insurance Matters Agreement dated as of
October 4, 2000 by and among Tality Corporation, the
Registrant, Cadence Holdings, Inc. and Tality, LP
(Incorporated by reference to Exhibit 2.09 from the 2000
Third Quarter Form 10-Q).
2.12 Asset Purchase Agreement dated as of October 4, 2000 by and
among the Registrant, Cadence Design System (Canada) Limited
and Tality Canada Corporation (Incorporated by reference to
Exhibit 2.10 from the 2000 Third Quarter Form 10-Q).
2.13 Asset Purchase Agreement dated as of October 3, 2000 by and
among Symbionics Limited, the Registrant and Cadence Design
Systems Limited (Incorporated by reference to Exhibit 2.11
from the 2000 Third Quarter Form 10-Q).
2.14 Fixed Term License Agreement dated as of October 4, 2000
between the Registrant and Tality, LP (Incorporated by
reference to Exhibit 2.12 from the 2000 Third Quarter Form
10-Q).
95
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
2.15 Joint Technology Development and Support Agreement dated as
of October 4, 2000 by and among Tality Corporation, the
Registrant, Cadence Holdings, Inc. and Tality, LP
(Incorporated by reference to Exhibit 2.13 from the 2000
Third Quarter Form 10-Q).
2.16 Joint Sales Agreement dated as of October 4, 2000 by and
among Tality Corporation, the Registrant, Cadence Holdings,
Inc. and Tality, LP (Incorporated by reference to Exhibit
2.14 from the 2000 Third Quarter Form 10-Q).
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) 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 amended on February
1, 2000, 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) filed on June 12, 1989 (the 1989 Form 8-K) and
amended by Exhibit 4.01 to this Form 10-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 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 Registrant's Form 10-Q for the
quarter ended July 4, 1998 (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 and
Exhibit 3.01 to the Registrant's Form 10-Q for the quarter
ended April 3, 1999).
4.01 Specimen Certificate of the Registrant's Common Stock
(Incorporated by reference to Exhibit 4.01 to the
Registrant's Form S-4 Registration Statement (No. 33-43400)
filed October 17, 1991).
4.02 Amended and Restated Rights Agreement, dated as of February
1, 2000, between the Registrant and ChaseMellon Shareholder
Services, L.L.C. 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 4.02 to the
Registrant's 2000 Annual Report on Form 10-K).
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, 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).
96
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
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 (previously the
Chief Executive Officer Bonus Plan for 1996), as amended
January 1, 1998 (Incorporated by reference to the 1998
Preliminary Proxy Statement).
10.08 The Registrant's Deferred Compensation Plan for 1994
(Incorporated by reference to Exhibit 10.09 to the 1994 Form
10-K).
10.09 The Registrant's 1996 Deferred Compensation Venture
Investment Plan (Incorporated by reference to Exhibit 10.11
to the 1995 Form 10-K).
10.10 The 1993 Non-Statutory Stock Option Plan (Incorporated by
reference to Exhibit 4.05 to the 1994 Form S-8).
10.11 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)).
10.12 Amendment, dated May 3, 1996 to Registrant's 1993
Non-Statutory Stock Option Plan (Incorporated by reference
to Exhibit 10.30 to the 1996 First Quarter Form 10-Q).
10.13 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).
10.14 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).
10.15 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) filed on November 27,
1996).
10.16 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)).
10.17 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).
10.18 Form of Executive Severance Agreement (Incorporated by
reference to Exhibit 10.43 to the 1997 Form 10-K).
10.19 Revolving Credit Agreement, dated September 30, 1998, by and
between ABN-AMRO 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)).
10.20 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).
10.21 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 originally filed on September 30, 1998).
97
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
10.22 Consulting Agreement, dated March 8, 1999, between the
Registrant and George M. Scalise (Incorporated by reference
to Exhibit 10.36 to the 1999 Form 10-K).
10.23 Executive Termination and Release Agreement, dated May 24,
1999, between Cadence and John R. Harding (Incorporated by
reference to Exhibit 10.48 from the Registrant's Form 10-Q
for the second quarter ended July 3, 1999 (the 1999 Second
Quarter Form 10-Q)).
10.24 The Registrant's 1995 Directors Stock Option Plan, as
amended May 5, 1999 (Incorporated by reference to Exhibit
10.49 from the 1999 Second Quarter Form 10-Q).
10.25 The Registrant's 1990 Employee Stock Purchase Plan, as
amended May 5, 1999 (Incorporated by reference to Exhibit
10.50 from the 1999 Second Quarter Form 10-Q).
10.26 Employment Agreement, dated September 16, 1999, between the
Registrant and H. Raymond Bingham (Incorporated by reference
to Exhibit 10.51 from the Registrant's Form 10-Q for the
third quarter ended October 2, 1999 (the 1999 Third Quarter
Form 10-Q)).
10.27 Consulting Agreement, dated July 1999, between the
Registrant and Alberto Sangiovanni-Vincentelli (Incorporated
by reference to Exhibit 10.52 from the 1999 Third Quarter
Form 10-Q).
10.28 Design Acceleration, Inc. 1994 Stock Option Plan
(Incorporated by reference to Exhibit 99 to the Registrant's
Form S-8 Registration Statement (No. 333-71717) originally
filed on February 3, 1999).
10.29 Quickturn Design Systems, Inc. 1988 Stock Option Plan, as
amended, (Incorporated by reference to Exhibit 99.1 to the
Registrant's Form S-8 Registration Statement (No. 333-69589)
filed on June 7, 1999).
10.30 Pi Design Systems, Inc. 1990 Stock Option Plan, as amended,
(Incorporated by reference to Exhibit 99.2 to the
Registrant's Form S-8 Registration Statement (No. 333-69589)
filed on June 7, 1999).
10.31 Quickturn Design Systems, Inc. 1992 Key Executive Stock
Option Plan, as amended, (Incorporated by reference to
Exhibit 99.3 to the Registrant's Form S-8 Registration
Statement (No. 333-69589) filed on June 7, 1999).
10.32 Quickturn Design Systems, Inc. 1993 Employee Qualified Stock
Purchase Plan, as amended, (Incorporated by reference to
Exhibit 99.4 to the Registrant's Form S-8 Registration
Statement (No. 333-69589) filed on June 7, 1999).
10.33 Quickturn Design Systems, Inc. 1994 Outside Director Stock
Option Plan (Incorporated by reference to Exhibit 99.7 to
the Registrant's Form S-8 Registration Statement (No.
333-69589) filed on June 7, 1999).
10.34 Quickturn Design Systems, Inc. 1996 Supplemental Stock Plan,
as amended, (Incorporated by reference to Exhibit 99.5 to
the Registrant's Form S-8 Registration Statement (No.
333-69589) filed on June 7, 1999).
10.35 Quickturn Design Systems, Inc. 1997 Stock Option Plan, as
amended, (Incorporated by reference to Exhibit 99.6 to the
Registrant's Form S-8 Registration Statement (No. 333-69589)
filed on June 7, 1999).
10.36 SpeedSim, Inc. 1995 Incentive and Nonqualified Stock Option
Plan (Incorporated by reference to Exhibit 99.8 to the
Registrant's Form S-8 Registration Statement (No. 333-69589)
filed on June 7, 1999).
10.37 OrCAD, Inc. 1991 Non-Qualified Stock Option Plan
(Incorporated by reference to Exhibit 99.1 to the
Registrant's Form S-8 Registration Statement (No. 333-85591)
filed on August 19, 1999).
10.38 OrCAD, Inc. 1995 Stock Option Plan (Incorporated by
reference to Exhibit 99.2 to the Registrant's Form S-8
Registration Statement (No. 333-85591) filed on August 19,
1999).
98
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
10.39 OrCAD, Inc. Amended 1995 Stock Incentive Plan (Incorporated
by reference to Exhibit 99.3 to the Registrant's Form S-8
Registration Statement (No. 333-85591) filed on August 19,
1999).
10.40 Form of Executive Retention Agreement between the Registrant
and Key Executives of the Registrant (Incorporated by
reference to Exhibit 10.57 to the 1999 Form 10-K).
10.41 Diablo Research Company LLC 1997 Stock Option Plan
(Incorporated by reference to Exhibit 99.1 to the
Registrant's Form S-8 Registration Statement (No. 333-93609)
filed on December 24, 1999).
10.42 Diablo Research Company LLC 1999 Stock Option Plan
(Incorporated by reference to Exhibit 99.2 to the
Registrant's Form S-8 Registration Statement (No. 333-93609)
filed on December 24, 1999).
10.43 The Registrant's 2000 Non-Statutory Equity Incentive Plan
(Incorporated by reference to Exhibit 99.1 to the
Registrant's Form S-8 Registration Statement filed on March
27, 2000).
10.44 Form of Indemnity Agreement between Cadence Design Systems,
Inc. and its directors and executive officers (Incorporated
by reference to Exhibit 10.01 from the 2000 Second Quarter
Form 10-Q).
10.45 Credit Agreement, dated as of September 29, 2000, by and
among the Registrant and ABN AMRO Bank N.V., Bank One, N.A.,
KeyBank National Association and UBS AG, Stamford Branch
(Incorporated by reference to Exhibit 10.01 from the 2000
Third Quarter Form 10-Q).
10.46 364 Day Credit Agreement, dated as of September 29, 2000, by
and among the Registrant and ABN AMRO Bank N.V., Bank One,
N.A., KeyBank National Association and UBS AG, Stamford
Branch (Incorporated by reference to Exhibit 10.02 from the
2000 Third Quarter Form 10-Q).
10.47 The Registrant's 1997 Stock Option Plan, as amended on
November 1, 2000 (Incorporated by reference to Exhibit 10.03
from the 2000 Third Quarter Form 10-Q).
10.48 The Registrant's 2000 Non-Statutory Equity Incentive Plan,
as amended (Incorporated by reference to the Registrant's
Form S-8 Registration Statement filed on November 13, 2000).
10.49 Employment Agreement between Tality Corporation and Robert
P. Wiederhold dated as of July 14, 2000 (Incorporated by
reference to Exhibit 10.05 from the 2000 Third Quarter Form
10-Q).
10.50 Tality Corporation 2000 Equity Incentive Plan, as amended
(Incorporated by reference to Exhibit 10.06 from the 2000
Third Quarter Form 10-Q).
10.51 Tality Corporation Directors Stock Option Plan (Incorporated
by reference to Exhibit 10.07 from the 2000 Third Quarter
Form 10-Q).
10.52 Employment Agreement between Ronald R. Barris and the
Registrant, dated July 1, 2000.
10.53 Description of the Registrant's Stock Purchase Program.
10.54 Form of Promissory Note and Pledge Agreement for employees
of the Registrant delivered in connection with purchases of
shares of Tality Corporation restricted common stock.
10.55 Form of Promissory Note between Ronald R. Barris and the
Registrant, dated September 18, 2000.
21.01 Subsidiaries of the Registrant.
23.01 Consent of Arthur Andersen LLP.
23.02 Consent of PricewaterhouseCoopers LLP.